1997 ANNUAL REPORT
RELATIONSHIPS
GROWTH
stability
people
business
SERVICE
[Logo]
*BANK HEADQUARTERS
Corporate Offices
Valley Green Corporate Center
7111 Valley Green Road
Fort Washington, PA 19034
Main Office
Prime Bank
6425 Rising Sun Avenue
Philadelphia, PA 19111
*BRANCHES
Philadelphia County
Burholme
Chestnut Hill
18th & JFK
Grant Plaza
Kensington
Lawndale
Penn Treaty
Somerton
Montgomery County
Bala Cynwyd
Bryn Mawr
Horsham
Huntingdon Valley
Jenkintown
Montgomeryville
Plymouth Meeting
Willow Grove
Bucks County
Fairless Hills
Oxford Valley
Richboro
Southampton
Yardley
Chester County
Devon
Delaware County
St. Davids
Media
Please see inside back cover for a full listing of our branch location
addresses.
Prime's corporate office, main office, and 24 branches, located throughout the
five-county Delaware Valley area, are easily accessible. The Bank's branch
network is strategically positioned for continued commercial market penetration.
RELATIONSHIPS
[Photos]
GROWTH
stability
[Photos]
people
business
[Photos]
SERVICE
PRIME BANCORP, INC.
FINANCIAL HIGHLIGHTS
1996
(Dollars in thousands, except per share data) 1997 (See note below)
- -------------------------------------------------------------------------------
Net income $ 10,519 $ 4,017
Basic earnings per share 1.95 0.77
Diluted earnings per share 1.91 0.74
Dividends declared per share 0.70 0.68
At Year End
Assets 953,425 926,071
Loans receivable, net 630,848 616,893
Deposits 694,444 736,642
Shareholders' equity 79,864 70,516
Book value per share 14.67 13.33
Selected Ratios
Return on average assets 1.13% 0.46%
Return on average shareholders' equity 13.97% 5.70%
Ratio of equity to assets 8.38% 7.61%
Ratio of non-performing assets to total assets 0.42% 0.92%
Note: The 1996 results, as presented above, include a one time FDIC assessment
of $2.71 million ($1.66 million after taxes) and $2.26 million ($1.70
million after taxes) for restructuring charges associated with the
acquisition of First Sterling Bancorp.
2
MARCH, 1998
[Photos]
James J. Lynch
President & C.E.O.
[Photo]
RELATIONSHIPS
GROWTH
stability
people
SERVICE
DEAR SHAREHOLDER:
"Quality growth" is the best phrase to describe Prime's 1997 performance. Our
commercial relationships grew as evidenced by increased commercial loans and
demand deposits.
Our shareholder returns grew as evidenced by an increase in Prime's return on
average equity and by a near 12% increase in the Company's cash dividend. We
also grew geographically as we completed our merger with First Sterling Bank.
Lastly, the market's perception of Prime as a premier commercial bank grew
through our conversion to a commercial bank during 1997.
In a regional banking market laced with huge takeovers and unprecedented
dislocation of employees and customers, Prime is carving its niche. We are
focused on, and dedicated to, serving Philadelphia regional bank customers. We
are truly the alternative to the larger banks. A mid-size bank with large-bank
capabilities and neighborhood bank service, Prime is stable, bigger, and
stronger than ever before. And, we believe Prime's growth story will continue.
We are also pleased with certain initiatives we have put in place to assist
us in our goal to be the premier banking company in the Philadelphia region.
Late in 1997 and continuing throughout 1998 we are undergoing a bank-wide
quality service training program. In addition, we have made several strategic
staff additions that will position our management team for further growth with
increased competence.
3
Prime's Bala Cynwyd Branch is one of five new branches acquired through the
merger with First Sterling Bancorp. The merger gave Prime access to the western
suburban market.
BY THE BEGINNING OF THE SECOND QUARTER WE WERE ALREADY STARTING TO SEE THE MANY
BENEFITS OF THE CONSOLIDATION.
Discussion of
1997 Financial Results
Prime reported net income of $10.5 million or $1.91 per diluted share for the
year ended December 31, 1997. In 1996, net income of $4.0 million or $.74 per
diluted share was reported. These amounts included charges of $5.0 million in
1996 (before the effect of income taxes) related to a special FDIC assessment
and restructuring charges associated with the acquisition of First Sterling
Bancorp. In the absence of these charges, 1996 net income would have amounted to
$7.4 million ($1.36 a share). The comparable amount for 1997 indicates a 42%
improvement to $10.5 million ($1.91 a share).
As a result of increasing commercial relationships, Prime has improved
margins through loan growth and favorable deposit mix changes. The 1997 net
interest margin of 4.27% on average earning assets of $877 million compares to
4.06% in 1996 on average earning assets of $809 million. Consequently, net
interest income for 1997 amounted to $37.1 million compared to $32.5 million in
1996, an increase of 14%.
Commercial and construction loans now represent 55% of Prime's loan
outstandings compared to 44% in 1996. Total loans at the end of 1997 were $639
million. The Bank also enhanced its reserve and loan coverage positions as the
allowance for loan losses at the end of 1997 totaled $8.5 million which was 283%
of non-performing loans and 214% of non-performing assets.
Non-interest income for the year totaled $4.9 million. This compares to $3.2
million for 1996.
Operating expenses in 1997 were 8% higher than in 1996, excluding the
adjustments mentioned above, due primarily to the higher salary and benefit
costs associated with the Bank's expanded commercial banking activities.
Successful Merger Completion
One of our major accomplishments in 1997 was the successful completion of the
merger with First Sterling Bank. During the first 120 days of 1997, we united
the operating systems of the two banks, as well as integrated and improved all
products and pricing. Accomplishing this in such a short time frame has given us
added confidence in our ability to assimilate future acquisitions.
We combined and restructured the two staffs into one team. We are proud to
report that the new business produced by the combined organization has supported
a net increase in the number of people employed.
Through the consolidation, we significantly enhanced the Bank's franchise
value. By the beginning of the second quarter we were already starting to see
the many benefits of the consolidation. The merger brought Prime five additional
branches, entrance into the valuable western suburban segment of the
Philadelphia-area market, and the added expertise of the First Sterling team of
bankers.
By the start of the fourth quarter, the former First Sterling branches
displayed new Prime Bank signs supporting the Bank's new look and image.
Completing the name change was the final step in a smooth transition. We begin
1998 as a unified organization focused on growing our market share by providing
quality service to both our business and retail customers.
Conversion To Commercial Bank Status
Another important accomplishment in 1997 was Prime's official conversion from a
thrift to a commercial bank. All federal and state banking regulatory approvals
were received and, as a result, Prime Bank is now a state-chartered commercial
bank and member of the Federal Reserve.
4
William H. Bromley, Executive V.P. (left) and James E. Kelly, Executive V.P. &
C.F.O. are dedicated to Prime's commercial banking strategy and look forward to
growing Prime into the 21st Century.
[Photos]
We are pleased to be the first mid-size Philadelphia regional thrift to
convert to commercial bank status. The conversion sends the message that Prime
is a commercial bank in terms of service and performance. With this
accomplished, and following our strategic plan, we are already benefiting from a
more diversified balance sheet, lower costs, better margins, streamlined
regulatory review, and improved market perception.
In addition, Prime Bancorp, Inc. has changed its NASDAQ ticker symbol to
PBNK. This better communicates to investors the fact that Prime is now a
commercial bank holding company.
Quality Products And Services
Prime also grew during 1997 in terms of product enhancements and services. While
carefully analyzing how well our products and services meet our customers'
needs, we also closely monitor their costs and the fee income they generate for
the Bank. We regularly consider changes and additions to what we offer,
introducing improvements as our customers' needs dictate.
Underscoring our commitment to our business customers, our cash management
and lock box programs were improved in 1997. We also brought the convenience of
PC banking service to our business customers through PrimeLink. In the area of
alternative financial products, such as investment and insurance products, Prime
continued to analyze options and study how to best take advantage of
opportunities in these areas of the market.
As part of our ongoing effort to bring easily accessible, timely and
accurate information to all of our customers, we successfully introduced
PrimeAccess24(sm), a fully-automated, 24-hour, customer service telephone access
system. During the month of December we received 36,000 calls through our
automated system. Our customers may now choose to use this time-saving system.
Or, they may still opt to speak directly with any of our bank specialists and
are welcome to do so. We also brought the number of Prime branches to 24 through
the opening of a Plymouth Meeting branch during the fourth quarter.
Growth Of Loans And Deposits
Commercial business and real estate loans grew significantly in 1997. We changed
the focus of our residential mortgage banking operation from portfolio lending
to originating and selling residential mortgages. Checking account deposits grew
at an unprecedented rate reflecting our success in penetrating the business
market niche.
Our People Make A Difference
Without the conscientious people at Prime, none of these many accomplishments
would be possible. To our board members and our dedicated staff, I want to
express my special thanks for a job well done.
At the end of 1997 we welcomed James E. Kelly to Prime as Executive Vice
President and Chief Financial Officer. An accomplished financial executive with
more than 20 years of Delaware Valley banking experience, including five years
as Corporate Controller and Senior Vice President of Finance for Midlantic
Corporation, Jim is a valuable addition to our senior executive staff. His
expertise nicely complements that of William H. Bromley, founder and former
President of First Sterling, who began serving as Prime's Executive Vice
President at the beginning of 1997. I strongly believe that we now have the best
banking executive management team in the Philadelphia region.
Prime is committed to employee training and the quest for reaching an even
higher level of customer service excellence. To this end, we kicked off our
5
[Photo]
WE ARE CREATING OUR MARKET NICHE AS THE PREMIER COMMERCIAL BANK IN THE DELAWARE
VALLEY.
bank-wide customer service training initiative at the beginning of the fourth
quarter. Our program focuses on continuously building the quality of service and
overall performance of our organization.
Focusing On Core Business
We are creating our market niche as the premier commercial bank in the Delaware
Valley. We are the bank that is ready and willing to take care of customers who
want the personal, quality service that they can't find today at other banks.
Many banks are working very hard to provide their customers with every type
of financial product imaginable, including those traditionally offered by stock
brokerage firms and insurance companies. Although we are exploring the merits of
offering some alternative products, we are steadfastly focused on our core
business -- growing deposits and quality loans while providing the highest
quality customer service possible. And, we are, and will remain, a
Philadelphia-area bank.
A Growing Part Of Our Community
As always, Prime is committed to serving our community and its people. We will
continue to pledge our support to our annual, company-wide United Way Campaign
and our award-winning anti-graffiti campaign. Prime provides a truck and a crew
dedicated exclusively to fighting graffiti in our five-county area.
Recently, Prime joined forces with the Berean Federal Savings Bank, the
nation's oldest continually operating African-American savings bank, to provide
additional capital for mortgage loans. The Bank has also allied with the
American Cancer Society and our local universities' Big Five Basketball Program
to support "Coaches vs. Cancer."
Continuing The Growth Story
Looking ahead, we plan to continue Prime's steady, strategic growth through
internal expansion and careful acquisition. We expect to complete plans to open
two new Prime branches in late 1998 or early next year.
We will work to implement what we learn from our customer service training
initiative. Prime will continue to hire and retain the most experienced,
talented, dedicated people. And, we will add and explore new technologies when
appropriate.
We also plan to expand through the acquisition of first-rate, community
banks. Through Prime's strategic partnering with other banks, we can gather
additional market share and talented professionals. We intend to take a
methodical approach to selecting acquisition candidates. We don't want to grow
for the sake of growth alone. We want to grow in value, as well as size, without
compromising our ability to provide the personalized, quality service that makes
Prime the region's leading bank for personal service.
As we become the Delaware Valley's premier commercial bank, we are "primed"
and ready to meet the challenges ahead. We will remain focused, while continuing
to add value. The opportunities for Prime look great.
As always, we thank you, our shareholders and our customers, for your
continued confidence and support.
Sincerely,
/s/ Signature
James J. Lynch
President & C.E.O.
6
[Photos]
New Prime Bank signs, like this one, displaying the Bank's new look and image
have been hung at all former First Sterling branches. This change was the final
step in a smooth merger transition.
Special Thanks To Two
Retiring Board Members
The diligent work of our distinguished board members is a big part of Prime's
success. Their valuable expertise significantly impacts the planning and
implementation of the Bank's strategic plans. At this time, we'd like to
recognize the vital contributions of two Prime Bancorp board members as they
leave the board to enjoy retirement.
Joseph G. Markmann, CPA
Mr. Markmann is an Associate Professor of Accounting & the former Chairman of
the Accounting Department of LaSalle University. He has been honored by the
naming of the Joseph G. Markmann Accounting Alumni Endowed Chair at LaSalle. Mr.
Markmann has been a member of the board of directors since Prime was formed in
1988. In 1987, he was a board member of the Cheltenham Federal Savings and Loan
Association board which was Prime's predecessor. We thank him for 11 years of
valuable advice and diligent service.
Arthur L. Powell
Although Mr. Powell only became a Prime Bancorp board member this year, he has
been a member of the First Sterling Bancorp board since 1988. President of
Kravco, Inc., a real estate development company which specializes in large
shopping malls, Mr. Powell served on Prime's Community Reinvestment Act
Committee and the Audit Committee. His insights and expertise have been most
appreciated.
Prime Is Helping To Fight Cancer
Prime has teamed up with the American Cancer Society (Southeast PA Region) to
support the American Cancer Society "Coaches vs. Cancer" Big Five Basketball
Program. Prime is working closely with the coaches of Penn, Drexel, Villanova,
St. Joe's, LaSalle, and Temple Universities to raise money for important cancer
research, education, and patient services. According to Prime Bank C.E.O. James
J. Lynch, "This is an extremely worthwhile effort and Prime is pleased and proud
to be a part of it. Fighting this deadly disease is a way that we can help each
and every member of our community, as well as generations to come."
Jim Lynch, Prime Bank C.E.O., (center) with local university basketball coaches.
(Left to right) Fran Dunphy, University of Pennsylvania; Bill Herrion, Drexel
University; John Chaney, Temple University; Phil Martelli, Saint Joseph's
University; Speedy Morris, LaSalle University; and Steve Lappas, Villanova
University.
[Photo]
7
Marcia C. Gallagher, Branch Manager, Devon works closely with customers to
achieve the highest level of customer contact and quality service.
(Left to right) Carol A. Chartrand, VP-Cash Management; Timothy J. Abell, Sr.
V.P.-Commercial Lending; Jan M. Smith, Sr. V.P.-Branch Management; and Steven H.
Santini, V.P.-Credit Policy and Administration meet regularly to discuss
commercial lending and cash management opportunities throughout Prime's branch
network.
(Left to right.) Gregory J. Webster, Sr. V.P.-Commercial Real Estate
Lending/Construction; Scott R. Gamble, V.P. Commercial Lending; and Steven C.
McGilvery, Sr. V.P. Commercial Lending work together to increase Prime's
commercial real estate loan portfolio.
RELATIONSHIPS
[Photos]
GROWTH
Relationship Banking
It's Our People That Make
The Difference
Customers want a banker they can count on. They want someone who understands
their needs, knows their business, and has the ability to get things done.
That's why Prime has assembled the best team of banking professionals in the
Region. Prime bankers build lasting relationships. And, they work to earn those
relationships every day.
An Expanded Commercial
Banking Team
Our commercial banking team has been expanded and enhanced by the hiring of
highly experienced, commercial banking talent. Many of our team members once
worked for big banks and became tired of big-bank bureaucracy and instability.
They came to Prime because they want to build valued customer relationships.
Now, they have both the ability and the authority to get the job done and are
true believers in Prime's "high-touch" approach to quality service.
In a turbulent local banking environment, Prime is carving a niche for quality
bankers and displaced customers. Our customers benefit from "big bank" expertise
and "neighborhood bank" service. Through Prime's 24-branch network, there is
constant interaction and exchange of ideas to develop commercial banking
opportunities. Commercial loans, real estate loans, cash management and lock box
programs, as well as alternative financing products, such as investment and
insurance products, are available for Prime customers.
Emphasizing Commercial
Banking Into The Next Century
Prime was the first mid-size bank in the Region to convert from a thrift to a
commercial bank. We took this step because we believe Prime's continued and
growing future success lies in commercial banking. Although we intend to remain
responsive to all customers -- commercial, consumer, and government -- our
emphasis is clearly focused on serving the special needs of our business
customers.
Currently 55% of Prime's loan portfolio is based in commercial assets. By the
year 2000, we plan to raise that number to 75%. Our top-executives and team of
talented commercial lenders have what it takes to make Prime the commercial
banking alternative for Delaware Valley businesses. We plan to take advantage of
every opportunity and do whatever it takes to get the job done.
8
[Photo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
As indicated by earnings performance and the completion of certain operating
goals discussed below, 1997 was a very productive year for Prime Bancorp, Inc.
("Prime or the Company"). Net income at $10.5 million was the highest total in
the Company's history and the resulting 14% return on average shareholders'
equity represented a substantial increase from prior years. Commercial
relationships continued to grow as the mix of loans outstanding increased from
44% commercial to 55% in 1997. Commercial deposits also increased as evidenced
by higher levels of demand deposits. The continued movement to a better mix of
earning assets also resulted in improved margins, the net interest yield on
earning assets.
Other events affecting the Company in 1997 included the consolidation of
computer, check processing and other operations of First Sterling Bank, acquired
in 1996. Early in the fall, the former First Sterling Bank and the Company's
largest subsidiary, Prime Bank (the "Bank"), were merged to form one commercial
bank operating under the Prime Bank name. Also in 1997, the Company opened its
24th branch at a convenient location in Plymouth Meeting.
EARNINGS
The Company reported net income for the year of $10.5 million or $1.91 a share
which was 42% above the adjusted $7.4 million ($1.36 a share) reported for 1996
before the effects of a special FDIC premium assessment and the restructuring
charges associated with the 1996 merger with First Sterling Bancorp ("the
adjustments"). Including the adjustments, income for 1996 was $4.0 million or
$.74 a share. 1995 net income was $7.5 million or $1.39 a share. All earnings
per share computations have been restated as required by Statement of Financial
Accounting Standards ("SFAS") No. 128.
[Chart]
dollars in millions
Net Income
as reported as adjusted
1995 7.5
1996 4.0 7.4
1997 10.5
Returns on average assets (ROA) and average equity (ROE) both improved. The
ROA in 1997 was 1.13% compared to .46% for 1996 (.85% excluding the
adjustments). ROE was 14.0% compared to 5.70% in 1996 (10.5% excluding the
adjustments).
9
NET INTEREST INCOME
Partly contributing to the Company's improved operating results were improved
margins resulting from loan growth and favorable deposit mix changes largely due
to increased focus on commercial relationships. Net interest income for 1997
amounted to $37 million, an increase of 14% over the $33 million in 1996 which
was 14% over 1995's total of $28 million. In addition to the improved mix of
loans and deposits, higher volumes added to average earning assets which
increased by 8% from $809 million to $877 million.
[Chart]
dollars in millions
Net Interest Income
1995 28.4
1996 32.5
1997 37.1
Prime's net interest margin improved to 4.27% in 1997 from 4.06% in 1996
and 1995. Most of the increase in 1997 was the result of improved loan mix and
reduced deposit costs.
A more detailed analysis of the mix of assets and liabilities and their
related interest rates is presented on pages 15 and 16.
NON-INTEREST INCOME
Non-interest income for the year amounted to $4.9 million including $1.2 million
in net gains on asset sales, part of which is reported as mortgage banking
activities. Included in these asset sales were mortgage loans sold as part of
the Company's strategy to originate residential loans for our customers but sell
the subsequent loan receivable into the secondary markets.
[Chart]
dollars in millions
Non-Interest Income
1995 3.4
1996 3.2
1997 4.9
Non-interest income in 1996 amounted to $3.2 million, of which gains on
asset sales amounted to $401 thousand. This was a slight decrease from the $3.4
million in 1995. Income from fees and service charges showed a significant
increase in 1997 to $2.4 million from $1.9 million in 1996 and $1.8 million in
1995. This was primarily due to higher pricing and the larger volume of
deposits.
For the Years
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Fees and service charges $ 2,433 $ 1,864 $ 1,820
Gain (loss) on sale of:
Securitization and sale of mortgages 606 -- --
Investment securities 135 288 448
Real estate owned 33 14 (44)
Mortgage banking activities 561 294 509
Other 1,102 761 710
- --------------------------------------------------------------------------------
$ 4,870 $ 3,221 $ 3,443
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Non-interest expenses of $23 million in 1997 were 8% or $1.8 million higher than
in 1996, excluding the adjustments that were part of 1996 results.
[Chart]
dollars in millions
Non-Interest Expense
as reported as adjusted
1995 18.9
1996 26.0 21.0
1997 22.8
Higher salary and benefit costs accounted for $1.0 million or over half of
the expense increase and are largely a consequence of the Company's expanded
commercial banking activities. Occupancy and equipment expenses increased to
$5.6 million in 1997 from $5.0 in 1996 mainly due to technology enhancements and
the first full year of costs for certain operating facilities. Other expenses
increased from $4.8 million to $5.4 million primarily due to increased printing
and supply costs necessitated by the conversion to a commercial bank and
increased expenses associated with real estate owned. The overall increase was
partly offset by a decrease in regular FDIC insurance premiums from $.8 million
to $.4 million. The Company's efficiency ratio has shown steady improvement from
60% in 1995 to 59% in 1996 and 55% in 1997.
For the Years
- -----------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------
Salaries & benefits $11,436 $10,437 $9,065
Occupancy & equipment 5,584 4,985 3,825
FDIC insurance 365 753 1,008
FDIC special assessment -- 2,713 --
Restructuring charges -- 2,260 --
Other 5,371 4,847 5,032
- -----------------------------------------------------------
$22,756 $25,995 $18,930
- -----------------------------------------------------------
10
BALANCE SHEET REVIEW
Prime's total assets grew 3% from $926 million at December 31, 1996 to $953
million at December 31,1997. Total assets at December 31, 1996 increased $106
million or 13% above the $820 million reported as of December 31, 1995.
Management's efforts to seek only the most cost effective funding sources
resulted in reduced levels of relatively high cost deposits. Consequently, total
assets grew by only 3% despite the growth in commercial assets. Marginal
yielding short term assets were allowed to mature and residential mortgage
assets also declined. Balance sheet changes are summarized in the following
table (dollars in millions):
Balances at December 31,
- -----------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------
Loans (net) $634.0 $616.9 $503.8
Investments (all) 251.9 239.5 259.3
Non-earning assets 67.5 69.7 56.9
- -----------------------------------------------------------
Total assets $953.4 $926.1 $820.0
- -----------------------------------------------------------
Deposits $694.4 $ 736.6 $644.3
Borrowings 172.7 110.4 97.7
Other liabilities 6.4 8.6 8.7
Equity 79.9 70.5 69.3
- -----------------------------------------------------------
Total liabilities and equity $953.4 $926.1 $820.0
- -----------------------------------------------------------
LOANS
While there was only a slight increase in the overall balance of loans, there
was a significant shift in the mix. The increased focus on commercial
relationships resulted in an increase in commercial and commercial real estate
loans of $75 million or 27% in 1997 to $351 million from $276 million at the end
of 1996. This increase was partly offset by management's decision to reduce the
mortgage portfolio by securitizing and selling some of the mortgages in the
portfolio and selling most new originations into the secondary markets.
Residential mortgages declined from $246 million to $183 million at the end of
1997.
INVESTMENTS
Investments grew $12 million, or approximately 5% from, $239.5 million at the
end of 1996 to $251.9 million at the end of 1997. The structure of the overall
portfolio is intended to provide flexibility for the Company's overall
management of balance sheet risks, particularly interest rate risk.
DEPOSITS
Deposits decreased from $736.6 million at December 31,1996 to $694.4 million at
December 31, 1997. This was primarily the result of a decision to eliminate
certain sources of funding that were relatively expensive. Consequently, time
deposits decreased $64.9 million. However, core demand and savings deposits
increased $22.7 million as the Company emphasized relationship banking.
BORROWINGS
Borrowings increased $62.3 million or 56% from year end 1996 to year end 1997
primarily due to increases in customer repurchase agreements and FHLB
borrowings. $23.6 million of the increase was in repurchase agreements with
Prime customers; these relationships increased from $47.5 million to $71.1
million. This is consistent with the increased commercial focus adopted by the
Company. Similar agreements at the end of 1995 were $21.9 million. The Company
also took advantage of favorable borrowing rates at the Federal Home Loan Bank
of Pittsburgh to increase these borrowings by $23 million.
11
[Photo]
BANKING RISKS
YEAR 2000 RISK
The Company is aware of the complex issues involving computer systems and the
risk of errors when record dates change to 01/01/00 on January 1, 2000. Systems
that do not properly recognize date sensitive information could generate
erroneous data or cause a system to fail. The Company is utilizing both internal
and external resources to identify, correct or reprogram, and test the systems
for year 2000 compliance. An impact study has been completed by an outside
consultant and their recommendations are already being implemented. It is
anticipated that all reprogramming efforts or new programs will be complete, or
in place, and substantially tested by December 31, 1998. To date, confirmations
have been received from the Company's primary processing vendors that they are
either year 2000 compliant or have plans to be in compliance by early 1998.
While management has been unable, so far, to put an exact figure on the year
2000 compliance expense and related potential effect on the Company's earnings,
it is currently estimated that expenditures will exceed $1.0 million but are
likely to be less than $2.0 million. Most of these expenditures (i.e., purchase
of new software) will be capitalized and amortized over a number of years. There
should not be a material effect on any year's earnings.
CREDIT RISK
Credit risk exists in financial instruments such as loans and leases,
investments and off-balance sheet instruments including loan commitments,
letters of credit and derivative instruments. The objective of credit risk
management is to reduce the risk of loss if a party to a contract fails to
perform according to the terms of a transaction. Essential to this process are
thorough underwriting practices regarding new commitments, active monitoring of
all portfolios and the early identification of potential problems and their
prompt resolution.
The Company manages credit risk by maintaining a well-diversified credit
portfolio and by adhering to its board approved credit policies. All loan
approvals are made by at least two experienced banking officers. The level of
officer approvals required is determined by the dollar amount and risk
characteristics of the credit extension. The credit process also includes the
review of approved and renewed loan relationships over $1 million by a committee
of directors.
Credit quality is continually assessed through the review and assignment of
a numerical grade to substantially all extensions of credit in the commercial
and commercial real estate portfolios. Lending officers have the primary
responsibility for monitoring their portfolios, identifying emerging problem
loans and recommending changes in quality ratings. The Loan Review Department
provides an independent assessment of these credit ratings, credit quality and
the credit management process. Loan review findings are regularly reported to
the audit committee of the board of directors. When signs of serious credit
weaknesses are detected, the Loan Workout Department is utilized to minimize
loss exposure.
LOAN PORTFOLIO COMPOSITION
The loan portfolio increased from $624.1 million at December 31, 1996 to $639.3
million at December 31, 1997. Loan growth was centered in the commercial and
commercial real estate loan portfolios. Consumer loans grew slightly while
residential mortgage loans declined significantly. The change in composition of
the loan portfolio was a direct result of management's efforts to improve
overall yields while continuing to manage risk through the origination of high
quality commercial and real estate loans.
NON-PERFORMING ASSETS
Non-performing assets declined during 1997 as a result of collection efforts and
charge-offs. Total non-performing assets decreased from $8.5 million at December
31, 1996 to $4.0 million at December 31, 1997. Non-accrual loans, a large
component of non-performing assets, fell by $4.2 million to $3.0 million during
the twelve month period.
12
The allowance for loan losses was $8.5 million at December 31, 1997, or
1.33% of total loans, compared with $7.2 million, or 1.15% of total loans at
December 31, 1996. The increase in the allowance reflects significant commercial
and commercial real estate loan growth. Non-performing assets declined during
1997 as a result of collection efforts and charge-offs. Total non-performing
assets decreased from $8.5 million at December 31, 1996 to $4.0 million at
December 31, 1997. Non-accrual loans, a large component of non-performing
assets, fell by $4.2 million to $3.0 million during the twelve month period.
The allowance for loan losses is based on a periodic evaluation of the loan
portfolio and is maintained at a level that management considers adequate to
absorb estimated potential losses. Management considers a variety of factors,
and recognizes the inherent risk of loss that always exists in the lending
process. Management uses a disciplined methodology to estimate the appropriate
level of allowance for loan losses. This methodology includes an evaluation of
loss potential from individual problem credits, as well as anticipated specific
and general economic factors that may adversely affect collectibility.
Management's determination of the adequacy of the allowance is based on
periodic evaluations of the credit portfolio. This evaluation is inherently
subjective as it requires material estimates, including, among others, the
amounts and timing of expected future cash flows on impaired loans, estimated
losses on consumer loans and residential mortgages, and general amounts for
historical loss experience, economic conditions, uncertainties in estimating
losses and inherent risks in the various credit portfolios, all of which may be
susceptible to significant change. Pursuant to SFAS 114, "Accounting by
Creditors for Impairment of a Loan," as amended, impaired loans, consisting of
nonaccrual and restructured commercial and commercial real estate loans, are
considered in the methodology for determining the allowance for credit losses.
Impaired loans are generally evaluated based on the present value of expected
future cash flows or the fair value of the underlying collateral if principal
repayment is expected to come from the sale or operation of such collateral.
CHARGE-OFFS
Net charge-offs totaled $2.2 million in 1997, a decrease of $554 thousand from
1996. The decrease was primarily due to lower commercial and commercial real
estate charge-offs but was partially offset by higher credit card and indirect
auto loan charge-offs. Approximately 33% of total net charge-offs were centered
in the credit card and indirect auto loan portfolios. The Company does not
anticipate a significant decrease in credit card losses in 1998. The Company
exited the indirect auto business in the third quarter of 1997 but does not
anticipate a significant change in charge-off rates in 1998.
The following table provides key asset quality trends (dollars in thousands).
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs $2,159 $2,713 $1,114 $1,132 $941
Net charge-offs as % of loans 0.34% 0.43% 0.22% 0.25% 0.23%
Non-performing loans $3,003 $7,084 $4,838 $6,968 $6,740
Allowance as % of non-performing loans 282.55% 83.25% 84.07% 87.07% 83.16%
Non-performing assets $3,961 $8,509 $5,755 $7,291 $7,133
Non-performing assets as % of assets 0.42% 0.91% 0.64% 0.99% 1.19%
Allowance for loan losses $8,485 $7,206 $6,082 $6,067 $5,605
Allowance as % loans 1.33% 1.15% 1.20% 1.35% 1.36%
Allowance as % non-performing assets 214.21% 84.69% 105.68% 83.21% 78.58%
- ---------------------------------------------------------------------------------------------------------------------------
* Statistics do not include the impact of a condominium project which was
acquired by a deed in lieu of foreclosure in 1995 and classified as land
acquired for development and resale. The balance of the condominium project as
of December 31, 1997, 1996, and 1995 was $5.9 million, $8.9 million and $10.1
million, respectively. Non-performing assets, and the ratio of non-performing
assets as a percentage of assets would have been $9.9 million and 1.04% in 1997,
$17.4 million and 1.88% in 1996, and $15.9 million and 1.93% in 1995.
INTEREST RATE RISK
The risk of losses from adverse interest rate changes is monitored by evaluating
the impact, if any, on the Company's net interest income under a variety of rate
assumptions. This evaluation monitors the degree of interest sensitivity to rate
changes. Management attempts to limit the projected negative impact of interest
rate changes on its income. Consequently, if the Company's internal analysis
would suggest that a reasonably possible rate projection would result in a
significant loss of net interest income (generally about 5% or more), it would
act to mitigate this potential future risk. The steps to mitigate possible
interest rate risk include changing the mix of assets and their scheduled
maturities. Among the assets most likely for these changes are investment
securities available for sale and short-term money market investments. Changing
the composition and maturity of certain liabilities is also an alternative
management may consider as is the option of using derivative financial
instruments to adjust a given interest sensitivity position.
In 1997 the Company did not engage in trading account activities and has no
current plans to do so. Trading account activities include security positions,
generally held for only short terms, that are primarily intended to generate
short-term profits.
13
GAP ANALYSIS
- --------------------------------------------------------------------------------
December 31, 1997
(Dollars in thousands)
3 Mo More 3 Mo More 6 Mo More 1 Yr More 3 Yr More 5 Yr More
or less thru 6 Mo thru 1 Yr thru 3 Yr thru 5 Yr thru 10 Yr 10 Yr Total
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Loans $ 293,068 $ 36,112 $ 42,381 $ 99,537 $ 84,978 $ 57,083 $ 26,400 $ 639,559
Investments 64,025 15,393 34,398 77,991 31,749 8,985 1,175 233,716
Interest bearing deposits 18,161 -- -- -- -- -- -- 18,161
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 375,254 51,505 76,779 177,528 116,727 66,068 27,575 891,436
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accruing loans 299 601 601 751 751 -- -- 3,003
Real estate owned 287 287 287 96 -- -- -- 957
Allowance for loan losses -- (849) (1,697) (2,546) (3,393) -- -- (8,485)
Other assets -- -- -- -- -- -- 66,514 66,514
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 375,840 $ 51,544 $ 75,970 $ 175,829 $ 114,085 $ 66,068 $ 94,089 $ 953,425
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES & EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ 305,820 $ 62,520 $ 43,927 $ 50,062 $ 228,442 $ 3,533 $ 140 $ 694,444
Borrowings 92,286 7,202 761 30,503 42,000 -- -- 172,752
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 398,106 69,722 44,688 80,565 270,442 3,533 140 867,196
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities -- -- -- -- -- -- 6,365 6,365
Equity -- -- -- -- -- -- 79,864 79,864
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 398,106 $ 69,722 $ 44,688 $ 80,565 $ 270,442 $ 3,533 $ 86,369 $ 953,425
- ------------------------------------------------------------------------------------------------------------------------------------
GAP $ (22,852) $ (18,217) $ 32,091 $ 96,963 $(153,715) $ 62,535 $ 27,435 $ 24,240
Cumulative GAP $ (22,852) $ (41,069) $ (8,978) $ 87,985 $ (65,730) $ (3,195) $ 24,240
- ------------------------------------------------------------------------------------------------------------------------------------
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997.
Expected Maturity/Principal Repayment December 31,
- -----------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------
Interest-sensitive assets:
Loans $370,894 $ 54,772 $ 44,765 $ 46,642 $ 38,336 $ 84,150 $639,559
Investments 71,428 58,940 24,914 19,899 16,008 42,527 233,716
Interest-bearing deposits 18,161 -- -- -- -- -- 18,161
- -----------------------------------------------------------------------------------------------------------------------
Total $460,483 $113,712 $ 69,679 $ 66,541 $ 54,344 $126,677 $891,436
- -----------------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
Savings, NOW, money market deposit $139,253 $ -- $ -- $215,724 $ -- $ -- $354,977
Certificates of deposit 273,014 34,068 15,994 6,887 5,831 3,673 339,467
Borrowings 100,249 30,503 -- -- 42,000 -- 172,752
- -----------------------------------------------------------------------------------------------------------------------
Total $512,516 $ 64,571 $ 15,994 $222,611 $ 47,831 $ 3,673 $867,196
- -----------------------------------------------------------------------------------------------------------------------
Total Average Interest Rate Fair Value
- ------------------------------------------------------------------------------------------------
Assets
Loans $639,559 8.89% 639,140
Investments 233,716 6.45% 233,872
Interest-bearing deposits 18,161 5.50% 18,161
- ------------------------------------------------------------------------------------------------
$891,436 8.18% $891,173
- ------------------------------------------------------------------------------------------------
Liabilities
Savings, NOW, money market deposit $354,977 1.73% $354,977
Certificates of deposit 339,467 5.51% 340,836
Borrowings 172,752 5.32% 173,102
- ------------------------------------------------------------------------------------------------
$867,196 3.92% $868,915
- ------------------------------------------------------------------------------------------------
14
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
- -------------------------------------------------------------------------------------
(Dollars in thousands)
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Balance Inc./Exp. Yield Balance Inc./Exp. Yield Balance Inc./Exp. Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable(1)(2)
Commercial &
commercial
real estate $316,006 $29,663 9.39% $250,334 $23,104 9.23% $218,430 $19,999 9.16%
Consumer 104,375 9,853 9.44% 87,163 7,789 8.94% 66,967 6,068 9.06%
Residential mortgage 206,631 15,807 7.65% 221,952 18,569 8.37% 195,633 16,983 8.68%
- ------------------------------------------------------------------------------------------------------------------------------------
627,012 55,323 8.82% 559,449 49,462 8.84% 481,030 43,050 8.95%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities(3) 241,824 15,734 6.51% 241,489 16,207 6.71% 218,913 15,583 7.12%
Interest-bearing
deposits 8,313 607 7.30% 8,485 295 3.48% 8,278 646 7.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest
earning assets 877,149 71,664 8.17% 809,423 65,964 8.15% 708,221 59,279 8.37%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for
loan losses (8,393) -- -- (6,421) -- -- (6,075) -- --
Non-interest
earning assets 64,988 -- -- 63,500 -- -- 55,453 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $933,744 $71,664 -- $866,502 $65,964 -- $757,599 $59,279 --
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook/statement $ 62,396 $ 1,169 1.87% $ 63,827 1,338 2.10% $ 65,157 $ 1,353 2.08%
Money market 126,568 4,313 3.41% 120,817 4,334 3.59% 105,923 3,919 3.70%
Commercial checking 98,721 281 0.28% 73,627 578 0.79% 56,100 510 0.91%
N.O.W. accounts 39,389 247 0.63% 40,720 782 1.92% 36,444 737 2.02%
Time deposits 381,129 20,496 5.38% 371,773 19,679 5.29% 333,791 18,747 5.62%
- ------------------------------------------------------------------------------------------------------------------------------------
708,203 26,506 3.74% 670,764 26,711 3.98% 597,415 25,266 4.23%
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and
other borrowings 143,421 7,726 5.39% 116,289 6,429 5.53% 88,769 5,291 5.96%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 851,624 34,232 4.02% 787,053 33,140 4.21% 686,184 30,557 4.45%
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities 6,810 -- -- 8,977 -- -- 8,616 -- --
Shareholders' equity 75,310 -- -- 70,472 -- -- 62,799 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $933,744 $34,232 $866,502 $33,140 $757,599 $30,557
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/
interest rate spread $37,432 4.15% $32,824 3.94% $28,722 3.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest earning
assets/net yield on
interest-earning assets $ 25,525 4.27% $ 22,370 4.06% $ 22,037 4.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest earning assets
to interest-bearing
liabilities 103% 103% 103%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-accrual loans and loans held for sale are included in loans.
(2) Yields on loans include income from origination fees, net of direct costs.
(3) Interest income is calculated on a tax equivalent basis.
15
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in average
volume multiplied by the prior year's rate), and (2) changes in rate (changes in
rate multiplied by the prior year's volume). The difference in the rate/volume
is allocated on a pro-rata basis to the change in rate variance and the change
in volume variance.
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 vs. 1997 1995 vs. 1996
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
- ---------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------------
Interest income:
Loan portfolio
Commercial & commercial real estate $5,992 $567 $6,559 $3,040 $66 $3,106
Consumer 1,539 525 2,064 1,830 (109) 1,721
Residential mortgage (1,282) (1,480) (2,762) 2,284 (698) 1,586
- ---------------------------------------------------------------------------------------------------------------------------
6,249 (388) 5,861 7,154 (741) 6,413
- ---------------------------------------------------------------------------------------------------------------------------
Investments 22 (495) (473) 1,607 (984) 623
Interest earning deposits (6) 318 312 16 (367) (351)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,265 (565) 5,700 8,777 (2,092) 6,685
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Passbook/statement (30) (139) (169) (28) 13 (15)
Money market 206 (227) (21) 551 (136) 415
Commercial checking 198 (495) (297) 159 (91) 68
N.O.W. checking (26) (509) (535) 86 (41) 45
Time deposits 495 (322) 817 2,135 (1,203) 932
- ---------------------------------------------------------------------------------------------------------------------------
843 (1,048) (205) 2,903 (1,458) 1,445
- ---------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank
advances and other borrowings 1,500 (203) 1,297 1,640 (502) 1,138
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,343 (1,251) 1,092 4,543 (1,960) 2,583
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income $3,922 $686 $4,608 $4,234 $(132) $4,102
- ---------------------------------------------------------------------------------------------------------------------------
LIQUIDITY RISK
The management process in this regard is to preserve stable, reliable and cost
effective sources of cash to fund loan growth as well as unexpected outflows of
deposits or other liabilities. As part of our liquidity management, we seek to
avoid concentrations in a limited number of liability sources and minimize
reliance on volatile large liabilities. The table below summaries Prime
Bancorp's funding profile at December 31, 1997.
From the table below, management concludes that 88.4% of its funding is
from core, local relationships. In addition to the above, the Company has access
to certain capital markets and can use funding vehicles such as securitizations
or large dollar liabilities. Core deposits, however, remain the Company's main
source of liquidity. Accordingly, branch development, including possible branch
expansion is always a planning consideration.
% of Total
Product Category Funding
- -------------------------------------------------
Transaction accounts 41.0%
Time deposits 39.2%
Customer repurchase agreements 8.2%
Other repurchase agreements 2.4%
Other borrowings 9.2%
- -------------------------------------------------
100.0%
- -------------------------------------------------
16
FINANCIAL CONDITION DATA
(Dollars in thousands)
As of December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Total amount of:
Assets $953,425 $926,071 $819,961 $739,231 $598,858
Loans receivable, net 630,848 616,893 497,034 441,401 403,693
Investment securities and interest-bearing deposits 251,877 239,497 259,328 117,193 156,199
Land acquired for development and resale 5,925 8,858 10,405 694 838
Deposits 694,444 736,642 644,306 585,066 491,163
Advances from Federal Home Loan Bank of Pittsburgh 79,550 37,598 37,646 24,694 23,000
Other borrowed money 91,486 70,685 57,622 56,525 18,644
Shareholders' equity 79,864 70,516 69,279 57,369 58,629
Offices open 24 23 22 20 16
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996(2) 1995 1994 1993(1)
- ---------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.13% 0.46% 0.97% 1.02% 1.38%
Return on average equity 13.97% 5.70% 11.89% 11.57% 13.88%
Average equity to average assets 8.07% 8.13% 8.29% 8.80% 9.93%
Book value per share $14.67 $13.33 $13.15 $11.19 $11.70
Dividends per share $0.70 $0.68 $0.62 $0.54 $0.50
Dividend payout ratio 36.65% 91.89% 44.93% 42.86% 39.37%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes the cumulative effect on prior years of a change in accounting
principle.
(2) Includes a one time FDIC special insurance assessment of $2.71 million
($1.66 million net of taxes) and restructuring charges of $2.66 million
($1.70 million net of taxes). Excluding these adjustments, return on assets,
return on average equity, and average equity to average assets, would have
been .85%, 10.48%, and 7.98% for the twelve months ended December 31, 1996,
respectively.
OPERATING DATA
(Dollars in thousands, except per share data)
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $71,364 $65,664 $58,979 $47,068 $41,953
Interest expense 34,232 33,140 30,557 21,280 18,283
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 37,132 32,524 28,422 25,788 23,670
Provision for loan losses 3,438 3,837 1,129 1,594 2,160
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 33,694 28,687 27,293 24,194 21,510
Fees and service charges and other income 3,535 2,625 2,530 2,398 2,209
Gain (loss) on sale of:
Securitization and sale of mortgages 606 -- -- -- --
Investment securities, net 135 288 448 (285) 269
Real estate owned 33 14 (44) (17) (26)
Mortgage banking activities 561 294 509 81 148
Non-interest expense 22,756 25,995 18,930 16,034 13,593
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and effect of cumulative
change in accounting principle 15,808 5,913 11,806 10,337 10,517
Income tax expense 5,289 1,896 4,337 3,625 3,939
- ---------------------------------------------------------------------------------------------------------------------------
Income before effect of cumulative change
in accounting principle 10,519 4,017 7,469 6,712 6,578
Cumulative effect on prior years of change in tax
accounting method -- -- -- -- 1,055
- ---------------------------------------------------------------------------------------------------------------------------
Net income $10,519 $4,017 $7,469 $6,712 $7,633
- ---------------------------------------------------------------------------------------------------------------------------
Dividends declared $3,791 $2,811 $2,351 $1,949 $1,821
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share (1) $1.91 $0.74 $1.39 $1.26 $1.27
- ---------------------------------------------------------------------------------------------------------------------------
(1) Earnings per share have been adjusted to reflect stock dividends.
17
CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS
The following quarterly financial information for the years ended December 31,
1997 and 1996 is unaudited. However, in the opinion of management, all
adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for the periods, are reflected in
conformity with generally accepted accounting principles. Results of operations
for the periods presented are not necessarily indicative of the results for the
entire year or for any other interim period.
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $17,129 $17,590 $18,319 $18,326 $15,345 $16,219 $16,989 $17,111
Interest expense 8,411 8,555 8,729 8,537 7,851 8,078 8,589 8,622
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 8,718 9,035 9,590 9,789 7,494 8,141 8,400 8,489
Provision for loan losses 845 873 856 864 363 472 537 2,465
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 7,873 8,162 8,734 8,925 7,131 7,669 7,863 6,024
Non-interest income 1,241 1,394 1,163 1,072 970 849 672 730
Non-interest expense 5,567 5,867 5,708 5,614 4,913 5,121 7,934(1) 8,027(2)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 3,547 3,689 4,189 4,383 3,188 3,397 601 (1,273)
Income taxes 1,232 1,173 1,419 1,465 1,092 1,191 114(1) (501)(2)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $2,315 $2,516 $2,770 $2,918 $2,096 $2,206 $487 $(772)
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $0.43 $0.46 $0.50 $0.52 $0.39 $0.41 $0.09 $(0.14)
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes a one-time FDIC Special Insurance Assessment of $2.71 million or
$1.66 million net of taxes.
(2) Includes restructuring charges of $2.26 million or $1.70 million net of
taxes.
18
MARKET INFORMATION
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "PBNK." On February 1, 1998 there were 5,444,260 shares of common
stock issued and outstanding, which were held by approximately 2,600
shareholders. The following table shows the high and low closing sale prices for
the common stock, as quoted on the NASDAQ National Market System, and the
dividends declared per share, for the periods indicated.
Dividends
Declared
For The Quarter Ended High Low (Per Share)
- --------------------------------------------------------------
March 31, 1995 $17.27 $16.14 $.15
June 30, 1995 16.36 15.68 .15
September 30, 1995 19.09 18.18 .15
December 31, 1995 20.88 18.00 .17
- --------------------------------------------------------------
March 31, 1996 $18.25 $17.75 $.17
June 30, 1996 18.75 18.00 .17
September 30, 1996 19.50 18.75 .17
December 31, 1996 20.50 18.75 .17
- --------------------------------------------------------------
March 31, 1997 $23.75 $19.75 $.17
June 30, 1997 25.25 20.50 .17
September 30, 1997 27.50 23.88 .17
December 31, 1997 37.25 27.50 .19
- --------------------------------------------------------------
The listed market makers for Prime's stock are:
Janney Montgomery Scott, Inc.
Ryan Beck & Co., Inc.
Legg Mason Wood Walker, Inc.
Sandler O'Neill & Partners
F. J. Morrissey & Co., Inc.
Wheat First Securities Inc.
The Board of Directors of the Company, on December 20, 1995, declared a
special 10% stock dividend to shareholders which was paid on February 1, 1996 to
shareholders of record on January 2, 1996. The trading information shown to the
left has been adjusted to reflect this stock dividend.
It is the Company's current policy to pay quarterly cash dividends. Future
cash dividends will be subject to determination and declaration by the Board of
Directors, which will take into account the Company's financial condition,
results of operations, industry standards, economic conditions, and regulatory
and tax considerations. Funds for the payment of the dividends by the Company
are generally obtained from the Bank. The amount of dividends that may be
declared or paid by the Bank are subject to certain restrictions.
19
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $23,068 $29,161
Interest-bearing deposits 18,161 2,703
Federal funds sold -- 600
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 41,229 32,464
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities (market value of $118,848 and $110,874) 117,988 110,766
Investment securities available for sale, at market value 115,728 125,428
Loans receivable 639,333 624,099
Allowance for loan losses (8,485) (7,206)
- ---------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 630,848 616,893
- ---------------------------------------------------------------------------------------------------------------------------
Loans held for sale 3,229 49
Accrued interest receivable 7,429 6,826
Real estate owned 957 1,335
Land acquired for development and resale 5,925 8,858
Property and equipment, net 10,023 10,291
Other assets 20,069 13,161
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $953,425 $926,071
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Liabilities:
Deposits $694,444 $736,642
Repurchase agreements 91,486 51,685
Borrowings from Federal Home Loan Bank of Pittsburgh 79,550 56,598
Advance payments by borrowers for taxes and insurance 1,716 2,104
Other liabilities 6,365 8,526
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 873,561 855,555
- ---------------------------------------------------------------------------------------------------------------------------
Commitments & contingencies (Note 14)
Shareholders' equity:
Serial preferred, $1 par value; 2,000,000 shares authorized unissued -- --
Common stock, $1 par value; 13,000,000 shares authorized and 5,444,266 and 5,291,157
shares issued and outstanding 5,444 5,291
Additional paid-in capital 39,096 37,390
Retained earnings 35,884 29,156
Valuation adjustment for debt securities, net of taxes (560) (1,321)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 79,864 70,516
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $953,425 $926,071
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for share data)
Years Ended December 31,
- --------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
Interest income:
Loans $55,323 $49,462 $43,050
Investment securities 15,434 15,907 15,283
Interest-bearing deposits 607 295 646
- --------------------------------------------------------------------------------------------------
Total interest income 71,364 65,664 58,979
- --------------------------------------------------------------------------------------------------
Interest expense:
Deposits 26,506 26,711 25,266
Short-term borrowings 7,422 5,272 3,534
Long-term borrowings 304 1,157 1,757
- --------------------------------------------------------------------------------------------------
Total interest expense 34,232 33,140 30,557
- --------------------------------------------------------------------------------------------------
Net interest income 37,132 32,524 28,422
- --------------------------------------------------------------------------------------------------
Provision for loan losses 3,438 3,837 1,129
Net interest income after provision for loan losses 33,694 28,687 27,293
- --------------------------------------------------------------------------------------------------
Non-interest income:
Fees and service charges 2,433 1,864 1,820
Gain (loss) on sale of:
Securitization and sale of mortgages 606 -- --
Investment securities, net 135 288 448
Real estate owned 33 14 (44)
Mortgage banking activities 561 294 509
Other 1,102 761 710
- --------------------------------------------------------------------------------------------------
Total non-interest income 4,870 3,221 3,443
- --------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 11,436 10,437 9,065
Occupancy and equipment 5,584 4,985 3,825
Federal insurance premiums 365 753 1,008
FDIC special insurance assessment -- 2,713 --
Restructuring and other merger related expenses -- 2,260 --
Other 5,371 4,847 5,032
- --------------------------------------------------------------------------------------------------
Total non-interest expense 22,756 25,995 18,930
- --------------------------------------------------------------------------------------------------
Income before income taxes 15,808 5,913 11,806
Income taxes 5,289 1,896 4,337
- --------------------------------------------------------------------------------------------------
Net income $10,519 $4,017 $7,469
- --------------------------------------------------------------------------------------------------
Earnings per share:
Basic $1.95 $0.77 $1.43
Diluted 1.91 0.74 1.39
Weighted average number of shares outstanding:
Basic 5,401,444 5,240,682 5,220,789
Diluted 5,494,009 5,411,731 5,388,491
Dividends declared per share $0.70 $0.68 $0.62
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Valuation
Adjustment
for Debt
Additional Securities,
Common Paid-in Retained Net of Shareholders'
Stock Capital Earnings Taxes Equity
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $5,270 $37,204 $22,832 $(7,084) $58,222
Dividends declared ($.62 per common share) -- -- (2,351) -- (2,351)
Valuation adjustment for debt securities, net of taxes -- -- -- 5,939 5,939
Net income -- -- 7,469 -- 7,469
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 5,270 37,204 27,950 (1,145) 69,279
Stock options exercised 21 112 -- -- 133
Tax benefit associated with exercise of stock options -- 74 -- -- 74
Dividends declared ($.68 per common share) -- -- (2,811) -- (2,811)
Valuation adjustment for debt securities, net of taxes -- -- -- (176) (176)
Net income -- -- 4,017 -- 4,017
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,291 37,390 29,156 (1,321) 70,516
Stock options exercised 153 997 -- -- 1,150
Tax benefit associated with exercise of stock options -- 709 -- -- 709
Dividends declared ($.70 per common share) -- -- (3,791) -- (3,791)
Valuation adjustment for debt securities, net of taxes -- -- -- 761 761
Net income -- -- 10,519 -- 10,519
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $5,444 $39,096 $35,884 $(560) $79,864
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $10,519 $4,017 $7,469
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization of intangibles 2,462 2,443 1,887
(Gain) loss on sale of:
Loans held for sale (418) (99) (68)
Investment securities (741) (288) (448)
Real estate owned (33) (14) 44
Provision for loan losses 3,438 3,837 1,129
(Increase) decrease in other assets and accrued interest receivable (7,023) (1,565) 261
Decrease in other liabilities (2,284) (462) (4,798)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 5,920 7,869 5,476
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities (44,682) (35,314) (49,549)
Maturities of investment securities 25,212 23,029 15,427
Sales of investment securities 12,285 -- --
Purchases of investment securities available for sale (54,165) (63,087) (84,848)
Maturities of investment securities available for sale 32,882 24,333 13,630
Sales of investment securities available for sale 50,104 40,443 118,343
Loans receivable (36,813) (121,829) (71,816)
Loans held for sale:
Originations, net of repayments (27,839) (7,855) (7,015)
Sales 22,988 9,492 9,742
Increase in land acquired for development and resale (1,831) (1,188) (819)
Purchase of property and equipment (510) (2,077) (1,611)
Proceeds from the sale of land acquired for development and resale 3,443 2,735 520
(Increase) decrease in real estate owned 823 -- (225)
Proceeds from sale of real estate owned 3,299 367 914
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,804) (130,951) (57,307)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits (42,198) 92,336 59,432
Borrowings from the FHLB of Pittsburgh 557,276 46,200 79,602
Repayments of borrowings from the FHLB of Pittsburgh (534,324) (46,248) (66,650)
Increase in other borrowed money 39,801 13,063 2,147
Increase (decrease) in advance payments by borrowers for taxes and insurance (388) (299) 102
Net proceeds from issuance of common stock 1,150 133 --
Cash dividends paid (3,668) (2,529) (2,490)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from financing activities 17,649 102,656 72,143
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 8,765 (20,426) 20,312
Cash and cash equivalents:
Beginning of year 32,464 52,890 32,578
End of year $41,229 $32,464 $52,890
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $36,011 $33,165 $29,142
Income taxes 2,818 3,100 4,238
Securitization of residential loans 17,798 2,091 --
Transfer of investment securities to held to maturity -- -- 87,035
Transfer of investment securities to available for sale -- -- 38,324
Transfer of loans receivable to loans held for sale -- -- 4,813
Transfer of loans held for sale to loans receivable -- 3,136 --
Transfer of loans receivable to real estate owned 3,711 1,269 849
Benefit associated with the exercise of stock options 709 74 --
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
23
[Photo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. SUMtMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of Prime
Bancorp, Inc. and subsidiaries (the "Company"). The accompanying consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles ("GAAP"), which have been applied on a consistent basis.
BUSINESS
The Company's principal subsidiary is Prime Bank (the "Bank") whose principal
business consists of attracting deposits and obtaining borrowings, then
converting those deposits and borrowings into various types of loans and
investments. These operations are conducted through a branch network in
Southeastern Pennsylvania. The Bank is subject to competition from other
financial institutions and is also subject to the regulations of certain
government agencies and undergoes periodic examinations by those regulatory
authorities.
Prime Bank, a savings bank, merged with First Sterling Bank, a commercial
bank, on October 1, 1997. The Bank operates under the name Prime Bank and
functions as a commercial bank whose deposits are insured by the Bank Insurance
Fund ("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC").
Prior to this, on March 19, 1996 Prime Bank, a federal savings bank,
converted into a Pennsylvania chartered stock savings bank with the legal name,
"Prime Bank, a savings bank." After the conversion, the Bank continued to do
business under the name "Prime Bank" and the Bank's deposits continued to be
insured by the Savings Association Insurance Fund ("SAIF") administered by the
FDIC.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. Certain amounts in prior
years have been reclassified for comparative purposes.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
INVESTMENT SECURITIES
Securities classified as held-to-maturity are those securities in which the
Company has the ability and intent to hold the securities until maturity and are
recorded at cost, adjusted for the amortization of premiums and discounts. All
other securities not included in held-to-maturity are classified as
available-for-sale and are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of shareholders' equity until realized.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
24
REAL ESTATE OWNED
Real estate acquired in partial or full satisfaction of loans are classified as
Real Estate Owned ("REO"). Prior to transferring a real estate loan to REO, it
is written down to the lower of cost or fair value less costs to sell. This
write-down is charged to the allowance for loan losses. Subsequently, REO is
carried at the lower of fair value less estimated costs to sell or carrying
value.
LAND ACQUIRED FOR
DEVELOPMENT AND RESALE
Land acquired for development and resale represents land and construction in
progress and is carried at the lower of cost or fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the lesser of
the lease term (where applicable) or the estimated useful lives of the related
property, which range from 5 to 40 years. Maintenance and repairs are expensed
as incurred.
LOANS RECEIVABLE
Interest income is recognized on the accrual basis. Generally, loans are placed
on non-accrual status when the loan becomes past due by 90 days or more as to
principal or interest. After a loan is placed on non-accrual status, any
interest previously accrued but not yet collected is reversed against current
interest income. A loan is returned to accrual status only when the borrower has
brought principal and interest current and full collectibility is reasonably
assured.
Fees earned for servicing loans for others are reported as income when the
related loan payments are collected. Loan servicing costs are charged to expense
as incurred. If the Bank sells loans and continues to service these loans for
the investor, the computation of the gain or loss is adjusted to allow for a
normal servicing fee over the estimated remaining maturities of the loans sold.
Normal servicing fees are based on the minimum servicing rates of the relevant
federally-sponsored market makers or comparable rates for transactions with
other investors. The resulting deferral is amortized as an adjustment of
servicing fee income over a period generally not in excess of seven years.
LOAN IMPAIRMENT
Impaired loans are measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. All payments received are applied to the principal
balance.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on a periodic evaluation of the loan
portfolio and is maintained at a level that management considers adequate to
absorb estimated potential losses. Management considers a variety of factors,
and recognizes the inherent risk of loss that always exists in the lending
process. Management uses a disciplined methodology to estimate the appropriate
level of allowance for loan losses. This methodology includes an evaluation of
loss potential from individual problem credits, as well as anticipated specific
and general economic factors that may adversely affect collectibility.
Management's determination of the adequacy of the allowance is based on
periodic evaluations of the credit portfolio. This evaluation is inherently
subjective as it requires material estimates, including, among others, the
amounts and timing of expected future cash flows on impaired loans, estimated
losses on consumer loans and residential mortgages, and general amounts for
historical loss experience, economic conditions, uncertainties in estimating
losses and inherent risks in the various credit portfolios, all of which may be
susceptible to significant change. Pursuant to Statement of Financial Accounting
Standard ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended, impaired loans, consisting of nonaccrual and restructured commercial
and commercial real estate loans, are considered in the methodology for
determining the allowance for credit losses. Impaired loans are generally
evaluated based on the present value of expected future cash flows or the fair
value of the underlying collateral if principal repayment is expected to come
from the sale or operation of such collateral.
LOANS HELD FOR SALE
As part of its mortgage banking activities, the Bank sometimes originates and
subsequently sells single family residential mortgage loans which meet the
underwriting and securitization characteristics of certain market makers. Loans
originated for sale are recorded as loans held for sale and are valued at the
lower of aggregate cost or market.
GOODWILL AND OTHER
INTANGIBLE ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from 10 to
15 years. Other intangible assets are amortized using accelerated and
straight-line methods over their respective estimated useful lives. On a
periodic basis, management reviews goodwill and other intangible assets and
evaluates events or changes in circumstances that may indicate impairment in the
carrying amount of these assets. In these instances, the Company measures
impairment on a discounted future cash flow basis.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS (DERIVATIVE CONTRACTS)
The Company uses off-balance sheet financial derivatives as part of the overall
asset/liability management process. Substantially all of these instruments are
used to manage risk related to changes in interest rates. Financial derivatives
primarily consist of interest rate swaps.
Interest rate swaps are agreements with a counterparty to exchange periodic
interest payments calculated on a notional principal amount. Purchased interest
rate caps and floors are agreements where, for a fee, the counterparty agrees to
pay the Company the amount, if any, by which a specified market interest rate is
higher or lower than a rate specified in the contract and applied to a notional
amount.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
25
variable index to another) of designated interest-bearing assets or liabilities
are accounted for under the accrual method. Under this method, the net amount
payable or receivable from the derivative contract is accrued as an adjustment
to interest income or expense of the designated instrument. Premiums on
contracts are deferred and amortized over the life of the agreement as an
adjustment to interest income or interest expense of the designated instruments.
Unamortized premiums are included in other assets.
Changes in fair value of financial derivatives accounted for under the
accrual method are not reflected in the financial results. Realized gains and
losses, except losses on terminated interest rate caps and floors, are deferred
as an adjustment to the carrying amount of the designated instruments and
amortized over the shorter of the remaining original life of the agreements or
the designated instruments.
MORTGAGE SERVICING RIGHTS
The Company recognizes as separate assets, the right to service mortgage loans
based on the fair value of those rights. The carrying value of capitalized
Mortgage Servicing Rights (MSRs) at December 31, 1997 was $730 thousand which
approximated fair value. Fair value was determined by calculating the discounted
present value of estimated expected net future cash flows, considering estimated
prepayments and defaults, projected interest rates and other factors. For
purposes of evaluating and measuring impairment, capitalized MSRs are aggregated
into groups having homogeneous risk characteristics, based on the attributes of
the underlying loans, and are separately valued, using appropriate assumptions
for each risk group. No valuation allowance was required for capitalized MSRs at
December 31, 1997. The MSRs are amortized on an accelerated method over a period
generally not in excess of seven years.
IMPAIRMENT OF LONG-LIVED
ASSETS AND LONG-LIVED ASSETS
TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and was 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.
Adoption of SFAS No. 125 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
INCOME TAXES
The Company and its wholly owned subsidiaries file a consolidated federal income
tax return. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
CAPITAL
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
prompt corrective action regulations define specific capital categories based on
an institution's capital ratios. The capital categories, in declining order, are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
To be considered "well capitalized," a bank must generally have a leverage
ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a
total risk-based capital ratio of at least 10%. A bank holding company must
generally have a primary capital ratio of at least 5.5% and a total capital
ratio of at least 6.0% to be deemed adequately capitalized. The regulatory
capital ratios of the Company and Prime Bank exceed those requirements.
BANK REGULATORY CAPITAL SCHEDULE
Capital
Actual Requirements
Amount Ratio Amount Ratio
- -----------------------------------------------------------------
Tier 1 capital
(to risk-weighted assets) $66,129 10.20% $25,943 4.00%
- -----------------------------------------------------------------
Total capital
(to risk-weighted assets) 74,241 11.45% 51,885 8.00%
- -----------------------------------------------------------------
Total leverage
(to total assets) 66,129 7.32% 36,151 4.00%
- -----------------------------------------------------------------
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
128, Earnings Per Share. SFAS 128, which superseded APB Opinion No. 15 ("APB
15"), Earnings Per Share, specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock. It replaced the presentation of primary EPS with
26
basic EPS which, unlike primary EPS, excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is computed similarly
to fully diluted EPS under APB 15. The Company adopted SFAS 128 as of December
31, 1997. All prior period EPS amounts have been restated to reflect the
provisions of this statement.
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Basic
Numerator
Net income available to
common shareholders $ 10,519 $ 4,017 $ 7,469
Demoninator
Weighted average shares
outstanding 5,401,444 5,240,682 5,220,789
- ---------------------------------------------------------------------------------------------------
Basic EPS $ 1.95 $ 0.77 $ 1.43
- ---------------------------------------------------------------------------------------------------
Diluted
Numerator
Net income available to
common shareholders $ 10,519 $ 4,017 $ 7,469
Demoninator
Weighted average shares
outstanding 5,401,444 5,240,682 5,220,789
Plus: dilutive stock options 92,565 171,049 167,702
- ---------------------------------------------------------------------------------------------------
5,494,009 5,411,731 5,388,491
- ---------------------------------------------------------------------------------------------------
Diluted EPS $ 1.91 $ 0.74 $ 1.39
- ---------------------------------------------------------------------------------------------------
ACCOUNTING STANDARDS
In June 1997, FASB issued SFAS 130, Reporting Comprehensive Income. SFAS 130
establishes standards for reporting and presentation of comprehensive income and
its components in financial statements. The statement is effective for fiscal
years beginning after December 15, 1997. Management does not expect SFAS 130 to
have a material effect on the financial statements of the Company.
In June 1997, FASB issued SFAS 131, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the reporting,
disclosure and presentation of the Company's operating segments, products and
services, geographic areas, and major customers. SFAS 131 supersedes FASB
Statement No. 14, Financial Reporting for Segments of a Business Enterprise but
retains the requirement to report information about major customers. It amends
FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. This statement is effective for fiscal years beginning after
December 15, 1997. Management does not expect SFAS 131 to have a material effect
on the financial statements of the Company.
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On January 1, 1996, the Company
adopted SFAS 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS 123 also allows
entities to provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS 123.
2. ACQUISITION
On December 31, 1996, the Company acquired First Sterling Bancorp, Inc. ("FSB")
in a transaction structured as a pooling of interests. 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. In
connection with the First Sterling Bancorp, Inc. merger and as required by the
Convertible Subordinated Debentures agreement, at December 31, 1996 the Company
also converted the $1.05 million principal amount of debentures issued in 1990
and 1991 by First Sterling Bancorp, Inc. to 110,510 shares of Prime stock. The
transaction was tax-free to the shareholders for federal income tax purposes.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
Years Ended December 31,
- --------------------------------------------------------------
1996 1995
- --------------------------------------------------------------
Net interest income:
Prime Bancorp $23,808 $20,970
First Sterling 8,716 7,452
- --------------------------------------------------------------
Combined $32,524 $28,422
- --------------------------------------------------------------
Net income:
Prime Bancorp $3,265 $5,853
First Sterling 752 1,616
- --------------------------------------------------------------
Combined $4,017 $7,469
- --------------------------------------------------------------
Total assets:
Prime Bancorp $691,422 $607,975
First Sterling 234,649 211,986
- --------------------------------------------------------------
Combined $926,071 $819,961
- --------------------------------------------------------------
Total deposits:
Prime Bancorp $554,237 $476,539
First Sterling 182,405 167,767
- --------------------------------------------------------------
Combined $736,642 $644,306
- --------------------------------------------------------------
Total shareholders' equity:
Prime Bancorp $57,037 $56,247
First Sterling 13,479 13,032
- --------------------------------------------------------------
Combined $70,516 $69,279
- --------------------------------------------------------------
27
3. STOCK OPTION PLAN
The Company's Incentive Stock Option Plan provides for the grant of stock
options to directors and certain employees of the Company or its subsidiaries.
The option plan is administered by a compensation committee of the board of
directors of the Company. The exercise price under the option plan must be at
least equal to the fair market value of the shares on the date of grant, and no
option may be exercisable after the expiration of ten years from the date it is
granted.
The following table presents stock options outstanding related to the plan:
Weighted-
Average
Exercise Exercise
Price Price Shares
- ---------------------------------------------------------------
January 1, 1995 4.32-14.77 8.27 233,703
Granted 17.95 17.95 93,500
Options Exercised 4.32 4.32 (110)
December 31, 1995 4.32-17.95 11.04 327,093
Granted 17.27-20.50 18.01 161,500
Options Exercised 4.32-14.77 6.39 (20,791)
December 31, 1996 4.32-18.38 13.13 467,802
Granted 29.63-37.25 35.22 49,500
Options Exercised 4.32-17.95 7.51 (153,109)
December 31, 1997 4.32-37.25 19.08 364,193
- ---------------------------------------------------------------
At December 31, 1997, there were additional shares available for grant
under the Plan. The weighted-average fair value of stock options granted during
1997, 1996, and 1995 was $520,000, $872,100, and $556,000 on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1997 - expected dividend yield 2.2%, risk-free interest rate of
5.46%, expected volatility of stock over the expected life of the options of
25.2%, and an expected life of five years; 1996 - expected dividend yield 3.3%,
risk-free interest rate of 5.8%, expected volatility of stock over the expected
life of the options of 13.8%, and an expected life of five years; 1995 -
expected dividend yield 3.4%, risk-free interest rate of 5.5%, expected
volatility of stock over the expected life of the options of 31.2%, and an
expected life of five years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below.
1997 1996 1995
- --------------------------------------------------------------
Net income As reported $10,519 $4,017 $7,469
Pro forma 10,181 3,323 6,913
Diluted earnings
per share As reported $1.91 $0.74 $1.39
Pro forma 1.85 0.61 1.28
- --------------------------------------------------------------
Pro forma net income reflects only options granted in 1997, 1996, and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected over the options' vesting period of two
years and compensation cost for options granted prior to January 1, 1995 is not
considered.
4. INVESTMENT SECURITIES
Investment securities at December 31, 1997 and 1996 were comprised of the
following:
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
State and municipal $6,735 $267 $-- $7,002 $6,739 $63 $(31) $6,771
Mortgage backed securities 106,563 726 (133) 107,156 97,778 478 (402) 97,854
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 113,298 993 (133) 114,158 104,517 541 (433) 104,625
Other securities 4,690 -- -- 4,690 6,249 -- -- 6,249
- ---------------------------------------------------------------------------------------------------------------------------
$117,988 $993 $(133) $118,848 $110,766 $541 $(433) $110,874
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Govt & U.S. Govt agency $64,483 $129 $(39) $64,573 $62,037 $235 $(244) $62,028
Mortgage-backed securities 51,544 135 (824) 50,855 53,269 182 (1,360) 52,091
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 116,027 264 (863) 115,428 115,306 417 (1,604) 114,119
Other securities 300 -- -- 300 11,340 -- (31) 11,309
- ---------------------------------------------------------------------------------------------------------------------------
$116,327 $264 $(863) $115,728 $126,646 $417 $(1,635) $125,428
- ---------------------------------------------------------------------------------------------------------------------------
28
Gross gains of $294,000, $296,000, and $851,000 and gross losses of
$159,000, $8,000, and $403,000 were realized on sales of investment securities
available for sale for the years ended December 31, 1997, 1996, and 1995,
respectively.
During 1997, the Company sold $12.3 million of investment securities held
to maturity which failed the Federal Financial Institutions Executive Council
sensitivity test and became classified as high risk. The net gain on these sales
was $48,000.
The amortized cost and estimated market value of investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Within 1 to 5 to After 10
1 Year 5 Years 10 Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
State and municipal $-- $-- $ 6,735 $-- $ 6,735
Mortgage-backed securities 94 2,560 9,166 94,743 106,563
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 94 2,560 15,901 94,743 113,298
- ---------------------------------------------------------------------------------------------------------------------------
Fair value $94 $2,567 $16,222 $95,275 $114,158
Weighted-average yield 9.00% 6.01% 5.95% 6.71% 6.68%
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Govt & U.S. Govt agency $17,992 $35,489 $11,002 $-- $ 64,483
Mortgage-backed securities -- 1,468 571 49,505 51,544
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 17,992 36,957 11,573 49,505 116,027
- ---------------------------------------------------------------------------------------------------------------------------
Fair value $18,029 $37,011 $11,577 $48,811 $115,428
Weighted-average yield 5.81% 6.07% 7.23% 6.73% 6.43%
- --------------------------------------------------------------------------------------------------------------------------
5. LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1996 were comprised of the following:
1997 1996
- --------------------------------------------------------------
First mortgage loans:
Residential:
One to four units $181,375 $235,023
Over four units 932 10,783
Commercial real estate loans 211,395 165,439
- --------------------------------------------------------------
Total first mortgage loans 393,702 411,245
- --------------------------------------------------------------
Other loans:
Commercial 139,989 110,840
Consumer 105,870 102,341
- --------------------------------------------------------------
Total other loans 245,859 213,181
- --------------------------------------------------------------
Total loans 639,561 624,426
- --------------------------------------------------------------
Deferred loan fees (228) (327)
Allowance for possible loan losses (8,485) (7,206)
- --------------------------------------------------------------
Total loans receivable, net $630,848 $616,893
- --------------------------------------------------------------
As of December 31, 1997, 1996, and 1995, the Bank had impaired loans
(non-performing loans) totaling approximately $3,003,000, $7,084,000, and
$4,838,000, all of which had a related allowance for impairment. The allowance
for loan losses on impaired loans totaled $593,000, $707,000, and $345,000 for
those years. The average balance of impaired loans was approximately $5,043,000
for 1997, $6,072,000 for 1996 and $5,903,000 for 1995. Interest income not
accrued for impaired loans for the years ended December 31, 1997, 1996, and 1995
was approximately $292,000, $414,000, and $366,000, respectively.
Substantially all of the Company's loan portfolio is to borrowers located
in southeastern Pennsylvania.
In addition, the Company took a deed in lieu of foreclosure of a
condominium project in 1995. The balance of the condominium project as of
December 31, 1997 and 1996 was $5.9 million and $8.9 million. Such amounts are
classified as land acquired for development and resale.
The following is a summary of the activity in the allowance for loan losses
for the years ended December 31, 1997, 1996, and 1995:
1997 1996 1995
- ------------------------------------------------------------
Balance at beginning of period $7,206 $6,082 $6,067
Provision for loan losses 3,438 3,837 1,129
Recoveries 498 190 338
Losses charged against allowance (2,657) (2,903) (1,452)
- ------------------------------------------------------------
Balance at end of period $8,485 $7,206 $6,082
- ------------------------------------------------------------
The following is an analysis of loans to directors and officers for the
year ended December 31:
1997
- ------------------------------------------------------------
Balance at beginning of period $6,801
Additions 2,182
Repayments 5,625
- ------------------------------------------------------------
Balance at end of period $3,358
- ------------------------------------------------------------
The loans to directors and officers are based upon substantially the same
underwriting criteria as those generally used by the Bank and do not involve
more than the normal risk of collectibility or present other unfavorable
features.
29
At December 31, 1997, 1996, and 1995, the Bank was servicing loans for
others in the amount of $68,228,000, $34,755,000 and $22,775,000 respectively.
Loan servicing income for those years was $170,000, $87,000, and $57,000,
respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment, less accumulated depreciation and amortization, are
summarized by major classification at December 31, 1997 and 1996 as follows:
1997 1996
- ------------------------------------------------------------
Land $596 $596
Buildings 7,333 7,194
Furniture and equipment 11,229 9,489
Leasehold improvements 1,751 1,716
- ------------------------------------------------------------
20,909 18,995
Less accumulated depreciation
and amortization (10,886) (8,704)
- ------------------------------------------------------------
$10,023 $10,291
- ------------------------------------------------------------
Depreciation expense for the years ended December 31, 1997, 1996, and 1995
was $2,182,000, $1,708,000, and $1,515,000, respectively.
7. DEPOSITS
Deposits at December 31, 1997 and 1996 consisted of the following:
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Interest % of Interest % of
Rate Amount Total Rate Amount Total
- ------------------------------------------------------------------------------------------------------------------------
NOW accounts 0.57% $43,988 6.33% 1.91% $44,444 6.03%
Money market deposit accounts 3.46% 130,959 18.86% 3.30% 130,028 17.65%
Passbook/statement 1.83% 64,297 9.26% 2.05% 63,022 8.56%
Commercial checking accounts -- 115,733 16.67% -- 94,767 12.86%
- ------------------------------------------------------------------------------------------------------------------------
354,977 51.12% 332,261 45.10%
- ------------------------------------------------------------------------------------------------------------------------
IRA accounts 5.60% 58,537 8.43% 5.79% 61,940 8.41%
14 to 31 day certificates 4.31% 612 0.09% 4.88% 227 0.03%
91 day certificate 4.36% 5,489 0.79% 4.96% 7,787 1.06%
Certificates with a $100,000 minimum
balance, 1 to 57 month maturities 5.41% 47,578 6.85% 5.44% 54,074 7.34%
6 month certificates 4.52% 16,890 2.43% 4.48% 74,395 10.10%
8 month certificates 5.19% 15,983 2.30% -- -- --
9 month certificates 4.49% 24,377 3.51% 4.87% 45,358 6.16%
18 month certificates 5.33% 13,210 1.90% 5.13% 9,488 1.29%
12 to 24 month certificates 5.41% 70,929 10.21% 5.01% 45,701 6.20%
30 to 60 month certificates 5.77% 47,889 6.90% 5.63% 81,683 11.09%
72 to 120 month certificates 6.28% 17,655 2.54% 5.95% 12,036 1.63%
180 month certificates callable in 2 years 7.26% 20,318 2.93% 7.30% 11,692 1.59%
- ------------------------------------------------------------------------------------------------------------------------
339,467 48.88% 404,381 54.90%
- ------------------------------------------------------------------------------------------------------------------------
$694,444 100.00% $736,642 100.00%
- ------------------------------------------------------------------------------------------------------------------------
A summary of certificates by maturity at December 31, 1997 follows:
Years Ending
December 31, Amount % of Total
- -----------------------------------------------------------
1998 $224,914 66.25%
1999 41,272 12.16%
2000 25,643 7.55%
2001 12,282 3.62%
Thereafter 35,356 10.42%
- -----------------------------------------------------------
$339,467 100.00%
- -----------------------------------------------------------
30
8. BORROWINGS FROM FEDERAL HOME LOAN BANK OF PITTSBURGH
Under terms of its collateral agreement, the Bank is required to maintain
otherwise unencumbered qualifying assets in an amount of at least as much as
advances from the Federal Home Loan Bank of Pittsburgh. The advances had
maturities and weighted interest rates as follows at December 31, 1997 and 1996:
December 31,
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
- -------------------------------------------------------------------------
1997 $-- -- $34,048 5.82%
1998 7,048 6.03% 7,048 6.04%
1999 502 5.70% 502 5.70%
2000 -- -- 15,000 4.97%
2002 72,000 5.50% -- --
- -------------------------------------------------------------------------
$79,550 5.55% $56,598 5.62%
- -------------------------------------------------------------------------
9. OTHER BORROWED MONEY
Other borrowed money at December 31, 1997, 1996, and 1995 was comprised of the
following:
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase with a weighted average interest rate
of 5.22% in 1997, 4.78% in 1996, and 5.60% in 1995 $91,486 $51,685 $37,622
- ---------------------------------------------------------------------------------------------------------------------------
The Bank has entered into repurchase agreements with its customers and with
other third parties which are collateralized by securities with a carrying
value, including accrued interest of $94,708,000, $53,450,000, and $49,176,000
at December 31, 1997, 1996, and 1995, respectively. The market value of the
underlying collateral for those years was $94,397,000, $53,688,000, and
$47,456,000. The maximum balance of repurchase agreements outstanding at any
month end during those years was $101,473,000, $124,981,000, and $59,524,000 and
the average balance outstanding was $77,369,000, $59,158,000, and $51,959,000,
respectively.
10. EMPLOYEE BENEFIT PLANS
The Bank has a defined contribution plan pursuant to the provision of 401(k) of
the Internal Revenue Code. The plan covers all employees who meet the age and
service requirements. Prime Bank's plan provides for elective employee
contributions up to 15% of compensation and a 66 2/3% matching Company
contribution limited to 6%. The Bank contributed $199,000, $176,000, and
$241,000 to this plan during the years ended December 1997, 1996, and 1995,
respectively. The Company also has a profit sharing plan. Under this feature,
all eligible employees share in the Company's profit sharing contributions. The
contributions for 1997, 1996, and 1995 were $360,000, $135,000, $134,000,
respectively. 1997 was the first year that the former First Sterling employees
were included in this plan.
The Company does not provide post-retirement benefits nor post-employment
benefits to its employees.
11. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 1997,
1996, and 1995 consisted of the following:
1997 1996 1995
- -----------------------------------------------------------
Current:
State $3 43 $ 297 $ 543
Federal 4,748 1,890 3,720
- -----------------------------------------------------------
5,091 2,187 4,263
Deferred:
Federal 198 (291) 74
- -----------------------------------------------------------
$5,289 $1,896 $4,337
- -----------------------------------------------------------
31
The provision for income taxes for the years ended
December 31, 1997, 1996, and 1995 differed from the statutory rate due to the
following:
1997 1996 1995
- -----------------------------------------------------------
Pretax income $15,808 $5,913 $11,806
- -----------------------------------------------------------
Tax at statutory rate 5,533 2,010 4,014
Tax exempt interest (160) (127) (119)
State taxes, net of federal
benefit and other 223 196 358
Merger costs -- 222 --
Income tax credits (238) (370) (15)
Other, net (69) (35) 99
- -----------------------------------------------------------
$5,289 $1,896 $4,337
- -----------------------------------------------------------
Deferred income taxes result from temporary differences in recording
certain revenues and expenses for financial reporting purposes. The deferred tax
assets at December 31, 1997, 1996, and 1995 consisted of the following debits
and (credits):
1997 1996 1995
- -----------------------------------------------------------------------
Deferred tax assets
Provision for loan losses $2,870 $2,351 $1,882
Deferred loan fees 177 170 427
Deferred compensation 54 537 514
Valuation adjustment for debt securities 314 811 649
Other, net 283 298 455
- -----------------------------------------------------------------------
Gross deferred tax assets 3,698 4,167 3,927
- -----------------------------------------------------------------------
Deferred tax liabilities
Loss on sale of loans -- 16 23
Deferred loan costs 467 377 268
FDIC insurance premium 57 50 --
Depreciation 32 98 291
Mortgage servicing rights 234 47 --
Other 56 32 31
- -----------------------------------------------------------------------
Gross deferred tax liabilities 846 620 613
- -----------------------------------------------------------------------
Net deferred tax assets $2,852 $3,547 $3,314
- -----------------------------------------------------------------------
Included in the table above is the effect of certain temporary differences
for which no deferred tax expense or benefit was recognized. Such items
consisted primarily of unrealized gains and losses on certain investments in
debt and equity securities accounted for under SFAS 115.
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Company will realize the benefits of these
deferred tax assets.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose information about the fair value of
financial instruments. The limitations on the making of estimates of fair value
are: estimates are made at a specific point in time, based upon, where
available, relevant market prices and information about the financial
instruments. For a substantial portion of the Company's financial instruments,
no quoted market exists. Therefore, estimates of "fair value" are based on a
number of subjective assumptions. Such assumptions include perceived risks
associated with these financial instruments, market rates of discount, and
expected durations. Given the uncertainties associated with these estimates, the
reported "fair values" represent estimates only and, therefore, cannot be
compared to the historical accounting model. Use of different assumptions would
likely result in different "fair value" estimates.
Under SFAS 107, the fair value of deposit accounts with no stated maturity
is equal to their carrying amount. This approach excludes significant benefits
that result from the low-cost funding provided by such deposits.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at December 31, 1997:
Cash and Short-Term Investments, Accrued Interest Receivable and Accrued
Interest Payable: Current carrying amounts approximate estimated fair
value.
Securities: Current quoted market prices are used to determine fair value.
Net Loans: The fair value of loans was estimated using a duration method
which approximates the effect of discounting the estimated future cash
flows over the expected repayment periods for loans using rates which
consider credit risk, servicing costs and other relevant factors.
Deposits with no stated maturity: Current carrying amounts approximate
estimated fair value.
Time Deposits: Fair value was estimated using a duration method which
approximates the effect of discounting the estimated future cash flows over
the expected periods using rates which consider alternative borrowing
costs, servicing costs, and other relevant factors.
Other Borrowed Funds: Fair value was estimated using a duration method
which approximates the effect of discounting the estimated cash flows over
the expected periods using rates which consider alternative borrowing
costs.
32
Off-balance sheet financial instruments: Commitments to extend credit and
standby letters of credit carry current market interest rates if converted
to loans. Because commitments to extend credit and standby letters of
credit, the majority of which carry current interest rates, are generally
unassignable by either the Bank or the borrower, they only have value to
the Bank and the borrower. However, the estimated net amount payable
(receivable) represents the fees currently charged to enter into similar
agreements, taking into account the remaining term of the agreement and the
present credit risk assessment of the counter-party.
The Company enters into derivative instruments primarily to hedge the
interest rate risk associated with various assets and liabilities. Such hedge
instruments generally take the form of interest rate swaps. In part through the
use of these instruments, the Company strives to be essentially insensitive to
changes in interest rates within reasonable ranges (i.e., plus or minus 200
basis points). Such instruments are subject to the same type of credit and
market risk as other financial instruments, and are monitored and controlled in
accordance with the Company's credit and risk management policies.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
December 31,
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Cash $41.2 $41.2 $32.5 $32.5
Investments 233.7 234.6 236.3 236.2
Net loans (A) 634.1 639.1 616.9 618.9
Accrued interest receivable 7.4 7.4 6.8 6.8
Financial Liabilities:
Deposits with no stated maturity 355.0 355.0 332.2 332.2
Time deposits 339.5 340.8 404.4 401.8
Other borrowed funds and FHLB borrowings 171.0 171.4 108.3 108.3
Accrued interest payable 1.8 1.8 3.6 3.6
- -------------------------------------------------------------------------------------------------------------------------
(A) The carrying amount of net loans includes loans receivable, net and loans
held for sale.
December 31,
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Contract or Net Amount Contract or Net Amount
Notional Payable Notional Payable
Amount (Receivable) Amount (Receivable)
- -------------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments:
Commitments to extend credit $51.0 $0.4 $35.9 $0.3
Standby letters of credit 3.0 -- 1.8 --
Commercial loan commitments 17.9 0.3 34.5 0.5
Loan commitments 2.9 -- 12.3 --
Loans in process for construction loans 63.6 -- 42.1 --
Interest rate swaps (see Note 13) 30.0 (0.6) 20.0 (0.1)
- ---------------------------------------------------------------------------------------------------------------------------
33
13. OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS
In addition to the financial assets and liabilities discussed above, Prime's
financial instruments include off-balance sheet items used to manage risks
associated with changes in interest rates from on-balance sheet assets and
liabilities. These contracts are financial derivatives and, in Prime's case,
include interest rate swaps and a variation referred to as a swaption involving
a future change in the swap contract in the event of a specified change in a
rate component. The table below presents the Company's outstanding derivative
contracts as of December 31, 1997.
DERIVATIVE CONTRACTS AS OF DECEMBER 31, 1997
Next
Notional Stated Optional Receive Pay Market Repricing
Type Amount Maturity Call Date Rate Rate Spread Value Date
- ---------------------------------------------------------------------------------------------------------------------------
Swap $5,000 5/6/00 -- 7.01% 6.00% 1.01% $121 1/6/98
Swaption 5,000 7/30/07 7/29/99 7.21% 5.97% 1.24% 18 1/29/98
Swaption 5,000 10/31/11 10/29/98 8.06% 5.96% 2.10% 58 1/29/98
Swaption 5,000 11/21/11 11/19/98 7.63% 5.96% 1.67% 17 1/20/98
Swaption 5,000 12/16/11 12/16/98 7.77% 5.96% 1.81% 39 1/16/98
Swaption 5,000 2/27/12 2/25/99 7.51% 5.96% 1.55% 5 1/26/98
- ---------------------------------------------------------------------------------------------------------------------------
$30,000 $258
- ---------------------------------------------------------------------------------------------------------------------------
Pay rate rates are based on three month Libor and will be reset on the
repricing dates noted above. Optional call dates are at the discretion of the
counterparty to the contract and are likely to be called if general market rates
remain at current levels or decline further.
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into financial instruments
which are not recorded in the consolidated financial statements but are required
to meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
The following is a summary of significant commitments and contingent
liabilities:
December 31,
- -----------------------------------------------------------
1997 1996
- -----------------------------------------------------------
Residential mortgage commitments 2,945 12,278
Commercial loan commitments 17,939 34,496
Standby letters of credit 2,955 1,810
Commitments to extend credit 51,023 35,897
Commitments to sell
residential loans 3,229 49
Construction loans in process 63,590 42,104
- -----------------------------------------------------------
The Bank is required to maintain certain average reserve balances as
established by the Federal Reserve Bank Board. The amounts of these reserve
balances for the reserve computation periods which included December 1997 and
1996 were $7,820,000, and $5,890,000, respectively.
Payment of dividends is generally subject to receipt of sufficient
dividends from the Bank and other non-bank subsidiaries of the Company. Dividend
payments by the Bank are subject to limitations imposed by federal and state
laws. Applicable minimum capital and "prompt corrective action" standards
further limit the ability of a bank to pay dividends. Dividends 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
bank and bank holding companies should generally pay dividends only out of
current operating earnings, with some exceptions.
In connection with the operation of certain branch offices, the Bank has
entered into operating leases for periods ranging from one to ten years. Total
rental expense for the years ended December 31, 1997, 1996, and 1995 was
$1,342,000, $1,246,000, and $753,000, respectively. Future minimum lease
payments under such operating leases are $1,029,000, $1,029,000, $1,027,000,
$921,000, and $788,000 for the years ended December 31, 1998 through 2002,
respectively.
34
15. PARENT COMPANY FINANCIAL INFORMATION
Presented below are the parent company only financial statements as of December
31, 1997, and 1996:
PRIME BANCORP, INC.
(Parent company only)
STATEMENTS OF FINANCIAL CONDITION
December 31,
- ---------------------------------------------------------
1997 1996
- ---------------------------------------------------------
Assets:
Cash on deposit with subsidiary $635 $99
Investment securities 499 --
Investments in bank
subsidiaries 73,886 64,277
Investments in non-bank
subsidiaries 5,838 6,826
Other assets 1 0
- ---------------------------------------------------------
Total assets $80,859 $71,202
- ---------------------------------------------------------
Liabilities and shareholders' equity:
Liabilities:
Other liabilities $995 $686
- ---------------------------------------------------------
Total liabilities 995 686
- ---------------------------------------------------------
Shareholders' equity:
Common stock 5,444 5,291
Additional paid-in capital 39,096 37,390
Retained earnings 35,324 27,835
- ---------------------------------------------------------
Total shareholders' equity 79,864 70,516
- ---------------------------------------------------------
Total liabilities and
shareholders' equity $80,859 $71,202
- ---------------------------------------------------------
STATEMENTS OF INCOME
Years ended December 31,
- -----------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
Income:
Dividends and interest
from subsidiary $5,297 $2,109 $3,008
Equity in undistributed
income of subsidiaries 5,296 2,097 4,491
- -----------------------------------------------------------------
10,593 4,206 7,499
Operating expense 74 189 30
- -----------------------------------------------------------------
Net income $10,519 $4,017 $7,469
- -----------------------------------------------------------------
Statements of Cash Flows
Cash flows from operating activities:
Net income $10,519 $4,017 $7,469
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed income of
subsidiaries (5,296) (2,097) (4,491)
Increase (decrease) in other assets (1) -- --
Increase (decrease)
in other liabilities 956 (24) 201
- -----------------------------------------------------------------
Net cash provided by operating
activities 6,178 1,896 3,179
- -----------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities (499) -- --
Sale of subsidiary to affiliate 75 -- --
Contribution to subsidiaries (2,700) -- (750)
- -----------------------------------------------------------------
Cash used in investing activities (3,124) -- (750)
- -----------------------------------------------------------------
Cash flows from financing activities:
Stock options exercised 1,150 133 --
Cash dividends paid (3,668) (2,529) (2,490)
- -----------------------------------------------------------------
Net cash used in financing
activities (2,518) (2,396) (2,490)
- -----------------------------------------------------------------
Net increase in cash 536 (500) (61)
Cash and cash equivalents:
Beginning of year 99 599 660
- -----------------------------------------------------------------
End of year $635 $99 $599
- -----------------------------------------------------------------
Supplemental disclosure of cash flow information:
Tax benefit from
exercise of stock options $709 $74 $--
- -----------------------------------------------------------------
35
MANAGEMENT'S STATEMENT OF FINANCIAL REPORTING
Management of Prime Bancorp, Inc. is responsible for establishing and
maintaining an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Federal Financial Institutions Examination Council instructions for
Consolidated Reports of Condition and Income (call report instructions). The
structure contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1997. This assessment
was based on criteria for effective internal control over financial reporting
described in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that, as of December 31, 1997, the Company maintained an
effective internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and call report
instructions.
/s/ James J. Lynch /s/ James E. Kelly
------------------------------- -------------------------
James J. Lynch, President & CEO James E. Kelly, EVP & CFO
36
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
PRIME BANCORP, INC.:
We have audited the accompanying consolidated statements of financial condition
of Prime Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the years then ended. We have also audited the accompanying
consolidated statements of income, shareholders' equity, and cash flows of Prime
Bancorp, Inc. and subsidiaries for the year ended December 31, 1995 prior to
their restatement for the 1996 pooling-of-interest transaction described in Note
2 to the consolidated financial statements. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The financial statements of First Sterling
Bancorp, Inc. included in the 1995 restated consolidated financial statements
were audited by other auditors whose report dated February 23, 1996, expressed
an unqualified opinion on those statements. The report of the other auditors has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for First Sterling Bancorp, Inc., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Prime Bancorp, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
We also audited the combination of the accompanying consolidated statements
of income, shareholders' equity and cash flows for the year ended December 31,
1995, after restatement for the 1996 pooling-of-interests; in our opinion, such
statements have been properly combined on the basis described in Note 2 of the
notes to the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
Philadelphia, PA
January 16, 1998
[COOPERS & LYBRAND LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
We have audited the consolidated statements of income, stockholders'
equity, and cash flows of First Sterling Bancorp, Inc. (the "Company") for the
year ended December 31, 1995, that appear in this annual report on Form 10-K,
after having been restated for the 1996 pooling-of-interests transaction in
which Prime Bancorp, Inc. acquired the Company. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flows for
the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Baltimore, Maryland
February 23, 1996
37
LOAN PORTFOLIO HISTORY
- --------------------------------------------------------------------------------
(Dollars in thousands)
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
Permanent first
mortgage loans:
One-to four-family $181,375 28.7% $235,023 38.1% $216,163 43.5% $185,409 42.0% $168,345 41.7%
Multi-family 932 0.1% 10,783 1.7% 9,303 1.9% 8,735 2.0% 8,148 2.0%
Commercial 150,411 23.8% 120,841 19.6% 102,958 20.7% 88,767 20.1% 73,726 18.3%
- ------------------------------------------------------------------------------------------------------------------------
Total permanent loans 332,718 52.6% 366,647 59.4% 328,424 66.1% 282,911 64.1% 250,219 62.0%
Allowance for loan
losses (2,811) -0.4% (2,081) -0.2% (1,728) -0.3% (1,856) -0.4% (1,522) -0.4%
- ------------------------------------------------------------------------------------------------------------------------
Total permanent first
mortgage loans, net 329,907 52.2% 364,566 59.2% 326,696 65.8% 281,055 63.7% 248,697 61.6%
- ------------------------------------------------------------------------------------------------------------------------
Total commercial
real estate loans 60,984 9.7% 44,598 7.2% 29,881 6.0% 36,154 8.2% 43,003 10.6%
Allowance for loan
losses (1,130) -0.2% (918) -0.2% (696) -0.1% (1,234) -0.3% (959) -0.2%
- ------------------------------------------------------------------------------------------------------------------------
Total commercial
real estate loans,
net 59,854 9.5% 43,680 7.0% 29,185 5.9% 34,920 7.9% 42,044 10.4%
- ------------------------------------------------------------------------------------------------------------------------
Commercial business
loans 139,989 22.2% 110,840 18.0% 68,777 13.8% 65,045 14.7% 61,863 15.3%
Allowance for loan
losses (1,736) -0.3% (2,251) -0.4% (1,954) -0.5% (1,301) -0.3% (1,740) -0.4%
- ------------------------------------------------------------------------------------------------------------------------
Total commercial
business loans,
net 138,253 21.9% 108,589 17.6% 66,823 13.3% 63,744 14.4% 60,123 14.9%
- ------------------------------------------------------------------------------------------------------------------------
Consumer loans:
Personal/lines of
credit 32,678 5.2% 27,296 4.4% 20,063 4.0% 21,582 4.9% 19,976 4.9%
Second mortgage/
equity 44,248 7.0% 44,229 7.2% 40,618 8.2% 31,492 7.1% 25,829 6.4%
Auto 19,718 3.1% 22,499 3.7% 10,046 2.0% 7,110 1.6% 4,900 1.2%
Education 6,163 1.0% 3,504 0.6% 2,992 0.6% 1,697 0.4% 2,230 0.6%
Home improvement
and other 2,290 0.4% 3,906 0.6% 1,745 0.4% 1,419 0.3% 1,959 0.5%
Savings account 773 0.1% 907 0.1% 1,119 0.2% 1,464 0.3% 1,135 0.3%
- ------------------------------------------------------------------------------------------------------------------------
Total consumer loans 105,870 16.8% 102,341 16.6% 76,583 15.4% 64,764 14.6% 56,029 13.9%
Allowance for loan
losses (1,334) -0.2% (963) -0.2% (1,066) -0.2% (1,035) -0.2% (623) -0.2%
- ------------------------------------------------------------------------------------------------------------------------
Total consumer loans,
net 104,536 16.6% 101,378 16.4% 75,517 15.2% 63,729 14.4% 55,406 13.7%
- ------------------------------------------------------------------------------------------------------------------------
Total unamortized loan
origination fees and
costs (228) 0.0% (327) 0.0% (549) -0.0% (1,406) -0.3% (1,816) -0.4%
Allowance for loan
loss (unallocated) (1,474) -0.2% (993) -0.2% (638) -0.1% (641) -0.1% (761) -0.2%
- ------------------------------------------------------------------------------------------------------------------------
Total loans
receivable, net $630,848 100.0% $616,893 100.0% $497,034 100.0% $441,401 100.0% $403,693 100.0%
- ------------------------------------------------------------------------------------------------------------------------
NON-ACCRUAL LOANS AND REAL ESTATE OWNED
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Single-family residential $1,170 $1,003 $1,786 $1,859 $1,913
Multi-family Residential and commercial real estate loans -- 3,087 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
1,170 4,090 1,786 1,859 1,913
- ------------------------------------------------------------------------------------------------------------------------
Consumer 380 243 517 2,956 1,698
Commercial loans 1,453 2,751 2,535 2,153 3,129
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans $3,003 $7,084 $4,838 $6,968 $6,740
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans to loans receivable 0.47% 1.14% 0.96% 1.55% 1.64%
- ------------------------------------------------------------------------------------------------------------------------
Total real estate owned 957 1,335 419 323 392
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans and real estate owned to total assets 0.42% 0.91% 0.64% 0.99% 1.19%
- ------------------------------------------------------------------------------------------------------------------------
38
SUMMARY ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
(Dollars in thousands)
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $7,206 $6,082 $6,067 $5,605 $4,386
Charge-offs:
Domestic:
Real estate--commercial (606) (813) (17) (197) (201)
Real estate--residential (354) (480) (118) (66) (48)
Commercial business loans (776) (1,119) (1,044) (614) (725)
Consumer (921) (491) (273) (382) (141)
- -------------------------------------------------------------------------------------------------------------------------
(2,657) (2,903) (1,452) (1,259) (1,115)
- -------------------------------------------------------------------------------------------------------------------------
Recoveries
Domestic:
Real estate--commercial 3 11 155 4 --
Real estate--residential 19 20 7 62 23
Commercial business loans 415 61 167 48 109
Consumer 61 98 9 13 42
- -------------------------------------------------------------------------------------------------------------------------
498 190 338 127 174
- -------------------------------------------------------------------------------------------------------------------------
Net charge-offs (2,159) (2,713) (1,114) (1,132) (941)
- -------------------------------------------------------------------------------------------------------------------------
Additions charged to operations 3,438 3,837 1,129 1,594 2,160
- -------------------------------------------------------------------------------------------------------------------------
Balance at the end of period $8,485 $7,206 $6,082 $6,067 $5,605
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to average loans
outstanding during the period 0.35% 0.49% 0.24% 0.27% 0.24%
- -------------------------------------------------------------------------------------------------------------------------
LOANS
LOAN MATURITIES AND INTEREST SENSITIVITY
1 Year 1 Through After 5 Gross
December 31, 1997 or Less 5 Years Years Loans
- -------------------------------------------------------------------------------------------------------------------------
Commercial real estate $41,932 $14,806 $4,246 $60,984
Commercial 138,624 80,536 71,240 290,400
- -------------------------------------------------------------------------------------------------------------------------
Total 180,556 95,342 75,486 351,384
- -------------------------------------------------------------------------------------------------------------------------
Loans with predetermined rate 19,204 53,819 45,730 118,753
Loans with floating rate 161,352 41,523 29,756 232,631
- -------------------------------------------------------------------------------------------------------------------------
Total 180,556 95,342 75,486 351,384
- -------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
December 31,
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
Commercial Loans $3,267 $2,251 $1,954 $1,301 $1,740
Commercial Real Estate 1,130 918 696 1,234 959
Consumer 1,334 963 1,066 1,035 623
Residential Mortgage 1,280 2,081 1,728 1,856 1,522
Unallocated 1,474 993 638 641 761
- -------------------------------------------------------------------------------------------------------------------------
$8,485 $7,206 $6,082 $6,067 $5,605
- -------------------------------------------------------------------------------------------------------------------------
39
INVESTMENT SECURITIES PORTFOLIO
- --------------------------------------------------------------------------------
(Dollars in thousands)
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Fair Fair Fair
Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ------------------------------------------------------------------------------------------------------------------------
State and municipal $6,735 $7,002 $6,739 $6,771 $400 $431
U.S. Govt & U.S. Govt Agency 0 0 0 0 11,830 11,971
Mortgage-backed securities 106,563 107,156 97,778 97,854 81,279 82,236
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities 113,298 114,158 104,517 104,625 93,509 94,638
Other securities 4,690 4,690 6,249 6,249 4,491 4,491
- ------------------------------------------------------------------------------------------------------------------------
$117,988 $118,848 $110,766 $110,874 $98,000 $99,129
- ------------------------------------------------------------------------------------------------------------------------
Available for Sale
- ------------------------------------------------------------------------------------------------------------------------
U.S. Govt & U.S. Govt Agency $64,483 $64,573 $62,037 $62,028 $52,961 $53,562
Mortgage-backed securities 51,544 50,855 53,269 52,091 55,570 54,739
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities 116,027 115,428 115,306 114,119 108,531 108,301
Other securities 300 300 11,340 11,309 17,710 17,764
- ------------------------------------------------------------------------------------------------------------------------
$116,327 $115,728 $126,646 $125,428 $126,241 $126,065
- ------------------------------------------------------------------------------------------------------------------------
DEPOSITS
The following table sets forth deposit accounts in dollar amounts and weighted
average rate on the date indicated.
At December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------------------
Passbook/statement $64,297 1.83% $63,022 2.05% $63,315 2.05%
NOW and Super NOW 43,988 0.57% 44,444 1.91% 37,602 1.46%
Money market accounts 130,959 3.46% 130,028 3.30% 113,110 3.69%
Fixed-rate certificates 233,352 5.50% 288,367 5.16% 257,045 5.30%
Jumbo certificates 47,578 5.41% 54,074 5.44% 48,929 5.74%
Individual retirement accounts (1) 58,537 5.60% 61,940 5.79% 64,506 5.87%
Commercial checking accounts (2) 115,733 -- 94,767 -- 59,799 --
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits $694,444 $736,642 $644,306
- ---------------------------------------------------------------------------------------------------------------------------
(1) Funds in IRA accounts are invested primarily in certificates of deposit.
(2) Non-interest bearing.
DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth remaining maturities of domestic time deposits of
$100,000 or more.
Other
Jumbo Time
December 31, 1997 C/D Deposits Total
- -----------------------------------------------------------
Three months or less $22,839 $4,984 $27,823
Over three through six months 18,670 3,929 22,599
Over six through twelve months 5,369 14,430 19,799
Over twelve months 700 12,270 12,970
- -----------------------------------------------------------
Total $47,578 $35,613 $83,191
- -----------------------------------------------------------
BORROWINGS
December 31,
- -----------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------
Advances from FHLB of Pittsburgh $79,550 $37,598 $37,646
Repo plus agreements with the
FHLB of Pittsburgh -- 19,000 20,000
Repurchase agreements 91,486 51,685 37,622
- -----------------------------------------------------------
$171,036 $108,283 $95,268
- -----------------------------------------------------------
40
PRIME BANCORP, INC. AND PRIME BANK
- --------------------------------------------------------------------------------
Board of Directors
Erwin T. Straw
Chairman of the Board
James J. Lynch
President and
Chief Executive Officer
Frederick G. Betz
President of Fred Betz and Sons, Inc. a custom home building company
William J. Cunningham
Basketball Hall of Famer and former championship winning coach of the
Philadelphia 76ers and former owner and founder of the Miami Heat pro basketball
franchise
Joseph A. Fluehr, III
Corporate Secretary, Funeral Director and owner of Fluehr Funeral Home
Robert A. Fox
President of R.A.F. Industries, a private investment company which acquires and
manages a diversified group of operating companies and venture capital
investments
Ernest Larenz
President of Medicare Management Nursing Homes, Philadelphia, PA
Arthur J. Kania
Principal of Trikan Associates
Joseph G. Markmann, CPA
Associate Professor of Accounting & former Chairman of Accounting Dept. of
LaSalle University
Roy T. Peraino
Former Chairman and Chief Executive Officer of Continental Bancorp and
Continental Bank and former President of Midlantic Corporation
David H. Platt
President of Somerton Springs Golf Shoppes, Driving Ranges, and President of
Sycamore Ridge, Inc. Golf Course
Arthur L. Powell
President of Kravco, Inc., a real estate development company which specializes
in large shopping malls
Prime Bancop and Prime Bank Officers
EXECUTIVE OFFICERS
James J. Lynch*
President and
Chief Executive Officer
William H. Bromley*
Executive Vice President
James E. Kelly*
Executive Vice President and CFO
COMMERCIAL LENDING
Timothy J. Abell
Senior Vice President
Robert J. Mulligan
Vice President
Michael J. Okino
Vice President
Jeff F. Southworth
Vice President
David W. Gill
Assistant Vice President
Brian T. Vesey
Commercial Loan Officer
Scott Gamble
Vice President
Carol A. Chartrand
Vice President -
Cash Management
Michael Prendergast
Vice President
Steven C. McGilvery
Senior Vice President
Thomas F. Gordon
Vice President
Frank Naylor
Vice President
Dorothy A. Hoerr
Assistant Vice President
Grant Conway
Commercial Loan Officer
COMMERCIAL
REAL ESTATE LENDING/CONSTRUCTION
Gregory J. Webster
Senior Vice President
Robert C. Kenney, Jr.
Vice President
Seth L. Mackler*
Vice President and Secretary
Eleanor A. Remolde
Assistant Vice President
Maureen P. Menarde
Real Estate Loan Officer
CONSUMER LENDING
Curt T. Schulmeister
Senior Vice President
Robin Carmody
Assistant Vice President
Joseph E. McNamara
Assistant Vice President
Jane A. Passaglia
Assistant Vice President
Thomas J. Blair
Consumer Loan Officer
RESIDENTIAL MORTGAGE LENDING
Robert T. Strong
Senior Vice President
Brian McGovern
Assistant Vice President
Laura Johnson
Mortgage Loan Officer
CREDIT POLICY AND ADMINISTRATION
Steven H. Santini
Vice President
Christian Schweizer III
Vice President
Bonnie L. Halbreiner
Assistant Vice President
Kenneth W. Hilbert
Assistant Vice President
Carolyn J. Matje
Assistant Vice President
COMPLIANCE AND COMMUNITY INVESTMENT
Doreen M. Berdan
Vice President
OPERATIONAL SERVICES
Dolores M. Lare
Senior Vice President
David R. Forlini
Vice President - Loan Services
Patricia L. Campbell
Loan Documentation Officer
Rita A. Tarr
Vice President - Deposit Services
Darren A. Knox
Vice President -
Information Technology
FINANCE AND ACCOUNTING
Frank H. Reeves*
Senior Vice President
Michael J. Sexton
Vice President
William J. Boyce
Assistant Controller
Antonio A. Pimpinella
Accounting Officer
Marissa R. Hack*
Senior Vice President, Treasurer
Catherine M. Hendrick
Assistant Vice President
BRANCH ADMINISTRATION
Jan M. Smith
Senior Vice President
Maureen Nicholas
Assistant Vice President
SUPPORT SERVICES
Harry E. Dingler, Jr.
Vice President - Human Resources
Peggy R. Grogan
Personnel Officer
Joseph B. Leotta
Vice President
Director of Marketing
John F. Downes
Vice President
* Officers of Prime Bank and Prime Bancorp. All others are officers
of Prime Bank.
41
Northern Advisory Board
Joseph Sokol (ret.)
Former Vice Chairman
Prime Bancorp & Prime Bank
Dorothy M. Bernhard (ret.)
Former Vice President North East
Federal Savings & Former Prime Bank Director
Robert G. Hess, Esq.
Howland, Hess, Guinan & Torpey
Former Prime Bank Director
Robert G. Stahl (ret.)
Past President of Stahl Chevrolet
Former Prime Bank Director
Marc B. Kaplin, Esq.
Kaplin, Stewart, Meloff, Reiter & Stein
Bruce A. Goodman
Sole Proprietor
Goodman Properties
Bart Blatstein
Vice President
Tower Investments, Inc.
Frank C. Corace
Partner
Valley Forge Asset Management Corp.
Frederick I. Robinson
Chairman & CEO
Keystone Industries
David C. Campbell
President
Equipment For Semi-Conductors, Inc.
Abbie Hoffman
President
Regal Corrugated Box Company, Inc.
Michael Binder
Executive Vice President
Capitol Sign Systems
Alfred J. Beljan
President
Belbold Contracting Corporation
B. Scott Holloway
Vice Chairman
Richmond Foundry, Inc.
Carmen D. Carosella
Vice President & CFO
United Refrigeration, Inc.
Western Advisory Board
Francis J. Grey, CPA
Financial Consultant
Smart & Associates, LLP
Albert R. Riviezzo, Esq.
Partner
Fox, Rothschild, O'Brien & Frankel, LLP
R. Richard Williams
President
Valquip Corporation
James D. Kania
Kania, Lindner, Lasak & Feeney
Former First Sterling Bank Director
Thomas J. Scanlon, Jr.
Director of Sales
BASF Corporation
Former First Sterling Bank Director
Allen Speiser, CPA
Former First Sterling Bank Director
William G. Warden, IV
Vice President
Superior Group, Inc.
Alvin Clay, Ph.D., Dean Emeritus
Villanova University
Frank A. Pension
President
The Pension Company
F. Scott Addis
CEO
Garno & Addis
E. William Ross, Sr.
President
Pelmor Laboratories, Inc.
Frank J. Craparo, M.D.
Abington Perinatal Associates, P.C.
R. Craig Williams, D.M.D.
Main Line Dental Group, P.C.
Deborah S. Kitz, Ph.D.
Abington Surgical Center
William G. Davis
President & CEO
Medstaff, Inc.
David C. Henderson
President
The Henderson Group
Edward Kassab, Esq.
Kassab, Archbold & O'Brien, LLP
G. Guy Smith, Esq.
Harris & Smith
Charles L. Wallace
Vice President
Energy Products Company
Steve P. Pahides
Banking (ret.)
Raymond L. Weinmann
President
The Weinmann Group
Former Prime Bank Director
Paul T. Bartkowski
Assistant Vice President
Valley Forge Asset Management Corp.
42
Prime Bank Branch Locations
PHILADELPHIA COUNTY
Burholme
1000 Cottman Avenue
Philadelphia, PA 19111-3698
(215) 342-2425
Manager - Ann C. Mozzone,
Banking Officer
Chestnut Hill
8500 Germantown Avenue
Philadelphia, PA 19118-3317
(215) 248-1600
Manager - Missy Dannehower,
Assistant Vice President
18th & JFK
18th & JFK Boulevard
Philadelphia, PA 19103-7421
(215) 972-7072
Manager - Edwin A. Bergin,
Banking Officer
Grant Plaza
1695 Grant Avenue
Philadelphia, PA 19115-3199
(215) 673-9600
Manager - Kimberly A. Erwin,
Banking Officer
Kensington
1841 E. Allegheny Avenue
Philadelphia, PA 19134-3192
(215) 426-9520
Manager - Frances Abel,
Assistant Vice President
Lawndale
6425 Rising Sun Avenue
Philadelphia, PA 19111-5299
(215) 742-5300
Manager - Robert A. Farrer,
Assistant Vice President
Penn Treaty
423 E. Girard Avenue
Philadelphia, PA 19125-3305
(215) 426-3303
Manager - Bridget A. Morsa
Somerton
O'Hanlon Plaza
14425 Bustleton Avenue
Philadelphia, PA 19116-1177
(215) 671-1232
Manager - Karen S. Sica,
Banking Officer
MONTGOMERY COUNTY
Bala Cynwyd
50 Monument Road
Bala Cynwyd, PA 19004-1723
(610) 617-0801
Manager - Linda S. Hodges,
Assistant Vice President
Bryn Mawr
22 North Bryn Mawr Avenue
Bryn Mawr, PA 19010-3304
(610) 520-0444
Manager - Nance J. Markel,
Banking Officer
Horsham
301 Horsham Road
Horsham, PA 19044-2017
(215) 956-9333
Manager - Suzanne B. Shane,
Assistant Vice President
Huntingdon Valley
Bethayres Shopping Center
618 Welsh Road
Huntingdon Valley, PA 19006-6302
(215) 938-7850
Manager - Virginia Fiorentine,
Banking Officer
Jenkintown
The Pavilion
261 Old York Road
Jenkintown, PA 19046-3793
(215) 572-0800
Manager - Lynn Levy Marks,
Assistant Vice President
Montgomeryville
521 Stump Road
North Wales, PA 19454-1516
(215) 368-1160
Manager - Ruth K. Hardin,
Assistant Vice President
Plymouth Meeting
661 W. Germantown Pike
Plymouth Meeting, PA 19462-1033
(610) 397-1600
Manager - Dale Grewal,
Assistant Vice President
Willow Grove
Moreland Plaza
Old York & Moreland Roads
Willow Grove, PA 19090-4194
(215) 659-5404
Manager - Gregory B. Morgan,
Assistant Vice President
BUCKS COUNTY
Fairless Hills
503 S. Oxford Valley Road
Fairless Hills, PA 19030-2612
(215) 943-2200
Manager - Kathryn M. Geissel,
Assistant Vice President
Oxford Valley
195 Bristol Oxford Valley Road
Langhorne, PA 19047-3083
(215) 943-1100
Manager - Kelly A. Colon
Richboro
984 Second Street Pike
Richboro, PA 18954-1527
(215) 322-4400
Manager - Wanda S. Albright,
Assistant Vice President
Southampton
723 Street Road
Southampton, PA 18966-3989
(215) 357-9090
Manager - Donna M. McKenna,
Assistant Vice President
Yardley
10 S. Main Street
Yardley, PA 19067-1511
(215) 493-7285
Manager - Deborah A. Zimmaro,
Assistant Vice President
CHESTER COUNTY
Devon
80 West Lancaster Avenue
Devon, PA 19333-1374
(610) 971-9072
Manager - Marcia C. Gallagher,
Assistant Vice President
DELAWARE COUNTY
St. Davids
558 East Lancaster Avenue
St. Davids, PA 19087-5048
(610) 971-9430
Manager - Debra G. Palochak,
Assistant Vice President
Media
101 W. Baltimore Avenue
Media, PA 19063-3205
(610) 892-2920
Manager - Peter W. Bendistis,
Vice President
43
44
[LOGO]