FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
(X) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
OR
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended:
June 30, 1996 Commission File Number: 0-17286
PRIME BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2528428
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6425 Rising Sun Avenue, Philadelphia, Pennsylvania 19111
(Address of principal executive offices) (Zip Code)
(215) 742-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the Registrant's common stock as of
June 30, 1996:
Common Stock -- 3,725,056
<PAGE>
PRIME BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Part I Financial Information
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Statements of Financial 1
Condition:
December 31, 1995 and June 30, 1996
(Unaudited)
Consolidated Statements of Operations, 2
Three Months Ended:
June 30, 1995 and 1996
(Unaudited)
Consolidated Statements of Operations, 3
Six Months Ended:
June 30, 1995 and 1996
(Unaudited)
Consolidated Statements of Cash Flows, 4 - 5
Six Months Ended:
June 30, 1995 and 1996
(Unaudited)
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of 8 - 15
Financial Condition and Results of Operations
Part II Other Information 16 - 42
Signatures 43
</TABLE>
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
---------- ---------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks...................... $ 13,092 $ 17,338
Interest-bearing deposits.................... 34,937 3,286
--------- ---------
Cash and cash equivalents................. 48,029 20,624
--------- ---------
Investment securities (market value of
($13,849 and $10,241)..................... 13,708 10,368
Investment securities available for sale..... 23,863 43,587
Mortgage-backed securities (market value of
($82,045 and $95,704)..................... 81,084 96,403
Mortgage-backed securities available for sale 54,739 55,544
Loans receivable............................. 348,886 380,064
Deferred fees.............................. (392) (80)
Allowance for loan losses.................. (3,764) (3,737)
-------- --------
Loans receivable, net................... 344,730 376,247
-------- --------
Loans held for sale ......................... 6,814 6,654
Accrued interest receivable.................. 4,339 4,894
Real estate owned............................ 370 481
Land acquired for development and resale..... 10,405 10,107
Property and equipment....................... 9,229 9,200
Other assets................................. 10,665 10,451
--------- ---------
Total assets........................... $ 607,975 $ 644,560
--------- ---------
--------- ---------
Liabilities and Stockholders' Equity
Liabilities:
Deposits.................................. $ 476,539 $ 499,781
Advances from Federal Home Loan Bank of
Pittsburgh.............................. 14,000 12,000
Other borrowed money...................... 54,844 68,760
Advance payments by borrowers for taxes
and insurance.......................... 2,211 2,163
Other liabilities......................... 4,134 3,808
--------- ---------
Total liabilities...................... 551,728 586,512
--------- ---------
Stockholders' equity
Serial preferred, $1 par value; 5,000,000
shares authorized and unissued.......... -- --
Common stock, $1 par value; 10,000,000
shares authorized; 3,889,707 and
3,909,119 shares issued respectively.... 3,890 3,909
Additional paid-in capital................. 30,455 30,637
Retained earnings substantially restricted 24,275 26,257
Valuation adjustment for debt securities
net of taxes............................ (1,558) (1,940)
Treasury stock (184,063 shares at cost).... (815) (815)
--------- ---------
Total stockholders' equity................. 56,247 58,048
--------- ---------
Total liabilities and stockholders' equity. $ 607,975 $ 644,560
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------
1995 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable, net................... $ 7,623 $ 8,378
Mortgage-backed securities.............. 2,077 2,425
Investment securities................... 870 781
Interest-bearing deposits............... 226 37
--------- ---------
Total interest income............. 10,796 11,621
--------- ---------
Interest expense:
Deposits................................ 4,693 4,704
Short-term borrowings................... 821 914
Long-term borrowings.................... 27 27
--------- ---------
Total interest expense............ 5,541 5,645
--------- ---------
Net interest income............... 5,255 5,976
--------- ---------
Provision for loan losses..................... 190 350
--------- ---------
Net interest income after provision
for loan losses...................... 5,065 5,626
--------- ---------
Non-interest income:
Fees and service charges................ 331 298
Gain (loss) on sale of:
Loans receivable, net................. 30 23
Investment securities, net............ (53) 18
Mortgage-backed securities, net....... 178 --
Land acquired for development and sale (73) --
Mortgage servicing rights............. 260 --
Rental income........................... 36 75
Other................................... 170 196
--------- ---------
Total non-interest income......... 879 610
--------- ---------
Non-interest expense:
Salaries and employee benefits.......... 1,768 1,790
Occupancy and equipment................. 637 873
Federal insurance premiums.............. 257 251
Other................................... 855 788
--------- ---------
Total non-interest expense........ 3,517 3,702
--------- ---------
Income before income taxes................... 2,427 2,534
Income taxes................................. 925 889
--------- ---------
Net Income....................... $ 1,502 $ 1,645
--------- ---------
--------- ---------
Earnings per share:
Primary and fully diluted.................... $ .40 $ .43
Weighted average number of shares
outstanding................................. 3,761,713 3,783,142
Dividends declared per share................. .15 .17
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
1995 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable, net................... $ 14,945 $ 16,138
Mortgage-backed securities.............. 4,159 4,682
Investment securities................... 1,658 1,558
Interest-bearing deposits............... 282 182
--------- ---------
Total interest income............. 21,044 22,560
Interest expense:
Deposits................................ 8,754 9,352
Short-term borrowings................... 1,779 1,662
Long-term borrowings.................... 66 54
--------- ---------
Total interest expense............ 10,599 11,068
--------- ---------
Net interest income............... 10,445 11,492
--------- ---------
Provision for loan losses..................... 356 650
--------- ---------
Net interest income after provision
for loan losses...................... 10,089 10,842
--------- ---------
Non-interest income:
Fees and service charges................ 516 702
Gain (loss) on sale of:
Loans receivable, net................. 41 49
Investment securities, net............ (345) 149
Mortgage-backed securities, net....... 396 --
Land acquired for development and sale 49 --
Mortgage servicing rights............. 260 --
Real estate owned .................... (73) --
Rental income........................... 54 143
Other................................... 293 331
---------
Total non-interest income......... 1,191 1,374
--------- ---------
Non-interest expense:
Salaries and employee benefits.......... 3,211 3,634
Occupancy and equipment................. 1,239 1,657
Federal insurance premiums.............. 514 496
Other................................... 1,645 1,448
--------- ---------
Total non-interest expense........ 6,609 7,235
--------- ---------
Income before income taxes.................... 4,671 4,981
Income taxes.................................. 1,709 1,733
--------- ---------
Net Income........................ $ 2,962 $ 3,248
--------- ---------
--------- ---------
Earnings per share:
Primary and fully diluted..................... $ .79 $ .86
Weighted average number of shares
outstanding.................................. 3,756,606 3,780,589
Dividends declared per share.................. .30 .34
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1996
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income................................. $ 2,963 $ 3,248
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation......................... 759 1,036
(Gain) loss on sale of:
Loans receivable................... (41) (49)
Investment securities ............. 345 (149)
Mortgage-backed securities ........ (396) --
Land acquired for development & resale (49) --
Real estate owned ................. 73 --
Provision for loan losses............ 356 650
Increase in accrued interest
receivable ......................... (509) (555)
Decrease in other assets............. 5,343 724
Decrease in other liabilities........ (6,595) (329)
--------- ---------
Net cash provided from operating
activities.................. 2,249 4,576
--------- ---------
Cash flows from investing activities:
Investment securities available for sale:
Purchases................................ (9,577) (24,144)
Maturities............................... 1,903 4,077
Sales.................................... 21,779 --
Mortgage-backed securities available for sale:
Purchases................................ (23,103) (5,098)
Repayments............................... 5,122 3,551
Sales.................................... 29,131 --
Investment securities:
Purchases................................ (11,706) (7,492)
Maturities............................... 389 10,981
Mortgage-backed securities:
Purchases................................ -- (20,256)
Repayments............................... -- 4,937
Loans receivable:
Originations, net of repayments.......... (17,666) (32,432)
Loans held for sale:
Originations, net of repayments.......... (2,759) (3,028)
Sales.................................... 5,008 3,237
Proceeds from sale of land acquired for
development and resale................... 520 1,374
Increase in land acquired for development
and resale............................... (524) (1,076)
Purchase of property and equipment......... (585) (814)
Increase real estate owned ................ (124) (12)
Proceeds from sale of real estate owned.... 130 166
--------- ---------
Net cash used in investing activities...... (2,062) (66,029)
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1996
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits................... 21,790 23,242
Advances from the Federal Home Loan Bank
of Pittsburgh........................... 68,450 30,800
Repayments of advances from the Federal
Home Loan Bank of Pittsburgh ............ (60,450) (32,800)
Increase (decrease) in other borrowed money (28,588) 13,916
Increase (decrease) in advance payments by
borrowers for taxes and insurance...... 25 (48)
Net proceeds from issuance of common stock. -- 201
Cash dividends paid........................ (1,161) (1,263)
--------- ---------
Net cash provided from financing
activities............................ 66 34,048
--------- ---------
Net change in cash and cash equivalents 253 (27,405)
--------- ---------
Cash and cash equivalents:
Beginning of year........................ 26,852 48,029
--------- ---------
End of period............................ 27,105 20,624
--------- ---------
--------- ---------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.............................. $ 10,404 $ 10,976
Income taxes.......................... 1,478 1,003
--------- ---------
--------- ---------
Non-cash investing activity consist of:
Transfer of loans to real estate owned $ 782 $ 265
--------- ---------
--------- ---------
Transfer of loans to land acquired for
development and resale.............. $ 9,932 $ --
--------- ---------
--------- ---------
Tax benefit associated with the exercise
of stock options...................... $ -- $ 74
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies of
Prime Bancorp, Inc. and subsidiaries (the "Company"). The accompanying
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles, which have been applied on a
consistent basis except for the change in accounting principle as described
below.
Business
The Company's principal business is conducted through Prime Bank (the
"Bank"). The Bank's principal business consists of attracting deposits and
obtaining borrowings, then investing those deposits and borrowings in various
types of loans, mortgage-backed securities, and other investments. These
operations are conducted through a branch network in Southeastern
Pennsylvania. The Bank is subject to the regulations of certain federal
agencies and, therefore, undergoes periodic examinations by those regulatory
authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. The Company's principal
subsidiary is the Bank. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior year amounts to conform with the
current year's presentation; such reclassifications have no impact on income.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. Results of operations for the
six month period ended June 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
Earnings Per Share
Earnings per share was calculated based on the weighted average number
of shares of common stock outstanding for the respective periods. Stock
options are considered common stock equivalents and are included in the
computation of the number of outstanding shares using the treasury stock
method.
-6-
<PAGE>
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan Impairment
On January 1, 1995, the Company adopted the provisions of Statement on
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan and SFAS No. 118, Accounting for Creditors of Impairment
of a Loan - Income Recognition and Disclosures. SFAS No. 114 and 118 require
that "impaired" loans be measured based on present value of expected future
cash flows, discounted at the loan's effective interest rate or, as a
practical expedient, at the loans observable market price or the fair value
of the collateral if the loan is collateral dependent.
As of June 30, 1996, the Company has impaired loans which consist of
non-accrual loans with a specific reserve of $70 thousand.
Acquisition
On June 12, 1996, Prime Bancorp, Inc. ("Prime") has entered into an
Agreement and Plan of Reorganization ("Agreement") with First Sterling
Bancorp, Inc. ("FSB"). Under the terms of the Agreement, Prime will exchange
one (1) share of Prime common stock for each FSB share outstanding. This
will result in the issuance of approximately 1.66 million shares of Prime
common stock to the shareholders of FSB. The transaction is based on a fixed
exchange ratio, and is expected to be accounted for as a pooling of
interests. The transaction is also expected to be tax-free to the
shareholders for federal income tax purposes.
Prime is the savings and loan holding company for Prime Bank ("the
Bank"), a Pennsylvania chartered stock savings bank. The Bank with
approximately $629 million in assets, has 18 branches located in
Philadelphia, Bucks and Montgomery counties. Headquartered in Devon,
Pennsylvania, FSB is the holding company of First Sterling Bank ("First
Sterling"), a Pennsylvania state chartered commercial bank with approximately
$228 million in assets. First Sterling currently operates 4 branches located
in Montgomery and Chester counties and recently received approval for a fifth
location in Media, Delaware county.
The transaction is subject to customary regulatory approvals and is
anticipated to close on or about December 31, 1996.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Assets of the Company increased on a consolidated basis 6.04% or $36.7
million from $607.9 million at December 31, 1995 to $644.6 at June 30, 1996.
This increase is primarily attributable to a $31.5 million increase in loans
receivable, net, a $16.4 million increase in investment securities, a $16.1
million increase in mortgage-backed securities which was partially offset by
a decrease in cash and cash equivalents of $27.4 million. Because of the
Bank's efforts to diversify lending away from traditional thrift residential
lending, investments are disproportionally weighted into mortgage-backed
securities, so that the Bank can continue to pass the Qualified Thrift
Lending test. Interest rate risk is reduced through investments in medium
term Collateral Mortgage Obligations ("CMOs") and Adjustable Rate Mortgages.
A large percentage of the CMO investments are U.S. Agency or backed by U.S.
Agency collateral and have average lives less than 4.5 years. The market
value of mortgage-backed securities are inversely related to interest rates,
market values generally rise as interest rates fall, and fall as interest
rates rise. Prepayment speeds, which are partly a function of interest
rates, also influence mortgage-backed security performance.
The Company's liabilities increased by 6.30% or $34.8 million, from
$551.7 million at December 31, 1995 to $586.5 million at June 30, 1996. This
was due primarily to an increase $23.2 million in deposits. Borrowed money,
which consists primarily of reverse repurchase agreements, increased $13.9
million. Funds obtained from deposit and reverse repurchase agreements were
used to pay off a $2.0 million FHLB advance and to fund loan originations and
security purchases.
Liquidity and Capital Resources
Liquidity for a financial institution is a measure of the financial
institution's ability to fund customers' needs for borrowings and deposit
withdrawals. The Company's policy has always been to maintain a strong
liquidity position, in addition to cash and short-term investments. The
Company's principal sources of funds are savings deposits, principal
repayments on loans, proceeds from the sale of loans, funds from operations,
advances from the FHLB of Pittsburgh and other borrowed money.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources - Continued
Cash flows used in investing activities were $66.0 million for the six
months ended June 30, 1996 compared to $2.1 million for the same period in
1995. This increase was attributable to an increase in loan originations,
net of prepayments of $14.8 million, an increase in investment activity of
$19.4 million, an increase in mortgage-backed security activity of $28.0
million and a $2.0 million decrease in loans held for sale.
Cash flows provided from financing activities were $34.0 million for the
six months ended June 30, 1996 compared to $66 thousand for the same period
in 1995. This change is primarily attributable to an increase of $42.5
million in other borrowed money and an increase of $1.5 million in deposits
which is partially offset by an increase of $10.0 million in FHLB advances
activity.
Cash flows from operating activities provided $4.6 million and $2.2
million for the six months ended June 30, 1996 and 1995, respectively. This
increase is primarily attributable to a decrease in other liabilities of $6.3
million offset by an increase in other assets of $4.6 million.
The Bank is required under federal regulations to maintain specific
levels of "liquidity" investments in qualifying types of U.S. Treasury and
federal agency obligations and other types of investments having maturities
of five years or less. The required level of these liquid investments, which
is currently 5% of the Bank's net withdrawable deposits plus short-term
liabilities, of which not less than 1% must consist of short term liquid
assets as
defined by the OTS, is changed from time to time by the OTS as a result of
changes in economic conditions. Such investments are intended to provide a
source of liquid funds upon which the Bank may rely, if necessary, to fund
deposit withdrawals and for other short-term funding needs. At June 30, 1995
and 1996, the Bank's liquidity ratio as measured by OTS standards was 9.3%
and 9.2%, respectively. The short-term liquidity ratios exceeded the
regulatory requirement of 1% for both periods. Under the liquidity standards
set forth by the Federal Deposit Insurance Corporation, the Bank's liquidity
ratio was 31.44% at June 30, 1996.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Capital
The following table sets forth, at June 30, 1996, the OTS capital and
the PA minimum leverage ratio requirements and the actual amount of
regulatory capital that the Bank had under each requirement (dollars in
thousands):
<TABLE>
<CAPTION>
Actual
Regulatory Regulatory
Requirement Capital Percent
----------- ---------- -------
<S> <C> <C> <C>
Tangible Capital 9,133 $45,915 7.54%
Risk-based Capital 31,729 49,652 12.52%
PA Leverage Ratio 24,355 45,915 7.54%
</TABLE>
The Bank meets the fully phased in risk-based capital requirements.
Net Income
The Company reported net income of $3.2 million and $1.6 million for the
six months and three months ended June 30, 1996. This represents an increase
of $286 thousand and $143 thousand when compared to the net income for the
same periods in 1995. The six month increase was primarily attributable to
an increase in net interest income after provision for loan losses of $753
thousand and an increase of non-interest income of $183 thousand which is
partially offset by increases of $626 thousand in non-interest expense and
$24 thousand in income taxes. The three month increase was primarily
attributable to an increase in net interest income after provision for loan
losses of $561 thousand which is partially offset by an increase in non-
interest expenses of $185 thousand and decreases in non-interest income of
$269 thousand and income taxes of $36 thousand.
On a fully diluted per share basis net income was $.86 and $.43 for the
six months and three months ended June 30, 1996 compared to the same period
in 1995. The Company's return on average assets was 1.04% and 1.05% for the
six months and three months ended June 30, 1996 compared to 1.04% and 1.06%
for the same period in 1995. The Company's return on average equity for the
six months and three months ended June 30, 1996 were 11.37% and 11.39%
compared with 11.59% and 11.25% for the same periods in 1995. Net income for
the three month period ended June 30, 1996, increased 2.6% to $1.6 million
when compared to the quarter ended March 31, 1996.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income
The major component of the Bank's earnings is net interest income. Net
interest income is the difference between interest income earned on loans and
other interest-earning assets and interest expense paid on deposits and
borrowings. Net interest income was $11.5 million and $6.0 million for the
six months and three months ended June 30, 1996. This represents a 10.02%
and 13.7% increase when compared to consolidated net interest income of $10.4
million and $5.3 million for the same period in 1995. Net interest income
increased by $460 thousand for the quarter ended June 30, 1996 from $5.5
million for the three months ended March 31, 1996.
The net interest margin decreased from 4.35% to 4.23% in the six months
ended June 30, 1996 compared to the same period in 1995. The decrease is
primarily the result of a change in the mix of earning assets caused by
leverage in the investment portfolio at somewhat lower spreads.
The yield on average interest-earning assets decreased 32 and 38 basis
points for the six months and the three months ended June 30, 1996 compared
to the respective periods in 1995. The yields on investment and mortgage-
backed securities increased 13 and 35 basis points, respectively, between the
three month period ended June 30, 1996 and the comparable period in 1995.
The cost of average interest-bearing liabilities decreased 42 basis
points to 3.95% for the three months ended June 30, 1996 from 4.37% for the
comparable period in 1995. This decrease is attributable to a general
decrease in rates being offered on deposit products.
The table below illustrates the changes in the net interest rate margin
and interest rate spread for the six months and three months ended June 30,
1995 and 1996.
<TABLE>
<CAPTION>
Six Months Three Months
Ended Ended
June 30, June 30,
------------ -------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rate on interest-earning assets....... 8.45% 8.13% 8.55% 8.17%
Rate on interest-bearing
liabilities......................... 4.19% 4.01% 4.37% 3.95%
Net interest rate spread.............. 4.26% 4.12% 4.18% 4.22%
Net interest rate margin.............. 4.35% 4.23% 4.28% 4.30%
</TABLE>
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income - continued
Net interest income has also been affected by growth in interest-earning
assets and an increase in interest-bearing liabilities. Total average
interest-earning assets increased $49.8 million for the six months ended June
30, 1996 to $567.0 million from $517.2 million at June 30, 1995. Total
average interest-bearing liabilities increased $46.6 million for the six
months ended June 30, 1996 to $552.4 million from $505.8 million at June 30,
1995.
Provisions for Loan Losses
The provision for loan losses was $650 thousand and $350 thousand for
the six months and the three months ended June 30, 1996 compared to $356
thousand and $190 thousand for the same periods in 1995. The allowance for
loan losses was $3.8 million and $3.7 million at December 31, 1995 and June
30, 1996, respectively. The Bank had net charge-offs of $747 thousand and
$457 thousand for the six months and three months ended June 30, 1996,
compared to $1.0 million and $726 thousand for the respective periods in
1995.
The following is a summary of the activity in the allowance for loan
losses for the six months ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands):
1995 1996
---------------------------------------------------------------
<S> <C> <C>
Balance at the beginning of period $ 4,285 $ 3,764
Provision for loan losses 356 650
Recoveries 15 70
Losses charged against allowance (1,039) (747)
-------- --------
Balance at the end of period $ 3,617 $ 3,737
-------- --------
-------- --------
Non-Interest Income
Non-interest income increased 15.4% and decreased 30.6% for the six
months and three months ended June 30, 1996 to $1.4 million and $610 thousand
in 1996 from 1.2 million and $879 thousand for the comparable periods in
1995. The increase for the six month period was primarily attributable to a
$186 thousand increase in fees and service charges, a net increase of $98
thousand realized on the sale of investment and mortgage-backed securities,
and a $127 thousand increase in other and rental income offset by a decrease
in the gain on sale of mortgage servicing rights of $260 thousand. The
decrease for the three month period is primarily attributable to a decrease
of $260 thousand on the gain on sale of mortgage servicing rights and a
decrease of $107 thousand from the
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Income - Continued
sale of investment and mortgage-backed securities which is partially offset
by a loss of $73 thousand on the sale of land acquired for development and
resale.
Non-interest income for the three month period ended June 30, 1996
decreased $154 thousand from the three month period ended March 31, 1996.
Non-Interest Expense
Overall non-interest expenses, which include salaries, employee
benefits, occupancy and equipment, federal insurance premiums and other
increased $169 thousand for the three month period ended June 30, 1996
compared to March 31, 1996.
The primary component of other expenses is salaries and employee
benefits, which increased 13.2% and 1.2% for the six months and three months
ended June 30, 1996 from $3.2 million and $1.8 million in 1995 to $3.6
million and $1.8 million in 1996. The number of full time equivalent
employees increased from 203 at June 30, 1995 to 217 at June 30, 1996 due to
branch office expansion as well as increased staffing in the lending area.
Occupancy and equipment expense increased 33.7% to $1.7 million and
37.0% to $873 thousand for the six months and three months ended June 30,
1996 from $1.2 million and $637 thousand for the same periods in 1995. The
increase is primarily attributable to an increase in maintenance expense as
well as the additional rent expense incurred from the opening of two branch
offices and the acquisition of two branches since June 30, 1995.
Federal insurance premiums decreased $18 thousand and $6 thousand for
the six months and three months ended June 30, 1996 as compared to the same
period in 1995.
Other expenses decreased $197 thousand and $67 thousand for the six
months and three months ended June 30, 1996 compared to the same period in
1995. This decrease is attributable to decreased marketing and supply
expenses.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Dividend Policy
The Board of Directors of the Company declared a cash dividend of $0.17
per share of common stock on June 19, 1996, payable August 1, 1996, to
shareholders of record on July 5, 1996. It is currently the Board's
intention to continue to pay dividends on a quarterly basis. This is the
Company's thirtieth consecutive quarterly cash dividend.
Future payment of dividends, however, will be subject to determination
and declaration by the Board of Directors, which will take into account the
Company's financial condition, results of operations, industry standards,
economic conditions and other factors including regulatory restrictions.
Currently, the Company must rely on the Bank's payment of a dividend to the
Company in order to generate the cash and income to pay the dividend. The
Board may also consider the payment of stock dividends from time to time in
addition to, or in lieu of, cash dividends.
The Bank may not declare or pay a cash dividend on any of its stock if
the effect thereof would cause the Bank's net worth to be reduced below (1)
the amount required for the liquidation account, or (2) the net worth
requirement imposed by OTS.
Credit Risk
The Bank manages credit risk by maintaining diversification in its loan
portfolio, by establishing and enforcing underwriting standards, by requiring
annual reviews of all loan relationships in excess of $1,000,000 by the
Credit Committee of the Bank's Board of Directors, by intensive collection
efforts, and by performing regular loan classification reviews of loans by
the loan review officer.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset Quality
Non-performing assets, which include non-accrual loans and real estate
owned, totaled $3.4 million at December 31, 1995 compared to $4.9 million at
June 30, 1996. The following table sets forth non-performing assets as of
December 31, 1995 and June 30, 1996 (Dollars in thousands):
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ----------
<S> <C> <C>
Non-accrual loans:
Residential loans $ 1,786 $ 1,126
Construction loans -- 1,398
Consumer loans 269 316
Commercial loans 925 1,676
-------- --------
Total non-accrual loans 2,980 4,516
Real estate owned 370 481
-------- --------
Total non-performing assets (1) $ 3,350 $ 4,997
-------- --------
-------- --------
Total non-performing assets to
loans receivable, net (1) 0.97% 1.33%
-------- --------
-------- --------
Total non-performing assets to
total assets (1) 0.55% 0.78%
-------- --------
-------- --------
Ratio of allowance for loan
losses to non-performing loans 112.36% 82.75%
-------- --------
-------- --------
(1) Statistics do not include the impact of the $10.0 million
condominium project, which was acquired by a deed in lieu of foreclosure
and classified as land acquired for development and resale. Non-
performing assets, the ratio of non-performing assets to loans
receivable, net and the ratio of non-performing assets to total assets
would have been $13.4 million, 3.9% and 2.2% at December 31, 1995 and
$15.0 million, 4.0% and 2.3% at June 30, 1996 if the condominium project
was included in non-performing assets. Interest income not recorded on
the project during the three months ended December 31, 1995 and June 30,
1996 was approximately $240 thousand and $243 thousand, respectively.
Interest income not recognized for non-accrual loans during the three
months ended December 31, 1995 and June 30, 1996 was $7 thousand and $67
thousand, respectively.
-15-
<PAGE>
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a material nature
at the present time. From time to time, the Company is a party to legal
proceedings wherein it enforces its security interest in mortgage loans made
by it.
Item 2 Changes in Securities
Not applicable.
Item 3 Defaults Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 Other Information
As a result of the conversion of Prime Bank, a federal savings bank,
("Prime Bank") to a Pennsylvania chartered stock savings bank under the name
"Prime Bank, a savings bank", effected on March 19, 1996, the regulatory
framework with in which the Registrant (sometimes referred to as "Prime") and
Prime Bank operate has changed significantly. In addition, the acquisition
of First Sterling Bancorp, Inc. ("First Sterling") by means of a merger (the
Merger"), pursuant to an Agreement and Plan Reorganization dated June 12,
1996, (the "Merger Agreement") announced on June 12, 1996 and reported on
Form 8-K filed June 27, 1996, will also impact the Registrant from the bank
regulatory perspective since First Sterling Bank ("First Sterling Bank") is
a Pennsylvania chartered bank. Consequently, the descriptions in the
Registrant's annual report on Form 10-K for the year ended December 31, 1995
relating to "Holding Company Regulation and Supervision", " Regulation of the
Bank", "Federal Home Loan bank System" and "Federal Reserve System" are no
longer accurate. Set forth in this item 5 is current information with
respect to these matters which takes into account the events described above.
-16-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
REGULATION AND SUPERVISION
Prime Bank, First Sterling Bank, Prime, First Sterling and New Prime are
and will be subject to extensive federal and state regulation by various bank
regulatory agencies. Certain activities of each of those entities may also
be subject to regulation by federal or state securities regulatory agencies,
state insurance regulatory agencies, and other federal, state and local
governmental bodies. The following is only a general summary of the laws and
regulations which will apply to Prime, Prime Bank and First Sterling Bank
after the Merger.
The statutes and regulations governing banks establish a comprehensive
framework for the regulation of activities in which an institution can engage
and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory activities and
examination policies including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulation whether by the Pennsylvania
Department of Banking ("PADOB"), the Federal Deposit Insurance Corporation
("FDIC") or the Congress could have a material adverse impact on Prime, Prime
Bank, First Sterling Bank and their operations.
Bank regulatory agencies have authority to impose a wide variety of
enforcement actions and penalties on an institution that fails to comply with
its regulatory requirements, particularly with respect to the capital
requirements. Possible enforcement actions include the imposition of a
capital plan, imposition of civil money penalties, conservatorship or
receivership, and termination of deposit insurance. Under certain provisions
of federal and state banking laws and regulations, banking agencies'
enforcement powers extend to directors and officers of banks and other
financial institutions and to other "institution-affiliated" parties,
including stockholders, attorneys, appraisers and accountants.
Regulation of the Holding Companies
Prime is a savings and loan holding company within the meaning of
Section 10 of the Home Owners' Loan Act of 1933, as amended ("HOLA"). As
such, Prime is registered with and subject to OTS examination and supervision
as well as certain reporting requirements. First Sterling is, and it is
intended that upon consummation of the Merger Prime will also be, a bank
holding company within the meaning of Section 3 of the Bank Holding Company
-17-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
Act of 1956, as amended ("BHCA"). As such, First Sterling is, and Prime is
expected to be, registered with and subject to FRB examination and
supervision as well as certain reporting requirements. Prime will also be
subject to certain regulation by Pennsylvania banking statutes affecting bank
holding companies.
Federal Bank Holding Company Regulation
Prime will be required to file with the Federal Reserve Board ("FRB") an
annual report and such additional information as the FRB may require pursuant
to the BHCA. The FRB may also make examinations of Prime and each of its
non-bank subsidiaries. The BHCA requires each bank holding company to obtain
the approval of the FRB before it may acquire substantially all the assets of
any bank, or before it may acquire ownership or control of any voting shares
of any bank if, after such acquisition, it would own or control, directly or
indirectly, more than five percent of the voting shares of such bank.
Pursuant to the BHCA, Prime may only engage in or own companies that engage
in banking or in activities deemed by the FRB to be so closely related to the
business of banking or managing or controlling banks as to be a proper
incident thereto, and Prime must gain permission from the FRB prior to
engaging in many new business activities.
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound manner. In addition, it
is the FRB's policy that in serving as a source of strength to its subsidiary
banks, a bank holding company should stand ready to use available resources
to provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility
and capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations
to serve as a source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking practice or a
violation of the FRB regulations or both.
Federal Savings and Loan Holding Company Regulation
Prime will be required to file with the OTS an annual report and such
additional information as the OTS may require pursuant to HOLA. The OTS may
also make examinations of New Prime and its subsidiaries.
-18-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
The HOLA prohibits a savings and loan holding company, directly or
indirectly, from (1) acquiring control (as defined under HOLA) of another
insured institution (or holding company thereof) without prior OTS approval,
(2) acquiring more than 5% of the voting shares of another insured
institution (or holding company thereof) which is not a subsidiary without
prior regulatory approval, (3) acquiring through merger, consolidation or
purchase of assets, another savings institution (whether or not it is insured
by Savings Association Insurance Fund ("SAIF) or holding company thereof
without prior OTS approval, or (4) acquiring control of a savings institution
not insured by the SAIF (except through a merger approved by the OTS). A
savings and loan holding company may not acquire as a separate subsidiary an
insured institution which has principal offices outside of the state where
the principal offices of its savings association subsidiary is located,
except (i) in the case of certain emergency acquisitions approved by the
FDIC, (ii) if the holding company controlled (as defined) such insured
institution as of March 5, 1987, or (iii) when applicable law specifically
authorizes such an acquisition.
Prime will be a nondiversified, "unitary" savings and loan holding
company, which is a savings and loan holding company which controls only one
savings association --- in this case, Prime Bank. There are generally no
restrictions on the non-banking activities of such a savings and loan holding
company and its nonbanking subsidiaries, although historically the FSLIC did
not permit a savings and loan holding company to acquire or be acquired by a
holding company engaged in securities underwriting or market making. Because
Prime also will be a bank holding company after the Merger, the restrictions
on bank holding company activities described above will limit Prime's
nonbanking activities, even if applicable OTS regulations would permit such
activities. If Prime acquires another savings association as a separate
subsidiary, Prime would then be classified as a "multiple" savings and loan
holding company. If the activities of Prime Bank and related activities
were, at some time in the future, to represent less than 50% of the
consolidated net earnings of Prime for any fiscal year, Prime would then be
classified as a "diversified" savings and loan holding company. In either
case, Prime would become subject to additional limitations by OTS regulation
on the types of business activities in which it or its subsidiaries might
engage.
If an insured institution subsidiary of a unitary savings and loan
holding company fails to meet the "qualified thrift lender" ("QTL") test
specified in HOLA and regulations thereunder, such unitary holding company
also would become subject to severe restrictions regarding activities and
other aspects of its operations. (See, "Regulation of the Banks - QTL
Test".)
-19-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a savings and loan holding company may acquire up to 5% of
the voting shares of any savings bank or savings and loan holding company not
a subsidiary thereof without prior regulatory approval. Another provision of
FIRREA permits a savings and loan holding company to acquire up to 15% of the
voting shares of certain undercapitalized savings banks.
Prime has the option to elect not to continue to be treated as a savings
and loan holding company and to deregister as a savings and loan holding
company. There is no assurance that Prime will continue to elect to be
treated as a savings and loan holding company.
Dividends
Dividend payments by Prime will be subject to federal and state
regulation. Because Prime does not engage directly in any income producing
activities, payment of dividends will also generally be subject to receipt of
sufficient dividends from the Banks or other non-bank subsidiaries of Prime.
Dividend payments by the Banks are subject to limitations imposed by federal
and state laws. Under the Pennsylvania Banking Code (the "PA Code"), no
dividends may be paid by institutions such as the Banks except from
"accumulated net earnings" (generally, undivided profits). Under the Federal
Deposit Insurance Act ("FDIA"), no dividends may be paid by an insured bank
if the bank is in arrears in the payment of any insurance assessment due to
the FDIC. State and federal regulatory authorities have adopted standards
for the maintenance of adequate levels of capital by banks. Adherence to such
standards further limits the ability of banks to pay dividends, and the
"prompt corrective action" regulations adopted by federal bank regulatory
agencies further restrict payments of dividends by banks which are not
adequately capitalized. Further, the payment of dividends by a bank can also
be prohibited under certain circumstances if it is deemed an unsafe or
unsound practice or would leave a bank in an unsafe or unsound condition.
Federal banking regulators have formal and informal policies which provide
that insured banks and bank holding companies should generally pay dividends
only out of current operating earnings, with some exceptions.
Capital Adequacy
The FRB has adopted risk-based capital and leverage ratio requirements
for bank holding companies such as First Sterling. Prime will be subject to
these guidelines upon completion of the Merger.
-20-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
Risk-Based Capital Guidelines. The FRB's risk-based capital guidelines
for bank holding companies set a required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) of 8%. At least half of the total capital is required to
be "Tier 1 capital", consisting principally of common shareholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill. The remainder ("Tier 2 capital")
may consist of a limited amount of subordinated debt and intermediate-term
preferred stock, certain hybrid capital instruments and other debt
securities, perpetual preferred stock and a limited amount of the general
loan loss allowance.
Tier 1 Capital Leverage Ratio. The FRB has also established a minimum
level of Tier 1 capital to total assets of 3% for those bank holding
companies which have the highest regulatory examination ratings and are not
contemplating or experiencing significant growth or expansion. All other
bank holding companies are required to maintain a Tier 1 capital leverage
ratio of at least 1% to 2% above the 3% stated minimum.
First Sterling currently meets these minimum capital requirements, and
it is anticipated that, upon completion of the Merger, Prime will also meet
these requirements. Set forth below is a table which shows in dollars and
percentages the risk-based capital and Tier 1 capital leverage requirements
applicable to First Sterling and Prime, together with the actual dollar
amount and percentage of capital in each category at June 30, 1996 for First
Sterling, and the pro forma dollar amount and percentage of capital in each
category for Prime assuming the Merger had been completed by June 30, 1996:
</TABLE>
<TABLE>
<CAPTION> Prime
Required First Sterling Pro Forma
Capital Requirement Ratio At 6/30/96 At 6/30/96
<S> <C> <C> <C> <C> <C>
Risk-Based Capital
Tier 1 Ratio 4.00% $12,676 8.23% $58,638 10.66%
Total Capital Ratio 8.00% $15,389 9.99% $65,088 11.83%
Tier 1 Leverage Ratio 4.00%/5.00% $12,676 5.56% $57,638 6.89%
</TABLE>
-21-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
Change in Bank Control Act
Under the Change in Bank Control Act of 1978 ("Change in Control Act"),
no person, acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control" of any federally insured depository
institution unless the appropriate Federal banking agency has been given 60
days' prior written notice of the proposed acquisition and within that period
has not issued a notice disapproving of the proposed acquisition or has
issued written notice of its intent not to disapprove the action. For this
purpose, "control" is generally defined as the power, directly, or
indirectly, to direct the management or policies of an institution or to vote
25% or more of any class of its voting securities. In addition, a person
will be presumed to have acquired "control" of an institution or holding
company upon most acquisitions of power to vote 10% or more (but less than
25%) of any class of voting securities if the institution or holding company
has registered securities under Section 12 of the Securities Exchange Act of
1934 or if no other person will own a greater percentage of that class of
voting securities immediately after the transaction, but this presumption may
be rebutted upon a formal finding by the appropriate Federal banking agency
that the acquisition will not result in control. The period for the agency's
disapproval may be extended by the agency. Upon receiving such notice, the
Federal agency is required to provide a copy to the appropriate state
regulatory agency if the institution of which control is to be acquired is
state chartered, and the Federal agency is obligated to give due
consideration to the views and recommendations of the state agency. Upon
receiving a notice, the Federal agency is also required to conduct an
investigation of each person involved in the proposed acquisition. Notice of
such proposal is to be published and public comment solicited thereon. A
proposal may be disapproved by the Federal agency if the proposal would have
anticompetitive effects, if the proposal would jeopardize the financial
stability of the institution to be acquired or prejudice the interests of its
depositors, if the competence, experience or integrity of any acquiring
person or proposed management personnel indicates that it would not be in the
interest of depositors or the public to permit such person to control the
institution, if any acquiring person fails to furnish the Federal agency with
all information required by the agency, or if the Federal agency determines
that the proposed transaction would result in an adverse effect on a deposit
insurance fund. In addition, the Change in Control Act requires that,
whenever any Federally insured depository institution makes a loan or loans
secured, or to be secured, by 25% or more of the outstanding voting stock of
a Federally insured depository institution, the president or chief executive
-22-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
officer of the lending bank must promptly report such fact to the appropriate
Federal banking agency regulating the institution whose stock secures the
loan or loans.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), enacted on September 29, 1994, permits bank
holding companies to acquire banks in any State beginning in 1995. Beginning
in 1997, acquired banks in different states may be merged into a single bank,
and thereafter merged banks may establish and acquire additional branches
anywhere the acquiree could have branched. States may opt out until June 1,
1997, but if so, domestic institutions will also be prohibited from branching
interstate. States may also enact laws permitting interstate merger
transactions and interstate de novo branching before June 1, 1997. Limited
branch purchases are still subject to state laws.
On July 6, 1995, Pennsylvania adopted an interstate banking act (the "PA
Interstate Banking Act") to harmonize Pennsylvania banking laws with the
Federal Interstate Banking Act. The PA Interstate Banking Act "opts in"
early under the Federal Interstate Banking Act to permit interstate mergers,
non-Pennsylvania holding company acquisitions of Pennsylvania banks, branch
acquisitions and de novo branching in any of the manners contemplated by the
Federal Interstate Banking Act, subject to prior regulatory approvals or
filings. In general, the PA Interstate Banking Act permits out-of-state
banking institutions to establish branches in Pennsylvania with the approval
of the Pennsylvania PADOB, provided the law of the state where the banking
institution is located would permit a Pennsylvania banking institution to
establish and maintain a branch in that state on substantially similar terms
and conditions. It also permits Pennsylvania banking institutions to
maintain branches in other states. Prime management anticipates that the
federal and Pennsylvania interstate banking legislation will increase
competitive pressures in Prime Bank's and First Sterling Bank's respective
markets by permitting entry of additional competitors but management is of
the opinion that they will not have a material impact upon the anticipated
results of operations of either Bank or of Prime.
Pennsylvania Banking Laws
Under the PA Code as presently enacted, Prime will be permitted to
control an unlimited number of banks, subject to prior approval of applicable
federal bank regulatory agencies and, in certain cases, the PADOB. The PA
Code authorizes reciprocal interstate banking with out any geographic
-23-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
limitation. Reciprocity between states exist when a foreign state's law
authorizes Pennsylvania bank holding companies to acquire banks or bank
holding companies located in that state on terms and conditions substantially
no more restrictive than those applicable to such an acquisition by a bank
holding company located in that state. Interstate ownership of banks in
Pennsylvania with banks in many other states, including the adjoining states
of Delaware, Maryland, New Jersey, Ohio, New York and other states, is
currently authorized.
With certain exceptions, the PA Code prohibits any person from
acquiring, directly or indirectly, the power to elect a majority of the board
of directors of a Pennsylvania commercial bank or stock savings bank, or more
than 10% of any class of outstanding stock of such institutions (5% in
certain circumstances) without prior approval of PADOB.
REGULATION OF THE BANKS
Prime Bank is a Pennsylvania chartered stock savings bank which is a
member of the Federal Home Loan Bank ("FHLB") System. Its deposit accounts
are insured up to applicable limits by the FDIC under the SAIF. Prime Bank
is subject to extensive regulation by the PADOB, as its chartering agency,
and the FDIC as its deposit insurer and primary federal banking regulator.
Prime Bank must file reports with the PADOB and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions. Prime Bank is
periodically examined by PADOB and the FDIC.
First Sterling Bank is a Pennsylvania chartered commercial bank which is
a member of the Federal Reserve System. Its deposit accounts are insured up
to applicable limits by the FDIC under the Bank Insurance Fund ("BIF").
First Sterling Bank is subject to extensive regulation by the PADOB, as its
chartering agency, the FRB, as its primary federal banking regulator, and the
FDIC as its deposit insurer. First Sterling Bank must file reports with the
PADOB and the FRB concerning its activities and financial condition, in
addition to obtaining regulatory approvals prior to entering into certain
transactions. First Sterling Bank is periodically examined by PADOB and the
FRB.
-24-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
Pennsylvania Banking Laws
The activities of Pennsylvania chartered commercial banks and savings
banks are governed by the PA Code. Because First Sterling Bank is a member
of the Federal Reserve System, certain of its activities are also governed by
FRB regulations applicable to
member banks. Because Prime Bank is a state chartered savings bank which is
not a member of the Federal Reserve System, certain of its activities are
also governed by FDIC regulations.
The PA Code limits the powers and activities of Pennsylvania chartered
commercial banks and savings banks, including the investment and lending
activities of those institutions. Subject to certain exclusions and
qualifications, each of the Banks is limited in making loans to any one
customer to an amount which equals 15% of each Bank's unimpaired capital
accounts from time to time. Aggregate loans to related groups of customers
may also be limited to this amount if so determined by the PADOB. Certain
loans, such as real estate loans, consumer loans and residential mortgage
loans, are subject to requirements and restrictions.
PADOB regulations establish minimum capital requirements for
Pennsylvania chartered financial institutions such as the Banks (the "PA
Capital Rules"). The PA Capital Rules include a minimum requirement for
leverage capital --- the ratio of "Tier 1" capital (as defined for federal
bank regulatory purposes) to total assets --- of 4.00%, and a minimum
requirement for "risked-based capital" as that which is required by federal
banking laws. PADOB may set a higher minimum leverage ratio requirement for
individual institutions. An institution that falls below these minimums,
except in specified circumstances, will be deemed by PADOB to be in unsafe
and unsound condition and conducting business in an unsafe manner. However,
an institution which is in compliance with a written agreement or order, the
purpose of which is to increase its capital ratios, will not be deemed unsafe
and unsound condition or conducting business in an unsafe manner based on its
capital ratios. Even if an institution meets its minimum capital ratio
requirements, PADOB has authority to take enforcement action which is
otherwise authorized against an institution which is in an unsafe or unsound
condition, is conducting its business in an unsafe or unsound manner, is in
violation of any agreement or order of PADOB, another banking agency, any
court, the institution's charter, or other applicable laws, or as to which
any other banking statute or regulation authorizes such enforcement action.
At June 30, 1996, Prime Bank and First Sterling Bank each met the
Pennsylvania minimum capital requirements.
-25-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
The table set forth below shows each capital requirement, together with
the actual capital levels of each Bank expressed in both dollar amounts and
percentages:
<TABLE>
<CAPTION>
Required Prime Bank First Sterling
Capital Requirement Ratio At 6/30/96 At 6/30/96
<S> <C> <C> <C> <C> <C>
PA Risk-Based Capital
Tier 1 Ratio 4.00% $45,915 11.58% $12,676 8.23%
Total Capital Ratio 8.00% $49,652 12.52% $15,389 9.99%
PA Tier 1 Leverage Ratio 4.00% $45,915 7.54% $12,676 5.56%
</TABLE>
Under the PA Code, each Bank may establish branches and other offices
without geographic limitation throughout Pennsylvania. The establishment of
new branches or other offices of Pennsylvania chartered institutions such as
the Banks are subject to the prior approval of PADOB.
Federal Deposit Insurance Regulation
Pursuant to the provisions of FIRREA, a new insurance fund, administered
by the FDIC and named SAIF, insures the deposits of savings associations
formerly insured by the FSLIC. The FDIC fund existing prior to the enactment
of FIRREA is now known as Bank Insurance Fund ("BIF") and continues to insure
the deposits of commercial banks and certain savings banks and to be
administered by the FDIC. Although the FDIC administers both funds, the
assets and liabilities are not commingled.
Safety and Soundness. Under the FDIA, federal regulators possess the
power to prohibit regulated institutions such as Prime Bank and First
Sterling Bank from engaging in any activity that would be an unsafe and
unsound banking practice and in violation of the law. Moreover, recent
Federal laws have expanded the circumstances under which officers or
directors of a bank may be removed by the institution's federal supervisory
agency, restrict and regulate lending by a bank to its executive officers,
directors, principal shareholders or related interests thereof and restrict
management personnel of a bank from serving as directors or in other
management positions with securities firms and with certain depository
institutions whose assets exceed a specified amount or which have an office
within a specified geographic area, and restrict management personnel from
borrowing from another institution that has a correspondent relationship with
their bank.
-26-
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations or has violated
any applicable law, regulation, rule, order or condition imposed by the FDIC
or the OTS. The management of Prime does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires financial institutions to take certain actions relating
to their internal operations including: providing annual reports on
financial condition to the appropriate federal banking regulators, having an
annual independent audit of financial statements performed by an independent
public accountant and establishing an independent audit committee comprised
solely of outside directors. The FDICIA also imposes certain operational and
managerial standards on financial institutions relating to internal controls,
loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits. A later amendment deals with
compensation standards. The FDICIA also requires the FDIC to assess deposit
insurance premiums based on risk. As noted below, the federal banking
agencies, including the OTS and the FDIC, have adopted certain rules
implementing these standards.
Prompt Corrective Action. The FDICIA also requires establishment of a
system of prompt corrective action to resolve the problems of
undercapitalized institutions. The federal banking regulators have adopted
final rules, which require such regulators to take certain supervisory
actions against undercapitalized institutions. The adopted rules create five
categories consisting of "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". Regulatory action taken will depend on the level of
capitalization of the institution and may range from restrictions on
distributions of dividends to seizure of the institution. Generally, subject
to a narrow exception, the FDICIA requires the institution's regulator to
appoint a receiver or conservator for an institution that is critically
undercapitalized. The FDICIA authorizes the institution's regulators to
specify the ratio of tangible capital to assets at which an institution
becomes critically undercapitalized and requires that the ratio be no less
than 2% of assets. The final rules also allow the regulators to downgrade an
institution that meets certain minimum capital requirements but is otherwise
in a "less than satisfactory" condition, which may result in an otherwise
"adequately capitalized" institution with other problems being classified as
"undercapitalized".
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PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
Under the OTS final rule implementing the prompt corrective action
provisions, generally a savings association that has a total risk-based
capital of less than 8.0% or a leverage ratio that is less than 4.0% would be
considered to be undercapitalized. A savings association that has total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3% or a leverage ratio that is less than 3.0% would be considered to be
"significantly undercapitalized" and a savings association that has a
tangible capital to assets ratio equal to or less than 2% would be deemed to
be "critically undercapitalized." Generally, the rule requires an association
to file a capital restoration plan with the OTS within 45 days of the date it
is deemed to be "undercapitalized", "significantly undercapitalized" or
"critically undercapitalized". In addition, numerous mandatory supervisory
actions become immediately applicable to the institution, including, but not
limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The OTS could also issue a
capital directive to the association which includes additional discretionary
restrictions on the association.
Other provisions of the FDICIA require supplemental disclosure in
financial statements filed with the regulators of the estimated fair market
value of assets and liabilities; permits thrift institutions to acquire
commercial banks and commercial banks to acquire thrift institutions with
appropriate regulatory approval; adjust the capital standards to account for
interest rate risk; and increase the amount of consumer loans that a savings
association may invest in from 30% to 35% of total assets.
Liability of Commonly Controlled Institutions; Priority Over Claims of
Shareholders and Affiliates. Pursuant to provisions of the FDIA, if one or
more insured depository institutions are under common control (as is the case
with the Banks), each institution (the "Obligated Institution") is
potentially liable to the FDIC for any loss incurred by the FDIC in
connection with a default by the any other insured depository institution
which is under common control (the "Defaulting Institution"). The FDIC's
claim against the assets of an Obligated Institution for the payment of this
liability has priority over any obligations which the Obligated Institution
owes to its shareholders or affiliates, but is generally subordinate to
obligations owed to persons other than shareholders or affiliates.
Real Estate Lending Standards. Under FDICIA and regulations adopted
thereunder, federally insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real
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Item 5. Other Information - (Continued)
estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards (including loan-to-value limits)
that are clear and measurable, loan administration procedures, and
documentation, approval and reporting requirements. The real estate lending
policies must reflect consideration of the Interagency Guidelines for Real
Estate Lending Policies (the "Interagency Guidelines") that have been adopted
by the federal bank regulators. The Interagency Guidelines, among other
things, require depository institutions to establish internal loan-to-value
limits for real estate loans that are not in excess of the following
supervisory limits: (i) for loans secured by raw land, the supervisory loan-
to-value limit is 65% of the value of the collateral; (ii) for land
development loans, the supervisory limit is 75%; (iii) for loans for the
construction of commercial, multi-family or other nonresidential property,
the supervisory limit is 80%; (iv) for loans for the construction of one- to
four-family properties, the supervisory limit is 85%; and (v) for loans
secured by other improved property (e.g., farmland, completed commercial
property and other income-producing property including non-owner-occupied,
one- to four-family property), the limit is 85%, or 90% with appropriate
credit enhancement in the form of either mortgage insurance or readily
marketable collateral.
Brokered Deposits. Federal law and regulations impose restrictions on
the acceptance of brokered deposits. Absent a waiver from the FDIC, an
insured depository institution will not be permitted to accept brokered
deposits unless the institution is "well capitalized." The FDIC can only
grant waivers to institutions that are "adequately capitalized" or that are
in conservatorship. At June 30, 1996, neither Prime Bank nor First Sterling
Bank had any brokered deposits.
Transactions with Affiliates and Other Related Parties
Each of the Banks is subject to certain restrictions on transactions
with "affiliates" such as Prime and any other non-bank subsidiaries of Prime
pursuant to Sections 23A and 23B of the Federal Reserve Act ("FRA"). In
summary, Section 23A (i) imposes individual and aggregate percentage of
capital limits on the dollar amount of a wide variety of affiliate dealings
coming within the definition of a "covered transaction" (in general, the
aggregate amount of transactions of either Bank with any one non-bank
affiliate (other than the other Bank) is limited to 10% of the capital and
surplus of the Bank and the aggregate amount of either Bank's transactions
with all non-bank affiliates is limited to 20% of the Bank's capital and
surplus.; (ii) establishes rules for ensuring arms' length dealings between
a bank and its affiliates; (iii) precludes the acquisition of "low quality"
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OTHER INFORMATION
Item 5. Other Information - (Continued)
assets by a bank from its affiliates; and (iv) imposes detailed
collateralization requirements for affiliate credit transactions. For
purposes of Section 23A a "covered transaction" includes the following (with
certain exceptions and exemptions): (A) a loan or extension of credit to an
affiliate; (B) a purchase of, or an investment in, securities issued by an
affiliate; (C) a purchase of assets (including assets subject to an agreement
to repurchase) from an affiliate, with certain exceptions; (D) the acceptance
of securities issued by an affiliate as collateral security for a loan or
extension of credit to any person or Prime; and (E) the issuance of a
guarantee, acceptance, or letter of credit, including an endorsement or
standby letter of credit, on behalf of an affiliate. Section 23B requires a
wide range of transactions which must be on terms which are at least as
favorable to each Bank as would apply to similar transactions with non-
affiliated companies. The transactions covered by section 23B include
"covered transactions" that are subject to section 23A, as well as (I) a
sales of securities or other assets to an affiliate including assets subject
to an agreement to repurchase; (II) a payment of money or the furnishing of
services to an affiliate under contract, lease, or otherwise; (III) any
transaction in which an affiliate acts as an agent or broker or receives a
fee for its services to the association or to any other person; or (IV) any
transaction or series of transactions with a third party if an affiliate has
an interest in the third party or participates in the transaction.
Each Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA. Among other
things, these regulations require such loans to be made on terms
substantially similar to those offered to unaffiliated individuals, place
limits on the amount of loans either Bank may make to such persons based, in
part, on the Bank's capital position, and require certain approval and
reporting procedures to be followed.
Classification of Assets
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories:
"substandard", "doubtful" and "loss". For assets classified "substandard",
and "doubtful", the institution is required to establish prudent general loan
loss reserves in accordance with generally accepted accounting principles.
Assets classified "loss" must be either completely written off or supported
by a 100% specific reserve. A classification category designated "special
mention" also must be established and maintained for assets not currently
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PART II
OTHER INFORMATION
Item 5. Other Information - (Continued)
requiring classification but having potential weaknesses or risk
characteristics that could result in future problems. An institution is
required to develop an in-house program to classify its assets, including
investment in subsidiaries, on a regular basis and set aside appropriate loss
reserves on the basis of such classification. Management believes that Prime
Bank and First Sterling Bank are each in compliance with the foregoing
requirements.
Federal Minimum Capital Requirements - Prime Bank
The FDIC has adopted risk-based capital and leverage ratio requirements
for nonmember insured banks such as Prime Bank.
Risk-Based Capital Guidelines. The FDIC's risk-based capital guidelines
for nonmember banks set a required minimum ratio of total capital to risk-
weighted assets (including off-balance sheet activities, such as standby
letters of credit) of 8%. At least half of the total capital is required to
be "Tier 1" (or "core") capital, consisting principally of common
shareholders' equity, noncumulative perpetual preferred stock, a limited
amount of cumulative perpetual preferred stock and minority interests in the
equity accounts of consolidated subsidiaries, less goodwill. The remainder
("Tier 2 capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and
other debt securities, perpetual preferred stock and a limited amount of the
general loan loss allowance.
Tier 1 Capital Leverage Ratio. The FDIC has also established a minimum
level of Tier 1 capital to total assets of 3% for those nonmember banks which
have the highest regulatory examination ratings and are not contemplating or
experiencing significant growth or expansion. All other nonmember banks are
required to maintain a Tier 1 capital leverage ratio of at least 1% to 2%
above the 3% stated minimum.
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Item 5. Other Information - (Continued)
At June 30, 1996, Prime Bank met each of its capital requirements. Set
forth below is a table which sets forth in terms of dollars and percentages
the tangible, core and risk-based capital requirements applicable to Prime
Bank, together with the actual dollar amounts and percentages of capital for
Prime Bank in each category at June 30, 1996:
<TABLE>
<CAPTION>
Required Prime Bank
Capital Requirement Ratio At 6/30/96
<S> <C> <C> <C>
Risk-Based Capital
Tier 1 Ratio 4.00% $45,915 11.58%
Total Capital Ratio 8.00% $49,652 12.52%
Tier 1 Leverage Ratio 4.00%/5.00% $45,915 7.54%
</TABLE>
Federal Minimum Capital Requirements - First Sterling Bank
Leverage Ratio. For banks which are members of the Federal Reserve
System, the FRB has established a minimum level of "primary capital" to total
assets of 5.5% and a minimum level of "total capital" to total assets of
6.0%. For these purposes, the components of "primary capital" generally
include common stock, surplus, undivided profits, contingency and other
capital reserves, and the allowance for possible loan and lease losses, and
"total capital" includes the primary capital components plus limited life
preferred stock and certain subordinated debt. In calculating the regulatory
capital ratios, goodwill is deducted from both the numerator (capital) and
the denominator (total assets) of the ratio, and the loan loss reserve is
added to the denominator (total assets). Generally, the FRB expects member
banks to operate above the minimum levels. Those member banks whose
operations are deemed by the FRB to involve or to be exposed to high or
inordinate degrees of risk may be expected to hold additional capital to
compensate for those risks.
In addition, the FRB has established three "zones" for total capital for
banking organizations of all sizes for the purpose of determining the nature
and intensity of supervisory actions:
Zone Total Capital Ratio
1 Above 7.0%
2 6.0% to 7.0%
3 Below 6.0%
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Item 5. Other Information - (Continued)
A member bank whose total capital places it in "Zone 1" will generally
be considered adequately capitalized provided its "primary capital" is above
the 5.5% minimum. In contrast, a member bank whose total capital places it
in "Zone 3" will generally be considered undercapitalized, absent clear
extenuating circumstances. Member banks in "Zone 2" will be scrutinized for
a variety of financial risks and capital adequacy will be determined
accordingly.
At June 30, 1996, First Sterling Bank met each of its regulatory
capital requirements. Set forth below is a table which sets forth in terms
of dollars and percentages the tangible, core and risk-based capital
requirements applicable to First Sterling Bank, together with the actual
dollar amounts and percentages of capital for First Sterling Bank in each
category at June 30, 1996:
<TABLE>
<CAPTION>
Required First Sterling
Capital Requirement Ratio At 6/30/96
<S> <C> <C> <C>
Primary Capital Ratio 5.50% $12,676 8.23%
Total Capital Ratio 6.00% $15,389 9.99%
</TABLE>
First Sterling's total capital ratio would place it in "Zone 1" for these
purposes as of June 30, 1996.
Insurance of Deposit Accounts
The FDIC sets deposit insurance assessment rates on a semiannual basis
separately for SAIF. The FDIC has authority to reduce the assessment rates
for either fund whenever the ratio of its reserves to insured deposits is
equal to or greater than 1.25%, and to increase deposit insurance assessments
whenever that ratio is less than 1.25%. Both funds' reserve levels have been
less than 1.25% since the separate funds were established under FIRREA. The
insurance assessments paid by an institution are to be based on the
probability that its fund (BIF or SAIF) will incur a loss with respect to the
institution.
An institution's semiannual deposit insurance assessment is computed
primarily by multiplying its "average assessment base" (generally, total
insurable domestic deposits) for the prior semiannual period by one-half the
annual assessment rate applicable to that institution depending upon its risk
category, which is based principally on two measures of risk. These measures
involve capital and supervisory factors.
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Item 5. Other Information - (Continued)
For the capital measure, institutions are assigned semiannually to one
of three capital groups according to their levels of supervisory capital as
reported on their call reports: "well capitalized" (group 1), "adequately
capitalized" (group 2) and "undercapitalized" (group 3). The capital ratio
standards for classifying an institution in one of these three groups are
total risk-based capital ratio (10 percent or greater for group 1, and
between 8 and 10 percent for group 2), the Tier 1 risk-based capital ratio (6
percent or greater for group 1, and between 4 and 6 percent for group 2), and
the leverage capital ratio (5 percent or greater for group 1, between 4 and
5 percent for group 2).
Within each capital group, institutions are assigned to one of three
supervisory risk subgroups -- subgroup A, B, or C, depending upon an
assessment of the institution's perceived risk based upon the results of its
most recent examination and other information available to regulators.
Subgroup A will consist of financially sound institutions with only a few
minor weaknesses. Subgroup B will consist of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration
of the institution and increased risk of loss to the BIF. Subgroup C will
consist of institutions that pose a substantial probability of loss to the
deposit insurance fund unless effective corrective action is taken. Thus,
there are nine possible classifications to which varying assessment rates are
applicable. The regulation generally prohibits institutions from disclosing
their subgroup assignments or assessment risk classifications without FDIC
authorization.
Prime Bank's deposits are insured by SAIF. Institutions with SAIF-
insured deposits are obligated to pay assessments at rates which range from
23 to 31 basis points. Prime Bank's insurance premium assessment is
currently 23 basis points. There is no assurance whether this assessment
rate will change, either due to changes in the capital group or supervisory
risk subgroup assigned Prime Bank by banking regulators or other action by
regulators, or due to Congressional or regulatory changes to the assessment
schedule.
First Sterling Bank's deposits are insured by BIF. On November 14,
1995, the FDIC Board adopted a resolution to reduce to a range of 0 to 27
basis points the assessment rate applicable to deposits assessable by the BIF
for the semiannual assessment period beginning January 1, 1996. The
reduction represents a downward adjustment of 4 basis points from the revised
BIF assessment rate schedule which was in effect for the second semiannual
assessment period of 1995. First Sterling Bank's insurance premium assessment
is currently $500 per quarter.
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PART II
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Item 5. Other Information - (Continued)
While reducing the BIF assessment rate, the FDIC maintained the SAIF
assessment rates at current levels because the FDIC does not project the SAIF
fund to reach the required reserve level of 1.25% of SAIF-insured deposits.
Legislation has been introduced in Congress which may cause the merger of the
BIF and SAIF funds. It is not possible to predict with any assurance if, or
when, legislation might be enacted to merge the two insurance funds or, if
such legislation is adopted, what impact the merger of the funds and the
legislation would have upon future FDIC deposit insurance assessments on the
Banks. Regulators have predicted that a failure to merge the SAIF and BIF
funds will result in an increased incidence of conversions of deposits from
SAIF to BIF as institutions attempt to reduce their costs of funds. One
impact of the entry of new deposits into the BIF fund would be to dilute the
proportion of coverage the BIF fund gives to existing BIF-insured deposits,
which in turn could, over time, increase the cost of BIF deposit insurance.
One impact of a reduction in the total deposits insured by SAIF fund could be
an increased risk of higher assessment rates if an increased incidence of
failures of SAIF-insured institutions occurs.
QTL Test - Prime Bank
A "qualified thrift lender", or "QTL," test is applicable under FIRREA
for purposes of determining the scope of permissible activities, pursuant to
HOLA, for a savings and loan holding company which controls a "savings
association". Under certain circumstances, a state chartered, FDIC-insured
savings bank may be determined by the Director of the OTS to be a "savings
association" for these purposes. Prime Bank is deemed, and it is expected
that Prime Bank immediately after the Merger will continue to be deemed, a
"savings association" for these purposes. In addition, any savings
association which fails to meet the QTL test may be prohibited from engaging
in activities not permitted to both national banks and savings associations,
may be forced to convert to a national bank, and may be denied the privilege
of advances, and ultimately may be required to repay outstanding advances,
from any Federal Home Loan Bank. In addition, such a savings association may
be required to be BIF insured and to pay the necessary "exit" and "entrance"
fees for converting to BIF from SAIF.
A new QTL test became effective as of January 1, 1992 and requires 65%
of an institution's assets to consist of certain housing and consumer-related
assets. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans related to domestic residential housing and
manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages
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OTHER INFORMATION
Item 5. Other Information - (Continued)
are related to residential housing or manufactured housing); and direct or
indirect obligations of the FSLIC or FDIC; and shares of stock issued by any
Federal Home Loan Bank. In addition, the following assets may be included in
meeting the test subject to an overall limit of 20% of the savings bank's
portfolio: 50% of residential mortgage loans originated and sold within 90
days of origination; 100% of investments in service corporations that meet
certain housing-related standards; 200% of loans related to the acquisition,
development and construction of one-to-four family housing meeting certain
low-income standards; 200% of certain loans in areas where credit needs of
low and moderate income residents are not being adequately met; 100% of
certain loans to churches, schools, nursing homes and hospitals; 100% of
consumer and educational loans (limited to 10% of total portfolio assets);
and shares of stock issued by the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association. To management's knowledge, the OTS
has not made any determination regarding the applicability of the QTL test to
Prime Bank. However, to the extent it might apply, management believes that
Prime Bank is in compliance with the QTL test.
There is no assurance that Prime Bank will continue to comply with the
QTL Test or will continue to elect to be treated as a "savings association"
for various purposes.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by federal
banking regulations, a bank or savings bank has a continuing and affirmative
obligation consistent with its safe and sound operation to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the applicable federal regulator for each bank (the FRB in the case
of First Sterling and the FDIC in the case of Prime Bank), in connection with
its examination of the bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such institution. The CRA requires
public disclosure of an institution's CRA rating and requires the OTS to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system in lieu of the existing five-tiered
numerical rating system.
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Item 5. Other Information - (Continued)
Federal Home Loan Bank System
Prime Bank is a member of the FHLB System by way of investment in the
Federal Home Loan Bank of Pittsburgh ("FHLBP"). The FHLB System consists of
12 regional Federal Home Loan Banks, subject to supervision and regulation by
a newly created Federal Housing Finance Board. The Federal Home Loan Banks
provide a central credit facility primarily for member financial
institutions. Each financial institution member is required to acquire and
hold shares of Federal Home Loan Bank capital stock in an amount at least
equal to the greater of 1% of the financial institution's aggregate unpaid
residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or 5% of its outstanding advances from the
FHLBP. At June 30, 1996, Prime Bank had a $2.9 million investment in the
stock of the FHLBP and was in compliance with this requirement. Advances
from a FHLB are secured by a member's shares of stock in the FHLB, certain
types of mortgages and other assets. Interest rates charged on advances vary
with the maturity and the cost of funds to the FHLB. At June 30, 1996 Prime
Bank had $58.0 million of advances and borrowings from the FHLBP. FHLB
System members are also authorized to borrow from the Federal Reserve
"discount window," but FRB regulations require institutions to exhaust all
FHLB sources before borrowing from a Federal Reserve Bank.
Federal Reserve System
Federal Reserve Membership - First Sterling Bank. First Sterling Bank
is a member of the Federal Reserve System. Member banks are entitled to
certain borrowing, item clearing and other privileges at Federal Reserve
Banks, and are obligated to purchase shares in the local Federal Reserve
Bank. In the case of a state bank such as First Sterling Bank, the amount of
Federal Reserve Bank stock which it is required to purchase and maintain must
be equal to 6% of the paid-up capital and surplus of the member institution.
Member banks are also required to comply with applicable regulations of the
FRB. These include, without limitation, capital requirements, reporting
requirements, submission to examination, limitations on certain activities,
investments and loans, regulation of payment of dividends, and compliance
with certain prompt corrective action, safety and soundness and real estate
lending standards.
Reserve Requirements. FRB regulations require each of the Banks to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The FRB regulations generally
require that reserves of 3% must be
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Item 5. Other Information - (Continued)
maintained against aggregate transaction accounts of $51.9 million or less
(subject to adjustment by the FRB) and an initial reserve of $1.557 million
plus 10% (subject to adjustment by the FRB between 8% and 14%) against that
portion of total transaction accounts in excess of $51.9 million. The first
$4.0 million of otherwise reservable balances (subject to adjustments by the
FRB) are exempted from the reserve requirements. The FRB may adjust reserve
requirements or impose supplemental reserve requirements under some
circumstances. Each of the Banks is in compliance with the foregoing
requirements. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank
or a pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the effective return or yield on the Banks' assets.
Other Laws and Regulations
Prime, First Sterling and the Banks are, and will continue after
consummation of the Merger to be, subject to a variety of laws and
regulations which are not limited to banking organizations. Without limiting
the foregoing, in lending to commercial and consumer borrowers, and in owning
and operating their properties, the Banks are each subject to regulations and
risks under state and federal environmental laws.
Compliance
While the expense of compliance can be substantial and could have an
adverse effect on the net income of all regulated institutions such as the
Banks, management believes that Prime, First Sterling and the Banks are
presently in compliance with applicable laws and regulations in all material
respects.
Legislation and Regulatory Changes
Legislation and regulations may be proposed or enacted from time to time
which could increase the cost of doing business, limit or expand permissible
activities, or affect the competitive balance between banks and other
competing financial services providers. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on New
Prime or either of the Banks.
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OTHER INFORMATION
Item 5. Other Information - (Continued)
Effect of Government Monetary Policies
The earnings of Prime and First Sterling are, and the earnings of Prime
after the Merger will be, affected by domestic and international economic
conditions and the monetary and fiscal policies of the United States
government and its agencies, as well as those of foreign countries. It is
not possible to predict the nature and impact of future changes in economic
conditions or governmental monetary or fiscal policies.
Recent Legislative Developments
Legislation Regarding Bad Debt Reserve. Under Section 593 of the Code,
thrift institutions such as Prime Bank which meet certain definitional tests
primarily relating to their assets and the nature of their business are
permitted to establish a tax reserve for bad debts and to make annual
additions thereto, which additions may, within specified limitations, be
deducted in arriving at their taxable income. Prime Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, may currently be computed using an amount based
on Prime Bank's actual loss experience (the "experience method"), or a
percentage equal to 8.0% of Prime Bank's taxable income (the "percentage of
taxable income method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition
to a non-qualifying reserve. Under provisions of H.R. 3448 passed by
Congress on August 2, 1996 ("H.R. 3448"), the percentage of taxable income
method would be repealed and thrift institutions such as Prime Bank would be
permitted to deduct bad debts only as they occur. In addition, Prime Bank
would be required to recapture (i.e., take into income) over a 6-year period
the excess of the balance of such reserves as of December 31, 1995, over the
greater of (a) the balance of such reserves as of December 31, 1987 or (b) an
amount that would have been the balance of such reserves as of December 31,
1995 had Prime Bank always computed the additions to its reserves using the
experience method. However, under H.R. 3448, such recapture requirements
would be suspended for each of two successive taxable years beginning January
1, 1996, in which Prime Bank originates an amount of certain residential
loans in excess of the average of the principal amounts of such loans made by
Prime Bank during its six taxable years preceding 1996.
If H.R. 3448 were not adopted, Prime would continue to be subject to
recapture of approximately $7.7 million in excess bad debt reserve deductions
if Prime Bank were to convert or merge into a commercial bank. However,
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Item 5. Other Information - (Continued)
if H.R. 3448 is enacted, a recapture of excess bad debt reserve deductions
would not be required.
Recapitalization of SAIF. The deposits of Prime Bank are currently
insured by the SAIF. SAIF reserves have not grown as quickly as the BIF
reserves due to a number of factors, including the fact that a significant
portion of SAIF premiums have been and are currently being used to make
payments on bonds issued in the late 1980's by the Financing Corporation
("FICO") to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation.
The U.S. Congress has been considering legislation which would provide
for recapitalization of the SAIF. The legislation being considered by the
House Banking Committee in August 1996 would provide that all SAIF member
institutions would pay a special one-time assessment to recapitalize the
SAIF, which in the aggregate would be sufficient to bring the reserve ratio
in the SAIF to 1.25% of insured deposits. Based on recent levels of reserves
maintained by the SAIF Fund, estimates of the amount of the special
assessment required to recapitalize the SAIF have ranged from 75 to 80 basis
points times the SAIF-assessable deposits. The special assessment would be
payable upon enactment of the legislation, based on the amount of SAIF
deposits on March 31, 1995. It is anticipated that, after the
recapitalization of the SAIF, premiums of SAIF-insured institutions would be
reduced so that they are comparable to those currently being assessed upon
BIF-insured commercial banks. The legislation would also provide for the
merger of the BIF and SAIF in 1999, and would direct the U.S. Treasury
Department to make recommendations by March 31, 1997 on elements of a single
charter for financial institutions. As considered by the House Banking
Committee, the legislation included provisions empowering banking regulators
to take steps to prevent affiliated institutions from facilitating deposit
shifts from the SAIF to the BIF.
It is presently uncertain whether legislation recapitalizing SAIF,
reducing SAIF premiums and/or imposing a special one-time assessment on
institutions with SAIF-insured deposits, will be adopted or, if adopted, the
amount of the assessments, if any, that would be imposed on Prime Bank as a
result.
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<PAGE> PART II
OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K - Report dated June 12, 1996 and June 27,
1996, and amended August 12, 1996, relating to execution of
Agreement and Plan of Reorganization dated June 12, 1996
("Agreement") with First Sterling Bancorp, Inc. The following
financial statements were filed with such reports:
Financial Statements, Pro Forma Financial Information and Exhibits
a) Financial Statements of Business Acquired.
Annual Financial Statements:
Report of Independent Accountant's
Consolidated Balance Sheets at December 31, 1995 and 1994
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Interim Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and
December 31, 1995
Consolidated Statements of Income (Unaudited) for
the Three and Six Months Ended June 30, 1996
and 1995
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1996 and
1995
Notes to Consolidated Financial Statements
(Unaudited)
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
Pro Forma Condensed Combined Statement of Operations
Six Months Ended June 30, 1996 and 1995
Pro Forma Condensed Combined Statement of Operations
Years Ended December 31, 1995 and 1994
Years Ended December 31, 1993
Notes to Pro Forma Combined Financial Information
-41-
<PAGE>
PART II
OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K - (Continued)
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.
-42-
<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 15, 1996 /s/ James J. Lynch
James J. Lynch
President and Chief
Executive Officer
Date: August 15, 1996 /s/ Michael J. Sexton
Michael J. Sexton
Treasurer and Chief
Financial
-43-
<PAGE>
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