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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, 1997
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7111 Valley Green Road, Fort Washington, PA 19034-2209
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 836-2400
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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
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(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
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[ ] 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 $143.1 million.(1)
The number of shares of the registrant's Common Stock outstanding as of
March 18, 1998 was 5,466,763 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part II Part III
Certain portions of the Annual Report Certain portions of the
to Shareholders for the year ended Proxy Statement 1998
December 31, 1997 March 18, 1998
(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 18, 1998. 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.
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PRIME BANCORP, INC.
Part I
Item 1. Business
Introduction
Prime Bancorp, Inc. ("the Company") was incorporated under the laws of the
Commonwealth 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
is regulated as a bank holding company. Prior to October 1, 1997, the Company's
principal subsidiaries were Prime Bank, a savings bank ("Prime Savings") and
First Sterling Bank, a commercial bank ("First Sterling"). On October 1, 1997,
the Company completed the merger between the Banks. The combined entity is one
commercial bank called Prime Bank (the "Bank"). The principal business of the
Company and the Bank consists of attracting deposits and obtaining borrowings,
then converting those deposits and borrowings into various types of loans and
investments.
The Company's corporate headquarters is in Fort Washington, Pennsylvania.
Its operations center is in northeast Philadelphia, Pennsylvania. The Company's
bank subsidiary has eight additional full service branch offices in northeast
Philadelphia, five full service branches in Bucks County, Pennsylvania, eight
full service branches in Montgomery County, Pennsylvania, two in Delaware
County, Pennsylvania, and one in Chester County, Pennsylvania.
Business
The Company follows a strategy which focuses on providing individuals,
businesses, and communities with high quality banking services. Banking services
includes lending money, gathering money and other complimentary fee generating
services. The Company's loan products include commercial, commercial real
estate, consumer and residential mortgages. Deposits and funding are gathered
along five major lines which are checking, savings, retail CDs, jumbo CDs and
commercial cash management.
Non-banking Subsidiary Activities
The Company presently conducts business through or has an investment in
eight non-banking subsidiaries. Of these, six are wholly owned by the Bank:
Prime Abstract, Inc. ("Prime Abstract"), Rowland Service Corporation
("Rowland"), Prime Financial Inc. ("Prime Financial"), NEFA Corporation
("NEFA"), 723 Service Corporation and 6524 Service Corporation. None of the
Company's non-banking subsidiaries generates net income which is individually or
in the aggregate, material to the consolidated financial results of the Company
on a consolidated basis.
o Prime Abstract, Inc.: Prime Abstract Inc., a wholly owned subsidiary of the
Bank, is a Delaware Corporation formed in 1988 for the purpose of
performing title searches and providing related permissable services for
its banking affiliates.
o Rowland Service Corporation: Rowland, a subsidiary of the Bank, was formed
to participate in a joint venture project with one local developer
involving the construction of a 15,000 square foot professional condominium
complex.
o Prime Financial Inc.: Prime Financial, a subsidiary of the Bank, was formed
to oversee full-service brokerage operations at the Bank. It is currently
inactive.
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o NEFA Corporation: NEFA, a subsidiary of the Bank, was formed to acquire
land currently held for development and resale.
o 723 Service Corporation: 723 Service Corporation, a subsidiary of the Bank,
was formed for the acquisition of property for debts previously contracted
by borrowers of the Bank.
o 6524 Service Corporation: 6524 Service Corporation was formed for the
acquisition of property for debts previously contracted by borrowers of the
Bank.
o 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.
o 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.
At December 31, 1997, the Company's aggregate debt and equity investment in
the non-banking subsidiares was $17.0 million. (1.78% of the Company's total
assets)
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, sales and maturities of
investment securities, borrowings from the Federal Home Loan Bank ("FHLB") of
Pittsburgh, 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 borrowings from the
FHLB of Pittsburgh and other borrowed funds to support expanded lending
activities or where otherwise advantageous to the Company.
Deposits
The Company has a stable base of core deposits, with approximately 9.26% of
its deposits held in passbook accounts which currently earn 1.83%. 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 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.
Borrowings
The FHLB System functions as a reserve credit facility for thrift
institutions and certain other home financing institutions. It also provides
certain special purpose loan and service programs for its members. As a member
of the FHLB System, the Bank is required to own capital stock in the FHLB of
Pittsburgh and is 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 Bank's capital or on the FHLB of Pittsburgh's assessment of the
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Bank's creditworthiness. See "Regulation of the Bank - Federal Home Loan Bank
System". At December 31, 1997, the Bank had $79.6 million in borrowings from the
FHLB of Pittsburgh.
The Company uses borrowings and repurchase agreements as a funding
alternative. Included in such borrowings are fundings from commercial cash
management relationships.
See Note 9 Other Borrowed Money on page 31 of the 1997 Annual Report to
Shareholders.
Employees
At December 31, 1997, the Company had 322 full-time equivalent employees,
including 288 full-time and 68 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 thrifts and commercial banks
located in its primary market area. 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 and Prime 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 Bank when compared with competitors which are
substantially less regulated.
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 regulated and subject to examination and supervision by the Board of
Governors of the Federal Reserve System ("FRB") and is subject to certain
reporting requirements. The Company is also subject to regulation by
Pennsylvania banking statutes affecting bank holding companies.
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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 any non-banking company or substantially all of 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.
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 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.
Other Capital Ratios. Furthermore, the FRB requires bank holding companies
to maintain 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% on the same basis as
required for member banks.
The Company currently meets these minimum capital requirements.
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
5
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.
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 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 Bank
Prime Bank is a Pennsylvania chartered commercial bank as of October 1,
1997, which is a member of the Federal Reserve Bank System. Its deposit accounts
are insured up to applicable limits by the Federal Deposit Insurance Corporation
("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, 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 are governed by
the PA Code. 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, the Bank is generally limited in making loans to any one
customer or group of related customers to an amount which equals 15% of the
Bank's unimpaired capital and surplus from time to time.
PADOB regulations establish minimum capital requirements for Pennsylvania
chartered financial institutions such as the Bank (the "PA Capital Rules"). The
PA Capital Rules include a minimum requirement for leverage capital -- the ratio
of "Tier 1" capital (as defined for federal bank regulatory purposes) to total
assets -- of 4.00%, and a minimum requirement for "risked-based capital" as that
which is required by federal banking laws. PADOB may set a higher minimum
leverage ratio requirement for individual institutions. At December 31, 1997,
Prime Bank met the Pennsylvania minimum capital requirements.
Federal Reserve System
Federal Reserve Membership. Prime 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.
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Reserve Requirements. FRB regulations require the Bank to maintain
non-interest earning reserves against the Bank's 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 Bank's assets.
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 a federal law enacted in 1996, 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.
Prompt Corrective Action. Federal banking laws and regulations establish 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. An institution such as
the Bank must maintain capital of not less than the requirements established by
its primary federal regulator in order to be deemed "adequately capitalized".
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.
Dividends
Dividend payments by the Bank to the Company are subject to the PA Code and
federal banking laws and regulations. Under the Pa Code, dividends may be paid
from `accumulated net earnings' (generally, undivided profits) without prior
regulatory approval. Under federal banking law, 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. In addition, banks which are not adequately
capitalized or otherwise fail to meet regulatory standards, including those for
safety and soundness, may be restricted in payment of dividends. The FRB and the
FDIC have formal and informal policies which provide that insured banks and bank
holding companies should generally pay dividends only out of current operating
earnings.
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Transactions with Affiliates and Other Related Parties
The Bank 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 with any one non-bank affiliate is limited to 10% of the
capital and surplus of the Bank and the aggregate amount of 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) sales of 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.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the FRA. Among other things, these
regulations require such loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and require certain approval 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
The FRB has adopted risk-based capital and leverage ratio requirements for
member insured banks such as Prime Bank.
Risk-Based Capital Guidelines. The FRB's risk-based capital guidelines for
member 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
8
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 FRB has also established a minimum level
of Tier 1 capital to total assets of 3% for those member banks which have the
highest regulatory examination ratings and are not contemplating or experiencing
significant growth or expansion. All other member banks are required to maintain
a Tier 1 capital leverage ratio of at least 1% to 2% above the 3% stated
minimum.
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 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.
At December 31, 1997, Prime Bank met each of its capital requirements.
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. Generally, a member bank with total capital of
at least 7.0% is placed in "Zone 1" and will be considered adequately
capitalized provided its "primary capital" is above the 5.5% minimum. In
contrast, a member bank with total capital below 6.0% is placed in "Zone 3" and
will generally be considered undercapitalized, absent clear extenuating
circumstances. Member banks in "Zone 2" (having capital between the other two
zones) will be scrutinized for a variety of financial risks and capital adequacy
will be determined accordingly.
Prime Bank's total capital ratio would place it in "Zone 1" for these
purposes as of December 31, 1997.
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).
9
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 currently is not required to pay any deposit insurance.
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. The Bank pays these FICO assessments on its BIF and SAIF deposits.
There is no assurance whether the foregoing assessment rates will remain
constant or change.
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. Limited branch purchases are still subject to
state laws. On July 6, 1995, Pennsylvania adopted an interstate banking act (the
"PA Interstate Banking Act") to harmonize Pennsylvania banking laws with the
Federal Interstate Banking Act. The PA Interstate Banking Act "opts in" early
under the Federal Interstate Banking Act to permit interstate mergers,
non-Pennsylvania holding company acquisitions of Pennsylvania banks, branch
acquisitions and de novo branching in any of the manners contemplated by the
Federal Interstate Banking Act, subject to prior regulatory approvals or
filings. In general, the PA Interstate Banking Act permits out-of-state banking
institutions may establish branches in Pennsylvania with the approval of the
Pennsylvania Banking Department, provided the law of the state where the banking
institution is located would permit a Pennsylvania banking institution to
establish and maintain a branch in that state on substantially similar terms and
conditions. It also permits Pennsylvania banking institutions to maintain
branches in other states. Bank management anticipates that the federal and
Pennsylvania interstate banking legistration will increase competitive pressures
in the Bank's market by permitting entry of additional competitors, but
management is of the opinion that they will not have a material impact upon the
anticipated results of operations of the Bank.
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.
10
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.
Other Laws and Regulations
The Company and the Bank 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 Bank is 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 the
Bank.
Effect of Government Monetary Policies
The earnings of the Company and the Bank 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.
Item 2. Properties.
The Company neither owns nor leases any real property. At present, it uses
the premises, equipment and furniture of Prime Bank, subject to payment of such
reasonable compensation, if any, as may be determined from time to time. In the
future it may consider acquiring office facilities.
Prime Bank has eight offices in Philadelphia County, five in Bucks County,
one office in Chester County, two offices in Delaware county, and eight in
Montgomery County, Pennsylvania. Of the twenty-four offices, eight are owned,
and sixteen offices are subject to leases. At its home office, Prime Bank offers
a full range of customer services. Except for safe deposit boxes, these same
services are available at each of Prime Bank's other offices. Prime Bank
participates in the MAC Money Access Service shared Automated Teller Machine
("ATM") network and the PLUS SYSTEM network which is the leading international
system of shared automated teller machines (ATMs) which enables customers to
obtain cash almost anytime and almost anywhere they travel in the United States.
Twelve offices are equipped with ATMs owned by Prime.
Item 3. Legal Proceedings.
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.
11
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information contained under the captions "Market Information" (page 19)
and Note 1 of "Notes to Consolidated Financial Statements" (page 24) in the
Company's 1997 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 1997 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" (pages 9 through 18) in the Company's 1997 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 1997 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.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the captions "ELECTION OF DIRECTORS" on
pages 5 through 6, "Executive Officers Who Are Not Directors" on page 8, and
"Section 16(a) Beneficial Ownership Reporting Compliance" on page 8. of the
Company's definitive Proxy Statement dated March 18, 1998 is incorporated herein
by reference thereto.
Item 11. Executive Compensation.
See information contained under the caption "EXECUTIVE COMPENSATION" on
pages 9 through 14 of the Company's definitive Proxy Statement dated March 18,
1998 which are incorporated herein by reference. The "Performance Graph" on page
14 and the "Board Compensation Committee Report on Executive Compensation" on
pages 12 and 13 shall not be deemed "soliciting material" or "filed" with the
Commission or incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the caption "BENEFICIAL OWNERSHIP OF VOTING
SECURITIES" on pages 2 through 4 of the Company's definitive Proxy Statement
dated March 18, 1998 is incorporated herein by reference.
12
Item 13. Certain Relationships and Related Transactions.
The information contained under the caption "Indebtedness of Management and
"Certain Relationships and Related Transactions" on page 12 of the Company's
definitive Proxy Statement dated March 18, 1998 is incorporated herein by
reference.
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 appear on
pages 20 through 37 of the Company's 1997 Annual Report included
as an exhibit to this report:
Page Reference
Annual Report
Financial Statements to Shareholders Page
------------------------------------ ----
Consolidated Statements of Financial Condition ............... 20
Consolidated Statements of Income ............................ 21
Consolidated Statements of Shareholders' Equity .............. 22
Consolidated Statements of Cash Flow ......................... 23
Notes to Consolidated Financial Statements ................ 24-35
Management's Statement on Financial Reporting ................ 36
Independent Auditors' Reports ................................ 37
(2) Other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) The following exhibits:
Exhibit
No. Description
- ------- -----------
2.1 Agreement and Plan of Organization dated June 12, 1996 and First
Amendment thereto dated September 12, 1996, by and among
Registrant, the former Prime Bancorp, Inc., a Delaware
corporation ("Old Prime") Prime and First Sterling. Prime will
supplementally provide a copy of the disclosure schedules to the
SEC upon request.
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.
4.1 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 LLP
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 & Young
LLP 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.
13
Exhibit
No. Description
------- -----------
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 Change in Control Agreement between the Company, Prime Prime and
James E. Kelly dated November 17, 1997.
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 then
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 Executive Benefit Plan for Erwin T. Straw
10.14 Incentive Stock Option Plan
14
Exhibit
No. Description
------- -----------
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.
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 Bancorp, Inc. Retirement Savings Plan as amended and
restated effective January 1, 1998.
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.
15
Exhibit
No. Description
------- -----------
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, 1997. (to be filed by amendment)
13.1 Annual Report to Shareholders for the year ended December 31,
1997.
22.1 Subsidiaries
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
None
16
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, 1998
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, 1998
- ----------------------------
Frederick G. Betz
/s/ William J. Cunningham Director March 28, 1998
- ----------------------------
William J. Cunningham
/s/ Joseph A. Fluehr, III Director March 28, 1998
- ----------------------------
Joseph A. Fluehr, III
/s/ Robert A. Fox Director March 28, 1998
- ----------------------------
Robert A. Fox
/s/ Arthur J. Kania Director March 28, 1998
- ----------------------------
Arthur J. Kania
17
Signature Title Date
--------- ----- ----
/s/ James E. Kelly Executive Vice President March 28, 1998
- ---------------------------- and Chief Financial Officer
James E. Kelly.
/s/ Ernest Larenz Director March 28, 1998
- ----------------------------
Ernest Larenz
/s/ James J. Lynch Director, President and Chief March 28, 1998
- ---------------------------- Executive Officer (Principal
James J. Lynch Executive Officer)
/s/ Joseph G. Markmann Director March 28, 1998
- ----------------------------
Joseph G. Markmann
/s/ Roy T. Peraino Director March 28, 1998
- ----------------------------
Roy T. Peraino
/s/ David H. Platt Director March 28, 1998
- ----------------------------
David H. Platt
/s/ Arthur L. Powell Director March 28, 1998
- ----------------------------
Arthur L. Powell
/s/ Frank H. Reeves Senior Vice President March 28, 1998
- ---------------------------- Chief Accounting Officer
Frank H. Reeves
/s/ Erwin T. Straw Chairman March 28, 1998
- ----------------------------
Erwin T. Straw
18