SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 12, 1996
PRIME BANCORP, INC.
(Exact name of registrant as specified in charter)
Delaware
(State of other jurisdiction of incorporation)
0-17286 23-2528428
(Commission File Number) (I.R.S. Employer
Identification No.)
6425 Rising Sun Avenue, Philadelphia, Pennsylvania 19111
(Address of principal executive offices) (Zip Code)
<PAGE>
The undersigned registrant hereby amends Item 7 Financial Statements, Pro
Forma Financial Information and Exhibits on Form 8-K filed with the
Securities and Exchange Commission on June 27, 1996 as set forth in the pages
attached hereto.
Amend Item 7 by submitting Financial Statements and Pro Forma Financial
Information relating to the Merger between the registrant and First Sterling
Bancorp, Inc.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
a) Financial Statements of Business Acquired.
Annual Financial Statements:
Report of Independent Accountants................... F-2
Consolidated Balance Sheets at December 31, 1995
and 1994......................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993................. F-4
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1995, 1994 and 1993. F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993........... F-6
Notes to Consolidated Financial Statements.......... F-7 - F-21
Interim Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and
December 31, 1995................................ F-22
Consolidated Statements of Income (Unaudited) for
the Three and Six Months Ended June 30, 1996
and 1995......................................... F-23
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1996 and
1995............................................. F-24
Notes to Consolidated Financial Statements
(Unaudited)...................................... F-25
b) Pro Forma Financial Information
The following unaudited pro forma condensed consolidated
financial statements are filed with this report:
Pro Forma Combined Balance Sheet at June 30, 1996..... F-26
Pro Forma Condensed Combined Statement of Operations
Six Months Ended June 30, 1996 and 1995............ F-27
Pro Forma Condensed Combined Statement of Operations
Years Ended December 31, 1995 and 1994............. F-28
Years Ended December 31, 1993...................... F-29
Notes to Pro Forma Combined Financial Information F-30 - F-31
The Pro Forma Combined Balance Sheet of Prime and First Sterling as of June
30, 1996, give effect to the Merger using a pooling of interest method of
accounting. The Pro Forma Financial Information should be read in conjunction
with the Consolidated Financial Statements of the Registrant. The data set
forth is not necessarily indicative of the results of the future operations
of Prime upon consummation of the Merger or the actual results that would
have been achieved had the Merger been consummated for the periods presented.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 1996 /s/ James J. Lynch
James J. Lynch
President and Chief
Executive Officer
Date: August 12, 1996 /s/ Michael J. Sexton
Michael J. Sexton
Treasurer and Chief
Financial Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
<TABLE>
<S> <C>
Annual Financial Statements
Report of Independent Accountants....................................................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1994............................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993..................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993..................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993..................................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
Interim Financial Statements
Consolidated Balance Sheets at June 30, 1996 and December 31, 1995...................................... F-22
Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended
June 30, 1996 and 1995............................................................................... F-23
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 1996 and 1995............................................................................... F-24
Notes to Consolidated Financial Statements (Unaudited).................................................. F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors of
First Sterling Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of First Sterling
Bancorp, Inc. and Subsidiary (the Company) as of December 31, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Sterling
Bancorp, Inc. and Subsidiary as of December 31, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 115, 'Accounting for
Certain Investments in Debt and Equity Securities' as of December 31, 1993.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 23, 1996
F-2
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS:
Cash and due from banks............................................................. $ 4,861,330 $ 926,529
Federal funds sold.................................................................. -- 4,800,000
Investments available for sale...................................................... 49,833,117 30,339,944
Investments held to maturity........................................................ 594,525 15,119,841
Federal Reserve Bank stock.......................................................... 242,800 242,800
Loans:
Commercial........................................................................ 94,507,827 75,947,150
Mortgage.......................................................................... 48,412,745 32,772,205
Consumer.......................................................................... 11,701,227 10,135,032
------------- -------------
Total loans....................................................................... 154,621,799 118,854,387
Allowance for loan losses......................................................... (2,318,001) (1,781,627)
------------- -------------
Loans, net........................................................................ 152,303,798 117,072,760
------------- -------------
Accrued interest and fees receivable.............................................. 2,143,807 1,362,593
Premises and equipment, at cost:
Leasehold improvements............................................................ 1,042,817 1,020,497
Furniture, fixtures and equipment................................................. 995,360 991,055
Computer equipment and software................................................... 926,888 819,074
------------- -------------
2,965,065 2,830,626
Accumulated depreciation.......................................................... (1,915,584) (1,551,950)
------------- -------------
Premises and equipment, net......................................................... 1,049,481 1,278,676
Federal income taxes receivable..................................................... -- 24,831
Deferred income taxes............................................................... 614,478 856,072
Prepaid expenses and other assets................................................... 342,237 302,770
------------- -------------
Total assets.................................................................... $ 211,985,573 $ 172,326,816
------------- -------------
------------- -------------
LIABILITIES:
Deposits:
Demand............................................................................ $ 24,404,024 $ 18,581,626
Savings and money market.......................................................... 24,420,762 24,090,249
Certificates of deposit less than $100,000........................................ 96,299,709 79,863,378
Certificates of deposit of $100,000 or more....................................... 22,833,811 14,879,266
------------- -------------
167,958,306 137,414,518
Repurchase agreements............................................................... 2,778,000 1,765,000
Income taxes payable................................................................ 16,948 --
Accrued interest payable............................................................ 2,976,922 1,886,888
Accrued liabilities................................................................. 1,577,325 1,788,502
Subordinated debentures............................................................. 1,050,000 1,050,000
FHLB advances....................................................................... -- 5,000,000
FHLB notes payable.................................................................. 23,646,201 13,694,067
------------- -------------
Total liabilities............................................................... 200,003,702 162,598,975
------------- -------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, par value $1 per share; 5,000,000 shares authorized; 1,470,003
shares issued; 1,454,203 and 1,470,003 shares outstanding at December 31, 1995
and 1994, respectively.......................................................... 1,470,003 1,470,003
Additional paid-in capital........................................................ 6,621,747 6,621,747
Retained earnings................................................................. 3,674,660 2,058,196
Unrealized gains (losses) on investments available for sale, net of taxes......... 412,961 (422,105)
Treasury stock, 15,800 shares, at cost............................................ (197,500) --
------------- -------------
Total shareholders' equity...................................................... 11,981,871 9,727,841
------------- -------------
Total liabilities and shareholders' equity...................................... $ 211,985,573 $ 172,326,816
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans.................................... $ 12,675,922 $ 9,730,124 $ 8,760,194
Interest on investment securities and federal funds sold...... 3,285,861 2,282,644 1,765,125
Other interest and dividends.................................. 222,650 69,491 118,075
-------------- -------------- --------------
Total interest income...................................... 16,184,433 12,082,259 10,643,394
-------------- -------------- --------------
Interest expense:
Interest on savings and money market deposits................. 977,218 861,003 770,942
Interest on certificates of deposit less than
$100,000................................................... 4,975,017 3,527,942 2,754,294
Interest on certificates of deposit of $100,000 or more....... 984,241 760,045 981,273
Interest on Federal Home Loan Bank borrowings................. 1,637,419 748,669 535,155
Interest on repurchase agreements............................. 79,576 50,908 13,279
Interest on subordinated debt................................. 78,750 78,750 78,750
-------------- -------------- --------------
8,732,221 6,027,317 5,133,693
-------------- -------------- --------------
Net interest income........................................ 7,452,212 6,054,942 5,509,701
Provision for loan losses....................................... 485,000 351,000 718,000
-------------- -------------- --------------
Net interest income after provision for loan
losses.................................................. 6,967,212 5,703,942 4,791,701
Other income:
Service charges and other fees................................ 583,219 499,494 626,148
Gain (loss) on sale of investment securities.................. 4,139 (116,972) 112,048
-------------- -------------- --------------
Net interest income and other income....................... 7,554,570 6,086,464 5,529,897
-------------- -------------- --------------
Operating expenses:
Salaries and employee benefits................................ 2,214,586 1,953,316 1,525,000
Occupancy..................................................... 1,046,415 950,121 747,252
Advertising................................................... 213,000 252,033 174,653
Insurance..................................................... 223,806 342,301 288,235
Other......................................................... 1,401,585 1,200,831 1,050,278
-------------- -------------- --------------
Total operating expenses................................... 5,099,392 4,698,602 3,785,418
-------------- -------------- --------------
Income before income taxes...................................... 2,455,178 1,387,862 1,744,479
Provision for income taxes...................................... 838,714 483,700 590,414
-------------- -------------- --------------
Net income................................................. $ 1,616,464 $ 904,162 $ 1,154,065
-------------- -------------- --------------
-------------- -------------- --------------
Earnings per share:
Primary....................................................... $ 1.07 $ .62 $ .83
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average shares outstanding -- Primary................ 1,515,253 1,464,598 1,396,503
-------------- -------------- --------------
-------------- -------------- --------------
Fully-diluted................................................. $ 1.03 $ .61 $ .79
-------------- -------------- --------------
-------------- -------------- --------------
Weighted Average shares outstanding --
fully-diluted.............................................. 1,625,763 1,575,108 1,520,032
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN ACCUMULATED SECURITIES TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS GAINS STOCK EQUITY
----------- ----------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992.......................... $ 1,370,003 $ 5,721,747 $ (31) -- $ 7,091,719
Net income...................... -- -- 1,154,065 -- 1,839,337
Unrealized appreciation on
available-for-sale securities,
net of deferred taxes......... -- -- -- $ 685,272 --
----------- ----------- ------------ ----------- ---------- ------------
Balance, December 31,
1993.......................... 1,370,003 5,721,747 1,154,034 685,272 -- 8,931,056
Net income...................... 904,162 904,162
Issuance of common
stock......................... 100,000 900,000 1,000,000
Unrealized depreciation on
available for sale securities,
net of deferred taxes......... (1,107,377) (1,107,377)
----------- ----------- ------------ ----------- ---------- ------------
Balance, December 31,
1994.......................... 1,470,003 6,621,747 2,058,196 (422,105) -- 9,727,841
Net income...................... 1,616,464 1,616,464
Unrealized appreciation on
available for sale securities,
net of deferred taxes......... 835,066 835,066
Treasury stock.................. $ (197,500) (197,500)
----------- ----------- ------------ ----------- ---------- ------------
Balance, December 31,
1995.......................... $ 1,470,003 $ 6,621,747 $3,674,660 $ 412,961 $ (197,500) $ 11,981,871
----------- ----------- ------------ ----------- ---------- ------------
----------- ----------- ------------ ----------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,616,464 $ 904,162 $ 1,154,065
Adjustments to reconcile net income to cash:
Provision for loan losses.................................... 485,000 351,000 718,000
Depreciation and amortization................................ 363,634 341,483 307,537
Deferred income tax benefit.................................. (188,591) (33,350) (168,790)
Amortization of premium (discount) on investments............ (26,482) 97,304 138,159
(Gain)/loss on sale of investment securities................. (4,139) 116,972 (112,048)
Increase in accrued interest receivable...................... (781,214) (252,058) (98,429)
(Increase) decrease in prepaid expenses and other assets..... (39,467) 184,954 (495,343)
Increase in accrued interest payable......................... 1,090,034 511,053 253,890
Increase (decrease) in accrued liabilities................... (211,177) 866,971 (1,530,723)
Increase in taxes payable.................................... 41,779 -- --
-------------- -------------- --------------
Net cash provided by operating activities.................. 2,345,841 3,088,491 166,318
-------------- -------------- --------------
Cash flows from investing activities:
Net increase in loans........................................... (35,716,038) (9,785,108) (19,773,260)
Additions to premises and equipment............................. (134,439) (625,488) (265,877)
Purchase of investments, available for sale..................... (30,871,431) (52,030,893) (18,862,908)
Purchase of securities, held to maturity........................ (6,958,125) (2,817,637) --
Purchase of FRB stock........................................... -- (29,900) --
Purchases of FHLB stock......................................... (572,300) (1,770,000) --
Proceeds from sales of securities available for sale............ 26,020,201 40,500,129 10,317,919
Proceeds from maturities of securities held to maturity......... 8,499,918 -- --
Principal receipts on securities available for sale............. 209,752 147,218 --
-------------- -------------- --------------
Net cash used in investing activities...................... (39,522,462) (26,411,679) (28,584,126)
-------------- -------------- --------------
Cash flows from financing activities:
Net increase in deposits........................................ 30,543,788 15,051,618 20,573,230
Increase in securities sold under agreement to repurchase....... 1,013,000 1,435,000 (100,000)
(Decrease) increase in advances under line of credit............ (5,000,000) 2,000,000 3,000,000
Increase in notes payable to Federal Home Loan Bank............. 9,952,134 3,694,067 5,000,000
Proceeds from issuance of bank stock............................ -- 1,000,000 --
Purchase of treasury stock...................................... (197,500) -- --
-------------- -------------- --------------
Net cash provided by financing activities.................. 36,311,422 23,180,685 28,473,230
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents.............. (865,199) (142,503) 55,422
Cash and cash equivalents at beginning of year.................... 5,726,529 5,869,032 5,813,610
-------------- -------------- --------------
Cash and cash equivalents at end of year.......................... $ 4,861,330 $ 5,726,529 $ 5,869,032
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures of cash flow information:
Interest paid................................................... $ 7,642,187 $ 5,515,264 $ 4,879,803
-------------- -------------- --------------
-------------- -------------- --------------
Taxes paid...................................................... $ 950,000 $ 603,922 $ 1,151,000
-------------- -------------- --------------
-------------- -------------- --------------
Noncash transactions:
Transfers to other real estate owned............................ -- -- 50,000
Change in unrealized gain/(loss) on securities, available for
sale, net of taxes of $430,185, $(570,496) and $353,000,
respectively................................................. $ 835,066 $ (1,107,377) $ 685,272
-------------- -------------- --------------
-------------- -------------- --------------
Transfer of securities from available for sale to held to
maturity..................................................... $ -- $ 6,216,704 $ --
-------------- -------------- --------------
-------------- -------------- --------------
Transfer of securities from held to maturity to available for
sale at fair value, amortized cost of $12,654,152............ $ 12,681,936 -- --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND REPORTING ENTITY
First Sterling Bancorp, Inc. (the Company) is a bank holding company
organized under the laws of the Commonwealth of Pennsylvania on January 15, 1987
to engage in commercial banking business through its wholly-owned subsidiary,
First Sterling Bank (the Bank), a Pennsylvania state-chartered bank insured by
the Federal Deposit Insurance Corporation. On May 26, 1988, the Bank was granted
a Certificate of Authority to conduct business and commenced commercial banking
operations on June 1, 1988.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, First Sterling Bank. All intercompany balances
and transactions have been eliminated in consolidation.
Interest Rate Risk
The earnings of the Company depend on the earnings of the Bank. The Bank is
dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Bank are subject
to risks and uncertainties surrounding its exposure to change in the interest
rate environment. The bank manages interest rate risk through its
asset/liability management strategies with the primary objective to maximize net
interest margin in current and anticipated rate environments, while balancing
interest-sensitive assets and liabilities and providing adequate liquidity for
projected needs.
Use of Estimates
In addition, the preparation of financial statements in conformity with
generally accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These significant estimates include the allowance
for loan losses. Actual results could differ from those estimates.
Investment Securities
As of December 31, 1993, the Bank elected to adopt FAS 115, 'Accounting for
Certain Investments in Debt and Equity Securities.' The impact of adopting this
standard, net of the related income tax effect, was $685,272 as of December 31,
1993. The statement requires management to make a determination as to which of
the three categories that they will classify their investments in:
Held-to-Maturity, Trading or Available-for-Sale.
Held to Maturity -- Securities identified as 'Held to Maturity' must be
held with the positive intent and ability to hold them to maturity. These
securities are reported at amortized cost.
Trading Securities -- Securities held with the intent for quick resale at a
trading profit. Trading securities are reported at fair value, with changes in
unrealized gains or losses included in current earnings.
Available for Sale -- Securities not included in the above two categories
are reported at fair value, with unrealized gains or losses, net of taxes,
excluded from earnings and reported directly as a separate component of
shareholders' equity. Securities classified as available for sale include
investments which management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates or other factors.
F-7
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Realized gains and losses on sale of investment securities are recognized
using the specific identification method.
On November 16, 1995, the bank restructured their investment portfolios in
connection with the amnesty window provided by the Financial Accounting
Standards Board (FASB). The Bank transferred, from its held to maturity
portfolio to its available for sale portfolio, government agency securities with
amortized cost and market values of $12,654,152 and $12,681,936, respectively,
and recorded unrealized gains and losses of $73,036 and $54,699, respectively,
net of taxes, as a separate component of shareholders' equity.
Loans and Allowances for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding.
Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful or is partially charged off, the loan is classified as nonaccrual.
Loans that are on a current payment status or past due less than 90 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in accordance
with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate.
The allowance for possible loan losses is established through a provision
for loan losses charged to operations. Loans are charged against the allowance
when management believes that the collectibility of the loan principal is
unlikely. Recoveries on loans previously charged off are credited to the
allowance.
The allowance is an estimate that management believes will be adequate to
absorb possible loan losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality and
diversification, review of specific problem loans, the adequacy of the
underlying collateral or present value of future cash flows, the results of the
most recent regulatory examination, current economic conditions and trends that
may affect the borrower's ability to pay. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if circumstances differ substantially from
assumptions used in making evaluations.
The Company adopted Statement of Financial Accounting Standards No. 114,
'Accounting by Creditors for Impairment of a Loan' ('SFAS 114') on January 1,
1995. SFAS 114 requires an adjustment to the carrying value of a loan through
the provision for possible credit losses when it is
F-8
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
'probable' that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan. SFAS 114 was subsequently amended by
Statement of Financial Accounting Standards No. 118, 'Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosure' ('SFAS 118') to
allow a creditor to use existing methods for recognizing interest income on an
impaired loan. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Impairment criteria
are applied to the loan portfolio exclusive of small homogeneous loans such as
residential mortgage and consumer loans which are evaluated collectively for
impairment. The adoption of SFAS Nos. 114 and 118 resulted in no additional
provision for loan losses.
Deferred Loan Fees
Fees for loan originations, commitments and origination costs are deferred
and recognized as an interest income yield adjustment over the terms of the
loans.
Premises and Equipment
Leasehold improvements, furniture, equipment and software are stated at
cost less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the lease term or the
lives of the improvements on the straight-line basis. Maintenance and repairs
and minor improvements are charged to current operations as incurred. Gain or
loss on retirement or disposal of individual assets is recorded as income or
expense in the period of retirement or disposal.
Real Estate Owned
Real estate owned consists of foreclosed assets and is stated at the lower
of cost or estimated fair value minus estimated costs to sell the property.
Income Taxes
In 1993, the Company adopted Statement of Financial Accounting Standards
No. 109, 'Accounting for Income Taxes,' which requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse (see Note 10).
Net Income Per Share
Net income per share is calculated on the basis of the weighted average
number of shares outstanding during the period, including the assumed exercise
of dilutive stock options using the treasury stock method. The convertible
subordinated debt is not considered a common stock equivalent. Fully diluted per
share data includes the assumed conversion of the convertible subordinated debt
using the 'If Converted' method. Fully diluted earnings per share, as presented,
includes the effect of the dilutive stock options and the convertible
subordinated debt.
F-9
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for a one-day period. The bank is required to maintain certain
average reserve balances as established by the Federal Reserve Board. The
amounts of those balances for the reserve computation periods which included
December 31, 1995 and 1994 were $478,000 and $487,000, respectively. These
requirements were satisfied through the restriction of vault cash and a balance
at the Federal Reserve Bank of Philadelphia.
Recently Issued Accounting Standards
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 122 'Accounting for
Mortgage Servicing Rights' which is effective for the Company beginning January
1, 1996. The statement requires the recognition of separate assets relating to
the rights to service mortgage loans for others based on their fair value if it
is practicable to estimate the value. The statement applies prospectively to
transactions entered into in 1996, therefore there will be no cumulative effect
upon adoption of this statement. In addition, this statement is not expected to
have a significant effect on the financial position or results of operations of
the Company.
In October 1995, the FASB issued SFAS No. 123 'Accounting for Stock Based
Compensation,' which is effective for the Corporation beginning January 1, 1996.
SFAS No. 123 provides an alternative method of accounting for stock-based
compensation arrangements, based on fair value of the stock-based compensation
utilizing various assumptions regarding the underlying attributes of the options
and the Corporation's stock, rather than the existing method of accounting for
stock based compensation which is provided in Accounting Principles Board
Opinion No. 25, 'Accounting for Stock Issued to Employees' (APB 25). The FASB
encourages entities to adopt the fair value based method, but does not require
the adoption of this method. For those entities that continue to apply APB 25,
pro forma disclosure of the effect, if adopted, of SFAS 123 on net income and
earnings per share would be required in the 1996 notes to consolidated financial
statements. The Company anticipates that it will continue its current accounting
policy.
3. INVESTMENTS
Investments available for sale as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AGGREGATE FAIR HOLDING HOLDING
VALUE GAINS LOSSES AMORTIZED COST
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes......................... $ 33,358,140 $ 443,130 $ 3,966 $ 32,918,976
Agencies -- MBS............................. 14,105,077 186,535 -- 13,918,542
FHLB Stock.................................. 2,369,900 -- -- 2,369,900
-------------- ----------- ----------- --------------
Total..................................... $ 49,833,117 $ 629,665 $ 3,966 $ 49,207,418
-------------- ----------- ----------- --------------
-------------- ----------- ----------- --------------
</TABLE>
F-10
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS -- (CONTINUED)
Investments held to maturity as of December 1995 are as follows:
<TABLE>
<CAPTION>
1995
--------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AGGREGATE HOLDING HOLDING AMORTIZED
FAIR VALUE GAINS LOSSES COST
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Municipal bonds..................................... $ 431,391 $ 31,291 $ -- $ 400,000
Agencies............................................ 190,852 -- 3,673 194,525
----------- ----------- ----------- -----------
Total............................................. $ 622,243 $ 31,291 $ 3,673 $ 594,525
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Investments available for sale as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
GROSS
GROSS UNREALIZED
AGGREGATE FAIR UNREALIZED HOLDING
VALUE HOLDING GAINS LOSSES AMORTIZED COST
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Treasuries................................. $ 27,548,126 $ -- $ (592,769) $ 28,140,895
Agencies -- CMO's.......................... 994,218 -- (5,782) 1,000,000
FHLB Stock................................. 1,797,600 -- -- 1,797,600
-------------- ----- ------------ --------------
Total.................................... $ 30,339,944 $ -- $ (598,551) $ 30,938,495
-------------- ----- ------------ --------------
-------------- ----- ------------ --------------
</TABLE>
Investments held to maturity as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AGGREGATE FAIR HOLDING HOLDING
VALUE GAINS LOSSES AMORTIZED COST
-------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Treasuries................................. $ 7,931,250 $ -- $ (33,160) $ 7,964,410
Agencies................................... 7,137,759 65,614 (83,286) 7,155,431
-------------- ----------- ------------ --------------
Total.................................... $ 15,069,009 $ 65,614 $ (116,446) $ 15,119,841
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
</TABLE>
The maturity distribution, by contractual maturity, of the aggregate fair
value and amortized cost of debt securities at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE FAIR VALUE COST
- ----------------------------------------------------------- -------------- --------------
<S> <C> <C>
Less than 1 year........................................... $ 10,132,501 $ 10,022,077
1 to 5 years............................................... 35,678,424 35,192,643
Greater than 10 years...................................... 4,022,192 3,992,698
-------------- --------------
Total.................................................... $ 49,833,117 $ 49,207,418
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY FAIR VALUE COST
- ------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
5 to 10 years..................................................... $ 431,391 $ 400,000
CMO's............................................................. 190,852 194,525
----------- -----------
Total........................................................... $ 622,243 $ 594,525
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS -- (CONTINUED)
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalty.
In 1995, 1994 and 1993, proceeds from the sale of securities available for
sale were $26,020,201, $40,500,129 and 10,317,919, respectively, resulting in
gross gains of $28,474 and gross losses of ($24,335) for 1995, gross losses of
($116,972) for 1994 and gross gain of $112,048 for 1993.
As of December 31, 1995 and 1994, approximately $13,000,000 and $4,000,000
of investment securities were pledged and segregated at the Federal Reserve Bank
to collateralize deposits of public funds and for other purposes.
As of December 31, 1995 and 1994, securities sold under agreements to
repurchase amounted to approximately $2,778,000 and $1,765,000, respectively.
The repurchase agreements were collateralized by U.S. Treasury securities that
have been pledged in an amount equal to the fair value of the repurchase
agreements or $2,778,000 and $1,765,000, as of December 31, 1995 and 1994,
respectively.
The bank is required to own shares of capital stock in the Federal Reserve
Bank (FRB) and Federal Home Loan Bank (FHLB) as part of doing business with
these institutions. The bank owned $242,800 of FRB stock and $2,369,900 and
$1,797,600 of FHLB stock at December 31, 1995 and 1994, respectively.
4. LOANS
At December 31, 1995, the recorded investment in loans for which impairment
has been recognized in accordance with FAS 114 totalled $1,829,502, of which
$717,451 related to loans with no valuation allowance because the loans have
been partially paid down or written down through charge-offs, and $1,112,051
related to loans with a corresponding valuation allowance of $532,591. For the
year ended December 31, 1995, the average recorded investment in impaired loans
was approximately $1,372,600. The Company recognized interest on impaired loans
of approximately $31,000 during 1995.
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $1,858,000, $874,000 and $1,450,498 at December 31,
1995, 1994 and 1993, respectively. If interest on those loans had been accrued,
such income would have approximated $119,660, $80,850 and $110,403 for 1995,
1994 and 1993, respectively. Interest income was recognized on nonaccrual loans
in 1995, 1994 and 1993 of $30,698, $35,216 and $110,403, respectively.
Designation of loans as nonaccrual or partial accrual loans does not relieve the
borrowers of their contractual obligations. In addition, at December 31, 1994
one loan was restructured with an aggregate balance of $1,129,254. The majority
of the outstanding principal balance on this loan was paid off during 1995. The
remaining $250,000 outstanding balance at December 31, 1995 is adequately
collateralized. If interest on this loan had been accrued in accordance with its
original terms, such income would have approximated $90,340 in 1994. Interest
income recognized on this loan was $33,878 in 1994. Unearned loan fee income was
$157,267, $108,635 and $63,634 as of December 31, 1995, 1994 and 1993
respectively.
F-12
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year............................. $ 1,781,627 $ 1,638,312 $ 1,183,547
Provision charged to operations.......................... 485,000 351,000 718,000
Net loans (charged off), recovered....................... 51,374 (207,685) (263,235)
------------- ------------- -------------
$ 2,318,001 $ 1,781,627 $ 1,638,312
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
During 1995 approximately $104,000 in loans were charged off, while
recoveries from loans previously written off amounted to $155,374.
6. CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $1,001,000 of 7.5% Convertible Subordinated Debentures
due December 31, 2000 during December 1990, and an additional $49,000 of such
debentures in 1991. The debentures are subordinated to any future senior
indebtedness of the Company and are convertible by the holders into the
Company's common stock at any time until December 31, 2000 at a conversion price
of $9.50 through 1996 and $11 per share thereafter until the maturity date. The
debentures are redeemable at any time at the option of the Company at a premium
of 3% until the maturity date.
The Company can require the holders to convert the principal, including any
redemption premium, into common stock at any time at a conversion price of $7.50
per share. The debentures are also payable upon the merger or transfer of
substantially all of the Company's assets, unless assumed by the acquiring
company.
Interest on the debentures is payable quarterly commencing on April 15,
1991. The debentures represent a primary capital investment as defined by the
Federal Reserve System Capital Adequacy Guidelines Regulation.
7. BORROWINGS FROM FEDERAL HOME LOAN BANK:
Line of Credit:
As of December 31, 1995 and 1994, the Bank had a line of credit with the
FHLB of approximately $17.83 million and $14.77 million, respectively. Advances
under this credit facility are payable on demand, bear interest at the Federal
funds rate plus .25% (6.05% at December 31, 1995 and 6.61% at December 31,
1994). Advances outstanding as of December 31, 1995 and 1994 are $0 and
$5,000,000, respectively.
F-13
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWINGS FROM FEDERAL HOME LOAN BANK: -- (CONTINUED)
Notes Payable:
As of December 31, 1995 the Bank has the following fixed rate loans with
the FHLB:
<TABLE>
<CAPTION>
AMOUNT TERM RATE MATURITY DATE
- -------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
$ 5,000,000 3 years 4.82% February 1996
3,000,000 2 years 5.25% March 1996
15,000,000 1.5 years 7.40% August 1996
23,933 2 years 4.69% January 1996
23,933 2.5 years 4.85% July 1996
23,933 3 years 5.01% January 1997
23,933 3.5 years 5.22% July 1997
23,933 4 years 5.43% January 1998
23,933 4.5 years 5.57% July 1998
502,603 2 years 5.70% January 1999
- --------------
$ 23,646,201
- --------------
- --------------
</TABLE>
All borrowings from the FHLB are collateralized by a pledge of the Bank's
entire portfolio of unencumbered investment securities, mortgage-backed
securities, certain mortgage loans and a lien on the Bank's FHLB stock.
8. SHAREHOLDERS' EQUITY
The Federal Reserve Board's risk-based capital guidelines require all
state-chartered member banks to maintain total capital equal to at least 8.0% of
risk-weighted total assets and Tier 1 capital (common stock, additional paid-in
capital and retained earnings) equal to 4.0% of risk-weighted total assets for
the years ended December 31, 1995 and 1994.
The risk-weighting process permits banks to discount the value of certain
high quality assets by varying percentages in computing the value of total
assets for the purpose of calculating the ratio of required capital. At December
31, 1995 and 1994, the Bank's total capital was 10.95% and 11.86% of
risk-weighted total assets and Tier 1 capital equals 8.48% and 9.61% of
risk-weighted total assets.
During 1995, the Company repurchased 15,800 shares of its $1 par common
stock at a price of $12.50 per share, shown as a deduction from the total of
capital stock, paid-in capital and retained earnings.
During 1994, the holding company offered and sold 100,000 shares of its $1
par common stock at $10.50 to the directors and other shareholders of the
Company. The transaction resulted in an additional 100,000 shares outstanding
and an increase in additional paid-in capital of $900,000, net of underwriting
and legal fees.
During 1988 and 1990, the Company issued options to purchase common stock
of the Company to selected directors and officers. The options price per share
is based on the estimated fair value on the date granted.
F-14
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SHAREHOLDERS' EQUITY -- (CONTINUED)
The following is a summary of options granted:
<TABLE>
<CAPTION>
SHARES OPTION PRICE EXPIRATION
UNDER OPTION PER SHARE DATE
------------- ------------- ------------
<S> <C> <C> <C>
Options granted 1988
(Vesting -- 5 years)..................................... 50,000 $ 5.00 5/31/97
Options granted 1988
(Vesting -- 5 years)..................................... 24,000 5.00 5/31/98
Options granted 1988
(Vesting -- 4 years)..................................... 9,166 6.00 5/31/97
Options granted 1990
(Vesting -- 5 years)..................................... 10,000 7.00 5/31/97
Options canceled 1993...................................... (3,333) 6.00
-------------
Balance December 31, 1993, 1994 and 1995................... 89,833 5.29 1.69 years
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
9. PENNSYLVANIA SHARES TAX
Effective July 1, 1989, Pennsylvania enacted legislation creating the bank
shares tax and a new bank tax credit allowing a one-time tax credit for banks
chartered after January 1, 1979. The maximum amount of the credit that can be
used in any year is limited to 80% of the tax liability for that year. Under the
revised statute, the Bank's share of the tax liability was reduced by aggregate
credits of approximately $500,000 for the years 1989 through 1991.
Subsequent to July 1, 1989, several lawsuits were brought against the
Pennsylvania Department of Revenue requesting the new bank shares tax and the
new bank tax credit be declared invalid.
On April 22, 1995 the Pennsylvania Department of Revenue negotiated a
settlement with the bank allowing in full the maximum amount of credit to be
applied to the tax liability. As of December 31, 1994 the bank had utilized all
of its tax credits. At December 31, 1995 the bank neither has nor is permitted
by law to have tax credits available to offset future shares tax liability.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes.
F-15
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES -- (CONTINUED)
The components of the deferred tax asset recognized in the 1995, 1994 and
1993 balance sheets are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred loan fees........................................... $ 25,969 $ 36,936 $ 21,636
Loan loss reserve............................................ 658,432 508,378 478,648
Depreciation................................................. 92,496 80,422 73,352
Deferred rent................................................ 16,436 18,715 21,816
Other real estate owned...................................... 6,800 6,800 6,800
Other........................................................ 27,081 -- 2,962
Unrealized depreciation on available for sale investments.... -- 217,449 --
----------- ----------- -----------
Gross deferred tax asset....................................... 827,214 868,700 605,214
----------- ----------- -----------
Deferred tax liabilities:
Unrealized (appreciation) on available for sale
investments............................................... (212,736) -- (353,000)
Other........................................................ -- (12,628) --
----------- ----------- -----------
Gross deferred tax liability................................... (212,736) (12,628) (353,000)
----------- ----------- -----------
Net deferred tax assets........................................ $ 614,478 $ 856,072 $ 252,214
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The components of income tax expense attributed to operations are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current............................................... $ 1,027,305 $ 517,050 $ 759,204
Deferred.............................................. (188,591) (33,350) (168,790)
------------- ----------- -----------
$ 838,714 $ 483,700 $ 590,414
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
Total income tax expense attributable to operations differed from the
amounts computed by applying the U.S. federal statutory tax rates to pre-tax
income from operations as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Provision computed by applying the U.S. statutory rate.... $ 834,761 $ 471,908 $ 595,922
Officer's life insurance.................................. 438 438 438
Business and entertainment expenses....................... 15,595 12,224 3,236
Tax-exempt interest income................................ 4,415 -- --
Loss on asset disposition................................. -- -- (1,546)
Tax credit -- low income.................................. (15,000) -- (3,500)
Other..................................................... (1,495) (870) (4,136)
----------- ----------- -----------
$ 838,714 $ 483,700 $ 590,414
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Bank has entered into certain noncancellable leases for bank premises
which are accounted for as operating leases. All lease agreements for office and
banking facilities are with an affiliate of a principal shareholder, except for
the Bala Cynwyd Branch office lease, which is with a nonaffiliate. The lease
terms are for ten years with renewal options for two additional five-year
periods.
F-16
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Future minimum rental payments, excluding real estate taxes, insurance and
maintenance required under noncancellable operating leases that have initial or
remaining lease terms in excess of one year at December 31, 1995, are as
follows:
<TABLE>
<S> <C>
1996...................................................................... $ 395,730
1997...................................................................... 395,730
1998...................................................................... 235,570
1999...................................................................... 177,186
2000...................................................................... 179,842
Thereafter................................................................ 525,312
-------------
Total................................................................... $ 1,909,370
-------------
-------------
</TABLE>
The total minimum rent expense for the initial lease term is being expensed
on a straight-line basis over the term of the lease. The difference between
rental expense recognized in the period and actual rental payments is recorded
as a deferred liability. The leases also require the Bank to pay its pro rata
portion of increases over the base year in direct expense such as maintenance,
taxes and insurance.
Rent expense for leases for the years ended December 31, 1995, 1994 and
1993 was $395,730, $348,892 and $293,846, respectively. Of these amounts,
$282,730, $267,720 and $293,846 were for leases with a related party.
Effective January 1, 1992, the Company entered into a five-year employment
agreement with an officer of the Company. The agreement provides for an annual
salary plus increases resulting from merit review.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate and/or purchase
residential, consumer, commercial and construction loans and standby letters of
credit to guarantee performance of a customer to a third party. Such instruments
generally have fixed expiration dates or termination clauses and may require
payment of a fee to the Bank. The Bank uses the same credit policies in making
commitments and issuing standby letters of credit as it does for
on-balance-sheet instruments. However, these instruments are properly not
recorded on the Bank's financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments.
Since some commitments and letters of credit are expected to expire without
being drawn down, the amounts summarized below as of December 31, 1995 and 1994,
respectively, do not necessarily represent future cash requirements.
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Commitments to extend credit...................................... $ 16,319,000 $ 17,183,000
Standby letter of credit.......................................... 794,000 724,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as they are not in violation of any condition established in the contract.
Commitments generally have fixed expiration
F-17
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK -- (CONTINUED)
dates or other termination clauses and many require the payment of a fee. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained upon extension of credit is based on management's
credit evaluation of the customer. Collateral held varies but may include real
estate, marketable securities, pledged deposits, equipment and accounts
receivable.
Standby letters of credit are conditional commitments issued that guarantee
the performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
It is the practice of the Bank to lend primarily in its trade area, which
is principally the Greater Delaware Valley area. The Bank, to a large extent,
extends credit collateralized by real estate. This includes residential and
commercial mortgages, residential and commercial construction loans, home equity
loans and commercial loans collateralized by real estate. These lending
activities could be similarly affected by a downturn in the general economy, the
regional economy or real estate values.
13. OTHER RELATED PARTY TRANSACTIONS
Certain directors, executive officers and their associates and bank
employees are indebted to the Bank. At December 31, 1995 and 1994, the loans
outstanding to these parties amounted to $5,405,000 and $8,780,146,
respectively.
The following table presents a rollforward of the loans outstanding to
these parties, for the year ended December 31, 1995:
<TABLE>
<S> <C>
Balance, December 31, 1994............................................................. $ 8,780,146
New loans.............................................................................. 1,167,663
Repayments and other changes........................................................... (4,542,809)
-------------
Balance, December 31, 1995............................................................. $ 5,405,000
-------------
-------------
</TABLE>
A law firm affiliated with a principal shareholder serves as counsel to the
Company. Fees and expenses of $183,465, $136,242 and $81,784, respectively, have
been paid or accrued for professional services for the years ended December 31,
1995, 1994 and 1993.
14. LITIGATION
In the normal course of business, litigation and claims may be brought
against the bank. Management, after reviewing developments with legal counsel,
establishes loss contingency reserves as deemed necessary. No such reserves have
been established as of December 31, 1995.
15. RETIREMENT PLANS
The Bank has a defined contribution plan pursuant to the provision of
401(k) of the Internal Revenue Code. The plan covers all employees who meet the
age and service requirements. The plan provides for elective employment
contributions up to 15% of compensation and a 40% matching company contribution
limited to 6%. The total expense relating to current retirement plans was
$31,021, $25,793 and $15,593, for 1995, 1994 and 1993, respectively.
F-18
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, 'Disclosure about Fair
Value of Financial Instruments,' requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet, for
which it is practical to estimate fair value. In cases where quoted market
prices are not available, fair values are based on assumptions including future
cash flows and discount rates. Accordingly, the fair value estimates cannot be
substantiated, may not be realized, and do not represent the underlying value of
the Company.
The Company used the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents:
The carrying value is a reasonable estimate of fair value.
Investment Securities and Securities Available for Sale:
For investment securities with a quoted market price, fair value is equal
to quoted market prices. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Loans:
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other homogeneous
categories of loans such as fixed rate commercial loans, residential mortgages
and consumer loans, fair value is estimated based on discounting the estimated
future cash flows using the current rates at which similar loans would be made
to borrowers with similar collateral and credit ratings and for similar
remaining maturities.
Deposit Liabilities:
For checking, savings and money market accounts, fair value is the amount
payable on demand at the reporting date. For time deposits, fair value is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Subordinated Debentures:
Fair value is estimated using the quoted average of the broker bid and ask
price at year end.
Commitments to Extend Credit and Standby Letters of Credit:
For commitments and standby letters of credit expiring within 90 days or
with a variable rate, the settlement amount is a reasonable estimate of fair
value. For commitments and standby letters of credit expiring beyond 90 days or
with a fixed rate, the fair value is the present value of the obligations based
on current loan rates.
F-19
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
At December 31, 1995, the carrying amount and the estimated fair value of
the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------
RECORDED
BANK FAIR
AMOUNT VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents........................................ $ 4,861,330 $ 4,861,330
Investment securities available for sale......................... 49,833,417 49,833,117
Investments held to maturity..................................... 594,525 622,243
FRB stock........................................................ 242,800 242,800
Net loans........................................................ 152,303,798 152,281,999
Financial liabilities:
Deposits
Demand........................................................... 24,404,024 24,404,024
Savings and money market......................................... 24,420,762 24,420,762
Certificates of deposit.......................................... 119,133,520 118,981,600
Subordinate debentures........................................... 1,050,000 1,050,000
Repurchase agreements............................................ 2,778,000 2,778,000
Off balance sheet financial instruments:
Commitments to extend credit..................................... 16,319,000 16,319,000
Standby letters of credit........................................ 794,000 794,000
</TABLE>
17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements for First Sterling Bancorp, Inc. only:
Balance Sheets as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Assets:
Cash................................................................ -- --
Investment in debt of subsidiary.................................... $ 1,050,000 $ 1,050,000
Investment in subsidiary, at equity................................. 11,981,870 9,727,840
-------------- --------------
Total assets............................................... $ 13,031,870 $ 10,777,840
-------------- --------------
-------------- --------------
Liabilities:
Subordinated debentures............................................. 1,050,000 1,050,000
-------------- --------------
Total liabilities.......................................... 1,050,000 1,050,000
-------------- --------------
Shareholders' equity:
Common stock........................................................ 1,470,003 1,470,003
Additional paid-in capital.......................................... 6,621,746 6,621,746
Retained earnings................................................... 3,674,660 2,058,196
Unrealized gains (losses) on investments available for sale, net of
taxes............................................................ 412,961 (422,105)
Treasury stock...................................................... (197,500) --
-------------- --------------
Total shareholders' equity................................. 11,981,870 9,727,840
-------------- --------------
Total liabilities and shareholders' equity................. $ 13,031,870 $ 10,777,840
-------------- --------------
-------------- --------------
</TABLE>
F-20
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. PARENT COMPANY FINANCIAL INFORMATION -- (CONTINUED)
Statements of Operations for the years ended December 31, 1995, 1994 and
1993:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ----------- -------------
<S> <C> <C> <C>
Income..................................................... $ 78,750 $ 78,750 $ 78,750
Expense.................................................... (78,750) (78,750) (78,750)
Equity in undistributed income of subsidiary............... 1,668,621 956,137 1,206,040
------------- ----------- -------------
Income before income taxes............................... 1,668,621 956,137 1,206,040
Income taxes............................................... -- -- --
------------- ----------- -------------
Net income............................................... $ 1,668,621 $ 956,137 $ 1,206,040
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income............................................. $ 1,668,621 $ 956,137 $ 1,206,040
Adjustments to reconcile net income to cash used by
operating activities:
Equity in undistributed earnings of
subsidiary....................................... (1,668,621) (956,137) (1,206,040)
------------- ------------- -------------
Net cash used by operating activities............... -- -- --
Investing activities:
Investments in Subsidiary.............................. -- (1,000,000) --
------------- ------------- -------------
Financing activities:
Proceeds from issuance of Stock........................ -- 1,000,000 --
------------- ------------- -------------
Increase in cash....................................... -- -- --
Cash, beginning of year................................ -- -- --
------------- ------------- -------------
Cash, end of year...................................... -- -- --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-21
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
ASSETS:
Cash and due from banks....................................................... $ 4,786,755 $ 4,861,330
Fed funds sold................................................................ 1,100,000 0
Investments available for sale................................................ 46,794,977 49,833,117
Investments held to maturity.................................................. 558,170 594,525
Fed Reserve bank stock........................................................ 242,800 242,800
Loans:
Commercial.................................................................. 108,200,710 94,507,827
Mortgage.................................................................... 50,550,846 48,412,745
Consumer.................................................................... 13,742,659 11,701,227
---------------- ----------------
Total loans........................................................... 172,494,215 154,621,799
Allowance for loan loss....................................................... (2,509,006) (2,318,001)
Loans, net............................................................ 169,985,209 152,303,798
Accrued interest receivable................................................... 2,101,247 2,143,807
Premises and equipment, at cost:
Leasehold improvements...................................................... 1,083,330 1,042,817
Furniture, fixtures and equipment........................................... 1,040,470 995,360
Computer equipment and software............................................. 995,980 926,888
---------------- ----------------
3,119,780 2,965,065
Accumulated depreciation...................................................... (2,088,360) (1,915,584)
---------------- ----------------
Premises and equipment, net........................................... 1,031,420 1,049,481
Deferred income taxes......................................................... 827,214 614,478
Prepaid expenses and other assets............................................. 516,446 342,237
---------------- ----------------
Total assets.......................................................... $ 227,944,238 $ 211,985,573
---------------- ----------------
---------------- ----------------
LIABILITIES:
Deposits:
Demand...................................................................... 26,993,002 24,404,024
Savings & money market...................................................... 28,852,448 24,420,762
Certificates of deposit less than $100,000.................................. 92,296,745 96,299,709
Certificates of deposit greater than $100,000............................... 8,872,256 22,833,811
---------------- ----------------
157,014,451 167,958,306
Repurchase agreements....................................................... 5,118,000 2,778,000
Accrued interest payable.................................................... 2,118,397 2,976,922
Accrued liabilities......................................................... 1,345,429 1,594,273
Subordinated debentures..................................................... 1,050,000 1,050,000
FHLB advances............................................................... 28,000,000 0
FHLB notes payable.......................................................... 20,622,268 23,646,201
---------------- ----------------
Total liabilities..................................................... 215,268,545 200,003,702
Shareholders' equity:
Common stock, par value $1 per share; 5,000,000 shares authorized; 1,454,203
shares outstanding.......................................................... 1,470,003 1,470,003
Additional paid-in capital.................................................... 6,621,747 6,621,747
Retained earnings............................................................. 4,728,915 3,674,660
Unrealized gains (losses) on investments available for sale,
net of taxes................................................................ 52,528 412,961
Treasury stock, 15,800 shares, at cost........................................ 197,500 197,500
---------------- ----------------
Total shareholders' equity............................................ 12,675,693 11,981,871
---------------- ----------------
Total liabilities and shareholders' equity............................ $ 227,944,238 $ 211,985,573
---------------- ----------------
---------------- ----------------
</TABLE>
F-22
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans......................... $ 3,885,167 $ 3,067,088 $ 7,488,409 $ 5,872,675
Interest on investment securities and federal
funds........................................... 709,796 806,343 1,484,247 1,591,778
Other interest & dividends......................... 72,486 65,602 128,545 114,150
------------- ------------- ------------- -------------
Total interest income........................ 4,667,449 3,939,033 9,101,201 7,578,603
------------- ------------- ------------- -------------
Interest expense:
Interest on savings and money market deposits...... 277,628 233,402 529,327 472,359
Interest on certificates of deposit less than
$100,000........................................ 1,297,254 1,208,384 2,737,100 2,257,203
Interest on certificates of deposit greater than
$100,000........................................ 225,986 177,336 559,794 367,671
Other interest..................................... 632,560 504,692 1,035,046 918,374
------------- ------------- ------------- -------------
Total interest expense....................... 2,433,428 2,123,814 4,861,267 4,015,607
------------- ------------- ------------- -------------
Net interest income.......................... 2,234,021 1,815,219 4,239,934 3,562,996
Provision for loan losses............................ 122,000 170,000 185,000 237,000
------------- ------------- ------------- -------------
Net interest income after provision for loan
losses.................................... 2,112,021 1,645,219 4,054,934 3,325,996
Other income:
Service charges and other fees..................... 165,800 160,552 343,779 286,003
Gain (loss) on sale of investment
securities...................................... 4,062 3,282 4,062 (17,034)
------------- ------------- ------------- -------------
Net interest income and other
income.................................... 2,281,883 1,809,053 4,402,775 3,594,965
------------- ------------- ------------- -------------
Operating expenses:
Salaries and employee benefits..................... 624,061 531,545 1,260,298 1,065,154
Occupancy.......................................... 374,253 262,461 704,340 514,833
Advertising........................................ 45,000 51,000 110,000 102,000
Insurance.......................................... 17,858 95,967 31,603 191,844
Other.............................................. 357,313 285,099 692,279 561,071
------------- ------------- ------------- -------------
Total operating expenses..................... 1,418,485 1,226,072 2,798,520 2,434,902
------------- ------------- ------------- -------------
Income before income taxes........................... 863,398 582,981 1,604,255 1,160,063
Provision for income taxes........................... 302,000 200,000 550,000 398,000
------------- ------------- ------------- -------------
Net income................................... $ 561,398 $ 382,981 $ 1,054,255 $ 762,063
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per share -- Primary...................... $ .37 $ .25 $ .69 $ .50
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding.................. 1,517,647 1,521,836 1,517,647 1,521,836
------------- ------------- ------------- -------------
Net income per share assuming full dilution.......... $ .35 $ .24 $ .66 $ .48
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares -- fully diluted............. 1,628,157 1,632,346 1,628,157 1,632,346
</TABLE>
F-23
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 1,054,255 762,063
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses..................................................... 185,000 237,000
Depreciation and amortization................................................. 172,776 147,595
Deferred income tax provision (benefit)....................................... (27,058) (60,001)
Loss (gain) on sale of investments............................................ (4,062) 17,034
(Increase) decrease in accrued interest receivable............................ 42,560 (230,955)
Increase in prepaid expenses and other assets................................. (174,209) (163,686)
Decrease in accrued interest payable.......................................... (858,525) (178,496)
Increase (decrease) in accrued liabilities.................................... (248,844) 497,671
-------------- --------------
Net cash provided by operating activities.................................. 141,893 1,028,225
-------------- --------------
Cash flows used in investing activities:
Net increase in loans........................................................... (17,866,411) (14,576,215)
Purchases of premises and equipment............................................. (154,714) (46,352)
Purchases of securities, available for sale..................................... (11,890,486) (10,107,006)
Purchases of securities, held to maturity....................................... -- (2,965,625)
Proceeds from sales of securities, available for sale........................... 14,391,226 13,462,485
Proceeds from maturities of securities, held to maturity........................ -- 499,918
Principal receipts on securities available for sale............................. 31,705 83,346
-------------- --------------
Net cash used in investing activities...................................... (15,488,680) (13,649,449)
-------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits............................................. (10,943,855) 7,930,190
Increase in securities sold under repurchase agreements......................... 2,340,000 (65,000)
Borrowings from Federal Home Loan Bank.......................................... 24,976,067 8,976,067
-------------- --------------
Net cash provided by financing activities.................................. 16,372,212 16,841,257
-------------- --------------
Net increase in cash and cash equivalents....................................... 1,025,425 4,220,033
Cash and cash equivalents at beginning of year.................................. 4,861,330 5,726,529
-------------- --------------
Cash and cash equivalents at end of year........................................ 5,886,755 9,946,562
-------------- --------------
-------------- --------------
Supplemental disclosures of cash flow information:
Interest paid................................................................. 3,292,000 2,302,000
Taxes paid.................................................................... 655,000 500,000
Non-cash transactions:
Change in unrealized gain/(loss) on securities, available for sale,
net of taxes of $348,000 and $(185,000)..................................... (360,000) 675,000
</TABLE>
F-24
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995, AND DECEMBER 31, 1995
(UNAUDITED)
1. REPORTING AND ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
First Sterling Bancorp, Inc. (the 'Company') and its wholly owned subsidiary,
First Sterling Bank, (the 'Bank'). All significant intercompany accounts and
transactions are eliminated in the consolidated statements.
The consolidated balance sheet as of June 30, 1996, as well as the
respective statements of income and cash flows for the three and six month
periods ended June 30, 1996 and 1995, are unaudited. The consolidated balance
sheet as of December 31, 1995 is derived from the Company's audited 1995 Annual
Report and the related footnotes are referenced to the Company's 1995 Annual
Report.
The financial statements reflect all adjustments, which in the opinion of
management are necessary for a fair presentation of the results of the interim
periods and are of a normal and recurring nature. The results for the periods
presented are not necessarily indicative of the full year.
2. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 122
(SFAS 122), 'Accounting for Mortgage Servicing Rights.' The statement requires
the recognition of separate assets relating to the rights to service mortgage
loans for others based on their fair value if it is practicable to estimate
their value. The statement applied prospectively to transactions entered into
during 1996, therefore, there was no cumulative effect upon adoption of this
statement. In addition, this statement did not have a significant effect on the
financial position or results of the Company as of June 30, 1996.
The Company did not adopt Statement of Financial Accounting Standards No.
123 (SFAS 123), 'Accounting for Stock Based Compensation,' but, rather continues
to apply its existing method of accounting for stock-based compensation which is
provided in Accounting Principal Opinion No. 25, 'Accounting for Stock Issued to
Employees' (APB 25). SFAS 123 provides an alternative method of accounting for
stock-based compensation arrangements, based on fair value of the stock-based
compensation utilizing various assumptions regarding the underlying attributes
of the options and the Corporation's stock. The Company will provide pro forma
disclosure of the effect as if SFAS 123 was adopted on net income and earnings
per share in the 1996 notes to consolidated financial statements.
3. MERGER AGREEMENT
On June 12, 1996 the Company entered into an Agreement and Plan of
Reorganization ('Agreement') with Prime Bancorp, Inc. Under the terms of the
Agreement, the Company and Prime Bancorp, Inc. will merge into a newly-formed
Holding Company, New Prime. As a result of the Merger, each share of the
Company's stock shall be converted into the right to receive one share of Prime
stock. The Merger is subject to various conditions, including stockholder
approvals, regulatory approvals from the Board of Governors of the Federal
Reserve System, the banking authorities of the Commonwealth of Pennsylvania and
the Office of Thrift Supervision as well as certain other federal and state
governmental authorities.
4. RELATED PARTY LEASES
During the first quarter of 1996, the Company entered into extended
noncancellable lease agreements for bank premises with an affiliate of a
principal shareholder. The lease arrangements pertain to space currently
occupied by the Bank and consist of three branches and the Company's
headquarters. As part of entering into these lease arrangements, the Company
significantly increased its space in the headquarters building to allow for
future growth. The lease terms are for a period of 10 years with renewal options
for two additional five year periods. The Company also leases space for its Bala
Cynwyd Branch from a non-affiliate.
F-25
<PAGE>
FIRST STERLING BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995, AND DECEMBER 31, 1995 -- (CONTINUED)
(UNAUDITED)
4. RELATED PARTY LEASES -- (CONTINUED)
Future minimum rental payments, excluding real estate taxes, insurance and
maintenance required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
AFFILIATED TOTAL
------------- -------------
<S> <C> <C>
Six month period ended December 31, 1996............................. $ 278,257 $ 335,108
Years ended December 31,
1997............................................................ 573,772 689,748
1998............................................................ 591,570 709,866
1999............................................................ 609,926 730,587
2000............................................................ 628,856 751,931
Thereafter........................................................... 3,449,672 3,878,270
------------- -------------
Total........................................................... $ 6,132,053 $ 7,095,509
------------- -------------
------------- -------------
</TABLE>
The leases also require the Company to pay its pro rata portion of
increases over the base year in direct expenses such as maintenance, taxes and
insurance.
Rent expense for leases for the six months ended June 30, 1996 and 1995 was
$397,903 and $215,104, respectively. Of these amounts, $340,903 and $158,479
were for leases to the related party described above.
The Company has entered into an Agreement with the affiliate of the
principal shareholder with respect to the corporate office lease. The Agreement
allows the Company, at its election, to reduce its corporate office tenancy upon
payment of a fee in the amount of $375,000 to the Landlord. Such Agreement, if
exercised, will reduce the expansion space at corporate headquarters by
approximately one-half and reduce the lease term for the balance of such space
from ten years to five years.
It is probable that the Company will exercise its option to reduce its
corporate office tenancy in the event that the pending merger with Prime
Bancorp, Inc. is consummated.
F-26
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
JUNE 30, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Pro Forma
Prime Sterling Adjustments Balance
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Cash in Banks $ 17,338 $ 4,595 $ $ 21,933
Interest-bearing deposits 3,286 192 3,478
Federal funds sold -- 1,100 1,100
-------- -------- -------- --------
Cash and cash equivalents 20,624 5,887 26,511
-------- -------- -------- --------
Investment securities 10,368 643 11,011
Investment securities available
for sale at market value 43,587 46,795 90,382
Mortgage-backed securities 96,403 158 96,561
Mortgage-backed securities
available for sale at market
value 55,544 -- 55,544
Loans receivable 380,064 172,494 552,558
Deferred fees, net (80) -- (80)
Allowance for loan losses (3,737) (2,509) (1,000)(4) (7,246)
-------- -------- --------- --------
Loans receivable, net 376,247 169,985 (1,000) 545,232
-------- -------- --------- --------
Loans held for sale 6,654 -- 6,654
Accrued interest receivable 4,894 2,101 6,995
Real estate owned, at cost 481 102 583
Land acquired for development
and resale 10,107 -- 10,107
Property and equipment 9,200 1,031 (300)(4) 9,931
Goodwill 3,623 -- 3,623
Other assets 6,828 1,242 847 (8) 8,917
-------- -------- --------- --------
$644,560 $227,944 $ (453) $872,051
-------- -------- --------- --------
-------- -------- --------- --------
Liabilities and Stockholders' Equity
Liabilities:
Deposits $499,781 $157,014 $ $656,795
Advances from Federal Home Loan
Bank of Pittsburgh 12,000 48,622 60,622
Other borrowed money 68,760 6,168 (1,050)(7) 73,878
Advance payments by borrowers
for taxes and insurance 2,163 279 2,442
Other liabilities 3,808 3,185 1,550 (4) 8,543
-------- -------- -------- --------
586,512 215,268 500 802,280
-------- -------- -------- --------
Stockholders' equity
Common stock 3,909 1,470 95 (6,7) 5,474
Additional paid-in capital 30,637 6,622 829 (6,7) 38,088
Retained earnings 26,257 4,729 (2,075)(4,6) 28,911
Valuation adjustment for debt
securities net of taxes (1,940) 53 -- (1,887)
Treasury Stock (815) (198) 198 (6) (815)
-------- -------- -------- --------
58,048 12,676 (953) 69,771
-------- -------- -------- --------
$644,560 $227,944 $ (453) $872,051
-------- -------- -------- --------
-------- -------- -------- --------
Book value per share $15.58 $8.72 $13.19
</TABLE>
F-27
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Pro Forma
Prime Sterling Balance
-------- -------- ---------
<S> <C> <C> <C>
Interest income $ 22,560 $ 9,101 $ 31,661
Interest expense 11,068 4,861 15,929
-------- -------- --------
Net interest income 11,492 4,240 15,732
-------- -------- --------
Provision for loan losses 650 185 835
-------- -------- --------
Net interest income after provision for
loan losses 10,842 4,055 14,897
-------- -------- --------
Gain (loss) on sale of assets 198 4 202
Rental income 143 -- 143
Other income 1,033 344 1,377
Non-interest expense 7,235 2,799 10,034
-------- -------- --------
Income before income taxes 4,981 1,604 6,585
Income tax expense 1,733 550 2,283
-------- -------- --------
Net income $ 3,248 $ 1,054 $ 4,302
-------- -------- --------
-------- -------- --------
Earnings per share:
Primary $ .86 $ .69 $ .80
Fully diluted .86 .66 .78
Weighted average number of shares outstanding:
Primary 3,777,707 1,517,647 5,390,064
Fully diluted 3,780,589 1,628,157 5,503,456
</TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Pro Forma
Prime Sterling Balance
-------- -------- ---------
<S> <C> <C> <C>
Interest income $ 21,044 $ 7,579 $ 28,623
Interest expense 10,599 4,016 14,615
-------- -------- --------
Net interest income 10,445 3,563 14,008
-------- -------- --------
Provision for loan losses 356 237 593
-------- -------- --------
Net interest income after provision
for loan losses 10,089 3,326 13,415
-------- -------- --------
Gain (loss) on sale of assets 328 (17) 311
Rental income 54 -- 54
Other income 809 286 1,095
Non-interest expense 6,609 2,435 9,044
-------- -------- --------
Income before income taxes 4,671 1,160 5,831
Income tax expense 1,709 398 2,107
-------- -------- --------
Net income $ 2,962 $ 762 $ 3,724
-------- -------- --------
-------- -------- --------
Earnings per share:
Primary $ .79 $ .50 $ .71
Fully diluted .79 .48 .70
Weighted average number of shares outstanding:
Primary 3,759,949 1,521,836 5,281,785
Fully diluted 3,761,713 1,632,346 5,394,059
</TABLE>
F-28
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Pro Forma
Prime Sterling Balance
-------- -------- ---------
<S> <C> <C> <C>
Interest income $ 42,795 $ 16,184 $ 58,979
Interest expense 21,825 8,732 30,557
-------- -------- --------
Net interest income 20,970 7,452 28,422
-------- -------- --------
Provision for loan losses 644 485 1,129
-------- -------- --------
Net interest income after provision
for loan losses 20,326 6,967 27,293
-------- -------- --------
Gain (loss) on sale of assets 728 4,732
Rental income 174 -- 174
Other income 1,954 583 2,537
Non-interest expense 13,831 5,099 18,930
-------- -------- --------
Income before income taxes 9,351 2,455 11,806
Income tax expense 3,498 839 4,337
-------- -------- --------
Net income $ 5,853 $ 1,616 $ 7,469
-------- -------- --------
-------- -------- --------
Earnings per share:
Primary $ 1.56 $ 1.07 $ 1.42
Fully diluted 1.55 1.03 1.39
Weighted average number of shares outstanding:
Primary 3,762,728 1,515,253 5,277,981
Fully diluted 3,773,808 1,625,763 5,399,571
</TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Pro Forma
Prime Sterling Balance
-------- -------- ---------
<S> <C> <C> <C>
Interest income $ 34,986 $ 12,082 $ 47,068
Interest expense 15,253 6,027 21,280
-------- -------- --------
Net interest income 19,733 6,055 25,788
-------- -------- --------
Provision for loan losses 1,243 351 1,594
-------- -------- --------
Net interest income after provision
for loan losses 18,490 5,704 24,194
-------- -------- --------
Gain (loss) on sale of assets (104) (117) (221)
Rental income 321 -- 321
Other income 1,578 499 2,077
Non-interest expense 11,336 4,698 16,034
-------- -------- --------
Income before income taxes 8,949 1,388 10,337
Income tax expense 3,141 484 3,625
-------- -------- --------
Net income $ 5,808 $ 904 $ 6,712
-------- -------- --------
-------- -------- --------
Earnings per share:
Primary $ 1.55 $ .62 $ 1.29
Fully diluted 1.55 .61 1.27
Weighted average number of shares outstanding:
Primary 3,736,405 1,464,598 5,201,003
Fully diluted 3,736,405 1,575,108 5,311,513
</TABLE>
F-29
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
DECEMBER 31, 1993
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Pro Forma
Prime Sterling Balance
-------- -------- ---------
<S> <C> <C> <C>
Interest income $ 31,310 $ 10,643 $ 41,953
Interest expense 13,150 5,133 18,283
-------- -------- --------
Net interest income 18,160 5,510 23,670
-------- -------- --------
Provision for loan losses 1,442 718 2,160
-------- -------- --------
Net interest income after provision for
loan losses 16,718 4,792 21,510
Gain (loss) on sale of assets 279 112 391
Rental income 350 -- 350
Other income 1,233 626 1,859
Non-interest expense 9,807 3,786 13,593
-------- -------- --------
Income before income taxes and effect
of cumulatie change in accounting
principle 8,773 1,744 10,517
Income tax expense 3,349 590 3,939
-------- -------- --------
Income before effect of cumulative change
in accounting principle 5,424 1,154 6,578
Cumulative effect on prior years of change
in tax accounting method 1,055 -- 1,055
-------- -------- --------
Net income $ 6,479 $ 1,154 $ 7,633
-------- -------- --------
-------- -------- --------
Primary earnings per share:
Income before effect of cumulative change
in accounting principle $1.46 $0.83 $1.30
Cumulative effect on prior years of change
in tax accounting method 0.28 -- 0.21
Net income $1.75 $0.83 $1.51
Fully diluted earnings per share:
Income before effect of cumulative change
in accounting principle $1.46 $0.79 $1.27
Cumulative effect on prior years of change
in tax accounting method 0.28 -- 0.20
Net income $1.75 $0.79 $1.47
Weighted average number of shares
outstanding:
Primary 3,706,276 1,396,503 5,102,779
Fully diluted 3,712,344 1,520,032 5,232,376
F-30
</TABLE>
<PAGE>
FOOTNOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
(1) The pro forma information presented is not necessarily indicative of the
results of operations or the combined financial position that would have
resulted had the Merger been consummated at the beginning of the
applicable periods indicated, nor is it necessarily indicative of the
results of operations in future periods or the future financial position
of the combined entities. Pro forma financial information assumes the
Merger was consummated as of the beginning of each of the periods
indicated.
(2) It is assumed that the Merger will be accounted for on a pooling of
interest accounting basis, and accordingly the related pro forma
adjustments herein reflect, where applicable, an exchange ratio of 1.00
share of Prime Stock for each outstanding share of First Sterling
common stock. In addition, upon consummation of the Merger, each
outstanding share of PBI Stock will become one (1) share of Prime
Stock.
(3) The pro forma condensed combined income statement does not reflect the
estimated $1.00 million provision for loan losses related to First
Sterling's loan portfolio, or charges and expenses of approximately
$1.85 million attributable to the Merger since these charges are non-
recurring.
(4) After the Merger, New Prime intends to modify First Sterling Bank's
approach to the workout of certain assets. This strategy involves the
accelerated resolution of problem assets which, Prime believes, is more
economical than a long-term work out approach, and will allow management
to concentrate its resources on growth and revenue generation. As a
result of this strategy, Prime will take an addition to the allowance
for loan losses of approximately $1.00 million ($620 thousand after-
tax). These additional allocations represent approximately 0.5% of First
Sterling's loan portfolio at June 30, 1996.
The pro forma combined balance sheet data at June 30, 1996 reflects
approximately $1.85 million of charges, which includes: $300 thousand
for fixed asset and service contract write downs; $375 thousand for the
reduction of both the space and term on First Sterling's office lease;
$225 thousand for employee severance costs; and $950 thousand for other
expenses directly attributable to the Merger. Accordingly, pro forma
stockholders equity has been reduced by $953 thousand, representing the
after tax effect of the charges and expenses attributable to the Merger
and the conversion of the Debentures.
F-31
<PAGE>
(5) In February 1992, the FASB issued Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under the asset and liability method provided for by SFAS No. 109,
deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax
rates applicable for future years to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
SFAS No. 109, 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.
Prime adopted SFAS No. 109 as of January 1, 1993. The cumulative effect
of this change in accounting for income taxes of $1,055,000 has been
calculated as of January 1, 1993 and is reported separately in the
consolidated statement of operations for the year ended December 31,
1993. First Sterling also adopted SFAS No. 109 as of January 1, 1993;
the impact of SFAS No. 109 on First Sterling was immaterial.
(6) Reflects the cancellation of 15,800 shares of First Sterling Stock held
as treasury stock.
(7) Reflects the conversion of $1.05 million in principal amount of
Debentures to 110,510 shares of Prime Stock.
(8) Reflects deferred tax receivable at statutory rates totalling $847
thousand related to approximately $1.2 million of expenses attributable
to the Merger and the addition of approximately $1.0 million to First
Sterling Bank's allowance for loan losses.
F-32
