Exhibit 13.1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______
Commission File Number: 0-17286
PRIME BANCORP, INC .
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(Exact name of registrant as specified in its charter)
Delaware 23-2528428
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6425 Rising Sun Avenue, Philadelphia, PA 19111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 742-5300
--------------
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No__
[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant is approximately $53.7 million. (1)
The number of shares of the registrant's Common Stock outstanding as of
March 20, 1996 was 3,723,353 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part II Part III
Annual Report to Stockholders Proxy Statement dated March 18, 1996
for the year ended December 31, 1995
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of Common Stock outstanding, reduced by the number of shares of
Common Stock held by executive officers, directors and stockholders owning
in excess of 10% of the registrant's Common Stock multiplied by the closing
price for the Common Stock on the National Association of Securities
Dealers National Market System on March 20, 1996. The information provided
shall in no way be construed as an admission that any person whose holdings
are included in this figure is not an affiliate of the registrant and any
such admission is hereby disclaimed. The information provided herein is
included solely for record keeping purposes of the Securities and Exchange
Commission.
Item 1. Business
Introduction
Prime Bancorp, Inc. ("the Company") was incorporated under the laws of the
State of Delaware in 1987 for the purpose of becoming a savings and loan holding
company for Prime Bank ("the Bank"). The Bank became a wholly-owned subsidiary
of the Company on November 14, 1988.
The Company is a unitary, nondiversified savings and loan holding company.
The Bank is a federally chartered savings bank which succeeded the business of
Cheltenham Federal Savings and Loan Association (Cheltenham") and North East
Federal Savings and Loan Association ("North East") upon the conversion of such
associations from federally chartered mutual savings and loan associations,
through merger, into the Bank, a stock savings bank on November 14, 1988.
The Bank's operations are headquartered in northeast Philadelphia,
Pennsylvania with eight additional full service branch offices in northeast
Philadelphia, five full service branches in Bucks County, Pennsylvania, and five
full service branches in Montgomery County, Pennsylvania.
Effective March 19, 1996, the Company's subsidiary, Prime Bank, a federal
savings bank, converted into a Pennsylvania chartered stock savings bank with
the legal name, "Prime Bank, a savings bank". After the conversion, the Bank
continues to do business under the name, "Prime Bank". After the conversion, the
Bank's deposits will continue to be insured by the Savings Association Insurance
Fund ("SAIF") administered by the Federal Deposit Insurance Corporation
("FDIC"). Because the Bank's deposits are SAIF insured, the Company is deemed to
be a "savings and loan holding company" regulated by the Office of Thrift
Supervision, and not a "bank holding company", which would be regulated by the
Board of Governors of the Federal Reserve System. The Bank continues to meet all
applicable "qualified thrift lender" tests. In the opinion of the Company's
management, there are not likely to be any material differences in the impact of
Pennsylvania banking laws and regulations on the ordinary activities of the
Bank, as compared to federal laws and regulations applicable to federal savings
associations.
Business
The Bank follows a community bank strategy which focuses on providing
individuals, businesses, and communities with high quality basic banking
services. Basic banking means lending money, gathering money and other
complementary fee generating services. Unlike the traditional thrift whose
primary products are related to residential real estate, the community bank
maintains a much greater degree of balance sheet diversification. Loans are
spread among consumer, commercial, construction and residential mortgages.
Deposits are gathered along four money lines which are checking, savings, retail
CDs and jumbo CDs.
Selected Consolidated Financial Data
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Years Ended December 31, 1991 1992 1993 1994 1995
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Return on assets 1.15% 1.28% 1.28%(1) 1.16% 1.00%
Return on equity 10.23% 10.93% 11.47%(1) 11.93% 11.27%
Average equity to average assets 11.28% 11.74% 11.02% 8.40% 9.25%
Book value per share $12.15 $12.61 $13.70 $12.86 $15.18
Dividends per share $ 0.22 $ 0.37 $ 0.50 $ 0.54 $ 0.62
Dividend payout ratio 23.87% 27.66% 28.11% 34.50% 39.16%
========================================================================================
(1) Excludes the cumulative effect on prior years of change in accounting
principle.
Lending Activities
The Bank's net loan portfolio, inclusive of mortgage-backed securities of
$135.8 million, totaled $480.5 million at December 31, 1995. This represented
approximately 79.0% of its total assets. At that date, approximately 61.2% of
its net loan portfolio consisted of loans secured by existing one-to-four family
residential properties (including mortgage-backed securities) and the remaining
balance consisted principally of multi-family residential and commercial real
estate loans (14.0% of the net loan portfolio), construction loans, net of loans
in process (5.2%), consumer loans (12.9%) and commercial business loans (7.1%).
1
The following table sets forth detailed information concerning the
composition of the loan portfolios (inclusive of mortgage-backed securities) as
of the dates specified for the Bank. (Dollars in thousands)
DECEMBER 31,
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1991 1992 1993 1994 1995
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Amount % Amount % Amount % Amount % Amount %
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Permanent first mortgage loans:
One-to four-family $ 115,135 39.7% $ 119,968 37.6% $ 123,400 32.3% $ 140,065 31.5% $ 157,816 32.9%
Multi-family 5,525 1.9% 5,394 1.7% 4,648 1.2% 4,148 0.9% 1,597 0.3%
Commercial 36,530 12.6% 39,988 12.5% 49,507 12.9% 62,240 14.0% 66,024 13.7%
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Total permanent loans 157,190 54.2% 165,350 51.8% 177,555 46.4% 206,453 46.4% 225,437 46.9%
Allowance for loan losses (747) -0.3% (827) -0.3% (1,007) -0.3% (1,247) -0.3% (814) -0.2%
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Total permanent first mortgage
loans, net 156,443 53.9% 164,523 51.5% 176,548 46.1% 205,206 46.1% 224,623 46.7%
Construction 68,867 23.8% 54,123 17.0% 58,375 15.2% 51,543 11.6% 42,264 8.8%
Loans in process (26,764) -9.2% (15,488) -4.9% (17,662) -4.6% (17,148) -3.9% (17,033) -3.5%
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Total construction loans, net 42,103 14.6% 38,635 12.1% 40,713 10.6% 34,395 7.7% 25,231 5.3%
Allowance for loan losses (632) -0.2% (580) -0.2% (634) -0.2% (829) -0.2% (399) -0.1%
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Total construction loans, net 41,471 14.4% 38,055 11.9% 40,079 10.4% 33,566 7.5% 24,832 5.2%
Commercial business loans 26,229 9.1% 37,488 11.7% 35,990 9.4% 35,350 8.0% 35,666 7.4%
Allowance for loan losses (328) -0.1% (463) -0.1% (1,152) -0.3% (873) -0.2% (1,301) -0.3%
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Total commercial loans, net 25,901 9.0% 37,025 11.6% 34,838 9.1% 34,477 7.8% 34,365 7.1%
Consumer loans:
Personal/lines of credit 13,939 4.8% 19,744 6.2% 18,683 4.9% 20,412 4.6% 19,141 4.0%
Second mortgage/equity 12,988 4.5% 14,781 4.6% 20,139 5.3% 22,663 5.1% 28,932 6.0%
Auto 6,297 2.2% 5,933 1.9% 4,900 1.3% 7,110 1.6% 10,046 2.1%
Education 1,467 0.5% 1,661 0.5% 2,230 0.6% 1,697 0.4% 2,992 0.6%
Home improvement and other 165 0.1% 164 0.1% 427 0.1% 367 0.1% 322 0.1%
Savings account 998 0.3% 1,029 0.3% 1,135 0.3% 1,464 0.3% 1,119 0.2%
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Total consumer loans 35,854 12.4% 43,312 13.6% 47,514 12.5% 53,713 12.1% 62,552 13.0%
Allowance for loan losses (359) -0.1% (433) -0.1% (412) -0.1% (695) -0.2% (612) -0.1%
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Total consumer loans, net 35,495 12.3% 42,879 13.5% 47,102 12.4% 53,018 11.9% 61,940 12.9%
Total unamortized loan origination
fees and costs (2,951) -1.0% (2,205) -0.7% (1,752) -0.5% (1,298) -0.3% (392) -0.1%
Allowance for loan loss (unallocated) (297) -0.1% (899) -0.3% (761) -0.2% (641) -0.1% (638) -0.1%
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Total loans receivable, net 256,062 88.5% 279,378 87.5% 296,054 77.3% 324,328 72.9% 344,730 71.7%
Total mortgage-backed securities 33,391 11.5% 39,778 12.5% 86,979 22.7% 120,453 27.1% 135,823 28.3%
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Total loans receivable and
mortgage-backed securities, net $ 289,453 100.0% $ 319,156 100.0% $ 383,033 100.0% $ 444,781 100.0% $ 480,553 100.0%
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2
Contractual Maturities
The following table sets forth the contractual maturities of the Bank's
loan portfolio as of December 31, 1995 by categories of loans. Adjustable-rate
loans are included in the period in which they mature rather than in the period
in which they are next scheduled to adjust, and fixed-rate loans are included in
the period in which they mature without regard to any expected prepayments
(dollars in thousands).
Within 1 Through Over Five
1 Year 5 Years Years Total
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Fixed rate mortgages $ 2,935 $ 5,171 $ 56,483 $ 64,589
ARM'S 234 1,084 93,506 94,824
Construction loans, net 18,954 6,277 -- 25,231
Commercial real estate and business loans 18,328 19,089 64,273 101,690
Consumer loans 6,841 39,091 16,620 62,552
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$ 47,292 $ 70,712 $230,882 $348,886
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The following table sets forth information regarding non-accrual loans and
real estate owned held by the Bank at the date indicated (dollars in thousands).
Years Ended December 31,
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1991 1992 1993 1994 1995
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Non-accrual loans:
Single-Family residential $1,611 $1,594 $1,913 $1,859 $1,786
Multi-Family residential and
commercial real estate loans 170 -- -- -- --
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Total residential loans 1,781 1,594 1,913 1,859 1,786
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Consumer loans 409 359 665 2,311 269
Commercial real estate loans 533 1,348 1,679 150 925
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Total non-accrual loans $2,723 $3,301 $4,257 $4,320 $2,980
====================================================================================
Total non-accrual loans to
loans receivable and
mortgage-backed securities, net 1.06% 1.03% 1.11% .96% .62%
====================================================================================
Total real estate owned, net of
allowance for REO loss 586 479 344 274 370
====================================================================================
Total non-accrual loans and real
estate owned to total assets 0.91% 0.96% 1.02% .81% .55%
====================================================================================
* Excludes the impact of the $10.1 million condominium project, which was
acquired by a deed in lieu of foreclosure and classified as land acquired for
development and resale.
At December 31, 1995, approximately $246,000 of interest would have been
recorded on loans accounted for on a non-accrual basis if such loans had been
current.
Potential problem loans consist of loans which are included in performing
loans at December 31, 1995, but for which potential credit problems of the
borrowers have caused management to have concerns as to the ability of such
borrowers to comply with present repayment terms. At December 31, 1995, such
potential problem loans amounted to approximately $3.0 million compared to
approximately $10.0 million one year ago. This decrease is primarily
attributable to a $9.6 million loan that a subsidiary of the Bank took title to
by a deed in lieu of foreclosure.
Allowance for Loan Losses
The allowance for loan losses is based on a periodic evaluation of the
portfolio and is maintained at a level that management considers adequate to
absorb losses known and inherent in the portfolio. Management considers a
variety of factors when establishing the allowance recognizing that an inherent
risk of loss always exists in the lending process. Consideration is given to the
impact of current economic conditions, diversification of the loan portfolio,
historical loss experience, delinquency statistics, results of detailed loan
reviews, borrowers' financial and managerial strengths, the adequacy of
underlying collateral, and other relevant factors. The allowance for loan losses
3
is increased by the provision for loan losses and recoveries on previously
charged-off loans. While management uses available information to establish
allowance for loan losses, future additions to the allowance for loan losses may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance for loan losses based on their
assessments of information which is available to them at the time of their
examination.
Years Ended December 31,
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1991 1992 1993 1994 1995
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(Dollars in thousands)
Balance at beginning of period $ 1,675 $ 2,363 $ 3,202 $ 3,966 $ 4,285
Charge-offs:
Real estate - construction (102) (76) -- -- --
Real estate - mortgages (140) (6) (48) (66) (118)
Commercial business loans (396) (436) (666) (615) (962)
Personal/lines of credit (30) (79) (82) (145) (234)
Second mortgage/equity -- -- (6) (74) (21)
Auto (27) (8) (14) (70) (13)
Education (11) -- -- -- --
Home improvement and other -- -- (35) (72) --
Savings account -- -- -- (8) --
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(706) (605) (851) (1,050) (1,348)
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Recoveries:
Real estate - construction -- -- -- 4 --
Real estate - mortgages 71 -- 23 63 7
Commercial business loans 2 40 142 47 167
Personal/lines of credit 1 1 8 1 7
Second mortgage/equity -- -- -- -- --
Auto -- -- -- 9 2
Education -- 1 -- -- --
Home improvement and other -- -- -- 2 --
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74 42 173 126 183
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Net charge-offs (632) (563) (678) (924) (1,165)
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Provision charged to operations 1,320 1,200 1,442 1,243 644
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Acquired allowance for loan losses
from the Bank of Delaware Valley -- 202 -- -- --
Balance at the end of period $ 2,363 $ 3,202 $ 3,966 $ 4,285 $ 3,764
=============================================================================================
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.25% 0.22% 0.23% 0.27% 0.34%
=============================================================================================
Investment Activities
Federally chartered thrift institutions such as the Bank have authority to
invest in various types of securities, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and thrift institutions, bankers' acceptances and
federal funds. Subject to various restrictions, federally chartered thrift
institutions may also invest a portion of their assets in commercial paper and
corporate debt securities and in mutual funds whose assets conform to the
investments that a federally chartered thrift institution is otherwise
authorized to make directly.
At December 31, 1995, 6.2% of the total assets of the Company were
investment securities. See Note 5 of the Notes to the Company's Consolidated
Financial Statements.
4
On December 31, 1993, the Company adopted SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities and transferred all
then-existing investments from held to maturity to available for sale.
Management's investment strategy focuses on maintaining an adequate reserve of
shorter term investments to conservatively meet liquidity needs, combined with a
more permanent portfolio of medium term investments to serve asset/liability
management purposes.
The investment portfolio, cash and deposits in other institutions provide
not only a source of income but also a source of liquidity to meet lending
demands, fluctuations in deposit flows and required liquidity levels. The Bank
has in the past used such excess liquidity to meet loan demand. The relative mix
of investment securities and loans in the Bank's portfolio is dependent upon the
attractiveness of yields available on loans as compared to investment securities
as well as the relative safety of the investment securities and loans and the
liquidity needs of the Bank. The securities constituting the Bank's investments
are limited primarily to U.S. Government and U.S. Government agency obligations.
The following table presents the composition of the investment securities
portfolio of the Company at the dates indicated (dollars in thousands).
Years Ended December 31,
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1993 1994 1995
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Fair Fair Fair
Cost Value Cost Value Cost Value
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Held to Maturity
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State and municipal $ -- $ -- $ 6,163 $ 5,880 $ -- $ --
Small Business Association Certificates -- -- 4,254 4,253 -- --
U.S. Government & U. S. Government
agency obligations -- -- -- -- 11,830 11,971
FHLB of Pittsburgh stock -- -- -- -- 1,750 1,750
Marketable equity securities:
FNMA stock -- -- -- -- 3 3
Atlantic Central Bankers Bank stock -- -- -- -- 75 75
Financial Institutions Insurance Group
stock -- -- -- -- 50 50
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$ -- $ -- $10,417 $10,133 $13,708 $13,849
=====================================================================================================
Available for Sale
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Small Business Association Certificates $ -- $ -- $ -- $ -- $17,233 $17,287
U.S. Government and U.S. Government
agency obligations 18,033 17,969 47,140 45,040 6,124 6,099
FHLB of Pittsburgh stock 1,345 1,345 2,471 2,471 -- --
Certificates of deposit 899 899 187 187 477 477
Commercial paper 2,993 2,993 -- -- -- --
Corporate notes/bonds 1,111 1,130 1,121 1,117 -- --
Marketable equity securities:
FNMA stock 3 3 3 3 -- --
Atlantic Central Bankers Bank stock -- -- 75 75 -- --
Financial Institutions Insurance Group
stock -- -- 50 50 -- --
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$24,384 $24,339 $51,047 $48,943 $23,834 $23,863
=====================================================================================================
5
Service Corporation Activities
Federal regulations permit a federally chartered thrift institution to
invest an amount up to 3% of its assets in the stock, obligations or other
securities of subsidiary service corporations engaged in certain activities,
provided that any investment in excess of 2% of the institution's assets is used
primarily for community, inner-city, and community development purposes. In
addition, under certain circumstances a federally chartered thrift institution
is authorized to invest up to 50% of its regulatory capital in conforming loans
to service corporations.
The Bank presently conducts business through or has an investment in five
service corporations: Rowland Service Corporation ("Rowland"), Prime Financial
Inc. ("Prime Financial"), NEFA Corporation ("NEFA"), 723 Service Corporation and
6524 Service Corporation.
Hatboro Manor: Hatboro Manor is a joint venture between Rowland and one
local developer involving the construction of a 15,000 square foot
professional condominium complex.
Burholme Woods: Burholme Woods was established in June, 1988 for the
development and sale of forty-six single family twin homes in the Burholme
section of northeast Philadelphia.
Prime Financial Inc.: Prime Financial is a service corporation formed to
oversee full-service brokerage operations at the Bank.
NEFA Corporation: NEFA is a service corporation formed to acquire land for
development and resale.
723 Service Corporation: 723 Service Corporation was formed for the
acquisition of property for debts previously contracted by borrowers of the
Bank.
6524 Service Corporation: 6524 Service Corporation was formed for the
acquisition of property for debts previously contracted by borrowers of the
Bank.
At December 31, 1995, the Bank's aggregate debt and equity investment in
the service corporations and joint ventures in which it is participating was
$12.1 million. (2.00% of the Bank's total assets)
Prime Abstract Inc.
Prime Abstract Inc., a wholly owned subsidiary of the Company, is a
Delaware Corporation formed in 1988 for the purpose of performing title searches
within the Commonwealth of Pennsylvania. Prime Abstract receives income from the
title search business which it generates, while the actual title search is
performed by an associated entity. The net income of Prime Abstract is
immaterial to the consolidated financial results of the Company on a basis.
Del-Prime, Inc.
Del-Prime, Inc., a wholly owned subsidiary of the Company, was incorporated
as a Delaware Corporation on November 8, 1989 to do business exclusively in
Delaware. The subsidiary holds tax-free municipal investment securities.
Del-Prime Investments, Inc.
Del-Prime Investments, Inc., a wholly owned subsidiary of the Company, was
incorporated as a Delaware Corporation on November 28, 1994 to do business
exclusively in Delaware. The subsidiary was formed to hold taxable investments.
6
Sources of Funds
General
The sources of funds to be used in lending and for other general business
purposes of the Bank are deposits, loan repayments, FHLB of Pittsburgh advances
and other borrowed funds. Deposit inflows and outflows are influenced
significantly by money market and general interest rate conditions, although the
Bank has the ability to respond to market conditions through the pricing of
deposit accounts. The Bank may also utilize advances from the FHLB of Pittsburgh
and other borrowed funds on a short-term basis to support expanded lending
activities.
Deposits
The Bank has a stable base of core deposits, with approximately 12.9% of
its deposits held in passbook accounts which currently earn 2.05%. The Bank also
offers short-term certificates of deposit and other deposit alternatives that
are more responsive to market conditions than passbook deposits and longer
maturity fixed-rate certificates. The core deposit base and overall variety of
deposits allow the Bank to be competitive in obtaining funds and to respond with
more flexibility to the threat of disintermediation. The Bank's deposits are
obtained primarily from the areas in Pennsylvania immediately surrounding its
offices.
The following table shows the maturity distribution of time deposits in
amounts of $100,000 or more at December 31, 1995 (dollars in thousands)
Jumbo Other Time Total Time
Deposits Deposits Deposits
- --------------------------------------------------------------------------------
Three months or less $12,077 $ 2,401 $14,478
Over three months to six months 5,117 514 5,631
Over six months to twelve months 7,886 2,005 9,891
Over twelve months 1,015 3,924 4,939
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$26,095 $ 8,844 $34,939
================================================================================
The following table sets forth the deposit accounts of the Bank in dollar
amounts and weighted average interest rates at the dates indicated (dollars in
thousands).
At December 31,
- ----------------------------------------------------------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Amount Average Amount Average Amount Average
Passbook and club $ 58,594 2.23% $ 66,293 2.04% $ 61,363 2.05%
NOW and Super NOW 20,627 2.19% 23,487 1.49% 25,884 1.22%
MMDA 73,452 3.09% 80,007 2.94% 93,580 3.73%
Fixed-rate certificates 130,869 4.37% 159,572 4.83% 169,094 5.24%
Jumbo certificates 20,427 4.78% 27,421 5.33% 26,095 5.67%
IRA (1) 39,455 5.72% 55,420 5.43% 56,157 5.87%
Commercial checking
accounts (2) 25,376 -- 35,451 -- 44,366 --
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Total Deposits $368,800 $447,651 $476,539
==============================================================================================
(1) Funds in IRA accounts are invested primarily in certificates of deposit.
(2) Non-interest bearing.
Borrowings
The FHLB System functions as a reserve credit facility for thrift
institutions and certain other home financing institutions. As a member of the
FHLB System, the Bank is required to own capital stock in the FHLB of Pittsburgh
and will be authorized to apply for advances on the security of such stock and
certain of its home mortgages and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
creditworthiness standards have been met. Such advances may be made pursuant to
several different credit programs, each with its own interest rate, maximum size
of advance and range of maturities. Depending on the program,
7
limitations on the amount of such borrowings are based either on a percentage of
the Bank's capital or on the FHLB of Pittsburgh's assessment of the Bank's
creditworthiness. See "Regulation of the Bank - Federal Home Loan Bank System".
At December 31, 1995, the Bank had $34.0 million in borrowings from the FHLB of
Pittsburgh.
The Bank uses borrowings and reverse repurchase agreements when funds are
not available from other sources at more attractive rates. In addition, the Bank
has borrowed to match maturities of specific opportunities (particularly
commercial real estate loans) or to fund excess loan demand.
The following table sets forth the borrowings of the Company at the dates
indicated (dollars in thousands).
At December 31,
- --------------------------------------------------------------------------------
1993 1994 1995
- --------------------------------------------------------------------------------
Advances from FHLB of Pittsburgh $10,000 $ 6,000 $14,000
Repo plus agreements with the
FHLB of Pittsburgh -- -- 20,000
Reverse repurchase agreements 16,914 53,381 34,844
Other 350 329 --
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$27,264 $59,710 $68,844
================================================================================
Employees
At December 31, 1995, the Bank had 225 employees, including 181 full-time
and 44 part-time employees. None of these employees are represented by a
collective bargaining agreement. Employee benefits include a profit sharing plan
and life, health and disability insurance. Management believes that relations
with its employees are good.
Competition
The Bank faces strong competition in the attraction of deposits. The Bank
is currently among the medium-sized SAIF-insured institutions in its market area
in terms of asset size. Its most direct competition for deposits is from the
other thrifts and commercial banks located in its primary market area. In times
of low interest rates the Bank faces additional competition for investor funds
from mutual funds, the stock market and other corporate and governmental
securities.
The Bank competes for deposits principally by offering depositors a wide
variety of savings programs, a market rate of return, tax-deferred retirement
programs and other related services and by the efficiency and quality of
services provided to borrowers, real estate brokers and builders. The Bank's
competition for loans varies from time to time depending upon the general
availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, volatility in the markets and other
factors that are not readily predictable. The Bank does not rely upon any
individual, group or entity for a material portion of its deposits.
As a result of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") , which was enacted on August 9, 1989 to restructure the
regulation of the savings and loan industry, the deposits of the Bank are
insured to the maximum amount permitted by law by the Savings Association
Insurance Fund ("SAIF"), the successor to the Federal Savings and Loan Insurance
Corporation ("FSLIC"). The Bank is subject to comprehensive regulation and
examination by the Office of Thrift Supervision ("OTS"), as its chartering
authority and primary regulator, and by the Federal Deposit Insurance
Corporation ("FDIC"), which administers the SAIF.
The Bank is also a member of the Federal Home Loan Bank ("FHLB") of
Pittsburgh, which is one of 12 regional banks that comprise the FHLB System.
8
HOLDING COMPANY REGULATION AND SUPERVISION
General
Prime Bancorp, Inc. is a savings and loan holding company within the
meaning of Section 10 of the Home Owners' Loan Act of 1933, as amended ("HOLA").
As such, the Company is registered with and subject to OTS examination and
supervision as well as certain reporting requirements. As a SAIF-insured
subsidiary of a savings institution holding company, the Bank is subject to
certain restrictions in dealing with the Company and with other persons from
time to time affiliated with the Bank.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, from (1) acquiring control (as defined) of another insured
institution (or holding company thereof) without prior OTS approval, (2)
acquiring more than 5% of the voting shares of another insured institution (or
holding company thereof) which is not a subsidiary without prior regulatory
approval, (3) acquiring through merger, consolidation or purchase of assets,
another savings institution (whether or not it is insured by SAIF) or holding
company thereof without prior OTS approval, or (4) acquiring control of a
savings institution not insured by the SAIF (except through a merger with and
into the Bank approved by the OTS). A savings and loan holding company may not
acquire as a separate subsidiary an insured institution which has principal
offices outside of the state where the principal offices of its subsidiary is
located, except (i) in the case of certain emergency acquisitions approved by
the FDIC, (ii) if the holding company controlled (as defined) such insured
institution as of March 5, 1987, or (iii) when the laws of the state where an
insured institution which is to be acquired is located specifically authorize
such an acquisition. The Bank has no plans to acquire an insured institution
outside of Pennsylvania.
Activities Limitations
Unless and until the Company acquires as a separate subsidiary another
insured institution, the Company will be a unitary savings and loan holding
company. There are generally no restrictions on the activities of a unitary
savings and loan holding company, although historically the FSLIC did not permit
a savings and loan holding company to acquire or be acquired by a company
engaged in securities underwriting or market making. If the Company acquires as
a separate subsidiary another insured institution, the Company would then be a
multiple savings and loan holding company, subject to limitations on the types
of business activities in which it may engage. The Company has no current plans
to pursue any such acquisition.
If an insured institution subsidiary of a unitary savings and loan holding
company fails to meet the "qualified thrift lender " ("QTL") test specified in
HOLA and regulations thereunder, then such unitary holding company also would
become subject to severe restrictions regarding activities and other aspects of
its operations. See Regulation of the Bank - QTL Test. At December 31, 1994, the
Bank's asset composition was substantially in excess of that required to qualify
the Bank as a QTL under the current QTL test.
Under FIRREA, a savings and loan holding company may acquire up to 5% of
the voting shares of any savings bank or savings and loan holding company not a
subsidiary thereof without prior regulatory approval. Another provision of
FIRREA permits a savings and loan holding company to acquire up to 15% of the
voting shares of certain undercapitalized savings banks.
Change in Bank Control Act
Under the Change in Bank Control Act of 1978 ("Change in Control Act"), no
person, acting directly or indirectly or through or in concert with one or more
other persons, may acquire "control" of any federally insured depository
institution unless the appropriate Federal banking agency has been given 60
days' prior written notice of the proposed acquisition and within that period
has not issued a notice disapproving of the proposed acquisition or has issued
written notice of its intent not to disapprove the action. For this purpose,
"control" is generally defined as the power, directly, or indirectly, to direct
the management or policies of an institution or to vote 25% or more of any class
of its voting securities. The period for the agency's disapproval may be
extended by the agency. Upon receiving such notice, the Federal agency is
required to provide a copy to the appropriate state
9
regulatory agency if the institution of which control is to be acquired is state
chartered, and the Federal agency is obligated to give due consideration to the
views and recommendations of the state agency. Upon receiving a notice, the
Federal agency is also required to conduct an investigation of each person
involved in the proposed acquisition. Notice of such proposal is to be published
and public comment solicited thereon. A proposal may be disapproved by the
Federal agency if the proposal would have anticompetitive effects, if the
proposal would jeopardize the financial stability of the institution to be
acquired or prejudice the interests of its depositors, if the competence,
experience or integrity of any acquiring person or proposed management personnel
indicates that it would not be in the interest of depositors or the public to
permit such person to control the institution, if any acquiring person fails to
furnish the Federal agency with all information required by the agency, or if
the Federal agency determines that the proposed transaction would result in an
adverse effect on a deposit insurance fund. In addition, the Change in Control
Act requires that, whenever any Federally insured depository institution makes a
loan or loans secured, or to be secured, by 25% or more of the outstanding
voting stock of a Federally insured depository institution, the president or
chief executive officer of the lending bank must promptly report such fact to
the appropriate Federal banking agency regulating the institution whose stock
secures the loan or loans.
1994 Interstate Banking Legislation.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), enacted on September 29, 1994, permits bank
holding companies to acquire banks in any State beginning in 1995. Beginning in
1997, acquired banks in different states may be merged into a single bank, and
thereafter merged banks may establish and acquire additional branches anywhere
the acquiree could have branched. States may opt out until June 1, 1997, but if
so, domestic institutions will also be prohibited from branching interstate.
States may also enact laws permitting interstate merger transactions and
interstate de novo branching before June 1, 1997. Limited branch purchases are
still subject to state laws. On July 6, 1995, Pennsylvania adopted an interstate
banking act (the "PA Interstate Banking Act") to harmonize Pennsylvania banking
laws with the Federal Interstate Banking Act. The PA Interstate Banking Act
"opts in" early under the Federal Interstate Banking Act to permit interstate
mergers, non- Pennsylvania holding company acquisitions of Pennsylvania banks,
branch acquisitions and de novo branching in any of the manners contemplated by
the Federal Interstate Banking Act, subject to prior regulatory approvals or
filings. In general, the PA Interstate Banking Act permits out-of-state banking
institutions may establish branches in Pennsylvania with the approval of the
Pennsylvania Banking Department, provided the law of the state where the banking
institution is located would permit a Pennsylvania banking institution to
establish and maintain a branch in that state on substantially similar terms and
conditions. It also permits Pennsylvania banking institutions to maintain
branches in other states. Bank management anticipates that the federal and
Pennsylvania interstate banking legislation will increase competitive pressures
in the Bank's market by permitting entry of additional competitors but
management is of the opinion that they will not have a material impact upon the
anticipated results of operations of the Bank.
Pennsylvania Banking Laws
Under the Pennsylvania Banking Code of 1965, as amended ("PA Code"), the
Company is permitted to control an unlimited number of banks, subject to prior
approval of the OTS. The PA Code authorizes reciprocal interstate banking with
out any geographic limitation. Reciprocity between states exist when a foreign
state's law authorizes Pennsylvania bank holding companies to acquire banks or
bank holding companies located in that state on terms and conditions
substantially no more restrictive than those applicable to such an acquisition
by a bank holding company located in that state. Interstate ownership of banks
in Pennsylvania with banks in Delaware, Maryland, New Jersey, Ohio, New York and
other states, is currently authorized. A number of additional states are
considering legislation to authorize reciprocal interstate banking.
The PA Code and the regulations established by the Banking Department set
minimum capital requirements for Pennsylvania chartered institutions such as the
Bank. Under the PA code, institutions such as the Bank may establish branches
without geographic limitation throughout Pennsylvania. The establishment of new
branches or other offices of a Pennsylvania chartered savings bank are subject
to the approval of the Banking Department. A bank holding company may own banks
located in Pennsylvania and other states.
10
With certain exceptions, the PA Code prohibits any person from acquiring,
directly or indirectly, more than 10% of any class of outstanding stock of a
Pennsylvania commercial bank such as the Bank (5% in certain circumstances)
without prior approval of the Banking Department.
REGULATION OF THE BANK
General
The Bank is a member of the FHLB System and its deposit accounts are
insured up to applicable limits by the FDIC under the SAIF. The Bank is subject
to extensive regulation by the Pennsylvania Banking Department (the "Banking
Department"), as its chartering agency, and the FDIC, as the deposit insurer.
The Bank must file reports with the Banking Department and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. There are periodic examinations by
the Banking Department and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any change
in such regulation whether by the Banking Department, the FDIC or the Congress
could have a material adverse impact on the Company, the Bank and their
operations.
Insurance and Regulatory Structure
Pursuant to the provisions of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA"), a new insurance fund, administered by
the FDIC and named SAIF, insures the deposits of savings associations formerly
insured by the FSLIC. The FDIC fund existing prior to the enactment of FIRREA is
now known as the Bank Insurance Fund ("BIF") and continues to insure the
deposits of commercial banks and certain savings banks and to be administered by
the FDIC. Although the FDIC administers both funds, the assets and liabilities
are not commingled. In addition, FIRREA abolished the FHLBB and replaced it with
OTS, which is a bureau of the Department of Treasury. The OTS is headed by a
single Director who is appointed by the President.
Under the Federal Deposit Insurance Act ("FDI Act"), the OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring enforcement action against all "bank-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day and, under certain circumstances,
including knowing or reckless conduct, as high as $1 million per day. Criminal
penalties for most financial institution crimes are 15 years in prison. In
addition, regulators are provided with far greater flexibility to impose
enforcement action on an institution that fails to comply with its regulatory
requirements, particularly with respect to the capital requirements. Possible
enforcement action ranges from the imposition of a capital plan and capital
directive to receivership, conservatorship or the termination of deposit
insurance. Under the FDI Act, the FDIC has the authority to recommend to the
Director of OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances.
Safety and Soundness
Under the Federal Deposit Insurance Act, federal regulators possess the
power to prohibit regulated institutions such as the Bank from engaging in any
activity that would be an unsafe and unsound banking practice and in violation
of the law. Moreover, recent Federal laws have expanded the circumstances under
which officers or directors of a bank may be removed by the institution's
federal supervisory agency, restrict and regulate lending by a bank to its
executive officers, directors, principal shareholders or related interests
thereof and restrict management personnel of a bank from serving as directors or
in other management positions with securities firms
11
and with certain depository institutions whose assets exceed a specified amount
or which have an office within a specified geographic area, and restrict
management personnel from borrowing from another institution that has a
correspondent relationship with their bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires financial institutions to take certain actions relating to
their internal operations including: providing annual reports on financial
condition to the appropriate federal banking regulators, having an annual
independent audit of financial statements performed by an independent public
accountant and establishing an independent audit committee comprised solely of
outside directors. The FDICIA also imposes certain operational and managerial
standards on financial institutions relating to internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits. A later amendment deals with compensation
standards. The FDICIA also requires the FDIC to assess deposit insurance
premiums based on risk. As noted below, the federal banking agencies, including
the OTS and the FDIC, have adopted certain rules implementing these standards.
Prompt Corrective Regulatory Action
The FDICIA also requires establishment of a system of prompt corrective
action to resolve the problems of undercapitalized institutions. The federal
banking regulators have adopted final rules, which require such regulators to
take certain supervisory actions against undercapitalized institutions. The
adopted rules create five categories consisting of "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized". Regulatory action taken will depend on the
level of capitalization of the institution and may range from restrictions on
distributions of dividends to seizure of the institution. Generally, subject to
a narrow exception, the FDICIA requires the institution's regulator to appoint a
receiver or conservator for an institution that is critically undercapitalized.
The FDICIA authorizes the institution's regulators to specify the ratio of
tangible capital to assets at which an institution becomes critically
undercapitalized and requires that the ratio be no less than 2% of assets. The
final rules also allow the regulators to downgrade an institution that meets
certain minimum capital requirements but is otherwise in a "less than
satisfactory" condition, which may result in an otherwise "adequately
capitalized" institution with other problems being classified as
"undercapitalized".
Under the OTS final rule implementing the prompt corrective action
provisions, generally a savings association that has a total risk-based capital
of less than 8.0% or a leverage ratio that is less than 4.0% would be considered
to be undercapitalized. A savings association that has total risk-based capital
less than 6.0%, a Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3.0% would be considered to be "significantly
undercapitalized" and a savings association that has a tangible capital to
assets ratio equal to or less than 2% would be deemed to be "critically
undercapitalized." Generally, the rule requires an association to file a capital
restoration plan with the OTS within 45 days of the date it is deemed to be
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized". In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also issue a capital directive to the
association which includes additional discretionary restrictions on the
association.
Other provisions of the FDICIA require supplemental disclosure in financial
statements filed with the regulators of the estimated fair market value of
assets and liabilities; permits thrift institutions to acquire commercial banks
and commercial banks to acquire thrift institutions with appropriate regulatory
approval; adjust the capital standards to account for interest rate risk; and
increase the amount of consumer loans that a savings association may invest in
from 30% to 35% of total assets.
12
Business Activities
The activities of savings institutions are governed by the Home Owner's
Loan Act, as amended by FIRREA and FDICIA (the "HOLA") and, in certain respects,
the FDI Act. These statutes (1) restrict the use of brokered deposits by
troubled savings institutions that are not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in certain
categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property, (4) permit savings and loan holding
companies to acquire up to 5% of the voting shares of non-subsidiary savings
institutions or savings and loan holding companies without prior approval, (5)
permit bank holding companies to acquire healthy savings institutions, and (6)
require the federal banking agencies to establish by regulation loan-to-value
limitations on real estate lending. However, the Bank does have the authority
under the HOLA to make certain loans or investments, not exceeding, in the
aggregate, the greater of the Bank's capital or 5.0% of its total assets, on
each of (i) non-conforming loans (loans upon the security of or respecting real
property or interests therein used for primarily residential or farm purposes
that do not comply with specific limitations of the HOLA), and (ii) construction
loans without security for the purpose of financing what is or is expected to be
residential property. To assure repayment of such loans, the Bank relies
substantially on the borrower's general credit standing, personal guarantees and
projected future income on the properties.
Lending Standards
Under FDICIA and regulations adopted thereunder, savings associations must
adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits) that
are clear and measurable, loan administration procedures, and documentation,
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, require depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans, the supervisory limit is 75%;
(iii) for loans for the construction of commercial, multi-family or other
nonresidential property, the supervisory limit is 80%; (iv) for loans for the
construction of one- to four-family properties, the supervisory limit is 85%;
and (v) for loans secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property including
non-owner-occupied, one- to four-family property), the limit is 85%. Although no
supervisory loan-to-value ratio that equals or exceeds 90% at origination is
prohibited, an institution should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable collateral.
The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multi-family and other
non-one- to four-family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans including loans insured or guaranteed by the U.S. government and its
agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout, loans to facilitate sales of real estate acquired
by the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
13
Classification of Assets
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories: "substandard",
"doubtful" and "loss". For assets classified "substandard", and "doubtful", the
institution is required to establish prudent general loan loss reserves in
accordance with generally accepted accounting principles. Assets classified
"loss" must be either completely written off or supported by a 100% specific
reserve. A classification category designated "special mention" also must be
established and maintained for assets not currently requiring classification but
having potential weaknesses or risk characteristics that could result in future
problems. An institution is required to develop an in-house program to classify
its assets, including investment in subsidiaries, on a regular basis and set
aside appropriate loss reserves on the basis of such classification. The Bank
believes that it is in compliance with the foregoing requirements.
Loans to One Borrower
Under the HOLA, as amended, savings institutions are subject to the
national bank limits on loans to one borrower. Generally, savings institutions
may not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of the Bank's unimpaired capital and surplus. An additional
amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include certain
securities and bullion, but generally does not include real estate.
Alternatively the HOLA authorizes savings associations to make loans to one
borrower, for any purpose, in an amount not to exceed $500,000 or, by order of
the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30%
of unimpaired capital and surplus to develop residential housing, provided: (i)
the purchase price of each single-family dwelling in the development does not
exceed $500,000; (ii) the savings association is in compliance with its fully
phased-in capital requirements; (iii) the loans comply with applicable
loan-to-value requirements; and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. The HOLA
also authorized a savings association to make loans to one borrower to finance
the sale of real property acquired in satisfaction of debts in an amount up to
50% of unimpaired capital and surplus. Management believes that the Bank is in
compliance with the loans to one borrower regulation.
Capital Requirements
The OTS capital regulations require savings institutions to meet three
capital standards: a 1.5% tangible capital standard; a leverage (core capital)
ratio of 3% or more (as discussed below); and an 8.0% risk based capital
standard. Core capital is defined as common stockholder's equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in equity accounts of consolidated subsidiaries less
intangible assets (as defined by regulation) other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
regulations also require that in meeting the leverage ratio, tangible and risk-
based capital standard institutions must deduct investments in loans and
extensions of credit to subsidiaries engaged in activities not permissible for a
national bank. The Bank currently has no subsidiaries engaged in such
activities.
The OTS has established a 3.0% leverage ratio (defined as the ratio of core
capital to adjusted total assets) for institutions in the strongest financial
and managerial condition, with a 1 MACRO Rating (the highest rating of the OTS
for savings institutions). For all other institutions, the minimum core capital
leverage ratio would be 3% plus at least an additional 100 to 200 basis points.
In determining the amount of additional capital under the proposal, the OTS
assesses both the quality of risk management systems and the level of overall
risk in each individual institution through the supervisory process on a
case-by-case basis.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk weighted assets of 8.0%. In determining the amount of
risk-weighted assets, all assets, including certain off balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3.0% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock, issued in accordance with OTS regulations and memoranda, and allowance
for loan and lease losses. Allowance for loan and lease losses
14
includable in supplementary capital is limited to a maximum of 1.25% of
risk-adjusted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
In 1992, the Federal banking agencies proposed to revise the risk-based
capital rules to account for interest rate risk. Under the proposed rules,
institutions with interest rate risk exposure above a normal level would be
required to hold extra capital in proportion to that risk. Under the proposals,
the threshold for normal risk was defined as a 1% or less decline in the net
economic value of an institution based on a 100 basis point upward or downward
shift in interest rates. Effective September 1, 1995, the federal banking
agencies adopted a final rule to implement minimum capital standards for
interest rate risk exposures in a two-step process. The 1995 rule implements the
first step of that process by revising the capital standards of the banking
agencies to explicitly include a bank's exposure to declines in the economic
value of its capital due to changes in interest rates as a factor that the
banking agencies will consider in evaluating a bank's capital adequacy. The rule
uses information and exposure estimates collected through a new proposed
supervisory measurement process as one quantitative factor used by examiners to
determine the adequacy of an individual bank's capital for interest rate risk.
Under the rule, examiners also will consider qualitative factors, including the
adequacy of the bank's internal interest rate risk management. The 1995 rule
does not codify an explicit minimum capital charge for interest rate risk, based
on the level of bank's measured interest rate risk exposure, but the banking
agencies announced that they will implement this second step at some future
date, through a subsequent and separate proposed rule after the banking agencies
and the banking industry have gained more experience with the proposed
supervisory measurement and assessment process. Federal law requires the banking
agencies to coordinate the development of interest rate risk capital standards
with the Bank for International Settlements and members of the Basle Committee
on Banking Supervision. However, the timing and nature of any international
standard for monitoring and assessing capital for interest rate risk is
uncertain. The Bank currently monitors and manages its assets and liabilities
for interest rate risk, and management believes that the interest rate risk
rules which have been implemented and proposed will not materially adversely
affect the Bank's operations.
At December 31, 1995, the Bank met each of its capital requirements. See
Capital Adequacy in Management's Discussion and Analysis for a table which sets
forth in terms of dollars and percentages the OTS' tangible, core and risk-based
capital requirements and the Bank's historical amounts and percentages at
December 31, 1995.
Similar requirements will apply to the Bank under FDIC regulations after
its conversion to a Pennsylvania chartered savings bank.
Pennsylvania Minimum Capital Requirements
Effective February 4, 1995, the Banking Department adopted final
regulations establishing minimum capital requirements for Pennsylvania chartered
financial institutions such as the Bank (the "PA Capital Rules"). The PA Capital
Rules include a minimum requirement for leverage capital -- the ratio of "Tier
1" capital (as defined for federal bank regulatory purposes) to total assets --
of 4.00%, and a minimum requirement for "risked-based capital" as that which is
required by federal banking laws. The Banking Department may set a higher
minimum leverage ratio requirement for individual institutions. An institution
that falls below these minimums, except in specified circumstances, will be
deemed by the Banking Department to be in unsafe and unsound condition and
conducting business in an unsafe manner. However, an institution which is in
compliance with a written agreement or order, the purpose of which is to
increase its capital ratios, will not be deemed unsafe and unsound condition or
conducting business in an unsafe manner based on its capital ratios. Even if an
institution meets its minimum capital ratio requirements, the Banking Department
has authority to take enforcement action which is otherwise authorized against
an institution which is in an unsafe or unsound condition, is conducting its
business in an unsafe or unsound manner, is in violation of any agreement or
order of the Banking Department, another banking agency, any court, the
institution's charter, or other applicable laws, or as to which any other
banking statute or regulation authorizes such enforcement action.
15
Liquidity
The Bank is required to maintain an average daily balance of liquid assets
(e.g., cash, certain time deposits, bankers' acceptances, specified United
States Government securities, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial paper)
equal to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 5%. OTS regulations also require each
member savings institution to maintain an average daily balance of short-term
liquid assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The monthly average liquidity of the Bank for December 31, 1995
was 7.17%. The Bank has never been subject to monetary penalties for failure to
meet its liquidity requirements.
Insurance of Deposit Accounts
The FDIC sets deposit insurance assessment rates on a semiannual basis
separately for the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). The FDIC has authority to reduce the assessment rates
for either fund whenever the ratio of its reserves to insured deposits is equal
to or greater than 1.25%, and to increase deposit insurance assessments whenever
that ratio is less than 1.25%. Both funds' reserve levels have been less than
1.25% since the separate funds were established under FIRREA. The insurance
assessments paid by an institution are to be based on the probability that its
fund (BIF or SAIF) will incur a loss with respect to the institution.
An institution's semiannual deposit insurance assessment is computed
primarily by multiplying its "average assessment base" (generally, total
insurable domestic deposits) for the prior semiannual period by one-half the
annual assessment rate applicable to that institution depending upon its risk
category, which is based principally on two measures of risk. These measures
involve capital and supervisory factors.
For the capital measure, institutions are assigned semiannually to one of
three capital groups according to their levels of supervisory capital as
reported on their call reports: "well capitalized" (group 1), "adequately
capitalized" (group 2) and "undercapitalized" (group 3). The capital ratio
standards for classifying an institution in one of these three groups are total
risk-based capital ratio (10 percent or greater for group 1, and between 8 and
10 percent for group 2), the Tier 1 risk-based capital ratio (6 percent or
greater for group 1, and between 4 and 6 percent for group 2), and the leverage
capital ratio (5 percent or greater for group 1, between 4 and 5 percent for
group 2).
Within each capital group, institutions are assigned to one of three
supervisory risk subgroups -- subgroup A, B, or C, depending upon an assessment
of the institution's perceived risk based upon the results of its most recent
examination and other information available to regulators. Subgroup A will
consist of financially sound institutions with only a few minor weaknesses.
Subgroup B will consist of institutions that demonstrate weaknesses which, if
not corrected, could result in significant deterioration of the institution and
increased risk of loss to the BIF. Subgroup C will consist of institutions that
pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. Thus, there are nine possible
classifications to which varying assessment rates are applicable. The regulation
generally prohibits institutions from disclosing their subgroup assignments or
assessment risk classifications without FDIC authorization.
16
The following table sets forth the FDIC's current schedule of assessment
rates by capital group and supervisory risk subgroup:
================================================================================
Supervisory risk subgroup
Capital Group
------------------------------
A B C
- --------------------------------------------------------------------------------
"Well capitalized" 23 bp 26 bp 29 bp
- --------------------------------------------------------------------------------
"Adequately capitalized" 26 bp 29 bp 30 bp
- --------------------------------------------------------------------------------
Less than adequately capitalized 29 bp 30 bp 31 bp
================================================================================
The Bank's deposits are insured by SAIF, and the Bank's insurance premium
assessment is currently 23 basis points. There is no assurance whether this
assessment rate will change, either due to changes in the capital group or
supervisory risk subgroup assigned the Bank by banking regulators or other
action by regulators, or due to Congressional or regulatory changes to the
assessment schedule.
On November 14, 1995, the FDIC Board adopted a resolution to reduce to a
range of 0 to 27 basis points the assessment rate applicable to deposits
assessable by the BIF for the semiannual assessment period beginning January 1,
1996. The reduction represents a downward adjustment of 4 basis points from the
revised BIF assessment rate schedule which was in effect for the second
semiannual assessment period of 1995.
While reducing the BIF assessment rate, the FDIC maintained the SAIF
assessment rates at current levels because the FDIC does not project the SAIF
fund to reach the required reserve level of 1.25% of SAIF-insured deposits.
Legislation has been introduced in Congress which may cause the merger of the
BIF and SAIF funds. It is not possible to predict with any assurance if, or
when, legislation might be enacted to merge the two insurance funds or, if such
legislation is adopted, what impact the merger of the funds and the legislation
would have upon future FDIC deposit insurance assessments on the Bank.
Investment in Subsidiaries
Under FIRREA, investments in and extensions of credit to subsidiaries not
engaged in activities permissible for national banks must generally be deducted
from capital. However, certain exemptions generally apply where: (i) a
subsidiary is engaged in activities impermissible for national banks solely as
an agent for its customers; (ii) the subsidiary is engaged solely in
mortgage-banking activities; (iii) the subsidiary is itself an insured
depository institution or a company the sole investment of which is an insured
depository institution acquired by the parent insured depository institution
prior to May 1989; and (iv) the institution is a federal savings bank, which was
chartered prior to October 1982 as a federal savings bank, or acquired its
principal assets from a federal savings bank chartered prior to October 1982.
QTL Test
A new QTL test became effective as of January 1, 1992 and requires 65% of
an institution's assets to consist of certain housing and consumer-related
assets. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans related to domestic residential housing and manufactured
housing; home equity loans; mortgage-backed securities (where the mortgages are
related to residential housing or manufactured housing); and direct or indirect
obligations of the FSLIC or FDIC; and shares of stock issued by any Federal Home
Loan Bank. In addition, the following assets may he included in meeting the test
subject to an overall limit of 20% of the savings bank's portfolio: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of investments in service corporations that meet certain housing-related
standards; 200% of loans related to the acquisition, development and
construction of one-to-four family housing meeting certain low-income standards;
200% of certain loans in areas where credit needs of low and moderate income
residents are not being adequately met; 100% of certain loans to churches,
schools, nursing homes and hospitals; 100% of consumer and educational loans
(limited to 10% of total portfolio assets); and shares of stock issued by the
Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association. The Bank is in compliance with the current QTL test.
17
Savings banks and subsidiaries may not acquire or retain investments in
corporate debt securities that at the time of acquisition were not rated in
certain rating categories by at least one nationally recognized rating
organization. Prime Bank does not hold any securities which are subject to the
foregoing requirements.
Enforcement
Under the FDI Act the OTS, as the primary regulator of savings
associations, is primarily responsible for enforcement action, but the FDIC also
has authority to impose enforcement action independently after following certain
procedures. FIRREA expanded the jurisdiction of the FDIC's enforcement powers to
all "institution- affiliated" parties, including stockholders, attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action having or likely to have an adverse effect on an insured institution.
Under FIRREA, civil penalties are classified into three levels, with amounts
increasing with the severity of the violation. The first tier provides for civil
penalties up to $5,000 per day for violation of law or regulation. A civil
penalty of up to $25,000 per day may be assessed if more than a minimal loss or
a pattern of misconduct is involved. Finally, a civil penalty of up to $1
million per day may be assessed for knowingly or recklessly causing a
substantial loss to an insured institution or taking action that results in a
substantial pecuniary gain or other benefit. Criminal penalties are increased to
$1 million per violation, up to $5 million for continuing violations or for the
actual amount of gain or loss. These monetary penalties may be combined with
prison sentences of up to five years.
FIRREA also provides regulators with far greater flexibility to impose
enforcement action on an insured institution that fails to comply with its
regulatory requirements, particularly with respect to the capital requirements.
Possible enforcement actions include the imposition of a capital plan and
termination of deposit insurance. The FDIC also may recommend that the chairman
of OTS take enforcement action. If action is not taken by the chairman, the FDIC
would have authority to compel such action under certain circumstances.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA requires
public disclosure of an institution's CRA rating and requires the OTS to provide
a written evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system in lieu of the existing five-tiered numerical rating
system.
Transactions with Affiliates and Other Related Parties
The Bank's authority to engage in transactions with related parties or
"affiliates" (i.e., any company that controls or is under common control with an
institution, including the Company and its non-savings institution subsidiaries)
or to make loans to certain insiders, is limited by Section 23A and 23B of the
Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
transactions with any individual affiliate to 10% of the capital and surplus of
the savings institution and also limits the aggregate amount of transactions
with all affiliates to 20% of the savings institution's capital and surplus.
Certain transactions with affiliates are required to be secured by collateral in
an amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standard, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In the absence of comparable transaction, such transactions may only occur under
terms and circumstances, including credit standards, that in good faith would be
offered to or would apply to nonaffiliated companies. Notwithstanding Sections
23A and 23B, savings institutions are prohibited from lending to any affiliate
18
that is engaged in activities that are not permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act ("BHC Act").
Further, no savings institution may purchase the securities of any affiliate
other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA, Regulation 0 thereunder,
Section 22(g) of the FRA and the OTS's Conflicts Rule at 12 CFR 563.43. Among
other things, these regulations require such loans to be made on terms
substantially similar to those offered to unaffiliated individuals, place limits
on the amount of loans the Bank may make to such persons based, in part, on the
Bank's capital position, and require certain approval procedures to be followed.
OTS regulations, with certain minor variances, apply Regulation O to savings
institutions. At December 31, 1995, the Bank had 17 loans with an aggregate
balance of $1.7 million outstanding to its executive officers and directors.
Brokered Deposits
FDICIA imposes new restrictions on the acceptance of brokered deposits.
Absent a waiver from the FDIC, an insured depository institution will not be
permitted to accept brokered deposits unless the institution is "well
capitalized." The FDIC can only grant waivers to institutions that are
"adequately capitalized" or that are in conservatorship. Further, effective 90
days after an institution is placed in conservatorship, it may not accept any
brokered deposits. Adequately capitalized and conservatorship institutions that
accept brokered deposits pursuant to an FDIC waiver may not pay an above-market
rate of interest on those deposits. At December 31, 1995 the Bank had no
brokered deposits.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System. The FHLB System consists of 12
regional Federal Home Loan Banks, subject to supervision and regulation by a
newly created Federal Housing Finance Board. The Federal Home Loan Banks provide
a central credit facility primarily for member savings institutions. Prime Bank,
as a member of the FHLB of Pittsburgh, is required to acquire and hold shares of
capital stock in the FHLB of Pittsburgh in an amount at least equal to the
greater of 1% of the Bank's aggregate unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each year, or 5%
of its outstanding advances from the FHLB of Pittsburgh. At December 31, 1995,
the Bank had a $1.8 million investment in the stock of the FHLB of Pittsburgh
and was in compliance with this requirement.
Advances from the FHLB are secured by a member's shares of stock in the
FHLB, certain types of mortgages and other assets. Interest rates charged on
advances vary with the maturity and the cost of funds to the FHLB. At December
31, 1995 the Bank had $14.0 million of advances from the FHLB of Pittsburgh.
The Bank is required to maintain a daily average balance of liquid assets
(cash, certain time deposits, bankers' acceptances, investment grade corporate
debt obligations and commercial paper, and specified United States government,
state or federal agency obligations) equal to a monthly average of not less than
a specified percentage of its net withdrawable savings deposits plus short-term
borrowings ("liquidity base"). This liquidity requirement may be changed from
time to time by OTS to any amount within the range of 4% to 10% and is currently
5%. Short-term liquid assets currently must constitute 1% of the liquidity base.
Monetary penalties may be imposed for failure to meet monthly liquidity
requirements.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves of 3% must be maintained against
aggregate transaction accounts of $51.9
19
million or less (subject to adjustment by the Federal Reserve Board) and an
initial reserve of $1.557 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $51.9 million. The first $4.0 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Federal Reserve Board may adjust
reserve requirements or impose supplemental reserve requirements under some
circumstances. The Bank is in compliance with the foregoing requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce the Bank's interest-earning assets. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but Federal
Reserve Board regulations require institutions to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
TAXATION
Federal Taxation
The Bank operates on a calendar year and files calendar year federal income
tax returns and reports its income and expenses using the accrual method of
accounting.
Thrift institutions are generally taxed in the same manner as other
corporations. Unlike other corporations, however, qualifying thrift institutions
such as the Bank that meet certain definitional tests relating to the nature of
their income, assets and business operations are allowed to establish a reserve
for bad debts and are permitted to deduct additions to that reserve on
"qualifying real property loans" using one of two alternative methods and on
"nonqualifying loans" using a 6 year moving average experience method.
"Qualifying real property loans" are, in general, loans secured by
interests in improved real property. "Nonqualifying loans" are all loans other
than qualifying real property loans. For each tax year,a qualifying institution
may compute the addition to its bad debt reserve for qualifying real property
loans using the most favorable of the following methods: (i) a method based on
the institution's actual loss experience (the "experience method") or (ii) a
method based on a specified percentage of an institution's taxable income (the
"percentage of taxable income method"). The addition to the reserve for
nonqualifying loans must be computed under the experience method and this amount
would serve to reduce the amount calculated under the percentage of taxable
income method for qualifying real property loans.
The Bank generally computes its addition to its allowance for loan losses
on qualifying real property loans using the percentage of taxable income method.
Under this method, a qualifying institution can deduct, as an addition to their
allowance for loan losses on qualifying real property loans, up to 8% of the
qualifying institution's taxable income (with certain adjustments). The
deduction may exceed the deduction computed under the experience method.
However, the deduction under the percentage of taxable income method is
reduced (but not below zero) by the amount determined to be a reasonable
addition to the reserve for losses on nonqualifying loans. In addition, the
deduction under this method may not exceed the amount necessary to increase the
balance at the close of the taxable year of the reserve for losses on qualifying
real property loans to 6% of such loans outstanding at such time.
A thrift institution that computes its bad debt deduction on the percentage
of taxable income method and files its federal income tax return as part of a
consolidated group is required to reduce proportionately its bad debt deduction
for losses attributable to the activities of other thrift institution members
and activities of nonthrift institution members of the consolidated group that
are "functionally related" to the activities of the thrift institution member.
In addition, the bad debt deduction otherwise allowable under the percentage of
taxable income method is eliminated entirely unless at least 60% of a thrift
institution's assets fall into certain designated categories. Also, the bad debt
deduction attributable to "qualifying real property loans" determined under the
percentage of taxable
20
income method (after application of the limitation discussed above), cannot
exceed the greater of (i) the amount deductible under the experience method or
(ii) the amount which, when added to the bad debt deduction for nonqualifying
loans, equals the amount by which 12% of the sum of the total deposits or
withdrawable accounts of depositors at the end of the taxable year exceeds the
sum of the surplus, undivided profits and reserves at the beginning of the
taxable year. To date, these limitations have not restricted the amount of the
Bank, otherwise allowable deductions for additions to its bad debt reserve.
To the extent that (i) the Bank's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under the
experience method (the "excess") and (ii) the Bank makes distributions to Prime
Bancorp that are considered to result in withdrawals from that excess bad debt
reserve, then the amounts deemed withdrawn will be included in the Bank's
taxable income. The amount considered to be withdrawn by a distribution will be
the amount of the distribution plus the amount necessary to pay the tax with
respect to the withdrawal. Dividends paid out of the Bank's current or
accumulated earnings and profits as calculated for federal income tax purposes,
however, will not be considered to result in withdrawals from the Bank's, bad
debt reserves for qualifying real property loans. Non-liquidating distributions
in excess of the Bank's, current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation of the Bank will be considered to result in withdrawals first from
the Banks, bad debt reserves on qualifying real property loans to the extent
thereof, and finally out of such other accounts as may be proper. At December
31, 1995, the Bank had approximately $21.0 million in retained earnings (apart
from amounts allocated to its bad debt reserve) that would be available for
distribution to its stockholders, subject to various restrictions imposed by
OTS, without the imposition of this additional tax on the Bank.
Thrift institutions are subject to special tax treatment with respect to
the deductibility of interest expense relating to certain tax-exempt
obligations. Thrift institutions are entitled to deduct 100% of their interest
expense allocable to the purchase or carrying of tax-exempt obligations acquired
before 1983. The deduction is reduced to 80% for obligations acquired after 1982
and eliminated entirely for obligations acquired after August 7, 1986 (except
for certain issues by small municipal issuers and certain charitable
organizations).
Depending on the composition of its items of income and expense a thrift
institution may be subject to the alternative minimum tax. A thrift institution
must pay an alternative minimum tax equal to the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased by certain tax preferences and adjustments, including depreciation
deductions in excess of those allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
the amount of bad debt reserve deduction claimed in excess of the deduction
based on the experience method and by 75% of the excess of adjusted current
earnings over AMTI. The AMTI may be reduced only up to 90% by net operating loss
carryovers, but alternative minimum tax paid attributable to most preferences
and adjustments (although not to post August 7, 1986 tax-exempt interest) can be
credited against regular tax due in later years.
TAX LITIGATION
The Bank was engaged in litigation in the United States Tax Court in
connection with a Statutory Notice of Deficiency issued by the Internal Revenue
Service for the tax years (December 31) 1969, 1970, 1971, 1972, 1973, 1974,
1975, 1976, 1977, 1978, 1980, and 1981. The Statutory Notice of Deficiency was
directed to Cheltenham Federal Savings and Loan Association ("Cheltenham") , a
predecessor to the Bank. The litigation involved two separate legal issues. The
controversy concerning these issues was resolved by the parties pursuant to a
Stipulation of Settled Issues which was entered into on or about November 20,
1991 (the "Stipulation"). The terms of the Stipulation reflected the results of
1991 U.S. Supreme Court decisions in Cottage Savings Association v. Commissioner
and United States of America v. Centennial Savings Bank. In January 1996, the
Bank settled its outstanding case with the IRS in connection with the
examination of the noted tax year returns. The United States Tax Court ruled
that Cheltenham properly recognized losses relating to the reciprocal purchase
and sale of mortgage
21
loans in 1980. The U.S. Tax Court also ruled in favor of the IRS on the issue of
the permissibility of reducing the basis of assets by the early withdrawal
penalty on savings certificates. The Bank had previously accrued the estimated
liability for the amount of interest due relating to this issue, and the actual
amount payable is not expected to be materially different.
REVISED ACCOUNTING STANDARDS
On December 31, 1993, the Company adopted the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. See
Investments, Mortgage-backed Securities and Other on page 36 of the 1995 Annual
Report to Stockholders.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, Accounting for Income Taxes and has reported the cumulative effect of that
change in the method of accounting for income taxes in the Consolidated
Statement of Operations. See Income Taxes on page 35 of the 1995 Annual Report
to Stockholders.
The Company adopted the provisions of SFAS No. 114, Accounting by Creditors
for Impairment of a Loan and SFAS No. 118, Accounting by Creditors of Impairment
of a Loan - Income Recognition and Disclosures in 1995. See Loan Impairment on
page 35 of the 1995 Annual Report to Stockholders.
The Company adopted SFAS No. 122 Accounting for Mortgage Servicing Rights.
See Mortgage Servicing Rights on page 35 of the 1995 Annual Report to
Stockholders.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock Based Compensation. This statement encourages the adoption
of fair value accounting for stock options issued to employees. Further, in the
event that fair value accounting is not adopted, the statement requires pro
forma disclosures of net income and earnings per share as if fair value
accounting had been adopted. SFAS No. 123 is required to be adopted in 1996.
Management currently expects that it will not adopt fair value accounting for
stock options issued to employees, and therefore does not expect the adoption of
this statement to materially affect the company's results of operations or
financial condition.
STATE TAXATION
The Bank is subject to the Pennsylvania Mutual Thrift Institution Tax Act,
which imposes a tax measured by the Savings Bank's net income. Under the current
law, the MTIT rate is 11.5%.
As a Delaware business corporation, the Company will be required to file
annual returns with and pay annual fees to the Secretary of State of Delaware.
The Company is currently subject to an annual franchise tax based on its net
worth and imposed by the State of Delaware.
Item 2. Properties.
The Company neither owns nor leases any real property. At present, it uses
the premises, equipment and furniture of the Bank without direct payment of any
rental fees. In the future it may consider acquiring office facilities.
The Bank has eight offices in Philadelphia County, five in Bucks County,
and five in Montgomery County, Pennsylvania. Of the eighteen offices, eight are
owned, and ten offices are subject to leases. At its home office, the Bank
offers a full range of customer services. Except for safe deposit boxes, these
same services are available at each of the Bank's other offices. The Bank
participates in the MAC Money Access Service shared Automated Teller Machine
("ATM") network and the PLUS SYSTEM network which is the leading international
system of
22
shared automated teller machines (ATMs) which enables customers to obtain cash
almost anytime and almost anywhere they travel in the United States. Eight
offices are equipped with ATMs owned by the Bank.
The following table sets forth certain information concerning the business
offices of the Bank at December 31, 1995 (dollars in thousands).
Net Book
Value of
Property and
Owned Leasehold
or Lease Improvements Deposits at
Leased Expiration At December 31, December 31,
(2) Date 1995 1995
- -------------------------------------------------------------------------------------------------------
Philadelphia, 6425 Rising Sun Avenue Owned -- $ 1,280 $120,288
Philadelphia, 18th & JFK Blvd Leased 3/31/2000 -- 13,037
Philadelphia, 1841 E. Allegheny Avenue Owned -- 101 39,356
Philadelphia, 14425 Bustleton Avenue Owned -- 150 19,575
Philadelphia, 1000 Cottman Avenue Owned -- 470 27,219
Philadelphia, 8500 Germantown Avenue Leased 7/31/2000 -- 24,151
Philadelphia, 1695 Grant Avenue Leased 7/31/2000 45 22,817
Philadelphia, 423 E. Girard Avenue Owned -- 45 19,653
Oxford Valley, Bucks County
195 Bristol Oxford Valley Road Leased 6/30/2000 133 17,359
Fairless Hills, Bucks County
503 South Oxford Valley Road Owned -- 324 23,961
Richboro, Bucks County
984 Second Street Pike Owned -- 232 33,293
Southampton, Bucks County
723 Street Road Owned -- 612 53,075
Yardley, Bucks County
10 South Main Street Leased 10/31/2000 14 2,220
Horsham, Montgomery County
301 Horsham Road Leased 9/30/99 65 16,052
Huntingdon Valley, Montgomery County
Bethayres Shopping Center/618 Welsh Road Leased 11/30/2000 26 8,924
Jenkintown, Montgomery County
The Pavilion/261 Old York Road Leased 6/01/98 194 14,915
Montgomeryville/North Wales
Montgomery County...521 Stump Road Leased 1/21/99 -- 15,615
Willow Grove, Montgomery County
Old York & Moreland Roads Leased 9/23/2004 -- 5,029
- -------------------------------------------------------------------------------------------------------
$ 3,691 $476,539
=======================================================================================================
Item 3. Legal Proceedings.
Except for litigation with the IRS concerning the deductibility of losses on the
reciprocal sale of mortgages (see TAX LITIGATION on pages 21 and 22), for which
the Bank has fully reserved against any potential liabilities and routine
foreclosures, there are no material legal proceedings to which the Company, the
Bank or its subsidiary service corporations are a party or to which any of their
properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
23
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the captions "Market Information" (page 28)
and Notes 1 and 3 of "Notes to Consolidated Financial Statements" (pages 34 and
37) in the Company's 1995 Annual Report to Stockholders is incorporated herein
by reference thereto.
Market Information
The Company's common stock is traded on the over-the-counter market and
reported on the NASDAQ National Market System under the symbol "PSAB." On
February 1, 1996, there were 3,905,161 shares of common stock issued and
3,721,098 shares of common stock outstanding, which were held by approximately
760 stockholders. The following table sets forth the high and low closing sale
prices for the common stock, as quoted on the NASDAQ National Market System, and
the dividends declared per share, for the periods indicated.
Dividends
Declared
For The Quarter Ended High Low (Per Share)
- -----------------------------------------------------------
December 31, 1988 $ 5.39 $ 4.27 N/A
March 31, 1989 $ 5.76 $ 5.16 $.03
June 30, 1989 6.05 5.68 .03
September 30, 1989 6.87 5.76 .04
December 31, 1989 6.69 5.68 .04
- -----------------------------------------------------------
March 31, 1990 $ 5.95 $ 4.84 $.05
June 30, 1990 5.12 4.27 .05
September 30, 1990 4.46 4.00 .05
December 31, 1990 3.53 3.15 .05
- -----------------------------------------------------------
March 31, 1991 $ 5.58 $ 3.25 $.05
June 30, 1991 6.05 5.12 .05
September 30, 1991 8.36 5.31 .05
December 31, 1991 8.36 6.69 .07
- -----------------------------------------------------------
March 31, 1992 $ 9.11 $ 8.36 $.08
June 30, 1992 9.48 8.74 .09
September 30, 1992 8.93 8.28 .10
December 31, 1992 10.78 9.40 .10
- -----------------------------------------------------------
March 31, 1993 $13.39 $10.23 $.10
June 30, 1993 15.08 12.19 .18
September 30, 1993 15.08 13.23 .11
December 31, 1993 17.35 14.67 .11
- -----------------------------------------------------------
March 31, 1994 $17.56 $15.91 $.13
June 30, 1994 17.97 16.95 .13
September 30, 1994 15.91 14.87 .13
December 31, 1994 15.23 14.32 .15
- -----------------------------------------------------------
March 31, 1995 $17.27 $16.14 $.15
June 30, 1995 16.36 15.68 .15
September 30, 1995 19.09 18.18 .15
December 31, 1995 20.88 18.00 .17
- -----------------------------------------------------------
The Board of Directors of the Company, on December 20, 1995, declared a
special 10% stock dividend to shareholders in the form of a dividend and was
paid on February 1, 1996 to shareholders of record on January 2, 1996. The
trading information set forth above has been adjusted to reflect the stock split
and the 10% stock dividends through and including December 31, 1995 for the
purpose of comparability.
It is the Company's current policy to pay quarterly cash dividends. Future
cash dividends will be subject to determination and declaration by the Board of
Directors, which will take into account the Company's financial condition,
results of operations, industry standards, economic conditions and regulatory
and tax considerations. Funds for the payment of the dividends by the Company
are obtained from the
24
Bank. The amount of dividends that may be declared or paid by the Bank are
subject to certain restrictions. See Note 3 to the consolidated financial
statements.
The listed market makers for the stock are: Robert W. Baird & Co., Inc.;
Wheat First Securities Inc.; Herzog, Heine, Geduld, Inc.; Sandler O'Neill &
Partners; Janney Montgomery Scott, Inc.; F.J. Morrissey & Co., Inc.; and Ryan
Beck & Co., Inc.
1. Summary of Significant Accounting Policies
The following is a description of the significant accounting policies of
Prime Bancorp, Inc. and subsidiaries (the "Company"). The accompanying
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which have been applied on a
consistent basis.
Business
The Company's principal subsidiary is Prime Bank (the "Bank") whose
principal business consists of attracting deposits and obtaining borrowings,
then converting those deposits and borrowings into various types of loans,
mortgage-backed securities, and other investments. These operations are
conducted through a branch network in Southeastern Pennsylvania. The Bank is
subject to competition from other financial institutions and it is also subject
to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in prior years have been reclassified for
comparative purposes.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and the estimated fair value of real estate owned, management
obtains independent appraisals for significant properties.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company
considers cash and cash equivalents to include cash, due from banks and
interest-bearing deposits with maturities of 3 months or less.
Investments, Mortgage-backed Securities and Other
Securities classified as held-to-maturity are those securities in which the
Company has the ability and intent to hold the security until maturity and are
recorded at amortized cost, adjusted for the amortization of premiums and
discounts. All other securities not included in held-to-maturity are classified
as available-for-sale and are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. Transfers of
securities between categories are recorded at fair value at the date of
transfer.
With the issuance of "A Guide to Implementation of Statement 115 Accounting
for Debt and Equity Securities," the Financial Accounting Standards Board has
allowed institutions to reassess the appropriateness of the
25
classifications of all securities and account for any resulting
reclassifications at fair value. The reclassifications should occur no later
than December 31, 1995 and will not call into question the intent of an
institution to hold other debt securities to maturity in the future.
A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
The Company has one interest rate swap which is used to hedge the interest
rate risk of 7 year fixed certificated of deposits. The Company does not use
derivatives for trading purposes.
Real Estate Owned
Real estate acquired in partial or full satisfaction of loans are
classified as Real Estate Owned ("REO"). Prior to transferring a real estate
loan to REO it is written down to the lower of cost or fair value. This
write-down is charged to the allowance for loan losses. Subsequently, REO is
carried at the lower of fair value less estimated costs to sell or carrying
value.
Land Acquired for Development and Resale
Land acquired for development and resale represents land and construction
in progress and is carried at the lower of cost or net realizable value.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the lesser of
the lease term (where applicable) or the estimated useful lives of the related
property, which range from 5 to 40 years. Maintenance and repairs are expensed
as incurred.
Loans Receivable
Interest income is recognized on the accrual basis. Generally, loans are
placed on non-accrual status when the loan becomes past due by 90 days or more
as to principal or interest. After a loan is placed on non-accrual status, any
interest previously accrued but not yet collected is reversed against current
interest income. A loan is returned to accrual status only when the borrower has
brought principal and interest current and full collectability is reasonably
assured.
Fees earned for servicing loans for others are reported as income when the
related loan payments are collected. Loan servicing costs are charged to expense
as incurred. If the Bank sells loans and continues to service such loans for the
investor, the computation of the gain or loss is adjusted to allow for a normal
servicing fee over the estimated remaining maturities of the loans sold. Normal
servicing fees are based on the minimum servicing rates of the relevant
federally-sponsored market makers or comparable rates for transactions with
other investors. The resulting deferral is amortized as an adjustment of
servicing fee income over a period generally not in excess of 7 years.
Loan Impairment
The Company adopted the provisions of SFAS No. 114, Accounting by Creditors
for Impairment of a Loan and SFAS No. 118, Accounting by Creditors of Impairment
of a Loan - Income Recognition and Disclosures in 1995.
26
SFAS No. 114 and 118 require that "impaired" loans be measured based on the
present value of expected future cash flows, discounted at the loan's effective
interest rate or, as a practical expedient, at the loans observable market price
or the fair value of the collateral if the loan is collateral dependent.
Mortgage Servicing Rights
The Company adopted SFAS 122 "Accounting for Certain Mortgage Banking
Activities". SFAS 122 requires that a mortgage banking enterprise recognize, as
separate assets, rights to service mortgage loans. SFAS 122 requires that a
periodic assessment of its capitalized mortgage servicing rights (MSRs") for
impairment, based on the fair value of those rights.
The carrying value of capitalized MSR's at December 31, 1995 was $260
thousand which approximated fair value. Fair value was determined by calculating
the discounted present value of estimated expected net future cash flows,
considering estimated prepayments and defaults, projected interest rates and
other factors. For purposes of evaluating and measuring impairment, capitalized
MSRs are aggregated into groups having homogeneous risk characteristics, based
on the attributes of the underlying loans, and are separately valued, using
appropriate assumptions for each risk group. No valuation allowance was required
for capitalized MSRs at December 31, 1995.
Stock Based Compensation
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation." This statement encourages the
adoption of fair value accounting for stock options issued to employees.
Further, in the event that fair value accounting is not adopted, the statement
requires pro forma disclosures of net income and earnings per share as if fair
value accounting had been adopted. SFAS No. 123 is required to be adopted in
1996. Management currently expects that it will not adopt fair value accounting
for stock options issued to employees, and therefore does not expect the
adoption of this statement to materially affect the company's results of
operations or financial condition.
Loans Held for Sale
The Bank has adopted a policy to sell off fixed rate single family
residential mortgage loans and adjustable rate mortgages which meet the
underwriting and securitization characteristics of certain market makers.
Conforming loans are transferred to loans held for sale and are valued at the
lower of cost or market.
Deferred Loan Fees, Net
Loan origination fees, commitment fees and loan origination costs are
deferred and amortized as an adjustment to the yield over the life of the loan
in a manner which approximates the interest method.
Allowance for Loan Losses
The allowance for loan losses is based on a periodic evaluation of the
portfolio and is maintained at a level that management considers adequate to
absorb losses known and inherent in the portfolio. Management considers a
variety of factors when establishing the allowance recognizing that an inherent
risk of loss always exists in the lending process. Consideration is given to the
impact of current economic conditions, diversification of the loan portfolio,
historical loss experience, delinquency statistics, results of detailed loan and
regulatory reviews, borrowers's financial and managerial strengths, the adequacy
of underlying collateral, and other relevant factors. The allowance for loan
losses is increased by the provision for loan losses and recoveries on
previously charged-off loans, and is reduced by actual charge-offs. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies as an integral
part of their examination process, periodically review the allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments of information which is
available to them at the time of their examination.
27
A substantial portion of the Company's loans are secured by real estate in
the Company's market area. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recoverability of a
substantial portion of the carrying amount of real estate owned is susceptible
to changes in economic and market conditions in the market area. However,
management believes that the allowance for loan losses is adequate and that the
value assigned to properties included in real estate owned and land acquired for
development and resale do not exceed their current estimated fair values less
estimated costs to sell.
Income Taxes
The Company and its wholly owned subsidiaries file a consolidated federal
income tax return. Deferred income taxes result from recognizing items of income
or expense in one time period for tax reporting and in another for financial
reporting purposes.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, Accounting for Income Taxes and has reported the cumulative effect of that
change in the method of accounting for income taxes in the 1993 consolidated
statement of operations. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income an allowance for bad debts based on a
percentage of taxable income before such deduction. The maximum amount of this
deduction is 8% of taxable income.
Capital
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized".
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at
least 4%, and a total risk-based capital ratio of at least 8%. The Bank's
regulatory capital ratios exceed the "well capitalized" ratio requirements of
10% total risk-based capital, 6.0% Tier 1 risk-based capital and a 5.0% leverage
ratio.
Earnings per share
Earnings per share have been calculated based on the weighted average
number of shares of common stock outstanding for the respective periods. Stock
options are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock method,
unless anti-dilutive. Earnings per share has been restated to reflect the stock
splits and stock dividends.
3. Stockholders' Equity
OTS regulations require that mutual associations converting to stock form
of ownership establish a "Liquidation Account" in an amount equal to the total
net worth of the association as of the date of the latest balance sheet
contained in the final offering circular. Each eligible savings account holder
is entitled to a proportionate share (subaccount) of this amount in the event of
a complete liquidation of the association, and only in such event. This
subaccount is reduced if the subaccount holders' savings deposits fall below the
amount at the date of record and will cease to exist if the savings account is
closed. The liquidation account will never be increased despite any increase
after conversion in the related savings deposits of a subaccount holder. At the
time of its conversion to
28
a stock form of ownership, the Bank's liquidation account was approximately
$18,737,000. The Bank's liquidation account at December 31, 1995 was
approximately $4,500,000.
The creation and maintenance of the liquidation account does not restrict
use or application of any of the stockholders' equity accounts of the Bank
except that the Bank may not declare or pay any cash dividend on or repurchase
any of its common stock, if the effect of such dividend or repurchase would be
to cause the stockholders' equity of the Bank to be reduced below the aggregate
amount then required for the liquidation account or the regulatory net worth
requirement.
The Company offers to its stockholders a Dividend Reinvestment and Stock
Purchase Plan, which provides participants with a method of reinvesting all or a
portion of cash dividends paid on shares of common stock in additional shares of
common stock without the payment of brokerage commissions or charges. Shares
purchased under such plan are purchased in the open market.
The Board of Directors of the Company declared a special 10% stock dividend
to shareholders in the form of a dividend and was paid on February 1, 1996 to
shareholders on record on January 2, 1996. This is the third stock dividend in
the last three years that the Company has declared and paid.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Condition Data" on
page 26 of the Company's 1995 Annual Report to Stockholders is incorporated
herein by reference thereto.
FINANCIAL CONDITION DATA
(Dollars in thousands)
Years Ended December 31,
- ------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
- ------------------------------------------------------------------------------------------
Total Amount of:
Assets $364,110 $393,324 $450,912 $566,904 $607,975
Loans (2) and mortgage-backed
securities 289,453 320,778 386,140 449,441 487,422
Investment securities and
interest-bearing deposits 57,307 46,543 34,732 71,733 72,453
Land acquired for development
and resale 1,209 1,000 838 694 10,405
Deposits 294,840 338,006 368,800 447,651 476,539
Advances from Federal Home Loan
Bank of Pittsburgh 11,900 5,900 10,000 6,000 14,000
Other borrowings 10,911 371 17,264 53,710 54,844
Stockholders' equity 41,325 44,909 49,698 47,641 56,247
Number of:
Real estate loans
outstanding 4,137 3,826 3,425 3,374 3,145
Savings accounts 46,783 51,666 62,256 76,847 75,892
Offices open 9 10 12 16 18
==========================================================================================
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (pages 18 through 27)
in the Company's 1995 Annual Report to Stockholders is incorporated herein by
reference thereto.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
29
General
The activities of Prime Bancorp, Inc. (the "Company") are limited primarily
to holding the common stock of its principal subsidiary, Prime Bank (the
"Bank"). The Bank's mission is to provide individuals, businesses and
communities within the Philadelphia area with high quality basic banking
services. Prime lends and gathers deposit money through eighteen local offices.
Loans are diversified among residential mortgage, residential construction,
consumer and commercial lines. Deposits are gathered through multiple checking,
savings and CD product lines. Legally, Prime maintains a thrift status to avoid
thrift-to-bank conversion penalties, but otherwise is strategically positioned
as a full service community bank.
Net Income
Prime Bancorp, Inc. reported net income of $5.85 million during 1995, a
small gain over the $5.81 million reported during 1994. Both numbers are well
above the $5.42 million earned for 1993 before a one time adjustment of $1.06
million caused by adoption of the Financial Accounting Standards Board's FAS
109.
[The following table was represented as a bar graph in the printed material.]
In Millions
1993 1994 1995
- ------------------------
$5.42 $5.81 $5.85
Prime's 1995 income growth was driven by a $1.24 million increase in net
interest income and a $1.06 million increase in non-interest income, offset by a
by a $2.50 million dollar increase in non-interest expense and a $600 thousand
dollar decrease in the loan loss provision. In 1994, growth was supported by a
$1.77 million increase in net interest income after the provision for loan
losses offset by a $1.53 million increase in non-interest expenses.
Net Interest Income
Net interest income for a bank is analogous to the gross profit margin of a
business. It represents the difference between income earned on earning assets
and the interest expense paid on liabilities. Net interest income is affected by
market and economic conditions which influence rates and loan and deposit
growth.
[The following table was represented as a bar graph in the printed material.]
In Millions
1993 1994 1995
- --------------------------
$18.16 $19.73 $20.97
Prime's net interest income represented 88% of the revenues during 1995.
Net interest income increased to $20.97 million for 1995 compared to $19.73
million and $18.16 million for 1994 and 1993, respectively. Prime's net interest
income increased 6.3% during 1995 compared with 1994's 8.7% growth. 1995's
improvement in net interest income was due exclusively to the positive volume
variances compared with 1994's mixture of positive volume and rate variance (see
rate/volume analysis table).
30
Prime's net interest margin declined from 4.65% during 1994 to 4.26% during
1995. This decline was caused mostly by a shift in balance sheet mix. The
September 1994 acquisition of two offices from the RTC and the deployment of
those moneys into investments caused most of the margin decline. Spreads
compressed only slightly during the year.
During the first quarter of 1995, a subsidiary of the bank took title to a
condominium project by deed in lieu of foreclosure. This had the effect of
converting a large earning asset into a non-earning asset. The carrying value of
the project averaged approximately $9.6 million during the year and negatively
impacted net interest income by approximately $800 thousand.
Management is committed toward maintaining long term stability in net
interest income despite changes in interest rates. This is accomplished through
the approximate matching of asset repricings and durations to liability
repricings and durations.
The two tables on pages twenty-four and twenty-five present an analytical
explanation of Prime's net interest income. The first provides a detailed spread
analysis. The second shows a differential rate/volume variance analysis.
Loan Loss Expense
The provision for loan losses for the years ending December 31, 1993, 1994
and 1995 was $1.44 million, $1.24 million and $.64 million respectively. The
lower 1995 provision was consistent with a decrease in non-performing loans
which was concentrated in low credit risk residential mortgages. The provision
was made in amounts sufficient to maintain the allowance for loan losses at an
adequate level.
[The following table was represented as a bar graph in the printed material.]
In Millions
1993 1994 1995
- -----------------------
$1.44 $1.24 $0.64
Non-Interest Income
Non-interest income increased dramatically rising from $1.80 million in
1994 to $2.86 million during 1995. This compares favorable to the small decrease
between 1993 and 1994. Increased service charges on deposit accounts accounted
for $480 thousand of the improvement. During 1995, gains in sales of mortgage
backed securities and excess servicing was $465 thousand and $260 thousand
respectively. Other income also improved in 1995 mostly due to revenues from the
corporation's title agent subsidiary. All of these gains were partly offset by
reductions in loan fee and rental incomes.
[The following table was represented as a bar graph in the printed material.]
In Millions
1993 1994 1995
- -----------------------
$1.85 $1.80 $2.86
Non-Interest Expense
Non-interest expenses increased by $2.50 million during 1995 compared to an
increase of $1.53 million last year. The higher expense increase supported the
expansion of the branch
31
banking network, costs associated with the a condominium project, and normal
staffing and salary increases.
[The following table was represented as a bar graph in the printed material.]
In Millions
1993 1994 1995
- -------------------------
$9.51 $11.34 $13.83
Branch salary and benefits expense increased $1.17 million during the year.
Occupancy and equipment expense increased by $769 thousand. Most of the
increases supported the new offices. Two offices were acquired from the RTC in
September of 1994. Other new offices were opened in December 1994, March 1995,
and October 1995. In addition the condominium project incurred expenses of $382
thousand during the year.
Income Taxes
The provision for federal and state income taxes for the years ended
December 31, 1993, 1994 and 1995 was $3.35 million, $3.14 million and $3.50
million, respectively. The $3.35 million number for 1993 was prior to the FASB
109 adjustment.
The lower tax number for 1994 was caused by a one time deployment of some
of the corporations's assets in tax free state obligations and other activities
that had the effect of reducing state taxes during 1994. Income taxes increased
by $357 thousand from $3.14 million in 1994 to $3.50 million in 1995. This
increase was caused by an increase in income before income taxes as well as a
decrease in tax free investments.
[The following table was represented as a bar graph in the printed material.]
In Millions
1993 1994 1995
- -------------------------
$3.35 $3.14 $3.50
Balance Sheet Review
Prime's total assets grew from $566.9 million at year end 1994 to $608.0
million at year end 1995, a gain of $41.1 million or 7.2%. Balance sheet changes
are summarized in the following table (dollars in millions):
Balance Sheet 1994 1995 $Change %Change
- --------------------------------------------------------------------------------
Loans (Net)(1) $ 329.0 $ 351.5 $ 22.5 6.8%
Investments (2) 192.2 208.3 16.1 8.4%
Non-Earnings Assets 45.7 48.2 2.5 5.5%
- --------------------------------------------------------------------------------
Total Assets $ 566.9 $ 608.0 $ 41.1 7.3%
================================================================================
Deposits $ 447.7 $ 476.5 $ 28.8 6.4%
Purchased Funds 61.8 71.1 9.3 15.0%
Other Liabilities 9.8 4.2 (5.6) (57.1%)
Equity 47.6 56.2 8.6 18.1%
- --------------------------------------------------------------------------------
Total Liabilities
and Equity $ 566.9 $ 608.0 $ 41.1 7.3%
================================================================================
(1) Loans (net) includes loans receivable and loans held for sale.
(2) Investments includes investments, mortgage-backed securities and
interest-bearing deposits.
1995 balance sheet growth was supported by a $28.8 million increase in
deposits and a $9.3 million increase in purchased funds, as well as an $8.6
million increase in capital. These funds were used to support loan growth of
$22.5 million, investment growth of $16.1 million
32
and net changes between non-earning assets and other liabilities.
Loans
Loans grew from $329.0 million at the end of 1994 to $351.5 million at the
end of 1995 an increase of 6.8%. During 1995 loan growth was sluggish through
most of the year. Growth was stable in residential mortgages, moderate in
consumer loans, and in commercial loans and negative in construction lending.
Investments
Investments increased moderately during the year, moving from $192.2
million at year-end 1994 to $208.3 million at year end 1995, a pick up of $16.1
million or 8.4% Management's investment strategy focuses on maintaining an
adequate reserve of shorter term investments to conservatively meet liquidity
needs, combined with a more permanent portfolio of medium-term investments to
serve asset/liability management purposes.
The composition of the investment portfolio was also influenced by the
"Qualified Thrift Lender" test established by Federal laws which requires the
Bank to maintain 65% of its assets in housing related loans and investments. In
order to meet this requirement and because of the Bank's loan diversification
into non-housing related products, most of the Bank's portfolio investments are
placed in Mortgage Backed Securities. Prime's mortgage backed securities are
among between Adjustable Rate Mortgages ("ARMs"), Variable Rate Collateralized
Mortgage Obligations ("CMOs") and medium term fixed rate CMOs.
Non-Interest Earning Assets
Non-interest earning assets increased from $45.7 to $48.2 million for 1994
and 1995 respectively. This increase reflects changes in deferred income taxes
as well as the movement of the condominium project into non-earning assets.
Deposits
Deposits increased $28.8 million or 6.4% during 1995. The year was
characterized by stable growth in checking account balances, moderate growth in
small savings and money market balances and moderate growth in Retail CDs.
During the year the Bank successfully promoted "Prime Basic and Prime Select"
two new relationship banking packages. The changes in the mix of deposit
accounts toward more transaction accounts was in keeping with the Bank's
community banking strategy.
Purchased Funds
Purchased funds at year-end 1995 were $71.1 million compared with $61.8
million at year-end 1994. Purchased funds at year end 1995 included $19.1
million in customer repos which were introduced during the year.
Allowance for Loan Losses
The allowance for loan losses decreased from $4.29 million at the end of
1994 to $3.76 million at the end of 1995.
The allowance for loan losses is based on a periodic evaluation of the
portfolio and is maintained at a level that management considers adequate to
absorb losses known and inherent in the portfolio. Management considers a
variety of factors when establishing the allowance recognizing that an inherent
risk of loss always exists in the lending process. Consideration is given to the
impact of current economic conditions, diversification of the loan portfolio,
historical loss experience, delinquency statistics, results of detailed loan
reviews, borrowers' financial and managerial strengths, the adequacy of
underlying collateral, and other relevant factors. The allowance for loan losses
is increased by the provision for loan losses and recoveries on previously
charged-off loans, and is reduced by actual charge-offs. While management uses
available information
33
to establish allowances for losses on loans, future additions to the allowance
for loan losses may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance for loan losses based
on their assessments of information which is available to them at the time of
their examination.
A substantial portion of the Company's loans are secured by real estate in
the Company's market area. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recoverability of a
substantial portion of the carrying amount of real estate owned is susceptible
to changes in economic and market conditions in the local area. However,
management believes that the allowance for loan losses is adequate and that the
value assigned to properties included in real estate owned do not exceed their
current estimated fair values less estimated costs to sell.
Capital Adequacy
The Company's equity increased by $8.6 million at year-end, reflective of
the differences between earnings of $5.85 million and dividends of $2.35
million, and the positive $5.1 million FASB 115 adjustment change. The Company's
equity ratio was 9.25% at year-end 1995 vs. 8.40% at year-end 1994. The
following table shows that the Bank's capital is well above federal adequacy
guidelines (dollars in thousands). These capital ratios qualify the Bank as
"well capitalized" under currrent regulatory guidelines and provide a foundation
for future growth.
Actual
Regulatory Regulatory
Requirement Capital %
- ------------------------------------------------------------------
Tangible capital $ 8,674 $43,484 7.52%
Core capital 17,348 43,484 7.52%
Risk-based capital 26,848 47,248 14.08%
- ------------------------------------------------------------------
34
BANKING RISKS
Credit Risk
During 1995, Prime continued to place a heavy emphasis on generating high
quality loans. Approvals of small loans rest with experienced lenders who follow
detailed underwriting and appraisal standards. Larger loans in excess of
$1,000,000 require board approvals pursuant to comparable standards.
During the first quarter of 1995, a subsidiary of the Bank took title to
the project by deed in lieu of foreclosure. At December 31, 1995 total exposure
on the project was $10.1 million. Management believes that any losses that might
be incurred would not have a material impact on earnings.
The following table provides key asset quality trends (dollars in
thousands).
1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------
Net Charge-offs (632) (563) (678) (924) (1,165)
Net Charge-offs as % of Loans .25% .22% .23% .27% .34%
Non-Performing Assets 3,309 3,780 4,601 4,594 3,349
Non-Performing Assets as % of
Assets .91% .96% 1.02% 0.81% 0.55%
Allowance for Loan Losses 2,363 3,202 3,966 4,285 3,764
Allowance as % Loans .92% 1.15% 1.34% 1.30% 1.07%
Allowance as % Non-Performing
Loans 86.78% 97.00% 93.16% 99.19% 112.39%
- --------------------------------------------------------------------------------
*Statistics do not include the impact of the $10.1 million condominium project
which was acquired by a deed in lieu foreclosure and classified as land acquired
for development and resale. Non-performing assets, and the ratio of
non-performing assets as a percentage of assets would have been $13.4 million
and 2.20%, respectively if the $10.1 million condominium project was included in
the non-performing assets.
A heavy emphasis on collections has always been a central element in the
Bank's credit culture. Steps were taken during 1995 to continue to improve loan
review effort. At the same time the Bank has intensified its efforts to improve
all aspects of credit monitoring to insure that credit quality remains high.
The allowance for loan losses decreased by $521 thousand from $4.3 million
in 1994 to $3.8 million in 1995. This decrease was consistent with a reduction
of non-performing assets of $1.3 million from $4.6 million in charge-offs of
$241 thousand.
Liquidity Risks
A solid base of stable core deposits is the first key to minimizing
liquidity risk. The second key is maintaining a pool of readily marketable
investments as a liquidity reserve to support unforeseen fluctuations in deposit
and loan volumes. The third and final key is to maintain plenty of excess
borrowing capacity.
Prime's loan to deposit ratio at year-end was an improvement in liquidity
from the prior year's. The Bank is required under federal regulations to
maintain specific levels of qualifying liquidity investments. The required level
is currently 5% of net withdrawable deposits plus short term liabilities. At
December 31, 1994 and 1995 the Bank's liquidity ratios were 7.17% and 11.25%
respectively. The Bank also exceeded the OTS 1% short-term liquidity ratio for
both years. The Bank's unused borrowing capacity at the Federal Home Loan Bank
was approximately $173.6 million at year end.
Interest Rate Risk
Prime's management strategy is to avoid speculative interest rate risk
Interest rate risk represents the volatility of net interest income and
portfolio market value of equity caused by changes in market interest rates.
Net interest income volatility is reduced primarily through the management
of deposit and loan rates, and the approximate rate sensitivity matching of
assets and liabilities over multiple time frames (the
35
difference in assets and liabilities in these time frames being referred to as
"the gap"). The table below presents the Bank's gaps over multiple time frames.
The Bank's tactical gap (weighted average one year gap) of a negative $5.2
million or a negative .90% of earning assets is neutral. Consequently, changes
in market rates of interest should have a relatively minimal impact on net
interest income.
The Bank estimates risk to the market value of portfolio equity through the
use of an internal model and by applying the OTS Net Portfolio Value model. The
model estimates the sensitivity of the market value of portfolio equity to
changes in the level of interest rates. According to the OTS model, the Bank's
interest rate risk compares favorably to the Bank's peer group.
GAP ANALYSIS
DECEMBER 31, 1995
3Mo More 3Mo More 6Mo More 1Yr More 3Yr More 5Yr Over
or less thru 6Mo thru 1Yr thru 3Yr thru 5Yr thru 10Yr 20 Years Total
- ----------------------------------------------------------------------------------------------------------------------
Earning Assets:
Construction 25,220 -- -- -- -- -- -- 25,220
ARM'S(7) 4,984 11,307 23,628 39,264 19,138 717 -- 99,038
Fixed Mortgages(1,7,8) 4,733 2,829 5,554 20,364 20,042 10,820 2,592 66,934
Consumer(7) 19,424 2,811 5,653 18,318 13,531 2,520 423 62,680
Commercial(7) 29,663 2,360 6,036 22,664 27,834 7,605 5,274 101,436
Liquidity(8) 44,292 1,957 2,995 1,827 2,297 -- -- 53,368
Portfolio(8) 64,177 10,822 31,709 33,996 15,061 -- -- 155,765
- ----------------------------------------------------------------------------------------------------------------------
Total Earning Assets 192,493 32,086 75,575 136,433 97,903 21,662 8,289 564,441
Liabilities:
Checking Accounts(2) 2,508 2,508 5,018 20,072 20,072 20,072 -- 70,250
Savings Accounts(2) 2,192 2,192 4,383 17,532 17,532 17,532 -- 61,363
Premier MM 20,098 20,098 -- -- -- -- -- 40,196
Money Market(3) 13,346 13,346 26,692 -- -- -- -- 53,384
Certificates(4) 60,508 38,970 66,892 47,925 27,521 9,530 -- 251,346
Borrowed Funds 54,844 -- 12,000 2,000 -- -- -- 68,844
Capital(5) 681 681 1,362 5,444 5,445 5,445 -- 19,058
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 154,177 77,795 116,347 92,973 70,570 52,579 -- 564,441
GAP 38,316 (45,709) (40,772) 43,460 27,333 (30,917) 8,289
as % earning assets 6.8% (8.19)% (7.2)% 7.7% 4.8% (5.5)% 1.5%
Cumulative Gap 38,316 (7,393) (48,165) (4,705) 22,628 (8,289)
as % earning assets 6.8% (1.3)% (8.5)% (0.8)% 4.0% (1.5)%
Tactical Gap (5,235)
as % earning assets (0.90)%
(1) Assumes Market Prepayment Rates.
(2) Assumes run-offs over 7 years.
(3) Assumes repricings over 1 year.
(4) Reflects the impact of interest rate swaps.
(5) Capital investment is targeted over 7 years.
(6) Includes loans held for sale.
(7) Reflects deferred fees net excluding allowance for loan loss.
(8) Does not reflect the FASB 115 market value adjustment.
36
Spread Analysis Report
1993 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest-earning assets:(1)
Loans receivable, net(2,3,4)
Residential $128,596 $ 11,935 9.28% $132,906 $ 11,394 8.57% $154,542 $ 13,476 8.72%
Construction 38,793 3,925 10.12% 34,995 4,063 11.61% 27,798 3,357 12.08%
Commercial 83,196 7,283 8.75% 87,678 7,785 8.88% 97,973 9,329 9.52%
Consumer 42,266 3,637 8.61% 46,124 3,634 7.88% 50,268 4,361 8.68%
VISA Credit Card 2,478 438 17.68% 2,864 446 15.57% 5,320 763 14.35%
- -----------------------------------------------------------------------------------------------------------------------------------
295,329 27,218 9.22% 304,567 27,322 8.97% 335,901 31,286 9.31%
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 64,073 2,835 4.42% 104,284 5,928 5.68% 129,294 8,528 6.60%
Investment securities(4) 20,698 915 4.42% 47,394 3,251 6.86% 55,668 4,097 7.36%
Interest-earning deposits 11,267 342 3.04% 4,800 179 3.73% 7,962 423 5.31%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 391,367 31,310 8.00% 461,045 36,680 7.96% 528,825 44,334 8.38%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 28,022 -- -- 37,885 -- -- 46,915 -- --
Total assets $419,389 $ 31,310 $498,930 $ 36,680 $575,740 $ 44,334
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:(1)
Savings $ 56,882 $ 1,284 2.26% $ 66,235 $ 1,333 2.01% $ 63,107 $ 1,291 2.05%
Money market accounts 69,670 1,957 2.81% 73,927 2,171 2.94% 84,718 3,156 3.73%
Commercial checking 24,823 -- -- 32,075 1 -- 39,141 1 --
N.O.W. Accounts 16,535 280 1.69% 21,240 291 1.37% 23,624 288 1.22%
Time deposits 180,985 8,993 4.97% 212,801 9,923 4.66% 250,745 13,594 5.42%
- -----------------------------------------------------------------------------------------------------------------------------------
348,895 12,514 3.59% 406,278 13,719 3.38% 461,335 18,330 3.97%
FHLB advances and other
borrowings 15,746 636 4.04% 32,763 1,534 4.68% 56,132 3,495 6.23%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 364,641 13,150 3.61% 439,041 15,253 3.47% 517,467 21,825 4.22%
- -----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 7,444 -- -- 11,219 -- -- 6,329 -- --
Stockholder's equity 47,304 -- -- 48,670 -- -- 51,944 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholder's equity $419,389 $ 13,150 $498,930 $ 15,253 $575,740 $ 21,825
Net interest income/interest
rate spread $ 18,160 4.39% $ 21,427 4.49% $ 22,509 4.16%
===================================================================================================================================
Net interest earning assets/net
yield interest-earning assets $ 26,726 4.64% $ 22,004 4.65% $ 11,358 4.26%
===================================================================================================================================
Net of interest-earning assets to
to interest-bearing liabilities 107% 105% 102%
===================================================================================================================================
(1) Average balances are calculated on a monthly basis.
(2) Non-accrual loans are included in loans.
(3) Yields on loans include income from origination fees net of costs.
(4) Tax free income are calculated on a tax equivalent basis.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the period indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in average volume multiplied by the prior years rate), and (2) changes
in rate (changes in rate multiplied by the prior years volume). The difference
in the rate/volume is allocated on a pro-rata basis to the change in rate
variance and the change in volume variance.
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------
1993 vs. 1994 1994 vs. 1995
- -------------------------------------------------------------------------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due to
- -------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------------------------------
Interest income:
Loan portfolio:
Residential $ 400 $(1,808) $(1,408) $ 1,591 $ 446 $ 2,037
Construction (384) 522 138 (767) 61 (706)
Commercial 392 110 502 1,078 466 1,544
37
Consumer 332 (335) (3) 376 351 727
VISA Credit Card 68 (60) 8 382 (65) 317
- -----------------------------------------------------------------------------------------------------
808 (1,571) (763) 2,660 1,259 3,919
- -----------------------------------------------------------------------------------------------------
Mortgage-backed securities 1,777 1,316 3,093 1,421 1,179 2,600
Investment securities 1,180 329 1,509 568 478 1,046
Interest-earning deposits (197) 34 (163) 118 126 244
- -----------------------------------------------------------------------------------------------------
Total interest-earning assets 3,568 108 3,676 4,767 3,042 7,809
- -----------------------------------------------------------------------------------------------------
Interest expense:
Savings 211 (162) 49 (63) 21 (42)
Money market accounts 120 94 214 317 668 985
Commercial checking -- 1 1 -- -- --
NOW accounts 80 (69) 11 33 (36) (3)
Time deposits 1,581 (651) 930 1,768 1,903 3,671
- -----------------------------------------------------------------------------------------------------
1,992 (787) 1,205 2,055 2,556 4,611
- -----------------------------------------------------------------------------------------------------
Borrowings and Federal Home
Loan Bank advances 687 211 898 1,094 867 1,961
- -----------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 2,679 (576) 2,103 3,149 3,423 6,572
- -----------------------------------------------------------------------------------------------------
Net change in interest
income $ 889 $ 684 $ 1,573 $ 1,618 $ (381) $ 1,237
=====================================================================================================
FINANCIAL CONDITION DATA
(Dollars in thousands)
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
- -----------------------------------------------------------------------------------------------------------
Total Amount of:
Assets $364,110 $393,324 $450,912 $566,904 $607,975
Loans (2) and mortgage-backed
securities 289,453 320,778 386,140 449,441 487,422
Investment securities and
interest-bearing deposits 57,307 46,543 34,732 71,733 72,453
Land acquired for development
and resale 1,209 1,000 838 694 10,405
Deposits 294,840 338,006 368,800 447,651 476,539
Advances from Federal Home Loan
Bank of Pittsburgh 11,900 5,900 10,000 6,000 14,000
Other borrowings 10,911 371 17,264 53,710 54,844
Stockholders' equity 41,325 44,909 49,698 47,641 56,247
Number of:
Real estate loans
outstanding 4,137 3,826 3,425 3,374 3,145
Savings accounts 46,783 51,666 62,256 76,847 75,892
Offices open 9 10 12 16 18
===========================================================================================================
OPERATING DATA
Years Ended December 31,
- --------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
- --------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Interest income $33,584 $30,691 $31,310 $34,986 $42,795
Interest expense 19,598 14,944 13,150 15,253 21,825
- --------------------------------------------------------------------------------------------------
Net interest income 13,986 15,747 18,160 19,733 20,970
Provision for loan losses 1,320 1,200 1,442 1,243 644
- --------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,666 14,547 16,718 18,490 20,326
Gain (loss) on sale of:
Mortgage loans -- 5 148 81 68
Mortgage-backed securities 179 148 -- -- 465
Investment securities (42) 138 157 (168) (21)
38
Mortgage servicing -- -- -- -- 260
Land acquired for
development
and resale 183 -- -- -- 20
Real estate owned -- (71) (26) (17) (64)
Rental income 227 214 350 321 174
Other income 1,702 1,668 1,233 1,578 1,954
Other expenses 8,197 8,769 9,807 11,336 13,831
- --------------------------------------------------------------------------------------------------
Income before income taxes and
effect of cumulative change
in accounting principle 6,718 7,880 8,773 8,949 9,351
Income tax expense 2,652 3,177 3,349 3,141 3,498
- --------------------------------------------------------------------------------------------------
Income before effect of
cumulative change in
accounting principle 4,066 4,703 5,424 5,808 5,853
Cumulative effect on prior
years of change in tax
accounting method -- -- 1,055 -- --
- --------------------------------------------------------------------------------------------------
Net income $ 4,066 $ 4,703 $ 6,479 $ 5,808 $ 5,853
==================================================================================================
Dividends paid and declared $ 970 $ 1,301 $ 1,821 $ 1,949 $ 2,348
==================================================================================================
Earnings per share(1) $ 1.19 $ 1.29 $ 1.74 $ 1.55 $ 1.55
==================================================================================================
(1) Earnings per share have been adjusted to reflect the stock split and stock
dividends.
(2) Loans include loans receivable and loans held for sale.
Consolidated Summary of Quarterly Earnings
The following quarterly financial information for the years ended December
31, 1994 and 1995 is unaudited. However, in the opinion of management, all
adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for the periods, are reflected in
conformity with generally accepted accounting principles. Results of operations
for the periods presented are not necessarily indicative of the results for the
entire year or for any other interim period.
1994 1995
- ------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
Interest income $7,965 $8,381 $9,011 $9,629 $10,248 $10,796 $10,762 $10,989
Interest expense 3,254 3,505 3,969 4,525 5,058 5,541 5,536 5,690
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,711 4,876 5,042 5,104 5,190 5,255 5,226 5,299
Provision for loan losses (303) (250) (249) (441) (166) (190) (159) (129)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,408 4,626 4,793 4,663 5,024 5,065 5,067 5,170
- ------------------------------------------------------------------------------------------------------------------------------
Other income 604 458 370 363 312 879 777 888
Other expense (2,723) (2,850) (2,937) (2,826) (3,092) (3,517) (3,446) (3,776)
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,289 2,324 2,226 2,200 2,244 2,427 2,398 2,282
Income tax expense (873) (811) (806) (651) (784) (925) (907) (882)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $1,416 $1,423 $1,420 $1,549 $1,460 $1,502 $1,491 $1,400
==============================================================================================================================
Earnings per share $ 0.38 $ 0.38 $ 0.38 $ 0.41 $ 0.38 $ 0.40 $ 0.40 $ 0.37
==============================================================================================================================
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, the notes thereto, and the opinion
of independent certified public accountants thereon, appearing on pages 29
through 48 of the Company's 1995 Annual Report to Stockholders are incorporated
herein by reference thereto.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31,
- -----------------------------------------------------------------------
1994 1995
- -----------------------------------------------------------------------
ASSETS:
39
Cash and due from banks $ 14,479 $ 13,092
Interest-bearing deposits 12,373 34,937
- ------------------------------------------------------------------------
Cash and cash equivalents 26,852 48,029
- ------------------------------------------------------------------------
Investment securities (market value of $10,133 and
$13,849) 10,417 13,708
Investment securities available for sale 48,943 23,863
Mortgage-backed Securities (market value of $0 and
$82,045) -- 81,084
Mortgage-backed Securities available for sale 120,453 54,739
Loans receivable: 329,911 348,886
Deferred fees (1,298) (392)
Allowance for loan losses (4,285) (3,764)
- ------------------------------------------------------------------------
Loans receivable, net 324,328 344,730
- ------------------------------------------------------------------------
Loans held for sale 4,660 6,814
Accrued interest receivable 3,755 4,339
Real estate owned 274 370
Land acquired for development and resale 694 10,405
Property and equipment, net 8,897 9,229
Other assets 17,631 10,665
- ------------------------------------------------------------------------
Total assets $566,904 $607,975
========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits $447,651 $476,539
Advances from Federal Home Loan Bank of
Pittsburgh 6,000 14,000
Other borrowed money 53,710 54,844
Advance payments by borrowers for taxes
and insurance 2,109 2,211
Other liabilities 9,793 4,134
- ------------------------------------------------------------------------
Total liabilities 519,263 551,728
- ------------------------------------------------------------------------
Commitments & Contingencies
Stockholders' equity:
Serial preferred, $1 par value; 5,000,000
shares authorized and unissued -- --
Common stock, $1 par value; 10,000,000
shares authorized and 3,889,707
and 3,889,597 issued and outstanding 3,890 3,890
Additional paid-in capital 30,455 30,455
Retained earnings (Note 3) 20,773 24,275
Valuation adjustment for debt securities
net of taxes (6,662) (1,558)
Treasury stock (184,063 shares at cost
in 1994 and 1995) (815) (815)
- ------------------------------------------------------------------------
Total stockholders' equity 47,641 56,247
- ------------------------------------------------------------------------
Total liabilities and stockholders' equity $566,904 $607,975
========================================================================
See accompanying notes to consolidated financial statements.
40
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Years Ended December 31,
- ----------------------------------------------------------------------
1993 1994 1995
- ----------------------------------------------------------------------
Interest income:
Loans receivable $27,218 $26,455 $30,374
Mortgage-backed securities 2,835 5,928 8,528
Investment securities 915 2,424 3,470
Interest-bearing deposits 342 179 423
- ----------------------------------------------------------------------
Total interest income 31,310 34,986 42,795
- ----------------------------------------------------------------------
Interest expense:
Deposits 12,514 13,719 18,330
Short-term borrowings 290 1,298 3,375
Long-term borrowings 346 236 120
- ----------------------------------------------------------------------
Total interest expense 13,150 15,253 21,825
- ----------------------------------------------------------------------
Net interest income 18,160 19,733 20,970
- ----------------------------------------------------------------------
Provision for loan losses 1,442 1,243 644
- ----------------------------------------------------------------------
Net interest income after
provision for loan losses 16,718 18,490 20,326
- ----------------------------------------------------------------------
Non-interest income:
Fees and service charges 801 1,096 1,198
Gain (loss) on sale of:
Loans receivable, net 148 81 68
Investment securities, net 157 (168) (21)
Mortgage-backed securities, net -- -- 465
Mortgage servicing -- -- 260
Land acquired for development and
resale -- -- 20
Real estate owned (26) (17) (64)
Rental income 350 321 174
Other 432 482 756
- ----------------------------------------------------------------------
Total non-interest income 1,862 1,795 2,856
- ----------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 5,333 5,685 6,850
Occupancy and equipment 1,669 2,010 2,779
Federal deposit insurance premiums 663 876 1,008
Other 2,142 2,765 3,194
- ----------------------------------------------------------------------
Total non-interest expense 9,807 11,336 13,831
- ----------------------------------------------------------------------
Income before income taxes and effect
of cumulative change in accounting
principle 8,773 8,949 9,351
Income taxes 3,349 3,141 3,498
- ----------------------------------------------------------------------
Income before effect of cumulative
change in accounting principle 5,424 5,808 5,853
Cumulative effect on prior years of
change in tax accounting method 1,055 -- --
- ----------------------------------------------------------------------
Net income $ 6,479 $ 5,808 $ 5,853
======================================================================
Primary and fully diluted earnings
per share:
Net income before effect of
cumulative change in accounting
principle $ 1.46 $ 1.55 $ 1.55
Cumulative effect on prior years of
change in tax accounting method .28 -- --
Net income 1.74 1.55 1.55
Weighted average number of shares
outstanding: 3,712,344 3,736,405 3,773,808
Dividends declared per share $ .50 $ .54 $ .62
======================================================================
41
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands except per share data)
Valuation
Unrealized Adjustment
Loss on for Debt
Additional Marketable Securities Total
Common Paid in Retained Treasury Equity Net of Stockholders'
Stock Capital Earnings Stock Securities Taxes Equity
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 3,414 $22,741 $ 19,679 $(815) $(110) $ -- $ 44,909
Retro active adjustment
for 10% stock dividend 354 7,069 (7,423) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992
restate for adjustment 3,768 29,810 12,256 (815) (110) -- 44,909
Stock options exercised 56 271 -- -- -- -- 327
Tax benefit associated with
exercise of stock options -- 66 -- -- -- -- 66
Dividends declared
($0.50 per common share) -- -- (1,821) -- -- -- (1,821)
Unrealized gain on marketable
equity securities -- -- -- -- 110 -- 110
Valuation adjustment for debt
securities net of taxes -- -- -- -- -- (372) (372)
Net income -- -- 6,479 -- -- -- 6,479
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 3,824 $30,147 $ 16,914 $(815) $-- $ (372) $ 49,698
Stock options exercised 66 267 -- -- -- -- 333
Tax benefit associated with
exercise of stock options -- 41 -- -- -- -- 41
Dividends declared
($0.54 per common share) -- -- (1,949) -- -- -- (1,949)
Valuation adjustment for debt
securities net of taxes -- -- -- -- -- (6,290) (6,290)
Net income -- -- 5,808 -- -- -- 5,808
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 3,890 $30,455 $ 20,773 $(815) $-- $(6,662) $ 47,641
Dividends declared
($0.62 per common share) -- -- (2,351) -- -- -- (2,351)
Valuation adjustment for
debt securities net of taxes -- -- -- -- -- 5,104 5,104
Net income -- -- 5,853 -- -- -- 5,853
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,890 $30,455 $ 24,275 $(815) $-- $(1,558) $ 56,247
===============================================================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
42
Years Ended December 31,
- --------------------------------------------------------------------------------
1993 1994 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,479 $ 5,808 $ 5,853
Adjustments to reconcile net income
to net cash from operating
activities:
Cumulative effect on prior years of change
in accounting principle (1,055) -- --
Depreciation and amortization of
intangibles 842 1,158 1,549
(Gain) Loss on sale of:
Loans held for sale (148) (81) (68)
Mortgage-backed securities -- -- 465
Investment securities (157) 168 21
Land acquired for development and resale -- -- (20)
Real estate owned 26 17 64
Provision for loan losses 1,442 1,243 644
Increase in accrued interest receivable (35) (657) (584)
(Increase) decrease in other assets 322 (3,666) 1,854
Increase (decrease) in other liabilities 508 6,010 (5,718)
- --------------------------------------------------------------------------------
Net cash provided from operating
activities 8,224 10,000 3,130
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities:
Purchases (51,791) (10,438) (20,186)
Maturities 50,158 21 5,271
Sales 2,048 -- --
Investment securities held for sale:
Purchases -- (37,515) (11,577)
Maturities -- 2,852 1,454
Sales 3,109 7,832 48,939
Mortgage-backed securities
Purchases -- -- (22,405)
Maturities -- -- 1,656
Mortgage-backed securities held for sale
Purchases (77,583) (59,516) (41,827)
Maturities 29,846 16,063 11,966
Sales -- 1,469 43,384
Loans receivable:
Originations, net of repayments (18,616) (30,474) (36,100)
Sales -- -- --
Loans held for sale:
Originations, net of repayments (10,838) (10,228) (7,015)
Sales 9,501 8,756 9,742
Decrease in land acquired
for development and resale 162 144 (819)
Purchase of property and equipment (1,079) (1,396) (1,477)
Proceeds from the sale of land acquired
for development and resale -- -- 520
Decrease in real estate owned (38) (5) (225)
Proceeds from sale of real estate
owned 645 1,015 914
Net cash and cash equivalents received
from banking institutions acquired 22,464 78,195 --
- --------------------------------------------------------------------------------
Net cash used in investing activities (42,012) (33,225) (17,785)
- --------------------------------------------------------------------------------
43
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
- -------------------------------------------------------------------------------
1993 1994 1995
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposit 8,178 (3,272) 28,888
Advances from the Federal Home Loan Bank
of Pittsburgh 21,000 41,850 74,650
Repayments of advances from the Federal
Home Loan Bank of Pittsburgh (16,900) (45,850) (66,650)
Increase (decrease) in other borrowed money 16,893 36,446 1,134
Increase (decrease) in advance payments
by borrowers for taxes and insurance 280 9 102
Net proceeds from issuance of common stock 327 333 --
Cash dividends paid (1,778) (1,763) (2,292)
- -------------------------------------------------------------------------------
Net cash provided from financing
activities 28,000 27,753 35,832
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents (5,788) 4,528 21,177
Cash and cash equivalents:
Beginning of year 28,112 22,324 26,852
End of year $ 22,324 $ 26,852 $ 48,029
===============================================================================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 13,199 $ 15,233 $ 21,500
Income taxes 3,626 3,566 3,288
Transfer of investment securities to
held to maturity -- -- 15,588
Transfer of investment securities to
available for sale 26,487 -- 27,212
Transfer of mortgage-backed securities to
held to maturity -- -- 71,447
Transfer of mortgage-backed securities to
available for sale 87,534 -- 11,112
Transfer of loans receivable to held for sale -- -- 4,813
Transfer of loans receivable to real
estate owned 498 957 849
Transfer of loans receivable to Land
acquired for development and resale -- -- 9,392
Acquisitions:
In conjunction with the acquisitions,
liabilities assumed and assets
acquired were as follows:
Assets acquired, net of cash and cash
received $ 333 $ 4,519 $ --
Cash and cash equivalents received 22,464 78,195 --
Liabilities assumed 22,797 82,714 --
===============================================================================
44
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The following is a description of the significant accounting policies of
Prime Bancorp, Inc. and subsidiaries (the "Company"). The accompanying
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which have been applied on a
consistent basis.
Business
The Company's principal subsidiary is Prime Bank (the "Bank") whose
principal business consists of attracting deposits and obtaining borrowings,
then converting those deposits and borrowings into various types of loans,
mortgage-backed securities, and other investments. These operations are
conducted through a branch network in Southeastern Pennsylvania. The Bank is
subject to competition from other financial institutions and it is also subject
to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in prior years have been reclassified for
comparative purposes.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and the estimated fair value of real estate owned, management
obtains independent appraisals for significant properties.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company
considers cash and cash equivalents to include cash, due from banks and
interest-bearing deposits with maturities of 3 months or less.
Investments, Mortgage-backed Securities and Other
Securities classified as held-to-maturity are those securities in which the
Company has the ability and intent to hold the security until maturity and are
recorded at amortized cost, adjusted for the amortization of premiums and
discounts. All other securities not included in held-to-maturity are classified
as available-for-sale and are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. Transfers of
securities between categories are recorded at fair value at the date of
transfer.
With the issuance of "A Guide to Implementation of Statement 115 Accounting
for Debt and Equity Securities," the Financial Accounting Standards Board has
allowed institutions to reassess the appropriateness of the classifications of
all securities and account for any resulting reclassifications at fair value.
The reclassifications should occur no later than December 31, 1995 and will not
call into question the intent of an institution to hold other debt securities to
maturity in the future.
A decline in the fair value of any available-for- sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
45
method. Dividend and interest income are recognized when earned. Realized gains
and losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
The Company has one interest rate swap which is used to hedge the interest
rate risk of 7 year fixed certificated of deposits. The Company does not use
derivatives for trading purposes.
Real Estate Owned
Real estate acquired in partial or full satisfaction of loans are
classified as Real Estate Owned ("REO"). Prior to transferring a real estate
loan to REO it is written down to the lower of cost or fair value. This
write-down is charged to the allowance for loan losses. Subsequently, REO is
carried at the lower of fair value less estimated costs to sell or carrying
value.
Land Acquired for Development and Resale
Land acquired for development and resale represents land and construction
in progress and is carried at the lower of cost or net realizable value.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the lesser of
the lease term (where applicable) or the estimated useful lives of the related
property, which range from 5 to 40 years. Maintenance and repairs are expensed
as incurred.
Loans Receivable
Interest income is recognized on the accrual basis. Generally, loans are
placed on non-accrual status when the loan becomes past due by 90 days or more
as to principal or interest. After a loan is placed on non-accrual status, any
interest previously accrued but not yet collected is reversed against current
interest income. A loan is returned to accrual status only when the borrower has
brought principal and interest current and full collectability is reasonably
assured.
Fees earned for servicing loans for others are reported as income when the
related loan payments are collected. Loan servicing costs are charged to expense
as incurred. If the Bank sells loans and continues to service such loans for the
investor, the computation of the gain or loss is adjusted to allow for a normal
servicing fee over the estimated remaining maturities of the loans sold. Normal
servicing fees are based on the minimum servicing rates of the relevant
federally-sponsored market makers or comparable rates for transactions with
other investors. The resulting deferral is amortized as an adjustment of
servicing fee income over a period generally not in excess of 7 years.
Loan Impairment
The Company adopted the provisions of SFAS No. 114, Accounting by Creditors
for Impairment of a Loan and SFAS No. 118, Accounting by Creditors of Impairment
of a Loan - Income Recognition and Disclosures in 1995. SFAS No. 114 and 118
require that "impaired" loans be measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate or, as a
practical expedient, at the loans observable market price or the fair value of
the collateral if the loan is collateral dependent.
Mortgage Servicing Rights
The Company adopted SFAS 122 "Accounting for Certain Mortgage Banking
Activities". SFAS 122 requires that a mortgage banking enterprise recognize, as
separate assets, rights to service mortgage loans. SFAS 122 requires that a
periodic assessment of its capitalized mortgage servicing rights (MSRs") for
impairment, based on the fair value of those rights.
The carrying value of capitalized MSR's at December 31, 1995 was $260
thousand which approximated fair value. Fair value was determined by calculating
the discounted present value of estimated expected net future cash flows,
considering estimated prepayments and defaults, projected interest rates and
other factors. For purposes of evaluating and measuring impairment, capitalized
MSRs are aggregated into groups having homogeneous risk characteristics, based
on the attributes of the underlying loans, and are separately valued, using
46
appropriate assumptions for each risk group. No valuation allowance was required
for capitalized MSRs at December 31, 1995.
Stock Based Compensation
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation." This statement encourages the
adoption of fair value accounting for stock options issued to employees.
Further, in the event that fair value accounting is not adopted, the statement
requires pro forma disclosures of net income and earnings per share as if fair
value accounting had been adopted. SFAS No. 123 is required to be adopted in
1996. Management currently expects that it will not adopt fair value accounting
for stock options issued to employees, and therefore does not expect the
adoption of this statement to materially affect the company's results of
operations or financial condition.
Loans Held for Sale
The Bank has adopted a policy to sell off fixed rate single family
residential mortgage loans and adjustable rate mortgages which meet the
underwriting and securitization characteristics of certain market makers.
Conforming loans are transferred to loans held for sale and are valued at the
lower of cost or market.
Deferred Loan Fees, Net
Loan origination fees, commitment fees and loan origination costs are
deferred and amortized as an adjustment to the yield over the life of the loan
in a manner which approximates the interest method.
Allowance for Loan Losses
The allowance for loan losses is based on a periodic evaluation of the
portfolio and is maintained at a level that management considers adequate to
absorb losses known and inherent in the portfolio. Management considers a
variety of factors when establishing the allowance recognizing that an inherent
risk of loss always exists in the lending process. Consideration is given to the
impact of current economic conditions, diversification of the loan portfolio,
historical loss experience, delinquency statistics, results of detailed loan and
regulatory reviews, borrowers's financial and managerial strengths, the adequacy
of underlying collateral, and other relevant factors. The allowance for loan
losses is increased by the provision for loan losses and recoveries on
previously charged-off loans, and is reduced by actual charge-offs. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies as an integral
part of their examination process, periodically review the allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments of information which is
available to them at the time of their examination.
A substantial portion of the Company's loans are secured by real estate in
the Company's market area. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recoverability of a
substantial portion of the carrying amount of real estate owned is susceptible
to changes in economic and market conditions in the market area. However,
management believes that the allowance for loan losses is adequate and that the
value assigned to properties included in real estate owned and land acquired for
development and resale do not exceed their current estimated fair values less
estimated costs to sell.
Income Taxes
The Company and its wholly owned subsidiaries file a consolidated federal
income tax return. Deferred income taxes result from recognizing items of income
or expense in one time period for tax reporting and in another for financial
reporting purposes.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, Accounting for Income Taxes and has reported the cumulative effect of that
change in the method of accounting for income taxes in the 1993 consolidated
statement of operations. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating
47
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Bank has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income an allowance for bad debts based on a
percentage of taxable income before such deduction. The maximum amount of this
deduction is 8% of taxable income.
Capital
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") regulations define specific capital categories based on an
institution's capital ratios. The capital categories, in declining order, are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized".
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at
least 4%, and a total risk-based capital ratio of at least 8%. The Bank's
regulatory capital ratios exceed the "well capitalized" ratio requirements of
10% total risk-based capital, 6.0% Tier 1 risk-based capital and a 5.0% leverage
ratio.
Earnings per share
Earnings per share have been calculated based on the weighted average
number of shares of common stock outstanding for the respective periods. Stock
options are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock method,
unless anti-dilutive. Earnings per share has been restated to reflect the stock
splits and stock dividends.
2. Acquisitions
On August 27, 1993, the Company completed the acquisition from the
Resolution Trust Corporation ("RTC") of the Home Unity Penn Treaty branch. The
office is located in the Fishtown section of Philadelphia. At closing, the
Company assumed deposits of approximately $22.8 million and acquired assets
consisting primarily of value associated with the deposit base of approximately
$258 thousand, and cash, collateral loans and other assets of approximately $75
thousand.
On March 25, 1994, the Company completed the acquisition from the RTC of
the Abraham Lincoln Fairless Hills branch, which is located in a suburb of
Philadelphia. At closing, the Company assumed liabilities of $20.1 million
consisting primarily of deposits of approximately $20.0 million and acquired
assets consisting primarily of value associated with the deposit base of
approximately $1.5 million, and cash and other assets of approximately $228
thousand.
On September 16, 1994, the Company completed the acquisition from the RTC
of the Second National 18th & JFK and Chestnut Hill branches, which are located
in Philadelphia. At closing, the Company assumed deposits of approximately $62.1
million and acquired assets consisting primarily of value associated with the
deposit base of approximately $2.7 million, and cash, collateral loans and other
assets of approximately $96 thousand.
All of the acquisitions were accounted for using the purchase method and
did not have a significant impact upon reported earnings in the year which the
acquisitions took place. Core deposit intangibles of $1.1 million were amortized
over 10 years and other intangibles of $3.1 million were amortized over 15
years.
3. Stockholders' Equity
OTS regulations require that mutual associations converting to stock form
of ownership establish a "Liquidation Account" in an amount equal to the total
net worth of the association as of the date of the latest balance sheet
contained in the final offering circular. Each eligible savings account holder
is entitled to a proportionate share (subaccount) of this amount in the event of
a complete liquidation of the association, and only in such event. This
subaccount is reduced if the subaccount holders' savings deposits fall below the
amount at the date of record and will cease to exist if the savings account is
closed. The liquidation account will never be increased despite
48
any increase after conversion in the related savings deposits of a subaccount
holder. At the time of its conversion to a stock form of ownership, the Bank's
liquidation account was approximately $18,737,000. The Bank's liquidation
account at December 31, 1995 was approximately $4,500,000.
The creation and maintenance of the liquidation account does not restrict
use or application of any of the stockholders' equity accounts of the Bank
except that the Bank may not declare or pay any cash dividend on or repurchase
any of its common stock, if the effect of such dividend or repurchase would be
to cause the stockholders' equity of the Bank to be reduced below the aggregate
amount then required for the liquidation account or the regulatory net worth
requirement.
The Company offers to its stockholders a Dividend Reinvestment and Stock
Purchase Plan, which provides participants with a method of reinvesting all or a
portion of cash dividends paid on shares of common stock in additional shares of
common stock without the payment of brokerage commissions or charges. Shares
purchased under such plan are purchased in the open market.
The Board of Directors of the Company declared a special 10% stock dividend
to shareholders in the form of a dividend and was paid on February 1, 1996 to
shareholders on record on January 2, 1996. This is the third stock dividend in
the last three years that the Company has declared and paid.
4. Stock Option Plan
The Company's Incentive Stock Option Plan provides for the grant of
incentive options to directors and certain employees of the Company and its
subsidiaries and the grant of non-incentive options to directors who are not
full-time employees of the Company and its subsidiaries. The option plan is
administered by a stock option committee which consists of three directors of
the Company, none of whom are eligible to receive options. The exercise price
under the option plan must be at least equal to the fair market value of the
shares on the date of grant, and no option may be exercisable after the
expiration of ten years from the date it is granted.
Under the Company's original option plan, 367,356 shares of Common Stock
have been reserved for issuance, of which a total of 367,167 stock options have
been granted since inception of the plan at an option price of $4.32 per share
(after adjustment for the 10% stock dividends). The maximum number of shares
subject to the option plan may be adjusted for a change in capitalization or
reorganization. The option plan is designed primarily as an incentive for full
time employees responsible for the decision making, policy formation and
personnel supervision functions that most directly affect the earnings of the
Company and the welfare of its subsidiaries. Since the inception of the stock
option plan, 216,627 stock options were exercised and 12,345 stock options have
been forfeited.
On December 21, 1994, the Board of Directors of the Company adopted an
Incentive Stock Option Plan ("Option Plan") also for the benefit of officers and
other full-time employees of the Company and its subsidiaries. The Option Plan
provides for the grant of non-incentive options to directors who are not full
time employees of the Company. The Option Plan was approved by the shareholers
at the April 19, 1995 annual meeting. Under the Option Plan, 388,978 shares of
common stock, par value $1.00 per share, have been reserved for issuance of
which a total of 99,000 shares have been granted at an option price of $17.95
per share as of December 31, 1995. The Board of Directors had also reserved
100,000 shares of common stock, par value $1.00 per share, for options granted
to one officer
The following schedule summarizes stock option activity and status on an
after stock-split basis:
December 31,
- --------------------------------------------------------------------------------
1994 1995
- --------------------------------------------------------------------------------
Outstanding at beginning of period 143,066 150,657
Granted 85,628 94,000
Exercised (78,037) (110)
- --------------------------------------------------------------------------------
Outstanding at end of period 150,657 244,547
================================================================================
49
5. Investment Securities
Investment securities at December 31, 1994 and 1995 were comprised of the
following (dollars in thousands):
1994 1995
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
State and municipal $ 6,163 $ -- $ (283) $ 5,880 $ -- $-- $ -- $ --
Small Business Association
Certificates 4,254 -- (1) 4,253 -- -- -- --
US Govt & US Govt Agency
obligations -- -- -- -- 11,830 141 -- 11,971
Marketable equity securities:
FHLB of Pittsburgh
stock -- -- -- -- 1,750 -- -- 1,750
FNMA stock -- -- -- -- 3 -- -- 3
Atlantic Central Bankers
Bank Stock -- -- -- -- 75 -- -- 75
Financial Institutions
Insurance Group Stock -- -- -- -- 50 -- -- 50
- ----------------------------------------------------------------------------------------------------------------------------
$10,417 $ -- $ (284) $10,133 $13,708 $ 141 $ -- $13,849
============================================================================================================================
Available for Sale
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Government and
U.S. Government
Agency obligations $47,140 $ -- $ (2,100) $45,040 $ 6,124 $ 16 $ (41) $ 6,099
SBA Certificates -- -- -- -- 17,233 55 (1) 17,287
Certificate of Deposits 187 -- -- 187 477 -- -- 477
Corporate Notes/Bonds 1,121 2 (6) 1,117 -- -- -- --
Marketable equity
securities:
Federal Home Loan Bank
of Pittsburgh Stock 2,471 -- -- 2,471 -- -- -- --
FNMA Stock 3 -- -- 3 -- -- -- --
Atlantic Central Bankers
Bank Stock 75 -- -- 75 -- -- -- --
Financial Institutions
Insurance Group Stock 50 -- -- 50 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
$51,047 $ 2 $ (2,106) $48,943 $23,834 $ 71 $ (42) $23,863
============================================================================================================================
Gross gains of $157,000, $0 and $341,000 and gross losses of $0, $168,000
and $363,000 were realized on sales of investment securities for the years ended
December 31, 1993, 1994 and 1995, respectively.
At December 31, 1995, the Company had structured notes of $11,830,000 in
its securities held to maturity portfolio compared to $13,000,000 in its
securities available for sale portfolio at December 31, 1994 comprised of U.S.
Government Agency step-up notes. At December 31, 1995, a net unrealized gain of
$141,000 was associated with the Company's structured notes.
The amortized cost and estimated market value of investments securities at
December 31, 1995, by contractual maturity are shown below (dollars in
thousands). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalities.
HELD TO MATURITY AVAILABLE FOR SALE
- -------------------------------------------------------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
- -------------------------------------------------------------------------------------------------------
Due in one year of less $ 2,952 $ 2,998 5.43% $ 2,477 $ 2,481 7.21%
Due after one year through five years 8,878 8,973 5.41% 5,210 5,181 7.65%
Due after five years through ten years -- -- -- 8,454 8,486 9.09%
Due after ten years -- -- -- 7,693 7,715 8.64%
- -------------------------------------------------------------------------------------------------------
11,830 11,971 5.12% 23,834 23,863 8.43%
50
Marketable equity securities 1,878 1,878 6.42% -- -- --
- -------------------------------------------------------------------------------------------------------
$13,708 $13,849 5.30% $23,834 $23,863 8.43%
=======================================================================================================
6. Mortgage-backed Securities
Mortgage-backed securities at December 31, 1994 and 1995 were comprised of
the following (dollars in thousands):
1994 1995
- ------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
GNMA pass-through
certificates $ -- $ -- $ -- $ -- $ 22 $ -- $ -- $ 22
FHLMC pass-through
certificates -- -- -- -- 207 -- (1) 206
Collateralized mortgage
obligations -- -- -- -- 80,855 1,031 (69) 81,817
- ------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ -- $81,084 $ 1,031 $ (70) $82,045
========================================================================================================================
Available for Sale
- ------------------------------------------------------------------------------------------------------------------------
GNMA pass-through
certificates $ 15,720 $ 1 $ (966) $ 14,755 $11,773 $ 87 $ (91) $11,769
FHLMC pass-through
certificates 7,968 -- (537) 7,431 4,962 16 (86) 4,892
FNMA pass-through
certificates 14,018 -- (484) 13,534 10,062 41 (32) 10,071
Mortgage pass-through
obligations 178 -- (8) 170 158 -- -- 158
Collateralized mortgage
obligations 91,079 -- (6,516) 84,563 28,615 27 (793) 27,849
- ------------------------------------------------------------------------------------------------------------------------
$128,963 $ 1 $ (8,511) $120,453 $55,570 $ 171 $ (1,002) $54,739
========================================================================================================================
Gross gains of $0, $0 and $481,000 and gross losses of $0, $0 and $16,000
were realized on sales of mortgage-backed securities for the years ended
December 31, 1993, 1994 and 1995, respectively.
On December 22, 1995, the Company reclassified $11,112,000 in debt
securities from held to maturity to available for sale. The net unrealized gain
at the time of reclassification was $17,000.
Interest rate risk is reduced through investments in medium term
Collateralized Mortgage Obligations ("CMOs") and Adjustable Rate Mortgages.
Approximately 96% of the CMO investments are U.S. Agency or backed by U.S.
Agency collateral and have average lives less than 4.7 years. The market value
of mortgage-backed securities are inversely related to interest rates, market
values generally rise as interest rates fall, and fall as interest rates rise.
Prepayment speeds, which are partly a function of interest rates, also influence
mortgage-backed security performance.
7. Loans Receivable
Loans receivable at December 31, 1993, 1994 and 1995 were comprised of the
following (dollars in thousands):
1993 1994 1995
- --------------------------------------------------------------------------------
First mortgage loans:
Residential:
One to four units $ 123,400 $ 140,065 $ 157,816
Over four units 4,648 4,148 1,597
Commercial and land 49,507 62,240 66,024
Construction (net of loans in
process of $17,291, $17,148 and
$17,033) 40,713 34,395 25,231
- --------------------------------------------------------------------------------
Total first mortgage loans 218,268 240,848 250,668
- --------------------------------------------------------------------------------
Other loans:
Commercial 35,990 35,350 35,666
Installment 46,379 52,249 61,433
Loans on savings accounts 1,135 1,464 1,119
- --------------------------------------------------------------------------------
Total other loans 83,504 89,063 98,218
- --------------------------------------------------------------------------------
Total loans 301,772 329,911 348,886
51
Deferred loan fees (1,752) (1,298) (392)
Allowance for possible loan losses (3,966) (4,285) (3,764)
- --------------------------------------------------------------------------------
Total loans receivable, net $ 296,054 $ 324,328 $ 344,730
================================================================================
At December 31, 1994 and 1995, the principal amounts of outstanding loans
on a non-accrual basis was approximately $4,320,000 and $2,980,000. Interest
income not accrued for non-accrual loans for the years ended December 31, 1993,
1994 and 1995 was approximately $350,000, $299,000 and $246,000, respectively.
At December 31, 1995, there were no loans for which impairment was required
to be recognized under SFAS No. 114 and 118.
The Bank is principally a local lender and therefore has a significant
concentration of loans to borrowers who reside in and/or which are
collateralized by real estate located primarily in Philadelphia, Montgomery and
Bucks counties.
In addition, the Company has taken a deed in lieu of foreclosure of a
condominium project of approximately $10.1 million. Such amounts are classified
as land acquired for development and resale. Interest income not recorded on the
project was approximately $800,000 for the year ended December 31, 1995.
The following is a summary of the activity in the allowance for loan losses
for the years ended December 31, 1993, 1994, and 1995 (dollars in thousands):
1993 1994 1995
- --------------------------------------------------------------------------------
Balance at beginning of period $ 3,202 $ 3,966 $ 4,285
Provision for loan losses 1,442 1,243 644
Recoveries 173 126 183
Losses charged against allowance (851) (1,050) (1,348)
- --------------------------------------------------------------------------------
Balance at end of period $ 3,966 $ 4,285 $ 3,764
================================================================================
The following is an analysis of loans to directors and officers for the
years ended December 31, 1995 (dollars in thousands):
1995
- --------------------------------------------------------------------------------
Balance at beginning of period $ 2,653
Additions 539
Repayments (534)
- --------------------------------------------------------------------------------
Balance at end of period $ 2,658
================================================================================
The loans to directors and officers are based upon substantially the same
underwriting criteria as those generally used by the Bank and do not involve
more than the normal risk of collectibility or present other unfavorable
features. At December 31, 1993, 1994 and 1995, the outstanding loans to
directors and officers was $2,094,000, $2,653,000 and $2,658,000 respectively.
At December 31, 1993, 1994 and 1995, the Bank was servicing loans for
others in the amount of $33,790,000, $34,462,000, and $17,649,000 respectively.
Loan servicing income for the years ended December 31, 1993, 1994, and 1995 was
$(28,000), $123,000, and $217,000 respectively.
8. Property and Equipment
Property and equipment, less accumulated depreciation and amortization, are
summarized by major classification at December 31, 1994 and 1995 as follows
(dollars in thousands):
1994 1995
- --------------------------------------------------------------------------------
Land $ 606 $ 606
Buildings 7,009 7,166
Furniture and equipment 4,906 6,210
Leasehold improvements 567 568
- --------------------------------------------------------------------------------
13,088 14,550
Less accumulated depreciation and amortization (4,191) (5,321)
- --------------------------------------------------------------------------------
52
$ $ 8,897 $ 9,229
================================================================================
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
was $828,000, $939,000 and $1,151,000, respectively.
9. Deposits
Deposits at December 31, 1994 and 1995 consisted of the following (dollars
in thousands):
1994 1995
- --------------------------------------------------------------------------------
Interest % of Interest % of
Rate Amount Total Rate Amount Total
- --------------------------------------------------------------------------------
NOW accounts 1.49% $ 23,487 5.25% 1.22% $ 25,884 5.43%
Money market deposit accounts 2.94% 80,007 17.87% 3.73% 93,580 19.64%
Passbook and club accounts 2.04% 66,293 14.81% 2.05% 61,363 12.88%
Commercial checking accounts -- 35,451 7.92% -- 44,366 9.31%
-------- ------- -------- -------
205,238 45.85% 225,193 47.26%
-------- ------- -------- -------
IRA accounts 5.43% 55,420 12.38% 5.87% 56,157 11.78%
14 to 31 day certificates 4.39% 149 0.03% 5.96% 462 0.10%
91 day certificate accounts 3.94% 5,301 1.18% 5.21% 11,374 2.39%
Certificates with a
$100,000 minimum balance
1 to 57 month maturities 5.33% 27,421 6.13% 5.67% 26,095 5.48%
6 month certificates 4.00% 28,914 6.46% 4.61% 17,807 3.74%
9 month certificates 5.72% 5,517 1.23% 5.06% 28,653 6.01%
18 month certificates 6.16% 1,825 0.41% 5.92% 11,027 2.31%
12 to 24 month certificates 3.86% 38,587 8.62% 4.98% 24,052 5.05%
30 to 60 month certificates 5.53% 69,479 15.52% 5.34% 64,357 13.50%
72 to 120 month certificates 5.86% 9,800 2.19% 5.98% 11,362 2.38%
-------- ------- -------- -------
242,413 54.15% 251,346 52.74%
-------- ------- -------- -------
$447,651 100.00% $476,539 100.00%
======== ======= ======== =======
A summary of certificates by maturity at December 31, 1995 follows (dollars in
thousands):
Years Ending December 31, Amount % of Total
- ------------------------------------------------------------------------
1996 $166,370 58.20%
1997 28,625 14.37%
1998 19,300 6.88%
1999 14,232 5.84%
Thereafter 22,819 9.08%
- ------------------------------------------------------------------------
$251,346 100.00%
========================================================================
Interest expense on deposit accounts for the years ended December 31, 1993,
1994, and 1995 as follows (dollars in thousands):
1993 1994 1995
- ----------------------------------------------------------------------------
NOW accounts $ 281 $ 291 $ 284
Money market deposit accounts 1,908 2,171 3,161
Passbook and club accounts 1,331 1,334 1,291
Time deposits 8,994 9,923 13,594
- -----------------------------------------------------------------------------
$ 12,514 $ 13,719 $ 18,330
=============================================================================
53
10. Advances from Federal Home Loan Bank of Pittsburgh
Under terms of its collateral agreement, the Bank is required to maintain
otherwise unencumbered qualifying assets in an amount of at least as much as
advances from The Federal Home Loan Bank of Pittsburgh. The advances had
maturities and weighted interest rates as follows at December 31, 1994 and 1995
(dollars in thousands):
December 31,
- --------------------------------------------------------------------------------
1994 1995
- --------------------------------------------------------------------------------
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
- --------------------------------------------------------------------------------
1995 $2,000 5.89% $ -- --
1996 2,000 4.82% 12,000 5.79%
1998 2,000 5.43% 2,000 5.43%
- --------------------------------------------------------------------------------
$6,000 5.38% $14,000 5.74%
================================================================================
11. Other Borrowed Money
Other borrowed money at December 31, 1993, 1994 and 1995 was comprised of
the following (dollars in thousands):
1993 1994 1995
- --------------------------------------------------------------------------------
Securities sold under agreements to repurchase
with a weighted average interest rate of
3.35% in 1993, 6.27% in 1994 and 5.75%
in 1995 $16,914 $53,381 $34,844
Repo plus agreements with the Federal Home
Loan Bank of Pittsburgh with a weighted
average interest rate of 0% in 1993, 0%
in 1994 and 5.79% in 1995 -- -- 20,000
Mortgage loans, secured by real estate payable
in monthly installments, bearing interest at
a weighted interest rate of 4.50% in 1993,
6.38% in 1994 and 0.00% in 1995 350 329 --
- --------------------------------------------------------------------------------
$17,264 $53,710 $54,844
================================================================================
The Bank has entered to repurchase agreements which are collateralized by
investment and mortgage-backed securities with a carrying value, including
accrued interest of $17,844,000, $58,344,000 and $46,386,000 at December 31,
1993, 1994 and 1995, respectively. The market value of the underlying collateral
was $17,756,000, $54,823,000 and $44,599,000 at December 31, 1993, 1994 and
1995, respectively. The maximum balance of repurchase agreements outstanding at
any month-end during the year was $16,914,000, $53,381,000, and $54,844,000 at
December 31, 1993, 1994 and 1995 and the average balance outstanding for the
year was $3,636,000, $23,575,000 $50,229,000 for the years
54
ended December 31, 1993, 1994 and 1995, respectively.
The foregoing includes repurchase agreements with the Federal Home Loan
Bank of Pittsburgh under its repo plus program. These agreements do not identify
specific securities as collateral.
12. Employee Benefit Plans
The Bank's defined benefit plan was terminated and all plan liabilities
were rolled over into the Company's retirement savings plan (401(k) Savings
Plan).
Under the 401(k) plan employees can contribute up to 15% of their
compensation to this plan. The Bank contributes 50% of the employee contribution
up to 6% of compensation. The Bank contributed $224,000, $223,000 and $210,000
into this plan during the years ended December 31, 1993, 1994 and 1995,
respectively. The plan also includes a profit sharing feature. Under this
feature, all eligible employees share in the Company's profit sharing
contributions. The Bank contributed 66 2/3% of the employee's contribution up to
6% of compensation. The contributions for 1993, 1994 and 1995 were $98,000,
$168,000 and $134,000, respectively.
The Bank has entered into individual contracts with two senior executives
to provided supplemental benefits after retirement. The benefit under one
contract is based on the executive's average annual compensation for five years
offset by social security and qualified retirement plan payments. The second
contract provides a flat benefit offset by social security and regular
retirement plan payments. The benefits provided under these individual contracts
are not funded. The amounts expensed for these contracts for the years ended
December 31, 1993, 1994 and 1995 were $254,000, $190,000 and $0.
The Company does not provide post-retirement benefits nor post-employment
benefits to its employees other than the 401(k) Savings Plan as may be required
by applicable law.
13. Income Taxes
The provision (and benefit) for income taxes for the years ended December
31, 1993, 1994 and 1995 consisted of the following (dollars in thousands):
1993 1994 1995
- --------------------------------------------------------------------------------
Current:
State $ 644 $ 286 $ 543
Federal 3,169 2,592 2,693
- --------------------------------------------------------------------------------
3,813 2,878 3,236
Deferred:
State (24) -- --
Federal (440) 263 262
- --------------------------------------------------------------------------------
(464) 263 262
- --------------------------------------------------------------------------------
$ 3,349 $3,141 $3,498
================================================================================
The provision for income taxes for the years ended December 31, 1993, 1994
and 1995 differed from the statutory rate due to the following (dollars in
thousands):
1993 1994 1995
- --------------------------------------------------------------------------------
Pretax income $ 8,733 $ 8,949 $ 9,351
- --------------------------------------------------------------------------------
Tax at statutory rate 2,982 3,043 3,179
Tax exempt interest (17) (97) (123)
State taxes, net of federal
benefit and other 425 189 358
Other, net (41) 6 84
- --------------------------------------------------------------------------------
$ 3,349 $ 3,141 $ 3,498
================================================================================
Deferred income taxes result from temporary differences in recording
certain revenues and expenses for financial reporting purposes. The deferred tax
assets at December 31, 1993, 1994, and 1995 consisted of the following debits
and (credits):
1993 1994 1995
- --------------------------------------------------------------------------------
Deferred tax assets
Provision for loan losses
and REO losses $1,354 $1,471 $1,217
Deferred loan fees 596 589 401
Deferred
compensation 465 525 514
Valuation adjustment
for debt securities 204 3,953 862
Other, net 270 300 362
- --------------------------------------------------------------------------------
Gross deferred tax
assets 2,889 6,838 3,405
- --------------------------------------------------------------------------------
Deferred tax liabilities
Loss on sale of loans 51 36 23
FDIC insurance
premium -- 203 268
Valuation adjustment
for debt securities -- 179 --
Depreciation 246 342 383
Other 25 25 31
- --------------------------------------------------------------------------------
Gross deferred tax
liabilities 322 785 705
- --------------------------------------------------------------------------------
Net deferred tax
assets $2,567 $6,053 $2,700
================================================================================
55
Included in the table above is the effect of certain temporary differences
for which no deferred tax expense or benefit was recognized. Such items
consisted primarily of unrealized losses on certain investments in debt and
equity securities accounted for under SFAS 115,
In January 1996 the Bank settled its outstanding case with the IRS in
connection with the examination of its 1980 and subsequent tax year returns. The
United States Tax Court ruled in favor of the IRS on the issue of the
permissibility of reducing the basis of assets by the early withdrawal penalty
on savings certificates. The Bank had previously accrued the estimated liability
for the amount of interest due relating to this issue, and the actual amount
payable will not be materially different.
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Company will realize the benefits of these
deferred tax assets.
As discussed in note 1, the Company adopted SFAS No. 109 as of January 1,
1993. The cumulative effect of this change in accounting for income taxes of
$1,055,000 has been calculated as of January 1, 1993 and is reported separately
in the consolidated statement of operations for the year ended December 31,
1993.
Retained earnings at December 31, 1995, the latest tax year end, include
earnings of approximately $7.7 million representing bad debt deductions for
which no provision for federal income taxes has been made.
14. Fair Value of Financial Instruments
The Company is required to disclose information about the fair value of
financial instruments.
The limitations on the making of estimates of fair value are: Estimates are
made at a specific point in time, based upon, where available, relevant market
prices and information about the financial instruments. For a substantial
portion of the Company's financial instruments, no quoted market exists.
Therefore, estimates of "fair value" are based on a number of subjective
assumptions. Such assumptions include perceived risks associated with these
financial instruments, market rates of discount, and expected durations. Given
the uncertainties associated with these estimates, the reported "fair values"
represent estimates only and, therefore, cannot be compared to the historical
accounting model. Use of different assumptions would likely result in different
"fair value" estimates.
Under SFAS 107, the fair value of deposit accounts with no stated maturity
is equal to their carrying amount. This approach excludes significant benefits
that result from the low-cost funding provided by such deposits.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at December 31, 1995:
Cash and Short Term Investments: Current carrying amounts approximate
estimated fair value.
Securities: Current quoted market prices are used to determine fair
value.
Net Loans: The fair value of loans was estimated using a duration
method which approximates the effect of discounting the estimated
future cash flows over the expected repayment periods for loans using
rates which consider credit risk, servicing costs and other relevant
factors.
Deposits with no stated maturity: Current carrying amounts approximate
estimated fair value.
Time Deposits: Fair value was estimated using a duration method which
approximates the effect of discounting the estimated future cash flows
over the expected periods using rates which consider alternative
borrowing costs, servicing costs and other relevant factors.
Other Borrowed Funds: Fair value was estimated using a duration method
which approximates the effect of discounting the
56
estimated cash flows over the expected periods using rates which
consider alternative borrowing costs.
Off-balance sheet financial instruments: Commitments to extend credit and
standby letters of credit carry current market interest rates if converted to
loans. Because commitments to extend credit and standby letters of credit, the
majority of which carry current interest rates, are generally unassignable by
either the Bank or the borrower, they only have value to the Bank and the
borrower. However, the estimated net amount payable (receivable) represents the
fees currently charged to enter into similar agreements, taking into account the
remaining term of the agreement and the present credit risk assessment of the
counter-party.
The Company enters into derivative instruments primarily to hedge the
interest rate risk associated with various assets and liabilities. Such hedge
instruments generally take the form of interest rate swaps. In part through the
use of these instruments, the Company strives to be essentially insensitive to
changes in interest rates within reasonable ranges (i.e., plus or minus 200
basis points). Such instruments are subject to the same type of credit and
market risk as other financial instruments, and are monitored and controlled in
accordance with the Company's credit and risk management policies.
On May 4, 1994, the Company entered into an interest rate swap with the
Federal Home Loan Bank of Pittsburgh ("FHLB" ) for $5,000,000 notional amount
with a term of 6 years due May 6, 2000. The swap hedges approximately $5,000,000
in 7 year fixed rate retail CD's with a remaining term to maturity of 6.1 years.
FHLB pays the Company a fixed rate of 7.01% and the Company in turn pays FHLB a
floating rate based on the London Interbank Offered Rate ("Libor") which as of
December 31, 1995 was 5.938%.
Estimated
Fair Value of Financial Instruments Carrying Amount Fair Value
- --------------------------------------------------------------------------------
(dollars in millions)
Financial Assets:
Cash $ 48.0 $ 48.0
Investments 37.5 37.5
Mortgage-backed securities 135.9 135.8
Net Loans(A) 351.5 354.1
Financial Liabilities:
Deposits with no stated
maturity 225.2 225.2
Time Deposits 251.3 251.2
Other Borrowed Funds and FHLB
Advances 68.8 68.8
57
(A) The carrying amount of net loans includes loans receivable net and loans
held for sale.
Contract or Net Amount
Notional Amount Payable (Receivable)
--------------- --------------------
Off-balance sheet financial
instruments:
Commitments to extend credit 20.2 0.1
Standby letters of credit 1.6 --
Commercial loan commitments 12.2 0.3
Loan commitments 4.9 --
Loans in process for construction
loans 17.0 --
Interest rate swap 5.0 (0.3)
15. Commitments and Contingencies
In the normal course of business, the Company enters into financial
instruments which are not recorded in the consolidated financial statements but
are required to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the statement of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
The following is a summary of significant commitments and contingent
liabilities:
58
December 31,
- --------------------------------------------------------------------------------
1994 1995
- --------------------------------------------------------------------------------
Loan commitments:
Fixed rate (rates ranging $ 1,168,000 $ 2,195,000
from 7.25% to 9.63% in 1994
and 6.13% to 8.50% in 1995)
Variable rate (rates ranging 2,867,000 2,735,000
from 4.88% to 8.50% in 1994
and 6.38% to 9.95% in 1995)
Commercial loan commitments 5,618,000 12,163,000
Standby letters of credit 3,506,000 1,621,000
Commitments to extend credit 6,228,000 20,211,000
Commitments to sell residential loans 165,000 --
Construction loans in process 17,148,000 17,033,000
The Bank is required to maintain certain average reserve balances as
established by the Federal Reserve Bank Board. The amounts of these reserve
balances for the reserve computation periods which included December 31, 1994
and 1995 were $1,760,000 and $3,060,000, respectively, which amounts were
satisfied through the restriction of vault cash.
The Company is party to certain claims and litigation arising in the
ordinary course of business. In the opinion of management, the resolution of
such claims and litigation will not materially affect the consolidated financial
position or results of operations. The Company has entered into employment
agreements with certain officers, which range from three to five years. Under
the terms of such agreements, the Company was obligated on December 31, 1995 to
pay, under current base salary levels, an aggregate amount of $2,539,766 over
the remaining term. In the event employment is terminated under circumstances as
defined by the agreements, the employees may be entitled to severance pay equal
to between 1.00 and 2.99 times their base salaries.
In connection with the operation of certain branch offices, the Bank has
entered into operating leases for periods ranging from one to five years. Total
rental expense for the years ended December 31, 1993, 1994 and 1995 was
$155,000, $200,000, and $357,000, respectively. Future minimum lease payments
under such operating leases are $399,000, $403,000, $391,000, $346,000, and
$227,000 for the years ended December 31, 1996 through 2000, respectively.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Parent Company Financial Information
Presented below are the parent company only financial statements as of
December 31, 1994, and 1995 (dollars in thousands):
Prime Bancorp, Inc.
(parent company only)
Statements of Financial Condition
December 31,
- --------------------------------------------------------------------------------
1994 1995
- --------------------------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 660 $ 599
Investments in bank subsidiaries 42,590 50,101
Investments in non-bank subsidiaries 4,830 6,048
- --------------------------------------------------------------------------------
Total Assets $48,080 $56,748
================================================================================
Liabilities and stockholders' equity:
Liabilities:
Other liabilities 439 501
- --------------------------------------------------------------------------------
Total liabilities 439 501
- --------------------------------------------------------------------------------
Shareholders'equity:
Common stock 3,890 3,890
Additional paid-in capital 30,455 30,455
Retained earnings 14,111 22,717
Treasury stock (184,063 shares at cost) (815) (815)
- --------------------------------------------------------------------------------
Total stockholders' equity 47,641 56,247
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $48,080 $56,748
================================================================================
Statements of Operations
December 31,
- --------------------------------------------------------------------------------
1993 1994 1995
- --------------------------------------------------------------------------------
Income:
Dividends and interest from
subsidiary $ 681 $2,928 $3,008
Equity in undistributed income
of subsidiaries 5,878 2,919 2,875
- --------------------------------------------------------------------------------
Total income 6,559 5,847 5,883
Operating expense 80 39 30
- --------------------------------------------------------------------------------
Net income $6,479 $5,808 $5,853
================================================================================
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 6,479 $ 5,808 $ 5,853
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (5,878) (2,919) (2,875)
Increase (decrease) in liabilities (6) (20) 3
- -------------------------------------------------------------------------------
Net cash provided by net operating activities 595 2,869 2,981
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Contribution to subsidiaries 0 (1,000) (750)
- -------------------------------------------------------------------------------
Cash used in investing activities 0 (1,000) (750)
Cash flows from financing activities:
Stock options exercised 327 333 0
Cash dividends paid (1,778) (1,763) (2,292)
- -------------------------------------------------------------------------------
Net cash used in financing activities (1,451) (1,430) (2,292)
- -------------------------------------------------------------------------------
Net increase in cash (856) 439 (61)
Cash and cash equivalents:
Beginning of year 1,077 221 660
End of year $ 221 $ 660 $ 599
===============================================================================
Supplemental disclosure of cash flow information:
Tax benefit from exercise of stock options $ 66 $ 41 $ --
60
Management's Statement on Financial Reporting
Management of Prime Bancorp, Inc. is responsible for establishing and
maintaining an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Federal Financial Institutions Examination Council instructions for
Consolidated Reports of Condition and Income (Thrift Financial Report
instructions). The structure contains monitoring mechanisms, and actions are
taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1995. This assessment
was based on criteria for effective internal control over financial reporting
described in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that, as of December 31, 1995, the Company maintained an
effective internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and Thrift
Financial Report instructions.
_______________________________ ___________________________________
Erwin T. Straw, President & CEO Walter L. Tillman, Jr. EVP & COO
61
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the caption "Election of Directors" on
pages 4 through 6 of the Company's Proxy Statement dated March 18, 1996 is
incorporated herein by reference thereto.
The Bylaws of the Company currently provide that the Board of Directors
shall consist of seven members, In accordance with the Certificate of
Incorporation and the Bylaws, the Board of Directors is divided into three
classes as nearly equal in number as possible. One class of directors is to be
elected annually. The members of each class are to be elected for a term of
three years and until their successors are elected and qualified.
The class of directors serving until 1997 are Frederick G. Betz, Oskar R.
Huber and David H. Platt. The class of directors serving until 1998 consists of
Joseph G. Markmann, Ernest Larenz and Joseph A. Fluehr, III. The class of
directors with terms expiring at this year's Annual Meeting are Mrs. Dorothy M.
Bernhard and Messrs Raymond Weinmann and Erwin T. Straw. The Board has nominated
Messrs. Raymond L. Weinmann and Erwin T. Straw for re-election at the 1996
Annual Meeting, each for a three-year term ending at the 1999 Annual Meeting and
until their successors are elected and qualified. Under Article III, Section 16
of the Company's Bylaws, a director may not serve beyond the annual meeting
following the date on which such director attains the age of 70. Because current
directors Dorothy M. Bernhard and Joseph G. Markmann have reached age 70, they
are ineligible to serve as directors following the 1996 Annual Meeting of
Stockholders. The Board of Directors of the Company on December 13, 1995 adopted
resolutions accepting the resignation of Oskar R. Huber whose term expires in
1997 and appointing James J. Lynch to fill the vacancy created by the
resignation of Mr. Huber from the Board of Directors effective January 29, 1996.
The Company has no reason to believe that any of the nominees will be
unavailable for election; however, should any nominee become unavailable for any
reason, the Board of Directors may designate a substitute nominee. The proxy
agents intend (unless authority has been withheld) to vote for the election of
the Company's nominees.
The following table sets forth certain information regarding management's
nominees for the Board of Directors of Prime Bancorp all of whom are currently
serving as directors of Prime Bancorp.
Term of
Position(s) Held Director of Office as
with Prime Bancorp Prime Bancorp Director
Name Age and Prime Bank Since to Expire
- --------------------------------------------------------------------------------
62
Raymond L. Weinmann.... 54 Director of 1994 1999
Prime Bancorp and
Prime Bank
Erwin T. Straw......... 66 Chairman of the 1988 1999
Board of Prime
Bancorp and Prime
Bank
The following table sets forth certain information regarding the members of
the Board of Directors who are continuing in office.
Joseph A. Fluehr, III.. 50 Secretary of Prime 1988 1998
Bancorp and Director
of Prime Bancorp and
Prime Bank
Ernest Larenz.......... 64 Director of Prime 1988 1998
Bancorp and Prime
Bank
Frederick G. Betz...... 66 Director of Prime 1988 1997
Bancorp and Prime
Bank
James E. Lynch......... 46 President, Chief 1988 1997
Executive Officer
and Director of Prime
Bancorp and Prime
Bank
David H. Platt......... 47 Director, Prime 1988 1997
Bancorp and Prime
Bank
The business experience during at least the last five years for each of the
nominees and each of the directors continuing in office is as follows:
Mr. Betz served as a director of Cheltenham from 1988 until the
merger/conversion. Presently he is President of Fred Betz and Sons, Inc., a
custom home building company located in Southampton, Pennsylvania.
Mr. Fluehr served as a director of North East from 1983 until the date of
the merger/conversion. He is a funeral director and the owner of the Joseph A.
Fluehr,III Funeral Home in Richboro, Pennsylvania. He is also the Chairman of
the Board of Trustees of St. Mary's Medical Center, a division of the Franciscan
Health System, in Langhorne, PA and a Director of St. Joseph's Home for the
Aged, Holland, PA.
Mr. Straw served as President and Chief Executive Officer of Cheltenham
Federal Savings and Loan Association ("Cheltenham") from January 1985 until the
date of the merger/conversion. Prior to joining Cheltenham, Mr. Straw was
employed for 24 years with Cheltenham Bank, ultimately serving as a Vice
President. Prior thereto, Mr. Straw spent six years with Household International
as a manager in the consumer finance industry.
Mr. Larenz served as a director of North East from 1976 until the date of
the merger/conversion. He is the President of Medicare Management Nursing Homes
which is responsible for the operation of various nursing homes. He is also a
63
builder/developer of residential and commercial properties.
Mr. Lynch served as Executive Vice President of MidLantic Bank from 1994 to
1995. Prior thereto, Mr. Lynch has held various positions within Continental
Bank culminating as President from 1992 to 1994. He helped orchestrate
Continental's merger with MidLantic. Prior thereto, Mr. Lynch was with First
Pennsylvania Bank from 1968 to 1976.
Mr. Platt served as a director of North East from 1983 until the
merger/conversion. He is the President of Somerton Springs Pro-Golf Shoppes
which has ten golf shops and two golf facilities throughout the Delaware Valley
area. He is also President of the Ballroom at Somerton Springs, Inc. and Newtown
Swim Club Inc.
Mr. Weinmann served as a director of Cheltenham from 1986 until the
merger/conversion. Mr. Weinmann is President of The Weinmann Group, a company
that provides consulting services to developers and builders. In 1977, he co-
founded Meehan-Weinmann, Inc. which became one of the ten largest construction
companies in the Delaware Valley, building many of the notable projects in
Philadelphia and Atlantic City. In 1983, the company was designated as
redeveloper of Conshohocken and was the prime mover of that community's
resurgence.
Item 11. Executive Compensation.
The information contained under the caption "Executive Compensation" on
pages 11 through 16 and under the caption "Board Compensation Committee Report
on Executive Compensation" on pages 17 and 18 of the Company's definitive Proxy
Statement dated March 18, 1996 is incorporated herein by reference.
EXECUTIVE COMPENSATION
Remuneration
Because the business of the Company essentially consists of the
business of the Bank no separate cash compensation was paid to executive
officers of the Company, all of whom are executive officers of the Bank and
received compensation as such. The following table sets forth information as to
all cash compensation paid for the year ended December 31, 1995 by the Bank, to
each executive officer whose cash compensation exceeded $100,000 during that
period, and to all executive officers as a group.
SUMMARY COMPENSATION TABLE(1)
Annual
Compensation(2)
---------------
Securities
Underlying
Name and Principal Salary Bonus Options/
Position Year Amount Amount SARs
- ------------------------------------------------------------------------------
Erwin T. Straw(3) 1993 $260,000 $ 56,000 --
President and CEO 1994 286,000 104,000 22,875
1995 293,000 50,000 27,500
Walter L. Tillman, Jr 1993 100,000 10,000 --
Executive Vice 1994 110,000 20,000 9,966
President 1995 130,000 10,000 11,000
and Chief Operating
Officer
(1) The Bank furnishes Mr. Straw with automobiles and also pays certain club
dues for Mr. Straw for the purpose of promoting the business of the Bank.
The Bank has determined, after reasonable inquiries, that the aggregate
64
amount of any personal benefits from the automobiles and club memberships
did not exceed 10% of Mr. Straw's cash compensation for the periods
reported and that the aggregate fringe benefits to all executive officers
did not exceed 10% of aggregate compensation. Therefore, these items have
not been included in the table.
(2) Information regarding group life, health, hospitalization, and medical
reimbursement plans maintained by the Company or the Bank is omitted
because those plans do not discriminate in scope, terms or operation in
favor of executive officers or directors and are generally available to all
salaried employees.
(3) Under the Company's Unfunded Executive Benefit Plan, which benefits
designated senior officers of the Company and the Bank, upon retirement Mr.
Straw would be entitled to a retirement benefit equal to 60% of the average
gross compensation paid to Mr. Straw during the five calendar years
preceding his retirement, less primary social security benefits and other
pension benefits. If Mr. Straw were to die before retirement, the Company's
Unfunded Executive Benefit Plan would provide for payments of death
benefits in the amount of $13,333.00 per month for 12 months from the date
of death, reducing to $6,667.00 per month until 192 months from date of
death.
The following table sets forth the number of stock options granted during 1995
by the Named Executives.
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
- ----------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year Date 5% 10%
- ----------------------------------------------------------------------------------------------------------
Erwin T. Straw 27,500 18.46% $19.75 12/13/2005 $310,500 $ 787,000
James J. Lynch(2) 55,000 36.91% $19.00 01/29/2006 $657,250 $1,665,400
Walter L. Tillman, Jr 11,000 7.38% $19.75 12/13/2005 $124,200 $ 314,800
(1) The number of shares have been restated to reflect the 10% stock dividend
payable on February 1, 1996 to shareholders of record on January 2, 1996.
(2) Pursuant to an Employment Agreement dated December 13, 1995, Mr. Lynch was
given the contractual right to the issuance of 50,000 shares upon
commencement of his employment with the Company on January 29, 1996. As
with other stock options granted by the Company, the number of shares was
adjusted to 55,000 with the 10% stock dividend payable on February 1, 1996
to shareholders of record on January 2, 1996.
The following table sets forth certain information regarding individual
exercises of stock options during 1995 by the Named Executives.
AGGREGATED OPTION/SAR EXERCISES AND
65
1995 YEAR-END OPTION/SAR VALUE TABLE (1)
Number of Shares Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options/SARs Options/SARs
on Value at December at December
Name Exercise Realized 31, 1995 (#)(2) 31, 1995
- --------------------------------------------------------------------------------
($)(2)
Erwin T. Straw -- $ -- 45,796 $ 927,369
James J. Lynch -- -- 55,000 1,113,750
Walter L. Tillman, Jr -- -- 20,966 424,562
Value of Common Stock on December 31, 1995 was $20.25 per share.
(1) The number of shares have been restated to reflect the 10% stock dividend
payable on February 1, 1996 to shareholders of record on January 2, 1996.
(2) All of the stock options granted in 1995 are exercisable.
Compensation of Directors
A description of the standard compensation arrangements for directors of
the company and the Bank is set forth under "The Board of Directors and its
Committees".
Employment Agreements
On December 13, 1995, the Board of Directors appointed James J. Lynch,
formerly Executive Vice President of MidLantic Bank, as President and CEO of the
Company, succeeding Erwin T. Straw. Mr. Straw, who has served as President and
CEO of the Bank since 1983, will continue to serve the Company as Chairman of
the Board.
The Company and the Bank have entered into employment agreements with Erwin
T. Straw, James J. Lynch and Walter L. Tillman, Jr.. Mr. Straw's agreement is
for a term of six years and provides for an automatic one-year extension on each
anniversary date of the agreement commencing on the second anniversary of the
agreement, unless notice to the contrary is given by Mr. Straw or the Company to
the other. The base salary payable under the agreement is $293,000. Mr. Lynch's
agreement is for a term of five years and provides for an automatic one-year
extension on each anniversary from the date of commencement of the term unless
notice to the contrary is given by Mr. Lynch or the Company to the other. The
base salary payment under the agreement is $300,000. In addition, Mr. Lynch will
be entitled to a bonus of not less than $100,000 per annum provided that the
overall performance of the Company is reasonably consistent with that of
previous years. Also, Mr. Lynch is entitled to participate in the Company's
Incentive Stock Option Plan and was granted 50,000 shares on January 29, 1996
and an additional 10,000 shares will be granted each year on his anniversary
date for the next five years. Tillman's agreement is for a term of three years
and provides for an automatic one-year extension on each anniversary date of the
agreement commencing on the second anniversary of the agreement unless notice to
the contrary is given by Mr. Tillman or Prime Bancorp to the other. The base
salary payable under the agreement is $130,000. The Company currently
66
renewed these agreements on similar terms. The employment agreements also
provide, among other things, for participation in any bonuses which the Boards
of Directors, in its discretion, may authorize from time to time, as well as
participation in stock options and other benefits applicable to executive
personnel.
In connection with a termination of employment by the employees for "good
reason," other than in connection with a change of control, such as for breach
of contract or a purported termination not affected pursuant to a notice of
termination, the agreements provide for severance payments. Mr. Straw's and
Lynch's agreement provide that such payments would be equal to the annual base
salary in effect as of the date of termination multiplied by the greater of the
number of years (including partial years) remaining under the agreement or the
number 2.99. The agreement for Mr.Tillman provides that such payments would be
equal to the employee's annual base salary in effect as of the date of
termination multiplied by the number of years (including partial years)
remaining in the term of employment.
Assuming that Messrs. Straw, Lynch and Tillman, continue to earn their
current base salaries, plus bonuses equal to those earned for 1995, their
maximum severance payments upon a termination for good reason, not in connection
with a change of control, would approximate $876,070, $1,500,000 and $162,500,
respectively.
"Good reason," according to the agreements, also includes, subsequent to a
change in control of Prime Bancorp and without the employee's express written
consent, the assignment of the employee to duties inconsistent with those
performed immediately prior to the change in control, a change in the employee's
reporting responsibilities, title or office, any removal of the employee from,
or any failure to re-elect the employee to, any such position, a reduction in
annual salary, the failure of Prime Bancorp to continue for him any bonus,
benefit or compensation plan or any action that would affect adversely
participation in or materially reduce his benefits under any such plan. The
agreements define "change in control" to include any of the following: (1) any
change in control required to be reported pursuant to item 5(f) of Schedule 14A,
promulgated under the Exchange Act; (2) the acquisition of beneficial ownership
by any person (as defined in Sections 13(d) and 14(d) of the Exchange Act) of
25% or more of the combined voting power of Prime Bancorp's then outstanding
securities; or (3) during any period of two consecutive years, there is a change
in the majority of the Board of Directors for any reason, unless the election of
each new director was approved by at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
If Mr. Straw terminates his employment for "good reason" in connection with
a change in control, he will receive severance payments covering the remaining
term of his agreement equal to the product of the number 2.99 multiplied by his
average aggregate annual compensation includable in his gross income for federal
income tax purposes for the past five calendar years. If Mr. Lynch similarly
terminates his employment, he is entitled to severance payments equal to the
product of his annual base salary in effect as of the date of termination by the
greater number of years remaining in the term of his contract or the number
2.99. If Mr. Tillman similarly terminates his employment, he is entitled to
severance payments equal to the product of his annual base salary in effect as
of the date of termination and the number of years (including partial years)
remaining in the term of his employment. All such severance payments will be
paid in a lump sum on or before the fifth day following the date of termination.
However, if the severance
67
payments would be deemed to constitute "parachute payments" under Section 280G
of the Internal Revenue Code (the "Code") of 1986, as amended, the severance
payments will be reduced to the extent necessary to ensure that no portion of
the severance payments are subject to the excise tax imposed by Section 4999 of
the Code.
Assuming that Messrs. Straw, Lynch and Tillman continue to earn their
current base salaries, plus bonuses equal to those earned for 1995, their
maximum severance payments, upon a termination for good reason, in connection
with a change in control, and without consideration of the excise tax imposed by
Section 4999 of the Code, would be $950,000, $1,500,000 and $162,500.
In the event an agreement is terminated by Prime Bancorp or the Bank for
just cause (as defined in the agreement), then the executive is not entitled to
compensation or other benefits for the period following such termination.
Unfunded Executive Benefit Plan
Erwin T. Straw is currently included in the Bank's Executive Benefit Plan,
an unfunded, non-qualified retirement benefit plan which provides a retirement
benefit (or, in event of death before retirement, a death benefit) supplemental
to the Company's other plans. Under Mr. Straw's agreement, the supplemental
annual benefit is 60% of his "Average Annual Compensation" less primary social
security benefits and other pension benefits. Average Annual Compensation is the
average of gross compensation paid to Mr. Straw during the five calendar years
preceding the date of his retirement. As of May 1994, Mr. Sokol is receiving a
monthly distribution from the plan. His annual benefit is $50,000.00 less
primary social security benefits and other pension benefits. Under the plan, if
Mr. Straw dies prior to retirement, the plan provides for payments of death
benefits to designated beneficiaries; for Mr. Straw, in the amount of $13,333.00
per month for 12 months from the date of death, reducing to $6,667.00 per month
until 192 months from date of death. Payments are taxed to the recipient for
Federal and Pennsylvania tax purposes as ordinary income on receipt.
Indebtedness of Management
I Loans to directors and executive officers are made only in conformance
with, and subject to the limitations of, applicable banking regulations. Such
loans were made in the ordinary course of business and were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other borrowers. These
loans do
68
not involve more than normal collection risk, nor do they present any other
unfavorable features.
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Committee Interlocks and Insider Participation in Group Decisions
The Board of Directors of the Company has no Compensation Committee, as all
compensation for executive officers and employees, other than the payment of
director's fees to directors of the Company, the approval by the Board of
Directors of stock option grants (if any), as required by Delaware law, and the
payment of matching contributions to the Company's 401(k) Plan, is paid to
executive officers and employees in their capacities as executive officers or
employees, as the case may be, of the Bank. Accordingly, this report was
prepared by the Compensation Committee of the Bank. The Board of Directors of
the Company has also reviewed and approved this Report.
Committee Report on Executive Compensation
The Compensation Committee administers the Bank's executive compensation
programs and has responsibility for recommending to the board of directors of
the Bank the compensation of all employees, including executive officers. The
current members of the Compensation Committee are Joseph A. Fluehr, III, who
serves as Committee Chair, Oskar R. Huber, Joseph Markmann and Robert Stahl,
none of whom is an employee of the Company or the Bank.
At the direction of the Board of Directors and pursuant to the charter of
the Committee, the Committee endeavors to ensure that the compensation programs
for executive officers of the Bank are effective in attracting and retaining key
executives responsible for the success of the Company and are administered in an
appropriate fashion in the long-term interest of the Company and its
shareholders. The Committee seeks to align total compensation for senior
management with
69
corporate performance. Committee actions related to the compensation of the
chief executive officer of Bank are submitted to the full board for
ratification.
The Committee believes that the Company's overall financial performance
should be an important factor in the compensation of the Bank's executive
officers. At the executive officer level, the Committee has a policy that a
significant proportion of total compensation should consist of variable,
performance-based components, such as stock options, bonuses, and profit sharing
plans which can increase or decrease to reflect changes in corporate and
individual performance. In addition, the availability of the Company's 401(k)
Plan, pursuant to which employees including executive officers (other than Mr.
Straw), may purchase common stock was considered by the Committee in making its
determination of the kind and amount of compensation to be paid to each
executive officer. These incentive compensation programs are intended to
reinforce management's commitment to enhancement of profitability and
shareholder value.
The Committee takes into account various qualitative and quantitative
indicators of corporate and individual performance in determining the level and
composition of compensation for the chief executive officer and other executive
officers. While the Committee considers such corporate performance measures as
net income, earnings per common share, return on average common stockholders'
equity and return on average total assets, the Committee does not apply any
specific qualitative factors, such as successful supervision of major corporate
projects, demonstrated leadership ability and contributions to industry and
community development.
The salary of Mr. Straw, the CEO, is fixed largely by his Employment
Agreement. However, in determining his bonus, the Committee considered the
following criteria: the Bank's financial performance, which continues to be
superior to many comparable institutions, its capital position, which continues
to be strong, and the opening of two new offices, which positioned the Bank for
growth in a new market area. The Committee was particularly mindful that Mr.
Straw has guided the Bank successfully through difficult economic times that
have caused many other banks to fail. The Committee believes that the Bank,
under Mr. Straw's leadership, has illustrated the vision to propel itself into
the next century, while at all times taking into consideration the welfare of
stockholders as well as the overall financial condition of the institution.
Finally, in determining an appropriate bonus level, the Committee consulted
several surveys of executive compensation in the Banking industry.
In accordance with the compensation philosophy and process described above,
the Committee authorized a bonus of $50,000 to Mr. Straw. In addition, the Stock
Option Committee has awarded stock options to all of the directors of the
Company.
Compensation Committee
Joseph A. Fluehr, III Chairman
Dorothy M. Bernhard
David H. Platt
Robert G. Stahl
70
Item 12. Security Ownership of Management
The information contained under the caption "Beneficial Ownership of Voting
Securities" on page 2 of the Company's definitive Proxy Statement dated March
18, 1996 is incorporated herein by reference.
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The Company does not know of any person or group that is the beneficial
owner of more than five percent of the outstanding Common Stock, except as
indicated herein. The following table reflects as of February 28, 1996 the
Common Stock beneficially owned by beneficial owners of more than five percent
of the outstanding common stock, directors and all officers and directors as a
group. Except as otherwise noted, each beneficial owner listed has sole
investment and voting power with respect to the Common Stock owned by him or
her.
Amount
and Nature Percent
of Beneficial of
Beneficial Owner Ownership(1) Class(2)
- ---------------- ------------ --------
Erwin T. Straw 263,092(4) 7.07%
Dorothy M. Bernhard 11,565(5) 0.31%(3)
Frederick G. Betz 48,858(6) 1.32%
Joseph A. Fluehr, III 42,698(7) 1.15%
Ernest Larenz 139,023(8) 3.74%
James J. Lynch 60,000 1.61%
Joseph G. Markmann 44,518(9) 1.20%
David H. Platt 18,768 0.50%(3)
Raymond L. Weinmann 16,437 0.44%(3)
All directors and
officers as a group,
consisting of
14 persons (10) 780,087 20.96%
- ----------
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission and, accordingly, may
include securities owned by or for, among others, the spouse and/or minor
children of the individual and any other relative who has the same home as
such individual, as well as other securities as to which the individual has
or shares voting or investment power or which the individual has the right
to acquire under outstanding stock options within 60 days after March 31,
1996. Beneficial ownership may be disclaimed as to certain of the
securities.
(2) Based on 3,721,098 shares outstanding on February 28, 1996, except when the
percentage reported relates to shares of Common Stock that a person has a
right to acquire, in which case it is based on the number of shares of
Common Stock that would be outstanding after the exercise of such right.
The following persons own stock options, for the amount of shares
indicated: Erwin T. Straw - 50,374; Dorothy M. Bernhard -
71
8,770; Frederick G. Betz - 19,552; Joseph A. Fluehr, III - 7,368; Ernest
Larenz - 7,368; James J. Lynch - 55,000; Joseph G. Markmann - 7,368; David
H. Platt - 12,327; and Raymond L. Weinmann - 14,066.
(3) Less than 1%.
(4) 93,833 shares are held jointly by Mr. Straw and his wife. 47,834 shares are
owned by Mr. Straw's wife. Also includes 13,549 shares of Common Stock held
by Mr. Straw in the Company's 401(k) Plan.
(5) 2,795 shares are held jointly by Mrs. Bernhard, her husband and daughter.
(6) 3,635 shares of Common Stock are held by Fred Betz & Sons Profit Sharing
Trust of which Mr. Betz is the Trustee and 2,524 shares are held in an IRA
account for Mr. Betz's wife.
(7) 23,148 shares are held jointly by Mr. Fluehr and his wife.
(8) 17,820 shares are held jointly by Mr. Larenz and his wife and 3,807 shares
are held in an IRA account of Mr. Larenz' wife.
(9) 35,543 shares are held jointly by Mr. Markmann and his wife.
(10) This amount includes an aggregate of 226,751 shares of Common Stock
issuable upon the exercise of options held by certain officers and
directors of the Company.
Item 13. Certain Relationships and Related Transactions.
The information contained under the caption "Indebtedness of Management" on
page 16 of the Company's definitive Proxy Statement dated March 18, 1996 is
incorporated herein by reference.
Indebtedness of Management
Loans to directors and executive officers are made only in conformance
with, and subject to the limitations of, applicable banking regulations. Such
loans were made in the ordinary course of business and were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other borrowers. These
loans do not involve more than normal collection risk, nor do they present any
other unfavorable features.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) The following consolidated financial statements of the Company and the
opinion of independent certified public accountants thereon which
appears on pages 29 through 49 of the Company's 1995 Annual Report
included as an exhibit to this report:
Page Reference
Annual Report
Financial Statements to Shareholders
---------------------------------------------------------------------
Consolidated Statements of Financial Condition 29
Consolidated Statements of Operations 30
Consolidated Statements of Stockholders' Equity 31
Consolidated Statements of Cash Flow 32 - 33
Notes to Consolidated Financial Statements. 34 - 47
72
Management's Statement on Financial Reporting 48
Independent Auditors' Report 49
(2) Other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) The following exhibits:
Exhibit #
- ---------
3.1 Certificate of Incorporation of Prime Bancorp, Inc. - Incorporated
herein by reference to Exhibit 3.1 of Registration Statement
#33-23083.
Certificate of Correction of Certificate of Incorporation of Prime
Bancorp, Inc. filed on November 8, 1991 - Incorporated herein by
reference to Exhibit 3.1 of the registrant's Annual Report on Form
10-K for the transition period ending December 31, 1991, filed with
the Securities and Exchange Commission on March 27, 1992.
3.2 Bylaws - Incorporated by reference to Exhibit 3.2 of Registration
Statement #33-23083 and by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-k for the transition period
ending December 31, 1991, filed with the Securities and Exchange
Commission on March 27, 1992.
10.1 (a) Employment agreement between the Holding Company, Prime Savings and
each of Erwin T. Straw, Joseph Sokol, Richard M. Tull, Robert T.
Strong, and Thomas P. Kirwin - Incorporated by reference to Exhibit
10.1 to registrant's Annual Report on Form 10-K for the fiscal year
ending June 30, 1989, filed with the Securities and Exchange
Commission on September 27, 1989.
(b) Employment agreement between the Holding Company, Prime Savings and
Walter L. Tillman, Jr. Incorporated by reference to Exhibit 10.1 to
registrant's Annual Report on Form 10-K for the fiscal year ending
June 30, 1990, filed with the Securities and Exchange Commission on
September 27, 1990.
(c) Employment agreement between the Holding Company, Prime Bank and James
J. Lynch
10.2 Incentive Stock Option Plan - Incorporated by reference to Exhibit
10.2 to registrant's Annual Report on Form 10-K for the fiscal year
ending December 31, 1994, filed with the Securities and Exchange
Commission on March 30, 1995.
10.3 Prime Bancorp, Inc. Salary Continuation and Supplemental Retirement
Plan - Incorporated by reference to Exhibit 10.3 to registrant's
Annual Report on Form 10-K for the fiscal year ending June 30, 1989,
filed with the Securities and Exchange Commission on September 27,
1989.
10.4 Prime Bancorp, Inc. Retirement Plan - Incorporated by reference to
Exhibit 10.4 to registrant's Annual Report on Form 10-K for the fiscal
year ending June 30, 1989, filed with the Securities and Exchange
Commission on September 27, 1989.
10.5 Prime Bancorp, Inc. Employee Retirement Savings Plan - Incorporated by
reference to Exhibit 10.5 to
73
registrant's Annual Report on Form 10-K for the fiscal year ending
June 30, 1989, filed with the Securities and Exchange Commission on
September 27, 1989.
10.6 Lease Agreement between Prime Savings and Lotz Realty, Inc. -
Incorporated by reference to exhibit to registrant's Annual Report on
Form 10-K for the fiscal year ending June 30, 1989, filed with the
Securities and Exchange Commission on September 27, 1989
10.7 Lease Agreement, between Prime Savings and Village Plaza Shopping
Center. - Incorporated by reference to exhibit 10.7 to registrant's
Annual Report on Form 10-K for the fiscal year ending June 30, 1989,
filed with the Securities and Exchange Commission on September 27,
1989.
10.8 Lease Agreement, between Prime Savings and Grant Plaza. - Incorporated
by reference to Exhibit 10.8 to registrant's Annual Report on Form
10-K for the fiscal year ending June 30, 1989, filed with the
Securities and Exchange Commission on September 27, 1989.
10.9 Report on Form 11-K, Prime Bancorp, Inc. Retirement Savings Plan for
the year ended December 31, 1995. (to be filed by amendment)
10.10 Lease Agreement, between the Bank and Hopkinson Corporation -
Incorporated by reference to Exhibit 10.10 to registrant's annual
report on Form 10-K for the fiscal year ending December 31, 1993,
filed with the Securities and Exchange Commission on April 14, 1993.
10.11 Lease Agreement, between the Bank and Foxcroft Square Company -
Incorporated by reference to Exhibit 10.11 to registrant's quarterly
report on Form 10-Q for the quarter ended March 31, 1993, filed with
the Securities and Exchange Commission on April 14, 1993.
10.12 Lease Agreement, between the Bank and Bell Atlantic Properties, Inc.
dated January 7, 1985. Incorporated by reference to Exhibit 10.2 to
registrant's Annual Report on Form 10-K for the fiscal year ending
December 31, 1994, filed with the Securities and Exchange Commission
on March 30, 1995.
10.13 Lease Agreement, between the Bank and the Trust of Russell A. Allen,
deceased dated July 31, 1985. Incorporated by reference to Exhibit
10.2 to registrant's Annual Report on Form 10-K for the fiscal year
ending December 31, 1994, filed with the Securities and Exchange
Commission on March 30, 1995.
10.14 Lease Agreement, between the Bank and Mark Cohen dated September 24,
1994. - Incorporated by reference to Exhibit 10.2 to registrant's
Annual Report on Form 10-K for the fiscal year ending December 31,
1994, filed with the Securities and Exchange Commission on March 30,
1995.
10.15 Lease Agreement, between the Bank and Corestates Bank dated March 1,
1995.
74
10.16 Lease Agreement, between the Bank and Cameron C. Troilo and Olga Jean
Troilo dated June 26, 1995.
13.1 1995 Annual Report to Stockholders.
22.1 Subsidiaries - Incorporated by reference to Exhibit 22.1 to
registrant's Annual Report on Form 10-K for the fiscal year ending
December 31, 1994, filed with the Securities and Exchange Commission
on March 30, 1995.
28.1 Purchase and Assumption Agreement By and among B.M.J. Financial Corp.,
Bank of Delaware Valley and Prime Savings Bank, fsb dated August 19,
1992 - Incorporated by reference to Exhibit 23.1 to registrant's Form
10-Q for the quarter ended September 30, 1992, filed with the
Securities and Exchange Commission on November 16, 1992.
28.2 Purchase and Assumption Agreement between the Bank and the Resolution
Trust Corporation dated July 26, 1993 - Incorporated by reference to
Exhibit 28.2 to registrant's Form 10-Q for the quarter ended September
30, 1993, filed with the Securities and Exchange Commission on
November 15, 1993.
28.3 Purchase and Assumption Agreement between the Bank and the Resolution
Trust Corporation dated December 25, 1993 - Incorporated by reference
to Exhibit 28.3 to registrant's Form 10-K for the fiscal year ended
December 31, 1994, filed with the Securities and Exchange Commission
on March 31, 1995.
28.4 Purchase and Assumption Agreement between the Bank and the Resolution
Trust Corporation dated September 16, 1994 - Incorporated by reference
to Exhibit 28.4 to registrant's Form 10-Q for the quarter ended
September 30, 1994 filed with the Securities and Exchange Commission
on November 14, 1994. (b) Reports on Form 8-K No reports on Form 8-K
were filed during the last quarter of the period covered by this
report. However, on January 15, 1993, the registrant did file a Report
on Form 8-K relating to the Acquisition or Disposition of Assets -
with the Securities and Exchange Commission.
PRIME BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused his report to be signed on its
behalf by the undersigned, hereunto duly authorized.
PRIME BANCORP, INC.
/s/ James J. Lynch
------------------
James J. Lynch, President and
Chief Executive Officer
Date: March 27, 1996
75
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- -------- ---------------
/s/ Dorothy M. Bernhard Director March 27, 1996
- -------------------------
Dorothy M. Bernhard
/s/ Frederick G. Betz Director March 27, 1996
- -------------------------
Frederick G. Betz
/s/ Joseph A. Fluehr, III Director March 27, 1996
- -------------------------
Joseph A. Fluehr, III
/s/ Ernest Larenz Director March 27, 1996
- -------------------------
Ernest Larenz
/s/ James J. Lynch Director, President March 27, 1996
- ------------------------- and Chief Executive
James J. Lynch Officer (Principal
Executive Officer)
/s/ Joseph G. Markmann Director March 27, 1996
- -------------------------
Joseph G. Markmann
/s/ David H. Platt Director March 27, 1996
- -------------------------
David H. Platt
76
Signature Title Date
- --------- -------- ---------------
/s/ Raymond L. Weinmann Director March 27, 1996
- -------------------------
Raymond L. Weinmann
/s/ Michael E. Sexton Treasurer and March 27, 1996
- ------------------------- Chief Financial Officer
Michael J. Sexton
/s/ Erwin T. Straw Chairman March 27, 1996
- ------------------------
Erwin T. Straw
/s/ Walter L. Tillman, Jr. Executive Vice-President March 27, 1996
- ------------------------- and Chief Operating
Walter L. Tillman, Jr. Officer
77
EXHIBIT INDEX
EXHIBIT DESCRIPTION Page
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Prime Bancorp, Inc. - 33
Incorporated herein by reference to Exhibit 3.1 of
Registration Statement #33-23083
3.2 Certificate of Correction of Certificate of 34
Incorporation of Prime Bancorp, Inc. filed on
November 8, 1991 - Incorporated herein by reference to
Exhibit 3.1 of the registrant's Annual Report on Form
10-K for the transition period ending December 31,
1991, filed with the Securities and Exchange Commission
on March 27, 1992.
Bylaws - Incorporated by reference to Exhibit 3.2 of
Registration Statement #33-23083 and by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the transition period ending December 31,
1991, filed with the Securities and Exchange Commission
on March 27, 1992.
10.1 (a) Employment agreement between the Holding Company, Prime 35
Savings and each of Erwin T. Straw, Joseph Sokol,
Richard M. Tull, Robert T. Strong, and Thomas P. Kirwin -
Incorporated by reference to Exhibit 10.1 to
registrant's Annual Report on Form 10-K for the fiscal
year ending June 30, 1989, filed with the Securities
and Exchange Commission on September 27, 1989.
(b) Employment agreement between the Holding Company, Prime 36
Savings and Walter L. Tillman, Jr. - Incorporated by
reference to Exhibit 10.1 to registrant's Annual Report
on Form 10-K for the fiscal year ending June 30, 1990,
filed with the Securities and Exchange Commission on
September 27, 1990.
(c) Employment agreement between the Holding Company, Prime 37 - 47
Bank and James J. Lynch dated December 13,
1995.
10.2 Incentive Stock Option Plan - Incorporated by reference 48
to Exhibit 10.2 to registrant's Annual Report on
Form 10-K for the fiscal year ending December 31, 1994,
filed with the Securities and Exchange Commission on
March 30, 1995.
10.3 Prime Bancorp, Inc. Salary Continuation and 49
Supplemental Retirement Plan - Incorporated by
reference to Exhibit 10.3 to registrant's Annual Report
on Form 10-K for the fiscal year ending June 30, 1989,
filed with the Securities and Exchange Commission on
September 27, 1989.
10.4 Prime Bancorp, Inc. Retirement Plan - Incorporated by 50
reference to Exhibit 10.4 to registrant's Annual
Report on Form 10-K for the fiscal year ending June 30,
1989, filed with the Securities and Exchange Commission
on September 27, 1989.
10.5 Prime Bancorp, Inc. Employee Retirement Savings Plan - 51
Incorporated by reference to Exhibit 10.5 to
registrant's Annual Report on Form 10-K for the fiscal
year ending June 30, 1989, filed with the Securities
and Exchange Commission on September 27, 1989.
10.6 Lease Agreement between Prime Savings and Lotz Realty, 52
Inc. - Incorporated by reference to Exhibit 10.6 to
registrant's Annual Report on Form 10-K for the fiscal
year ending June 30, 1989, filed with the Securities
and Exchange Commission on September 27, 1989
78
EXHIBIT INDEX
EXHIBIT DESCRIPTION Page
- --------------------------------------------------------------------------------
10.7 Lease Agreement, between Prime Savings and Village 53
Plaza Shopping Center. - Incorporated by reference
to Exhibit 10.7 to registrant's Annual Report on Form
10-K for the fiscal year ending June 30, 1989, filed
with the Securities and Exchange Commission on
September 27, 1989.
10.8 Lease Agreement, between Prime Savings and Grant Plaza. - 54
Incorporated by reference to Exhibit 10.8 to
registrant's Annual Report on Form 10-K for the fiscal
year ending June 30, 1989, filed with the Securities
and Exchange Commission on September 27, 1989.
10.9 Report on Form 11-K, Prime Bancorp, Inc. Retirement 55
Savings Plan for the year ended December 31, 1995.
(to be filed by amendment)
10.10 Lease Agreement, between the Bank and Hopkinson 56
Corporation - Incorporated by reference to Exhibit
10.10 to registrant's Annual Report on Form 10-K for
the fiscal year ending December 31, 1992, filed with
the Securities and Exchange Commission on April 14,
1993.
10.11 Lease Agreement, between the Bank and Foxcroft Square 57
Company - Incorporated by reference to Exhibit 10.11
to registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 1993, filed with the Securities
and Exchange Commission on April 14, 1994.
10.12 Lease Agreement, between the Bank and Bell Atlantic 58
Properties, Inc. dated January 7, 1985. -
Incorporated by reference to Exhibit 10.12 to
registrant's annual report on Form 10-K for the fiscal
year ending December 31, 1994, filed with the
Securities and Exchange Commission on March 30, 1995.
10.13 Lease Agreement, between the Bank and the Trust of 59
Russell A. Allen, deceased dated July 31, 1985. -
Incorporated by reference to Exhibit 10.12 to
registrant's annual report on Form 10-K for the fiscal
year ending December 31, 1994, filed with the
Securities and Exchange Commission on March 30, 1995.
10.14 Lease Agreement, between the Bank and Mark Cohen dated 60
September 24, 1994. - Incorporated by reference to
Exhibit 10.12 to registrant's annual report on Form
10-K for the fiscal year ending December 31, 1994,
filed with the Securities and Exchange Commission on
March 30, 1995.
10.15 Lease Agreement, between the Bank and Corestates Bank 61 - 82
dated March 1, 1995.
10.16 Lease Agreement, between the Bank and Cameron C. Troilo 83 - 100
and Olga Jean Troilo dated June 26, 1995.
13.1 1995 Annual Report to Stockholders. 101 - 129
22.1 Subsidiaries - Incorporated by reference to Exhibit 130
10.12 to registrant's annual report on Form 10-K
for the fiscal year ending December 31, 1994, filed
with the Securities and Exchange Commission on March
30, 1995.
79
EXHIBIT INDEX
EXHIBIT DESCRIPTION Page
- --------------------------------------------------------------------------------
28.1 Purchase and Assumption Agreement By and among B.M.J. 131
Financial Corp., Bank of Delaware Valley and Prime
Savings Bank, fsb dated August 19, 1992 - Incorporated
by reference to Exhibit 23.1 to registrant's Form 10-Q
for the quarter ended September 30, 1992, filed with
the Securities and Exchange Commission on November 16,
1992.
28.2 Purchase and Assumption Agreement between the Bank and 132
the Resolution Trust Corporation dated July 26,
1993 - Incorporated by reference to Exhibit 28.2 to
registrant's Form 10-Q for the quarter ended September
30, 1993, filed with the Securities and Exchange
Commission on November 15, 1993.
28.3 Purchase and Assumption Agreement between the Bank and 133
the Resolution Trust Corporation dated December 25,
1993 - Incorporated by reference to Exhibit 28.3 to
registrant's Form 10-K for the fiscal year ended
December 31, 1993, filed with the Securities and
Exchange Commission on March 31, 1994.
28.4 Purchase and Assumption Agreement between the Bank and 134
the Resolution Trust Corporation dated September
16, 1994 - Incorporated by reference to Exhibit 28.4 to
registrant's Form 10-Q for the quarter ended September
30, 1994, filed with the Securities and Exchange
Commission on November 14, 1994.
80
EXHIBIT 3.1
Certificate of Incorporation of Prime Bancorp, Inc. Incorporated herein by
reference to Exhibit 3.1 of Registration Statement #33-23083.
The Certificate of Correction of Certificate of Incorporation of Prime Bancorp,
Inc. filed on November 8, 1991 - Incorporated herein by reference to Exhibit 3.1
of the registrant's Annual Report on From 10-K for the transition period ending
December 31, 1991, filed with the Securities and Exchange Commission on March
27, 1992.
81
EXHIBIT 3.2
Bylaws - Incorporated by reference to Exhibit 3.2 of Registration Statement
#33-23083 as Exhibit 3.2 to the registrant's Annual Report on Form 10-K for the
transition period ending December 31, 1991, filed with the Securities and
Exchange Commission on March 27, 1992.
82
EXHIBIT 3.2
Bylaws of Prime Bancorp, Inc.
Article III, Section 2, as amended on 3/18/92:
SECTION 2. Number and Term. The board of directors shall consist of 10
members and shall be divided into three classes as nearly equal in number as
possible. The members of each class shall be elected for a term of three years
and until their successors are elected for a term of three years and until their
successors are elected and qualified or until their earlier resignation or
removal. one class shall be elected annually. The size of the board of directors
may be increased or decreased only by a vote of two-thirds of the members of the
board of directors or by a vote of two-thirds of the shares eligible to be voted
at a duly constituted meeting of stockholders called for such purpose.
136
EXHIBIT 10.1(a)
Employment agreement between the Holding Company, Prime Savings and each of
Erwin T. Straw, Joseph Sokol, Richard M. Tull, Robert T. Strong, and Thomas P.
Kirwin. - Incorporated by reference to Exhibit 10.1 to registrant's Annual
report on Form 10-K for the fiscal year ending June 30, 1989, filed with the
Securities and Exchange Commission on September 27, 1989.
83
EXHIBIT 10.1(b)
Employment agreement between the Holding Company, Prime Savings and Walter L.
Tillman, Jr. - Incorporated by reference to Exhibit 10.1 to registrant's annual
report on Form 10-K for the fiscal year ending June 30, 1990, filed with the
Securities and Exchange Commission on September 27, 1990.
84
EXHIBIT 10.1(c)
Employment agreement between the Holding Company, Prime Bank and James J. Lynch
dated December 13, 1995.
48
EXHIBIT 10.2
Incentive Stock Option Plan - Incorporated by reference to Exhibit 10.2 to
registrant's Annual Report on Form 10-K for the fiscal year ending December 31,
1994, filed with the Securities and Exchange Commission on March 31, 1995.
49
EXHIBIT 10.3
Prime Bancorp, Inc. Salary Continuation and Supplemental Retirement Plan -
Incorporated by reference to Exhibit 10.3 to registrant's annual report on Form
10-K for the fiscal year ending June 30, 1989, filed with the Securities and
Exchange Commission on September 27, 1989.
50
EXHIBIT 10.4
Prime Bancorp, Inc. - Incorporated by reference to Exhibit 10.4 to registrant's
annual report on Form 10-K for the fiscal year ending June 30, 1989, filed with
the Securities and Exchange Commission on September 27, 1989.
51
EXHIBIT 10.5
Prime Bancorp, Inc. Employee Retirement Savings Plan - Incorporated by reference
to Exhibit 10.5 to registrant's annual report on Form 10-K for the fiscal year
ending June 30, 1989, filed with the Securities and Exchange Commission on
September 27, 1989.
52
EXHIBIT 10.6
Lease Agreement, between Prime Savings and Lotz Realty, Inc. - Incorporated by
reference to Exhibit 10.6 to registrant's annual report on Form 10-K for the
fiscal year ending June 30, 1989, filed with the Securities and Exchange
Commission on September 27, 1989.
53
EXHIBIT 10.7
Lease Agreement, between the Prime Savings and Village Plaza Shopping Center.
Incorporated to by reference Exhibit 10.7 to registrant's annual report on Form
10-K for the fiscal year ending June 30, 1989, filed with the Securities and
Exchange Commission on September 27, 1989.
54
EXHIBIT 10.8
Lease Agreement, between Prime Savings and Grant Plaza. - Incorporated by
reference to Exhibit 10.8 to registrant's annual report on Form 10-K for the
fiscal year ending June 30, 1989, filed with the Securities and Exchange
Commission on September 27, 1989.
55
EXHIBIT 10.9
Report on Form 11-K, Prime Bancorp, Inc. Retirement Savings Plan for the year
ended December 31, 1995 (to be filed by amendment).
56
EXHIBIT 10.10
Lease Agreement, between the Bank and Hopkinson Corporation - Incorporated by
reference to Exhibit 10.10 to registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1992, filed with the Securities and Exchange
Commission on April 14, 1994.
57
EXHIBIT 10.11
Lease Agreement, between the Bank and Foxcroft Square Company - Incorporated by
reference to Exhibit 10.11 to registrant's quarterly report on Form 10-Q for the
quarter ended March 31, 1993, filed with the Securities and Exchange Commission
on April 14, 1994.
58
EXHIBIT 10.12
Lease Agreement, between the Bank and Bell Atlantic Properties, Inc. dated -
January 7, 1985. - Incorporated by reference to Exhibit 10.12 to registrant's
Annual Report on Form 10-K for the fiscal year ending December 31, 1994, filed
with the Securities and Exchange Commission on March 31, 1995.
59
EXHIBIT 10.13
Lease Agreement, between the Bank and the Trust of Russell A. Allen, deceased
dated July 31, 1985. - Incorporated by reference to Exhibit 10.13 to
registrant's Annual Report on Form 10-K for the fiscal year ending December 31,
1994, filed with the Securities and Exchange Commission on March 31, 1995.
60
EXHIBIT 10.14
Lease Agreement, between the Bank and Mark Cohen dated September 24, 1994. -
Incorporated by reference to Exhibit 10.13 to registrant's Annual Report on Form
10-K for the fiscal year ending December 31, 1994, filed with the Securities and
Exchange Commission on March 31, 1995.
61
EXHIBIT 10.15
Lease Agreement, between the Bank and Corestates Bank dated March 1, 1995.
83
EXHIBIT 10.16
Lease Agreement, between the Bank and Cameron C. Troilo and Olga Jean Troilo
dated June 26, 1995.
101
EXHIBIT 13.1
1995 Annual Report to Stockholders
130
EXHIBIT 22.1
Subsidiaries - Incorporated by reference to Exhibit 10.13 to registrant's Annual
Report on Form 10-K for the fiscal year ending December 31, 1994, filed with the
Securities and Exchange Commission on March 31, 1995.
131
EXHIBIT 22.1
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Prime Abstract, Inc. Delaware
Rowland Service Corporation Pennsylvania
NEFA Corporation Pennsylvania
Prime Financial, Inc. Pennsylvania
Del-Prime, Inc. Delaware
143
EXHIBIT 28.1
Purchase and Assumption Agreement By and among B.M.J. Financial Corp., Bank of
Delaware Valley and Prime Savings Bank, fsb dated August 19, 1992 - Incorporated
by reference to Exhibit 23.1 to registrant's Form 10-Q for the Quarter Ended
September 30, 1992, filed with the Securities and Exchange Commission on
November 16, 1992.
132
EXHIBIT 28.2
Purchase and Assumption Agreement between the Bank and the Resolution Trust
Corporation dated July 26, 1993 - Incorporated by reference to Exhibit 28.2 to
registrant's Form 10-Q for the Quarter Ended September 30, 1993, filed with the
Securities and Exchange Commission on on November 15, 1993.
133
EXHIBIT 28.3
Purchase and Assumption Agreement between the Bank and the Resolution Trust
Corporation dated December 25, 1993 - Incorporated by reference to Exhibit 28.4
to registrant's Form 10-K for the fiscal year ended December 31, 1993, filed
with the Securities and Exchange Commission on March 31, 1994.
134
EXHIBIT 28.4
Purchase and Assumption Agreement between the Bank and the Resolution Trust
Corporation dated September 16, 1994 - Incorporated by reference to Exhibit 28.4
to registrant's Form 10-Q for the quarter ended September 30, 1994, filed with
the Securities and Exchange Commission on November 14, 1994.
135