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:
September 30, 1997 Commission File Number: 0-17286
PRIME BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2860688
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7111 Valley Green Road, Fort Washington, Pennsylvania 19111
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 836-2400
----------------------------------------------------
(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
September 30, 1997:
Common Stock -- 5,420,716
<PAGE>
PRIME BANCORP, INC.
INDEX
Part I Financial Information
Item 1. Consolidated Financial Statements
Financial Highlights 1
Consolidated Statements of Financial 2
Condition:
September 30, 1997 and 1997 (Unaudited)
and December 31, 1996
Consolidated Statements of Operations, 3
Three Months Ended:
September 30, 1997 and 1996
(Unaudited)
Consolidated Statements of Operations, 4
Nine Months Ended:
September 30, 1997 and 1996
(Unaudited)
Consolidated Statements of Cash Flows, 5 - 6
Nine Months Ended:
September 30, 1997 and 1996
(Unaudited)
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of 9 - 16
Financial Condition and Results of Operations
Part II Other Information 17
Signatures 18
<PAGE>
FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
(Unaudited)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 $ Change % Change 1997 1996 $ Change % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income $9,590 $8,400 $ 1,190 14.2% $27,343 $24,035 $ 3,308 13.8%
Provision for
loan losses 856 537 319 59.4% 2,574 1,372 1,202 87.6%
Non-interest
income 1,163 672 491 73.1% 3,798 2,491 1,307 52.5%
Non-interest
expenses 5,708 7,934 (2,226) (28.1%) 17,142 17,968 (826) (4.6%)
- -------------------------------------------------------------------------------------------
Income before
taxes 4,189 601 3,588 597.0% 11,425 7,186 4,239 59.0%
Income taxes 1,419 114 1,305 1144.7% 3,824 2,397 1,427 59.5%
- -------------------------------------------------------------------------------------------
Net income $2,770 $ 487 $2,283 468.8% $7,601 $4,789 $2,812 58.7%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Earnings per share $0.49 $0.09 $0.40 444.4% $1,37 $0.88 $0.49 55.7%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Dividends per share $0.17 $0.17 $0.00 0.0% $0.51 $0.51 $0.00 0.0%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 Change % Change 1997 1996 Change % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Return on average
assets 1.16% 0.22% 0.94% 427.3% 1.08% 0.75% 0.33% 44.0%
Return on average
equity 14.34% 2.73% 11.61% 425.3% 13.59% 9.12% 4.47% 49.0%
Net interest
margin 4.36% 4.07% 0.29% 7.1% 4.20% 4.07% 0.13% 3.2%
Efficiency ratio 53.08% 87.46% (34.38%) (39.3%) 55.05% 67.74% (12.69%) (18.7%)
- --------------------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
September 30,
- --------------------------------------------------------------------
1997 1996 $ Change % Change
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $960,745 $908,919 $51,826 5.7%
Loans receivable, net 620,192 580,757 39,435 6.8%
Investment securities
available for sale 97,722 139,021 (41,299) (29.7%)
Investment securities
held to maturity 144,341 114,556 29,785 26.0%
Deposits 693,143 682,693 10,450 1.5%
Total borrowings 183,665 143,001 40,664 28.4%
Shareholders' equity 77,337 71,834 5,503 7.7%
- -------------------------------------------------------------------
</TABLE>
ASSET QUALITY
<TABLE>
<CAPTION>
September 30,
- -----------------------------------------------
1997 1996
- ------------------------------------------------
<S> <C> <C>
Non-performing assets
to total assets 0.80% 1.18%
Allowance for loan
losses to total loans 1.42% 1.16%
Allowance for loan losses
to non-performing loans 172.69% 66.48%
Allowance for loan losses
to non-performing assets 114.78% 63.07%
- ------------------------------------------------
</TABLE>
1
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
- ---------------------------------------------------------------------------
1997 1996 1996
- ---------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Assets
Cash and due from banks.................... $ 30,731 $ 25,686 $ 29,161
Interest-bearing deposits.................. 25,059 2,288 2,703
Federal funds sold......................... 2,400 1,800 600
-------- -------- --------
Cash and cash equivalents............... 58,190 29,774 32,464
-------- -------- --------
Investment securities (fair value of
($145,504, $113,969 and $110,874)....... 144,341 114,556 110,766
Investment securities available for sale... 97,722 139,021 125,428
Loans receivable........................... 629,289 587,710 624,426
Deferred fees............................ (262) (213) (327)
Allowance for loan losses................ (8,835) (6,740) (7,206)
-------- -------- --------
Loans receivable, net................. 620,192 580,757 616,893
-------- -------- --------
Loans held for sale ....................... 2,050 6,609 49
Accrued interest receivable................ 7,093 6,925 6,826
Real estate owned.......................... 2,581 547 1,335
Land acquired for development and resale... 5,989 9,483 8,858
Property and equipment..................... 10,023 10,247 10,291
Other assets............................... 12,564 11,000 13,161
-------- -------- --------
Total assets......................... $960,745 $908,919 $926,071
-------- -------- --------
-------- -------- --------
Liabilities and Shareholders' Equity
Liabilities:
Deposits................................ $693,143 $682,693 $736,642
Advances from Federal Home Loan Bank of
Pittsburgh............................ 100,550 109,598 56,598
Other borrowed money.................... 83,115 33,403 51,685
Advance payments by borrowers for taxes
and insurance......................... 769 1,252 2,104
Other liabilities....................... 5,831 10,139 8,526
-------- -------- --------
Total liabilities.................... 883,408 837,085 855,555
-------- -------- --------
Shareholders' equity:
Serial preferred, $1 par value; 2,000,000
shares authorized and unissued....... -- -- --
Common stock, $1 par value; 13,000,000
shares authorized; 5,420,716,
5,291,157 and 5,291,157 shares issued 5,421 5,291 5,291
Additional paid-in capital.............. 38,687 37,384 37,390
Retained earnings....................... 34,003 30,840 29,156
Valuation adjustment for debt securities
net of taxes......................... (774) (1,681) (1,321)
-------- -------- --------
Total shareholders' equity.............. 77,337 71,834 70,516
-------- -------- --------
Total liabilities and shareholders'
equity............................... $960,745 $908,919 $926,071
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
- -----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable, net................... $ 14,242 $ 12,809
Investment securities................... 3,928 4,132
Interest-bearing deposits............... 149 48
--------- ---------
Total interest income............. 18,319 16,989
--------- ---------
Interest expense:
Deposits................................ 6,447 6,687
Short-term borrowings................... 2,282 1,651
Long-term borrowings.................... -- 251
--------- ---------
Total interest expense............ 8,729 8,589
--------- ---------
Net interest income............... 9,590 8,400
--------- ---------
Provision for loan losses..................... 856 537
--------- ---------
Net interest income after provision
for loan losses...................... 8,734 7,863
--------- ---------
Non-interest income:
Fees and service charges................ 618 408
Gain (loss) on sale of:
Loans held for sale................... 120 68
Investment securities available for
sale................................. 157 63
Real estate owned..................... 3 14
Rental income........................... 58 49
Other................................... 207 70
--------- ---------
Total non-interest income.......... 1,163 672
--------- ---------
Non-interest expenses:
Salaries and employee benefits.......... 2,772 2,615
Occupancy and equipment................. 1,400 1,205
Federal insurance premiums.............. 99 255
FDIC special insurance assessment....... -- 2,713
Other................................... 1,437 1,146
--------- ---------
Total non-interest expenses........ 5,708 7,934
--------- ---------
Income before income taxes.............. 4,189 601
Income taxes............................ 1,419 114
--------- ---------
Net Income......................... $ 2,770 $ 487
--------- ---------
--------- ---------
Earnings per share:
Primary and fully diluted.................... $ .49 $ .09
Weighted average number of shares
outstanding................................. 5,544,498 5,416,546
Dividends declared per share................. $ .17 $ .17
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable, net................... $ 41,027 $ 36,338
Investment securities................... 11,663 11,975
Interest-bearing deposits............... 348 240
--------- ---------
Total interest income............. 53,038 48,553
--------- ---------
Interest expense:
Deposits................................ 20,146 19,865
Short-term borrowings................... 5,245 3,672
Long-term borrowings.................... 304 981
--------- ---------
Total interest expense............ 25,695 24,518
--------- ---------
Net interest income............... 27,343 24,035
--------- ---------
Provision for loan losses..................... 2,574 1,372
--------- ---------
Net interest income after provision
for loan losses...................... 24,769 22,663
--------- ---------
Non-interest income:
Fees and service charges................ 1,898 1,448
Gain (loss) on sale of:
Loans held for sale................... 240 163
Investment securities available for
sale................................ 704 216
Real estate owned..................... 47 14
Rental income........................... 171 192
Other................................... 738 458
--------- ---------
Total non-interest income......... 3,798 2,491
--------- ---------
Non-interest expenses:
Salaries and employee benefits.......... 8,606 7,509
Occupancy and equipment................. 4,158 3,621
Federal insurance premiums.............. 269 753
FDIC special insurance assessment....... -- 2,713
Other................................... 4,109 3,372
--------- ---------
Total non-interest expenses....... 17,142 17,968
--------- ---------
Income before income taxes.............. 11,425 7,186
Income taxes............................ 3,824 2,397
--------- ---------
Net Income........................ $ 7,601 $ 4,789
--------- ---------
--------- ---------
Earnings per share:
Primary and fully diluted..................... $ 1.37 $ .88
Weighted average number of shares
outstanding.................................. 5,529,156 5,412,343
Dividends declared per share.................. $ .51 $ .51
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- ----------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income................................. $ 7,601 $ 4,789
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation and amortization....... 1,845 1,829
(Gain) loss on sale of:
Loans held for sale............... (240) (163)
Investment securities available
for sale........................ (704) (216)
Real estate owned ................ (47) (14)
Provision for loan losses........... 2,574 1,372
Increase in accrued interest
receivable ........................ (267) (442)
Decrease in other assets............ 1,014 352
Increase (decrease) in other
liabilities........................ (2,705) 1,431
--------- ---------
Net cash provided from operating
activities....................... 9,071 8,938
--------- ---------
Cash flows from investing activities:
Investment securities available for sale:
Purchases................................ (32,383) (47,369)
Maturities............................... 17,503 11,294
Sales.................................... 61,616 22,532
Investment securities:
Purchases................................ (52,799) (36,659)
Maturities............................... 19,224 20,303
Loans receivable:
Originations, net of repayments.......... (25,301) (85,430)
Loans held for sale:
Originations, net of repayments.......... (17,928) (5,527)
Sales.................................... 14,078 5,895
Proceeds from sale of land acquired for
development and resale................... 2,975 2,140
Increase in land acquired for development
and resale............................... (106) (1,218)
Purchase of property and equipment......... (1,303) (1,510)
Increase in real estate owned.............. 927 2
Proceeds from sale of real estate owned.... 1,593 219
--------- ---------
Net cash used in investing activities...... (11,904) (115,328)
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits........ (43,499) 38,387
Borrowings from the Federal Home Loan Bank
of Pittsburgh........................... 766,900 1,260,550
Repayments of borrowings from the Federal
Home Loan Bank of Pittsburgh ............ (722,948) (1,208,598)
Increase in other borrowed money........... 31,430 (4,219)
Decrease in advance payments by
borrowers taxes and insurance............ (1,335) (1,151)
Net proceeds from issuance of common stock. 758 201
Cash dividends paid........................ (2,747) (1,896)
--------- ---------
Net cash provided from financing
activities........................... 28,559 83,274
--------- ---------
Net change in cash and cash equivalents 25,726 23,116
--------- ---------
Cash and cash equivalents:
Beginning of period....................... 32,464 52,890
--------- ---------
End of period............................. $ 58,190 $ 29,774
--------- ---------
--------- ---------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................. $ 26,898 $ 20,353
--------- ---------
--------- ---------
Income taxes......................... 4,133 1,862
--------- ---------
--------- ---------
Non-cash investing activity consist of:
Securitization of residential loans.. $ 17,798 $ --
--------- ---------
--------- ---------
Transfer of loans to held for sale... $ 15,709 $ --
--------- ---------
--------- ---------
Transfer of loans to real estate owned $ 3,719 $ 335
--------- ---------
--------- ---------
Tax benefit associated with the
exercise of stock options......... $ 652 $ 74
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<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.
Business
Prime Bancorp, Inc. ("the Company") was incorporated under the laws of
the Commonwealth of Pennsylvania in 1996 for the purpose of converting the
Company's predecessor, incorporated in 1988, from a Delaware Corporation to
a Pennsylvania Corporation, while at the same time effecting the merger with
First Sterling Bancorp, Inc. The Company is regulated as a bank holding
company. Prior to October 1, 1997, the Company's principal subsidiaries were
Prime Bank, and First Sterling Bank (the "Banks"), whose principal businesses
consists of attracting deposits and obtaining borrowings, then converting
those deposits and borrowings into various types of loans and investments.
The Company's corporate headquarters is in Fort Washington,
Pennsylvania. Its operations center is in northeast Philadelphia,
Pennsylvania. The Company's bank subsidiary has eight additional full
service branch offices in northeast Philadelphia, five full service branches
in Bucks County, Pennsylvania, seven full service branches in Montgomery
County, Pennsylvania, two in Delaware County, Pennsylvania, and one in
Chester County, Pennsylvania.
On October 1, 1997, the Company completed the merger between the Banks.
The combined entity is one commercial bank called Prime Bank. Since December
31, 1996, the Company has operated as a bank holding company.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned and majority-owned subsidiaries. The
Company's principal subsidiaries are the Banks. 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 net
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
nine month period ended September 30, 1997 are not necessarily indicative of
the results to be expected for the full year.
7
<PAGE>
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings Per Share. SFAS 128, which supersedes APB Opinion No. 15 ("APB
15"), Earnings Per Share, specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock. It replaces the presentation of primary EPS and,
unlike primary EPS, excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to
fully diluted EPS under APB 15. The Company will adopt SFAS 128 as of
December 31, 1997. Management does not expect SFAS 128 to have a material
effect on the EPS of the Company.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS 130, establishes
standards for reporting and presentation of comprehensive income and its
components in financial statements. The Company will adopt SFAS 130 as of
December 31, 1997. Management does not expect SFAS 130 to have a material
effect on the consolidated financial statements of the Company.
In June 1997, FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), Financial Reporting for Segments of a Business
Enterprise. SFAS 131 establishes standards for the reporting, disclosure and
presentation of the Company's operating segments, products and services,
geographic areas, and major customers. SFAS 131 supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated
subsidiaries. The Company will adopt SFAS 131 as of December 31, 1997.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Assets of the Company increased 3.7% or $34.6 million from $926.1
million at December 31, 1996 to $960.7 million at September 30, 1997. This
increase is primarily attributable to an increase of $25.7 million in cash
and cash equivalents. Investment securities increased $5.9 million and loans
receivable, net increased by $3.3 million which is partially offset by a
decrease in non-earning assets.
The Company's liabilities increased by 3.3% or $27.8 million, from
$855.6 million at December 31, 1996 to $883.4 million at September 30, 1997.
This increase was primarily due to an increase in borrowings from the Federal
Home Loan Bank of Pittsburgh of $44.0 million and other borrowed money of
$31.4 million which is partially off set by decreases in deposits of $43.5
million, advance payments by borrowers for taxes and insurance and other
liabilities. The decrease in deposits is the result of a run-off of higher
rate certificates of deposit and replacing those funds with lower cost
borrowings.
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. The Company's principal sources of funds are deposits,
principal repayments on loans, proceeds from the sale of loans, funds from
operations, advances from the FHLB of Pittsburgh and other borrowed money.
Cash flows used in investing activities were $12.1 million for the nine
months ended September 30, 1997 compared to $115.4 million for the same
period in 1996. This change was primarily attributable to a decrease in loan
originations net of repayments to $25.3 million from $85.4 million in 1996,
securitization of $17.8 million of residential loans and the increase in the
origination of residential loans for sale in the secondary market. Sales of
investment securities increased to $61.6 million in 1997 from $22.5 million
in 1996.
Cash flows provided from financing activities were $28.6 million for the
nine months ended September 30, 1997 compared to $83.3 million for the same
period in 1996. This change is primarily attributable to a decrease in
deposits of $43.5 million in 1997 compared to an increase of $38.4 million in
1996 which was offset by an increase in net borrowings from the Federal Home
Loan Bank of Pittsburgh of $44.0 million in 1997 compared to an increase of
$51.9 million in 1996.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources - Continued
Cash flows from operating activities provided $9.2 million and $9.0
million for the nine months ended September 30, 1997 and 1996, respectively.
This increase is primarily due to an increase in net income and the provision
for loan losses and a decrease in other assets partially offset by a decrease
in other liabilities of $2.7 million in 1997 compared to an increase of $1.4
million in 1996.
Capital
The Federal Deposit Insurance Corporation has adopted risk-based capital
and leverage ratio requirements for non-member insured banks such as Prime
Bank. At September 30, 1997, Prime Bank met each of its capital
requirements. The table below sets forth the minimum capital ratio
applicable to Prime Bank, together with the actual dollar amounts and
percentages of capital for Prime Bank in each category at September 30, 1997:
<TABLE>
<CAPTION>
Required Prime Bank
Capital Requirement Ratio Amount Ratio
---------- ---------------
<S> <C> <C> <C>
Risk-Based Capital
Tier 1 Ratio 4.00% $46,390 9.69%
Total Capital Ratio 8.00% 52,379 10.94%
Tier 1 Leverage Ratio 4.00%/5.00% 46,390 6.91%
</TABLE>
First Sterling Bank is a member of the Federal Reserve System which 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%.
At September 30, 1997, First Sterling Bank met each of its regulatory
capital requirements. The table below sets forth the minimum capital ratios
applicable to First Sterling Bank, together with the actual dollar amounts
and percentages of capital for First Sterling Bank in each category at
September 30 1997:
<TABLE>
<CAPTION>
Required First Sterling
Capital Requirement Ratio Amount Ratio
--------- ----------------
<S> <C> <C> <C>
Primary Capital Ratio 5.50% $19,645 8.72%
Total Capital Ratio 6.00% 19,645 8.72%
The Federal Reserve Bank has adopted risk-based capital and leverage
ratio requirements for bank holding companies such as the Company. At
September 30, 1997, the Company meets all regulatory capital requirements.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Income
The Company reported net income of $7.6 million and $2.8 million for the
nine months and three months ended September 30, 1997. This represents an
increase of $2.8 million and $2.3 million when compared to the same periods
in 1996. The nine month and three month increase was primarily attributable
a one time charge in 1996 associated with the BIF/SAIF recapitalization plan
of $2.7 million pre-tax or $1.6 million after tax. Net income for the nine
months and three months ended September 30, 1996 would have been $6.5 million
and $2.2 million, respectively if the BIF/SAIF charge was excluded. Net
interest income after the provision for loan losses increased $2.1 million
and $871 thousand for the nine months and three months ended September 30,
1997 when compared to the same periods in 1996.
On a fully diluted per share basis net income increased to $1.37 and
$0.49 for the nine months and three months ended September 30, 1997 when
compared to $0.88 and $0.09 for the same period in 1996. Fully diluted
earnings per share would have been $1.29 and $0.42 if the one time BIF/SAIF
charge was excluded. The Company's return on average assets was 1.08% and
1.16% for the nine months and three months ended September 30, 1997 compared
to 0.75% and 0.22% for the same periods in 1996. Return on average assets
before the one time BIF/SAIF charge was 1.00% and 0.94% for the nine months
and three months ended September 30, 1996.
Net Interest Income
The major component of the Company'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 $27.3 million and $9.6 million for the
nine months and three months ended September 30, 1997. This represents a
13.8% and 14.2% increase when compared to net interest income of $24.0
million and $8.4 million for the same periods in 1996.
The net interest margin increased to 4.20% and 4.36% for the nine months
and three months ended September 30, 1997 from 4.07% and 4.07% for the same
period in 1996. The increase is primarily the result of lower funding costs.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income - Continued
The table below illustrates the changes in the net interest rate margin
and interest rate spread for the nine months and three months ended September
30, 1997 and 1996.
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Average Average
Balance Interest Yield Balance Interest Yield
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $633,012 $14,242 9.00% $577,020 $12,809 8.88%
Investment securities 254,356 4,152 6.53% 255,744 4,255 6.66%
-------- ------- ----- -------- ------- -----
Total interest-earning
assets 887,368 18,394 8.29% 832,764 17,064 8.20%
-------- ------- ----- -------- ------- -----
Interest-bearing liabilities:
Deposits 694,865 6,447 3.71% 690,312 6,687 3.87%
Borrowings 168,972 2,282 5.40% 119,588 1,902 6.36%
-------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 863,837 8,729 4.04% 809,900 8,589 4.24%
-------- ------- ----- -------- ------- -----
Net interest rate spread 4.25% 3.96%
----- -----
----- -----
Net interest rate margin 4.36% 4.07%
----- -----
----- -----
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
Average Average
Balance Interest Yield Balance Interest Yield
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $625,255 $41,027 8.75% $543,071 $36,338 8.92%
Investment securities 249,225 12,236 6.55% 251,770 12,440 6.59%
-------- ------- ----- -------- ------- -----
Total interest-earning
assets 874,480 52,263 8.12% 794,841 48,778 8.18%
-------- ------- ----- -------- ------- -----
Interest-bearing liabilities:
Deposits 713,477 20,146 3.76% 675,743 19,865 3.92%
Borrowings 136,474 5,549 5.42% 95,114 4,653 6.52%
-------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 849,951 25,695 4.03% 770,857 24,518 4.24%
-------- ------- ----- -------- ------- -----
Net interest rate spread 4.09% 3.94%
----- -----
----- -----
Net interest rate margin 4.20% 4.07%
----- -----
----- -----
</TABLE>
* Tax free income is calculated on a tax equivalent basis.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Provisions for Loan Losses
The provision for loan losses was $2.6 million and $856 thousand for the
nine months and three months ended September 30, 1997 compared to $1.4
million and $537 thousand for the same periods in 1996. The allowance for
loan losses was $8.8 million and $7.2 million at September 30, 1997 and
December 31, 1996, respectively. The Company had net charge-offs of $945
thousand for the nine months ended September 30, 1997, compared to $714
thousand for the comparable period in 1996.
Management considers a variety of factors when establishing the
allowance, recognizing that an inherent risk of loss always exists in the
lending process. Consideration is given to the impact of current economic
conditions, diversification of the loan portfolio, historical loss
experience, delinquency statistics, results of detailed loan and regulatory
reviews, borrowers' financial and managerial strengths, the adequacy of
underlying collateral, and other relevant factors.
The following is a summary of the activity in the allowance for loan
losses for the nine months ended September 30, 1997 and 1996 (Dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Balance at the beginning of period $ 7,206 $ 6,082
Provision for loan losses 2,574 1,372
Recoveries 443 116
Losses charged against allowance (1,388) (830)
-------- --------
Balance at the end of period $ 8,835 $ 6,740
-------- --------
-------- --------
</TABLE>
Credit Risk
The Bank manages credit risk by maintaining diversification in its loan
portfolio, by establishing and enforcing rigorous underwriting standards, by
intensive collection efforts, and by establishing and performing regular loan
classification reviews of loans by the loan review committee.
Asset Quality
Non-performing assets, which include non-accruing loans and real estate
owned, totaled $8.5 million at December 31, 1996 compared to $7.6 million at
September 30 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth non-performing assets as of September 30,
1997 and 1996, and December 31, 1996 (Dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
- ------------------------------------------------------------------------
1997 1996 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans (1):
Residential loans $ 1,517 $ 958 $ 1,003
Construction 461 4,181 3,162
Consumer loans 444 309 243
Commercial loans 2,694 4,691 2,751
------- ------- -------
Total non-accrual loans 5,116 10,139 7,159
Real estate owned 2,581 547 1,335
------- ------- -------
Total non-performing assets $ 7,697 $10,686 $ 8,494
------- ------- -------
------- ------- -------
Total non-performing loans to
loans receivable, net 0.82% 1.75% 1.16%
------- ------- -------
------- ------- -------
Total non-performing assets to
total assets 0.80% 1.18% 0.92%
------- ------- -------
------- ------- -------
Ratio of allowance for loan
losses to non-performing loans 172.69% 66.48% 100.66%
------- ------- -------
------- ------- -------
</TABLE>
(1) Statistics do not include the impact of a 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, 2.2% and 1.4% at
September 30, 1997, $19.7 million, 3.4% and 2.2% at September 30, 1996 and
$17.0 million, 2.8% and 1.8% at December 31, 1996 if the condominium
project was included in non-performing assets.
Non-Interest Income
Non-interest income increased by $1.3 million and $491 thousand for the
nine months and three months ended September 30, 1997 to $3.8 million and
$1.2 million in 1997 from $2.5 million and $672 thousand for the comparable
periods in 1996. The increase for the nine month period was primarily
attributable to an increase of $488 thousand realized on the sale of
investment securities, a $450 thousand increase in fees and service charges,
and increases in other income. The increase for the three month period is
primarily attributable to an increase in fees and service charges and the
gain on sale of loans and investment securities. The Company has instituted
a strategy of selling all new residential mortgage originations to the
secondary market.
Non-Interest Expense
The primary component of other expenses is salaries and employee
benefits, which increased 14.6% and 6.0% for the nine months and three months
ended September 30, 1997 from $7.5 million and $2.6 million in 1996 to $8.6
million and $2.8 million in 1997. This increase is primarily attributable to
additional personnel in the commercial and commercial real estate lending
operations which resulted in increased loan volume and income.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Expense - Continued
Occupancy and equipment expense increased 14.8% to $4.2 million and
16.2% to $1.4 million for the nine months and three months ended September
30, 1997 from $3.6 million and $1.2 million for the same periods in 1996.
The increase is primarily attributable to the expansion of the branch network
and the technological enhancements involving the upgrading of data processing
and telecommunication systems. This has enabled the Company to offer new
products to our customers such as home banking, cash management, Prime Access
our fully automated 24 hour customer service telephone system and a Web Site
to offer investor information, as well as bank news.
Federal deposit insurance premiums decreased to $269 thousand and $99
thousand for the nine months and the three months ended September 30, 1997
from $753 thousand and $255 thousand for the same periods in 1996. This
decrease is primarily attributable to a decrease in Prime Bank's assessment
rate from 23 basis points in 1996 to 6 basis points in 1997 as a result of
federal legislation which became effective in the fourth quarter of 1996.
The FDIC special deposit insurance assessment decreased for the nine
months and three months ended September 30, 1996 by $2.7 million. The
assessment was a one time charge to recapitalize the SAIF Fund.
Other expenses increased to $4.1 million and $1.4 million for the nine
months and the three months ended September 30, 1997 from $3.4 million and
$1.1 million for the same periods in 1996. This increase is primarily
attributable to increases in advertising, legal and office supplies.
Dividend Policy
The Board of Directors of the Company declared a cash dividend of $0.17
per share of common stock on September 17, 1997, payable November 1, 1997, to
shareholders of record on October 5, 1997. It is currently the Board's
intention to continue to pay dividends on a quarterly basis. This is the
Company's thirty fifth 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 dividends 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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Under Pennsylvania banking law, the Bank may declare and pay dividends
only out of accumulated net earnings, and a dividend may not be declared or
paid out of its surplus. Furthermore, under federal and state banking laws,
an institution may be prevented from paying dividends under certain
circumstances when it is not adequately capitalized. In addition, the Bank
(whose predecessor converted in 1988 from a mutual savings and loan
association to a stock savings bank) may not be permitted to declare or pay
a dividend if the effect of the dividend would be to reduce its regulatory
capital below the amount required for its liquidation account.
16
<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 to enforce loan obligations of its borrowers and to foreclose
upon or repossess collateral securing loans.
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
See the Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1997 for a report on the Company's Annual Shareholders' Meeting
held April 23, 1997.
Item 5 Other Information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
Form 8-K filed with the Securities and Exchange
Commission on 10/10/97.
17
<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.
Prime Bancorp, Inc.
Date: November 14, 1997 /s/ James J. Lynch
----------------- -------------------------
James J. Lynch
President and Chief
Executive Officer
Date: November 14, 1997 /s/ Frank H. Reeves
----------------- -------------------------
Frank H. Reeves
Senior Vice President and
Chief Accounting Officer
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,731
<INT-BEARING-DEPOSITS> 25,059
<FED-FUNDS-SOLD> 2,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,722
<INVESTMENTS-CARRYING> 144,341
<INVESTMENTS-MARKET> 145,504
<LOANS> 629,027
<ALLOWANCE> 8,835
<TOTAL-ASSETS> 960,745
<DEPOSITS> 693,143
<SHORT-TERM> 183,665
<LIABILITIES-OTHER> 6,600
<LONG-TERM> 0
0
0
<COMMON> 5,421
<OTHER-SE> 71,916
<TOTAL-LIABILITIES-AND-EQUITY> 960,745
<INTEREST-LOAN> 41,027
<INTEREST-INVEST> 11,663
<INTEREST-OTHER> 348
<INTEREST-TOTAL> 53,038
<INTEREST-DEPOSIT> 20,146
<INTEREST-EXPENSE> 25,695
<INTEREST-INCOME-NET> 27,343
<LOAN-LOSSES> 2,574
<SECURITIES-GAINS> 704
<EXPENSE-OTHER> 17,142
<INCOME-PRETAX> 11,425
<INCOME-PRE-EXTRAORDINARY> 11,425
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,601
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 8.12
<LOANS-NON> 5,116
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 535
<ALLOWANCE-OPEN> 7,206
<CHARGE-OFFS> 1,388
<RECOVERIES> 443
<ALLOWANCE-CLOSE> 8,835
<ALLOWANCE-DOMESTIC> 7,632
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,203
</TABLE>
