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, 1996
-----------------
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
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PRIME BANCORP, INC.
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(Exact name or registrant as specified in its charter)
Pennsylvania 23-2860688
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7111 Valley Green Road, Fort Washington, PA 19111
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 836-2400
--------------
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 ___
---
[X] 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 $98.5 million.(1)
The number of shares of the registrant's Common Stock outstanding as of
March 24, 1997 was 5,380,990 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part II Part III
Certain portions of the Annual Report Certain portions of the Proxy Statement 1997
to Shareholders for the year ended March 24, 1997
December 31, 1996
(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 24,
1997. The information provided shall in no way be construed as an
admission that any person whose holdings are included in this figure is
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 Pennsylvania in 1996 for the purpose of converting the Company's
predecessor from a Delaware Corporation to a Pennsylvania Corporation, while at
the same time effecting the merger with First Sterling Bancorp, Inc. The Company
will operate as both a bank holding company and a savings and loan holding
company. The Company's principal subsidiaries are Prime Bank and First Sterling
Bank (the "Banks") whose principal business consists of attracting deposits and
obtaining borrowings, then converting those deposits and borrowings into various
types of loans and investments.
The Company'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, seven
full service branches in Montgomery County, Pennsylvania, two in Delaware
County, Pennsylvania, and one in Chester County, Pennsylvania.
Effective March 19, 1996, the Company's subsidiary, Prime Bank
("Prime"), a federal savings bank, converted into a Pennsylvania chartered stock
savings bank with the legal name, "Prime Bank, a savings bank". After the
conversion, Prime continues to do business under the name, "Prime Bank". After
the conversion, the Bank's deposits continue to be insured by the Savings
Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC"). See "Recent Legislative and Regulatory
Developments on page 17. Prime 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.
On December 31, 1996, the Company acquired First Sterling Bancorp, Inc.
in a transaction structured as a pooling of interest. The financial data for
1996 and prior years reflects the combined data to reflect the pooling of
interest accounting. Each outstanding share of common stock of FSB was exchanged
for one share of the Company. This resulted in the issuance of approximately
1.66 million shares of Company stock. First Sterling assets and net worth at
December 31, 1996 was $235.0 million and $13.5 million, respectively.
Business
The Company 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
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------
Return on average assets 1.21% 1.38%(1) 1.02% 0.97% .45%(2)
Return on average equity 11.53% 13.88%(1) 11.57% 11.89% 5.79%(2)
Average equity to average assets 10.49% 9.93% 8.80% 8.18% 7.86%(2)
Book value per share $10.50 $11.70 $11.19 $13.15 $13.33 (2)
Dividends per share $ 0.37 $ 0.50 $ 0.54 $ 0.62 $ 0.68
Dividend payout ratio 35.24% 39.37% 42.86% 44.93% 91.89%
===========================================================================================================
(1) Includes the cumulative effect on prior years of change in accounting
principle.
(2) Includes a one time FDIC special insurance assessment of $1.66 million
net of taxes, restructuring charges of $1.70 million net of taxes and
$620 thousand of additional loan loss provision net of taxes. Excluding
these charges, return on assets, return on equity, average equity to
average assets, and book value per share would have been .91%, 11.55%,
8.01% and $14.08 for the twelve months ended December 31, 1996,
respectively.
1
Lending Activities
The Company's net loan portfolio totaled $616.9 million at December 31,
1996. This represented approximately 66.6% of its total assets. At that date,
approximately 38.1% of the loan portfolio consisted of loans secured by existing
one-to-four family residential properties and the remaining balance consisted
principally of multi-family residential and commercial real estate loans (21.3%
of the net loan portfolio), construction loans, net of loans in process (7.0%),
consumer loans (16.4%) and commercial business loans (17.6%).
2
The following table sets forth detailed information concerning the
composition of the loan portfolios as of the dates specified for the Company.
(Dollars in thousands)
December 31,
- - -------------------------------------------------------------------------------
1992 1993 1994
---- ---- ----
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
Permanent first mortgage loans:
One-to-four family $ 156,886 42.6% $ 168,345 41.7% $ 185,409 42.0%
Multi-family 5,394 1.5% 8,148 2.0% 8,735 2.0%
Commercial 59,488 16.2% 73,726 18.3% 88,767 20.1%
--------- ----- --------- ----- --------- -----
Total permanent loans 221,768 60.3% 250,219 62.0% 282,911 64.1%
Allowance for loan losses (1,252) -0.3% (1,522) -0.4% (1,856) -0.4%
--------- ----- --------- ----- --------- -----
Total permanent first mortgage
loans, net 220,516 60.0% 248,697 61.6% 281,055 63.7%
Construction 55,394 15.0% 60,665 15.0% 55,061 12.1%
Loans in process (15,488) -4.2% (17,662) -4.4% (18,907) -3.9%
--------- ----- --------- ----- --------- -----
Total construction loans, net of LIP 39,906 10.8% 43,003 10.6% 36,154 8.2%
Allowance for loan losses (878) -0.2% (959) -0.2% (1,234) -0.3%
--------- ----- --------- ----- --------- -----
Total construction loans, net 39,028 10.6% 42,044 10.4% 34,920 7.9%
Commercial business loans 61,121 16.6% 61,863 15.3% 65,045 14.7%
Allowance for loan losses (701) -0.2% (1,740) -0.4% (1,301) -0.3%
--------- ----- --------- ----- --------- -----
Total commercial loans, net 60,420 16.4% 60,123 14.9% 63,744 14.4%
Consumer loans:
Personal/lines of credit 20,852 5.7% 19,976 4.9% 21,582 4.9%
Second mortgage/equity 20,077 5.4% 25,829 6.4% 31,492 7.1%
Auto 5,933 1.6% 4,900 1.2% 7,110 1.6%
Education 1,661 0.5% 2,230 0.6% 1,697 0.4%
Home improvement and other 2,205 0.6% 1,959 0.5% 1,419 0.3%
Savings account 1,029 0.2% 1,135 0.3% 1,464 0.3%
--------- ----- --------- ----- --------- -----
Total consumer loans 51,757 14.0% 56,029 13.9% 64,764 14.6%
Allowance for loan losses (656) -0.2% (623) -0.2% (1,035) -0.2%
--------- ----- --------- ----- --------- -----
Total consumer loans, net 51,101 13.8% 55,406 13.7% 63,729 14.4%
Total unamortized loan origination
fees and costs (2,205) -0.6% (1,816) -0.4% (1,406) -0.3%
Allowance for loan loss (unallocated) (899) -0.2% (761) -0.2% (641) -0.1%
--------- ----- --------- ----- --------- -----
Total loans receivable, net $ 367,961 100.0% $ 403,693 100.0% $ 441,401 100.0%
========= ===== ========= ===== ========= =====
1995 1996
---- ----
Amount % Amount %
-------- ----- -------- ------
Permanent first mortgage loans:
One-to-four family $216,163 43.5% $235,023 38.1%
Multi-family 9,303 1.9% 10,783 1.7%
Commercial 102,958 20.7% 120,841 19.6%
-------- ----- -------- -----
Total permanent loans 328,424 66.1% 366,647 59.4%
Allowance for loan losses (1,728) -0.3% (2,081) -0.2%
-------- ----- -------- -----
Total permanent first mortgage
loans, net 326,696 65.8% 364,566 59.2%
Construction 51,564 9.4% 86,702 14.0%
Loans in process (21,683) -3.4% (42,104) -6.8%
-------- ----- -------- -----
Total construction loans, net of LIP 29,881 6.0% 44,598 7.2%
Allowance for loan losses (696) -0.1% (918) -0.2%
-------- ----- -------- -----
Total construction loans, net 29,185 5.9% 43,680 7.0%
Commercial business loans 68,777 13.8% 110,840 18.0%
Allowance for loan losses (1,954) -0.4% (2,251) -0.4%
-------- ----- -------- -----
Total commercial loans, net 66,823 13.4% 108,589 17.6
Consumer loans:
Personal/lines of credit 20,063 4.0% 27,296 4.4%
Second mortgage/equity 40,618 8.2% 44,229 7.2%
Auto 10,046 2.0% 22,499 3.7%
Education 2,992 0.6% 3,504 0.6%
Home improvement and other 1,745 0.4% 3,906 0.6%
Savings account 1,119 0.2% 907 0.1%
-------- ----- -------- -----
Total consumer loans 76,583 15.4% 102,341 16.6%
Allowance for loan losses (1,066) -0.2% (963) -0.2%
-------- ----- -------- -----
Total consumer loans, net 75,517 15.2% 101,378 16.4%
Total unamortized loan origination
fees and costs (549) -0.1% (327) 0.0%
Allowance for loan loss (unallocated) (638) -0.1% (993) -0.2%
-------- ----- -------- -----
Total loans receivable, net $497,034 100.0% $616,893 100.0%
======== ====== ======== =====
3
Contractual Maturities
The following table sets forth the contractual maturities of the
Company's loan portfolio as of December 31, 1996 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)(1).
Within 1 Through Over Five
1 Year 5 Years Years Total
-------- --------- --------- -----
Construction loans $ 33,819 $ 10,779 $ -- $ 44,598
Commercial real estate and business loans 66,153 86,929 89,382 242,464
-------- -------- ------- --------
$ 99,972 $ 97,708 $ 89,382 $287,062
======== ======== ======= ========
Loans with predetermined interest rate 16,808 31,656 21,304 69,773
Loans with variable interest rate 83,164 66,052 68,073 217,289
-------- -------- ------- --------
$ 99,972 $ 97,708 $ 89,382 $287,062
======== ======== ======= ========
(1) Excluded residential mortgages, home equity, and consumer loans.
The following table sets forth information regarding non-accrual loans
and real estate owned held by the Company at the date indicated (dollars in
thousands).
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995* 1996*
---- ---- ---- ----- -----
Non-accrual loans:
Single-Family residential $1,594 $1,913 $1,859 $1,786 $1,003
Multi-Family residential and
commercial real estate loans -- -- -- -- 3,087
------ ------ ------ ------ ------
Total residential loans 1,594 1,913 1,859 1,786 4,090
------ ------ ------ ------ ------
Consumer loans 1,512 1,698 2,956 517 243
Commercial real estate loans 3,037 3,129 2,153 2,535 2,751
------ ------ ------ ------ ------
Total non-accrual loans $6,143 $6,740 $6,968 $4,838 $7,084
====== ====== ====== ====== ======
Total non-accrual loans to
loans receivable, net 1.66% 1.66% 1.57% .97% 1.15%
====== ====== ====== ====== ======
Total real estate owned, net of
allowance for REO loss 479 392 323 419 1,335
====== ====== ====== ====== ======
Total non-accrual loans and real
estate owned to total assets 1.29% 1.19% 0.99% .64% 0.92%
====== ====== ====== ====== ======
* Excludes the impact of the $8.5 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, 1996, approximately $414,000 of interest would have
been recorded on loans accounted for on a non-accrual basis if such loans had
been current. No interest income was recognized on these loans during 1996,
since all cash received was applied against principal. All non-accrual loans are
considered to be impaired loans.
There were no loans which were contractually passed due 90 days or more
and still accruing for any period presented. Potential problems loans consist of
loans which are included in performing loans at December 31, 1996, 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, 1996, such potential problem loans amounted to
approximately $3.2 million compared to approximately $3.0 million one year ago.
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
4
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. While management uses available information to
establish the 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 Company 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,
- --------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $3,171 $4,386 $5,605 $6,067 $6,082
Charge-offs:
Real estate - construction (76) -- -- -- (813)
Real estate - mortgages (6) (48) (66) (118) (480)
Real estate - commercial (583) (201) (197) (17) --
Commercial business loans (436) (725) (614) (1,044) (1,119)
Personal/lines of credit (83) (120) (254) (239) (290)
Second mortgage/equity -- (6) (50) (21) (67)
Auto (8) (15) (70) (13) (78)
Education -- -- -- -- (41)
Home improvement and other -- -- -- -- (15)
Savings account -- -- (8) -- --
------ ------ ------ ------ ------
(1,192) (1,115) (1,259) (1,452) (2,903)
------ ------ ------ ------ ------
Recoveries:
Real estate - construction -- -- 4 -- --
Real estate - mortgages -- 23 62 7 20
Real estate - commercial -- -- -- 155 11
Commercial business loans 40 109 48 167 61
Personal/lines of credit 1 42 2 7 66
Second mortgage/equity -- -- -- -- --
Auto -- -- 9 2 24
Education 1 -- -- -- 7
Home improvement and other -- -- 2 -- 1
------ ------ ------ ------ ------
42 174 127 338 190
------ ------ ------ ------ ------
Net charge-offs (1,150) (941) (1,132) (1,114) (2,713)
------ ------ ------ ------ ------
Provision charged to operations 2,163 2,160 1,594 1,129 3,837
------ ------ ------ ------ ------
Acquired allowance for loan losses
from the Bank of Delaware Valley 202 -- -- -- --
Balance at the end of period $4,386 $5,605 $6,067 $6,082 $7,206
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.34% 0.24% 0.27% 0.24% 0.49%
====== ====== ====== ====== ======
Investment Activities
The Company has the 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
regulatory restrictions, the Company may also invest a portion of their assets
in commercial paper and corporate debt securities and in mutual funds.
5
At December 31, 1996, 25.5% of the total assets of the Company were
investment securities. See Note 5 of the Notes to the Company's Consolidated
Financial Statements.
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 Company have in the past used such excess liquidity to meet loan demand. The
relative mix of investment securities and loans in the Company'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 Company. The securities
constituting the Bank's investments are limited primarily to U.S. Government and
U.S. Government agency obligations.
Certain investment securities were reclassified in December, 1995, from
held to maturity to available for sale, in conjunction with the issuance of "A
Guide to Implementation of Statement 115 Accounting for Debt and Equity
Securities," by the Financial Accounting Standards Board in 1995.
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,
----------------------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Fair Fair Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- --------- --------
Held to Maturity
Investment Securities:
State and Municipal $ 6,163 $ 5,880 $ 400 $ 431 $ 6,739 $ 6,771
U.S. Government & U.S
Government Agency
Obligations 15,120 15,069 11,830 11,971 -- --
Small Business Association
Certificates 4,254 4,253 -- -- -- --
Israel Bonds -- -- -- -- 100 100
Marketable Equity Securities:
FHLB of Pittsburgh stock -- -- 4,120 4,120 5,728 5,728
Federal Reserve Bank -- -- 243 243 243 243
FNMA Stock -- -- 3 3 3 3
Atlantic Central Bankers
Bank Stock -- -- 75 75 75 75
Financial Institutions
Insurance Group Stock -- -- 50 50 -- --
Valley Forge Investment
Companies, Inc. -- -- -- -- 100 100
Mortgage-Backed Securities:
GMNA Pass-Through
Certificates -- -- 217 213 136 137
FHLMC Pass-Through
Certificates -- -- 207 206 202 203
Collateralized Mortgage
Obligations -- -- 80,855 81,817 97,440 97,514
-------- -------- -------- -------- --------- --------
$ 25,537 $ 25,202 $ 98,000 $ 99,129 $110,766 $110,874
======== ======== ======== ======== ========= ========
6
Years Ended December 31,
----------------------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Fair Fair Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- --------- --------
Available for Sale
Investment Securities:
U.S. Government & U.S
Government Agency
Obligations $ 75,281 $ 72,588 $ 52,961 $ 53,562 $ 62,037 $ 62,028
Small Business Association
Certificates -- -- 17,233 17,287 8,340 8,309
Corporate Notes/Bonds 1,121 1,117 -- -- -- --
Certificates of Deposit 187 187 477 477 3,000 3,000
Marketable Equity Securities:
FHLB of Pittsburgh Stock 4,269 4,269 -- -- -- --
FNMA Stock 3 3 -- -- -- --
Atlantic Central Bankers
Bank Stock 75 75 -- -- -- --
Financial Institutions
Insurance Group Stock 50 50 -- -- -- --
Mortgage-Backed Securities:
GNMA Pass-Through
Certificates 15,720 14,755 11,773 11,769 10,174 10,178
FHLMC Pass-Through
Certificates 7,968 7,431 4,962 4,892 3,707 3,653
FNMA Pass-Through
Certificates 14,018 13,534 10,062 10,071 7,449 7,441
Mortgage Pass-Through
Obligations 178 170 158 158 -- --
Collateralized Mortgage
Obligations 92,079 85,557 28,615 27,849 31,939 30,819
-------- -------- -------- -------- --------- --------
$210,949 $199,736 $126,241 $126,065 $126,646 $125,428
======== ======== ======== ======== ========= ========
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 Company presently conducts business through or have 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.
7
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, 1996, Prime 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 Prime 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
consolidated 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.
Sources of Funds
General
The sources of funds to be used in lending and for other general
business purposes of the Company 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 Company has the ability to respond to market conditions through the
pricing of deposit accounts. The Company 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 Company has a stable base of core deposits, with approximately 8.6%
of its deposits held in passbook accounts which currently earn 2.05%. The
Company 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
8
certificates. The core deposit base and overall variety of deposits allow the
Company to be competitive in obtaining funds and to respond with more
flexibility to the threat of disintermediation. The Company'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, 1996 (dollars in thousands)
Jumbo Other Time Total Time
Deposits Deposits Deposits
-------- ---------- ----------
Three months or less $26,366 $ 9,575 $35,941
Over three months to six months 15,769 9,724 25,493
Over six months to twelve months 8,558 16,154 24,712
Over twelve months 3,381 3,713 7,094
------- ------- -------
$54,074 $39,166 $93,240
======= ======= =======
The following table sets forth the deposit accounts of the Company in
dollar amounts and weighted average interest rates at the dates indicated
(dollars in thousands).
At December 31,
---------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Weighted Weighted Weighted
Amount Average Amount Average Amount Average
------ -------- ------ -------- ------ --------
Passbook and club $ 67,887 2.04% $ 63,315 2.05% $ 63,022 2.05%
NOW and Super NOW 33,078 1.49% 37,602 1.46% 44,444 1.91%
Money market accounts 102,503 2.94% 113,110 3.69% 130,028 3.30%
Fixed-rate certificates 228,942 4.83% 257,045 5.30% 288,367 5.16%
Jumbo certificates 42,300 5.33% 48,929 5.74% 54,074 5.44%
Individual retirement
accounts (1) 62,263 5.43% 64,506 5.87% 61,940 5.79%
Commercial checking
accounts (2) 48,093 -- 59,799 -- 94,767 --
-------- ---- -------- ---- -------- ----
Total Deposits $585,066 $644,306 $736,642
======== ======== ========
(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 Banks are 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 Government)
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,
limitations on the amount of such borrowings are based either on a percentage of
the Banks' capital or on the FHLB of Pittsburgh's assessment of the Bank's
creditworthiness. See "Regulation of the Banks' - Federal Home Loan Bank
System". At December 31, 1996, the Bank's had $56.6 million in borrowings from
the FHLB of Pittsburgh.
The Company uses borrowings and reverse repurchase agreements when
funds are not available from other sources at more attractive rates. In
addition, the Company has borrowed to match maturities of specific opportunities
(particularly commercial real estate loans) or to fund excess loan demand.
9
The following table sets forth the borrowings of the Company at the
dates indicated (dollars in thousands).
At December 31,
---------------------------------------------------------------
1994 1995 1996
---- ---- ----
Advances from FHLB of Pittsburgh $24,694 $37,646 $37,598
Repo plus agreements with the
FHLB of Pittsburgh -- 20,000 19,000
Reverse repurchase agreements 55,146 37,622 51,685
Other 329 -- --
------- ------- --------
$80,169 $95,268 $108,283
======= ======= ========
See Note 10 Other Borrowed Money on page 33 of the 1996 Annual Report
to Shareholders.
Employees
At December 31, 1996, the Company had 325 employees, including 272
full-time and 53 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 Company faces strong competition in the attraction of deposits. 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
Company faces additional competition for investor funds from mutual funds, the
stock market and other corporate and governmental securities.
The Company 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
Company'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 Company does not rely upon any
individual, group or entity for a material portion of its deposits.
REGULATION AND SUPERVISION
The Company, Prime Bank and First Sterling Bank are subject to
extensive federal and state regulation by various bank regulatory agencies.
Their activities may also be subject to regulation by federal or state
securities regulatory agencies, state insurance regulatory agencies, and other
federal, state and local governmental bodies. Banking statutes and regulations
are comprehensive and are intended primarily for the protection of the insurance
fund and depositors. Bank regulatory authorities have extensive discretion in
connection with their supervisory activities and examination policies and have
authority to impose a wide variety of enforcement actions and penalties on an
institution or company that fails to comply with its regulatory requirements.
Possible enforcement actions include the imposition of a capital plan,
imposition of civil money penalties, conservatorship or receivership, and
termination of deposit insurance. Certain enforcement powers extend to directors
and officers of banks and other financial institutions and to other
"institution-affiliated" parties, including stockholders, attorneys, appraisers
and accountants. The following is only a general summary of the applicable
banking laws and regulations. The expense of regulatory compliance for the
Company is substantial and increasing and has an adverse effect on the net
income of all regulated institutions such as the Company and the Banks when
compared with competitors which are substantially less regulated.
10
Regulation of the Company
The Company is a bank holding company within the meaning of Section 3
of the Bank Holding Company Act of 1956, as amended ("BHCA"). As such, the
Company is registered with and subject to FRB examination and supervision as
well as certain reporting requirements. The Company is also subject to
regulation by Pennsylvania banking statutes affecting bank holding companies.
Federal Bank Holding Company Regulation
The Company is required to file with the FRB an annual report and such
additional information as the FRB may require pursuant to the BHCA. The FRB may
also make examinations of the Company and each of its non-bank subsidiaries. The
BHCA requires each bank holding company to obtain the approval of the FRB before
it may acquire substantially all the assets of any bank, or before it may
acquire ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting shares of such bank. Pursuant to the BHCA, the Company may
only engage in or own companies that engage in banking or in activities deemed
by the FRB to be so closely related to the business of banking or managing or
controlling banks as to be a proper incident thereto, and the Company must gain
permission from the FRB prior to engaging in many new business activities.
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner.
Dividends
Because the Company does not engage directly in any material income
producing activities, payment of dividends will generally be subject to receipt
of sufficient dividends from the Banks or other non-bank subsidiaries of the
Company. Dividend payments by the Banks are subject to limitations imposed by
federal and state laws. Under the Pennsylvania Banking Code (the "PA Code"), no
dividends may be paid by institutions such as the Banks except from "accumulated
net earnings" (generally, undivided profits). Under the Federal Deposit
Insurance Act ("FDIA"), no dividends may be paid by an insured bank if the bank
is in arrears in the payment of any insurance assessment due to the FDIC.
Applicable minimum capital and "prompt corrective action" standards further
limit the ability of a bank to pay dividends, which can also be prohibited under
certain circumstances if it is deemed an unsafe or unsound practice or would
leave a bank in an unsafe or unsound condition. Federal banking regulators have
formal and informal policies which provide that insured banks and bank holding
companies should generally pay dividends only out of current operating earnings,
with some exceptions.
Capital Adequacy
The FRB has adopted risk-based capital and leverage ratio requirements
for bank holding companies such as the Company.
Risk-Based Capital Guidelines. The FRB's risk-based capital guidelines
for bank holding companies set a required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) of 8%. At least half of the total capital is required to be
"Tier 1 capital", consisting principally of common Shareholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and other intangibles. The remainder
("Tier 2 capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock and a limited amount of the general
loan loss allowance.
Tier 1 Capital Leverage Ratio. The FRB has also established a minimum
level of Tier 1 capital to total assets of 3% for those bank holding companies
which have the highest regulatory examination ratings and are
11
not contemplating or experiencing significant growth or expansion. All other
bank holding companies are required to maintain a Tier 1 capital leverage ratio
of at least 1% to 2% above the 3% stated minimum.
The Company currently meets these minimum capital requirements. Set
forth below is a table which shows the minimum capital ratios applicable to the
Company, together with the actual dollar amount and percentage of capital in
each category at December 31, 1996:
Required Actual
Capital Requirement Ratio Amount Ratio
-------- ------ -----
Risk-Based Capital
Tier 1 Ratio 4.00% $58,043 9.19%
Total Capital Ratio 8.00% 64,578 10.22%
Tier 1 Leverage Ratio 4.00%/5.00% 58,043 6.46%
Change in Bank Control Act
Under the Change in Bank Control Act of 1978, as amended ("Change in
Control Act") and the regulations adopted thereunder, 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. "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. A
presumption of "control" arises upon most acquisitions of power to vote 10% or
more of any class of voting securities if the institution or holding company has
registered securities under Section 12 of the Securities Exchange Act of 1934 or
if no other person will own a greater percentage of that class of voting
securities immediately after the transaction. This presumption may be rebutted
upon a formal finding by the appropriate federal banking agency that the
acquisition will not result in control.
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.
Pennsylvania Laws Affecting Bank Holding Companies
Under the Pennsylvania Banking Code of 1965, as amended ("PA Code") as
presently enacted, the Company will be permitted to control an unlimited number
of banks, subject to prior approval of applicable federal bank regulatory
agencies and, in certain cases, the Pennsylvania Department of Banking
("PADOB"). The PA Code authorizes reciprocal interstate banking without any
geographic limitation. Reciprocity between states exists 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
12
in Pennsylvania with banks in many other states, including the adjoining states
of Delaware, Maryland, New Jersey, Ohio, New York and other states, is currently
authorized.
With certain exceptions, the PA Code prohibits any person from
acquiring, directly or indirectly, the power to elect a majority of the board of
directors of a Pennsylvania commercial bank or stock savings bank, or more than
10% of any class of outstanding stock of such institutions (5% in certain
circumstances) without prior approval of PADOB.
Regulation of the Banks
Prime Bank is a Pennsylvania chartered stock savings bank which is a
member of the Federal Home Loan Bank ("FHLB") System. Its deposit accounts are
insured up to applicable limits by the FDIC. Most of its deposits are insured
under the Savings Association Insurance Fund ("SAIF"), although some deposits
are insured under the Bank Insurance Fund ("BIF"). Prime Bank is subject to
extensive regulation, reporting requirements and examination by the PADOB, as
its chartering agency, and the FDIC as its deposit insurer and primary federal
banking regulator.
First Sterling Bank is a Pennsylvania chartered commercial bank which
is a member of the Federal Reserve System. Its deposit accounts are insured up
to applicable limits by the FDIC under the BIF. First Sterling Bank is subject
to extensive regulation, reporting requirements and examination by the PADOB, as
its chartering agency, the FRB, as its primary federal banking regulator, and
the FDIC as its deposit insurer.
Pennsylvania Banking Laws
The activities of Pennsylvania chartered commercial banks and savings
banks are governed by the PA Code. Because First Sterling Bank is a member of
the Federal Reserve System, certain of its activities are also governed by FRB
regulations applicable to member banks. Because Prime Bank is a state chartered
savings bank which is not a member of the Federal Reserve System, certain of its
activities are also governed by FDIC regulations.
The PA Code limits the powers and activities of Pennsylvania chartered
commercial banks and savings banks, including the investment and lending
activities of those institutions. Subject to certain exclusions and
qualifications, each of the Banks is generally limited in making loans to any
one customer or group of related customers to an amount which equals 15% of each
Bank's unimpaired capital accounts from time to time.
PADOB regulations establish minimum capital requirements for
Pennsylvania chartered financial institutions such as the Banks (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. PADOB
may set a higher minimum leverage ratio requirement for individual institutions.
At December 31, 1996, Prime Bank and First Sterling Bank each met the
Pennsylvania minimum capital requirements.
The table set forth below shows each capital requirement together with the
actual capital levels of each Bank:
Required Prime Bank First Sterling
Capital Requirement Ratio At 12/31/96 At 12/31/96
PA Risk-Based Capital
Tier 1 Ratio 4.00% 9.56% 8.14%
Total Capital Ratio 8.00% 10.52% 9.40%
PA Tier 1 Leverage Ratio 4.00% 6.65% 5.88%
13
Federal Deposit Insurance Regulation
The FDIC administers the BIF and SAIF funds, although the funds' assets
and liabilities are not commingled. Each fund is to be maintained at a
designated ratio to the aggregate dollar amount of deposits insured by that
fund. Pursuant to the 1996 Banking Law, the SAIF fund was recapitalized, and the
two funds are to be merged on or before January 1, 1999 if on that date no
further savings associations exist. See "1996 Federal Banking Legislation -
Recapitalization of SAIF" below.
Prompt Corrective Action. Federal banking laws and regulations
establish of a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The federal banking regulators are required 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, federal law requires the institution's regulator to appoint
a receiver or conservator for an institution that is critically
undercapitalized. Regulators are authorized 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.
Liability of Commonly Controlled Institutions; Priority Over Claims of
Shareholders and Affiliates. Pursuant to provisions of the FDI Act, if one or
more insured depository institutions are under common control (as is the case
with the Banks), each institution (the "Obligated Institution") is potentially
liable to the FDIC for any loss incurred by the FDIC in connection with a
default by the any other insured depository institution which is under common
control (the "Defaulting Institution"). The FDIC's claim against the assets of
an Obligated Institution for the payment of this liability has priority over any
obligations which the Obligated Institution owes to its shareholders or
affiliates, but is generally subordinate to obligations owed to persons other
than shareholders or affiliates.
Real Estate Lending Standards. Federally insured depository
institutions must adopt and maintain written policies, in conformance with
minimum federal guidelines, 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.
Brokered Deposits. Federal law and regulations impose 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.
Transactions with Affiliates and Other Related Parties
Each of the Banks is subject to certain restrictions on transactions
with "affiliates" such as the Company and any other non-bank subsidiaries of the
Company pursuant to Sections 23A and 23B of the Federal Reserve Act. In summary,
Section 23A (i) imposes individual and aggregate percentage of capital limits on
the dollar amount of a wide variety of affiliate dealings coming within the
definition of a "covered transaction" (in general, the aggregate amount of
transactions of either Bank with any one non-bank affiliate (other than the
other Bank) is limited to 10% of the capital and surplus of the Bank and the
aggregate amount of either Bank's transactions with all non-bank affiliates is
limited to 20% of the Bank's capital and surplus.; (ii) establishes rules for
ensuring arms' length dealings between a bank and its affiliates; (iii)
precludes the acquisition of "low quality" assets by a bank from its affiliates;
and (iv) imposes detailed collateralization requirements for affiliate credit
transactions. Section 23B requires a wide range of transactions between a bank
and its affiliates to be on terms which are at least as favorable to the bank as
would apply to similar transactions with non-affiliated companies. These include
"covered transactions" that are subject to section 23A, as well as (i) a sales
of
14
securities or other assets to an affiliate including assets subject to an
agreement to repurchase; (ii) a payment of money or the furnishing of services
to an affiliate under contract, lease, or otherwise; (iii) any transaction in
which an affiliate acts as an agent or broker or receives a fee for its services
to the association or to any other person; or (iv) any transaction or series of
transactions with a third party if an affiliate has an interest in the third
party or participates in the transaction.
Each 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. 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 either Bank may make to such persons based, in part, on the Bank's capital
position, and require certain approval and reporting procedures to be followed.
Federal and state laws and regulations restrict management personnel of
a bank from serving as directors or in other management positions with
securities firms 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.
Classification of Assets
Under current federal regulations, an institution must classify its
problem assets according to one of four categories: "substandard", "doubtful",
"loss" and "special mention". 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.
Federal Minimum Capital Requirements - Prime Bank
The FDIC has adopted risk-based capital and leverage ratio requirements
for nonmember insured banks such as Prime Bank.
Risk-Based Capital Guidelines. The FDIC's risk-based capital guidelines
for nonmember banks set a required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) of 8%. At least half of the total capital is required to be
"Tier 1" (or "core") capital, consisting principally of common shareholders'
equity, noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill. The remainder ("Tier 2 capital") may
consist of a limited amount of subordinated debt and intermediate-term preferred
stock, certain hybrid capital instruments and other debt securities, perpetual
preferred stock and a limited amount of the general loan loss allowance.
Tier 1 Capital Leverage Ratio. The FDIC has also established a minimum
level of Tier 1 capital to total assets of 3% for those nonmember banks which
have the highest regulatory examination ratings and are not contemplating or
experiencing significant growth or expansion. All other nonmember banks are
required to maintain a Tier 1 capital leverage ratio of at least 1% to 2% above
the 3% stated minimum.
15
At December 31, 1996, Prime Bank met each of its capital requirements.
The table below sets forth the minimum capital ratios applicable to Prime Bank,
together with the actual dollar amounts and percentages of capital for Prime
Bank in each category at December 31, 1996:
Required Prime Bank
Capital Requirement Ratio Amount Ratio
-------- ------ -----
Risk-Based Capital
Tier 1 Ratio 4.00% $44,564 9.56%
Total Capital Ratio 8.00% 49,022 10.52%
Tier 1 Leverage Ratio 4.00%/5.00% 44,564 6.65%
Federal Minimum Capital Requirements - First Sterling Bank
Leverage Ratio. For banks which are members of the Federal Reserve
System, the FRB has established a minimum level of "primary capital" to total
assets of 5.5% and a minimum level of "total capital" to total assets of 6.0%.
For these purposes, the components of "primary capital" generally include common
stock, surplus, undivided profits, contingency and other capital reserves, and
the allowance for possible loan and lease losses ("ALLL"), and "total capital"
includes the primary capital components plus limited life preferred stock and
certain subordinated debt. In calculating the regulatory capital ratios,
goodwill is deducted from both the numerator (capital) and the denominator
(total assets) of the ratio, and the ALLL is added to the denominator (total
assets). Generally, the FRB expects member banks to operate above the minimum
levels. Those member banks whose operations are deemed by the FRB to involve or
to be exposed to high or inordinate degrees of risk may be expected to hold
additional capital to compensate for those risks.
In addition, the FRB has established three "zones" for total capital
for banking organizations of all sizes for the purpose of determining the nature
and intensity of supervisory actions:
Zone Total Capital Ratio
1 Above 7.0%
2 6.0% to 7.0%
3 Below 6.0%
A member bank whose total capital places it in "Zone 1" will generally
be considered adequately capitalized provided its "primary capital" is above the
5.5% minimum. In contrast, a member bank whose total capital places it in "Zone
3" will generally be considered undercapitalized, absent clear extenuating
circumstances. Member banks in "Zone 2" will be scrutinized for a variety of
financial risks and capital adequacy will be determined accordingly.
At December 31, 1996, First Sterling Bank met each of its regulatory
capital requirements. The table below sets forth the minimum capital ratios
applicable to First Sterling Bank, together with the actual dollar amounts and
percentages of capital for First Sterling Bank in each category at December 31,
1996:
First Sterling
Required ---------------
Capital Requirement Ratio Amount Ratio
-------- ------ -----
Primary Capital Ratio 5.50% $16,119 6.83%
Total Capital Ratio 6.00% 16,119 6.83%
16
First Sterling's total capital ratio would place it in "Zone 2" for these
purposes as of December 31, 1996.
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%.
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.
Prime Bank's insurance premium assessment is currently 6.5 basis points
on all of its assessable SAIF- and BIF-insured deposits. First Sterling Bank's
insurance premium assessment is currently 0 basis points on all of its
assessable deposits.
In addition to the foregoing FDIC deposit insurance assessments, all
insured institutions are also obligated to pay assessments to the federal
Financing Corporation ("FICO") to help pay interest on FICO bonds issued to pay
part of the costs of the savings and loan bailout in 1979. SAIF-insured deposits
are currently subject to a FICO assessment of 6.5 basis points, and BIF-insured
deposits are currently subject to a FICO assessment of approximately 1.3 basis
points.
There is no assurance whether the foregoing assessment rates will
remain constant or change. See, "Recent Legislative and Regulatory Developments
- - Amendments to FDIC Deposit Insurance Assessment Rules", below.
QTL Test - Prime Bank
A "qualified thrift lender", or "QTL," test is applicable under FIRREA
for purposes of determining the scope of permissible activities, pursuant to
HOLA, for a savings and loan holding company. It requires savings associations
to maintain a specified minimum percentage of their assets invested in
residential mortgage loans and/or other housing- or consumer-related assets.
Currently, because the Company is a bank holding company, it is not treated as a
savings and loan holding company. Prime Bank has also been informed by the OTS
that
17
the OTS does not treat Prime Bank as a savings association. There is no
assurance that Prime Bank will comply or continue to comply with the QTL Test.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), an institution has
obligations 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 applicable federal regulator for each bank 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.
Federal Home Loan Bank System
Prime Bank is a member of the FHLB System by way of investment in the
Federal Home Loan Bank of Pittsburgh ("FHLBP"). 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 financial institutions. Each
financial institution member is required to acquire and hold shares of Federal
Home Loan Bank capital stock. Advances from a 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. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but FRB regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
Federal Reserve System
Federal Reserve Membership - First Sterling Bank. First Sterling Bank
is a member of the Federal Reserve System. Member banks are entitled to certain
borrowing, item clearing and other privileges at Federal Reserve Banks, and are
obligated to purchase shares in the local Federal Reserve Bank. Member banks are
also required to comply with applicable regulations of the FRB.
Reserve Requirements. FRB regulations require each of the Banks to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The FRB regulations generally
require that reserves of 3% (below certain levels) and 10% (for deposits above
certain levels) must be maintained against aggregate transaction accounts,
subject to an exemption for specified levels of deposits which would otherwise
be reservable. 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 FRB, the effect of this reserve
requirement is to reduce the effective return or yield on the Banks' assets.
Recent Legislative and Regulatory Developments
1996 Bad Debt Reserve Legislation. Section 1616 of the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "Job Protection
Act"), repealed the "percentage of taxable income" method for deducting loan
loss provisions for institutions such as Prime Bank. Under Section 593 of the
Internal Revenue Code of 1986, as amended, thrift institutions which had
previously met certain definitional tests primarily relating to their assets and
the nature of their business were permitted to establish a tax reserve for bad
debts and, within limits, deduct annual additions thereto for Federal tax
purposes. Under the Job Protection Act, institutions such as Prime Bank are
permitted to deduct bad debts only as they occur. In addition, the Job
Protection Act requires institutions such as Prime Bank to recapture (i.e., take
into income) over a 6-year period the excess of the balance of such reserves as
of December 31, 1995, over the greater of (a) the balance of such
18
reserves as of December 31, 1987 or (b) an amount that would have been the
balance of such reserves as of December 31, 1995 had the institution always
computed the additions to its reserves using the experience method. These
recapture requirements are suspended for each of two successive taxable years
beginning January 1, 1996, in which an institution originates an amount of
certain residential loans in excess of the average of the principal amounts of
such loans made by the institution during its six taxable years preceding 1996.
1996 Federal Banking Law - Recapitalization of SAIF. The Economic
Growth And Regulatory Paperwork Reduction Act of 1996 (the "1996 Banking Law"),
enacted on September 30, 1996 as Title II of the Omnibus Consolidated
Appropriations Act for Fiscal Year 1997, implemented a wide range of regulatory
relief provisions affecting federal insured depository institutions. Most
notably, it: (1) mandated the recapitalization of the SAIF as of October 1,
1996; (2) requires banks and other institutions holding BIF-insured deposits to
pay a portion of the interest on FICO bonds; (3) requires the merger of SAIF and
BIF on January 1, 1999 but only if no insured depository institution is a
savings association on that date; and (4) requires the Department of Treasury to
submit to Congress by March 31, 1997 a study on the development of a common
charter for all insured depository institutions.
Among the other supervisory provisions of the 1996 Banking Law which
may affect the Banks are the following: ATMs and other remote service units were
excluded from the definition of "branch" for purposes of certain branch approval
requirements and geographic restrictions; the law permits well-capitalized banks
rated CAMEL 1 or 2 to invest in bank premises in amounts up to 150 percent of
the bank's capital and surplus with only a 30-day after-the-fact notice and
establishes expedited procedures to permit certain bank holding companies to
engage in permissible nonbanking activities, except for acquisitions of thrifts;
exempted from the insider lending restrictions a bank's company-wide benefit or
compensation plans that are widely available to employees of the bank and that
do not give preference to any officer, director, or principal shareholder (or
related interests) over other employees of the bank; permits the Federal banking
agencies to raise the asset limit for an 18-month examination cycle from
$175,000,000 to $250,000,000 for banks with a CAMEL 2 rating; eliminates the
independent auditor attestation requirement for compliance with safety and
soundness laws; authorizes the Federal banking agencies to permit a bank's
independent audit committee to include some inside directors if the bank is
unable to find competent outside directors, provided a majority of the committee
is still made up of outside directors; requires the Fed and HUD, within 6 months
of enactment, to simplify and improve RESPA and TILA disclosures and provide a
single format for such disclosures; makes a number of changes to RESPA's
disclosure requirements; generally provides that, if a bank or a third party
self-tests for compliance under the Equal Credit Opportunity Act and the Fair
Housing Act, the test results will not be used against the bank if the bank
identifies possible violations and is taking appropriate corrective actions, and
if the bank is not using the results in its defense; sunsets the
Truth-in-Savings Act's civil liability provision in five years; substantially
amends the Fair Credit Reporting Act (FCRA); prohibits the Federal banking
agencies from examining for compliance with FCRA unless there has been a
complaint about a violation or the agency otherwise has knowledge of a
violation; and amends the Comprehensive Environmental Response, Compensation,
and Liability Act to clarify that a lender is not liable for environmental
cleanups of property securing a loan unless the lender, among other things,
participates in day-to-day decision making over the operations of the property
or has control over environmental compliance and provides that lenders that
foreclose on property may take certain post-foreclosure actions without
incurring liability for environmental cleanup if the lender did not participate
in management of the property prior to foreclosure and the lender seeks to
dispose of the property as soon as it is commercially reasonable.
Amendments to FDIC Deposit Insurance Assessment Rules. On November 22,
1996, the federal Financing Corporation ("FICO") adopted a regulation pursuant
to the 1996 Banking Law which obligates all federally insured depository
institutions to commence paying on January 1, 1997, special assessments toward
the funding of interest payments on FICO bonds. The special assessment rates are
currently 6.5 basis points on all SAIF-assessable deposits, and approximately
1.3 basis points on all BIF-assessable deposits. After December 31, 1999 (or
when the last savings association ceases to exist, if earlier), all assessable
deposits at all institutions will be assessed at the same rates in order to pay
FICO bond interest.
19
In December 1996, the FDIC took action to implement for the first part
of 1997 a reduced assessment schedule for institutions with SAIF-insured
deposits. It also continued in effect an existing rate schedule for BIF-insured
deposits. As a result of these FDIC actions, the total semi-annual deposit
insurance assessment for all BIF-insured and SAIF-insured institutions currently
ranges from 0 to 27 basis points (depending upon an institution's risk
classification), in addition to the special FICO assessment described above.
FDIC Proposed Rule to Prohibit Deposit Shifting. Pursuant to provisions
of the 1996 Banking Law, the FDIC on February 11, 1997 proposed a regulation
which would prohibit federally insured depository institutions from taking any
action which would have the effect of shifting deposits insured under the
Savings Association Insurance Fund (SAIF) to deposits insured under the Bank
Insurance Fund (BIF) for the purpose of evading the assessment rates applicable
to SAIF deposits.
Other Laws and Regulations
The Company and the Banks are subject to a variety of laws and
regulations which are not limited to banking organizations. Without limiting the
foregoing, in lending to commercial and consumer borrowers, and in owning and
operating their properties, the Banks are each subject to regulations and risks
under state and federal environmental laws.
Legislation and Regulatory Changes
Legislation and regulations may be proposed or enacted from time to
time which could increase the cost of doing business, limit or expand
permissible activities, or affect the competitive balance between banks and
other competing financial services providers. No prediction can be made as to
the likelihood of any major changes or the impact such changes might have on the
Company or either of the Banks.
Effect of Government Monetary Policies
The earnings of the Company and the Banks are affected by domestic and
international economic conditions and the monetary and fiscal policies of the
United States government and its agencies, as well as those of foreign
countries. It is not possible to predict the nature and impact of future changes
in economic conditions or governmental monetary or fiscal policies.
TAXATION
Federal Taxation
The Company files a consolidated federal income tax return on a
calendar year basis. The Small Business Job Protection Act of 1996, enacted on
August 20, 1996, provides for the repeal of the tax bad debt deduction computed
under the percentage of taxable income method. The repeal of the use of this
method is effective for tax years beginning after December 31, 1995. Prior to
the change in law, Prime Bank had qualified under the provisions of the Internal
Revenue Code which permitted it to deduct from taxable income an allowance for
bad debts based on 8% taxable income.
Due to the change in tax law, Prime Bank is required to recapture into
income, over a six year period, the portion of its tax bad debt reserves that
exceed its base tax year reserves (i.e. tax reserves for tax years beginning
before 1988). The base tax year reserves, which may be subject to recapture if
Prime Bank ceases to qualify as a bank for federal income tax purposes, are
restricted with respect to certain distributions. Prime Bank's total tax bad
debt reserves at December 31, 1996 are approximately $7.9 million of which $7.7
million represents the base year amount and $.2 million is subject to recapture.
The $.2 million has been previously reserved as a deferred tax liability,
therefore, this recapture will not affect reported net income.
20
To the extent Prime Bank makes distributions to Prime Bancorp that are
considered to result in withdrawals from its tax bad debt reserves, then the
amounts deemed withdrawn will be included in Prime 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 Prime 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 Prime Bank's, bad debt reserves for
qualifying real property loans. Non-liquidating distributions in excess of Prime
Bank's, current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation of
Prime Bank will be considered to result in withdrawals first from Prime Bank,
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, 1996,
substantially all of Prime Bank's retained earnings (apart from amounts
allocated to its bad debt reserve) are available for distribution to its
stockholders, subject to various restrictions imposed by OTS, without the
imposition of this additional tax on Prime 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 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 paid was not materially different.
21
REVISED ACCOUNTING STANDARDS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of in 1996.
See Impairment of Long-Lived Assets and Long Lived Assets to Be Disposed Of on
page 27 of the 1996 Annual Report to Shareholders.
The Company adopted SFAS No. 122 Accounting for Mortgage Servicing
Rights in 1995. See Mortgage Servicing Rights on page 27 of the 1996 Annual
Report to Shareholders.
On January 1, 1996, the Company adopted the provisions of SFAS No. 123,
Accounting for Stock Based Compensation. See Stock Option Plan on pages 28 and
29 of the 1996 Annual Report to Shareholders.
During 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and SFAS No. 127 Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Certain provisions relating to the
accounting for repurchase agreements have been deferred for one year. Management
of the Company does not expect that adoption of SFAS No. 125 will have a
material impact on the Company's financial position, results of operations, or
liquidity.
STATE TAXATION
Prime 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 Pennsylvania business corporation, the Company will be required to
file annual returns with and pay annual fees to the Commonwealth of
Pennsylvania. The Company is currently subject to an annual franchise tax based
on its net worth and imposed by the State of Pennsylvania.
Item 2. Properties.
The Company neither owns nor leases any real property. At present, it
uses the premises, equipment and furniture of Prime Bank without direct payment
of any rental fees. In the future it may consider acquiring office facilities.
Prime 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
Prime offers a full range of customer services. Except for safe deposit boxes,
these same services are available at each of the Prime's other offices. Prime
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 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 Prime.
First Sterling Bank has two offices in Montgomery County, one office in
Chester County, and two offices in Delaware County which are subject to leases.
First Sterling branches offer a broad range of products and services. First
Sterling also participates in the MAC Money Access Service shared Automated
Teller Machine ("ATM") network and the PLUS SYSTEM. Three offices are equipped
with ATMs owned by First Sterling.
22
The following table sets forth certain information concerning the
business offices of Prime Bank and First Sterling Offices at December 31, 1996
(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 1996 1996
------ ---------- --------------- ------------
Prime Bank Offices
Philadelphia, 6425 Rising Sun Avenue Owned -- $ 1,267 $142,298
Philadelphia, 18th & JFK Blvd. Leased 3/31/2000 -- 18,514
Philadelphia, 1841 E. Allegheny Avenue Owned -- 74 39,426
Philadelphia, 14425 Bustleton Avenue Owned -- 282 21,632
Philadelphia, 1000 Cottman Avenue Owned -- 457 29,120
Philadelphia, 8500 Germantown Avenue Leased 7/31/2000 -- 32,283
Philadelphia, 1695 Grant Avenue Leased 7/31/2000 16 24,846
Philadelphia, 423 E. Girard Avenue Owned -- 42 19,104
Oxford Valley, Bucks County
195 Bristol Oxford Valley Road Leased 6/30/2000 127 20,231
Fairless Hills, Bucks County
503 South Oxford Valley Road Owned -- 301 26,174
Richboro, Bucks County
984 Second Street Pike Owned -- 238 36,877
Southampton, Bucks County
723 Street Road Owned -- 586 56,174
Fort Washington, Montgomery County
7111 Valley Green Road Leased 09/30/2001 19 --
Yardley, Bucks County
10 South Main Street Leased 10/31/2000 1 8,019
Horsham, Montgomery County
301 Horsham Road Leased 9/30/99 63 20,314
Huntingdon Valley, Montgomery County
Bethayres Shopping Center/618 Welsh Road Leased 11/30/2000 -- 13,471
Jenkintown, Montgomery County
The Pavilion/261 Old York Road Leased 6/01/98 179 20,208
Montgomeryville/North Wales
Montgomery County, 521 Stump Road Leased 1/21/99 -- 17,409
Willow Grove, Montgomery County
Old York & Moreland Roads Leased 9/23/2004 -- 8,138
------ ---------- -------- --------
Total Prime Bank Offices $3,652 $554,238
======== ========
First Sterling Offices
Bala Cynwyd, Montgomery County
50 Monument Road Leased 04/30/2004 61 $ 32,763
Bryn Mawr, Montgomery County
22 North Bryn Mawr Avenue Leased 12/31/2005 59 58,735
Devon, Chester County
80 West Lancaster Avenue Leased 12/31/2005 89 47,411
St. Davids, Delaware County
558 East Lancaster Avenue Leased 12/31/2005 79 41,793
Media, Delaware County
101 West Baltimore Pike Leased 06/30/2009 53 1,702
------ ---------- -------- --------
Total First Sterling Offices $ 342 $182,404
======== ========
23
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 page 21), for
which Prime 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.
On December 17, 1996, there was a special meeting of the shareholders
of the Registrant's predecessor to vote on two matters: (1) the merger with
First Sterling Bancorp, Inc. and (2) the merger with and into Prime Newco, Inc.
which effectively changed the Registrant from a Delaware corporation to a
Pennsylvania corporation. Both mergers were approved by shareholders. As to the
merger with First Sterling Bancorp, Inc. the vote was as follows: 2,770,520 For,
73,995 Against, and 4,415 Abstentions. As to the Merger to become a Pennsylvania
corporation, the vote was as follows: 2,771,786 For, 73,729 Against, and 3,415
Abstentions.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the captions "Market Information" (page
19) and Notes 1 and 3 of "Notes to Consolidated Financial Statements" (pages 25
and 29) in the Company's 1996 Annual Report to Shareholders is incorporated
herein by reference thereto.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Condition Data"
on page 17 of the Company's 1996 Annual Report to Shareholders is incorporated
herein by reference thereto.
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 9 through
18) in the Company's 1996 Annual Report to Shareholders is incorporated herein
by reference thereto.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, the notes thereto, and the
opinion of independent auditors thereon, appearing on pages 20 through 40 of the
Company's 1996 Annual Report to Shareholders are incorporated herein by
reference thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
24
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the caption "Election of Directors" on
pages 4 through 7 of the Company's Proxy Statement dated March 24, 1997 is
incorporated herein by reference thereto.
Item 11. Executive Compensation.
See information contained under the caption "Executive Compensation"
on pages 8 through 11 and page 13 and under the caption "Board Compensation
Committee Report on Executive Compensation" on pages 11 and 12 of the Company's
definitive Proxy Statement dated March 24, 1997. The "Performance Graph" on page
13 and the "Board Compensation Committee Report on Executive Compensation: on
pages 11 and 12 shall not be deem "soliciting material" or "filed" with the
Commission or incorporated herein by reference.
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 24, 1997 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information contained under the caption "Indebtedness of
Management" on page 11 of the Company's definitive Proxy Statement dated March
24, 1997 is incorporated herein by reference.
First Sterling Bank leases three (3) of its five (5) branch offices
from Dominion Properties, L.P. The Arthur J. Kania Trust is the major
shareholder of First Sterling and a limited partner in Dominion Properties, L.P.
Allen Speiser, a director of First Sterling, is a trustee of the Arthur J. Kania
Trust. James D. Kania, a director of First Sterling , is a beneficiary of the
Arthur J. Kania Trust and a General Partner of Dominion Properties, L.P.
The leases with Dominion Properties, L.P. run for terms of ten (10)
years commencing January 1, 1996. the leases also provide certain renewal
options with annual increases in rent for two (2) of the branch office leases
based on the changes in the consumer price index. Prior to execution of the
Merger Agreement, First Sterling and Dominion Properties, L.P. entered into an
agreement with respect to the corporate offices of First Sterling which
agreement allows First Sterling at its election, to reduce both space and term
of its office tenancy upon payment of a fee in the amount of $375,000.00 to the
landlord. Prime Believes that the fee negotiated is consistent with that which
would be paid in an arm length transaction with an unaffiliated landlord.
25
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 auditors thereon which appears
on pages 20 through 40 of the Company's 1996 Annual Report
included as an exhibit to this report:
Page Reference
Annual Report
Financial Statements to Shareholders
--------------------------------------------------------------------------------
Consolidated Statements of Financial Condition 20
Consolidated Statements of Operations 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flow 23 - 24
Notes to Consolidated Financial Statements. 25 - 38
Management's Statement on Financial Reporting 39
Independent Auditors' Report 40
(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:
26
Exhibit No. Description Page No.
- ----------- ----------- --------
2.1 Agreement and Plan of Organization dated June 12, 1996 and First
Amendment thereto dated September 12, 1996, by and among Registrant,
Prime and First Sterling. Prime will supplementally provide a copy of
the disclosure schedules to the SEC upon request.
2.2 Agreement and Plan of Merger dated September 12, 1996 between
Registrant and Prime.
3.1 Articles of Incorporation of Prime Bancorp, Inc. - Incorporated herein
by reference to Exhibit 3.1 of Registration Statement #333-13741
3.2 Bylaws - Incorporated by reference to Exhibit 3.2 of Registration
Statement #333-13741.
(a) Employment agreement between Prime and Erwin T. Straw, dated
November 14, 1988. 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. Addendum to Employment Agreement dated as of
January 29, 1996 - Incorporated by reference to Exhibit 10.4 to
Registration Statement #333-13741
(b) Employment agreement between Prime and Walter L. Tillman, Jr. -
Incorporated by reference to Exhibit 10.2 to Registration Statement
#333-13741.
(c) Employment agreement between Prime and James J. Lynch dated
December 18, 1995. Incorporated by reference to Exhibit 10.1 (c) to
Prime's Annual Report on Form 10-K for the year ended December 31, 1995
(file no. 0-17286).
4.1 Form of First Sterling Subordinated Convertible Debenture. Registrant
will supplementally provide a copy of the Debenture to the SEC upon
request. Incorporated herein by reference to Exhibit 4.1 to
Registration Statement #333-13741.
4.2 Form of Registrant's Stock Certificate for common stock. Incorporated
herein by reference to Exhibit 4.2 to Registration Statement
#333-13741.
5.1 Consent and Opinion of Stradley, Ronon, Stevens & Young regarding
legality of shares. Incorporated herein by reference to Exhibit 5.1 to
Registration Statement #333-13741.
8.1 Consent and form of Opinion of Stradley, Ronon, Stevens and Young
regarding tax matters. Incorporated herein by reference to Exhibit 8.1
to Registration Statement #333-13741.
8.2 Form of Opinion of Kania, Linder, Lasak and Feeney regarding tax
matters. Incorporated herein by reference to Exhibit 8.2 to
Registration Statement #333-13741.
10.1 Employment Agreement between the Prime, Prime Bank and James J. Lynch
dated December 18, 1995. Incorporated by reference to Exhibit 10.1(c)
to Registrants Annual Report on Form 10-K for year ended December 31,
1995, file no. 0-17286.
10.2 Employment Agreement between the Prime, Prime Bank and Walter L.
Tillman, Jr. dated as of September 25, 1996. Incorporated herein by
reference to Exhibit 8.2 to Registration Statement #333-13741.
27
10.3 Employment Agreement between the Prime, Prime Bank and Erwin T. Straw
dated November 14, 1988. Incorporated by reference to Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for year ended June 30, 1989.
10.4 Addendum to Employment between the Prime, Prime Bank and Erwin T. Straw
dated as of January 29, 1996. Incorporated herein by reference to
Exhibit 10.4 to Registration Statement #333-13741.
10.5 Employment Agreement between the Prime, Prime Bank and William H.
Bromley to become effective upon completion of the merger with First
Sterling. Incorporated herein by reference to Exhibit 10.5 to
Registration Statement #333-13741.
10.6 First Sterling 1988 Non-Qualified Stock Option Plan. Incorporated
herein by reference to Exhibit 10.6 to Registration Statement
#333-13741.
10.7 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated December 7, 1995 for Devon branch and office. Incorporated
herein by reference to Exhibit 10.7 to Registration Statement
#333-13741.
10.8 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated June 4, 1996 regarding right to reduce the space leased
under lease agreement for Devon offices and the lease term for a
portion of such space. Incorporated herein by reference to Exhibit 10.8
to Registration Statement #333-13741.
10.9 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated as of December 15, 1995 for the St. David's branch.
Incorporated herein by reference to Exhibit 10.9 to Registration
Statement #333-13741.
10.10 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated as of December 15, 1995 for branch in Bryn Mawr Square.
Incorporated herein by reference to Exhibit 10.10 to Registration
Statement #333-13741.
10.11 Lease Agreement between Monument Road Associates and First Sterling
Bank dated April 14, 1994 for Bala Cynwyd branch. Incorporated herein
by reference to Exhibit 10.11 to Registration Statement #333-13741.
10.12 Lease Agreement between Silvio F. and Elizabeth O. D'Ignazio and First
Sterling Bank dated as of July 3, 1996 for Media branch. Incorporated
herein by reference to Exhibit 10.12 to Registration Statement
#333-13741.
10.13 First Sterling Bank 401(k) qualified retirement plan adoption
agreement. Incorporated herein by reference to Exhibit 10.13 to
Registration Statement #333-13741.
10.14 Incentive Stock Option Plan - Incorporated by reference to Exhibit 10.2
to Prime'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 Prime's Salary Continuation and Supplemental Retirement Plan -
Incorporated by reference to Exhibit 10.3 to Prime'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.
28
10.16 Prime's Retirement Plan - Incorporated by reference to Exhibit 10.4 to
Prime'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.
10.17 Prime's Employee Retirement Savings Plan - Incorporated by reference to
Exhibit 10.5 to Prime'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.
10.18 Lease Agreement between Prime Bank and Lotz Realty, Inc. - Incorporated
by reference to exhibit to Prime'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.
10.19 Lease Agreement, between Prime Bank and Village Plaza Shopping Center.
- Incorporated by reference to exhibit 10.7 to Prime'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.
10.20 Lease Agreement, between Prime Bank and Grant Plaza. - Incorporated by
reference to Exhibit 10.8 to Prime'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.
10.21 Lease Agreement, between Prime Bank and Hopkinson Corporation -
Incorporated by reference to Exhibit 10.10 to Prime'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.
10.22 Lease Agreement, between Prime Bank and Foxcroft Square Company -
Incorporated by reference to Exhibit 10.11 to Prime'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.
10.23 Lease Agreement, between Prime Bank and Bell Atlantic Properties, Inc.
dated January 7, 1985. - Incorporated by reference to Exhibit 10.12 to
Prime'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.
10.24 Lease Agreement, between Prime Bank and the Trust of Russell A. Allen,
deceased dated July 31, 1985. - Incorporated by reference to Exhibit
10.13 to Prime'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.
10.25 Lease Agreement, between Prime Bank and Mark Cohen dated September 24,
1994. - Incorporated by reference to Exhibit 10.14 to Prime'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.
10.26 Lease Agreement, between Prime Bank and Corestates Bank dated March 1,
1995. Incorporated by reference to Exhibit 10.15 to Prime's Annual
Report on Form 10-K for the year ended December 31, 1995, filed with
the Securities and Exchange Commission on March 30, 1996.
29
10.27 Lease Agreement, between Prime Bank and Cameron C. Troilo and Olga Jean
Troilo dated June 26, 1995. Incorporated by reference to Exhibit 10.16
to Prime's Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission on March 30,
1996.
10.28 Report on Form 11-K, Prime Bancorp, Inc. Retirement Savings Plan for
the year ended December 31, 1996. (to be filed by amendment)
13.1 Annual Report on Form 10-K for the year ended December 31, 1996.
13.2 Quarterly Report on Form 10-Q for the six month period ended June 30,
1996. Incorporated herein by reference to Exhibit 13.2 to Registration
Statement #333-13741.
13.3 Consolidated balance sheets of First Sterling Bancorp, Inc. as of
December 31, 1995 and 1994, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1995 as audited by Coopers and
Lybrand LLP. Incorporated herein by reference to Exhibit 13.3 from
pages F-1 to F-21 of Registration Statement #333-13741 filed with the
Securities and Exchange Commission on October 8, 1996.
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.
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of KPMG Peat Marwick LLP. Incorporated herein by reference to
Exhibit 23.1 to Registration Statement #333-13741.
23.3 Consent of Stradley, Ronon, Stevens & Young, LLP. Incorporated herein
by reference to Exhibit 23.3 to Registration Statement #333-13741.
23.4 Consent of Kania, Linder, Lasak and Feeney. Incorporated herein by
reference to Exhibit 23.4 to Registration Statement #333-13741.
23.5 Consent of Berwind Financial Group, L.P. Incorporated herein by
reference to Exhibit 23.5 to Registration Statement #333-13741.
99.1 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.
99.2 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.
30
99.3 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.
99.4 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
On June 27, 1996, the registrant did file a Report on
Form 8-K relating to the Merger with First Sterling
Bancorp, Inc.
*Incorporated by reference from the indicated filing each in SEC File No.
0-17286.
31
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 28, 1997
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/ Frederick G. Betz Director March 28, 1997
- -------------------------
Frederick G. Betz
- ------------------------- Director March 28, 1997
William J. Cunningham
/s/ Joseph A. Fluehr, III Director March 28, 1997
- -------------------------
Joseph A. Fluehr, III
- ------------------------- Director March 28, 1997
Robert A. Fox
/s/ Ernest Larenz Director March 28, 1997
- -------------------------
Ernest Larenz
/s/ James J. Lynch Director, President
- ------------------------- and Chief Executive March 28, 1997
James J. Lynch Officer (Principal
Executive Officer)
/s/ Joseph G. Markmann Director March 28, 1997
- -------------------------
Joseph G. Markmann
32
Signature Title Date
- --------- ----- ----
- ------------------------- Director March 28, 1997
Roy T. Peraino
/s/ David H. Platt Director March 28, 1997
- -------------------------
David H. Platt
- ------------------------- Director March 28, 1997
Arthur L. Powell
/s/ Frank H. Reeves Senior Vice President March 28, 1997
- -------------------------
Frank H. Reeves Chief Financial and
Accounting Officer
/s/ Erwin T. Straw Chairman March 28, 1997
- -------------------------
Erwin T. Straw
/s/ Walter L. Tillman, Jr. Executive Vice President March 28, 1997
- -------------------------
Walter L. Tillman, Jr.
33