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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number: 0-17286
PRIME BANCORP, INC.
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(Exact name or registrant as specified in its charter)
Pennsylvania 23-2860688
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(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization Identification Number
7111 Valley Green Road, Fort Washington, PA 19034-2209
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 836-2400
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
[ ] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant is approximately $231.2 million.(1)
The number of shares of the registrant's Common Stock outstanding as of
March 18, 1999 was 11,001,806 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of Common Stock outstanding, reduced by the number of shares of Common
Stock held by executive officers, directors and stockholders owning in excess of
10% of the registrant's Common Stock multiplied by the closing price for the
Common Stock on the National Association of Securities Dealers National Market
System on March 18, 1999. The information provided shall in no way be construed
as an admission that any person whose holdings are included in this figure is an
affiliate of the registrant and any such admission is hereby disclaimed. The
information provided herein is included solely for record keeping purposes of
the Securities and Exchange Commission.
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PRIME BANCORP, INC.
Part I
Item 1. Business
Introduction
Prime Bancorp, Inc. ("the Company" or "Prime") was incorporated under
the laws of the Commonwealth of Pennsylvania in 1996 for the purpose of
converting the Company's predecessor from a Delaware Corporation to a
Pennsylvania Corporation, while at the same time effecting the merger with First
Sterling Bancorp, Inc. The Company is regulated as a bank holding company. Prior
to October 1, 1997, the Company's principal subsidiaries were Prime Bank, a
savings Bank ("Prime Savings") and First Sterling Bank, a commercial bank
("First Sterling"). On October 1, 1997, the Company completed the merger of the
Banks. The combined entity is one commercial bank called Prime Bank (the
"Bank"). The principal business of the Company and the Bank consists of
attracting deposits and obtaining borrowings, then converting those deposits and
borrowings into various types of loans and investments.
The Company's corporate headquarters is in Fort Washington,
Pennsylvania. Its operations center is in northeast Philadelphia, Pennsylvania.
The Company's bank subsidiary has eight additional full service branch offices
in Philadelphia, five full service branches in Bucks County, Pennsylvania, eight
full service branches in Montgomery County, Pennsylvania, two in Delaware
County, Pennsylvania, and one in Chester County, Pennsylvania.
On February 17, 1999, Prime entered into a definitive Agreement and
Plan of Merger pursuant to which Summit Bancorp, Inc. ("Summit") will acquire
Prime. Under the terms of the definitive agreement, Summit will exchange one (1)
share of Prime common stock for .675 shares of Summit common stock in a tax-free
exchange with a transaction value of approximately $292.0 million. Upon the
consummation of the merger with Summit Bancorp, the Bank will merge with Summit
Bank of Pennsylvania. The transaction is subject to customary regulatory
approvals and is anticipated to be completed in the third quarter of 1999. As a
result of the transaction, the Board of Directors has concluded that it is in
the best interest of the Company to defer the holding of the 1999 annual meeting
of shareholders indefinitely. A special meeting of shareholders will be held to
vote on the proposed transaction, and it is anticipated that the Board of
Directors will take action to set the date for this meeting prior to April 30,
1999.
In connection with the transaction, Prime and Summit entered into a
Stock Option Agreement dated February 18, 1999 pursuant to which Prime granted
to Summit an option to purchase 1,087,498 shares of Prime common stock at a
price of $18.00 per share (the closing price on February 17, 1999) upon the
occurrence of certain events. Prime also agreed to pay Summit a breakup fee of
$5,000,000 in the event the transaction is not completed for certain reasons.
Business
The Company follows a strategy which focuses on providing individuals,
businesses, and communities with high quality banking services. Banking services
includes lending money, gathering money and other complimentary fee generating
services. The Company's loan products include commercial, commercial real
estate, consumer and residential mortgages. Deposits and funding are gathered
along five major lines which are checking, savings, retail CDs, jumbo CDs and
commercial cash management.
Lending Activities
The Company's loan portfolio totaled $666.5 million at December 31,
1998. This represented approximately 64% of its total assets. At that date,
approximately 63% of the loan portfolio consisted of commercial and commercial
real estate loans and the remaining balance consisted of consumer loans (18%)
and residential mortgages (19%).
2
Non-banking Subsidiary Activities
The Company presently conducts business through or has an investment in
eight non-banking subsidiaries. Of these, six are wholly owned by the Bank:
Prime Abstract, Inc. ("Prime Abstract"), Rowland Service Corporation
("Rowland"), Prime Financial Inc. ("Prime Financial"), NEFA Corporation
("NEFA"), 723 Service Corporation and 6524 Service Corporation. None of the
Company's non-banking subsidiaries generates net income which is individually or
in the aggregate, material to the consolidated financial results of the Company
on a consolidated basis.
o Prime Abstract, Inc.: Prime Abstract Inc., a wholly owned subsidiary of the
Bank, is a Delaware Corporation formed in 1988 for the purpose of performing
title searches and providing related permissible services for its banking
affiliates.
o Rowland Service Corporation: Rowland, a subsidiary of the Bank, was formed to
participate in a joint venture project with one local developer involving the
construction of a 15,000 square foot professional condominium complex.
o Prime Financial Inc.: Prime Financial, a subsidiary of the Bank, was formed to
oversee full-service brokerage operations at the Bank. It is currently
inactive.
o NEFA Corporation: NEFA, a subsidiary of the Bank, was formed to acquire land
currently held for development and resale.
o 723 Service Corporation: 723 Service Corporation, a subsidiary of the Bank,
was formed for the acquisition of property for debts previously contracted by
borrowers of the Bank.
o 6524 Service Corporation: 6524 Service Corporation was formed for the
acquisition of property for debts previously contracted by borrowers of the
Bank.
o Del-Prime, Inc.: Del-Prime, Inc., a wholly owned subsidiary of the Company,
was incorporated as a Delaware Corporation on November 8, 1989 to do business
exclusively in Delaware. The subsidiary holds tax-free municipal investment
securities.
o Del-Prime Investments, Inc.: Del-Prime Investments, Inc., a wholly owned
subsidiary of the Company, was incorporated as a Delaware Corporation on
November 28, 1994 to do business exclusively in Delaware. The subsidiary was
formed to hold taxable investments.
At December 31, 1998, the Company's aggregate debt and equity
investment in the non-banking subsidiaries was $3.7 million. (0.36% of the
Company's total assets)
REGULATION AND SUPERVISION
The Company and Prime Bank are subject to extensive federal and state
regulation by various bank regulatory agencies. Their activities may also be
subject to regulation by federal or state securities regulatory agencies, state
insurance regulatory agencies, and other federal, state and local governmental
bodies. Banking statutes and regulations are comprehensive and are intended
primarily for the protection of the insurance fund and depositors. Bank
regulatory authorities have extensive discretion in connection with their
supervisory activities and examination policies and have authority to impose a
wide variety of enforcement actions and penalties on an institution or Company
that fails to comply with its regulatory requirements. Possible enforcement
actions include the imposition of a capital plan, imposition of civil money
penalties, conservatorship or receivership, and termination of deposit
insurance. Certain enforcement powers extend to directors and officers of banks
and other financial institutions and to other "institution-affiliated" parties,
including stockholders, attorneys, appraisers and accountants. The following is
only a general summary of the applicable banking laws and regulations. The
expense of regulatory compliance for the Company is substantial and increasing
and has an adverse effect on the net income of all regulated institutions such
as the Company and the Bank when compared with competitors which are
substantially less regulated.
3
Regulation of the Company
The Company is a bank holding company within the meaning of Section 3
of the Bank Holding Company Act of 1956, as amended ("BHCA"). As such, the
Company is regulated and subject to examination and supervision by the Board of
Governors of the Federal Reserve System ("FRB") and is subject to certain
reporting requirements. The Company is also subject to regulation by
Pennsylvania banking statutes affecting bank holding companies.
Federal Bank Holding Company Regulation
The Company is required to file with the FRB an annual report and such
additional information as the FRB may require pursuant to the BHCA. The FRB may
also make examinations of the Company and each of its non-bank subsidiaries. The
BHCA requires each bank holding company to obtain the approval of the FRB before
it may acquire any non-banking company or substantially all of the assets of any
Bank, or before it may acquire ownership or control of any voting shares of any
Bank if, after such acquisition, it would own or control, directly or
indirectly, more than five percent of the voting shares of such bank. Pursuant
to the BHCA, the Company may only engage in or own companies that engage in
banking or in activities deemed by the FRB to be so closely related to the
business of banking or managing or controlling Banks as to be a proper incident
thereto, and the Company must gain permission from the FRB prior to engaging in
many new business activities.
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner.
Capital Adequacy
The FRB has adopted risk-based capital and leverage ratio requirements
for bank holding companies such as the Company.
Risk-Based Capital Guidelines. The FRB's risk-based capital guidelines
for bank holding companies set a required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) of 8%. At least half of the total capital is required to be
"Tier 1 capital", consisting principally of common shareholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and other intangibles. The remainder
("Tier 2 capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock and a limited amount of the general
loan loss allowance.
Tier 1 Capital Leverage Ratio. The FRB has also established a minimum
level of Tier 1 capital to total assets of 3% for those bank holding companies
which have the highest regulatory examination ratings and are not contemplating
or experiencing significant growth or expansion. All other bank holding
companies are required to maintain a Tier 1 capital leverage ratio of at least
1% to 2% above the 3% stated minimum.
Other Capital Ratios. Furthermore, the FRB requires bank holding
companies to maintain a minimum level of primary capital to total assets of 5.5%
and a minimum level of total capital to total assets of 6.0% on the same basis
as required for member Banks.
The Company currently meets these minimum capital requirements.
4
Change in Bank Control Act
Under the Change in Bank Control Act of 1978, as amended ("Change in
Control Act") and the regulations adopted thereunder, no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire "control" of any federally insured depository institution unless the
appropriate federal banking agency has been given 60 days prior written notice
of the proposed acquisition and within that period has not issued a notice
disapproving of the proposed acquisition or has issued written notice of its
intent not to disapprove the action. "Control" is generally defined as the
power, directly or indirectly, to direct the management or policies of an
institution or to vote 25% or more of any class of its voting securities. A
presumption of "control" arises upon most acquisitions of power to vote 10% or
more of any class of voting securities if the institution or holding company has
registered securities under Section 12 of the Securities Exchange Act of 1934 or
if no other person will own a greater percentage of that class of voting
securities immediately after the transaction. This presumption may be rebutted
upon a formal finding by the appropriate federal banking agency that the
acquisition will not result in control.
Pennsylvania Laws Affecting Bank Holding Companies
Under the Pennsylvania Banking Code of 1965, as amended ("PA Code") as
presently enacted, the Company will be permitted to control an unlimited number
of Banks, subject to prior approval of applicable federal bank regulatory
agencies and, in certain cases, the Pennsylvania Department of Banking
("PADOB"). The PA Code authorizes reciprocal interstate banking without any
geographic limitation. Reciprocity between states exists when a foreign state's
law authorizes Pennsylvania bank holding companies to acquire banks or bank
holding companies located in that state on terms and conditions substantially no
more restrictive than those applicable to such an acquisition by a Bank holding
Company located in that state. Interstate ownership of banks in Pennsylvania
with banks in many other states, including the adjoining states of Delaware,
Maryland, New Jersey, Ohio, New York and other states, is currently authorized.
With certain exceptions, the PA Code prohibits any person from
acquiring, directly or indirectly, the power to elect a majority of the board of
directors of a Pennsylvania commercial bank or stock savings bank, or more than
10% of any class of outstanding stock of such institutions (5% in certain
circumstances) without prior approval of PADOB.
Regulation of the Bank
Prime Bank became a Pennsylvania chartered commercial bank as of
October 1, 1997, and is a member of the Federal Reserve Bank System. Its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). Most of its deposits are insured under the Bank Insurance
Fund ("BIF"), although some deposits are insured under the Savings Association
Insurance Fund ("SAIF"). Prime Bank is subject to extensive regulation,
reporting requirements and examination by the PADOB, as its chartering agency,
the FRB, as its primary federal banking regulator, and the FDIC as its deposit
insurer.
Pennsylvania Banking Laws
The activities of Pennsylvania chartered commercial banks are governed
by the PA Code. The PA Code limits the powers and activities of Pennsylvania
chartered commercial banks and savings banks, including the investment and
lending activities of those institutions. Subject to certain exclusions and
qualifications, the Bank is generally limited in making loans to any one
customer or group of related customers to an amount which equals 15% of the
Bank's unimpaired capital and surplus from time to time.
PADOB regulations establish minimum capital requirements for
Pennsylvania chartered financial institutions such as the Bank (the "PA Capital
Rules"). The PA Capital Rules include a minimum requirement for leverage capital
- -- the ratio of "Tier 1" capital (as defined for federal Bank regulatory
purposes) to total assets -- of 4.00%, and a minimum requirement for
"risked-based capital" as that which is required by federal banking laws. PADOB
may set a higher minimum leverage ratio requirement for individual institutions.
At December 31, 1998, Prime Bank met the Pennsylvania minimum capital
requirements.
5
Federal Reserve System
Federal Reserve Membership. Prime Bank is a member of the Federal
Reserve System. Member banks are entitled to certain borrowing, item clearing
and other privileges at Federal Reserve Banks, and are obligated to purchase
shares in the local Federal Reserve Bank. Member banks are also required to
comply with applicable regulations of the FRB.
Reserve Requirements. FRB regulations require the Bank to maintain
non-interest earning reserves against the Bank's transaction accounts (primarily
NOW and regular checking accounts). The FRB regulations generally require that
reserves of 3% (below certain levels) and 10% (for deposits above certain
levels) must be maintained against aggregate transaction accounts, subject to an
exemption for specified levels of deposits which would otherwise be reservable.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce the
effective return or yield on the Bank's assets.
Federal Deposit Insurance Regulation
The FDIC administers the BIF and SAIF funds, although the funds' assets
and liabilities are not commingled. Each fund is to be maintained at a
designated ratio to the aggregate dollar amount of deposits insured by that
fund. Pursuant to a federal law enacted in 1996, the SAIF fund was
recapitalized, and the two funds were to be merged on or before January 1, 1999
if on that date no further savings associations exist.
Prompt Corrective Action. Federal banking laws and regulations
establish a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The federal banking regulators are required to
take certain supervisory actions against undercapitalized institutions. The
adopted rules create five categories consisting of "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized". Regulatory action taken will depend on the
level of capitalization of the institution and may range from restrictions on
distributions of dividends to seizure of the institution. Generally, subject to
a narrow exception, federal law requires the institution's regulator to appoint
a receiver or conservator for an institution that is critically
undercapitalized. Regulators are authorized to specify the ratio of tangible
capital to assets at which an institution becomes critically undercapitalized
and requires that the ratio be no less than 2% of assets. An institution such as
the Bank must maintain capital of not less than the requirements established by
its primary federal regulator in order to be deemed "adequately capitalized".
Real Estate Lending Standards. Federally insured depository
institutions must adopt and maintain written policies, in conformance with
minimum federal guidelines, that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
Brokered Deposits. Federal law and regulations impose restrictions on
the acceptance of brokered deposits. Absent a waiver from the FDIC, an insured
depository institution will not be permitted to accept brokered deposits unless
the institution is "well capitalized." The FDIC can only grant waivers to
institutions that are "adequately capitalized" or that are in conservatorship.
6
Dividends
Dividend payments by the Bank to the Company are subject to the PA Code
and federal banking laws and regulations. Under the PA Code, dividends may be
paid from `accumulated net earnings' (generally, undivided profits) without
prior regulatory approval. Under federal banking law, no dividends may be paid
by an insured Bank if the Bank is in arrears in the payment of any insurance
assessment due to the FDIC. In addition, Banks which are not adequately
capitalized or otherwise fail to meet regulatory standards, including those for
safety and soundness, may be restricted in payment of dividends. The FRB and the
FDIC have formal and informal policies which provide that insured Banks and Bank
holding Companies should generally pay dividends only out of current operating
earnings.
Transactions with Affiliates and Other Related Parties
The Bank is subject to certain restrictions on transactions with
"affiliates" such as the Company and any other non-bank subsidiaries of the
Company pursuant to Sections 23A and 23B of the Federal Reserve Act ("FRA"). In
summary, Section 23A
(i) imposes individual and aggregate percentage of capital limits on the
dollar amount of a wide variety of affiliate dealings coming within the
definition of a "covered transaction" (in general, the aggregate amount of
transactions with any one non-bank affiliate is limited to 10% of the
capital and surplus of the Bank and the aggregate amount of transactions
with all non-bank affiliates is limited to 20% of the Bank's capital and
surplus);
(ii) establishes rules for ensuring arms' length dealings between a Bank and
its affiliates;
(iii) precludes the acquisition of "low quality" assets by a Bank from its
affiliates; and
(iv) imposes detailed collateralization requirements for affiliate credit
transactions.
Section 23B requires a wide range of transactions between a bank and
its affiliates to be on terms which are at least as favorable to the bank as
would apply to similar transactions with non-affiliated companies. These include
"covered transactions" that are subject to Section 23A, as well as
(i) sales of securities or other assets to an affiliate including assets
subject to an agreement to repurchase;
(ii) a payment of money or the furnishing of services to an affiliate under
contract, lease, or otherwise;
(iii) any transaction in which an affiliate acts as an agent or broker or
receives a fee for its services to the association or to any other person;
or
(iv) any transaction or series of transactions with a third party if an
affiliate has an interest in the third party or participates in the
transaction.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA. Among other things,
these regulations require such loans to be made on terms substantially similar
to those offered to unaffiliated individuals, place limits on the amount of
loans the Bank may make to such persons based, in part, on the Bank's capital
position, and require certain approval and reporting procedures to be followed.
Federal and state laws and regulations restrict management personnel of
a Bank from serving as directors or in other management positions with
securities firms and with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified geographic area, and
restrict management personnel from borrowing from another institution that has a
correspondent relationship with their bank.
7
Classification of Assets
Under current federal regulations, an institution must classify its
problem assets according to one of four categories: "substandard", "doubtful",
"loss" and "special mention". For assets classified "substandard", and
"doubtful", the institution is required to establish prudent general loan loss
reserves in accordance with generally accepted accounting principles. Assets
classified "loss" must be either completely written off or supported by a 100%
specific reserve.
Federal Minimum Capital Requirements
The FRB has adopted risk-based capital and leverage ratio requirements
for member insured banks such as Prime Bank.
Risk-Based Capital Guidelines. The FRB's risk-based capital guidelines
for member Banks set a required minimum ratio of total capital to risk-weighted
assets (including off-balance sheet activities, such as standby letters of
credit) of 8%. At least half of the total capital is required to be "Tier 1" (or
"core") capital, consisting principally of common shareholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill. The remainder ("Tier 2 capital") may
consist of a limited amount of subordinated debt and intermediate-term preferred
stock, certain hybrid capital instruments and other debt securities, perpetual
preferred stock and a limited amount of the general loan loss allowance.
Tier 1 Capital Leverage Ratio. The FRB has also established a minimum
level of Tier 1 capital to total assets of 3% for those member Banks which have
the highest regulatory examination ratings and are not contemplating or
experiencing significant growth or expansion. All other member Banks are
required to maintain a Tier 1 capital leverage ratio of at least 1% to 2% above
the 3% stated minimum.
Leverage Ratio. For Banks which are members of the Federal Reserve
System, the FRB has established a minimum level of "primary capital" to total
assets of 5.5% and a minimum level of "total capital" to total assets of 6.0%.
For these purposes, the components of "primary capital" generally include common
stock, surplus, undivided profits, contingency and other capital reserves, and
the allowance for possible loan losses ("ALLL"), and "total capital" includes
the primary capital components plus limited life preferred stock and certain
subordinated debt. In calculating the regulatory capital ratios, goodwill is
deducted from both the numerator (capital) and the denominator (total assets) of
the ratio, and the ALLL is added to the denominator (total assets). Generally,
the FRB expects member Banks to operate above the minimum levels. Those member
Banks whose operations are deemed by the FRB to involve or to be exposed to high
or inordinate degrees of risk may be expected to hold additional capital to
compensate for those risks.
At December 31, 1998, Prime Bank met all of its capital requirements.
In addition, the FRB has established three "zones" for total capital
for banking organizations of all sizes for the purpose of determining the nature
and intensity of supervisory actions. Generally, a member Bank with total
capital of at least 7.0% is placed in "Zone 1" and will be considered adequately
capitalized provided its "primary capital" is above the 5.5% minimum. In
contrast, a member Bank with total capital below 6.0% is placed in "Zone 3" and
will generally be considered undercapitalized, absent clear extenuating
circumstances. Member banks in "Zone 2" (having capital between the other two
zones) will be scrutinized for a variety of financial risks and capital adequacy
will be determined accordingly.
Prime Bank's total capital ratio would place it in "Zone 1" for these
purposes as of December 31, 1998.
Insurance of Deposit Accounts
The FDIC sets deposit insurance assessment rates on a semiannual basis
separately for the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). The FDIC has authority to reduce the assessment rates
for either fund whenever the ratio of its reserves to insured deposits is equal
to or greater than 1.25%, and to increase deposit insurance assessments whenever
that ratio is less than 1.25%.
8
An institution's semiannual deposit insurance assessment is computed
primarily by multiplying its "average assessment base" (generally, total
insurable domestic deposits) for the prior semiannual period by one-half the
annual assessment rate applicable to that institution depending upon its risk
category, which is based principally on two measures of risk. These measures
involve capital and supervisory factors.
For the capital measure, institutions are assigned semiannually to one
of three capital groups according to their levels of supervisory capital as
reported on their call reports: "well capitalized" (group 1), "adequately
capitalized" (group 2) and "undercapitalized" (group 3). The capital ratio
standards for classifying an institution in one of these three groups are total
risk-based capital ratio (10 percent or greater for group 1, and between 8 and
10 percent for group 2), the Tier 1 risk-based capital ratio (6 percent or
greater for group 1, and between 4 and 6 percent for group 2), and the leverage
capital ratio (5 percent or greater for group 1, between 4 and 5 percent for
group 2).
Within each capital group, institutions are assigned to one of three
supervisory risk subgroups--subgroup A, B, or C, depending upon an assessment of
the institution's perceived risk based upon the results of its most recent
examination and other information available to regulators. Subgroup A will
consist of financially sound institutions with only a few minor weaknesses.
Subgroup B will consist of institutions that demonstrate weaknesses which, if
not corrected, could result in significant deterioration of the institution and
increased risk of loss to the BIF. Subgroup C will consist of institutions that
pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. Thus, there are nine possible
classifications to which varying assessment rates are applicable. The regulation
generally prohibits institutions from disclosing their subgroup assignments or
assessment risk classifications without FDIC authorization.
Prime Bank currently is not required to pay any deposit insurance.
In addition to the foregoing FDIC deposit insurance assessments, all
insured institutions are also obligated to pay assessments to the federal
Financing Corporation ("FICO") to help pay interest on FICO bonds issued to pay
part of the costs of the savings and loan bailout in 1979. SAIF-insured deposits
are currently subject to a FICO assessment of 6.5 basis points, and BIF-insured
deposits are currently subject to a FICO assessment of approximately 1.3 basis
points. The Bank pays these FICO assessments on its BIF and SAIF deposits.
There is no assurance whether the foregoing assessment rates will
remain constant or change.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), enacted on September 29, 1994, permits bank
holding companies to acquire banks in any state beginning in 1995. Beginning in
1997, acquired banks in different states may be merged into a single bank, and
thereafter merged banks may establish and acquire additional branches anywhere
the acquiree could have branched. Limited branch purchases are still subject to
state laws. On July 6, 1995, Pennsylvania adopted an interstate banking act (the
"PA Interstate Banking Act") to harmonize Pennsylvania banking laws with the
Federal Interstate Banking Act. The PA Interstate Banking Act "opts in" early
under the Federal Interstate Banking Act to permit interstate mergers,
non-Pennsylvania holding company acquisitions of Pennsylvania banks, branch
acquisitions and de novo branching in any of the manners contemplated by the
Federal Interstate Banking Act, subject to prior regulatory approvals or
filings. In general, the PA Interstate Banking Act permits out-of-state banking
institutions to establish branches in Pennsylvania with the approval of the
Pennsylvania Banking Department, provided the law of the state where the banking
institution is located would permit a Pennsylvania banking institution to
establish and maintain a branch in that state on substantially similar terms and
conditions. It also permits Pennsylvania banking institutions to maintain
branches in other states. Bank management anticipates that the federal and
Pennsylvania interstate banking legistration will increase competitive pressures
in the Bank's market by permitting entry of additional competitors, but
management is of the opinion that they will not have a material impact upon the
anticipated results of operations of the Bank.
9
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), an institution has
obligations to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the applicable federal regulator for each Bank to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The CRA requires public disclosure of an institution's CRA rating.
Federal Home Loan Bank System
Prime Bank is a member of the FHLB System by way of investment in the
Federal Home Loan Bank of Pittsburgh ("FHLB"). The FHLB System consists of 12
regional Federal Home Loan Banks, subject to supervision and regulation by a
newly created Federal Housing Finance Board. The Federal Home Loan Banks provide
a central credit facility primarily for member financial institutions. Each
financial institution member is required to acquire and hold shares of Federal
Home Loan Bank capital stock. Advances from a FHLB are secured by a member's
shares of stock in the FHLB, certain types of mortgages and other assets.
Interest rates charged on advances vary with the maturity and the cost of funds
to the FHLB. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but FRB regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
Other Laws and Regulations
The Company and the Bank are subject to a variety of laws and
regulations which are not limited to banking organizations. Without limiting the
foregoing, in lending to commercial and consumer borrowers, and in owning and
operating their properties, the Bank is subject to regulations and risks under
state and federal environmental laws.
Legislation and Regulatory Changes
Legislation and regulations may be proposed or enacted from time to
time which could increase the cost of doing business, limit or expand
permissible activities, or affect the competitive balance between banks and
other competing financial services providers. No prediction can be made as to
the likelihood of any major changes or the impact such changes might have on the
Company or the Bank.
Employees
At December 31, 1998, the Company had 314 full time equivalent
employees, including 288 full-time and 56 part-time employees. None of these
employees are represented by a collective bargaining agreement. Employee
benefits include a profit sharing plan and life, health and disability
insurance. Management believes that relations with its employees are good.
Competition
The Company faces strong competition in the attraction of deposits. Its
most direct competition for deposits is from thrifts and commercial Banks
located in its primary market area. The Company faces additional competition for
investor funds from mutual funds, the stock market and other corporate and
governmental securities.
10
The Company competes for deposits principally by offering depositors a
wide variety of savings programs, a market rate of return, tax-deferred
retirement programs and other related services and by the efficiency and quality
of services provided to borrowers, real estate brokers and builders. The
Company's competition for loans varies from time to time depending upon the
general availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, volatility in the markets and other
factors that are not readily predictable. The Company does not rely upon any
individual, group or entity for a material portion of its deposits.
Effect of Government Monetary Policies
The earnings of the Company and the Bank are affected by domestic and
international economic conditions and the monetary and fiscal policies of the
United States government and its agencies, as well as those of foreign
countries. It is not possible to predict the nature and impact of future changes
in economic conditions or governmental monetary or fiscal policies.
The following table sets forth information regarding non-accrual loans
and real estate owned held by the Bank at the date indicated (dollars in
thousands).
Non-Accrual Loans and Real Estate Owned
December 31,
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Single-family residential $1,302 $1,170 $1,003 $1,786 $1,859
Multi-family Residential and
commercial real estate loans 15 -- 3,087 -- -
- ------------------------------------------------------------------------------------------------------------------------
1,317 1,170 4,090 1,786 1,859
- ------------------------------------------------------------------------------------------------------------------------
Consumer 552 380 243 517 2,956
Commercial loans 1,042 1,453 2,751 2,535 2,153
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans $2,911 $3,003 $7,084 $4,838 $6,968
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans to loans receivable 0.44% 0.47% 1.14% 0.96% 1.55%
- ------------------------------------------------------------------------------------------------------------------------
Total real estate owned, net of allowance
for REO loss 702 957 1,335 419 323
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans and real estate
owned to total assets 0.35% 0.42% 0.91% 0.64% 0.99%
- ------------------------------------------------------------------------------------------------------------------------
At December 31, 1998, approximately $291,000 of interest would have
been recorded on loans accounted for on a non-accrual basis if such loans had
been current.
Potential problem loans consist of loans which are included in
performing loans at December 31, 1998, but for which potential credit problems
of the borrowers have caused management to have concerns as to the ability of
such borrowers to comply with present repayment terms. At December 31, 1998,
such potential problem loans amounted to approximately $2.9 million compared to
approximately $3.0 million one year ago.
Allowance for Loan Losses
The allowance for loan losses is based on a periodic evaluation of the
portfolio and is maintained at a level that management considers adequate to
absorb losses known and inherent in the portfolio. Management considers a
variety of factors when establishing the allowance recognizing that an inherent
risk of loss always exists in the lending process. Consideration is given to the
impact of current economic conditions, diversification of the loan portfolio,
historical loss experience, delinquency statistics, results of detailed loan
reviews, borrowers' financial and managerial strengths, the adequacy of
underlying collateral, and other relevant factors. The allowance for loan losses
is increased by the provision for loan losses and recoveries on previously
charged-off loans. While management uses available information to establish
allowance for loan losses, future additions to the allowance for loan losses may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses. Such agencies may require the
Bank to recognize additions to the allowance for loan losses based on their
assessments of information which is available to them at the time of their
examination.
11
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $8,485 $7,206 $6,082 $6,067 $5,605
Charge-offs:
Domestic:
Real estate--commercial -- (606) (813) (17) (197)
Real estate--mortgages (88) (354) (480) (118) (66)
Commercial business loans (78) (776) (1,119) (1,044) (614)
Consumer (1,021) (921) (491) (273) (382)
- --------------------------------------------------------------------------------------------------------------------
(1,187) (2,657) (2,903) (1,452) (1,259)
- --------------------------------------------------------------------------------------------------------------------
Recoveries
Domestic:
Real estate--commercial 50 3 11 155 4
Real estate--mortgages 6 19 20 7 62
Commercial business loans 68 415 61 167 48
Consumer 120 61 98 9 13
- --------------------------------------------------------------------------------------------------------------------
244 498 190 338 127
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs (943) (2,159) (2,713) (1,114) (1,132)
- --------------------------------------------------------------------------------------------------------------------
Additions charged to operations 2,027 3,438 3,837 1,129 1,594
Balance at the end of period $9,569 $8,485 $7,206 $6,082 $6,067
====================================================================================================================
Ratio of net charge-offs during the period
to average loans outstanding during the
period 0.15% 0.35% 0.49% 0.24% 0.27%
- --------------------------------------------------------------------------------------------------------------------
Allocation of Allowance for Loan Losses
December 31,
---------------------------------------------------------------
December 31 - 1998 1997 1996 1995 1994
---------------------------------------------------------------
dollars in thousands Amount Amount Amount Amount Amount
- ---------------------------------------------------------------------------------------------------------
Commercial loans $3,086 $ 3,267 $ 2,251 $ 1,954 $ 1,301
Commercial real estate 2,247 1,130 918 696 1,234
Consumer 1,267 1,334 963 1,066 1,035
Residential mortgage 1,965 1,280 2,081 1,728 1,856
Allowance for loan loss (unallocated) 1,004 1,474 993 638 641
---------------------------------------------------------------
$9,569 $ 8,485 $ 7,206 $ 6,082 $ 6,067
- ---------------------------------------------------------------------------------------------------------
Investment Activities
The investment portfolio, cash and deposits in other institutions
provide not only a source of income but also a source of liquidity to meet
lending demands, fluctuations in deposit flows and required liquidity levels.
The Company has in the past used such excess liquidity to meet loan demand. The
relative mix of investment securities and loans in the Company's portfolio is
dependent upon the attractiveness of yields available on loans as compared to
investment securities as well as the relative safety of the investment
securities and loans and the liquidity needs of the Company.
At December 31, 1998, 29.6% of the total assets of the Company were
investment securities. See Note 4 of the Notes to the Company's Consolidated
Financial Statements.
12
The following table presents the composition of the investment
securities portfolio of the Company at the dates indicated (dollars in
thousands).
Investment Securities Portfolio
December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Fair Fair Fair
Cost Value Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
Held to Maturity
- -------------------------------------------------------------------------------------------------------------
State and municipal $ 6,732 $ 7,078 $ 6,735 $ 7,002 $ 6,739 $ 6,771
Mortgage-backed securities 34,304 34,692 106,563 107,156 97,778 97,854
- -------------------------------------------------------------------------------------------------------------
Total debt securities 41,036 41,770 113,298 114,158 104,517 104,625
Other securities 15,400 15,401 4,690 4,690 6,249 6,249
- -------------------------------------------------------------------------------------------------------------
$56,436 $ 57,171 $117,988 $118,848 $110,766 $110,874
=============================================================================================================
Available for Sale
- -------------------------------------------------------------------------------------------------------------
U.S. Govt & US Govt Agency $123,380 $124,354 $64,483 $64,573 $62,037 $62,028
Mortgage-backed Securities 108,861 108,612 51,544 50,855 53,269 52,091
Corporate Bonds 17,316 17,648 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total debt securities 249,557 250,614 116,027 115,428 115,306 114,119
Other Securities 300 321 300 300 11,340 11,309
- -------------------------------------------------------------------------------------------------------------
$249,857 $250,935 $116,327 $115,728 $126,646 $125,428
=============================================================================================================
Sources of Funds
General
The sources of funds to be used in lending and for other general
business purposes of the Company are deposits, loan repayments, sales and
maturities of investment securities, borrowings from the Federal Home Loan Bank
("FHLB") of Pittsburgh, and other borrowed funds. Deposit inflows and outflows
are influenced significantly by money market and general interest rate
conditions, although the Company has the ability to respond to market conditions
through the pricing of deposit accounts. The Company may also utilize borrowings
from the FHLB of Pittsburgh and other borrowed funds to support expanded lending
activities or where otherwise advantageous to the Company.
Deposits
The Company has a stable base of core deposits, with approximately
9.05% of its deposits held in passbook and statement savings accounts which
currently earn 1.82%. The Company also offers short-term certificates of deposit
and other money market alternatives that are more responsive to market
conditions than passbook deposits and longer maturity fixed-rate certificates.
The core deposit base and overall variety of deposits allow the Company to be
competitive in obtaining funds and to respond with more flexibility to the
threat of disintermediation. The Company's deposits are obtained primarily from
the areas in Pennsylvania immediately surrounding its offices.
13
The following table sets forth deposit accounts in dollar amounts and
weighted average rates at the dates indicated (dollars in thousands).
At December 31,
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------
Passbook and statement $ 63,631 1.82% $ 64,297 1.83% $ 63,022 2.05%
NOW and Super NOW 50,369 0.48% 43,988 0.57% 44,444 1.91%
Money market accounts 164,194 3.15% 130,959 3.46% 130,028 3.30%
Fixed-rate certificates 202,213 5.23% 233,352 5.50% 288,367 5.16%
Jumbo certificates 37,665 4.96% 47,578 5.41% 54,074 5.44%
Individual retirement
accounts (1) 56,626 5.56% 58,537 5.60% 61,940 5.79%
Checking accounts (2) 128,195 -- 115,733 -- 94,767 --
- ----------------------------------------------------------------------------------------------------------------
Total deposits $702,893 $694,444 $736,642
================================================================================================================
(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.
Jumbo Other Time
December 31, 1998 - in thousands C/D Deposits Total
- ---------------------------------------------------------------------------------------------
Three months or less $23,088 $ 5,388 $28,476
Over three through six months 10,840 3,855 14,695
Over six through twelve months 3,286 8,586 11,872
Over twelve months 451 100 551
- ---------------------------------------------------------------------------------------------
Total $37,665 $17,929 $55,594
=============================================================================================
Borrowings
The FHLB System functions as a reserve credit facility for financial
institutions and certain other home financing institutions. It also provides
certain special purpose loan and service programs for its members. As a member
of the FHLB System, the Bank is required to own capital stock in the FHLB of
Pittsburgh and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States Government) provided
certain creditworthiness standards have been met. Such advances may be made
pursuant to several different credit programs, each with its own interest rate,
maximum size of advance and range of maturities. Depending on the program,
limitations on the amount of such borrowings are based either on a percentage of
the Bank's capital or on the FHLB of Pittsburgh's assessment of the Bank's
creditworthiness. See "Regulation of the Bank - Federal Home Loan Bank System".
At December 31, 1998, the Bank had $134.5 million in borrowings from the FHLB of
Pittsburgh.
14
The Company uses borrowings and repurchase agreements as a funding
alternative. Included in such borrowings are fundings from commercial cash
management relationships.
December 31,
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Advances from FHLB of Pittsburgh $124,503 $ 79,550 $ 37,598
Repo plus agreements with the FHLB of Pittsburgh 10,000 -- 19,000
Repurchase agreements 103,852 91,486 51,685
- ---------------------------------------------------------------------------------------------------
$238,355 $171,036 $108,283
===================================================================================================
Item 2. Properties.
The Company neither owns nor leases any real property. At present, it
uses the premises, equipment and furniture of Prime Bank, subject to payment of
such reasonable compensation, if any, as may be determined from time to time.
Prime Bank has eight offices in Philadelphia County, five in Bucks
County, one office in Chester County, two offices in Delaware County, and eight
in Montgomery County, Pennsylvania. Of the twenty-four offices, eight are owned,
and sixteen offices are subject to leases. At its home office, Prime Bank offers
a full range of customer banking services. Except for safe deposit boxes, these
same services are available at each of Prime Bank's other offices. Prime Bank
participates in the MAC Money Access Service shared Automated Teller Machine
("ATM") network and the PLUS SYSTEM network which is the leading international
system of shared automated teller machines (ATMs) which enables customers to
obtain cash almost anytime and almost anywhere they travel in the United States.
Twelve offices are equipped with ATMs owned by Prime.
Item 3. Legal Proceedings.
There are no material legal proceedings to which the Company, the Bank
or its subsidiary service corporations are a party or to which any of their
properties are subject, other than ordinary routine litigation incidental to its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock is traded on the NASDAQ National Market
System under the symbol "PBNK." On March 18, 1999 there were 11,001,806 shares
of common stock issued and outstanding, which were held by approximately 900
shareholders of record and approximately 2,600 beneficial owners. The following
table sets forth the high and low closing sale prices for the common stock, as
quoted on the NASDAQ National Market System, and the dividends declared per
share, for the periods indicated.
15
Dividends
Declared
For The Quarter Ended High Low (Per Share)
- ------------------------------------------------------------------
March 31, 1996 $9.13 $8.88 $0.085
June 30, 1996 9.38 9.00 0.085
September 30, 1996 9.75 9.38 0.085
December 31, 1996 10.25 9.38 0.085
==================================================================
March 31, 1997 $11.88 $9.88 $0.085
June 30, 1997 12.63 10.25 0.085
September 30, 1997 13.75 11.94 0.085
December 31, 1997 18.63 13.75 0.095
==================================================================
March 31, 1998 $19.56 $17.38 $0.095
June 30, 1998 24.75 19.38 0.095
September 30, 1998 26.25 15.50 0.095
December 31, 1998 20.00 15.50 0.110
==================================================================
The listed market makers of Prime's stock are:
- ----------------------------------------------------------------
F.J. Morrissey & Co., Inc. Janney Montgomery Scott, Inc.
- ----------------------------------------------------------------
Advest, Inc. Troster Singer Corp.
- ----------------------------------------------------------------
Wheat First Securities, Inc. Knight Securities
- ----------------------------------------------------------------
Ryan Beck & Co. Inc. Sandler O'Neill & Partners
- ----------------------------------------------------------------
Tucker Anthony Incorporated
- ----------------------------------------------------------------
The Board of Directors of the Company, on May 14, 1998, declared a 2
for 1 stock split payable as a dividend on June 19, 1998 to shareholders of
record on May 29, 1998. The trading information set forth above 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
other factors including 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
regulatory restrictions.
Item 6. Selected Financial Data.
FINANCIAL CONDITION DATA
As of December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Total amount of:
Assets $1,039,340 $953,425 $926,071 $819,961 $739,231
Loans receivable, net 656,914 630,848 616,893 497,034 441,401
Investment securities and interest-bearing
deposits 317,677 251,877 239,497 259,328 117,193
Land acquired for development and resale 1,705 5,925 8,858 10,405 694
Deposits 702,893 694,444 736,642 644,306 585,066
Borrowings from Federal Home Loan Bank of
Pittsburgh 134,503 79,550 37,598 37,646 24,694
Other borrowed money 103,852 91,486 70,685 57,622 56,525
Shareholders' equity 89,803 79,864 70,516 69,279 57,369
Offices open 24 24 23 22 20
===========================================================================================================================
16
SELECTED FINANCIAL DATA
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 (1) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.20% 1.13% 0.46% 0.97% 1.02%
Return on average equity 14.42% 13.97% 5.72% 11.89% 11.57%
Average equity to average assets 8.33% 8.07% 8.13% 8.29% 8.80%
Book value per share $8.18 $7.33 $6.66 $6.58 $5.60
Dividends per share $0.395 $0.350 $0.340 $0.310 $0.270
Dividend payout ratio 36.57% 36.65% 91.89% 44.93% 42.86%
OPERATING DATA
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Interest income $76,263 $71,364 $65,664 $58,979 $47,068
Interest expense 35,910 34,232 33,140 30,557 21,280
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 40,353 37,132 32,524 28,422 25,788
Provision for loan losses 2,027 3,438 3,837 1,129 1,594
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 38,326 33,694 28,687 27,293 24,194
Fees, service charges and other income 3,892 3,535 2,625 2,530 2,398
Gain (loss) on sale of:
Securitization and sale of mortgages -- 606 -- -- --
Mortgage loans 315 -- -- -- --
Investments (6) 135 288 448 (285)
REO and land acquired for development & resale (152) 33 14 (44) (17)
Mortgage banking activities 1,475 561 294 509 81
Non-interest expense 25,402 22,756 25,995(1) 18,930 16,034
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 18,448 15,808 5,913 11,806 10,337
Income tax expense 6,305 5,289 1,896 4,337 3,625
- -------------------------------------------------------------------------------------------------------------------------
Net income $12,143 $10,519 $ 4,017 $ 7,469 $ 6,712
=========================================================================================================================
Dividends declared $ 4,331 $ 3,791 $ 2,811 $ 2,351 $ 1,949
=========================================================================================================================
Diluted earnings per share (2) $ 1.08 $ .96 $ .37 $ .70 $ 0.64
=========================================================================================================================
(1) 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%, 7.98% for the twelve months ended December
31, 1996, respectively.
(2) Earnings per share have been adjusted to reflect stock splits and stock
dividend.
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
During 1998 Prime has continued its strategy to grow commercial assets
by increasing its penetration into the small business markets in the
Philadelphia region. The continuing goal, which began prior to the 1997
conversion to a commercial Bank charter, is to establish Prime as the premier
lender to the small business community. In doing so, the Company has changed the
mix of assets in order to improve overall profitability. Results for the year
1998 suggest that these strategies are working as the Company reported record
earnings, significant growth in commercial assets and improved performance
ratios. It is also noteworthy that this was accomplished during a year in which
the Company needed to invest in back room technologies, including plans to avoid
problems that may be associated with the Y2K issue.
SUMMARY OPERATING RESULTS
Net income at $12.1 million was the highest in the Company's history,
exceeding last year's record of $10.5 million. The increased earnings were 15%
ahead of 1997 results and amounted to $1.08 per diluted share compared to $.96
in 1997. Net income per share in 1997 was considerably above the $.37 reported
in 1996, which included certain adjustments, a portion of which was related to
the acquisition of First Sterling Bancorp, Inc.
The return on average equity was 14.42 % in 1998, up from 13.97% in
1997 and 5.72% in 1996. The return on average assets was 1.20%, up from 1.13% in
1997 and .46% in 1996.
The improvement in reported earnings is primarily due to $3.2 million
more in net interest income resulting from the increased levels of earning
assets and a similar margin (4.26% versus 4.27% in 1997). A lower loan loss
provision ($1.4 million less than in 1997) was also a factor although this was
partly offset by $.6 million less in gains on the sale of assets. Comparing 1997
to 1996, earnings increased due to higher net interest income (up $4.6 million),
gains on the sale of assets and the absence of non-recurring charges related to
the acquisition of First Sterling Bancorp and a special Bank insurance
assessment.
NET INTEREST INCOME
Growth in net interest income was the largest factor in the growth in
earnings from year to year. Net interest income increased 9% to $40.4 million
from $37.1 million in 1997. In 1997 net interest income increased 14% over
1996's $32.5 million. The higher levels of net interest income reflect a shift
to a higher yielding commercial asset mix from the savings Bank structure under
which Prime previously operated and which emphasized residential lending assets.
The Company continues to strive for a balanced loan portfolio with an emphasis
on commercial relationships but with a growing consumer portfolio and continued
servicing to the residential mortgage market.
The net interest margin remained consistent, 4.26% in 1998 versus 4.27%
in 1997. Lower asset yields (8.02% down from 8.17% in 1997) were generally
caused by market conditions and were largely offset by reduced funding costs
(3.76% of earning assets, down from 3.90% in 1997). 1997's margin was a
significant improvement over 1996's 4.06%.
One major factor in improved net interest income, aside from a larger
volume and a richer mix of earning assets, was the increase in average demand
deposits, largely non-interest bearing, of $26.9 million. This increase more
than offset decreases in the average of all other deposits amounting to $22.7
million. The decrease in other deposits was mainly attributable to relatively
higher cost retail certificates of deposit that were generally not part of an
overall banking relationship with Prime Bank (non-core customers). The net
result was a decrease in deposit costs as interest bearing deposits declined in
favor of non-interest balances. Therefore, despite a $65.4 million increase in
borrowed funds, overall interest costs were, as a percent of earnings assets,
lower in 1998 than in 1997.
18
The increase in borrowed funds on average, $25.9 million represents
increased customer funds in the form of repurchase agreements. This relationship
funding is another reflection of increased commercial business activity.
A more detailed analysis of the mix of assets and liabilities and their
related interest rates is presented on pages 27 and 28.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $1.4 million in 1998 from
1997's $3.4 million primarily due to reduced charge-offs and the improved
quality of the loan portfolio. 1997 had shown a slight decrease from 1996. A
more detailed explanation of the factors considered in determining the proper
provision for loan losses is presented in the section "Banking Risks".
NON-INTEREST INCOME
Non-interest income, excluding gains on the sale of assets increased
$1.2 million to $5.3 million in 1998 from $4.1 million in 1997, a 31% increase.
Mortgage banking activities accounted for most of this increase as this source
of revenues increased from $.56 million in 1997 to $1.48 million in 1998.
Deposit fees and other service charges rose by $.57 million from 1997 primarily
due to increases in transaction deposit accounts and an increase in standard
charges for services. These increases partially offset by a decrease of $.57
million in gains on the sale of assets and $.23 million less in loan fees.
In 1997 non-interest income was $1.6 million over 1996 levels due
primarily to gains on the sale of assets and increased fees and service charges.
NON-INTEREST EXPENSE
Non-interest expense increased $2.6 million or 12% from $22.8 million
in 1997. The major factors contributing to this increase were higher salary and
benefit costs, which increased $1.8 million, from $11.4 million to $13.2
million. These costs are largely associated with new employees. The new
employees were used to compliment Prime's continuing penetration of the regional
commercial markets plus technical staff needed to more effectively serve our
customers and to respond to the year 2000 systems issues. In 1997 an increase of
$1.8 million compared to the prior year was recorded, excluding certain
adjustments recognized in 1996. The adjustments related to Prime's acquisition
of First Sterling Bancorp and a special Bank insurance assessment, both
recognized in 1996. The expense increase in 1997 included $1.0 million in salary
and benefit costs largely as a consequence of the Company's expanded commercial
banking activities and a $.6 million increase in occupancy and equipment expense
due to technology enhancements and the first full year of costs for certain new
operating facilities.
The Company's efficiency ratios (operating expenses as a percent of net
revenues) were 56% in 1998, 55% in 1997 and 59% in 1996.
BALANCE SHEET REVIEW
Total assets at year-end grew by 9% compared to 1997 versus 3% growth
in 1997 compared to 1996. Assets were $1.04 billion at December 31, 1998
compared to $953 million at December 31, 1997 and $926 million at December 31,
1996. The growth in assets, $86 million, was funded by increased customer
balances in deposits and other liability products plus $55 million in additional
borrowings from the Federal Home Loan Bank (FHLB). Much of the increase in
funding was used for loan growth in the commercial and consumer portfolios.
Reductions in residential mortgage loans, through loan sales, regular
amortization and early payments, amounted to $53 million and were invested in
securities at fixed spreads.
19
Average total assets for 1998 increased by $77 million, including $72
million in commercial and consumer loans. Residential mortgage prepayments and
other actions reduced that portfolio, on average, by $54 million and was
replaced by investment portfolio additions.
LOANS
The emphasis on building commercial relationships resulted in
commercial and commercial real estate loans growing a further 20% in 1998
following 27% growth in 1997. As of the respective year ends these loans grew
from $276 million in 1996 to $351 million in 1997 and $420 million in 1998. The
increases were partially offset by a decrease in residential mortgages from $246
million in 1996 to $182 million in 1997 and $129 million in 1998. The decreases
were the result of the policy adopted by management in 1996 to sell certain
mortgages in the portfolio and not to retain on the Company's books most new
mortgage originations, which were instead sold into the secondary markets.
Another factor in the declining mortgage portfolio was a rate environment that
fostered a strong refinancing market.
INVESTMENTS
Growth in the investment portfolios arose from liquidity provided from
declining residential mortgage loans and from increases in funding not needed
for commercial and consumer loan increases. All incremental portfolio additions,
and any reinvestment of maturities in the portfolios, were placed in the
"available for sale" category. Consequently, the "held until maturity" portfolio
declined from $118 million at the end of 1997 to $56 million at year-end 1998.
The larger "available for sale" portfolio provides more flexibility in
asset/liability management.
DEPOSITS
While there was only a 1% increase in overall deposits from December
31, 1997 to December 31, 1998 ($694 million to $703 million), there was a
significant change in the mix of the deposits. Demand and savings accounts,
which are lower cost accounts, increased from $355 million to $406 million while
higher cost certificates of deposit decreased from $339 million to $297 million.
The reduced reliance on higher cost certificates of deposit and more emphasis on
relationship banking began in 1997. This resulted in overall deposits decreasing
from $737 million at December 31, 1996 to $703 million at the end of 1998.
REPURCHASE AGREEMENTS
Through cash management and other support services to commercial
clients, Prime gathers funding in the form of repurchase agreements, borrowings
for which Prime offers investment securities as collateral. At December 31, 1998
this activity provided $104 million in funding at an average cost of 4.22%. This
compares to $71 million at the end of 1997 at an average cost of 4.92%.
FHLB BORROWINGS
The Company uses FHLB borrowings as a liquidity tool, including funding
for investment opportunities created by market conditions. As of December 31,
1998 $135 million in borrowings from the FHLB were outstanding, most of which
were specifically matched to investments and resulted in spreads of from 60 to
170 basis points. At the end of 1997 $80 million in FHLB borrowings were
outstanding.
20
BANKING RISKS
CREDIT RISK
Credit risk arises from the potential that a borrower or counterparty
will fail to perform according to contractual terms. Such risk exists in
numerous financial instruments and off-balance sheet items including loans and
leases, investments, letters of credit and derivative instruments. The Company
strives to maintain strong credit quality through the management of this risk.
In its endeavor, the Company attempts to identify, monitor, and control credit
risk through the adoption of high underwriting standards and good risk
management practices.
A key element in the establishment of these standards and practices is
the implementation of sound lending policies and procedures. The Company's board
approved lending policies are comprehensive and are designed to establish
accountability for appropriate personnel. Loan approvals are made by at least
two experienced banking loan officers with loan officer approval authority based
on the size and risk in the credit relationship.
As part of the credit risk monitoring process, various committees have
been established. These committees are intended to ensure that sound
underwriting practices are sustained and that management and the Board of
Directors are aware of the level of risk in the portfolio. One such committee is
the Senior Loan Officers Committee. The committee of officers meets on a monthly
basis to review approved and renewed credit relationships that exceed $750
thousand. The review includes, but is not limited to, a discussion on the
structure, terms, and repayment ability of these credit relationships.
The Credit Committee, a committee of directors and senior management,
meets six times a year to discuss similar items on credit relationships
exceeding $1 million. This committee also reviews relationships above $250
thousand that are considered to have an inordinate amount of risk and
relationships that warrant exception to lending policies. In addition to
reviewing individual credit relationships, the committee is informed on
aggregate portfolio issues such as possible concentrations of credit and
potential portfolio exposure arising from Year 2000 risk.
The Company's independent Loan Review Department provides further
assurance that credit risk is identified and controlled. The loan portfolio is
monitored closely for any indication of deteriorating credit quality. Individual
lending relationships are assessed regularly and provided with a numerical grade
based on the estimated level of risk in the relationship. Some of the criteria
considered in the evaluation include the borrowing entity's ability to repay the
debt, the adequacy of its management, and the industry in which it operates.
Also considered in the evaluation is the adequacy of collateral, the ability of
guarantors to provide support and the overall structure of the obligation. While
it is the loan officer's responsibility to inform management of any change in
the credit quality of an individual lending relationship, the independent loan
review function provides an additional level of control in the monitoring
process.
The Loan Review Department also examines the portfolio on an aggregate
basis by reviewing overall portfolio quality and trends. Management and the
Board are regularly informed of the condition of the portfolio and of any
situation that may exceed the Company's risk tolerance.
NON-PERFORMING ASSETS
Non-performing assets decreased to $3.6 million at December 31, 1998
from $4 million at December 31, 1997. The reduction represents the second
consecutive year of declines in non-performing assets. The reduction primarily
resulted from the sale of real estate owned and repossessed autos. Repossessed
assets totaled $702 thousand at December 31, 1998, representing a $255 thousand
reduction from year-end 1997. Non-accrual loans, the largest component of
non-performing assets, totaled $2.9 million at December 31, 1998 and reduced by
$92 thousand from the prior year-end amount.
21
ALLOWANCE FOR LOAN LOSSES
While management endeavors to minimize the possibility of loss in its
portfolio, it recognizes that losses are intrinsic to the lending process. As
such, the adequacy of the allowance for loan losses is monitored closely and is
maintained at a level that management believes is sufficient to protect against
anticipated and unforeseen losses.
At December 31, 1998, the allowance for loan losses totaled $9.6
million, or 1.44% of total loans, as compared to $8.5 million, or 1.33% of total
loans at December 31, 1997. The increased reserves reflects, in part, growth in
the total amount of loans outstanding as well as the changing mix of loan
assets. At December 31, 1998, 63% of the loan portfolio was in commercial and
commercial real estate receivables as compared to 55% at the end of 1997.
A detailed and systematic approach is applied in assessing the adequacy
of the allowance for losses. Numerous factors are considered in the analysis
including economic conditions, portfolio growth and composition, credit quality,
delinquency and charge-off trends, historical performance and possible
concentrations of credit. The evaluation of the allowance for losses
incorporates both identified loss potential among specific loans and the
underlying risks inherent in the portfolio. Reserves are allocated to
deteriorated commercial and commercial real estate portfolios based on the
perceived level of risk in the individual credits. Reserves allocated for
consumer and residential portfolios are based on historical losses as well as
projected trends. Potential losses are monitored monthly to ensure that an
adequate level of reserves is maintained. Given the numerous variables, an
increase in the size of the portfolio or a change in any of the assessed
components could result in an increase in the allowance for losses despite an
overall improvement in credit quality.
Also incorporated in the analysis is an assessment of Statement of
Financial Accounting Standards ("SFAS") 114. Pursuant to SFAS 114, Accounting by
Creditors for Impairment of a Loan, as amended, impaired loans are 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. At December 31, 1998, impaired loans
totaled $1.5 million and required reserves of $507 thousand. These loans
consisted primarily of commercial non-accrual loans.
NET CHARGE-OFFS
Net charge-offs totaled $943 thousand in 1998, representing a
significant decrease from the $2.2 million recognized in 1997. The reduction
resulted from strong collection efforts coupled with a favorable economy and
improved credit quality. Charge-offs in the commercial, commercial real estate
and residential portfolios were minimal while charge-offs in the consumer
portfolio remained in line with the prior year. The majority of charge-offs were
in the credit card and indirect auto portfolios. The Company is no longer active
in the indirect auto lending business.
22
The following table provides key asset quality trends (dollars in thousands).
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Net charge-offs $ 943 $ 2,159 $ 2,713 $ 1,114 $ 1,132
Net charge-offs as % of loans 0.14% 0.34% 0.43% 0.22% 0.25%
Non-performing loans $ 2,911 $ 3,003 $ 7,084 $ 4,838 $ 6,968
Allowance as % of non-performing
loans 328.72% 282.55% 101.72% 125.71% 87.07%
Non-performing assets $ 3,613 $ 3,960 $ 8,509 $5,755 $ 7,291
Non-performing assets as % of assets 0.35% 0.42% 0.92% 0.64% 0.99%
Allowance for loan losses $ 9,569 $ 8,485 $ 7,206 $6,082 $ 6,067
Allowance as % loans 1.44% 1.33% 1.15% 1.21% 1.36%
Allowance as % non-performing assets 264.92% 214.21% 84.69% 105.68% 83.21%
================================================================================================================================
*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, 1998, 1997, 1996 and 1995 was $1.6 million , $5.9 million, $8.9
million and $10.1 million, respectively. Non-performing assets, and the ratio of
non-performing assets as a percentage would have been $5.2 million and 0.50% in
1998, $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.
YEAR 2000 RISK and the Company's State of Readiness
The Company has been pro-active in regard to the possible consequences
that the digital change to a new millennium may have on computers and other
operations. Prime is now primarily in the testing phase in its program to avoid
problems associated with this worldwide concern sometimes referred to as the
"Y2K issue". Testing for all major systems is scheduled for substantial
completion by mid-1999.
Late in 1997 Prime established a team of senior officers to address Y2K
issues. This Company-wide effort involved an intense review of all systems and
functions that could be affected by the date change in question. Aside from
internal systems and functions, outside servicers and customers were subject to
review in regard to their Y2K preparedness. The result of this process was the
identification of 71 internal systems (six non-information technology related)
that may be affected by Y2K and a small number of customers whose systems need
still further review and testing. See table II below.
In accordance with the Company's year 2000 commercial credit policy, an
analysis was performed on the commercial and commercial real estate loans to
access the Y2K risk inherent in the loan portfolios and to determine whether
additional reserves are required to mitigate this risk. This analysis was based
on questionnaires as well as interviews with the customers, which were performed
by the Company's account officers. The results of the analysis and a second
interview with all borrowers rated high or medium risk based on the first
interview resulted in the conclusion that less than 9% of the commercial and
commercial real estate portfolios is rated high or medium risk and therefore no
additional reserves are required.
Through December 31, 1998, the Company had expensed $126,000 in costs
related to the Y2K issue, $25,000 of which was recorded in 1997. It is estimated
that an additional $2.0 million of expenditures will be made during the next
fourteen months. As some of these future expenditures are capital items, the
charge to current operating results is less, as indicated in the table that
follows. Y2K project costs are being funded from operating cash flows and are
not expected to have a material adverse effect on the Company's results of
operations. The estimates set forth herein of the amounts and timing of
projected costs do not incorporate any cost efficiencies or extra costs which
might arise in connection with the pending merger with Summit Bancorp. Any cost
savings or increases will depend upon the timing of consummation of the merger
with Summit Bancorp and a corresponding merger of Prime Bank with Summit Bank of
Pennsylvania, as well as a number of other technological and operations factors,
which have not yet been fully evaluated. Consequently, management is not able to
predict, at this time, whether overall Y2K compliance costs will increase or
decrease from these estimates.
23
TABLE I
ESTIMATED Y2K EXPENDITURES
Period Expenditures Charge to Expense
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
1997 $ 25,000 $25,000 $ -- $ -- $ --
1998 376,800 -- 101,100 58,100 60,300
1999 1,561,000 -- -- 478,200 263,600
2000 87,200 -- -- -- 83,000
- ------------------------------------------------------------------------------------------------------------------------------------
$2,050,000 25,000 101,100 536,300 406,900
The relative completion status of all Y2K projects as of December 31,
1998 is reflected in the following table.
TABLE II
RELATIVE COMPLETION PERCENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Testing/
Exposure Area Assessment Remediation Validation Implementation
- ------------------------------------------------------------------------------------------------------------------------------------
Information Technology
(I/T) 100% 98% 63% 29%
Non-I/T (Vaults, phones,
fax machines, etc.) 100% 100% 100% 100%
3RD parties - Clients [*]
[*] Only 2% of client base was of sufficient size and systems dependent to be
assessed as "high risk" exposures in regard to Y2K. These commercial borrowers
are being subject to interviews and other assessments of their Y2K readiness.
The current evaluation of this exposure does not lead management to believe that
any incremental loss provisions are necessary.
As of December 31, 1998, of the total seventy-one (71) systems
identified for remediation and testing, twenty-five (25) systems had been
remediated with testing also completed. An additional forty-one (41) systems had
been remediated but were subject to the completion of testing. Only one system
had not yet been remediated. Four (4) PC related systems will be corrected in
early 1999 when the PC's are replaced.
A major portion of the Company's Information Technology ("I/T") budget
has been devoted to the Y2K problem. This has resulted in delayed implementation
of certain upgrades in systems capabilities that may have otherwise occurred. On
the other hand, certain Y2K resolution plans have accelerated the upgrade of
other system capabilities. The net result is that the Y2K effort has not
adversely delayed I/T projects and will not result in a material loss of future
revenues or material increases in future expenses.
Initially the Company used an outside vendor to help in the assessment
phase of major Y2K issues. In addition, the Company is subject to independent
review by banking regulators who periodically make onsite visits. Based on these
contacts, management believes it is making satisfactory progress in its efforts
to avoid any material adverse consequences from the date change to a new
millennium.
If no further progress regarding the Company's efforts to avoid Y2K
consequences were made, it is possible that there would be material adverse
effects on operating results. Customer deposit balances or loans receivable may
become inaccurate and lead to losses, the magnitude of which is not reasonably
possible to estimate, especially given the alternatives developed in the
Company's contingency plans. However, given the level of progress to date and
the momentum of the effort, management does not believe that material adverse
consequences will develop in the year 2000.
The Company has developed a Year 2000 Corporate Contingency Plan for
"mission critical" systems which was approved at the March 1999 Board Meeting..
Mission critical systems are those that are essential to the Company's daily
operating effectiveness. These plans are designed to react in the event that the
solutions now in process to resolve Y2K issues are unsuccessful. Such plans
involve manual process intervention, staffing increases, outsourcing and other
alternatives.
24
The Year 2000 statements contained herein and in other securities or
regulatory filings of the Company or Prime Bank may not be relied upon as
representations or warranties for any purpose other than disclosure for federal
securities law compliance purposes.
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains certain
forward-looking statements, either expressed or implied, which are provided to
assist the reader in making judgments about the Company's possible future
financial performance. Such statements are subject to certain risks and
uncertainties including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market and competition that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
- --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
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 (NII) under
a variety of rate assumptions. 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 NII (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. At
December 31, 1998 and 1997, net interest income simulations using a 200 basis
point change in short-term interest rates show that net interest income
volatility over the next twelve months would be 2% for both periods.
In 1998 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.
GAP ANALYSIS
A starting point for analyzing the possible impact of changing interest
rates on NII is a table that groups assets and liabilities according to their
expected repricing dates, the periods in which the contractual terms allow for a
change in the interest rate. The table that follows displays, as of December 31,
1998, the Company's balance sheet grouped into repricing periods beginning with
those assets and liabilities that may be subject to rate changes in the first
quarter of 1999. The indicated excess of liabilities subject to change suggests
that income may be favorably impacted in the event of lower rates but negatively
impacted if rates increase. This conclusion, however, is inappropriate if based
solely on the GAP analysis. Other factors, such as the expected pace of rate
changes on components of the balance sheet need to be considered. Therefore,
management applies computer based modeling that takes into account the GAP
information as well as the pace of rate changes in a variety of economic
scenarios. The result is an estimate of changes to NII in each of the scenarios
and, as indicated above, management would take certain actions if a reasonably
possible scenario results in a projected loss of NII of 5% or more.
25
GAP ANALYSIS
December 31, 1998
(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 $311,222 $26,771 $47,452 $109,339 $90,689 $65,135 $15,045 $665,653
Investments 56,644 35,642 56,712 79,417 25,779 29,733 23,444 307,371
Interest bearing deposits 10,306 -- -- -- -- -- -- 10,306
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 378,172 62,413 104,164 188,756 116,468 94,868 38,489 983,330
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accruing loans 291 582 582 728 728 -- -- 2,911
Real estate owned 211 211 211 69 -- -- -- 702
Allowance for loan losses -- (957) (1,914) (2,871) (3,827) -- -- (9,569)
Other assets -- -- -- -- -- -- 61,966 61,966
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $378,674 $62,249 $103,043 $186,682 $113,369 $94,868 $100,455 $1,039,340
====================================================================================================================================
Liabilities and equity
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $237,577 $64,980 $75,635 $ 132,718 $88,534 $ 103,449 $ -- $702,893
Borrowings 112,355 2,000 -- -- 109,000 15,000 -- 238,355
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 349,932 66,980 75,635 132,718 197,534 118,449 -- 941,248
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities -- -- -- -- -- -- 8,289 8,289
Equity -- -- -- -- -- -- 89,803 89,803
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and $349,932 $66,980 $75,635 $ 132,718 $197,534 $ 118,449 $98,092 $1,039,340
equity
====================================================================================================================================
GAP $ 28,240 $(4,567) $28,529 $ 56,038 $(81,066) $(23,581) $38,489 $42,082
Cumulative GAP $ 28,240 $23,673 $52,202 $ 108,240 $ 27,174 $ 3,593 $42,082
26
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES (Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 $380,898 $34,844 9.15% $316,006 $29,663 9.39% $250,334 $23,104 9.23%
Consumer 111,494 10,330 9.27% 104,375 9,853 9.44% 87,163 7,789 8.94%
Residential 152,829 11,648 7.62% 206,631 15,807 7.65% 221,952 18,569 8.37%
- ------------------------------------------------------------------------------------------------------------------------------------
645,221 56,822 8.81% 627,012 55,323 8.82% 559,449 49,462 8.84%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities (3) 287,841 18,483 6.44% 241,824 15,734 6.51% 241,489 16,207 6.71%
Interest-bearing deposits 22,078 1,258 5.43% 8,313 607 7.30% 8,485 295 3.48%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning
assets 955,140 76,563 8.02% 877,149 71,664 8.17% 809,423 65,964 8.15%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (9,188) -- (8,393) -- (6,421) --
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest earning
assets 64,753 -- 64,988 -- 63,500 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,010,705 $76,563 $933,744 $71,664 $866,502 $65,964
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook/statement $63,304 $1,159 1.83% $62,396 $1,169 1.87% $63,827 $1,338 2.10%
Money market 146,181 5,180 3.54% 132,436 4,313 3.41% 120,817 4,334 3.59%
Checking accounts 115,887 7 0.01% 92,853 281 0.28% 73,627 578 0.79%
N.O.W. accounts 43,277 239 0.55% 39,389 247 0.63% 40,720 782 1.92%
Time deposits 343,713 18,386 5.35% 381,129 20,496 5.38% 371,773 19,679 5.29%
- ------------------------------------------------------------------------------------------------------------------------------------
712,362 24,971 3.51% 708,203 26,506 3.74% 670,764 26,711 3.98%
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other
borrowings 208,852 10,939 5.24% 143,421 7,726 5.39% 116,289 6,429 5.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 921,214 35,910 3.90% 851,624 34,232 4.02% 787,053 33,140 4.21%
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities 5,300 -- -- 6,810 -- -- 8,977 -- --
Shareholders' equity 84,191 -- -- 75,310 -- -- 70,472 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,010,705 $35,910 $933,744 $34,232 $866,502 $33,140
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/interest
rate spread $40,653 4.12% $37,432 4.15% $32,824 3.94%
====================================================================================================================================
Net interest earning assets/
net yield on interest-earning
assets $33,926 4.26% $25,525 4.27% $22,370 4.06%
====================================================================================================================================
Interest earning assets
to interest-bearing liabilities 104% 103% 103%
====================================================================================================================================
(1) Non-accrual loans are included in loans.
(2) Yields on loans include income from origination fees, net of costs.
(3) Tax free interest income is calculated on a tax equivalent basis.
27
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
changes in interest income or expense not arising solely as a result of volume
or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
- ------------------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loan portfolio
Commercial & commercial real
estate $ 6,578 $ (1,397) $ 5,181 $5,992 $ 567 $6,559
Consumer 672 (195) 477 1,539 525 2,064
Residential (4,116) (43) (4,159) (1,282) (1,480) (2,762)
- ------------------------------------------------------------------------------------------------------------------------------------
3,134 (1,635) 1,499 6,249 (388) 5,861
- ------------------------------------------------------------------------------------------------------------------------------------
Investments 2,994 (186) 2,749 22 (495) (473)
Interest earning deposits 1,005 (413) 651 (6) 318 312
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,133 (2,234) 4,899 6,265 (565) 5,700
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Passbook/statement 17 (27) (10) (30) (139) (169)
Money market 448 419 867 417 (438) (21)
Checking accounts 70 (344) (274) 152 (449) (297)
N.O.W. accounts 24 (32) (8) (26) (509) (535)
Time deposits (2,012) (98) (2,110) 495 322 817
- ------------------------------------------------------------------------------------------------------------------------------------
(1,453) (82) (1,535) 1,008 (1,213) (205)
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank
advances and other borrowings 3,525 (312) 3,213 1,500 (203) 1,297
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,072 (394) 1,678 2,508 (1,416) 1,092
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 5,061 $ (1,840) $ 3,221 $ 3,757 $ 851 $ 4,608
====================================================================================================================================
28
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 following table summarizes
Prime Bancorp's funding profile at December 31, 1998.
Product Category % of Total
- ---------------- Funding
Retail transaction deposits 43.2%
Time deposits 31.5%
Customer repurchase agreements 11.0%
Other borrowings 14.3%
-----
100.0%
=====
From the above table, management concludes that 85.7% 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.
29
Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except for share data)
December 31,
- --------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
Assets:
Cash and due from Banks $ 31,027 $ 23,068
Interest-bearing deposits 10,306 18,161
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents 41,333 41,229
- --------------------------------------------------------------------------------------------------------
Investment securities (market value of $57,171 and $118,848) 56,436 117,988
Investment securities available for sale 250,935 115,728
Loans receivable 666,483 639,333
Allowance for loan losses (9,569) (8,485)
- --------------------------------------------------------------------------------------------------------
Loans receivable, net 656,914 630,848
- --------------------------------------------------------------------------------------------------------
Loans held for sale 2,081 3,229
Accrued interest receivable 7,659 7,429
Real estate owned 702 957
Land acquired for development and resale 1,705 5,925
Property and equipment, net 9,652 10,023
Other assets 11,923 20,069
- --------------------------------------------------------------------------------------------------------
Total assets $ 953,425 1,039,340
========================================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Deposits $ 702,893 $694,444
Repurchase agreements 103,852 91,486
Borrowings from Federal Home Loan Bank of Pittsburgh 134,503 79,550
Other liabilities 8,289 8,081
- --------------------------------------------------------------------------------------------------------
Total liabilities 949,537 873,561
- --------------------------------------------------------------------------------------------------------
Commitments & contingencies (Note 16)
Shareholders' equity:
Serial preferred, $1 par value; 2,000,000 shares authorized unissued -- --
Common stock, $1 par value; 13,000,000 shares authorized
10,984,833 and 10,888,532 shares issued and outstanding 10,985 10,888
Additional paid-in capital 34,435 33,652
Retained earnings 43,696 35,884
Accumulated other comprehensive income 687 (560)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 89,803 79,864
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,039,340 $953,425
========================================================================================================
See accompanying notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands. except for share data) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and fees $ 56,822 $ 55,323 $ 49,462
Investment securities 18,183 15,434 15,907
Interest-bearing deposits 1,258 607 295
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 76,263 71,364 65,664
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 24,971 26,506 26,711
Short-term borrowings 5,258 7,422 5,272
Long-term borrowings 5,681 304 1,157
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 35,910 34,232 33,140
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 40,353 37,132 32,524
- ---------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2,027 3,438 3,837
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 38,326 33,694 28,687
- ---------------------------------------------------------------------------------------------------------------------
Non-interest income:
Fees and service charges 2,778 2,433 1,864
Gain on sale of assets 200 774 302
Mortgage banking income 1,475 561 294
Other 1,071 1,102 761
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 5,524 4,870 3,221
- ---------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 13,262 11,436 10,437
Occupancy and equipment 5,667 5,584 4,985
Federal insurance premiums 339 365 753
FDIC special insurance assessment -- -- 2,713
Restructuring and other merger related expenses -- -- 2,260
Other 6,134 5,371 4,847
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 25,402 22,756 25,995
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 18,448 15,808 5,913
Income taxes 6,305 5,289 1,896
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 12,143 $ 10,519 $ 4,017
=====================================================================================================================
Earnings per share:
Basic $ 1.11 $ 0.97 $ 0.38
Diluted 1.08 0.96 0.37
Weighted average number of shares outstanding:
Basic 10,947,717 10,802,888 10,481,364
Diluted 11,254,925 10,988,018 10,823,462
Dividends declared per share $ 0.395 $ 0.350 $ 0.340
=====================================================================================================================
See accompanying notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Common Stock:
Beginning of period $10,888 $10,582 $10,540
Stock Options 97 306 42
------- ------- -------
End of period 10,985 10,888 10,582
------- ------- -------
Additional paid in capital:
Beginning of period 33,652 32,099 31,934
Stock options 281 844 91
Tax benefit associated with the exercise
of stock options 502 709 74
------- ------- -------
End of period 34,435 33,652 32,099
------- ------- -------
Retained earnings
Beginning of period 35,884 29,156 27,950
Net Income 12,143 $12,143 10,519 $10,519 $ 4,017 $4,017
------- ------- ------
Dividends declared (4,331) (3,791) (2,811)
------- ------- -------
End of period 43,696 35,884 29,156
------- ------- -------
Accumulated comprehensive income:
Beginning of period (560) (1,321) (1,145)
Unrealized holding gains on securities
arising during period, net of taxes 1,243 1,243 11
Less reclassification adjustment for
(gains) losses included in net income 4 (482) (187)
------- ------- ------
Other comprehensive income 1,247 1,247 761 761 (176) (176)
------- ------- ------- ------- ------- ------
Comprehensive income $13,390 $11,280 $3,841
------- ------- ------
End of period 687 (560) (1,321)
======= ======= =======
Total shareholders' equity $89,803 79,864 $70,516
======= ======= =======
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 12,143 $ 10,519 $ 4,017
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization of intangibles 2,417 2,462 2,443
(Gain) loss on:
Loans held for sale (1,522) (418) (99)
Sale of investment securities 6 (741) (288)
Land acquired for development and resale and REO 152 (33) (14)
Provision for loan losses 2,027 3,438 3,837
Loans held for sale:
Originations, net of repayments (57,496) (27,839) (7,855)
Sales 60,166 22,988 9,492
(Increase) decrease in other assets and accrued
interest receivable 7,651 (7,023) (1,565)
Increase (decrease) in other liabilities 188 (2,284) (462)
- -----------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 25,732 1,069 9,506
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities (10,710) (44,682) (35,314)
Repayment of investment securities 72,262 25,212 23,029
Sales of investment securities -- 12,285 --
Purchases of investment securities available for sale (226,411) (54,165) (63,087)
Repayments of investment securities available for sale 43,206 32,882 24,333
Sales of investment securities available for sale 49,648 50,104 40,443
Loans receivable (28,294) (36,813) (121,829)
Proceeds from sale of land acquired for development
and resale 5,546 3,443 2,735
Increase in land acquired for development and resale (1,478) (1,831) (1,188)
Purchase of property and equipment (1,731) (510) (2,077)
Proceeds from sale of property and equipment 43 -- --
(Increase) decrease in real estate owned (1,064) 823 --
Proceeds from sale of real estate owned 1,520 3,299 367
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (97,463) (9,953) (132,588)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 8,449 (42,198) 92,336
Borrowings from the FHLB of Pittsburgh 221,200 557,276 46,200
Repayments of borrowings from the FHLB of Pittsburgh (166,247) (534,324) (46,248)
Increase in repurchase agreements 12,366 39,801 13,063
Decrease in advance payments by borrowers for taxes and
insurance (153) (388) (299)
Net proceeds from issuance of common stock 378 1,150 133
Cash dividends paid (4,158) (3,668) (2,529)
- -----------------------------------------------------------------------------------------------------------
Net cash provided from financing activities 71,835 17,649 102,656
- -----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 104 8,765 (20,426)
Cash and cash equivalents:
Beginning of year 41,229 32,464 52,890
End of year $ 41,333 $ 41,229 $ 32,464
===========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 36,590 $ 36,011 $ 33,165
Income taxes 5,602 2,818 3,100
Securitization of residential loans -- 17,798 2,091
Transfer of loans held for sale to loans receivable -- -- 3,136
Transfer of loans to real estate owned -- 3,711 1,269
===========================================================================================================
See accompanying notes to consolidated financial statements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
of Prime Bancorp, Inc. and subsidiaries (the "Company"). The accompanying
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"), which have been applied on a
consistent basis.
BUSINESS
The Company's principal subsidiary is Prime Bank (the "Bank") whose
principal business consists of attracting deposits and obtaining borrowings,
then converting those deposits and borrowings into various types of loans 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 and is a member of the Federal Reserve System
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 until its merger with First
Sterling Bank.
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 and accretion 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.
34
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 cost or fair value less estimated costs to sell.
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
Loans are stated at the principal amount outstanding, less unearned
discounts and net deferred loan origination fees. 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 such loans
for the investor, the computation of the gain or loss is adjusted to allow for a
normal servicing fee over the estimated remaining maturities of the loans sold.
Normal servicing fees are based on the minimum servicing rates of the relevant
federally-sponsored market makers or comparable rates for transactions with
other investors. The resulting deferral is amortized as an adjustment of
servicing fee income over a period generally not in excess of 7 years.
The Company defers loan origination fees less certain direct costs, and
subsequently recognizes them as an adjustment of the loan's yield over the
contractual life of the loan using the level-yield method.
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 inherent in the portfolio. 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.
35
Pursuant to 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, discounted
at the loan's effective interest rate, or the fair value of the underlying
collateral if principal repayment is expected to come from the sale or operation
of such collateral. All payments received are applied to the principal balance.
LOANS HELD FOR SALE
As part of its mortgage banking activities the Bank originates and
subsequently securitizes or 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 or
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 such assets. In such 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 and also 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.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
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.
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. Fair value is 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 mortgage servicing rights ("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. The MSRs are amortized over a period generally not in excess of 7 years.
36
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and 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.
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.
EARNINGS PER SHARE
SFAS No. 128, Earnings Per Share, which superseded Accounting
Principles Board ("APB") No. 15, Earnings Per Share, establishes standards for
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 basic EPS which, unlike primary EPS, excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS under APB 15. All prior period
EPS amounts have been restated to reflect the provisions of this statement.
All share amounts reflected in these financial statements have been
restated to reflect the effect of stock splits and stock dividends.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and presentation of comprehensive income and its components in
financial statements. The Company adopted this statement in the first quarter of
1998 and has presented the required information about comprehensive income in
the consolidated statement of shareholders' equity.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 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 SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise but retains the requirement to report information about
major customers. It amends SFAS 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 considers the Company to have only
one segment under the guidelines of SFAS 131 and reports accordingly.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
"derivaties") and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of certain exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposures. This statement is
effective for all fiscal quarters of fiscal years beginning after December 15,
1999. Earlier adoption is permitted. The Company has not yet determined the
impact, if any, of this Statement, including its provisions for the potential
reclassifications of investment securities, on net income, financial condition
or equity.
37
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of 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 No. 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 No. 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 No. 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 No. 123.
1. 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 3.32 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 221,020 shares of Prime
stock. The transaction was tax-free to the shareholders for federal income tax
purposes. The above shares have been adjusted for 2 for 1 stock split.
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.
Year Ended
December 31,
- -------------------------------------------------
1996
- -------------------------------------------------
Net interest income:
Prime Bancorp $23,808
First Sterling 8,716
- -------------------------------------------------
Combined $32,524
=================================================
Net income:
Prime Bancorp $ 3,265
First Sterling 752
- -------------------------------------------------
Combined $ 4,017
=================================================
Total shareholders' equity:
Prime Bancorp $57,037
First Sterling 13,479
- -------------------------------------------------
Combined $70,516
=================================================
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.
38
The following table presents stock option data related to the plan:
Weighted-
Average
Shares in thousands Exercise Price Shares
- ----------------------------------------------------------
- ----------------------------------------------------------
December 31, 1995 $ 5.52 654,186
Granted 9.01 323,000
Options Exercised 3.20 (41,582)
December 31, 1996 6.82 935,604
Granted 17.61 99,000
Options Exercised 3.76 (306,218)
December 31, 1997 9.54 728,386
Granted 18.03 67,250
Options Exercised 6.69 (115,978)
December 31, 1998 10.85 679,658
==========================================================
The fair value of stock options granted during 1998, 1997 and 1996 was
$243, $260 and $436 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1998--expected dividend
yield 2.8%, risk-free interest rate of 4.58%, expected volatility of stock over
the expected life of the options of 31.6%, and an expected life of five years;
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 5.80%, expected volatility of stock over the expected life of
the options of 13.8%, and an expected life of five years. Shares of common stock
available for the granting of options under the plan at December 31, 1998, 1997
and 1996 were 101,706, 168,956 and 267,956, respectively.
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
on the following table.
1998 1997 1996
- ---------------------------------------------------------------------
Net income As reported $12,143 $10,519 $4,017
Pro forma 11,985 10,181 3,323
Earnings per share:
Basic As reported 1.11 0.97 0.38
Pro forma 1.09 0.94 0.32
Diluted As reported 1.08 0.96 0.37
Pro forma 1.06 0.93 0.31
=====================================================================
Pro forma net income reflects only options granted from 1996 through
1998. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected over the applicable vesting period
for the options and compensation cost for options granted prior to January 1,
1996 is not considered.
The following table summarizes information about options outstanding at December
31, 1998:
Options Outstanding Options Exercisible
- ----------------------------------------------------------------------------------- ---------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
$ 7.39 to $10.25 518,408 7.00 $ 8.70 435,908 $ 8.65
14.82 to 18.00 97,250 9.59 16.80 97,250 16.80
18.63 to 26.00 64,000 9.05 19.20 64,000 19.20
- ------------------------------------------------------------------------------------------------------------------------------
$ 7.39 to $26.00 679,658 7.56 $10.85 597,158 $ 7.56
==============================================================================================================================
39
4. INVESTMENT SECURITIES
Investment securities at December 31, 1998 and 1997 were comprised of the
following:
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 6,732 $ 346 $ -- $ 7,078 $ 6,735 $267 $ -- $ 7,002
Mortgage backed securities 34,304 397 (9) 34,692 106,563 726 (133) 107,156
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities 41,036 743 (9) 41,770 113,298 993 (133) 114,158
Other securities 15,400 1 -- 15,401 4,690 -- -- 4,690
- ------------------------------------------------------------------------------------------------------------------------------------
$ 56,436 $ 744 $ (9) $ 57,171 $117,988 $993 $(133) $118,848
====================================================================================================================================
Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Govt & U.S. Govt agency $123,380 $ 975 $ (1) $124,354 $ 64,483 $129 $ (39) $ 64,573
Mortgage-backed securities 108,861 298 (547) 108,612 51,544 135 (824) 50,855
Corporate Bonds 17,316 332 -- 17,648 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities 249,557 1,605 (548) 250,614 116,027 264 (863) 115,428
Other securities 300 21 -- 321 300 -- -- 300
- ------------------------------------------------------------------------------------------------------------------------------------
$249,857 $1,626 $(548) $250,935 $116,327 $264 $(863) $115,728
- ------------------------------------------------------------------------------------------------------------------------------------
Gross gains of $45, $294, and $296 and gross losses of $51, $159, and
$8 were realized on sales of investment securities available for sale for the
years ended December 31, 1998, 1997, and 1996 respectively.
The amortized cost and estimated market value of investment securities
at December 31, 1998, 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 $ -- $ -- $ 6,732 $ -- $ 6,732
Mortgage backed securities -- 1,350 4,718 28,236 34,304
- -------------------------------------------------------------------------------------------------------------------------
Total debt securities -- 1,350 11,450 28,236 41,036
- -------------------------------------------------------------------------------------------------------------------------
Fair value $ -- $ 1,357 $11,887 $ 28,526 $ 41,770
Weighted-average yield -- 7.10% 5.79% 6.82% 6.55%
=========================================================================================================================
Available for Sale
- -------------------------------------------------------------------------------------------------------------------------
U.S. Govt & U.S. Govt agency $33,497 $44,936 $44,947 $ -- $123,380
Mortgage-backed securities -- -- 3,621 105,240 108,861
Corporate bonds -- 7,033 -- 10,283 17,316
- -------------------------------------------------------------------------------------------------------------------------
Total debt securities 33,497 51,969 48,568 115,523 249,557
- -------------------------------------------------------------------------------------------------------------------------
Fair value $33,729 $52,402 $48,834 $115,649 $250,614
Weighted-average yield 5.82% 6.07% 6.43% 6.63% 6.36%
- -------------------------------------------------------------------------------------------------------------------------
The carrying value of investment securities pledged to secure public
funds on deposit and securities sold under agreements to repurchase is as
follows:
December 31,
- -----------------------------------------------------------
1998 1997
- -----------------------------------------------------------
Secure public funds on deposit $25,962 $19,480
Secure repurchase agreements 115,521 94,708
- -----------------------------------------------------------
$141,483 $114,188
===========================================================
40
5. LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 were comprised of the following:
1998 1997
- -----------------------------------------------------------------
First mortgage loans:
Residential:
One to four units $129,622 $181,375
Over four units 564 932
Commercial real estate loans(1) 243,846 211,395
- -----------------------------------------------------------------
Total first mortgage loans 374,032 393,702
- -----------------------------------------------------------------
Other loans:
Commercial 175,432 139,989
Consumer 116,905 105,870
- -----------------------------------------------------------------
Total other loans 292,337 245,859
- -----------------------------------------------------------------
Total loans 666,369 639,561
- -----------------------------------------------------------------
Deferred loan fees 114 (228)
Allowance for loan losses (9,569) (8,485)
- -----------------------------------------------------------------
Total loans receivable, net $656,914 $630,848
=================================================================
(1) Includes construction loans of $51.9 million in 1998 and $38.2 million in
1997.
As of December 31, 1998 and 1997, the Bank had impaired loans totaling
approximately $1,474 and $1,677, all of which had a related allowance for
impairment. The allowance for loan losses on impaired loans totaled $507 and
$593 as of December 31, 1998 and 1997, respectively. The average balance of
impaired loans was approximately $1,576 for 1998, $3,283 for 1997 and $3,712 for
1996. Interest income not accrued for impaired loans for the years ended
December 31, 1998, 1997 and 1996 was approximately $175, $193, and $289,
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, 1998 and 1997 was $1.7 million and $5.9 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, 1998, 1997, and 1996:
1998 1997 1996
- --------------------------------------------------------------
Balance at beginning
of period $ 8,485 $ 7,206 $ 6,082
Provision for loan losses 2,027 3,438 3,837
Recoveries 244 498 190
Losses charged
against allowance (1,187) (2,657) (2,903)
- --------------------------------------------------------------
Balance at end of period $ 9,569 $ 8,485 $ 7,206
==============================================================
The loans to directors and officers are based upon substantially the
same underwriting criteria, and on substantially the same terms as those
generally offered by the Bank and do not involve more than the normal risk of
collectibility or present other unfavorable features.
The following is an analysis of loans to directors and officers for
the year ended December 31, 1998:
1998
- ----------------------------------------------------------------
Balance at beginning of period $3,358
Additions 10,530
Repayments 2,711
- ----------------------------------------------------------------
Balance at end of period $11,177
================================================================
41
The Bank services mortgage loans for investors which are not included
in the acCompanying consolidated statements of financial condition. Fees earned
for servicing loans are reported as income when the related mortgage payments
are collected. Mortgage Servicing Rights ("MSRs") are amortized as a reduction
to loan service fee income on a method that approximates the level-yield basis
over the estimated remaining life of the underlying mortgage loans. MSRs are
carried at fair value and impairment, if any, is recognized through a valuation
allowance. For the year ended December 31, 1998, 1997 and 1996, no impairment
existed in the MSRs and as a result, no valuation allowance was required.
MSR activity is summarized as follows:
Year ended December 31,
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Balance at beginning of year $ 730 $339 $266
Capitalized 656 553 154
Amortized (259) (162) (81)
- -----------------------------------------------------------------
Balance at end of year $1,127 $730 $339
=================================================================
6. PROPERTY AND EQUIPMENT
Property and equipment, less accumulated depreciation and amortization,
are summarized by major classification at December 31, 1998 and 1997 as follows:
1998 1997
- ---------------------------------------------------------------
Land $ 597 $ 596
Buildings 7,375 7,333
Furniture and equipment 12,692 11,229
Leasehold improvements 1,751 1,751
- ---------------------------------------------------------------
22,415 20,909
Less accumulated depreciation and
amortization (12,763) (10,886)
- ---------------------------------------------------------------
$ 9,652 $ 10,023
===============================================================
Depreciation expense for the years ended December 31, 1998, 1997, and
1996 was $2,062, $2,182, and $1,708, respectively.
7. DEPOSITS
Deposits at December 31, 1998 and 1997 consisted of the following:
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Interest % of Interest % of
Rate Amount Total Rate Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
NOW accounts 0.48% $ 50,369 7.17% 0.57% $ 43,988 6.33%
Money market deposit accounts 3.15% 164,194 23.36% 3.46% 130,959 18.86%
Passbook/statement 1.82% 63,631 9.05% 1.83% 64,297 9.26%
Checking accounts 0.00% 128,195 18.24% 0.00% 115,733 16.67%
- ---------------------------------------------------------------------------------------------------------------------------
406,389 57.82% 354,977 51.12%
- ---------------------------------------------------------------------------------------------------------------------------
IRA accounts 5.56% 56,626 8.06% 5.60% 58,537 8.43%
Certificates of deposit 5.23% 202,213 28.76% 5.50% 233,352 33.60%
Certificates with a $100,000 minimum
balance 4.96% 37,665 5.36% 5.41% 47,578 6.85%
- ---------------------------------------------------------------------------------------------------------------------------
296,504 42.18% 339,467 48.88%
- ---------------------------------------------------------------------------------------------------------------------------
$702,893 100.00% $694,444 100.00%
===========================================================================================================================
42
A summary of certificates by maturity at December 31, 1998 follows:
Years Ending December 31, Amount % of Total
- -----------------------------------------------------------------
1999 $ 205,589 69.33%
2000 46,543 15.70%
2001 15,760 5.32%
2002 8,094 2.73%
Thereafter 20,518 6.92%
- -----------------------------------------------------------------
$ 296,504 100.00%
=================================================================
8. BORROWINGS FROM FEDERAL HOME LOAN BANK OF PITTSBURGH
Under terms of its collateral agreement securing borrowings from the
Federal Home Loan Bank of Pittsburgh, the Bank is required to maintain otherwise
unencumbered qualifying assets (mainly certain loans and investments) 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, 1998 and 1997:
December 31,
- -------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------
1998 $ -- -- $ 7,048 6.03%
1999 10,503 4.99% 502 5.70%
2000 -- -- -- --
2002 72,000 5.52% 72,000 5.50%
2003 37,000 5.06% -- --
2005 15,000 5.35% -- --
- -------------------------------------------------------------------------------------------------
$134,503 5.33% $79,550 5.55%
=================================================================================================
9. OTHER BORROWED MONEY
The following table presents information regarding other borrowed money
at December 31, 1998, 1997 and 1996 which was comprised of the following:
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase:
Average balance during the year $ 79,367 $ 77,369 $ 59,158
Average interest rate during the year 4.83% 5.22% 4.78%
Maximum month-end balance during the year 103,852 101,473 124,981
Balance at the end of the year 103,852 91,486 51,685
Investment securities pledged as collateral :
Carrying value 115,521 94,708 53,450
Estimated fair value 115,103 94,397 53,688
=======================================================================================================================
10. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." which establishes new standards for computing and
presenting earnings per share ("EPS"). All earnings per share amounts have been
restated to conform to the new requirements.
Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding.
43
Diluted EPS is computed by dividing net income by the weighted average
number of common shares and common equivalent shares outstanding during the
year. For the diluted EPS calculation, the weighted average number of common
shares and common equivalent shares outstanding include the average number of
shares of common stock outstanding adjusted for the dilutive effect of
unexercised stock options using the treasury stock method. When applying the
treasury stock method, the Company's average stock price is utilized, and the
Company adds to the proceeds the tax benefit that would have been credited to
additional paid-in capital assuming exercise of non-qualified stock options.
The computation of basic and diluted EPS for the fiscal years ended
December 31, 1998, 1997 and 1996 are presented in the following table.
- ----------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------
Basic
Numerator
Net income $ 12,143 $ 10,519 $ 4,017
Denominator
Weighted average
common shares 10,947,717 10,802,888 10,481,364
- ----------------------------------------------------------------------
Basic EPS $ 1.11 $ 0.97 $ 0.38
======================================================================
Diluted
Numerator
Net income $ 12,143 $ 10,519 $ 4,017
Denominator
Weighted average
common shares 10,947,717 10,802,888 10,481,364
Effect of dilutive 307,208 185,130 342,098
stock options
- ----------------------------------------------------------------------
11,254,925 10,988,018 10,823,462
- ----------------------------------------------------------------------
Diluted EPS $ 1.08 $ 0.96 $ 0.37
======================================================================
11. 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," an institution 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.
44
REGULATORY CAPITAL SCHEDULE
as of December 31, 1998
For Capital To be Well
Actual Adequacy Minimum Capitalized
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets):
Prime Bancorp $86,287 11.74% $29,398 4.00% $44,097 6.00%
Prime Bank 84,233 11.47% $29,366 4.00% 44,050 6.00%
Total capital (to risk-weighted assets):
Prime Bancorp 95,479 12.99% 58,797 8.00% 73,496 10.00%
Prime Bank 93,405 12.72% 58,733 8.00% 73,416 10.00%
Total leverage (to total assets):
Prime Bancorp 86,287 8.48% 40,682 4.00% 50,853 5.00%
Prime Bank 84,223 8.28% 40,682 4.00% 50,852 5.00%
as of December 31, 1997
For Capital To be Well
Actual Adequacy Minimum Capitalized
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to risk-weighted assets):
Prime Bancorp $77,277 11.76% $26,277 4.00% $39,416 6.00%
Prime Bank 66,129 10.20% 25,943 4.00% 38,914 6.00%
Total capital (to risk-weighted assets):
Prime Bancorp 85,492 13.01% 52,554 8.00% 65,693 10.00%
Prime Bank 74,241 11.45% 51,885 8.00% 64,856 10.00%
Total leverage (to total assets):
Prime Bancorp 77,277 8.26% 37,431 4.00% 46,789 5.00%
Prime Bank 66,129 7.32% 36,151 4.00% 45,188 5.00%
12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan pursuant to the provisions
of 401(k) of the Internal Revenue Code. The plan covers all employees who meet
the age and service requirements. The Company's plan provides for elective
employee contributions up to 15% of compensation and a 66 2/3% matching Company
contribution limited to the first 6% of the employee's contribution. The Company
contributed $296, $199, and $176 to this plan during the years ended December
1998, 1997, and 1996, 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 1998, 1997, and 1996 were $371, $360, and
$135, respectively.
The Company does not provide post-retirement benefits nor
post-employment benefits to its employees.
13. INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31, 1998, 1997, and 1996 consisted of the following:
1998 1997 1996
- --------------------------------------------------------------
Current:
State $ 28 $ 343 $ 297
Federal 6,293 4,748 1,890
- --------------------------------------------------------------
6,321 5,091 2,187
- --------------------------------------------------------------
Deferred:
Federal (16) 198 (291)
- --------------------------------------------------------------
$6,305 $5,289 $1,896
==============================================================
45
The provision for income taxes for the years ended December 31, 1998,
1997, and 1996 differed from the statutory rate due to the following:
1998 1997 1996
- --------------------------------------------------------------
Pretax income $18,448 $15,808 $5,913
- --------------------------------------------------------------
Tax at statutory rate 6,457 5,533 2,012
Tax exempt interest (104) (160) (127)
State taxes, net of federal
benefit and other 18 223 196
Merger costs -- -- 222
Income tax credits (243) (238) (370)
Other, net (177) (69) (35)
- --------------------------------------------------------------
$6,305 $5,289 $1,896
==============================================================
Deferred income taxes result from temporary differences in recording
certain revenues and expenses for financial reporting purposes. The deferred tax
assets at December 31, 1998 and 1997 consisted of the following:
1998 1997
- --------------------------------------------------------------
Deferred tax assets
Provision for loan losses
and REO losses $3,144 $2,870
Deferred loan fees 80 177
Deferred compensation 45 54
Valuation adjustment
for debt securities -- 314
Other, net 420 283
- --------------------------------------------------------------
Gross deferred tax assets 3,689 3,698
- --------------------------------------------------------------
Deferred tax liabilities
Deferred loan costs 544 467
FDIC insurance premium 69 57
Depreciation 14 32
Mortgage servicing rights 379 234
Valuation adjustment
for debt securities 368 --
Other 200 56
- --------------------------------------------------------------
Gross deferred tax liabilities 1,574 846
- --------------------------------------------------------------
Net deferred tax assets $2,115 $2,852
==============================================================
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.
46
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose information about the fair value of
financial instruments. The limitations on the making of estimates of fair value
are: estimates are made at a specific point in time, based upon, where
available, relevant market prices and information about the financial
instruments. For a substantial portion of the Company's financial instruments,
no quoted market exists. Therefore, estimates of "fair value" are based on a
number of subjective assumptions. Such assumptions include perceived risks
associated with these financial instruments, market rates of discount, and
expected durations. Given the uncertainties associated with these estimates, the
reported "fair values" represent estimates only and, therefore, cannot be
compared to the historical accounting model. Use of different assumptions would
likely result in different "fair value" estimates.
Under SFAS 107, the fair value of deposit accounts with no stated
maturity is equal to their carrying amount. This approach excludes significant
benefits that result from the low-cost funding provided by such deposits.
The following methods and assumptions were used to estimate the fair
value of each major classification of financial instruments at December 31,
1998:
Cash, 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 discounted cash flow
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 discounted cash flow 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.
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.
47
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------
Financial assets:
Cash $ 41.3 $ 41.3 $ 41.2 $ 41.2
Investments 307.4 308.1 233.7 234.6
Net loans (1) 659.0 675.0 634.1 639.1
Accrued interest receivable 7.7 7.7 7.4 7.4
Financial liabilities:
Deposits with no stated maturity 406.4 406.4 355.0 355.0
Time deposits 296.5 299.9 339.5 340.8
Other borrowed funds and FHLB borrowings 238.4 241.9 171.0 171.4
Accrued interest payable 1.1 1.1 1.8 1.8
=======================================================================================================
(1) The carrying amount of net loans includes loans receivable, net and loans
held for sale.
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Net Amount Net Amount
Contract or Payable Contract or Payable
Notional Amount (Receivable) Notional Amount (Receivable)
- -------------------------------------------------------------------------------------------------------------------------
Off-balance sheet financial instruments:
Commitments to extend credit $51.5 $0.4 $51.0 $0.4
Standby letters of credit 8.0 -- 3.0 --
Commercial loan commitments 15.8 0.3 17.9 0.3
Loan commitments 8.0 -- 2.9 --
Loans in process for construction loans 87.3 -- 63.6 --
Interest rate swaps (see note 15) 15.0 (0.2) 30.0 (0.6)
=========================================================================================================================
15. 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, 1998.
Derivative Contracts as of December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Next
Notional Stated Optional Receive Pay Market Repricing
Type Amount Maturity Call Date Rate Rate Spread Value Date
- ----------------------------------------------------------------------------------------------------------------
Swap $ 5,000 5/06/00 -- 7.01% 6.00% 1.01% $132 1/6/99
Swaption 5,000 7/30/07 7/29/99 7.21% 5.97% 1.24% 48 1/29/99
Swaption 5,000 2/27/12 2/25/99 7.51% 5.96% 1.55% 16 1/26/99
- ----------------------------------------------------------------------------------------------------------------
$15,000 $196
================================================================================================================
1997 off balance sheet derivative contracts consisted of interest rate
swaps of $5,000, with a market value of $121 and interest rate swaptions of
$25,000, with a market value of $137.
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.
48
16. 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,
- -----------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------
Residential mortgage commitments $ 8,024 $ 2,945
Commercial loan commitments 15,774 17,939
Standby letters of credit 8,020 2,955
Commitments to extend credit 51,495 51,023
Commitments to sell
residential loans 2,081 3,229
Construction loans in process 87,342 63,590
=================================================================
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 1998 and
1997 were $10,868 and $7,820, respectively, which amounts were satisfied through
the restriction of vault cash.
In connection with the operation of certain branch offices, the Bank
has entered into operating leases for periods ranging from one to more than ten
years. Total rental expense for the years ended December 31, 1998, 1997, and
1996 was $1,446, $1,342, and $1,246, respectively. Future minimum lease payments
under such operating leases are $1,356, $1,196, $1,050, 1,056, and $989 for the
years ended December 31, 1999 through 2003, respectively.
17. SUBSEQUENT EVENTS
On February 17, 1999, Prime entered into a definitive Agreement and
Plan of Merger pursuant to which Summit Bancorp, Inc. ("Summit") will acquire
Prime. Under the terms of the definitive agreement, Summit will exchange one (1)
share of Prime common stock for .675 shares of Summit common stock in a tax-free
exchange with a transaction value of approximately $292.0 million. The
transaction is subject to customary regulatory approvals and is anticipated to
be completed in the third quarter of 1999.
49
18. PARENT COMPANY FINANCIAL INFORMATION
Presented below are the parent company only financial statements as of
December 31, 1998, and 1997:
PRIME BANCORP, INC.
(Parent company only)
STATEMENTS OF FINANCIAL CONDITION
December 31,
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 1,818 $ 635
Investment securities 505 499
Investments in Bank subsidiaries 89,456 73,886
Investments in non-Bank subsidiaries 227 5,838
Other assets 550 1
- -------------------------------------------------------------------------
Total assets $92,556 $80,859
=========================================================================
Liabilities and shareholders' equity:
Liabilities:
Other liabilities $2,753 $ 995
- -------------------------------------------------------------------------
Total liabilities 2,753 995
- -------------------------------------------------------------------------
Total shareholders' equity 89,803 79,864
- -------------------------------------------------------------------------
Total liabilities and shareholders' equity $92,556 $80,859
=========================================================================
STATEMENTS OF INCOME
Year ended December 31,
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Income:
Dividends and interest
from subsidiaries $12,362 $5,297 $2,109
Equity in undistributed
income of subsidiaries (187) 5,296 2,097
- -----------------------------------------------------------------
Investment securities 30 -- --
12,205 10,593 4,206
- -----------------------------------------------------------------
Operating expense 62 74 189
- -----------------------------------------------------------------
Net income $12,143 $10,519 $4,017
=================================================================
Years ended December 31,
- -------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------
Statement of Cash Flows
Cash flows from operating activities:
Net income $12,143 $10,519 $4,017
Adjustments to reconciles net
income to net cash provided by
operating activities:
Equity in undistributed income of
subsidiaries 187 (5,296) (2,097)
Increase (decrease) in other
assets (549) (1) --
Increase (decrease)
in other liabilities 2,085 956 (24)
- -------------------------------------------------------------------
Net cash provided by
operating activities 13,866 6,178 1,896
- -------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities (3) (499) --
Sale of subsidiary to affiliate -- 75 --
Contribution to subsidiaries (8,900) (2,700) --
- -------------------------------------------------------------------
Cash used in investing
activities (8,903) (3,124) --
- -------------------------------------------------------------------
Cash flows from financing activities:
Stock options exercised 378 1,150 133
Cash dividends paid (4,158) (3,668) (2,529)
- -------------------------------------------------------------------
Net cash used in financing
activities (3,780) (2,518) (2,396)
- -------------------------------------------------------------------
Net increase in cash 1,183 536 (500)
Cash and cash equivalents:
Beginning of year 635 99 599
- -------------------------------------------------------------------
End of year $1,818 $ 635 $ 99
===================================================================
50
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
Management of Prime Bancorp, Inc. is responsible for establishing and
maintaining effective internal control 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 internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed the Company's internal control over
financial reporting presented in conformity with both generally accepted
accounting principles and call report instructions as of December 31, 1998. 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, 1998, the Company
maintained effective internal control 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
51
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
PRIME BANCORP, INC.
We have audited the accompanying consolidated statement of financial condition
of Prime Bancorp, Inc. as of December 31, 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. 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. The financial statements of Prime Bancorp, Inc.
for the years ended December 31, 1997 and 1996 were audited by other auditors
whose report dated January 16, 1998, expressed an unqualified opinion on those
statements.
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 1998 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prime Bancorp,
Inc. at December 31, 1998, and the consolidated results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 19, 1999, except for Note 17,
as to which the date is February 17, 1999.
52
LOAN PORTFOLIO HISTORY
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
Permanent first mortgage loans:
One-to four-family $ 129,622 19.7% $ 181,375 28.7% $235,023 38.1% $216,163 43.5% $185,409 42.0%
Multi-family 564 0.1% 932 0.1% 10,783 1.7% 9,303 1.9% 8,735 2.0%
Commercial 141,593 21.6% 150,411 23.8% 120,841 19.6% 102,958 20.7% 88,767 20.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Total permanent loans 271,779 41.4% 332,718 52.6% 59.4% 328,424 66.1% 282,911 64.1%
Allowance for loan losses (1965) -0.3% (2,811) -0.4% (2,081) -0.2% (1,728) -0.3% (1,856) -0.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total permanent first mortgage
loans, net 269,814 41.1% 329,907 52.2% 364,566 59.2% 326,696 65.8% 281,055 63.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial real estate loans 102,253 15.6% 60,984 9.7% 44,598 7.2% 29,881 6.0% 36,154 8.2%
Allowance for loan losses (2,247) -0.3% (1,130) -0.2% (918) -0.2% (696) -0.1% (1,234) -0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate
loans, net 100,006 15.3% 59,854 9.5% 43,680 7.0% 29,185 5.9% 34,920 7.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 175,432 26.7% 139,989 22.2% 110,840 18.0% 68,777 13.8% 65,045 14.7%
Allowance for loan losses (3,086) -0.5% (1,736) -0.3% (2,251) -0.4% (1,954) -0.5% (1,301) -0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial business
loans, net 172,346 26.2% 138,253 21.9% 108,589 17.6% 66,823 13.3% 63,744 14.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer loans:
Personal/lines of credit 16,931 2.6% 32,678 5.2% 27,296 4.4% 20,063 4.0% 21,582 4.9%
Second mortgage/equity 68,729 10.5% 44,248 7.0% 44,229 7.2% 40,618 8.2% 31,492 7.1%
Auto 18,519 2.8% 19,718 3.1% 22,499 3.7% 10,046 2.0% 7,110 1.6%
Education 9,454 1.4% 6,163 1.0% 3,504 0.6% 2,992 0.6% 1,697 0.4%
Home improvement and other 2,295 0.3% 2,290 0.4% 3,906 0.6% 1,745 0.4% 1,419 0.3%
Savings account 977 0.2% 773 0.1% 907 0.1% 1,119 0.2% 1,464 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 116,905 17.8% 105,870 16.8% 102,341 16.6% 76,583 15.4% 64,764 14.6%
Allowance for loan losses (1,267) -0.2% (1,334) -0.2% (963) -0.2% (1,066) -0.2% (1,035) -0.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans, net 115,638 17.6% 104,536 16.6% 101,378 16.4% 75,517 15.2% 63,729 14.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total unamortized loan
origination
fees and costs 114 0.0% (228) 0.0% (327) 0.0% (549) -0.1% (1,406) -0.3%
Allowance for loan loss
(unallocated) (1,004) -0.2% (1,474) -0.2% (993) -0.2% (638) -0.1% (641) -0.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $ 656,914 100.0% $630,848 100.0% $616,893 100.0% $497,034 100.0% $441,401 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Maturities and Interest Sensitivity
The following table sets forth the maturities and sensitivity to
changes in interest rates of loans of the Company's loan portfolio at December
31, 1998:
1 Year 1 Through After 5 Gross
or Less 5 Years Years Loans
- ------------------------------------------------------------------------------------------------------
Commercial $179,140 $ 89,999 $48,860 $317,999
Commercial real estate 77,174 10,610 14,115 101,899
- ------------------------------------------------------------------------------------------------------
$256,314 $100,609 $62,975 $419,898
- ------------------------------------------------------------------------------------------------------
Loans with predetermined rate 23,445 91,308 62,711 177,464
Loans with floating rate 232,869 9,301 264 242,434
- ------------------------------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On September 17, 1998, the Board of Directors of Prime Bancorp, Inc.
(the "Company") approved the appointment of Ernst & Young LLP as its independent
auditors for the fiscal year ending December 31, 1998. The Company's independent
accountant in prior years was KPMG LLP.
The decision to change independent accountants was recommended by the
Company's management, approved by the Company's Audit Committee and reviewed by
its Board of Directors.
53
The reports of KPMG LLP on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31, 1997, and in the
subsequent interim period, there were no disagreements with KPMG LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
KPMG LLP, would have caused KPMG LLP to make reference to the matter in their
report.
During the two most recent fiscal years and through September 21, 1998,
there have been no reportable events as defined in Regulation S-K Item 304 (a)
(1) (v).
During the fiscal years ended December 31, 1997 and 1996 and the
subsequent interim periods preceding the decision to change independent
accountants, neither the Company nor anyone on its behalf consulted Ernst &
Young LLP regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, and
neither a written report nor oral advice was provided to the Company by Ernst &
Young LLP.
The Company requested KPMG LLP to furnish a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements. A copy of the letter dated September 21, 1998 is filed as Exhibit 16
on Form 8-K which was filed with the Securities and Exchange Commission on
September 23, 1998.
54
Part III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS
The Bylaws of the Company currently provide that the Board of Directors
shall consist of not less than seven (7) or more than fifteen (15) members.
Currently, there are twelve (12) members of the Board. In accordance with the
Articles of Incorporation and the Bylaws, the Board of Directors is divided into
three (3) classes as nearly equal in number as possible. One class of directors
is to be elected annually. The members of each class are to be elected for a
term of three (3) years or until their successors are elected and qualified.
The class of directors serving until the 2000 Annual Meeting consists
of Frederick G. Betz, Robert A. Fox, James J. Lynch and David H. Platt. The
class of directors serving until the 2001 Annual Meeting consists of Fred Blume,
Joseph A. Fluehr, III, Michael B. Laign and Ernest Larenz. The directors with
terms expiring at the 1999 Annual Meeting are William J. Cunningham, Arthur J.
Kania, Roy T. Peraino and Erwin T. Straw. Pursuant to the retirement policy for
directors contained in the Company's Bylaws, Messrs. Peraino and Straw will
retire from the Board of Directors effective at the 1999 Annual Meeting. The
Board of Directors has concluded that it is in the best interest of the Company
to defer the holding of the 1999 Annual Meeting indefinitely as a result of the
proposed merger with Summit Bancorp. A Special Meeting of Shareholders will be
held to vote on the proposed transaction, and it is anticipated that the Board
of Directors will take action to set the date for this meeting prior to April
30, 1999.
BUSINESS BACKGROUND OF DIRECTORS
The following table sets forth certain information regarding the
members of the Board of Directors of the Company. The business experience during
at least the last five years for each of the directors is described below.
Frederick G. Betz, age 68, served as a director of Cheltenham Federal
Savings & Loan Association and subsequently the Company since 1988. Mr. Betz is
also Past President of Fred Betz and Sons, Inc., a land development and custom
home building Company located in Southampton, Pennsylvania.
Fred Blume, age 58, is an attorney and is the Administrative Partner of
the law firm of Blank Rome Comisky & McCauley, LLP. He joined the firm in 1967
and was admitted to the partnership in 1972. Mr. Blume serves on the Board of
Overseers of the Law School of the University of Pennsylvania.
William J. Cunningham, age 55, had been a Director of First Sterling
Bancorp, Inc. since 1988 and became a director of the Company when it merged
with First Sterling Bancorp, Inc. in 1996. He was a co-founder and managing
partner of the Miami Heat, a National Basketball Association (NBA) team from
1988 until the sale of his interest in 1995. From 1986 to 1988 Mr. Cunningham
was a national analyst and sports commentator for CBS, Inc. He served as the
Coach of the Philadelphia 76ers from 1977 through 1984, leading the team to an
NBA championship in 1983. Throughout the period from 1965 through 1978 he played
professionally for the Philadelphia 76ers, including the 1967 NBA Championship
team.
55
Joseph A. Fluehr, III, age 53, served as a director of North East
Federal Savings & Loan Association and subsequently the Company since 1983. He
is a funeral director and the owner of the Joseph A. Fluehr, III Funeral Homes,
Inc. in Richboro and New Britain, Pennsylvania. He is also a member of the
Pennsylvania State Board of Funeral Directors, Harrisburg, PA; a member of the
Entities Board of St. Mary's Medical Center, a division of Catholic Health
Initiatives, Langhorne, PA and a Director of St. Joseph's Home for the Aged,
Holland, PA.
Robert A. Fox, age 69, is President of R.A.F. Industries, a private
investment Company which acquires and manages a diversified group of operating
Companies and venture capital investments. He is a former Chairman of the Board
of Warner Company and Waste Resources Corporation. Mr. Fox serves as a member of
the Board of Directors of Safeguard Scientifics, Inc. and Children's Concept,
Inc. (Zany Brainy). He is a Trustee of the University of Pennsylvania and a
member of the Board of Managers of the Wistar Institute.
Arthur J. Kania, age 67, is a principal of Trikan Associates, which
owns and manages various real estate holdings and is active in venture capital
investments. He is also a partner of the law firm Kania, Lindner, Lasak and
Feeney. Mr. Kania is a former member of the Boards of Directors of PNC Bank,
Midlantic Corporation and Continental Bank. He is a member of the Boards of
Directors of Opt-Sciences Corporation and Piasecki Aircraft Corporation. He also
serves on the Board of Consultors of Villanova University School of Law and is
past Vice-Chairman of the Board of Trustees of Villanova University and past
Chairman of the Board of Trustees of the University of Scranton. He was
co-founder of AID Inc., a leading health care provider, and was its Chairman and
Chief Executive Officer from 1970 through 1974. Mr. Kania was also co-founder of
Greate Bay Country Club and the Brighton Hotel (now Sands Hotel and Casino,
Atlantic City).
Michael B. Laign, age 48, is the President and Chief Executive Officer
of the Holy Redeemer Health System in Huntingdon Valley, Pennsylvania. He also
serves on the Board of Directors of Holy Redeemer Health System and each of its
subsidiary corporations. Mr. Laign previously served as Executive Vice President
of Frankford Healthcare System, Inc., from 1984 until 1993, when he joined Holy
Redeemer Health System. He serves on the Board of Governors of the American
Heart Association, the Board of Directors of the Delaware Valley Healthcare
Council of The Hospital & Health System Association of Pennsylvania, and the
Board of Directors of The Hospital & Healthsystem Association of Pennsylvania.
Ernest Larenz, age 67, served as a director of North East Federal
Savings & Loan Association and subsequently the Company since 1976. He is the
President of Medicare Management Nursing Homes who are consultants for the
operation of various nursing homes. He is also a builder/developer of
residential and commercial properties.
James J. Lynch, age 49, served as Executive Vice President of Midlantic
Bank from 1994 to 1995. From 1976 through 1994, Mr. Lynch held various positions
with Continental Bank, culminating as President from 1992 to 1994. Mr. Lynch's
banking career spans thirty (30) years starting with First Pennsylvania Bank as
a part-time employee while attending college and entering its management
training program in 1971. Mr. Lynch currently serves as Chairman of the Central
Philadelphia Development Corporation, a non-profit business advocacy
organization, a member of the Executive Committee of the Pennsylvania Bankers
Association, a member of the Board of Trustees and Executive Committee of
LaSalle University, a member of the Board of Trustees of Holy Redeemer Health
System and a director of various other civic and community organizations.
Roy T. Peraino, age 70, is the former Chairman and Chief Executive
Officer of Continental Bancorp and Continental Bank. He is also the former
President of Midlantic Corporation. Mr. Peraino had worked for more than 40
years in the Philadelphia banking community.
David H. Platt, age 50, served as a director of North East Federal
Savings & Loan Association and subsequently the Company since 1983. He is the
President of Somerton Springs Golf Shoppes which has twenty-two golf shops and
eight golf facilities throughout the Delaware Valley area. He is also President
of the Newtown Swim Club Inc. and is President and owner of Sycamore Ridge Golf
Club Inc.
Erwin T. Straw, age 70, served as President and Chief Executive Officer
of Cheltenham Federal Savings & Loan Association since January 1985. In November
1988, he forged the merger between Cheltenham and North East Federal, creating
what subsequently was named Prime Savings Bank, later changed to Prime Bank. At
the same time he formed a holding Company, Prime Bancorp. He served as it's
Chairman of the Board until January 1999. Mr. Straw continues to serve as a
member of Prime's Board of Directors.
56
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following information is provided with respect to the executive
officers of the Company who do not serve on the Board of Directors.
William H. Bromley, age 48, became Executive Vice President of the
Company on December 31, 1996 in connection with the merger with First Sterling
Bancorp, Inc. He had served as President, Chief Executive Officer and a director
of First Sterling Bancorp Inc. and First Sterling Bank since 1988. Before
joining First Sterling, Mr. Bromley was employed for seven years by Industrial
Valley Bank and Trust Company ("IVB") from 1979 through 1986 as a commercial
loan officer and as a Regional Vice President for Chester County, Lancaster
County and central and western Delaware County. Prior to joining IVB, Mr.
Bromley worked for three years (1976 to 1979) with Midlantic National Bank in
Haddonfield, N.J. Mr. Bromley currently serves as a member of the Board of
Directors, Treasurer and a member of the Executive Committee of the Upper Main
Line YMCA. He is a member of the Board of Directors of the Pennsylvania
Community Bankers Association and is Vice President and a member of the Board of
Directors of Insured Financial Institutions of the Delaware Valley.
James E. Kelly, age 54, became Executive Vice President and Chief
Financial Officer of the Company in November, 1997. Previously, he was corporate
controller and Senior Vice President of Finance for Midlantic Corporation for
five (5) years. Prior to his tenure at Midlantic, Mr. Kelly was chief financial
officer of Continental Bancorp Inc., a $7.5 billion Bank holding Company at the
time it was acquired by Midlantic.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of the Company's common stock to file reports of beneficial ownership
and changes in beneficial ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for the period January 1,
1998 through December 31, 1998, all filing requirements related to its officers
and directors were complied with in all material respects except for the
following: Robert A. Fox filed a late Form 3 and Joseph A. Fluehr, III reported
a transaction from March 1994 late on a Form 5.
Item 11. Executive Compensation.
EXECUTIVE COMPENSATION
REMUNERATION
The Company is a Bank holding Company whose business is essentially
conducted by Prime Bank, its wholly-owned, Pennsylvania-chartered Bank
subsidiary. The officers of the Company are also officers of Prime Bank, and all
cash compensation for the officers is paid by the Bank. The following table sets
forth information as to compensation paid to the Company's chief executive
officer and the other executive officers as determined by SEC rules
(collectively, the "named executive officers") for the three (3) fiscal years
ended December 31, 1998, whose annual cash compensation exceeded $100,000 during
that period.
57
SUMMARY COMPENSATION TABLE (1)
Annual Compensation
----------------------------
Securities All Other
Salary Bonus Underlying Compensation
Name and Principal Position Year Amount Amount Options (2)
- ------------------------------------------------------------------------------------------------------
James J. Lynch 1998 $345,000 $120,750 -- $25,362
President & CEO 1997 345,000 100,000 -- 24,980
1996 277,000 100,000 220,000 1,330
William H. Bromley (3) 1998 200,000 45,000 -- 17,387
Executive Vice President 1997 200,000 50,000 -- 15,448
1996 200,000 85,000 66,000 5,090
James E. Kelly 1998 155,000 34,875 35,000 13,225
Executive Vice President
and CFO
- ------------------
(1) This table does not include columns for Other Annual Compensation,
Restricted Stock Awards and Long-Term Incentive Plan Payouts. The Company
had no amounts to report in the columns for Restricted Stock Awards and
Long-Term Incentive Plan Payouts. The amount of Other Annual Compensation
paid to the named executive officers was in each case for perquisites or
other fringe benefits which are not reportable since they did not exceed
the lesser of $50,000 or ten percent (10%) of salary and bonus as reported
for each named executive officer. The Company furnishes Messrs. Lynch and
Bromley with automobiles and also pays certain club dues for the purpose of
promoting the business of the Company.
(2) Includes contributions made for named executive officers under the
Company's 401(k) Plan and term life insurance premiums paid on behalf of
each executive.
(3) The compensation in 1996 for Mr. Bromley was paid by First Sterling Bank
which was acquired by the Company as of the close of business on December
31, 1996.
STOCK OPTIONS
The following table sets forth information on stock options granted
during 1998 to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
- -------------------------------------------------------------------------------------
Number of % of total Value at Assumed Annual
Securities Options/SARs Rates of Stock Price
Underlying Granted to Exercise Appreciation
Options/SARs Employees in or Expiration for Option Term
Name Granted Fiscal Year Base Price Date -----------------------
5% %10
- -----------------------------------------------------------------------------------------------------------------
James E. Kelly 10,000 15% $17.38 12/16/08 $256,700 $408,800
58
The following table sets forth certain information regarding individual
exercises of stock options during 1998 by the named executive officers and the
value of such officers' unexercised options at December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Shares Number of Unexercised Value of Unexercised in-the-Money
Acquired Options at Fiscal Year End (1) Options at Fiscal Year End (2)
On Value ------------------------------------------------------------------------------------
Exercise Realized Total Exercisable Unexercisable Total Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------------
James J. Lynch None -- 220,000 154,000 66,000 1,565,300 1,095,710 469,590
William H. Bromley None -- 66,000 49,500 16,500 90,750 363,000 272,250
James J. Kelly None -- 35,000 35,000 -- -- -- --
- -------------------
(1) The number of shares have been restated to reflect both the 10% stock
dividend paid on February 1, 1996 to shareholders of record on January 2,
1996 and the 2 for 1 stock split paid on June 19, 1998 to shareholders of
record May 29, 1998.
(2) This column represents the difference on December 31, 1998 between the
market price of the Common Stock ($15.75) and the option exercise price.
EMPLOYMENT AGREEMENTS
The Company and Prime Bank have entered into employment agreements with
James J. Lynch and William H. Bromley. Mr. Lynch's agreement is for a term of
five years and provides for automatic one-year extensions on each anniversary of
the date of commencement of the agreement unless notice to the contrary is given
by Mr. Lynch or the Company to the other. The base salary payment under the
agreement is $300,000. In addition, Mr. Lynch will be entitled to a bonus of not
less than $100,000 per annum provided that the overall performance of the
Company is reasonably consistent with that of previous years. Also, Mr. Lynch is
entitled to participate in the Company's Incentive Stock Option Plan and was
awarded options to purchase 220,000 shares upon commencement of his employment
with the Company on January 29, 1996. Options to acquire 110,000 shares were
immediately vested, while the options for the remaining 110,000 shares vest
equally, one-fifth per year, over five years on the anniversary date of the
commencement of his employment.
Mr. Bromley's agreement is for a term of three years commencing
December 31, 1996 and provides for automatic one-year extensions on each
anniversary date of the commencement of the agreement unless notice to the
contrary is given by Mr. Bromley or the Company to the other. The base salary
payment under the agreement is $200,000. In addition, Mr. Bromley was entitled
to a bonus of not less than $50,000 for 1997 provided that the overall
performance of the Company was reasonably consistent with that of previous
years. Also, Mr. Bromley is entitled to participate in the Company's Incentive
Stock Option Plan and was granted options to purchase 66,000 shares on December
31, 1996 one-half of which vested immediately, an additional 16,500 shares
vested on January 15, 1998, and the remaining shares vested on January 15, 1999.
The employment agreements for both of Messrs. Lynch and Bromley also
provide, among other things, for participation in any bonuses which the Board of
Directors, in its discretion, may authorize from time to time, as well as
participation in stock options and other benefits applicable to executive
personnel.
In connection with a termination of employment by Messrs. Lynch or
Bromley for "good reason," other than in connection with a change of control,
such as for breach of contract or a purported termination not effected pursuant
to a notice of termination, the agreements provide for severance payments.
59
Mr. Lynch's agreement provide that such payments would be equal to the
total annual compensation in effect as of the date of termination multiplied by
the greater of the number of years (including partial years) remaining under the
agreement or the number 2.99. The agreement for Mr. Bromley provides that such
payments would be equal to the employee's total annual compensation in effect as
of the date of termination multiplied by the greater of the number of years
(including partial years) remaining under the agreement or the number 1.5. If
Mr. Lynch terminates his employment for "good reason" in connection with a
change in control, he would receive severance payments equal to 2.99 times his
average aggregate annual compensation. If Mr. Bromley similarly terminates his
employment for "good reason", he is entitled to severance payments equal to the
product of the number 2 multiplied by his average aggregate annual compensation
includable in his gross income for federal income tax purposes for the past
three years. All such severance payments will be paid in a lump sum on or before
the fifth day following the date of termination. However, if the severance
payments would be deemed to constitute "parachute payments" under Section 280G
of the Internal Revenue Code of 1986, as amended, (the "Code") the severance
payments will be reduced to the extent necessary to ensure that no portion of
the severance payments are subject to the excise tax imposed by Section 4999 of
the Code.
"Good reason," according to the agreements, also includes, subsequent
to a change in control of the Company and without the employee's express written
consent, the assignment of the employee to duties inconsistent with those
performed immediately prior to the change in control, a change in the employee's
reporting responsibilities, title or office, any removal of the employee from,
or any failure to re-elect the employee to, any such position, a reduction in
annual salary, the failure of the Company to continue for him any bonus, benefit
or compensation plan or any action that would affect adversely participation in
or materially reduce his benefits under any such plan. The agreements define
"change in control" to include any of the following: (1) any change in control
required to be reported pursuant to item 6(e) of Schedule 14A, promulgated under
the Exchange Act; (2) the acquisition of beneficial ownership by any person (as
defined in Sections 13(d) and 14(d) of the Exchange Act) of 25% or more of the
combined voting power of the Company's then outstanding securities; or (3)
during any period of two consecutive years, there is a change in the majority of
the Board of Directors for any reason, unless the election of each new director
was approved by at least two-thirds of the directors then still in office who
were directors at the beginning of the period.
The Company, Prime Bank and Mr. Kelly have entered into a Change of
Control Agreement as of November 17, 1997, which obligates the Company to make
certain payments to Mr. Kelly in the event that either (i) his employment with
the Company is terminated, or (ii) he terminates his employment with the Company
for "good reason", in each case after a "change in control", both as defined in
a manner substantially similar to the definitions in the preceding paragraph.
Upon such termination of employment, Mr. Kelly will be entitled to receive
severance payments equal to the sum of (A) the product of the number 2
multiplied by his highest annual base salary includable in his gross income for
federal income tax purposes for the past five years and (B) a prorated portion
of the cash bonus received by Mr. Kelly for the prior fiscal year. Such
severance payment will be paid in a lump sum within one (1) calendar week
following the date of termination. However, if the severance payments would be
deemed to constitute "parachute payments" under Section 280G of the Code, the
severance payments will be reduced to the extent necessary to ensure that no
portion of the payments are subject to the excise tax imposed by Section 4999 of
the Code.
Assuming that Messrs. Lynch, Bromley and Kelly continue to earn their
1998 base salaries, plus bonuses, their maximum severance payments, upon a
termination for good reason in connection with a change in control, and without
consideration of the excise tax imposed by Section 4999 of the Code, would be,
respectively, $1,283,458, $520,000 and $344,875.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN GROUP DECISIONS
The Compensation Committee of the Board of Directors is responsible for
setting the compensation for executive officers of the Company. The members of
the Compensation Committee during 1998 were William J. Cunningham, Joseph A.
Fluehr, III, Robert A. Fox, Arthur J. Kania, Ernest Larenz and Erwin T. Straw.
Mr. Straw was chief executive officer of the Company and Prime Bank until
January 29, 1996 and an employee of Prime Bank until January 29, 1997. In 1998,
Prime Bank leased certain real property from Dominion Properties, L.P., the
majority ownership interest in which is owned by a trust established by Mr.
Kania for the benefit of his children. The law firm in which Mr. Kania is a
partner performed legal services for Prime Bank in 1998. These transactions are
described in "Certain Relationships and Related Transactions" on page 61.
60
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
(The information under this caption shall not be deemed "filed"
with the SEC or "soliciting material")
COMPENSATION POLICIES APPLICABLE TO EXECUTIVE OFFICERS
The Compensation Committee administers the Company's executive
compensation programs and has responsibility for recommending to the Board of
Directors for approval the compensation of all officers. The 1998 members of the
Compensation Committee were William J. Cunningham, Joseph A. Fluehr, III, Robert
A. Fox, Arthur J. Kania, Ernest Larenz and Erwin T. Straw.
The purpose of the Company's executive compensation program is to
attract and retain key executives responsible for the success of the Company so
as to maximize profits and shareholder value. The Company's executive
compensation program is made up principally of annual base salary and benefits,
incentive cash compensation and stock options awarded under the Company's
Incentive Stock Option Plan (the "Plan").
The Committee believes that the Company's overall financial performance
should be an important factor in the compensation of its executive officers. The
Committee seeks to align executives' goals with the shareholders' goals of stock
appreciation and yield by having a policy, at the executive officer level, that
a significant proportion of total compensation consist of variable,
performance-based components, such as stock options, bonuses, and profit sharing
plans, the value of which will rise or fall depending on the Company's
performance. These incentive compensation programs are intended to reinforce
management's commitment to enhancement of profitability and shareholder value.
The Committee takes into account various qualitative and quantitative
indicators of corporate and individual performance in determining the level and
composition of compensation for the chief executive officer and other executive
officers. The corporate performance measures which the Committee considers
include net income growth, earnings per common share, return on average common
shareholders' equity and return on average total assets. The Committee also
considers the executive's responsibilities, individual contribution to the
Company's profits and achievement of any goals and objectives that may have been
established for such executive. The Committee does not rely on any fixed
formulae or specific numerical criteria in determining an executive's aggregate
compensation, but does utilize peer group studies to determine the fairness and
adequacy of aggregate compensation.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The base salary of and cash bonus for Mr. Lynch, the Chief Executive
Officer, are fixed largely by his Employment Agreement. However, in reviewing
the fairness of his cash bonus and the level of his base salary, the Committee
considered the following criteria: the Company's financial performance, which
continues to be comparable or superior to many peer institutions and its capital
position, which continues to be strong. The Committee also reviewed Mr. Lynch's
experience, knowledge, leadership and management skills, and his communication
and interaction with the Board of Directors. The Committee believes that Mr.
Lynch has demonstrated the competency to continue above average growth of the
Company and to position it strategically for strong future performance, while at
all times taking into consideration its overall financial condition and the
welfare of its shareholders.
61
Finally, the Committee consulted surveys of executive compensation in
the banking industry and considered the already established obligations under
Mr. Lynch's Employment Agreement. In light of the number of stock options
awarded to Mr. Lynch upon the commencement of his employment, a portion of which
will vest through 2001, no additional options were granted to Mr. Lynch in 1998.
In accordance with the compensation philosophy and process described above, the
Committee concluded that a cash bonus of $120,750.00 was appropriate in the case
of Mr. Lynch for 1998 and that his salary for 1999 remain at $345,000.00. These
recommendations were approved by the Board of Directors and the cash bonus was
paid in 1999.
Compensation Committee
Arthur J. Kania,
Chairman
William J. Cunningham
Joseph A. Fluehr, III
Robert A. Fox
Ernest Larenz
Erwin T. Straw
COMPENSATION OF DIRECTORS
In 1998, each director received a $12,500 annual retainer. Directors
received $600 for each Board meeting attended and $400 for each Committee
Meeting attended. The Chairman of each committee received an additional $750
annual retainer. Mr. Straw received $50,000 in 1998 for his services as Chairman
of the Board.
In April 1998, the Directors' Deferred Compensation Plan was
established. Under this plan, directors may elect to defer all or a portion of
their director's fees, which are allocated monthly to a book account maintained
by the Company. The two investment elections permitted are Prime common stock
and Prime 30-day certificates of deposit. No stock or C/Ds are actually
purchased, but earnings and appreciation thereon are calculated as if the
elected investment were purchased as of the end of each month. Benefits are
payable in cash either in a lump sum or in not more than 10 installments at the
election of the director, generally upon retirement from the Board. At December
31, 1998, eight (8) directors were participating and had elected Prime common
stock, and an amount equal to the equivalent of 6,577 shares of Prime common
stock was accrued under the plan for the benefit of the directors.
62
PERFORMANCE GRAPH
(The information under this caption shall not be deemed "filed" with the SEC or
"Soliciting Material".)
The graph below summarizes the cumulative return experienced by the
Company's shareholders for the period from December 31, 1993 through December
31, 1998, compared to the NASDAQ Stock Market Index and the NASDAQ Bank Stocks
Index.
The points on the graph represent the following numbers:
Prime NASDAQ NASDAQ
Year Bancorp Stock Market Bank Stock
- ---------------- ------------- ------------- -------------
1993 100 100 100
1994 317 210 206
1995 397 292 307
1996 413 363 406
1997 717 444 685
1998 630 672 613
The lines and numbers represent index levels derived from compounded
daily returns that include reinvestment of all dividends. Returns on Prime
Bancorp, Inc. common stock have been adjusted to account for the 10% stock
dividends distributed to shareholders on November 1, 1994 and February 1, 1996
and for the 2 for 1 stock split payable as a dividend to shareholders on June
19, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The Company does not know of any person or group that is the beneficial
owner of more than five percent of the outstanding shares of Common Stock,
except as indicated herein. The following table reflects as of February 26,
1999, the Common Stock beneficially owned by holders of more than five percent
of the outstanding Common Stock, directors, the named executive officers listed
in the Summary Compensation Table at Item 11 above, and all officers and
directors as a group. Except as otherwise noted, each beneficial owner listed
has sole investment and voting power with respect to the Common Stock owned by
him or her.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
----------------------------------------------------------------------------
Arthur J. Kania Trust, Allen Speiser
and Stanley J. Kania Trustees 1,007,832 (3) 9.17%
Erwin T. Straw 547,157 (2,4) 4.94%
Frederick G. Betz 98,353 (2,5) *
Fred Blume 6,700 (6) *
William J. Cunningham 218,315 (7) 1.99%
Joseph A. Fluehr, III 99,092 (2,8) *
Robert A. Fox 45,000 (9) *
Arthur J. Kania 245,630 (10) 2.24%
Michael B. Laign 2,608
Ernest Larenz 278,994 (11) 2.54%
James J. Lynch 214,570 (2,12) 1.92%
Roy T. Peraino 20,000 (13)
David H. Platt 6,178 *
William H. Bromley 198,338 (2,14) 1.79%
James E. Kelly, Jr 41,084 (2,15) *
All directors and officers as a group
consisting of 14 persons (16) 2,022,019 17.78%
- ----------------------------
* Less than 1%.
(1) The information contained in this table is based on information furnished
by the respective shareholders or contained in filings made with the
Securities and Exchange Commission. The securities "beneficially owned" by
an individual are determined in accordance with the definition of
"beneficial ownership" set forth in the regulations of the Securities and
Exchange Commission and, accordingly, may include securities owned by or
for, among others, the spouse and/or minor children of the individual and
any other relative who has the same home as such individual, as well as
other securities as to which the individual has or shares voting or
investment power or which the individual has the right to acquire under
outstanding stock options within 60 days after March 31, 1999. Beneficial
ownership may be disclaimed as to certain of the securities.
(2) Based on 10,984,833 shares outstanding on February 26, 1999; except when
the percentage reported relates to shares of Common Stock that a person has
a right to acquire, in which case it is based on the number of shares of
Common Stock that would be outstanding after the exercise of such right.
The following persons own presently exercisable stock options for the
amount of shares indicated: Erwin T. Straw -- 100,748; Frederick G. Betz --
14,736; William H. Bromley -- 66,000; Joseph A. Fluehr, III -- 11,000;
James J. Lynch -- 176,000; and James E. Kelly -- 35,000.
63
(3) Includes 933,000 shares owned by the Trust, 55,496 shares owned by trusts
or Allen Speiser's benefit, and 9,336 shares owned by a trust of which Mr.
Speiser is trustee for the benefit of third parties. Excludes 245,630
shares owned directly by Mr. Arthur J. Kania, grantor of and counsel to the
Arthur J. Kania Trust and a director of the Company. The address for the
Trust is Two Bala Plaza, Fifth Floor, 333 City Line Avenue, Bala Cynwyd, PA
19004.
(4) 183,340 shares are held jointly by Mr. Straw and his wife. 92,890 shares
are owned by Mr. Straw's wife. 2,315 shares are held for Mr. Straw in the
Company's 401(k) plan. Also includes 30,924 shares which are owned by
Eastern Telephone Systems, Inc., on the Board of Directors of which Mr.
Straw serves and in which Mr. Straw has an equity interest.
(5) 7,270 shares of Common Stock are held by Fred Betz & Sons Profit Sharing
Trust of which Mr. Betz is the Trustee, 47,514 shares are held by Mr. Betz'
wife and 5,687 shares are held in an IRA account for Mr. Betz' wife.
(6) Includes 300 shares owned by Mr. Blume's wife.
(7) Includes 15,578 shares owned by a pension plan for the benefit of
Mr. Cunningham.
(8) 49,860 shares are held jointly by Mr. Fluehr and his wife. 2,904 shares are
held in the Joseph A. Fluehr, III Funeral Homes, Inc. Profit Sharing Trust.
Mr. and Mrs. Fluehr share investment control of these shares
(9) Includes 5,000 shares owned by a trust for which Mr. Fox is co-trustee and
beneficiary.
(10) Excludes 933,000 shares owned by the Arthur J. Kania Trust established by
Mr. Kania as grantor (See Note 3 above) and 198,228 shares owned by members
of Mr. Kania's family. Mr. Kania disclaims beneficial ownership of all such
shares.
(11) 8,521 shares are held in an IRA account for Mr. Larenz' wife.
(12) 4,224 shares are held for Mr. Lynch in the Company's 401(k) Plan.
(13) 20,000 shares are held in an IRA account.
(14) Includes 8,076 shares held for Mr. Bromley in the Company's 401(k) Plan.
Also includes 1,450 shares held in an IRA account for the benefit of Mr.
Bromley's wife, 420 shares owned directly by Mr. Bromley's wife and 475
shares owned directly by Mr. Bromley's children.
(15) Includes 1,157 shares held for Mr. Kelly in the Company's 401(k) Plan.
(16) This amount includes an aggregate of 403,484 shares of Common Stock
issuable upon the exercise of presently exercisable stock options held by
certain officers and directors of the Company. See Note 2 above. The
address for each officer and director is c/o Prime Bancorp, Inc., 7111
Valley Green Road, Fort Washington, Pennsylvania 19034.
Item 13. Certain Relationships and Related Transactions.
INDEBTEDNESS OF MANAGEMENT
Loans to directors and executive officers are made only in conformance
with, and subject to the limitations of, applicable banking regulations. Such
loans are made in the ordinary course of business and are made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other borrowers. These loans do not
involve more than normal collection risk, nor do they present any other features
more favorable than loans made to unaffiliated third parties.
64
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prime Bank, the Company's wholly-owned subsidiary, leased three (3)
Bank branch offices and some administrative office space from Dominion
Properties, L.P. ("Dominion") in 1998. The majority ownership interest in
Dominion is held by the Arthur J. Kania Trust. Arthur J. Kania, a director of
the Company, is grantor of the Trust and legal counsel to the Trust and
Dominion. Mr. Kania's children are the beneficiaries of the Trust. Dominion sold
one of the offices to an unrelated third party in December 1998 and sold a
second property to an unrelated third party in March 1999..
The leases with Dominion have original terms which expire on December
31, 2005. The leases provide for certain renewal options and rent escalation
based upon increases in the Consumer Price Index. Total rent and other charges
paid by the Company to Dominion under the leases in 1998 were approximately
$419,000. Payments under individual leases may vary due to increases in the
Consumer Price Index, real estate taxes, utilities and common area maintenance
charges.
In 1998, the law firm of Kania, Lindner, Lasak and Feeney performed
legal services for the Company's subsidiaries and received compensation
therefor. Mr. Kania is a partner in such firm.
In 1998, the law firm of Blank Rome Comisky & McCauley, LLP performed
legal services for the Company's subsidiaries and received compensation
therefor. Mr. Blume is a partner in such firm. Mr. Blume's firm is also
providing legal services to the Company in connection with the merger with
Summit Bancorp.
65
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(2) Other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable
and therefore have been omitted.
(3) The following exhibits:
Exhibit No. Description
2.1 Agreement and Plan Of Merger dated February 17, 1999 between Summit
Bancorp., a New Jersey business corporation ("Summit"), and Prime
Bancorp, Inc., a Pennsylvania business corporation ("Prime"). Prime
will supplementally provide a copy of the exhibits and disclosure
schedules to the SEC upon request.
2.2 Stock Option Agreement, dated February 18, 1999 (this "Agreement"),
between Summit Bancorp., a New Jersey corporation ("Grantee"), and
Prime Bancorp, Inc., a Pennsylvania corporation ("Issuer").
3.1 Articles of Incorporation of Prime Bancorp, Inc. - Incorporated
herein by reference to Exhibit 3.1 of Registration Statement
#333-13741
3.2 Bylaws - Incorporated by reference to Exhibit 3.2 of Registration
Statement #333-13741.
4.1 Form of Registrant's Stock Certificate for common stock. -
Incorporated herein by reference to Exhibit 4.2 to Registration
Statement #333-13741.
10.1* Employment Agreement between the Prime, Prime Bank and James J. Lynch
dated December 18, 1995. Incorporated by reference to Exhibit 10.1(c)
to Registrants Annual Report on Form 10-K for year ended December 31,
1995, File No. 0-17286.
10.2* Change in Control Agreement between the Company, Prime Bank and James
E. Kelly dated November 17, 1997.
10.3* Directors Deferred Compensation Plan
10.4* Employment Agreement between the Prime, Prime Bank and William H.
Bromley to become effective upon completion of the merger with First
Sterling. - Incorporated herein by reference to Exhibit 10.5 to
Registration Statement #333-13741.
10.5* First Sterling 1988 Non-Qualified Stock Option Plan - Incorporated
herein by reference to Exhibit 10.6 to Registration Statement
#333-13741.
10.6 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated December 7, 1995 for Devon branch and office. -
Incorporated herein by reference to Exhibit 10.7 to Registration
Statement #333-13741.
10.7 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated June 4, 1996 regarding right to reduce the space leased
under lease agreement for Devon offices and then lease term for a
portion of such space. - Incorporated herein by reference to Exhibit
10.8 to Registration Statement #333-13741.
66
Exhibit No. Description
10.8 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated as of December 15, 1995 for the St. David's branch. -
Incorporated herein by reference to Exhibit 10.9 to Registration
Statement #333-13741.
10.9 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated as of December 15, 1995 for branch in Bryn Mawr Square. -
Incorporated herein by reference to Exhibit 10.10 to Registration
Statement #333-13741.
10.10 Lease Agreement between Monument Road Associates and First Sterling
Bank dated April 14, 1994 for Bala Cynwyd branch. - Incorporated
herein by reference to Exhibit 10.11 to Registration Statement
#333-13741.
10.11 Lease Agreement between Silvio F. and Elizabeth O. D'Ignazio and
First Sterling Bank dated as of July 3, 1996 for Media branch. -
Incorporated herein by reference to Exhibit 10.12 to Registration
Statement #333-13741.
10.12* Executive Benefit Plan for Erwin T. Straw - Trust Agreement by and
between Prime Bank and Investors Trust Company dated March 11, 1997.
10.13* 1995 Incentive Stock Option Plan - Incorporated herein by reference
to Exhibit 10.14 filed with the Securities and Exchange Commission on
March 30, 1998.
10.14* Prime's Salary Continuation and Supplemental Retirement Plan -
Incorporated by reference to Exhibit 10.3 to Prime's Annual Report on
Form 10-K for the fiscal year ending June 30, 1989, filed with the
Securities and Exchange Commission on September 27, 1989.
10.15 Prime's Retirement Plan - Incorporated by reference to Exhibit 10.4
to Prime's Annual Report on Form 10-K for the fiscal year ending June
30, 1989, filed with the Securities and Exchange Commission on
September 27, 1989.
10.16 Prime Bancorp, Inc. Retirement Savings Plan as amended and restated
effective January 1, 1998.
10.17 Lease Agreement between Prime Bank and Lotz Realty, Inc. -
Incorporated by reference to exhibit to Prime's Annual Report on Form
10-K for the fiscal year ending June 30, 1989, filed with the
Securities and Exchange Commission on September 27, 1989.
10.18 Lease Agreement, between Prime Bank and Village Plaza Shopping
Center. - Incorporated by reference to exhibit 10.7 to Prime's Annual
Report on Form 10-K for the fiscal year ending June 30, 1989, filed
with the Securities and Exchange Commission on September 27, 1989.
10.19 Lease Agreement, between Prime Bank and Grant Plaza. - Incorporated
by reference to Exhibit 10.8 to Prime's Annual Report on Form 10-K
for the fiscal year ending June 30, 1989, filed with the Securities
and Exchange Commission on September 27, 1989.
10.20 Lease Agreement, between Prime Bank and Hopkinson Corporation -
Incorporated by reference to Exhibit 10.10 to Prime's Annual Report
on Form 10-K for the fiscal year ending December 31, 1993, filed with
the Securities and Exchange Commission on April 14, 1993.
10.21 Lease Agreement, between Prime Bank and Foxcroft Square Company -
Incorporated by reference to Exhibit 10.11 to Prime's quarterly
report on Form 10-Q for the quarter ended March 31, 1993, filed with
the Securities and Exchange Commission on April 14, 1993.
67
Exhibit No. Description
10.22 Lease Agreement, between Prime Bank and Bell Atlantic Properties,
Inc. dated January 7, 1985. Incorporated by reference to Exhibit
10.12 to Prime's Annual Report on Form 10-K for the fiscal year
ending December 31, 1994, filed with the Securities and Exchange
Commission on March 30, 1995.
10.23 Lease Agreement, between Prime Bank and the Trust of Russell A.
Allen, deceased dated July 31, 1985. - Incorporated by reference to
Exhibit 10.13 to Prime's Annual Report on Form 10-K for the fiscal
year ending December 31, 1994, filed with the Securities and Exchange
Commission on March 30, 1995.
10.24 Lease Agreement, between Prime Bank and Mark Cohen dated September
24, 1994. - Incorporated by reference to Exhibit 10.14 to Prime's
Annual Report on Form 10-K for the fiscal year ending December 31,
1994, filed with the Securities and Exchange Commission on March 30,
1995.
10.25 Lease Agreement, between Prime Bank and CoreStates Bank dated March
1, 1995. Incorporated by reference to Exhibit 10.15 to Prime's Annual
Report on Form 10-K for the year ended December 31, 1995, filed with
the Securities and Exchange Commission on March 30, 1996.
10.26 Lease Agreement, between Prime Bank and Cameron C. Troilo and Olga
Jean Troilo dated June 26, 1995. Incorporated by reference to Exhibit
10.16 to Prime's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the Securities and Exchange Commission
on March 30, 1996.
10.27 Report on Form 11-K, Prime Bancorp, Inc. Retirement Savings Plan for
the year ended December 31, 1998. (to be filed by amendment)
22.1 Subsidiaries
23.1 Consent of Ernst & Young, LLP
23.2 Consent of KPMG LLP
27 Financial Data Schedule
* Denotes a management contract or compensatory plan.
(b) Reports on Form 8-K
1) Report dated February 18, 1999 relating to changes in control
of registrant
68
PRIME BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused his report to be signed on its
behalf by the undersigned, hereunto duly authorized.
PRIME BANCORP, INC.
/s/ James J. Lynch
--------------------------------
James J. Lynch, President and
Chief Executive Officer
Date: March 28, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Frederick G. Betz Director March 28, 1999
- ---------------------------
Frederick G. Betz
/s/ Fred Blume, Esq. Director March 28, 1999
- ---------------------------
Fred Blume, Esq.
/s/ William J. Cunningham Director March 28, 1999
- ---------------------------
William J. Cunningham
/s/ Joseph A. Fluehr, III Director March 28, 1999
- ---------------------------
Joseph A. Fluehr, III
/s/ Robert A. Fox Director March 28, 1999
- ---------------------------
Robert A. Fox
69
Signature Title Date
- --------- ----- ----
/s/ Arthur J. Kania Director March 28, 1999
- ---------------------------
Arthur J. Kania
/s/ James E. Kelly Executive Vice President and March 28, 1999
- --------------------------- Chief Financial Officer
James E. Kelly.
/s/ Michael B. Laign Director March 28, 1999
- ---------------------------
Michael B. Laign
/s/ Ernest Larenz Director March 28, 1999
- ---------------------------
Ernest Larenz
/s/ James J. Lynch Chairman, President and Chief March 28, 1999
- --------------------------- Executive Officer (Principal
James J. Lynch Executive Officer)
/s/ Roy T. Peraino Director March 28, 1999
- ---------------------------
Roy T. Peraino
/s/ David H. Platt Director March 28, 1999
- ---------------------------
David H. Platt
/s/ Frank H. Reeves Senior Vice President March 28, 1999
- --------------------------- Chief Accounting Officer
Frank H. Reeves
/s/ Erwin T. Straw Director March 28, 1999
- ---------------------------
Erwin T. Straw