UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission File Number: 0-17286
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PRIME BANCORP, INC.
-------------------------------------------------------------
(Exact name or registrant as specified in its charter)
Pennsylvania 23-2860688
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7111 Valley Green Road, Fort Washington, PA 19111
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 836-2400
--------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
[X] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of
the registrant is approximately $98.5 million.(1)
<PAGE>
The number of shares of the registrant's Common Stock outstanding as of
March 24, 1997 was 5,380,990 shares.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<S> <C>
Part II Part III
Certain portions of the Annual Report Certain portions of the Proxy Statement 1997
to Shareholders for the year ended March 24, 1997
December 31, 1996
</TABLE>
(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of Common Stock outstanding, reduced by the number of
shares of Common Stock held by executive officers, directors and
stockholders owning in excess of 10% of the registrant's Common Stock
multiplied by the closing price for the Common Stock on the National
Association of Securities Dealers National Market System on March 24,
1997. The information provided shall in no way be construed as an
admission that any person whose holdings are included in this figure is
an affiliate of the registrant and any such admission is hereby
disclaimed. The information provided herein is included solely for
record keeping purposes of the Securities and Exchange Commission.
<PAGE>
Item 1. Business
Introduction
Prime Bancorp, Inc. ("the Company") was incorporated under the laws of
the State of Pennsylvania in 1996 for the purpose of converting the Company's
predecessor from a Delaware Corporation to a Pennsylvania Corporation, while at
the same time effecting the merger with First Sterling Bancorp, Inc. The Company
will operate as both a bank holding company and a savings and loan holding
company. The Company's principal subsidiaries are Prime Bank and First Sterling
Bank (the "Banks") whose principal business consists of attracting deposits and
obtaining borrowings, then converting those deposits and borrowings into various
types of loans and investments.
The Company's operations are headquartered in northeast Philadelphia,
Pennsylvania with 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.
Effective March 19, 1996, the Company's subsidiary, Prime Bank
("Prime"), a federal savings bank, converted into a Pennsylvania chartered stock
savings bank with the legal name, "Prime Bank, a savings bank". After the
conversion, Prime continues to do business under the name, "Prime Bank". After
the conversion, the Bank's deposits continue to be insured by the Savings
Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC"). See "Recent Legislative and Regulatory
Developments on page 17. Prime continues to meet all applicable "qualified
thrift lender" tests. In the opinion of the Company's management, there are not
likely to be any material differences in the impact of Pennsylvania banking laws
and regulations on the ordinary activities of the bank, as compared to federal
laws and regulations applicable to federal savings associations.
On December 31, 1996, the Company acquired First Sterling Bancorp, Inc.
in a transaction structured as a pooling of interest. The financial data for
1996 and prior years reflects the combined data to reflect the pooling of
interest accounting. Each outstanding share of common stock of FSB was exchanged
for one share of the Company. This resulted in the issuance of approximately
1.66 million shares of Company stock. First Sterling assets and net worth at
December 31, 1996 was $235.0 million and $13.5 million, respectively.
Business
The Company follows a community bank strategy which focuses on
providing individuals, businesses, and communities with high quality basic
banking services. Basic banking means lending money, gathering money and other
complementary fee generating services. Unlike the traditional thrift whose
primary products are related to residential real estate, the community bank
maintains a much greater degree of balance sheet diversification. Loans are
spread among consumer, commercial, construction and residential mortgages.
Deposits are gathered along four money lines which are checking, savings, retail
CDs and jumbo CDs.
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
- -----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.21% 1.38%(1) 1.02% 0.97% .45%(2)
Return on average equity 11.53% 13.88%(1) 11.57% 11.89% 5.79%(2)
Average equity to average assets 10.49% 9.93% 8.80% 8.18% 7.86%(2)
Book value per share $10.50 $11.70 $11.19 $13.15 $13.33 (2)
Dividends per share $ 0.37 $ 0.50 $ 0.54 $ 0.62 $ 0.68
Dividend payout ratio 35.24% 39.37% 42.86% 44.93% 91.89%
===========================================================================================================
</TABLE>
(1) Includes the cumulative effect on prior years of change in accounting
principle.
(2) Includes a one time FDIC special insurance assessment of $1.66 million
net of taxes, restructuring charges of $1.70 million net of taxes and
$620 thousand of additional loan loss provision net of taxes. Excluding
these charges, return on assets, return on equity, average equity to
average assets, and book value per share would have been .91%, 11.55%,
8.01% and $14.08 for the twelve months ended December 31, 1996,
respectively.
1
<PAGE>
Lending Activities
The Company's net loan portfolio totaled $616.9 million at December 31,
1996. This represented approximately 66.6% of its total assets. At that date,
approximately 38.1% of the loan portfolio consisted of loans secured by existing
one-to-four family residential properties and the remaining balance consisted
principally of multi-family residential and commercial real estate loans (21.3%
of the net loan portfolio), construction loans, net of loans in process (7.0%),
consumer loans (16.4%) and commercial business loans (17.6%).
2
<PAGE>
The following table sets forth detailed information concerning the
composition of the loan portfolios as of the dates specified for the Company.
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
- - -------------------------------------------------------------------------------
1992 1993 1994
---- ---- ----
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Permanent first mortgage loans:
One-to-four family $ 156,886 42.6% $ 168,345 41.7% $ 185,409 42.0%
Multi-family 5,394 1.5% 8,148 2.0% 8,735 2.0%
Commercial 59,488 16.2% 73,726 18.3% 88,767 20.1%
--------- ----- --------- ----- --------- -----
Total permanent loans 221,768 60.3% 250,219 62.0% 282,911 64.1%
Allowance for loan losses (1,252) -0.3% (1,522) -0.4% (1,856) -0.4%
--------- ----- --------- ----- --------- -----
Total permanent first mortgage
loans, net 220,516 60.0% 248,697 61.6% 281,055 63.7%
Construction 55,394 15.0% 60,665 15.0% 55,061 12.1%
Loans in process (15,488) -4.2% (17,662) -4.4% (18,907) -3.9%
--------- ----- --------- ----- --------- -----
Total construction loans, net of LIP 39,906 10.8% 43,003 10.6% 36,154 8.2%
Allowance for loan losses (878) -0.2% (959) -0.2% (1,234) -0.3%
--------- ----- --------- ----- --------- -----
Total construction loans, net 39,028 10.6% 42,044 10.4% 34,920 7.9%
Commercial business loans 61,121 16.6% 61,863 15.3% 65,045 14.7%
Allowance for loan losses (701) -0.2% (1,740) -0.4% (1,301) -0.3%
--------- ----- --------- ----- --------- -----
Total commercial loans, net 60,420 16.4% 60,123 14.9% 63,744 14.4%
Consumer loans:
Personal/lines of credit 20,852 5.7% 19,976 4.9% 21,582 4.9%
Second mortgage/equity 20,077 5.4% 25,829 6.4% 31,492 7.1%
Auto 5,933 1.6% 4,900 1.2% 7,110 1.6%
Education 1,661 0.5% 2,230 0.6% 1,697 0.4%
Home improvement and other 2,205 0.6% 1,959 0.5% 1,419 0.3%
Savings account 1,029 0.2% 1,135 0.3% 1,464 0.3%
--------- ----- --------- ----- --------- -----
Total consumer loans 51,757 14.0% 56,029 13.9% 64,764 14.6%
Allowance for loan losses (656) -0.2% (623) -0.2% (1,035) -0.2%
--------- ----- --------- ----- --------- -----
Total consumer loans, net 51,101 13.8% 55,406 13.7% 63,729 14.4%
Total unamortized loan origination
fees and costs (2,205) -0.6% (1,816) -0.4% (1,406) -0.3%
Allowance for loan loss (unallocated) (899) -0.2% (761) -0.2% (641) -0.1%
--------- ----- --------- ----- --------- -----
Total loans receivable, net $ 367,961 100.0% $ 403,693 100.0% $ 441,401 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1995 1996
---- ----
Amount % Amount %
-------- ----- -------- ------
<S> <C> <C> <C> <C>
Permanent first mortgage loans:
One-to-four family $216,163 43.5% $235,023 38.1%
Multi-family 9,303 1.9% 10,783 1.7%
Commercial 102,958 20.7% 120,841 19.6%
-------- ----- -------- -----
Total permanent loans 328,424 66.1% 366,647 59.4%
Allowance for loan losses (1,728) -0.3% (2,081) -0.2%
-------- ----- -------- -----
Total permanent first mortgage
loans, net 326,696 65.8% 364,566 59.2%
Construction 51,564 9.4% 86,702 14.0%
Loans in process (21,683) -3.4% (42,104) -6.8%
-------- ----- -------- -----
Total construction loans, net of LIP 29,881 6.0% 44,598 7.2%
Allowance for loan losses (696) -0.1% (918) -0.2%
-------- ----- -------- -----
Total construction loans, net 29,185 5.9% 43,680 7.0%
Commercial business loans 68,777 13.8% 110,840 18.0%
Allowance for loan losses (1,954) -0.4% (2,251) -0.4%
-------- ----- -------- -----
Total commercial loans, net 66,823 13.4% 108,589 17.6
Consumer loans:
Personal/lines of credit 20,063 4.0% 27,296 4.4%
Second mortgage/equity 40,618 8.2% 44,229 7.2%
Auto 10,046 2.0% 22,499 3.7%
Education 2,992 0.6% 3,504 0.6%
Home improvement and other 1,745 0.4% 3,906 0.6%
Savings account 1,119 0.2% 907 0.1%
-------- ----- -------- -----
Total consumer loans 76,583 15.4% 102,341 16.6%
Allowance for loan losses (1,066) -0.2% (963) -0.2%
-------- ----- -------- -----
Total consumer loans, net 75,517 15.2% 101,378 16.4%
Total unamortized loan origination
fees and costs (549) -0.1% (327) 0.0%
Allowance for loan loss (unallocated) (638) -0.1% (993) -0.2%
-------- ----- -------- -----
Total loans receivable, net $497,034 100.0% $616,893 100.0%
======== ====== ======== =====
</TABLE>
3
<PAGE>
Contractual Maturities
The following table sets forth the contractual maturities of the
Company's loan portfolio as of December 31, 1996 by categories of loans.
Adjustable-rate loans are included in the period in which they mature rather
than in the period in which they are next scheduled to adjust, and fixed-rate
loans are included in the period in which they mature without regard to any
expected prepayments (dollars in thousands)(1).
<TABLE>
<CAPTION>
Within 1 Through Over Five
1 Year 5 Years Years Total
-------- --------- --------- -----
<S> <C> <C> <C> <C>
Construction loans $ 33,819 $ 10,779 $ -- $ 44,598
Commercial real estate and business loans 66,153 86,929 89,382 242,464
-------- -------- ------- --------
$ 99,972 $ 97,708 $ 89,382 $287,062
======== ======== ======= ========
Loans with predetermined interest rate 16,808 31,656 21,304 69,773
Loans with variable interest rate 83,164 66,052 68,073 217,289
-------- -------- ------- --------
$ 99,972 $ 97,708 $ 89,382 $287,062
======== ======== ======= ========
</TABLE>
(1) Excluded residential mortgages, home equity, and consumer loans.
The following table sets forth information regarding non-accrual loans
and real estate owned held by the Company at the date indicated (dollars in
thousands).
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995* 1996*
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Single-Family residential $1,594 $1,913 $1,859 $1,786 $1,003
Multi-Family residential and
commercial real estate loans -- -- -- -- 3,087
------ ------ ------ ------ ------
Total residential loans 1,594 1,913 1,859 1,786 4,090
------ ------ ------ ------ ------
Consumer loans 1,512 1,698 2,956 517 243
Commercial real estate loans 3,037 3,129 2,153 2,535 2,751
------ ------ ------ ------ ------
Total non-accrual loans $6,143 $6,740 $6,968 $4,838 $7,084
====== ====== ====== ====== ======
Total non-accrual loans to
loans receivable, net 1.66% 1.66% 1.57% .97% 1.15%
====== ====== ====== ====== ======
Total real estate owned, net of
allowance for REO loss 479 392 323 419 1,335
====== ====== ====== ====== ======
Total non-accrual loans and real
estate owned to total assets 1.29% 1.19% 0.99% .64% 0.92%
====== ====== ====== ====== ======
</TABLE>
* Excludes the impact of the $8.5 million condominium project, which was
acquired by a deed in lieu of foreclosure and classified as land acquired for
development and resale.
At December 31, 1996, approximately $414,000 of interest would have
been recorded on loans accounted for on a non-accrual basis if such loans had
been current. No interest income was recognized on these loans during 1996,
since all cash received was applied against principal. All non-accrual loans are
considered to be impaired loans.
There were no loans which were contractually passed due 90 days or more
and still accruing for any period presented. Potential problems loans consist of
loans which are included in performing loans at December 31, 1996, but for which
potential credit problems of the borrowers have caused management to have
concerns as to the ability of such borrowers to comply with present repayment
terms. At December 31, 1996, such potential problem loans amounted to
approximately $3.2 million compared to approximately $3.0 million one year ago.
Allowance for Loan Losses
The allowance for loan losses is based on a periodic evaluation of the
portfolio and is maintained at a level that management considers adequate to
absorb losses known and inherent in the portfolio. Management considers a
variety of factors when establishing the allowance recognizing that an inherent
risk of loss always exists in the lending process. Consideration is given to the
impact of current economic conditions, diversification of the loan
4
<PAGE>
portfolio, historical loss experience, delinquency statistics, results of
detailed loan reviews, borrowers' financial and managerial strengths, the
adequacy of underlying collateral, and other relevant factors. The allowance for
loan losses is increased by the provision for loan losses and recoveries on
previously charged-off loans. While management uses available information to
establish the allowance for loan losses, future additions to the allowance for
loan losses may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require the Company recognize additions to the allowance for loan losses based
on their assessments of information which is available to them at the time of
their examination.
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $3,171 $4,386 $5,605 $6,067 $6,082
Charge-offs:
Real estate - construction (76) -- -- -- (813)
Real estate - mortgages (6) (48) (66) (118) (480)
Real estate - commercial (583) (201) (197) (17) --
Commercial business loans (436) (725) (614) (1,044) (1,119)
Personal/lines of credit (83) (120) (254) (239) (290)
Second mortgage/equity -- (6) (50) (21) (67)
Auto (8) (15) (70) (13) (78)
Education -- -- -- -- (41)
Home improvement and other -- -- -- -- (15)
Savings account -- -- (8) -- --
------ ------ ------ ------ ------
(1,192) (1,115) (1,259) (1,452) (2,903)
------ ------ ------ ------ ------
Recoveries:
Real estate - construction -- -- 4 -- --
Real estate - mortgages -- 23 62 7 20
Real estate - commercial -- -- -- 155 11
Commercial business loans 40 109 48 167 61
Personal/lines of credit 1 42 2 7 66
Second mortgage/equity -- -- -- -- --
Auto -- -- 9 2 24
Education 1 -- -- -- 7
Home improvement and other -- -- 2 -- 1
------ ------ ------ ------ ------
42 174 127 338 190
------ ------ ------ ------ ------
Net charge-offs (1,150) (941) (1,132) (1,114) (2,713)
------ ------ ------ ------ ------
Provision charged to operations 2,163 2,160 1,594 1,129 3,837
------ ------ ------ ------ ------
Acquired allowance for loan losses
from the Bank of Delaware Valley 202 -- -- -- --
Balance at the end of period $4,386 $5,605 $6,067 $6,082 $7,206
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.34% 0.24% 0.27% 0.24% 0.49%
====== ====== ====== ====== ======
</TABLE>
Investment Activities
The Company has the authority to invest in various types of securities,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and thrift
institutions, bankers' acceptances and federal funds. Subject to various
regulatory restrictions, the Company may also invest a portion of their assets
in commercial paper and corporate debt securities and in mutual funds.
5
<PAGE>
At December 31, 1996, 25.5% of the total assets of the Company were
investment securities. See Note 5 of the Notes to the Company's Consolidated
Financial Statements.
The investment portfolio, cash and deposits in other institutions
provide not only a source of income but also a source of liquidity to meet
lending demands, fluctuations in deposit flows and required liquidity levels.
The Company have in the past used such excess liquidity to meet loan demand. The
relative mix of investment securities and loans in the Company's portfolio is
dependent upon the attractiveness of yields available on loans as compared to
investment securities as well as the relative safety of the investment
securities and loans and the liquidity needs of the Company. The securities
constituting the Bank's investments are limited primarily to U.S. Government and
U.S. Government agency obligations.
Certain investment securities were reclassified in December, 1995, from
held to maturity to available for sale, in conjunction with the issuance of "A
Guide to Implementation of Statement 115 Accounting for Debt and Equity
Securities," by the Financial Accounting Standards Board in 1995.
The following table presents the composition of the investment
securities portfolio of the Company at the dates indicated (dollars in
thousands).
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Fair Fair Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity
Investment Securities:
State and Municipal $ 6,163 $ 5,880 $ 400 $ 431 $ 6,739 $ 6,771
U.S. Government & U.S
Government Agency
Obligations 15,120 15,069 11,830 11,971 -- --
Small Business Association
Certificates 4,254 4,253 -- -- -- --
Israel Bonds -- -- -- -- 100 100
Marketable Equity Securities:
FHLB of Pittsburgh stock -- -- 4,120 4,120 5,728 5,728
Federal Reserve Bank -- -- 243 243 243 243
FNMA Stock -- -- 3 3 3 3
Atlantic Central Bankers
Bank Stock -- -- 75 75 75 75
Financial Institutions
Insurance Group Stock -- -- 50 50 -- --
Valley Forge Investment
Companies, Inc. -- -- -- -- 100 100
Mortgage-Backed Securities:
GMNA Pass-Through
Certificates -- -- 217 213 136 137
FHLMC Pass-Through
Certificates -- -- 207 206 202 203
Collateralized Mortgage
Obligations -- -- 80,855 81,817 97,440 97,514
-------- -------- -------- -------- --------- --------
$ 25,537 $ 25,202 $ 98,000 $ 99,129 $110,766 $110,874
======== ======== ======== ======== ========= ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Fair Fair Fair
Cost Value Cost Value Cost Value
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Available for Sale
Investment Securities:
U.S. Government & U.S
Government Agency
Obligations $ 75,281 $ 72,588 $ 52,961 $ 53,562 $ 62,037 $ 62,028
Small Business Association
Certificates -- -- 17,233 17,287 8,340 8,309
Corporate Notes/Bonds 1,121 1,117 -- -- -- --
Certificates of Deposit 187 187 477 477 3,000 3,000
Marketable Equity Securities:
FHLB of Pittsburgh Stock 4,269 4,269 -- -- -- --
FNMA Stock 3 3 -- -- -- --
Atlantic Central Bankers
Bank Stock 75 75 -- -- -- --
Financial Institutions
Insurance Group Stock 50 50 -- -- -- --
Mortgage-Backed Securities:
GNMA Pass-Through
Certificates 15,720 14,755 11,773 11,769 10,174 10,178
FHLMC Pass-Through
Certificates 7,968 7,431 4,962 4,892 3,707 3,653
FNMA Pass-Through
Certificates 14,018 13,534 10,062 10,071 7,449 7,441
Mortgage Pass-Through
Obligations 178 170 158 158 -- --
Collateralized Mortgage
Obligations 92,079 85,557 28,615 27,849 31,939 30,819
-------- -------- -------- -------- --------- --------
$210,949 $199,736 $126,241 $126,065 $126,646 $125,428
======== ======== ======== ======== ========= ========
</TABLE>
Service Corporation Activities
Federal regulations permit a federally chartered thrift institution to
invest an amount up to 3% of its assets in the stock, obligations or other
securities of subsidiary service corporations engaged in certain activities,
provided that any investment in excess of 2% of the institution's assets is used
primarily for community, inner-city, and community development purposes. In
addition, under certain circumstances a federally chartered thrift institution
is authorized to invest up to 50% of its regulatory capital in conforming loans
to service corporations.
The Company presently conducts business through or have an investment
in five service corporations: Rowland Service Corporation ("Rowland"), Prime
Financial Inc. ("Prime Financial"), NEFA Corporation ("NEFA"), 723 Service
Corporation and 6524 Service Corporation.
Hatboro Manor: Hatboro Manor is a joint venture between Rowland and one
local developer involving the construction of a 15,000 square foot
professional condominium complex.
7
<PAGE>
Burholme Woods: Burholme Woods was established in June, 1988 for the
development and sale of forty-six single family twin homes in the
Burholme section of northeast Philadelphia.
Prime Financial Inc.: Prime Financial is a service corporation formed
to oversee full-service brokerage operations at the Bank.
NEFA Corporation: NEFA is a service corporation formed to acquire land
for development and resale.
723 Service Corporation: 723 Service Corporation was formed for the
acquisition of property for debts previously contracted by borrowers of
the Bank.
6524 Service Corporation: 6524 Service Corporation was formed for the
acquisition of property for debts previously contracted by borrowers of
the Bank.
At December 31, 1996, Prime Bank's aggregate debt and equity investment
in the service corporations and joint ventures in which it is participating was
$12.1 million. (2.00% of Prime Bank's total assets)
Prime Abstract Inc.
Prime Abstract Inc., a wholly owned subsidiary of the Company, is a
Delaware Corporation formed in 1988 for the purpose of performing title searches
within the Commonwealth of Pennsylvania. Prime Abstract receives income from the
title search business which it generates, while the actual title search is
performed by an associated entity. The net income of Prime Abstract is
immaterial to the consolidated financial results of the Company on a
consolidated basis.
Del-Prime, Inc.
Del-Prime, Inc., a wholly owned subsidiary of the Company, was
incorporated as a Delaware Corporation on November 8, 1989 to do business
exclusively in Delaware. The subsidiary holds tax-free municipal investment
securities.
Del-Prime Investments, Inc.
Del-Prime Investments, Inc., a wholly owned subsidiary of the Company,
was incorporated as a Delaware Corporation on November 28, 1994 to do business
exclusively in Delaware. The subsidiary was formed to hold taxable investments.
Sources of Funds
General
The sources of funds to be used in lending and for other general
business purposes of the Company are deposits, loan repayments, FHLB of
Pittsburgh advances and other borrowed funds. Deposit inflows and outflows are
influenced significantly by money market and general interest rate conditions,
although the Company has the ability to respond to market conditions through the
pricing of deposit accounts. The Company may also utilize advances from the FHLB
of Pittsburgh and other borrowed funds on a short-term basis to support expanded
lending activities.
Deposits
The Company has a stable base of core deposits, with approximately 8.6%
of its deposits held in passbook accounts which currently earn 2.05%. The
Company also offers short-term certificates of deposit and other deposit
alternatives that are more responsive to market conditions than passbook
deposits and longer maturity fixed-rate
8
<PAGE>
certificates. The core deposit base and overall variety of deposits allow the
Company to be competitive in obtaining funds and to respond with more
flexibility to the threat of disintermediation. The Company's deposits are
obtained primarily from the areas in Pennsylvania immediately surrounding its
offices.
The following table shows the maturity distribution of time deposits in
amounts of $100,000 or more at December 31, 1996 (dollars in thousands)
<TABLE>
<CAPTION>
Jumbo Other Time Total Time
Deposits Deposits Deposits
-------- ---------- ----------
<S> <C> <C> <C>
Three months or less $26,366 $ 9,575 $35,941
Over three months to six months 15,769 9,724 25,493
Over six months to twelve months 8,558 16,154 24,712
Over twelve months 3,381 3,713 7,094
------- ------- -------
$54,074 $39,166 $93,240
======= ======= =======
</TABLE>
The following table sets forth the deposit accounts of the Company in
dollar amounts and weighted average interest rates at the dates indicated
(dollars in thousands).
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
Weighted Weighted Weighted
Amount Average Amount Average Amount Average
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Passbook and club $ 67,887 2.04% $ 63,315 2.05% $ 63,022 2.05%
NOW and Super NOW 33,078 1.49% 37,602 1.46% 44,444 1.91%
Money market accounts 102,503 2.94% 113,110 3.69% 130,028 3.30%
Fixed-rate certificates 228,942 4.83% 257,045 5.30% 288,367 5.16%
Jumbo certificates 42,300 5.33% 48,929 5.74% 54,074 5.44%
Individual retirement
accounts (1) 62,263 5.43% 64,506 5.87% 61,940 5.79%
Commercial checking
accounts (2) 48,093 -- 59,799 -- 94,767 --
-------- ---- -------- ---- -------- ----
Total Deposits $585,066 $644,306 $736,642
======== ======== ========
</TABLE>
(1) Funds in IRA accounts are invested primarily in certificates of deposit.
(2) Non-interest bearing.
Borrowings
The FHLB System functions as a reserve credit facility for thrift
institutions and certain other home financing institutions. As a member of the
FHLB System, the Banks are required to own capital stock in the FHLB of
Pittsburgh and will be authorized to apply for advances on the security of such
stock and certain of its home mortgages and other assets (principally securities
which are obligations of, or guaranteed by, the United States Government)
provided certain creditworthiness standards have been met. Such advances may be
made pursuant to several different credit programs, each with its own interest
rate, maximum size of advance and range of maturities. Depending on the program,
limitations on the amount of such borrowings are based either on a percentage of
the Banks' capital or on the FHLB of Pittsburgh's assessment of the Bank's
creditworthiness. See "Regulation of the Banks' - Federal Home Loan Bank
System". At December 31, 1996, the Bank's had $56.6 million in borrowings from
the FHLB of Pittsburgh.
The Company uses borrowings and reverse repurchase agreements when
funds are not available from other sources at more attractive rates. In
addition, the Company has borrowed to match maturities of specific opportunities
(particularly commercial real estate loans) or to fund excess loan demand.
9
<PAGE>
The following table sets forth the borrowings of the Company at the
dates indicated (dollars in thousands).
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Advances from FHLB of Pittsburgh $24,694 $37,646 $37,598
Repo plus agreements with the
FHLB of Pittsburgh -- 20,000 19,000
Reverse repurchase agreements 55,146 37,622 51,685
Other 329 -- --
------- ------- --------
$80,169 $95,268 $108,283
======= ======= ========
</TABLE>
See Note 10 Other Borrowed Money on page 33 of the 1996 Annual Report
to Shareholders.
Employees
At December 31, 1996, the Company had 325 employees, including 272
full-time and 53 part-time employees. None of these employees are represented by
a collective bargaining agreement. Employee benefits include a profit sharing
plan and life, health and disability insurance. Management believes that
relations with its employees are good.
Competition
The Company faces strong competition in the attraction of deposits. Its
most direct competition for deposits is from the other thrifts and commercial
banks located in its primary market area. In times of low interest rates the
Company faces additional competition for investor funds from mutual funds, the
stock market and other corporate and governmental securities.
The Company competes for deposits principally by offering depositors a
wide variety of savings programs, a market rate of return, tax-deferred
retirement programs and other related services and by the efficiency and quality
of services provided to borrowers, real estate brokers and builders. The
Company's competition for loans varies from time to time depending upon the
general availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, volatility in the markets and other
factors that are not readily predictable. The Company does not rely upon any
individual, group or entity for a material portion of its deposits.
REGULATION AND SUPERVISION
The Company, Prime Bank and First Sterling Bank are subject to
extensive federal and state regulation by various bank regulatory agencies.
Their activities may also be subject to regulation by federal or state
securities regulatory agencies, state insurance regulatory agencies, and other
federal, state and local governmental bodies. Banking statutes and regulations
are comprehensive and are intended primarily for the protection of the insurance
fund and depositors. Bank regulatory authorities have extensive discretion in
connection with their supervisory activities and examination policies and have
authority to impose a wide variety of enforcement actions and penalties on an
institution or company that fails to comply with its regulatory requirements.
Possible enforcement actions include the imposition of a capital plan,
imposition of civil money penalties, conservatorship or receivership, and
termination of deposit insurance. Certain enforcement powers extend to directors
and officers of banks and other financial institutions and to other
"institution-affiliated" parties, including stockholders, attorneys, appraisers
and accountants. The following is only a general summary of the applicable
banking laws and regulations. The expense of regulatory compliance for the
Company is substantial and increasing and has an adverse effect on the net
income of all regulated institutions such as the Company and the Banks when
compared with competitors which are substantially less regulated.
10
<PAGE>
Regulation of the Company
The Company is a bank holding company within the meaning of Section 3
of the Bank Holding Company Act of 1956, as amended ("BHCA"). As such, the
Company is registered with and subject to FRB examination and supervision as
well as certain reporting requirements. The Company is also subject to
regulation by Pennsylvania banking statutes affecting bank holding companies.
Federal Bank Holding Company Regulation
The Company is required to file with the FRB an annual report and such
additional information as the FRB may require pursuant to the BHCA. The FRB may
also make examinations of the Company and each of its non-bank subsidiaries. The
BHCA requires each bank holding company to obtain the approval of the FRB before
it may acquire 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, the Company may
only engage in or own companies that engage in banking or in activities deemed
by the FRB to be so closely related to the business of banking or managing or
controlling banks as to be a proper incident thereto, and the Company must gain
permission from the FRB prior to engaging in many new business activities.
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner.
Dividends
Because the Company does not engage directly in any material income
producing activities, payment of dividends will generally be subject to receipt
of sufficient dividends from the Banks or other non-bank subsidiaries of the
Company. 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.
Applicable minimum capital and "prompt corrective action" standards further
limit the ability of a bank to pay dividends, which 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 the Company.
Risk-Based Capital Guidelines. The FRB's risk-based capital guidelines
for bank holding companies set a required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) of 8%. At least half of the total capital is required to be
"Tier 1 capital", consisting principally of common Shareholders' equity,
noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and other intangibles. The remainder
("Tier 2 capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock and a limited amount of the general
loan loss allowance.
Tier 1 Capital Leverage Ratio. The FRB has also established a minimum
level of Tier 1 capital to total assets of 3% for those bank holding companies
which have the highest regulatory examination ratings and are
11
<PAGE>
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.
The Company currently meets these minimum capital requirements. Set
forth below is a table which shows the minimum capital ratios applicable to the
Company, together with the actual dollar amount and percentage of capital in
each category at December 31, 1996:
Required Actual
Capital Requirement Ratio Amount Ratio
-------- ------ -----
Risk-Based Capital
Tier 1 Ratio 4.00% $58,043 9.19%
Total Capital Ratio 8.00% 64,578 10.22%
Tier 1 Leverage Ratio 4.00%/5.00% 58,043 6.46%
Change in Bank Control Act
Under the Change in Bank Control Act of 1978, as amended ("Change in
Control Act") and the regulations adopted thereunder, no person, acting directly
or indirectly or through or in concert with one or more other persons, may
acquire "control" of any federally insured depository institution unless the
appropriate federal banking agency has been given 60 days' prior written notice
of the proposed acquisition and within that period has not issued a notice
disapproving of the proposed acquisition or has issued written notice of its
intent not to disapprove the action. "Control" is generally defined as the
power, directly, or indirectly, to direct the management or policies of an
institution or to vote 25% or more of any class of its voting securities. A
presumption of "control" arises upon most acquisitions of power to vote 10% or
more of any class of voting securities if the institution or holding company has
registered securities under Section 12 of the Securities Exchange Act of 1934 or
if no other person will own a greater percentage of that class of voting
securities immediately after the transaction. This presumption may be rebutted
upon a formal finding by the appropriate federal banking agency that the
acquisition will not result in control.
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.
Pennsylvania Laws Affecting Bank Holding Companies
Under the Pennsylvania Banking Code of 1965, as amended ("PA Code") as
presently enacted, the Company will be permitted to control an unlimited number
of banks, subject to prior approval of applicable federal bank regulatory
agencies and, in certain cases, the Pennsylvania Department of Banking
("PADOB"). The PA Code authorizes reciprocal interstate banking without any
geographic limitation. Reciprocity between states exists when a foreign state's
law authorizes Pennsylvania bank holding companies to acquire banks or bank
holding companies located in that state on terms and conditions substantially no
more restrictive than those applicable to such an acquisition by a bank holding
company located in that state. Interstate ownership of banks
12
<PAGE>
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. Most of its deposits are insured
under the Savings Association Insurance Fund ("SAIF"), although some deposits
are insured under the Bank Insurance Fund ("BIF"). Prime Bank is subject to
extensive regulation, reporting requirements and examination by the PADOB, as
its chartering agency, and the FDIC as its deposit insurer and primary federal
banking regulator.
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 BIF. First Sterling Bank is subject
to extensive regulation, reporting requirements and examination by the PADOB, as
its chartering agency, the FRB, as its primary federal banking regulator, and
the FDIC as its deposit insurer.
Pennsylvania Banking Laws
The activities of Pennsylvania chartered commercial banks 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 generally limited in making loans to any
one customer or group of related customers to an amount which equals 15% of each
Bank's unimpaired capital accounts from time to time.
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.
At December 31, 1996, Prime Bank and First Sterling Bank each met the
Pennsylvania minimum capital requirements.
The table set forth below shows each capital requirement together with the
actual capital levels of each Bank:
Required Prime Bank First Sterling
Capital Requirement Ratio At 12/31/96 At 12/31/96
PA Risk-Based Capital
Tier 1 Ratio 4.00% 9.56% 8.14%
Total Capital Ratio 8.00% 10.52% 9.40%
PA Tier 1 Leverage Ratio 4.00% 6.65% 5.88%
13
<PAGE>
Federal Deposit Insurance Regulation
The FDIC administers the BIF and SAIF funds, although the funds' assets
and liabilities are not commingled. Each fund is to be maintained at a
designated ratio to the aggregate dollar amount of deposits insured by that
fund. Pursuant to the 1996 Banking Law, the SAIF fund was recapitalized, and the
two funds are to be merged on or before January 1, 1999 if on that date no
further savings associations exist. See "1996 Federal Banking Legislation -
Recapitalization of SAIF" below.
Prompt Corrective Action. Federal banking laws and regulations
establish of a system of prompt corrective action to resolve the problems of
undercapitalized institutions. The federal banking regulators are required to
take certain supervisory actions against undercapitalized institutions. The
adopted rules create five categories consisting of "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized". Regulatory action taken will depend on the
level of capitalization of the institution and may range from restrictions on
distributions of dividends to seizure of the institution. Generally, subject to
a narrow exception, federal law requires the institution's regulator to appoint
a receiver or conservator for an institution that is critically
undercapitalized. Regulators are authorized to specify the ratio of tangible
capital to assets at which an institution becomes critically undercapitalized
and requires that the ratio be no less than 2% of assets.
Liability of Commonly Controlled Institutions; Priority Over Claims of
Shareholders and Affiliates. Pursuant to provisions of the FDI Act, 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. Federally insured depository
institutions must adopt and maintain written policies, in conformance with
minimum federal guidelines, that establish appropriate limits and standards for
extensions of credit that are secured by liens or interests in real estate or
are made for the purpose of financing permanent improvements to real estate.
Brokered Deposits. Federal law and regulations impose restrictions on
the acceptance of brokered deposits. Absent a waiver from the FDIC, an insured
depository institution will not be permitted to accept brokered deposits unless
the institution is "well capitalized." The FDIC can only grant waivers to
institutions that are "adequately capitalized" or that are in conservatorship.
Transactions with Affiliates and Other Related Parties
Each of the Banks is subject to certain restrictions on transactions
with "affiliates" such as the Company and any other non-bank subsidiaries of the
Company pursuant to Sections 23A and 23B of the Federal Reserve Act. 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" assets by a bank from its affiliates;
and (iv) imposes detailed collateralization requirements for affiliate credit
transactions. Section 23B requires a wide range of transactions between a bank
and its affiliates to be on terms which are at least as favorable to the bank as
would apply to similar transactions with non-affiliated companies. These include
"covered transactions" that are subject to section 23A, as well as (i) a sales
of
14
<PAGE>
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.
Federal and state laws and regulations restrict management personnel of
a bank from serving as directors or in other management positions with
securities firms and with certain depository institutions whose assets exceed a
specified amount or which have an office within a specified geographic area, and
restrict management personnel from borrowing from another institution that has a
correspondent relationship with their bank.
Classification of Assets
Under current federal regulations, an institution must classify its
problem assets according to one of four categories: "substandard", "doubtful",
"loss" and "special mention". For assets classified "substandard", and
"doubtful", the institution is required to establish prudent general loan loss
reserves in accordance with generally accepted accounting principles. Assets
classified "loss" must be either completely written off or supported by a 100%
specific reserve.
Federal Minimum Capital Requirements - 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.
15
<PAGE>
At December 31, 1996, Prime Bank met each of its capital requirements.
The table below sets forth the minimum capital ratios applicable to Prime Bank,
together with the actual dollar amounts and percentages of capital for Prime
Bank in each category at December 31, 1996:
Required Prime Bank
Capital Requirement Ratio Amount Ratio
-------- ------ -----
Risk-Based Capital
Tier 1 Ratio 4.00% $44,564 9.56%
Total Capital Ratio 8.00% 49,022 10.52%
Tier 1 Leverage Ratio 4.00%/5.00% 44,564 6.65%
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 ("ALLL"), and "total capital"
includes the primary capital components plus limited life preferred stock and
certain subordinated debt. In calculating the regulatory capital ratios,
goodwill is deducted from both the numerator (capital) and the denominator
(total assets) of the ratio, and the ALLL is added to the denominator (total
assets). Generally, the FRB expects member banks to operate above the minimum
levels. Those member banks whose operations are deemed by the FRB to involve or
to be exposed to high or inordinate degrees of risk may be expected to hold
additional capital to compensate for those risks.
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%
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 December 31, 1996, 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 December 31,
1996:
First Sterling
Required ---------------
Capital Requirement Ratio Amount Ratio
-------- ------ -----
Primary Capital Ratio 5.50% $16,119 6.83%
Total Capital Ratio 6.00% 16,119 6.83%
16
<PAGE>
First Sterling's total capital ratio would place it in "Zone 2" for these
purposes as of December 31, 1996.
Insurance of Deposit Accounts
The FDIC sets deposit insurance assessment rates on a semiannual basis
separately for the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). The FDIC has authority to reduce the assessment rates
for either fund whenever the ratio of its reserves to insured deposits is equal
to or greater than 1.25%, and to increase deposit insurance assessments whenever
that ratio is less than 1.25%.
An institution's semiannual deposit insurance assessment is computed
primarily by multiplying its "average assessment base" (generally, total
insurable domestic deposits) for the prior semiannual period by one-half the
annual assessment rate applicable to that institution depending upon its risk
category, which is based principally on two measures of risk. These measures
involve capital and supervisory factors.
For the capital measure, institutions are assigned semiannually to one
of three capital groups according to their levels of supervisory capital as
reported on their call reports: "well capitalized" (group 1), "adequately
capitalized" (group 2) and "undercapitalized" (group 3). The capital ratio
standards for classifying an institution in one of these three groups are total
risk-based capital ratio (10 percent or greater for group 1, and between 8 and
10 percent for group 2), the Tier 1 risk-based capital ratio (6 percent or
greater for group 1, and between 4 and 6 percent for group 2), and the leverage
capital ratio (5 percent or greater for group 1, between 4 and 5 percent for
group 2).
Within each capital group, institutions are assigned to one of three
supervisory risk subgroups -- subgroup A, B, or C, depending upon an assessment
of the institution's perceived risk based upon the results of its most recent
examination and other information available to regulators. Subgroup A will
consist of financially sound institutions with only a few minor weaknesses.
Subgroup B will consist of institutions that demonstrate weaknesses which, if
not corrected, could result in significant deterioration of the institution and
increased risk of loss to the BIF. Subgroup C will consist of institutions that
pose a substantial probability of loss to the deposit insurance fund unless
effective corrective action is taken. Thus, there are nine possible
classifications to which varying assessment rates are applicable. The regulation
generally prohibits institutions from disclosing their subgroup assignments or
assessment risk classifications without FDIC authorization.
Prime Bank's insurance premium assessment is currently 6.5 basis points
on all of its assessable SAIF- and BIF-insured deposits. First Sterling Bank's
insurance premium assessment is currently 0 basis points on all of its
assessable deposits.
In addition to the foregoing FDIC deposit insurance assessments, all
insured institutions are also obligated to pay assessments to the federal
Financing Corporation ("FICO") to help pay interest on FICO bonds issued to pay
part of the costs of the savings and loan bailout in 1979. SAIF-insured deposits
are currently subject to a FICO assessment of 6.5 basis points, and BIF-insured
deposits are currently subject to a FICO assessment of approximately 1.3 basis
points.
There is no assurance whether the foregoing assessment rates will
remain constant or change. See, "Recent Legislative and Regulatory Developments
- - Amendments to FDIC Deposit Insurance Assessment Rules", below.
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. It requires savings associations
to maintain a specified minimum percentage of their assets invested in
residential mortgage loans and/or other housing- or consumer-related assets.
Currently, because the Company is a bank holding company, it is not treated as a
savings and loan holding company. Prime Bank has also been informed by the OTS
that
17
<PAGE>
the OTS does not treat Prime Bank as a savings association. There is no
assurance that Prime Bank will comply or continue to comply with the QTL Test.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), an institution has
obligations to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the applicable federal regulator for each bank to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution. The CRA requires public disclosure of an institution's CRA rating.
Federal Home Loan Bank System
Prime Bank is a member of the FHLB System by way of investment in the
Federal Home Loan Bank of Pittsburgh ("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. Advances from a FHLB are secured by a member's
shares of stock in the FHLB, certain types of mortgages and other assets.
Interest rates charged on advances vary with the maturity and the cost of funds
to the FHLB. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but FRB regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
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. Member banks are
also required to comply with applicable regulations of the FRB.
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% (below certain levels) and 10% (for deposits above
certain levels) must be maintained against aggregate transaction accounts,
subject to an exemption for specified levels of deposits which would otherwise
be reservable. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the effective return or yield on the Banks' assets.
Recent Legislative and Regulatory Developments
1996 Bad Debt Reserve Legislation. Section 1616 of the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "Job Protection
Act"), repealed the "percentage of taxable income" method for deducting loan
loss provisions for institutions such as Prime Bank. Under Section 593 of the
Internal Revenue Code of 1986, as amended, thrift institutions which had
previously met certain definitional tests primarily relating to their assets and
the nature of their business were permitted to establish a tax reserve for bad
debts and, within limits, deduct annual additions thereto for Federal tax
purposes. Under the Job Protection Act, institutions such as Prime Bank are
permitted to deduct bad debts only as they occur. In addition, the Job
Protection Act requires institutions such as Prime Bank 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
18
<PAGE>
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 the institution always
computed the additions to its reserves using the experience method. These
recapture requirements are suspended for each of two successive taxable years
beginning January 1, 1996, in which an institution originates an amount of
certain residential loans in excess of the average of the principal amounts of
such loans made by the institution during its six taxable years preceding 1996.
1996 Federal Banking Law - Recapitalization of SAIF. The Economic
Growth And Regulatory Paperwork Reduction Act of 1996 (the "1996 Banking Law"),
enacted on September 30, 1996 as Title II of the Omnibus Consolidated
Appropriations Act for Fiscal Year 1997, implemented a wide range of regulatory
relief provisions affecting federal insured depository institutions. Most
notably, it: (1) mandated the recapitalization of the SAIF as of October 1,
1996; (2) requires banks and other institutions holding BIF-insured deposits to
pay a portion of the interest on FICO bonds; (3) requires the merger of SAIF and
BIF on January 1, 1999 but only if no insured depository institution is a
savings association on that date; and (4) requires the Department of Treasury to
submit to Congress by March 31, 1997 a study on the development of a common
charter for all insured depository institutions.
Among the other supervisory provisions of the 1996 Banking Law which
may affect the Banks are the following: ATMs and other remote service units were
excluded from the definition of "branch" for purposes of certain branch approval
requirements and geographic restrictions; the law permits well-capitalized banks
rated CAMEL 1 or 2 to invest in bank premises in amounts up to 150 percent of
the bank's capital and surplus with only a 30-day after-the-fact notice and
establishes expedited procedures to permit certain bank holding companies to
engage in permissible nonbanking activities, except for acquisitions of thrifts;
exempted from the insider lending restrictions a bank's company-wide benefit or
compensation plans that are widely available to employees of the bank and that
do not give preference to any officer, director, or principal shareholder (or
related interests) over other employees of the bank; permits the Federal banking
agencies to raise the asset limit for an 18-month examination cycle from
$175,000,000 to $250,000,000 for banks with a CAMEL 2 rating; eliminates the
independent auditor attestation requirement for compliance with safety and
soundness laws; authorizes the Federal banking agencies to permit a bank's
independent audit committee to include some inside directors if the bank is
unable to find competent outside directors, provided a majority of the committee
is still made up of outside directors; requires the Fed and HUD, within 6 months
of enactment, to simplify and improve RESPA and TILA disclosures and provide a
single format for such disclosures; makes a number of changes to RESPA's
disclosure requirements; generally provides that, if a bank or a third party
self-tests for compliance under the Equal Credit Opportunity Act and the Fair
Housing Act, the test results will not be used against the bank if the bank
identifies possible violations and is taking appropriate corrective actions, and
if the bank is not using the results in its defense; sunsets the
Truth-in-Savings Act's civil liability provision in five years; substantially
amends the Fair Credit Reporting Act (FCRA); prohibits the Federal banking
agencies from examining for compliance with FCRA unless there has been a
complaint about a violation or the agency otherwise has knowledge of a
violation; and amends the Comprehensive Environmental Response, Compensation,
and Liability Act to clarify that a lender is not liable for environmental
cleanups of property securing a loan unless the lender, among other things,
participates in day-to-day decision making over the operations of the property
or has control over environmental compliance and provides that lenders that
foreclose on property may take certain post-foreclosure actions without
incurring liability for environmental cleanup if the lender did not participate
in management of the property prior to foreclosure and the lender seeks to
dispose of the property as soon as it is commercially reasonable.
Amendments to FDIC Deposit Insurance Assessment Rules. On November 22,
1996, the federal Financing Corporation ("FICO") adopted a regulation pursuant
to the 1996 Banking Law which obligates all federally insured depository
institutions to commence paying on January 1, 1997, special assessments toward
the funding of interest payments on FICO bonds. The special assessment rates are
currently 6.5 basis points on all SAIF-assessable deposits, and approximately
1.3 basis points on all BIF-assessable deposits. After December 31, 1999 (or
when the last savings association ceases to exist, if earlier), all assessable
deposits at all institutions will be assessed at the same rates in order to pay
FICO bond interest.
19
<PAGE>
In December 1996, the FDIC took action to implement for the first part
of 1997 a reduced assessment schedule for institutions with SAIF-insured
deposits. It also continued in effect an existing rate schedule for BIF-insured
deposits. As a result of these FDIC actions, the total semi-annual deposit
insurance assessment for all BIF-insured and SAIF-insured institutions currently
ranges from 0 to 27 basis points (depending upon an institution's risk
classification), in addition to the special FICO assessment described above.
FDIC Proposed Rule to Prohibit Deposit Shifting. Pursuant to provisions
of the 1996 Banking Law, the FDIC on February 11, 1997 proposed a regulation
which would prohibit federally insured depository institutions from taking any
action which would have the effect of shifting deposits insured under the
Savings Association Insurance Fund (SAIF) to deposits insured under the Bank
Insurance Fund (BIF) for the purpose of evading the assessment rates applicable
to SAIF deposits.
Other Laws and Regulations
The Company and the Banks are subject to a variety of laws and
regulations which are not limited to banking organizations. Without limiting the
foregoing, in lending to commercial and consumer borrowers, and in owning and
operating their properties, the Banks are each subject to regulations and risks
under state and federal environmental laws.
Legislation and Regulatory Changes
Legislation and regulations may be proposed or enacted from time to
time which could increase the cost of doing business, limit or expand
permissible activities, or affect the competitive balance between banks and
other competing financial services providers. No prediction can be made as to
the likelihood of any major changes or the impact such changes might have on the
Company or either of the Banks.
Effect of Government Monetary Policies
The earnings of the Company and the Banks are affected by domestic and
international economic conditions and the monetary and fiscal policies of the
United States government and its agencies, as well as those of foreign
countries. It is not possible to predict the nature and impact of future changes
in economic conditions or governmental monetary or fiscal policies.
TAXATION
Federal Taxation
The Company files a consolidated federal income tax return on a
calendar year basis. The Small Business Job Protection Act of 1996, enacted on
August 20, 1996, provides for the repeal of the tax bad debt deduction computed
under the percentage of taxable income method. The repeal of the use of this
method is effective for tax years beginning after December 31, 1995. Prior to
the change in law, Prime Bank had qualified under the provisions of the Internal
Revenue Code which permitted it to deduct from taxable income an allowance for
bad debts based on 8% taxable income.
Due to the change in tax law, Prime Bank is required to recapture into
income, over a six year period, the portion of its tax bad debt reserves that
exceed its base tax year reserves (i.e. tax reserves for tax years beginning
before 1988). The base tax year reserves, which may be subject to recapture if
Prime Bank ceases to qualify as a bank for federal income tax purposes, are
restricted with respect to certain distributions. Prime Bank's total tax bad
debt reserves at December 31, 1996 are approximately $7.9 million of which $7.7
million represents the base year amount and $.2 million is subject to recapture.
The $.2 million has been previously reserved as a deferred tax liability,
therefore, this recapture will not affect reported net income.
20
<PAGE>
To the extent Prime Bank makes distributions to Prime Bancorp that are
considered to result in withdrawals from its tax bad debt reserves, then the
amounts deemed withdrawn will be included in Prime Bank's taxable income. The
amount considered to be withdrawn by a distribution will be the amount of the
distribution plus the amount necessary to pay the tax with respect to the
withdrawal. Dividends paid out of Prime Bank's current or accumulated earnings
and profits as calculated for federal income tax purposes, however, will not be
considered to result in withdrawals from Prime Bank's, bad debt reserves for
qualifying real property loans. Non-liquidating distributions in excess of Prime
Bank's, current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation of
Prime Bank will be considered to result in withdrawals first from Prime Bank,
bad debt reserves on qualifying real property loans to the extent thereof, and
finally out of such other accounts as may be proper. At December 31, 1996,
substantially all of Prime Bank's retained earnings (apart from amounts
allocated to its bad debt reserve) are available for distribution to its
stockholders, subject to various restrictions imposed by OTS, without the
imposition of this additional tax on Prime Bank.
Thrift institutions are subject to special tax treatment with respect
to the deductibility of interest expense relating to certain tax-exempt
obligations. Thrift institutions are entitled to deduct 100% of their interest
expense allocable to the purchase or carrying of tax-exempt obligations acquired
before 1983. The deduction is reduced to 80% for obligations acquired after 1982
and eliminated entirely for obligations acquired after August 7, 1986 (except
for certain issues by small municipal issuers and certain charitable
organizations).
Depending on the composition of its items of income and expense a
thrift institution may be subject to the alternative minimum tax. A thrift
institution must pay an alternative minimum tax equal to the amount (if any) by
which 20% of alternative minimum taxable income ("AMTI"), as reduced by an
exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular
taxable income increased by certain tax preferences and adjustments, including
depreciation deductions in excess of those allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of bad debt reserve deduction claimed in excess of the
deduction based on the experience method and by 75% of the excess of adjusted
current earnings over AMTI. The AMTI may be reduced only up to 90% by net
operating loss carryovers, but alternative minimum tax paid attributable to most
preferences and adjustments (although not to post August 7, 1986 tax-exempt
interest) can be credited against regular tax due in later years.
TAX LITIGATION
The Bank was engaged in litigation in the United States Tax Court in
connection with a Statutory Notice of Deficiency issued by the Internal Revenue
Service for the tax years (December 31) 1969, 1970, 1971, 1972, 1973, 1974,
1975, 1976, 1977, 1978, 1980, and 1981. The Statutory Notice of Deficiency was
directed to Cheltenham Federal Savings and Loan Association ("Cheltenham"), a
predecessor to the Bank. The litigation involved two separate legal issues. The
controversy concerning these issues was resolved by the parties pursuant to a
Stipulation of Settled Issues which was entered into on or about November 20,
1991 (the "Stipulation"). The terms of the Stipulation reflected the results of
1991 U.S. Supreme Court decisions in Cottage Savings Association v. Commissioner
and United States of America v. Centennial Savings Bank. In January 1996, the
Bank settled its outstanding case with the IRS in connection with the
examination of the noted tax year returns. The United States Tax Court ruled
that Cheltenham properly recognized losses relating to the reciprocal purchase
and sale of mortgage loans in 1980. The U.S. Tax Court also ruled in favor of
the IRS on the issue of the permissibility of reducing the basis of assets by
the early withdrawal penalty on savings certificates. The Bank had previously
accrued the estimated liability for the amount of interest due relating to this
issue, and the actual amount paid was not materially different.
21
<PAGE>
REVISED ACCOUNTING STANDARDS
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of in 1996.
See Impairment of Long-Lived Assets and Long Lived Assets to Be Disposed Of on
page 27 of the 1996 Annual Report to Shareholders.
The Company adopted SFAS No. 122 Accounting for Mortgage Servicing
Rights in 1995. See Mortgage Servicing Rights on page 27 of the 1996 Annual
Report to Shareholders.
On January 1, 1996, the Company adopted the provisions of SFAS No. 123,
Accounting for Stock Based Compensation. See Stock Option Plan on pages 28 and
29 of the 1996 Annual Report to Shareholders.
During 1996, the Financial Accounting Standards Board issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and SFAS No. 127 Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and is to be applied prospectively. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Certain provisions relating to the
accounting for repurchase agreements have been deferred for one year. Management
of the Company does not expect that adoption of SFAS No. 125 will have a
material impact on the Company's financial position, results of operations, or
liquidity.
STATE TAXATION
Prime Bank is subject to the Pennsylvania Mutual Thrift Institution Tax
Act, which imposes a tax measured by the Savings Bank's net income. Under the
current law, the MTIT rate is 11.5%.
As a Pennsylvania business corporation, the Company will be required to
file annual returns with and pay annual fees to the Commonwealth of
Pennsylvania. The Company is currently subject to an annual franchise tax based
on its net worth and imposed by the State of Pennsylvania.
Item 2. Properties.
The Company neither owns nor leases any real property. At present, it
uses the premises, equipment and furniture of Prime Bank without direct payment
of any rental fees. In the future it may consider acquiring office facilities.
Prime Bank has eight offices in Philadelphia County, five in Bucks
County, and five in Montgomery County, Pennsylvania. Of the eighteen offices,
eight are owned, and ten offices are subject to leases. At its home office, the
Prime offers a full range of customer services. Except for safe deposit boxes,
these same services are available at each of the Prime's other offices. Prime
participates in the MAC Money Access Service shared Automated Teller Machine
("ATM") network and the PLUS SYSTEM network which is the leading international
system of shared automated teller machines (ATMs) which enables customers to
obtain cash almost anytime and almost anywhere they travel in the United States.
Eight offices are equipped with ATMs owned by Prime.
First Sterling Bank has two offices in Montgomery County, one office in
Chester County, and two offices in Delaware County which are subject to leases.
First Sterling branches offer a broad range of products and services. First
Sterling also participates in the MAC Money Access Service shared Automated
Teller Machine ("ATM") network and the PLUS SYSTEM. Three offices are equipped
with ATMs owned by First Sterling.
22
<PAGE>
The following table sets forth certain information concerning the
business offices of Prime Bank and First Sterling Offices at December 31, 1996
(dollars in thousands).
<TABLE>
<CAPTION>
Net Book
Value of
Property and
Owned Leasehold
or Lease Improvements Deposits at
Leased Expiration At December 31, December 31,
(2) Date 1996 1996
------ ---------- --------------- ------------
<S> <C> <C> <C> <C>
Prime Bank Offices
Philadelphia, 6425 Rising Sun Avenue Owned -- $ 1,267 $142,298
Philadelphia, 18th & JFK Blvd. Leased 3/31/2000 -- 18,514
Philadelphia, 1841 E. Allegheny Avenue Owned -- 74 39,426
Philadelphia, 14425 Bustleton Avenue Owned -- 282 21,632
Philadelphia, 1000 Cottman Avenue Owned -- 457 29,120
Philadelphia, 8500 Germantown Avenue Leased 7/31/2000 -- 32,283
Philadelphia, 1695 Grant Avenue Leased 7/31/2000 16 24,846
Philadelphia, 423 E. Girard Avenue Owned -- 42 19,104
Oxford Valley, Bucks County
195 Bristol Oxford Valley Road Leased 6/30/2000 127 20,231
Fairless Hills, Bucks County
503 South Oxford Valley Road Owned -- 301 26,174
Richboro, Bucks County
984 Second Street Pike Owned -- 238 36,877
Southampton, Bucks County
723 Street Road Owned -- 586 56,174
Fort Washington, Montgomery County
7111 Valley Green Road Leased 09/30/2001 19 --
Yardley, Bucks County
10 South Main Street Leased 10/31/2000 1 8,019
Horsham, Montgomery County
301 Horsham Road Leased 9/30/99 63 20,314
Huntingdon Valley, Montgomery County
Bethayres Shopping Center/618 Welsh Road Leased 11/30/2000 -- 13,471
Jenkintown, Montgomery County
The Pavilion/261 Old York Road Leased 6/01/98 179 20,208
Montgomeryville/North Wales
Montgomery County, 521 Stump Road Leased 1/21/99 -- 17,409
Willow Grove, Montgomery County
Old York & Moreland Roads Leased 9/23/2004 -- 8,138
------ ---------- -------- --------
Total Prime Bank Offices $3,652 $554,238
======== ========
First Sterling Offices
Bala Cynwyd, Montgomery County
50 Monument Road Leased 04/30/2004 61 $ 32,763
Bryn Mawr, Montgomery County
22 North Bryn Mawr Avenue Leased 12/31/2005 59 58,735
Devon, Chester County
80 West Lancaster Avenue Leased 12/31/2005 89 47,411
St. Davids, Delaware County
558 East Lancaster Avenue Leased 12/31/2005 79 41,793
Media, Delaware County
101 West Baltimore Pike Leased 06/30/2009 53 1,702
------ ---------- -------- --------
Total First Sterling Offices $ 342 $182,404
======== ========
</TABLE>
23
<PAGE>
Item 3. Legal Proceedings.
Except for litigation with the IRS concerning the deductibility of
losses on the reciprocal sale of mortgages (see TAX LITIGATION on page 21), for
which Prime has fully reserved against any potential liabilities and routine
foreclosures, there are no material legal proceedings to which the Company, the
Bank or its subsidiary service corporations are a party or to which any of their
properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 17, 1996, there was a special meeting of the shareholders
of the Registrant's predecessor to vote on two matters: (1) the merger with
First Sterling Bancorp, Inc. and (2) the merger with and into Prime Newco, Inc.
which effectively changed the Registrant from a Delaware corporation to a
Pennsylvania corporation. Both mergers were approved by shareholders. As to the
merger with First Sterling Bancorp, Inc. the vote was as follows: 2,770,520 For,
73,995 Against, and 4,415 Abstentions. As to the Merger to become a Pennsylvania
corporation, the vote was as follows: 2,771,786 For, 73,729 Against, and 3,415
Abstentions.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the captions "Market Information" (page
19) and Notes 1 and 3 of "Notes to Consolidated Financial Statements" (pages 25
and 29) in the Company's 1996 Annual Report to Shareholders is incorporated
herein by reference thereto.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Condition Data"
on page 17 of the Company's 1996 Annual Report to Shareholders is incorporated
herein by reference thereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" (pages 9 through
18) in the Company's 1996 Annual Report to Shareholders is incorporated herein
by reference thereto.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, the notes thereto, and the
opinion of independent auditors thereon, appearing on pages 20 through 40 of the
Company's 1996 Annual Report to Shareholders are incorporated herein by
reference thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
24
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the caption "Election of Directors" on
pages 4 through 7 of the Company's Proxy Statement dated March 24, 1997 is
incorporated herein by reference thereto.
Item 11. Executive Compensation.
See information contained under the caption "Executive Compensation"
on pages 8 through 11 and page 13 and under the caption "Board Compensation
Committee Report on Executive Compensation" on pages 11 and 12 of the Company's
definitive Proxy Statement dated March 24, 1997. The "Performance Graph" on page
13 and the "Board Compensation Committee Report on Executive Compensation: on
pages 11 and 12 shall not be deem "soliciting material" or "filed" with the
Commission or incorporated herein by reference.
Item 12. Security Ownership of Management.
The information contained under the caption "Beneficial Ownership of
Voting Securities" on page 2 of the Company's definitive Proxy Statement dated
March 24, 1997 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information contained under the caption "Indebtedness of
Management" on page 11 of the Company's definitive Proxy Statement dated March
24, 1997 is incorporated herein by reference.
First Sterling Bank leases three (3) of its five (5) branch offices
from Dominion Properties, L.P. The Arthur J. Kania Trust is the major
shareholder of First Sterling and a limited partner in Dominion Properties, L.P.
Allen Speiser, a director of First Sterling, is a trustee of the Arthur J. Kania
Trust. James D. Kania, a director of First Sterling , is a beneficiary of the
Arthur J. Kania Trust and a General Partner of Dominion Properties, L.P.
The leases with Dominion Properties, L.P. run for terms of ten (10)
years commencing January 1, 1996. the leases also provide certain renewal
options with annual increases in rent for two (2) of the branch office leases
based on the changes in the consumer price index. Prior to execution of the
Merger Agreement, First Sterling and Dominion Properties, L.P. entered into an
agreement with respect to the corporate offices of First Sterling which
agreement allows First Sterling at its election, to reduce both space and term
of its office tenancy upon payment of a fee in the amount of $375,000.00 to the
landlord. Prime Believes that the fee negotiated is consistent with that which
would be paid in an arm length transaction with an unaffiliated landlord.
25
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) The following consolidated financial statements of the Company
and the opinion of independent auditors thereon which appears
on pages 20 through 40 of the Company's 1996 Annual Report
included as an exhibit to this report:
<TABLE>
<CAPTION>
Page Reference
Annual Report
Financial Statements to Shareholders
--------------------------------------------------------------------------------
<S> <C>
Consolidated Statements of Financial Condition 20
Consolidated Statements of Operations 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flow 23 - 24
Notes to Consolidated Financial Statements. 25 - 38
Management's Statement on Financial Reporting 39
Independent Auditors' Report 40
(2) Other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
(3) The following exhibits:
</TABLE>
26
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
2.1 Agreement and Plan of Organization dated June 12, 1996 and First
Amendment thereto dated September 12, 1996, by and among Registrant,
Prime and First Sterling. Prime will supplementally provide a copy of
the disclosure schedules to the SEC upon request.
2.2 Agreement and Plan of Merger dated September 12, 1996 between
Registrant and Prime.
3.1 Articles of Incorporation of Prime Bancorp, Inc. - Incorporated herein
by reference to Exhibit 3.1 of Registration Statement #333-13741
3.2 Bylaws - Incorporated by reference to Exhibit 3.2 of Registration
Statement #333-13741.
(a) Employment agreement between Prime and Erwin T. Straw, dated
November 14, 1988. Incorporated by reference to Exhibit 10.1 to
registrant's Annual Report on Form 10-K for the fiscal year ending June
30, 1989, filed with the Securities and Exchange Commission on
September 27, 1989. Addendum to Employment Agreement dated as of
January 29, 1996 - Incorporated by reference to Exhibit 10.4 to
Registration Statement #333-13741
(b) Employment agreement between Prime and Walter L. Tillman, Jr. -
Incorporated by reference to Exhibit 10.2 to Registration Statement
#333-13741.
(c) Employment agreement between Prime and James J. Lynch dated
December 18, 1995. Incorporated by reference to Exhibit 10.1 (c) to
Prime's Annual Report on Form 10-K for the year ended December 31, 1995
(file no. 0-17286).
4.1 Form of First Sterling Subordinated Convertible Debenture. Registrant
will supplementally provide a copy of the Debenture to the SEC upon
request. Incorporated herein by reference to Exhibit 4.1 to
Registration Statement #333-13741.
4.2 Form of Registrant's Stock Certificate for common stock. Incorporated
herein by reference to Exhibit 4.2 to Registration Statement
#333-13741.
5.1 Consent and Opinion of Stradley, Ronon, Stevens & Young regarding
legality of shares. Incorporated herein by reference to Exhibit 5.1 to
Registration Statement #333-13741.
8.1 Consent and form of Opinion of Stradley, Ronon, Stevens and Young
regarding tax matters. Incorporated herein by reference to Exhibit 8.1
to Registration Statement #333-13741.
8.2 Form of Opinion of Kania, Linder, Lasak and Feeney regarding tax
matters. Incorporated herein by reference to Exhibit 8.2 to
Registration Statement #333-13741.
10.1 Employment Agreement between the Prime, Prime Bank and James J. Lynch
dated December 18, 1995. Incorporated by reference to Exhibit 10.1(c)
to Registrants Annual Report on Form 10-K for year ended December 31,
1995, file no. 0-17286.
10.2 Employment Agreement between the Prime, Prime Bank and Walter L.
Tillman, Jr. dated as of September 25, 1996. Incorporated herein by
reference to Exhibit 8.2 to Registration Statement #333-13741.
27
<PAGE>
10.3 Employment Agreement between the Prime, Prime Bank and Erwin T. Straw
dated November 14, 1988. Incorporated by reference to Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for year ended June 30, 1989.
10.4 Addendum to Employment between the Prime, Prime Bank and Erwin T. Straw
dated as of January 29, 1996. Incorporated herein by reference to
Exhibit 10.4 to Registration Statement #333-13741.
10.5 Employment Agreement between the Prime, Prime Bank and William H.
Bromley to become effective upon completion of the merger with First
Sterling. Incorporated herein by reference to Exhibit 10.5 to
Registration Statement #333-13741.
10.6 First Sterling 1988 Non-Qualified Stock Option Plan. Incorporated
herein by reference to Exhibit 10.6 to Registration Statement
#333-13741.
10.7 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated December 7, 1995 for Devon branch and office. Incorporated
herein by reference to Exhibit 10.7 to Registration Statement
#333-13741.
10.8 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated June 4, 1996 regarding right to reduce the space leased
under lease agreement for Devon offices and the lease term for a
portion of such space. Incorporated herein by reference to Exhibit 10.8
to Registration Statement #333-13741.
10.9 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated as of December 15, 1995 for the St. David's branch.
Incorporated herein by reference to Exhibit 10.9 to Registration
Statement #333-13741.
10.10 Lease Agreement between Dominion Properties L.P. and First Sterling
Bank dated as of December 15, 1995 for branch in Bryn Mawr Square.
Incorporated herein by reference to Exhibit 10.10 to Registration
Statement #333-13741.
10.11 Lease Agreement between Monument Road Associates and First Sterling
Bank dated April 14, 1994 for Bala Cynwyd branch. Incorporated herein
by reference to Exhibit 10.11 to Registration Statement #333-13741.
10.12 Lease Agreement between Silvio F. and Elizabeth O. D'Ignazio and First
Sterling Bank dated as of July 3, 1996 for Media branch. Incorporated
herein by reference to Exhibit 10.12 to Registration Statement
#333-13741.
10.13 First Sterling Bank 401(k) qualified retirement plan adoption
agreement. Incorporated herein by reference to Exhibit 10.13 to
Registration Statement #333-13741.
10.14 Incentive Stock Option Plan - Incorporated by reference to Exhibit 10.2
to Prime's Annual Report on Form 10-K for the fiscal year ending
December 31, 1994, filed with the Securities and Exchange Commission on
March 30, 1995.
10.15 Prime's Salary Continuation and Supplemental Retirement Plan -
Incorporated by reference to Exhibit 10.3 to Prime's Annual Report on
Form 10-K for the fiscal year ending June 30, 1989, filed with the
Securities and Exchange Commission on September 27, 1989.
28
<PAGE>
10.16 Prime's Retirement Plan - Incorporated by reference to Exhibit 10.4 to
Prime's Annual Report on Form 10-K for the fiscal year ending June 30,
1989, filed with the Securities and Exchange Commission on September
27, 1989.
10.17 Prime's Employee Retirement Savings Plan - Incorporated by reference to
Exhibit 10.5 to Prime's Annual Report on Form 10-K for the fiscal year
ending June 30, 1989, filed with the Securities and Exchange Commission
on September 27, 1989.
10.18 Lease Agreement between Prime Bank and Lotz Realty, Inc. - Incorporated
by reference to exhibit to Prime's Annual Report on Form 10-K for the
fiscal year ending June 30, 1989, filed with the Securities and
Exchange Commission on September 27, 1989.
10.19 Lease Agreement, between Prime Bank and Village Plaza Shopping Center.
- Incorporated by reference to exhibit 10.7 to Prime's Annual Report on
Form 10-K for the fiscal year ending June 30, 1989, filed with the
Securities and Exchange Commission on September 27, 1989.
10.20 Lease Agreement, between Prime Bank and Grant Plaza. - Incorporated by
reference to Exhibit 10.8 to Prime's Annual Report on Form 10-K for the
fiscal year ending June 30, 1989, filed with the Securities and
Exchange Commission on September 27, 1989.
10.21 Lease Agreement, between Prime Bank and Hopkinson Corporation -
Incorporated by reference to Exhibit 10.10 to Prime's Annual Report on
Form 10-K for the fiscal year ending December 31, 1993, filed with the
Securities and Exchange Commission on April 14, 1993.
10.22 Lease Agreement, between Prime Bank and Foxcroft Square Company -
Incorporated by reference to Exhibit 10.11 to Prime's quarterly report
on Form 10-Q for the quarter ended March 31, 1993, filed with the
Securities and Exchange Commission on April 14, 1993.
10.23 Lease Agreement, between Prime Bank and Bell Atlantic Properties, Inc.
dated January 7, 1985. - Incorporated by reference to Exhibit 10.12 to
Prime's Annual Report on Form 10-K for the fiscal year ending December
31, 1994, filed with the Securities and Exchange Commission on March
30, 1995.
10.24 Lease Agreement, between Prime Bank and the Trust of Russell A. Allen,
deceased dated July 31, 1985. - Incorporated by reference to Exhibit
10.13 to Prime's Annual Report on Form 10-K for the fiscal year ending
December 31, 1994, filed with the Securities and Exchange Commission on
March 30, 1995.
10.25 Lease Agreement, between Prime Bank and Mark Cohen dated September 24,
1994. - Incorporated by reference to Exhibit 10.14 to Prime's Annual
Report on Form 10-K for the fiscal year ending December 31, 1994, filed
with the Securities and Exchange Commission on March 30, 1995.
10.26 Lease Agreement, between Prime Bank and Corestates Bank dated March 1,
1995. Incorporated by reference to Exhibit 10.15 to Prime's Annual
Report on Form 10-K for the year ended December 31, 1995, filed with
the Securities and Exchange Commission on March 30, 1996.
29
<PAGE>
10.27 Lease Agreement, between Prime Bank and Cameron C. Troilo and Olga Jean
Troilo dated June 26, 1995. Incorporated by reference to Exhibit 10.16
to Prime's Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Securities and Exchange Commission on March 30,
1996.
10.28 Report on Form 11-K, Prime Bancorp, Inc. Retirement Savings Plan for
the year ended December 31, 1996. (to be filed by amendment)
13.1 Annual Report on Form 10-K for the year ended December 31, 1996.
13.2 Quarterly Report on Form 10-Q for the six month period ended June 30,
1996. Incorporated herein by reference to Exhibit 13.2 to Registration
Statement #333-13741.
13.3 Consolidated balance sheets of First Sterling Bancorp, Inc. as of
December 31, 1995 and 1994, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1995 as audited by Coopers and
Lybrand LLP. Incorporated herein by reference to Exhibit 13.3 from
pages F-1 to F-21 of Registration Statement #333-13741 filed with the
Securities and Exchange Commission on October 8, 1996.
22.1 Subsidiaries - Incorporated by reference to Exhibit 22.1 to
registrant's Annual Report on Form 10-K for the fiscal year ending
December 31, 1994, filed with the Securities and Exchange Commission on
March 30, 1995.
23.1 Consent of Coopers & Lybrand, L.L.P.
23.2 Consent of KPMG Peat Marwick LLP. Incorporated herein by reference to
Exhibit 23.1 to Registration Statement #333-13741.
23.3 Consent of Stradley, Ronon, Stevens & Young, LLP. Incorporated herein
by reference to Exhibit 23.3 to Registration Statement #333-13741.
23.4 Consent of Kania, Linder, Lasak and Feeney. Incorporated herein by
reference to Exhibit 23.4 to Registration Statement #333-13741.
23.5 Consent of Berwind Financial Group, L.P. Incorporated herein by
reference to Exhibit 23.5 to Registration Statement #333-13741.
99.1 Purchase and Assumption Agreement By and among B.M.J. Financial Corp.,
Bank of Delaware Valley and Prime Savings Bank, fsb dated August 19,
1992 - Incorporated by reference to Exhibit 23.1 to registrant's Form
10-Q for the quarter ended September 30, 1992, filed with the
Securities and Exchange Commission on November 16, 1992.
99.2 Purchase and Assumption Agreement between the Bank and the Resolution
Trust Corporation dated July 26, 1993 - Incorporated by reference to
Exhibit 28.2 to registrant's Form 10-Q for the quarter ended September
30, 1993, filed with the Securities and Exchange Commission on November
15, 1993.
30
<PAGE>
99.3 Purchase and Assumption Agreement between the Bank and the Resolution
Trust Corporation dated December 25, 1993 - Incorporated by reference
to Exhibit 28.3 to registrant's Form 10-K for the fiscal year ended
December 31, 1994, filed with the Securities and Exchange Commission on
March 31, 1995.
99.4 Purchase and Assumption Agreement between the Bank and the Resolution
Trust Corporation dated September 16, 1994 - Incorporated by reference
to Exhibit 28.4 to registrant's Form 10-Q for the quarter ended
September 30, 1994 filed with the Securities and Exchange Commission on
November 14, 1994.
(b) Reports on Form 8-K
On June 27, 1996, the registrant did file a Report on
Form 8-K relating to the Merger with First Sterling
Bancorp, Inc.
*Incorporated by reference from the indicated filing each in SEC File No.
0-17286.
31
<PAGE>
PRIME BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused his report to be signed on its
behalf by the undersigned, hereunto duly authorized.
PRIME BANCORP, INC.
/s/ James J. Lynch
----------------------------------
James J. Lynch, President and
Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Frederick G. Betz Director March 28, 1997
- -------------------------
Frederick G. Betz
- ------------------------- Director March 28, 1997
William J. Cunningham
/s/ Joseph A. Fluehr, III Director March 28, 1997
- -------------------------
Joseph A. Fluehr, III
- ------------------------- Director March 28, 1997
Robert A. Fox
/s/ Ernest Larenz Director March 28, 1997
- -------------------------
Ernest Larenz
/s/ James J. Lynch Director, President
- ------------------------- and Chief Executive March 28, 1997
James J. Lynch Officer (Principal
Executive Officer)
/s/ Joseph G. Markmann Director March 28, 1997
- -------------------------
Joseph G. Markmann
32
<PAGE>
Signature Title Date
- --------- ----- ----
- ------------------------- Director March 28, 1997
Roy T. Peraino
/s/ David H. Platt Director March 28, 1997
- -------------------------
David H. Platt
- ------------------------- Director March 28, 1997
Arthur L. Powell
/s/ Frank H. Reeves Senior Vice President March 28, 1997
- -------------------------
Frank H. Reeves Chief Financial and
Accounting Officer
/s/ Erwin T. Straw Chairman March 28, 1997
- -------------------------
Erwin T. Straw
/s/ Walter L. Tillman, Jr. Executive Vice President March 28, 1997
- -------------------------
Walter L. Tillman, Jr.
33
<PAGE>
1996 ANNUAL REPORT
PRIME BANCORP, INC.
Bank Headquarters
Corporate Offices
Valley Green Corporate Center
7111 Valley Green Road
Fort Washington, PA 19034
Main Office
Prime Bank
6425 Rising Sun Avenue
Philadelphia, PA 19111
Main Office
First Sterling Bank
80 West Lancaster Avenue
Devon, PA 19333
(Map of Metropolitan Philadelphia and five-county Delaware Valley area)
Prime's corporate offices, main offices, and 23 branches, located throughout the
five-county Delaware Valley area, are easily accessible. The First Sterling
merger brought Prime five new branch locations.
Branches
Prime Bank
First Sterling
Bank
Philadelphia County
Burholme
Chestnut Hill
18th & JFK
Grant
Kensington
Lawndale
Penn Treaty
Somerton
Montgomery County
Horsham
Huntingdon Valley
Jenkintown
Montgomeryville
Willow Grove
First Sterling Bala Cynwyd
First Sterling Bryn Mawr
Bucks County
Fairless Hills
Oxford Valley
Richboro
Southampton
Yardley
Chester County
First Sterling Devon
Delaware County
First Sterling St. Davids
First Sterling Media
Please see inside back cover for a full listing of our branch location
addresses.
<PAGE>
PRIME BANCORP, INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS*
(Dollars in thousands except per share data) 1995 1996 % Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $7,469 $4,017 (1) -46.2%
Fully Diluted Earnings Per Share 1.38 0.74 (1) -46.4%
Dividends Declared Per Share 0.62 0.68 9.7%
At Year End
Assets 819,961 926,071 12.9%
Loans Receivable, Net 497,034 616,893 24.1%
Deposits 644,306 736,642 14.3%
Stockholders' Equity 69,279 70,516 1.8%
Book Value Per Share 13.15 13.33 (1) 1.4%
Selected Ratios
Return on Average Assets 0.97% 0.45% (1) -52.1%
Return on Average Stockholders' Equity 11.89% 5.79% (1) -51.3%
Ratio of Equity to Assets 8.45% 7.61% (1) -8.5%
Ratio of Non-Performing Assets to Total Assets 0.70% 0.92% 31.4%
</TABLE>
* All amounts have been restated to reflect the 1996 merger with First
Sterling Bancorp, as more fully described in Footnote 2 to the Consolidated
Financial Statements.
(1) Includes a one time FDIC special insurance assessment of $1.66 million net
of taxes, restructuring charges of $1.70 million net of taxes and $620
thousand of additional loan loss provision net of taxes. Excluding these
charges, net income, fully diluted earnings per share, book value per
share, return on average assets, return on average equity and equity to
assets would have been $8.01 million, $1.47, $14.08, .91%, 11.55%, and
8.01% for the twelve months ended December 31, 1996, respectively.
[The printed version of this document contains a bar graph depicting the
following plot points]
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Deposit Growth $439,796 $491,163 $585,066 $644,306 $736,642
[The printed version of this document contains a bar graph depicting the
following plot points]
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Loan Growth $369,145 $405,331 $443,182 $497,034 $616,893
[The printed version of this document contains a bar graph depicting the
following plot points]
$ in Millions
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
Net Interest Income 20.20 23.67 25.79 28.42 32.52
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 1
<PAGE>
March, 1997
Dear Shareholders:
The year 1996 was a turning point, an exciting period of transition, for Prime
Bancorp, Inc. I recently completed my first year as President and Chief
Executive Officer, and have never been more optimistic about the future.
Prime is strategically positioned to become the premier Delaware Valley
commercial bank. As we become a complete financial services provider, I believe
our commitment to customer service excellence will make Prime the bank of choice
for individuals and businesses throughout our region.
We took some very important steps last year. First, we made significant
progress toward our conversion from a thrift to a commercial bank. During 1996,
Congress passed legislation removing two major financial obstacles to the
conversion. The first resolved the issue of the deductibility of the allowance
for loan losses for tax purposes, providing a significant savings for the thrift
industry. The second piece of legislation resulted in a one-time BIF/SAIF
recapitalization assessment which will help make the future more equitable, in
terms of deposit insurance, between thrifts and commercial banks.
Also in 1996, we completed the merger of First Sterling Bancorp, Inc. into
Prime Bancorp, Inc. Through this merger, Prime expanded its presence into
Delaware, Montgomery, and Chester counties. The merger brought us many benefits
including five additional branches and First Sterling's high-quality commercial
loan generation capabilities. We've added William H. Bromley, founder and
President of First Sterling, and his talented staff, to the Prime organization.
And, three First Sterling board appointees have joined the Prime Bancorp, Inc.
Board of Directors bringing with them their valuable expertise and insights.
(Please see pages six and seven for "About The First Sterling Merger.")
Illustrating Prime's new direction, we introduced a fresh new look for
Prime Bancorp, Inc. on the front of this report. It symbolizes the organization
that we are rapidly becoming. Stating our name proudly and boldly, the new look
underscores our continuous movement forward as we seek future opportunities.
Still another transition, in 1996 we accepted the retirement of Erwin T.
Straw. Although he will continue as Chairman of the Board of Directors, he will
no longer participate in day to day bank operations. Erv Straw's fine
leadership, along with our dedicated Board of Directors and staff, set the solid
foundation upon which we now build. We wish him well and thank him for his
enormous contribution to our community and the banking industry. (Please see
page eight for "A Tribute To Erwin T. Straw.")
<PAGE>
[Picture of James J. Lynch]
James J. Lynch
President & C.E.O.
DISCUSSION OF 1996 FINANCIAL RESULTS
Prime reported earnings of $4.02 million for the year ending December 31, 1996.
The earnings have been restated to reflect the results of the merger for the
full year in accordance with the pooling of interests accounting method. The
Bank's net income for 1996, excluding one-time charges, was $8.01 million, a
7.2% increase over last year.
Prime's core earnings, measured by the spread between net interest income
and non-interest expenses, strongly improved during 1996, with the Bank
demonstrating strong balance sheet growth. Loans, led by growth in commercial,
construction, and consumer lending, grew 24.1% from $497.0 million to $616.9
million. It is important to note that most of this growth was supported by a
14.3% increase in core deposits from $644.3 million in 1995 to $736.6 million at
the end of 1996. Balance sheet growth drove net interest income up 14.4% from
$28.42 million during 1995 to $32.52 million in 1996, an increase of $4.10
million.
Non-interest expenses, excluding one-time charges, also increased but at a
slower 11.1% pace. The higher expenses were attributable to the hiring of key
lending personnel, the continued expansion of our branch network, and
technological enhancements upgrading data processing and telecommunication
systems.
Non-interest income growth was flat during 1996 at $3.22 million compared
to $3.44 million for 1995. However, 1995's non-interest income included a $260
thousand gain from the one-time sale of mortgage servicing. This is an area that
will receive management focus as we look to increase revenues from fee income.
A LOOK BEYOND ONE-TIME EVENTS
One-time charges played a significant role in the financial results for 1996. It
is important to look beyond the short-term impact of these charges and focus on
the long-term benefits that they represent.
First, there was a one-time assessment of all thrifts to recapitalize the
federal deposit savings associations insurance fund. Prime's portion of the
assessment was $1.66 million on an after-tax basis. Second, the merger with
First Sterling generated $1.70 million, after taxes, in one-time, merger-related
costs.
Finally, as mentioned in our November 8th proxy, we adopted a more
aggressive strategy to accelerate the resolution of problem real estate loans
during 1996. This effort required the one-time charge of approximately $1
million ($620 thousand after tax), along with additional amounts to replenish
reserves depleted by charged-off loans. We strongly believe this strategy will
be more economical than a long-term approach to working out the problem real
estate loans.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 3
<PAGE>
I BELIEVE THAT CUSTOMERS,
BOTH INDIVIDUALS AND BUSINESSES, STILL
WANT A BANKER THEY CAN TRUST --
NOT JUST A BANK -- TO HANDLE THE
IMPORTANT DETAILS
OF THEIR FINANCIAL LIVES.
THAT IS WHY PRIME STRESSES
SERVICE EXCELLENCE ABOVE ALL ELSE.
Including these one-time charges, net income for 1996 was $4.02 million, or
$.74 per share on a fully diluted basis. Earnings for 1995 were $7.47 million,
or $1.38 per share.
PRIME'S POSITION TODAY
I believe that customers, both individuals and businesses, still want a banker
they can trust -- not just a bank -- to handle the important details of their
financial lives. That is why Prime stresses service excellence above all else.
Sure, we are committed to continuing to probe and develop cost-effective
technologies. But it is our service that makes us shine.
With the completion of the merger, Prime is positioned to effectively
compete with the smaller community and neighborhood banks and with the big
banking institutions. We have become more than a traditional thrift organization
by combining the best of a retail-oriented traditional thrift with the best of a
commercial lending bank. The result, we believe, will be the best commercial
bank in our marketplace.
RETAIL BANKING
Our friendly, experienced retail banking team, enhanced by our new employees
from First Sterling, are dedicated to serving our retail customers. As we expand
and change, we will guide our employees with ongoing training to strengthen
product knowledge, as well as service and management skills.
As a recognized leader in the area of mortgage lending, we bring our
customers the convenience of obtaining a mortgage where they bank. We plan to
work to increase market share in this area and in the more general area of
consumer lending.
Although the merger brought us five additional branches, we will continue
to develop Prime's distribution network. We plan to open two new branches in
1997. We believe one of the locations will be the Plymouth Meeting area and we
are researching other viable locations for the second.
COMMERCIAL BANKING
Like our retail banking team, our exceptional commercial banking group has
benefited from the addition of the fine people from First Sterling. Focused on
building relationships, our commercial lending team does what it takes to serve
Prime's business clients. Enhanced cash management products and services are
being introduced and delivered to meet the needs of our business customers.
To further support our commercial banking efforts, we are pursuing new
lines of business through an alliance with Valley Forge Asset Management, an
established money management
<PAGE>
firm. Through this alliance we can offer our business customers ancillary
services such as 401k and pension plan options. And for our individual private
banking customers, the alliance enables us to offer asset management services.
We are also exploring other alliances to bring our customers non-traditional
banking products such as mutual funds, annuities, and other insurance products.
1997 AND BEYOND
Looking at 1997, we expect this to be the year that Prime becomes a
billion-dollar bank. We also believe that we will complete our conversion to a
commercial bank by the end of the year further strengthening our competitive
edge.
As always, we will continue to evaluate the returns of fee income versus
the costs and risks of products and technologies. One of the new consumer
technologies planned for 1997 is an automated telephone system designed to give
customers and businesses easy 24-hour access to account and product information.
We also plan to bring PC banking to our business customers this Spring and we
are exploring the feasibility of home PC banking and internet banking for our
individual customers in the future.
As we expand our services and open new branch locations, we will continue
to support important community reinvestment projects such as the rehabilitation
of the St. Joseph's orphanage in North Philadelphia into a 62-unit apartment
complex for low-income housing. Prime is also involved with Habitat for
Humanity, a project that assists public efforts to revitalize urban communities
by creating home ownership opportunities for low-income families. These projects
help us participate in the rebuilding of our inner cities as good corporate
citizens and neighbors.
As mentioned in the beginning of my letter, I've never been more optimistic
about the future. Clearly we are proud of our accomplishments in 1996 and we are
ready to meet the challenges of 1997 and beyond. Prime has become a bold new
force in Delaware Valley banking. We look forward to telling you about our
progress in future reports. And finally, I'd like to take this opportunity to
thank all of you, our customers, our staff, our board, and our shareholders, for
your confidence and support.
Sincerely,
[SIGNATURE]
James J. Lynch
President & C.E.O.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 1
<PAGE>
ABOUT THE
FIRST STERLING MERGER
[Picture of Main Office]
Main Office
Devon, PA
[Picture of Corporate Offices]
Corporate
Offices
Fort Washington, PA
First Sterling Bank opened in 1988 as a state chartered commercial bank. It was
founded by William H. Bromley, formerly with Industrial Valley Bank (IVB), and a
group of business leaders, to fill a niche in the western suburbs marketplace
for the service-oriented community bank. In just eight years, Mr. Bromley and
his staff, successfully grew the bank to five locations with total assets of
$235 million.
MERGER BENEFITS
The merger enables Prime to expand into the very desirable western
Pennsylvania suburbs. Mergers among the large major banks have disrupted the
Delaware Valley's banking market. By merging First Sterling into Prime, the
combined organization is better equipped to aggressively penetrate this market.
Prime's banking operations contribute significantly to First Sterling's
ability to attract more, and larger, commercial loans and deposits. And Prime
benefits from First Sterling's high-quality commercial loan generation programs.
The valuable experience and areas of specialization of the First Sterling
management team and Board of Directors is yet another merger benefit. Prime
welcomes contributions from all new employees and directors.
PRIME AND FIRST STERLING
A Winning Combination
PRIME BANCORP, INC. BEFORE MERGER AFTER MERGER
- -------------------------------------------------------------------------------
Total Assets $691 million $926 million
1996 Annual Net Income (1) $5.8 million $8.0 million
Total Branches 18 23
Loan Mix:
Commercial 31% 41%
Real Estate/Construction 9% 6%
Consumer 20% 16%
Residential Mortgages 40% 37%
Deposit Mix:
Demand 19% 22%
Savings 30% 24%
Time 51% 54%
(1) Excludes one time FDIC special assessment and restructuring and other
merger related expenses.
<PAGE>
[Picture of James J. Lynch, William H. Bromley and Walter L. Tillman, Jr.]
James J. Lynch,
President & C.E.O.,
Prime Bancorp, Inc.
William H. Bromley,
Executive V.P.,
Prime Bancorp, Inc.
Walter L. Tillman, Jr.
Executive V.P.,
Prime Bancorp, Inc.
The greater size of the combined organization is also beneficial giving
Prime earnings growth through expansion and efficiencies. There is a larger pool
of resources creating savings in such areas as training, advertising, and
promotion.
The top management of Prime and First Sterling see the merger as a positive
event for shareholders, customers, and employees of both banks. "We are
extremely pleased to have reached this agreement with First Sterling," said
James J. Lynch, President and Chief Executive Officer of Prime Bancorp, Inc.
"The combination of these two companies creates a premier commercial bank for
the five-county Philadelphia area. First Sterling provides a perfect complement
to Prime's existing branch network. The five First Sterling branches offer Prime
an entrance into the rapidly expanding western suburbs. All branch locations of
both banks will remain open and we will continue to grow and expand by opening
new branches providing more opportunities for our employees."
According to William H. Bromley, Executive V.P. of Prime Bancorp, Inc. and
First Sterling's President, the merger brings many resources to First Sterling
customers and employees. "This merger is viewed favorably by the entire First
Sterling family. It enables us to offer our customers additional financial
products. The expansion of credit lines, through the combined capital of the two
banks, helps us to better serve our customers' needs," Mr. Bromley explained.
"We are equally excited and comfortable that the First Sterling culture and
level of service will not be interrupted, but will be enhanced, by the merger."
NEW ADVERTISING CAMPAIGN FEATURES PRIME'S NEW IMAGE
As a result of the merger, Prime has grown, spread its wings, and become a "Bold
New Force" in the Delaware Valley banking community. A new advertising campaign
is currently introducing the new Prime Bank image to the public.
Prime now has "The strength of a big bank, the service of a small one."
This new position enables Prime to compete with banks of all sizes when it comes
to personal service and products. Not too big and not too small. Prime is now
just the right size for success.
[Picture of two covers]
A WELCOME TO FOUR
NEW BOARD MEMBERS
WE ARE PROUD TO WELCOME
FOUR NEW DISTINGUISHED MEMBERS TO THE
PRIME BANCORP, INC. BOARD OF DIRECTORS.
THEY ARE:
WILLIAM J. CUNNINGHAM,
BASKETBALL HALL OF FAMER
AND FORMER CHAMPIONSHIP WINNING
COACH OF THE PHILADELPHIA
76ERS AND FORMER OWNER AND
FOUNDER OF THE MIAMI HEAT PRO
BASKETBALL FRANCHISE.
ROBERT A. FOX,
PRESIDENT OF R.A.F. INDUSTRIES, A PRIVATE
INVESTMENT COMPANY WHICH ACQUIRES AND
MANAGES A DIVERSIFIED GROUP OF OPERATING
COMPANIES AND VENTURE CAPITAL
INVESTMENTS.
ROY T. PERAINO,
FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
OF CONTINENTAL BANCORP AND
CONTINENTAL BANK AND FORMER PRESIDENT OF
MIDLANTIC CORPORATION.
ARTHUR L. POWELL,
PRESIDENT OF KRAVCO, INC.,
A REAL ESTATE DEVELOPMENT
COMPANY WHICH SPECIALIZES IN
LARGE SHOPPING MALLS.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 7
<PAGE>
A TRIBUTE TO ERWIN T. STRAW
[Picture of Erwin T. Straw]
OFTEN DESCRIBED AS A TRUE GENTLEMAN,
MR. STRAW'S CARING, SINCERITY,
AND GOOD HUMOR ARE PART OF
WHAT'S MADE HIM A SUCCESS IN
ALL AREAS OF HIS LIFE.
Erwin T. Straw
Chairman
From 1984 through January 1996, Erwin T. Straw served Prime Bank as President
and Chief Executive Officer. On January 31, 1996, he turned the position over to
his successor, James J. Lynch, and became Chairman of the Board of Directors of
Prime Bancorp, Inc. Although continuing this role, Mr. Straw is now retiring
from participation in the Bank's day to day operations. It is at this time that
we would like to honor him for his long, successful career and his many
contributions.
Born and raised in Philadelphia, Mr. Straw was a member of Northeast
Catholic High School's Class of 1946. After high school, he enlisted in the U.S.
Navy and served as a radio operator on a minesweeper into 1948. He graduated
with honors in 1952 from Mount Saint Mary's College, Emmitsburg, PA, and he was
elected as President of the Honor Society. He later graduated from Stonier
Graduate School of Banking, Rutgers University. Prior to joining Prime Bank, Mr.
Straw was Lending Vice President at Cheltenham Bank from 1960 to 1984.
An active member of the Philadelphia business community, Mr. Straw is a
past President and Director of the Insured Financial Institutions of the
Delaware Valley. He is a Director of the Pennsylvania Association of Community
Bankers, and a member of the Thrift Institutions Advisory Council for the
Federal Reserve Bank of Philadelphia. His many civic roles include serving as
Treasurer of the Board of Trustees of Episcopal Hospital, a Trustee of Manor
Junior College, and a Director of the Philadelphia Protestant Home.
Often described as a true gentleman, Mr. Straw's caring, sincerity, and
good humor are part of what's made him a success in all areas of his life. The
father of seven children, six daughters and one son, he and his wife, Ella, now
have thirteen grandchildren.
We thank Mr. Straw for his leadership and dedication to Prime Bank's
success. Through his many years of service to the Bank, he has built a stable,
competitive organization with a strong service culture and a commitment to its
customers, community, and employees. We wish him all the best.
<PAGE>
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
The activities of Prime Bancorp, Inc. (the "Company") are limited primarily to
holding the common stock of its principal subsidiaries, Prime Bank and First
Sterling Bank (the "Bank"). The Bank's mission is to provide individuals,
businesses and communities, within the Philadelphia area, with high-quality
financial services. Operating through 23 offices, the Bank lends, gathers
deposit money, and provides other financial services. Loans are diversified
among residential mortgage, commercial real estate, consumer, and commercial
lines while deposits are gathered through multiple checking, savings, and CD
product lines.
[The printed version of this document contains a bar graph depicting the
following plot points]
In Millions
1994 1995 1996*
-------- -------- --------
Net Income $6.71 $7.47 $8.01
- ----------
* excludes one-time charges
NET INCOME
Prime Bancorp, Inc. reported net income of $4.02 million during 1996
compared with $7.47 million for 1995, and $6.71 million for 1994. The decrease
in income for 1996 was caused by one-time charges, on an after-tax basis,
including $1.66 million for an assessment to recapitalize the federal deposit
insurance fund, $1.70 million in merger-related costs, and $620 thousand in
extra loan loss provisioning. All numbers, including prior financial
information, have been restated to reflect the results of the merger with First
Sterling Bancorp, Inc., Devon, Pennsylvania for all years in accordance with the
pooling-of-interests accounting method. Net income for 1996, excluding one-time
charges, would have been $8.01 million, a 7.2% increase over 1995.
[The printed version of this document contains a bar graph depicting the
following plot points]
In Millions
1994 1995 1996
-------- -------- --------
Net Income $25.79 $28.42 $32.52
NET INTEREST INCOME
Net interest income for a bank is analogous to the gross profit of a
business. It represents the difference between income earned on earning assets
and the interest expense paid on liabilities. Net interest income is affected by
market and economic conditions which influence rates, as well as loan and
deposit growth.
Net interest income strongly increased by 14.4% over 1995 which was 10.2%
ahead of 1994. Balance sheet growth drove net interest income higher to $32.52
million during 1996 compared to $28.42 million for 1995, and $25.79 million for
1994. The improvement was largely supported by volume increases. Earning assets
in 1996 increased 12.2%. Period end loans increased 24.1%, led by growth in
commercial, construction, consumer, and consumer real estate.
Prime's net interest margin declined from 4.18% during 1995 to 4.14% during
1996, compared with 4.44% in 1994. Most of this decrease in margins has been
caused by changes in balance sheet mix and thinner spreads on newly booked
business.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 9
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
Management is committed to maintaining long-term stability in net interest
income despite changes in interest rates. This is accomplished through the
approximate matching of asset repricings and durations to liability repricings
and durations.
The two tables on pages 15 and 16 present an analytical explanation of
Prime's net interest income. The first provides a detailed spread analysis and
the second shows a differential rate/volume variance analysis.
[The printed version of this document contains a bar graph depicting the
following plot points]
In Millions
1994 1995 1996
-------- -------- --------
Provision for loan losses $1.59 $1.13 $3.84
PROVISION FOR LOAN LOSSES
The provision for loan losses for 1996 was sharply higher than in 1995.
Provision for loan losses was $3.84 million in 1996 compared with $1.13 million
in 1995. The increased level reflected additional provisioning to keep pace with
rapid loan growth, the one-time charge of approximately $1 million ($620
thousand after tax) to accelerate the resolution of problem loans, and
additional amounts to replenish reserves depleted by charged-off loans. Net
charge-offs were higher at $2.71 million in 1996, which included a large
charge-off on a residential construction loan. This compares with net
charge-offs $1.11 million in 1995 and $1.13 million in 1994.
NON-INTEREST INCOME
Non-interest income was $3.44 million in 1995 while 1996's amount was $3.22
million. Non-interest income for 1995 included a $260 thousand gain from the
one-time sale of mortgage servicing. The slight decline in investment income for
1996 followed a strong increase from 1994 to 1995.
In spite of the decrease, fees and service charges continued steady growth.
Security gains were $288 thousand and $448 thousand in 1996 and 1995 compared
with security losses of $285 thousand in 1994.
[The printed version of this document contains a bar graph depicting the
following plot points]
In Millions
1994 1995 1996
-------- -------- --------
Non-Interest income $2.18 $3.44 $3.22
NON-INTEREST EXPENSE
Non-interest expenses of $26.00 million for 1996 included $4.97 million in
non-recurring expenses. Specifically, this included $2.71 million for the
assessment to recapitalize the federal deposit savings association insurance
fund and $2.26 million in merger-related costs. Excluding one-time charges,
non-interest expenses were $21.02 million, up 11.1% from $18.93 million for 1995
which was 18.1% higher than they were in 1994.
Non-interest expenses also increased because of a 15.1% increase in
salaries and benefits primarily due to the hiring of key lending personnel,
continued expansion of the branch network, and technological enhancements
involving the upgrading of data processing and telecommunication systems.
[The printed version of this document contains a bar graph depicting the
following plot points]
In Millions
1994 1995 1996*
-------- -------- --------
Non-Interest Expense $16.03 $18.93 $21.02
- ----------
* excludes one-time charges
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
INCOME TAXES
The provision for federal and state income taxes for the years ended
December 31, 1996, 1995, and 1994 was $1.90 million, $4.34 million, and $3.63
million, respectively.
The lower provision for income taxes for 1996 was the result of lower
pre-tax income and credits earned through the Bank's reinvestment projects,
which was offset by non-deductible merger costs.
[The printed version of this document contains a bar graph depicting the
following plot points]
In Millions
1994 1995 1996
-------- -------- --------
Income Taxes $3.63 $4.34 $1.90
BALANCE SHEET REVIEW
Prime's total assets grew 12.9% from $820.0 million at year-end 1995 to
$926.1 million twelve months later. Balance sheet changes are summarized in the
following table (dollars in millions):
- -------------------------------------------------------------
Balance Sheet 1995 1996 $Change %Change
- -------------------------------------------------------------
Loans (Net)(1) $503.8 $616.9 $113.1 22.5%
Investments(2) 259.3 239.5 (19.8) -7.6%
Non-earning assets 56.9 69.7 12.8 22.5%
Total Assets 820.0 926.1 106.1 12.9%
Deposits 644.3 736.6 92.3 14.3%
Purchased Funds(3) 97.7 110.4 12.7 13.0%
Other Liabilities 8.7 8.6 (.1) -1.1%
Equity 69.3 70.5 1.2 1.7%
Total Liabilities
and Equity 820.0 926.1 106.1 12.9%
=============================================================
(1) Loans (net) includes loans receivable and loans held for sale.
(2) Investments includes investments and interest-bearing deposits.
(3) Purchased funds includes advance payments by borrowers for taxes and
insurance.
1996 balance sheet growth was supported by a $92.3 million increase in deposits
and a $12.7 million increase in purchased funds, as well as a $1.2 million
increase in equity and a $.1 million decline in other liabilities. These funds
were used to support loan growth of $113.1 million. There was an investment
decline of $19.8 million, which also helped fund growth, and a $12.8 million
increase in non-earning assets.
LOANS
Loans grew 22.5% from $503.8 million at the end of 1995 to $616.9 million at the
end of 1996, an increase of $113.1 million. During 1996, commercial, consumer,
and commercial real estate loan growth was strong, as a result of the Bank's
expanded and improved lending team.
INVESTMENTS
Investments declined moderately, 7.6%, during the year, making room on the
balance sheet for more loan growth. Management's investment strategy continues
to focus on maintaining an adequate reserve of shorter-term investments to
conservatively meet liquidity needs, combined with a more permanent portfolio of
medium-term investments to serve asset/liability management purposes.
The composition of the investment portfolio is also influenced by the
"Qualified Thrift Lender" test established by Federal laws which require the
Bank to maintain 65% of its assets in housing related loans and investments. In
order to meet this requirement and because of the Bank's loan diversification
into non-housing related products, most of the Bank's portfolio investments are
placed in mortgage-backed securities. Prime's mortgage-backed securities are
principally collateralized mortgage obligations (CMOs) and adjustable rate
mortgages (ARMs).
NON-INTEREST EARNING ASSETS
Non-interest earning assets increased from $56.9 million in 1995 to $69.7
million in 1996. This increase reflects higher levels associated with strong
demand deposit and other balance sheet growth.
DEPOSITS
Deposits increased $92.3 million or 14.3% during 1996. The year was
characterized by strong growth in checking account balances, particularly in
commercial deposits. Also, good growth in retail CDs, including $11.7 million in
a new callable CD product introduced late in the year, contributed to the
increase.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 11
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
PURCHASED FUNDS
Purchased funds at year-end 1996 increased 13.0% to $110.4 million from $97.7
million at year-end 1995. Purchased funds at year- end 1996 included $32.6
million in customer repos. Customer repos for 1995 came to $19.1 million.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses increased from $6.08 million at the end of 1995 to
$7.21 million at the end of 1996, an increase of 18.5%. The allowance for loan
losses is based on a periodic evaluation of the portfolio and is maintained at a
level that management considers adequate to absorb losses known and inherent in
the portfolio.
Management considers a variety of factors when establishing the allowance
recognizing that an inherent risk of loss always exists in the lending process.
Consideration is given to the impact of current economic conditions,
diversification of the loan portfolio, historical loss experience, delinquency
statistics, results of detailed loan reviews, borrowers' financial and
managerial strengths, the adequacy of underlying collateral, and other relevant
factors.
As a result of the merger with First Sterling, the Bank has modified its
approach to the workout of certain assets. This strategy involves the
accelerated resolution of problem assets which, the Bank believes, is more
economical than a long-term work out approach, and will allow management to
concentrate its resources on growth and revenue generation.
The allowance for loan losses is increased by the provision for loan losses
and recoveries on previously charged-off loans, and is reduced by actual
charge-offs. While management uses available information to establish allowances
for losses on loans, future additions to the allowance for loan losses may be
necessary based on the changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such
agencies may require the Bank to make additions to the allowance for loan losses
based on their assessment of information which is available to them at the time
of their examination.
A substantial portion of the Company's loans are secured by real estate in
its market area. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio and the recoverability of a substantial
portion of the carrying amount of real estate owned is susceptible to changes in
economic and market conditions in the Company's local area. However, management
believes that the allowance for loan losses is adequate and that the value
assigned to properties included in real estate owned do not exceed their current
estimated fair values less estimated costs to sell.
CAPITAL ADEQUACY
The Company's equity increased by $1.2 million during 1996. The Company's equity
ratio was 7.61% at year-end 1996 vs. 8.45% at year-end 1995. These capital
ratios qualify the Bank as "well capitalized" under current regulatory
guidelines and provide a foundation for future growth.
<PAGE>
BANKING RISKS
CREDIT RISK
During 1996, Prime continued to place a heavy emphasis on generating high
quality loans. Approvals of loans rest with experienced lenders who follow
detailed underwriting and appraisal standards. The Bank focuses on keeping
credit risks at reasonable levels.
In 1996 higher provisions were made regarding credit risk. As previously
stated, the increased level reflected additional provisioning to keep pace with
rapid loan growth, the one-time charge of approximately $1 million ($620
thousand after tax) to accelerate the resolution of problem loans, and
additional amounts to replenish reserves depleted by charged-off loans.
LIQUIDITY RISKS
A solid base of stable core deposits is the key to minimizing liquidity risk.
The second key is maintaining a pool of readily marketable investments as a
liquidity reserve to support unforeseen fluctuations in deposit and loan
volumes. The third and final key is to maintain plenty of excess borrowing
capacity.
Prime's loan to deposit ratio improved during 1996. The Bank's unused
borrowing capacity at the Federal Home Loan Bank was approximately $161.8
million at year end.
<PAGE>
The following table provides key asset quality trends (dollars in thousands).
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Charge-offs $(1,150) $ (941) $(1,132) $(1,114) $(2,713)
Net Charge-offs as % of Loans 0.31% 0.23% 0.26% 0.22% 0.44%
Non-Performing Assets $6,622 $7,133 $ 7,291 $ 5,755 $8,509(1)
Non-Performing Assets as % of Assets 1.29% 1.19% 0.99% 0.70% 0.92%
Allowance for Loan Losses $4,386 $5,605 $ 6,067 $ 6,082 $7,206
Allowance as % Loans 1.19% 1.38% 1.37% 1.22% 1.17%
Allowance as % Non-Performing Assets 66.23% 78.58% 83.21% 105.68% 84.69%(1)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Non-performing assets, which includes non-accrual loans, increased from
$5.8 million in 1995 to $8.5 million in 1996. The increase was primarily
attributable to the classification of construction and commercial loans to
non-accrual status during the third quarter of 1996.
INTEREST RATE RISK
Prime's management strategy is to avoid speculative interest rate risk.
Interest rate risk represents the volatility of net interest income and
portfolio market value caused by changes in market interest rates.
Net interest income volatility is reduced primarily through the management
of deposit and loan rates, and the approximate rate sensitivity matching of
assets and liabilities over multiple time frames (the difference in assets and
liabilities in these time frames being referred to as "the gap"). The table on
the next page presents the Bank's gaps over multiple time frames. The Bank's
tactical gap (weighted average one year gap) of a negative $12.9 million or a
negative 1.5% of earning assets is considered by management to be moderate and
reasonable. Consequently, changes in market rates of interest should have a
relatively minimal impact on net interest income. Prime's estimated duration of
equity finished the year within Asset/Liability management policy guidelines.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 13
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
GAP ANALYSIS
December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
3 Mo More 3 Mo More 6 Mo More 1 Yr More 3 Yr More 5 Yr More
Earning Assets: or less thru 6 Mo thru 1 Yr thru 3 Yr thru 5 Yr thru 10 Yr 10 Yr Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Construction Loans $38,575 $ -- $ -- $ -- $ -- $ -- $ -- $ 38,575
ARM'S (6) 12,134 15,799 39,752 36,792 36,567 2,360 -- 143,404
Fixed Mortgages (1, 6) 5,338 3,610 7,132 25,472 26,364 17,298 520 85,734
Consumer Loans (6) 38,626 3,069 6,576 22,133 23,574 6,559 2,035 102,572
Commercial (6) 109,961 7,479 13,417 35,187 56,042 23,592 8,136 253,814
Liquidity 20,766 5,987 12,032 11,955 4,030 -- -- 54,770
Portfolio 74,315 9,719 19,158 51,423 13,341 12,003 4,768 184,727
- ---------------------------------------------------------------------------------------------------------------------------
Total Earning Assets $299,715 $ 45,663 $ 98,067 $182,962 $159,918 $61,812 $15,459 $863,596
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Checking Accounts (2) $ -- $ -- $ -- $ 30,956 $ 30,956 $77,384 $ -- $139,296
Savings Accounts (2) 2,645 2,645 5,290 21,164 15,756 15,522 -- 63,022
Premier MM/Select (3) 30,927 30,927 23,585 -- -- -- -- 85,439
Money Market (1) 8,576 8,576 17,151 10,192 -- -- -- 44,495
Certificates (4) 103,233 81,931 102,464 93,820 20,112 2,820 10 404,390
Borrowed Funds 95,709 -- 5,024 7,550 -- -- -- 108,283
Capital (5) 668 668 1,334 5,334 5,334 5,333 -- 18,671
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities $241,758 $ 124,747 $154,848 $169,016 $ 72,158 $101,059 $10 $863,596
GAP $57,957 $(79,084) $(56,781) $ 13,946 $ 87,760 $(39,247) $15,449
as % earning assets 6.7% -9.1% -6.6% 1.6% 10.2% -4.6% 1.8%
Cumulative GAP $57,957 $(21,127) $(77,908) $(63,962) $ 23,798 $(15,449)
as % earning assets 6.7% -2.4% -9.0% -7.4% 2.8% -1.8%
Tactical GAP (12,910)
as % earning assets -1.49%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes Market Prepayment Rates.
(2) Assumes run-offs over 10 years.
(3) Assumes repricings over 1 year.
(4) Reflects the impact of interest rate swaps.
(5) Capital investment is targeted over 7 years.
(6) Reflects net deferred fees excluding allowance for loan loss.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
SPREAD ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Loans receivable, net (2,3,4)
Residential $167,291 $14,231 8.51% $194,394 $16,983 8.74% $221,251 $18,569 8.39%
Construction 34,995 4,063 11.61% 27,798 3,357 12.08% 29,467 3,116 10.57%
Commercial 160,001 13,778 8.61% 180,635 17,554 9.72% 220,213 20,750 9.42%
Consumer 55,710 4,449 7.99% 60,219 5,218 8.67% 78,741 6,709 8.52%
Credit Card 3,364 531 15.78% 5,899 850 14.41% 7,960 1,080 13.57%
- ----------------------------------------------------------------------------------------------------------------------------------
421,361 37,052 8.79% 468,945 43,962 9.37% 557,632 50,224 9.01%
- ----------------------------------------------------------------------------------------------------------------------------------
Investment securities (4) 192,018 11,462 5.97% 239,844 15,910 6.63% 247,988 16,353 6.59%
Interest-bearing deposits 5,969 248 4.15% 8,278 646 7.80% 8,485 295 3.48%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 619,348 48,762 7.87% 717,067 60,518 8.44% 814,105 66,872 8.21%
- ----------------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets 39,719 -- -- 50,830 -- -- 68,911 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $659,067 $48,762 $767,897 $60,518 -- $883,016 $66,872 --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities: (1)
Passbook/Statement $ 67,870 $ 1,366 2.01% $ 65,157 $ 1,353 2.08% $ 63,827 $ 1,338 2.10%
Money Market/Premier 92,866 2,739 2.95% 105,923 3,919 3.70% 120,817 4,334 3.59%
Commercial Checking 47,222 304 0.64% 56,100 510 0.91% 73,627 578 0.79%
N.O.W. Accounts 32,690 577 1.77% 36,444 737 2.02% 40,720 782 1.92%
Time Deposits 286,972 13,881 4.84% 333,791 18,747 5.62% 356,453 19,679 5.52%
- ----------------------------------------------------------------------------------------------------------------------------------
527,620 18,867 3.58% 597,415 25,266 4.23% 655,444 26,711 4.08%
- ----------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other
borrowings 49,765 2,413 4.85% 84,897 5,291 6.23% 116,386 6,429 5.52%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 577,385 21,280 3.69% 682,312 30,557 4.48% 771,830 33,140 4.29%
- ----------------------------------------------------------------------------------------------------------------------------------
Other liabilities 23,682 -- -- 22,786 -- -- 41,813 -- --
Stockholders' equity 58,000 -- -- 62,799 -- -- 69,373 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $659,067 $21,280 $767,897 $30,557 $883,016 $33,140
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income/interest
rate spread $27,482 4.18% $29,961 3.96% $33,732 3.92%
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest earning assets/
net yield interest-earning
assets $41,963 4.44% $34,755 4.18% $42,275 4.14%
- ----------------------------------------------------------------------------------------------------------------------------------
Interest earning assets
to interest-bearing liabilities 107% 105% 105%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average balances are calculated on a monthly basis.
(2) Non-accrual loans are included in loans.
(3) Yields on loans include income from origination fees, net of costs.
(4) Tax free income is calculated on a tax equivalent basis.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 15
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in average
volume multiplied by the prior year's rate), and (2) changes in rate (changes in
rate multiplied by the prior year's volume). The difference in the rate/volume
is allocated on a pro-rata basis to the change in rate variance and the change
in volume variance.
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1994 vs. 1995 1995 vs. 1996
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due to
- ---------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio
Residential $2,306 $ 401 $2,707 $2,619 $(883) $1,736
Construction (836) 130 (706) 130 (371) (241)
Commercial 1,777 1,999 3,776 3,692 (496) 3,196
Consumer 360 409 769 1,551 (60) 1,491
Credit Card 400 (81) 319 296 (66) 230
- ---------------------------------------------------------------------------------------------------------------------------
4,007 2,858 6,865 8,288 (1,876) 6,412
- ---------------------------------------------------------------------------------------------------------------------------
Investments 2,855 1,793 4,648 511 113 624
Interest earning deposits 96 302 398 11 (362) (351)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,958 4,953 11,911 8,810 (2,125) 6,685
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings (55) 42 (13) (25) 9 (16)
Money Market/Premier 385 795 1,180 552 (136) 416
Commercial Checking 57 149 206 70 (2) 68
N.O.W. Accounts 66 94 160 92 (47) 45
Time deposits 2,266 2,600 4,866 1,319 (387) 932
- ---------------------------------------------------------------------------------------------------------------------------
2,719 3,680 6,399 2,008 (563) 1,445
- ---------------------------------------------------------------------------------------------------------------------------
Federal Home Loan
Bank advances and other borrowings 1,704 1,174 2,878 1,962 (824) 1,138
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,423 4,854 9,277 3,970 (1,387) 2,583
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income $2,535 $99 $2,634 $4,840 $(738) $4,102
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
Financial Condition Data
(Dollars in thousands)
<TABLE>
<CAPTION>
As of December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets $512,404 $598,858 $739,231 $819,961 $926,071
Loans (2) and mortgage-backed securities 409,361 493,779 566,514 639,866 766,811
Investment securities and interest-bearing deposits 68,367 66,113 117,193 123,310 89,628
Land acquired for development and resale 1,000 838 694 10,405 8,858
Deposits 439,796 491,163 585,066 644,306 736,642
Advances from Federal Home Loan
Bank of Pittsburgh 10,900 23,000 24,694 37,646 37,598
Other borrowed money 1,851 18,644 56,525 57,622 70,685
Stockholders' equity 52,001 58,629 57,369 69,279 70,516
Offices open 14 16 20 22 23
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPERATING DATA
(Dollars in thousands, except per share data)
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $40,027 $41,953 $47,068 $58,979 $65,664
Interest expense 19,830 18,283 21,280 30,557 33,140
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 20,197 23,670 25,788 28,422 32,524
Provision for loan losses 2,163 2,160 1,594 1,129 3,837
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 18,034 21,510 24,194 27,293 28,687
Gain (loss) on sale of:
Loans receivable 5 148 81 68 99
Investment securities 737 269 (285) 448 288
Mortgage servicing -- -- -- 260 --
Land acquired for development and resale -- -- -- 20 --
Real estate owned (71) (26) (17) (64) 14
Rental income 214 350 321 174 240
Fees and service charges and other income 1,989 1,859 2,077 2,537 2,580
Non-interest expense 11,994 13,593 16,034 18,930 25,995
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and effect of cumulative
change in accounting principle 8,914 10,517 10,337 11,806 5,913
Income tax expense 3,182 3,939 3,625 4,337 1,896
- ---------------------------------------------------------------------------------------------------------------------------
Income before effect of cumulative change
in accounting principle 5,732 6,578 6,712 7,469 4,017
Cumulative effect on prior years of change in tax
accounting method -- 1,055 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income $5,732 $ 7,633 $6,712 $7,469 $4,017
- ---------------------------------------------------------------------------------------------------------------------------
Dividends declared $1,301 $1,821 $1,949 $2,351 $2,811
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share (1) $1.05 $1.27 $1.26 $1.38 $.74
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Earnings per share have been adjusted to reflect the stock split and stock
dividends.
(2) Loans include loans receivable and loans held for sale.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 17
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
CONSOLIDATED SUMMARY OF QUARTERLY EARNINGS
The following quarterly financial information for the years ended December 31,
1995 and 1996 is unaudited. However, in the opinion of management, all
adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for the periods, are reflected in
conformity with generally accepted accounting principles. Results of operations
for the periods presented are not necessarily indicative of the results for the
entire year or for any other interim period.
<TABLE>
<CAPTION>
1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $13,888 $14,735 $15,005 $15,351 $15,345 $16,219 $16,989 $17,111
Interest expense 6,950 7,665 7,824 8,118 7,851 8,078 8,589 8,622
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,938 7,070 7,181 7,233 7,494 8,141 8,400 8,489
Provision for loan losses (233) (360) (363) (173) (363) (472) (537) (2,465)(1)
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,705 6,710 6,818 7,060 7,131 7,669 7,863 6,024
- ------------------------------------------------------------------------------------------------------------------------------
Non-interest income 417 1,043 931 1,052 970 849 672 730
Non-interest expense (4,301) (4,743) (4,795) (5,091) (4,913) (5,121) (7,934)(2) (8,027)(3)
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 2,821 3,010 2,954 3,021 3,188 3,397 601 (1,273)
Income tax (expense) benefit (982) (1,125) (1,106) (1,124) (1,092) (1,191) (114)(2) 501(3)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ 1,839 $ 1,885 $ 1,848 $ 1,897 $ 2,096 $ 2,206 $ 487 $ (772)
- ------------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 0.35 $ 0.36 $ 0.35 $ 0.36 $ 0.39 $ 0.41 $ 0.09 $(0.14)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a one-time provision of approximately $1.0 million to accelerate
the resolution of problem loans.
(2) Includes a one-time FDIC Special Insurance Assessment of $1.66 million net
of taxes.
(3) Includes restructuring charges of $1.70 million net of taxes.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
MARKET INFORMATION
The Company's common stock is traded on the over-the-counter market and reported
on the NASDAQ National Market System under the symbol "PSAB." On February 1,
1997 there were 5,380,990 shares of common stock issued and outstanding, which
were held by approximately 812 stockholders. The following table sets forth the
high and low closing sale prices for the common stock, as quoted on the NASDAQ
National Market System, and the dividends declared per share, for the periods
indicated.
Dividends
Declared
For The Quarter Ended High Low (Per Share)
--------------------------------------------------------
December 31, 1988 $ 5.39 $ 4.27 N/A
March 31, 1989 $ 5.76 $ 5.16 $.03
June 30, 1989 6.05 5.68 .03
September 30, 1989 6.87 5.76 .04
December 31, 1989 6.69 5.68 .04
--------------------------------------------------------
March 31, 1990 $ 5.95 $ 4.84 $.05
June 30, 1990 5.12 4.27 .05
September 30, 1990 4.46 4.00 .05
December 31, 1990 3.53 3.15 .05
--------------------------------------------------------
March 31, 1991 $ 5.58 $ 3.25 $.05
June 30, 1991 6.05 5.12 .05
September 30, 1991 8.36 5.31 .05
December 31, 1991 8.36 6.69 .07
--------------------------------------------------------
March 31, 1992 $ 9.11 $ 8.36 $.08
June 30, 1992 9.48 8.74 .09
September 30, 1992 8.93 8.28 .10
December 31, 1992 10.78 9.40 .10
--------------------------------------------------------
March 31, 1993 $13.39 $10.23 $.10
June 30, 1993 15.08 12.19 .18
September 30, 1993 15.08 13.23 .11
December 31, 1993 17.35 14.67 .11
--------------------------------------------------------
March 31, 1994 $17.56 $15.91 $.13
June 30, 1994 17.97 16.95 .13
September 30, 1994 15.91 14.87 .13
December 31, 1994 15.23 14.32 .15
--------------------------------------------------------
March 31, 1995 $17.27 $16.14 $.15
June 30, 1995 16.36 15.68 .15
September 30, 1995 19.09 18.18 .15
December 31, 1995 20.88 18.00 .17
--------------------------------------------------------
March 31, 1996 $18.25 $17.75 $.17
June 30, 1996 18.75 18.00 .17
September 30, 1996 19.50 18.75 .17
December 31, 1996 20.50 18.75 .17
--------------------------------------------------------
The Board of Directors of the Company, on December 20, 1995, declared a
special 10% stock dividend to shareholders in the form of a dividend which was
paid on February 1, 1996 to shareholders of record on January 2, 1996. The
trading information set forth above has been adjusted to reflect such stock
dividends and adjusted for the previous stock split and 10% stock dividends for
purposes of comparability.
It is the Company's current policy to pay quarterly cash dividends. Future
cash dividends will be subject to determination and declaration by the Board of
Directors, which will take into account the Company's financial condition,
results of operations, industry standards, economic conditions, and regulatory
and tax considerations. Funds for the payment of the dividends by the Company
are obtained from the Bank. The amount of dividends that may be declared or paid
by the Bank are subject to certain restrictions. See Note 3 to the consolidated
financial statements.
The listed market makers for the stock are: Robert W. Baird & Co., Inc.;
Wheat First Securities Inc.; Herzog, Heine, Geduld, Inc.; Sandler O'Neill &
Partners; Janney Montgomery Scott, Inc.; F.J. Morrissey & Co., Inc.; and Ryan
Beck & Co., Inc.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 19
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $17,627 $29,161
Interest-bearing deposits 35,263 2,703
Federal Funds Sold -- 600
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 52,890 32,464
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities (fair value of $99,129 and $110,874) 98,000 110,766
Investment securities available for sale 126,065 125,428
Loans receivable: 503,665 624,426
Deferred fees (549) (327)
Allowance for loan losses (6,082) (7,206)
- ---------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 497,034 616,893
- ---------------------------------------------------------------------------------------------------------------------------
Loans held for sale 6,814 49
Accrued interest receivable 6,483 6,826
Real estate owned 419 1,335
Land acquired for development and resale 10,405 8,858
Property and equipment, net 10,278 10,291
Other assets 11,573 13,161
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $819,961 $926,071
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $644,306 $736,642
Advances from Federal Home Loan Bank of Pittsburgh 37,646 37,598
Other borrowed money 57,622 70,685
Advance payments by borrowers for taxes and insurance 2,403 2,104
Other liabilities 8,705 8,526
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 750,682 855,555
- ---------------------------------------------------------------------------------------------------------------------------
Commitments & Contingencies (Note 14)
Stockholders' equity:
Serial preferred, $1 par value; 2,000,000 shares authorized and unissued -- --
Common stock, $1 par value; 13,000,000 shares authorized and 5,270,357
and 5,291,157 issued and outstanding 5,270 5,291
Additional paid-in capital 37,204 37,390
Retained earnings (Note 3) 27,950 29,156
Valuation adjustment for debt securities net of taxes (1,145) (1,321)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 69,279 70,516
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $819,961 $926,071
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $36,185 $43,050 $49,462
Investment securities 10,635 15,283 15,907
Interest-bearing deposits 248 646 295
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 47,068 58,979 65,664
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 18,867 25,266 26,711
Short-term borrowings 1,349 3,534 5,272
Long-term borrowings 1,064 1,757 1,157
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 21,280 30,557 33,140
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 25,788 28,422 32,524
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,594 1,129 3,837
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 24,194 27,293 28,687
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Fees and service charges 1,595 1,781 1,902
Gain (loss) on sale of:
Loans receivable, net 81 68 99
Investment securities, net (285) 448 288
Land acquired for development and resale -- 20 --
Mortgage servicing -- 260 --
Real estate owned (17) (64) 14
Rental income 321 174 240
Other 482 756 678
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,177 3,443 3,221
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 7,638 9,065 10,437
Occupancy and equipment 2,960 3,825 4,985
Federal deposit insurance premiums 876 1,008 753
FDIC special assessment -- -- 2,713
Restructuring and other merger related expenses -- -- 2,260
Other 4,560 5,032 4,847
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 16,034 18,930 25,995
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 10,337 11,806 5,913
Income taxes 3,625 4,337 1,896
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 6,712 $ 7,469 $ 4,017
- ---------------------------------------------------------------------------------------------------------------------------
Primary and fully diluted earnings per share:
Net income $ 1.26 $ 1.38 $ .74
Weighted average number of shares outstanding 5,311,513 5,399,571 5,430,529
Dividends declared per share $ .54 $ .62 $ .68
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 21
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Valuation
Adjustment
for Debt
Additional Securities Total
Common Paid in Retained Net of Stockholders'
Stock Capital Earnings Taxes Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $5,204 $36,896 $18,069 $313 $60,482
Stock options exercised 66 267 -- -- 333
Tax benefit associated with exercise of stock options -- 41 -- -- 41
Dividends declared ($.54 per common share) -- -- (1,949) -- (1,949)
Valuation adjustment for debt securities net of taxes -- -- -- (7,397) (7,397)
Net Income -- -- 6,712 -- 6,712
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 5,270 37,204 22,832 (7,084) 58,222
Dividends declared ($.62 per common share) -- -- (2,351) -- (2,351)
Valuation adjustment for debt securities net of taxes -- -- -- 5,939 5,939
Net Income -- -- 7,469 -- 7,469
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 5,270 37,204 27,950 (1,145) 69,279
Stock options exercised 21 112 -- -- 133
Tax benefit associated with exercise of stock options -- 74 -- -- 74
Dividends declared ($.68 per common share) -- -- (2,811) -- (2,811)
Valuation adjustment for debt securities net of taxes -- -- -- (176) (176)
Net Income -- -- 4,017 -- 4,017
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $5,291 $37,390 $29,156 $(1,321) $70,516
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $6,712 $7,469 $4,017
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization of intangibles 1,596 1,887 2,443
(Gain) Loss on sale of:
Loans held for sale (81) (68) (99)
Investment securities 285 (448) (288)
Land acquired for development and resale -- (20) --
Real estate owned 17 64 (14)
Provision for loan losses 1,594 1,129 3,837
Increase in accrued interest receivable (909) (1,365) (343)
(Increase) decrease in other assets (3,514) 1,626 (1,296)
Increase (decrease) in other liabilities 7,388 (4,798) (462)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 13,088 5,476 7,795
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities:
Purchases (13,256) (49,549) (35,314)
Maturities 21 15,427 23,029
Investment securities held for sale:
Purchases (150,862) (84,848) (63,087)
Maturities 19 062 13,630 24,333
Sales 49,801 118,343 40,443
Loans receivable:
Originations, net of repayments (40,259) (71,816) (121,829)
Sales -- -- --
Loans held for sale:
Originations, net of repayments (10,228) (7,015) (7,855)
Sales 8,756 9,742 9,492
Decrease in land acquired for development and resale 144 (819) (1,188)
Purchase of property and equipment (2,021) (1,611) (2,077)
Proceeds from the sale of land acquired for
development and resale -- 520 2,735
Decrease in real estate owned (5) (225) --
Proceeds from sale of real estate owned 1,015 914 367
Net cash and cash equivalents received from
banking institutions acquired 78,195 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (59,637) (57,307) (130,951)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 23
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $11,780 $59,432 $92,336
Advances from the Federal Home Loan Bank
of Pittsburgh 47,544 79,602 46,200
Repayments of advances from the Federal
Home Loan Bank of Pittsburgh (45,850) (66,650) (46,248)
Increase in other borrowed money 37,881 2,147 13,063
Increase (decrease) in advance payments
by borrowers for taxes and insurance 9 102 (299)
Net proceeds from issuance of common stock 1,333 -- 207
Purchase of treasury stock -- (198) --
Cash dividends paid (1,763) (2,292) (2,529)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from financing activities 50,934 72,143 102,730
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 4,385 20,312 (20,426)
Cash and cash equivalents:
Beginning of year 28,193 32,578 52,890
End of year $32,578 $52,890 $32,464
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $20,748 $29,142 $33,165
Income taxes 4,170 4,238 3,100
Securitization of residential loans -- -- 2,091
Transfer of investment securities to held to maturity 6,217 87,035 --
Transfer of investment securities to available for sale -- 38,324 --
Transfer of loans receivable to loans held for sale -- 4,813 --
Transfer of loans held for sale to loans receivable -- -- 3,136
Transfer of loans receivable to real estate owned 957 849 1,269
Benefit associated with the exercise of stock options 66 -- 74
Acquisitions:
In conjunction with the acquisitions,
liabilities assumed and assets
acquired were as follows:
Assets acquired, net of cash and cash received $4,519 $ -- $ --
Cash and cash equivalents received 78,195 -- --
Liabilities assumed 82,714 -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- -------------------------------------------------------------------------------
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 ("GAAP"), which have been applied on a consistent basis.
BUSINESS
The Company's principal subsidiaries are Prime Bank and First Sterling Bank
whose principal business consists of attracting deposits and obtaining
borrowings, then converting those deposits and borrowings into various types of
loans, mortgage-backed securities, and other investments. These operations are
conducted through a branch network in Southeastern Pennsylvania. The Banks are
subject to competition from other financial institutions and are also subject to
the regulations of certain federal agencies and undergo periodic examinations by
those regulatory authorities.
Effective March 19, 1996, Prime Bank, a federal savings bank, converted
into a Pennsylvania chartered stock savings bank with the legal name, "Prime
Bank, a savings bank." After the conversion, the Bank continued to do business
under the name "Prime Bank" and the Bank's deposits continue to be insured by
the Savings Association Insurance Fund ("SAIF") administered by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank continues to meet all
applicable "qualified thrift lender" tests. In the opinion of the Company's
management, there are not likely to be any material differences in the impact of
Pennsylvania banking laws and regulations on the ordinary activities of the
Bank, as compared to federal laws and regulations applicable to federal savings
associations.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in prior years have been reclassified for comparative purposes.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and the estimated fair value of real estate owned, management
obtains independent appraisals for significant properties.
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, the Company considers
cash and cash equivalents to include cash, due from banks, interest-bearing
deposits with maturities of 3 months or less and federal funds sold.
INVESTMENT SECURITIES
Securities classified as held-to-maturity are those securities in which the
Company has the ability and intent to hold the securities until maturity and are
recorded at amortized cost, adjusted for the amortization of premiums and
discounts. All other securities not included in held-to-maturity are classified
as available-for-sale and are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. Transfers of
securities between categories are recorded at fair value at the date of
transfer.
With the issuance of "A Guide to Implementation of Statement 115 Accounting
for Debt and Equity Securities," the Financial Accounting Standards Board
allowed institutions to reassess the appropriateness of the classifications of
all securities and account for any resulting reclassifications at fair value.
The reclassifications could occur no later than December 31, 1995 and would not
call into question the intent of an institution to hold other debt securities to
maturity in the future (See Note 5).
A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
The Company has one interest rate swap which is used to hedge the interest
rate risk of 7 year fixed-rate certificates of
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 25
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
deposit. The Company has three interest rate swaptions which are used to
hedge the interest rate risk of 15 year fixed-rate certificates of deposit which
are callable in two years. The Company does not use derivatives for trading
purposes.
REAL ESTATE OWNED
Real estate acquired in partial or full satisfaction of loans are classified as
Real Estate Owned ("REO"). Prior to transferring a real estate loan to REO it is
written down to the lower of cost or fair value less costs to sell. This
write-down is charged to the allowance for loan losses. Subsequently, REO is
carried at the lower of fair value less estimated costs to sell or carrying
value.
LAND ACQUIRED FOR DEVELOPMENT AND RESALE
Land acquired for development and resale represents land and construction in
progress and is carried at the lower of cost or fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the lesser of
the lease term (where applicable) or the estimated useful lives of the related
property, which range from 5 to 40 years. Maintenance and repairs are expensed
as incurred.
LOANS RECEIVABLE
Interest income is recognized on the accrual basis. Generally, loans are placed
on non-accrual status when the loan becomes past due by 90 days or more as to
principal or interest. After a loan is placed on non-accrual status, any
interest previously accrued but not yet collected is reversed against current
interest income. A loan is returned to accrual status only when the borrower has
brought principal and interest current and full collectability is reasonably
assured.
Fees earned for servicing loans for others are reported as income when the
related loan payments are collected. Loan servicing costs are charged to expense
as incurred. If the Banks sell loans and continue to service such loans for the
investor, the computation of the gain or loss is adjusted to allow for a normal
servicing fee over the estimated remaining maturities of the loans sold. Normal
servicing fees are based on the minimum servicing rates of the relevant
federally-sponsored market makers or comparable rates for transactions with
other investors. The resulting deferral is amortized as an adjustment of
servicing fee income over a period generally not in excess of 7 years.
LOAN IMPAIRMENT
Impaired loans are measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate or, as a practical
expedient, at the loans observable market price or the fair value of the
collateral if the loan is collateral dependent. All payments received are
applied to the principal balance.
DEFERRED LOAN FEES, NET
Loan origination fees, commitment fees and loan origination costs are deferred
and amortized as an adjustment to the yield over the life of the loan in a
manner which approximates the interest method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on a periodic evaluation of the portfolio
and is maintained at a level that management considers adequate to absorb losses
known and inherent in the portfolio. Management considers a variety of factors
when establishing the allowance recognizing that an inherent risk of loss always
exists in the lending process. Consideration is given to the impact of current
economic conditions, diversification of the loan portfolio, historical loss
experience, delinquency statistics, results of detailed loan and regulatory
reviews, borrowers' financial and managerial strengths, the adequacy of
underlying collateral, and other relevant factors. The allowance for loan losses
is increased by the provision for loan losses and recoveries on previously
charged-off loans, and is reduced by actual charge-offs. While management uses
available information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require the Company to recognize additions to the allowance
for loan losses based on their judgments of information which is available to
them at the time of their examination.
A substantial portion of the Company's loans are secured by real estate in
the Company's market area. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recoverability of a
substantial portion of the carrying amount of real estate owned is susceptible
to changes in economic and market conditions in the market area. However,
management believes that the allowance for loan losses is adequate and that the
value assigned to properties included in real estate owned and land acquired for
development and resale do not exceed their current estimated fair values less
estimated costs to sell.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
LOANS HELD FOR SALE
The Banks have adopted a policy to sell fixed-rate single family residential
mortgage loans and adjustable-rate mortgages which meet the underwriting and
securitization characteristics of certain market makers. Conforming loans are
recorded as loans held for sale and are valued at the lower of aggregate cost or
market.
MORTGAGE SERVICING RIGHTS\
The Company recognizes as separate assets, the right to service mortgage
loans based on the fair value of those rights.
The carrying value of capitalized MSRs at December 31, 1996 was $340
thousand which approximated fair value. Fair value was determined by calculating
the discounted present value of estimated expected net future cash flows,
considering estimated prepayments and defaults, projected interest rates and
other factors. For purposes of evaluating and measuring impairment, capitalized
MSRs are aggregated into groups having homogeneous risk characteristics, based
on the attributes of the underlying loans, and are separately valued, using
appropriate assumptions for each risk group. No valuation allowance was required
for capitalized MSRs at December 31, 1996.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No. 125 will
have a material impact on the Company's financial position, results of
operations, or liquidity.
INCOME TAXES
The Company and its wholly owned subsidiaries file a consolidated federal income
tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to January 1, 1996 the Bank qualified under provisions of the
Internal Revenue Code which permitted it to deduct up to 8% of taxable income,
an allowance for bad debts based on a percentage of taxable income before such
deduction. This tax provision was repealed on January 1, 1996 from the Internal
Revenue Code.
CAPITAL
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
prompt corrective action regulations define specific capital categories based on
an institution's capital ratios. The capital categories, in declining order, are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
To be considered "adequately capitalized," an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at
least 4%, and a total risk-based capital ratio of at least 8%. A bank holding
company must generally have a primary capital ratio of at least 5.5% and a total
capital ratio of at least 6.0% to be deemed adequately capitalized. The
regulatory capital ratios of the company and each bank exceed those
requirements. The regulatory capital ratios of both Prime Bank and First
Sterling Bank exceed the "well capitalized" ratio requirements of 10% total
risk-based capital, 6.0% Tier 1 risk-based capital and a 5.0% leverage ratio.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 27
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
REGULATORY CAPITAL SCHEDULE
(Dollars in thousands)
Capital
Actual Requirements
Amount Ratio Amount Ratio
- --------------------------------------------------------------
Tier 1 capital
(to risk-weighted assets):
Prime Bank $44,564 9.56% $18,648 4.00%
First Sterling
Bank 13,479 8.14% 6,621 4.00%
- --------------------------------------------------------------
Total capital
(to risk-weighted assets):
Prime Bank 49,022 10.52% 37,296 8.00%
First Sterling
Bank 15,556 9.40% 13,242 8.00%
- --------------------------------------------------------------
Leverage (to average assets):
Prime Bank 44,564 6.65% 26,791 4.00%
First Sterling
Bank 13,479 5.88% 9,173 4.00%
- --------------------------------------------------------------
EARNINGS PER SHARE
Earnings per share have been 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, unless
anti-dilutive. Earnings per share has been restated to reflect the stock splits
and stock dividends.
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
2. ACQUISITIONS
On December 31, 1996, the Company acquired First Sterling Bancorp, Inc.
("FSB") in a transaction structured as a pooling of interests. Each outstanding
share of common stock of FSB was exchanged for one share of the Company. This
resulted in the issuance of approximately 1.66 million shares of Company stock.
In connection with the First Sterling Bancorp, Inc. merger and as required by
the Convertible Subordinated Debentures agreement, at December 31, 1996 the
Company also converted the $1.05 million principal amount of debentures issued
in 1990 and 1991 by First Sterling Bancorp, Inc. to 110,510 shares of Prime
stock. The transaction was tax-free to the shareholders for federal income tax
purposes.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
Years Ended
December 31,
- -----------------------------------------------------------------
1994 1995 1996
- -----------------------------------------------------------------
Net interest income:
Prime Bancorp $19,733 $20,970 $23,808
First Sterling 6,055 7,452 8,716
- -----------------------------------------------------------------
Combined $25,788 $28,422 $32,524
- -----------------------------------------------------------------
Net income:
Prime Bancorp $5,808 $5,853 $3,265
First Sterling 904 1,616 752
- -----------------------------------------------------------------
Combined $6,712 $7,469 $4,017
- -----------------------------------------------------------------
Total Assets:
Prime Bancorp $566,904 $607,975 $691,422
First Sterling 172,327 211,986 234,649
- -----------------------------------------------------------------
Combined $739,231 $819,961 $926,071
- -----------------------------------------------------------------
Total Deposits:
Prime Bancorp $447,651 $476,539 $554,237
First Sterling 137,415 167,767 182,405
- -----------------------------------------------------------------
Combined $585,066 $644,306 $736,642
- -----------------------------------------------------------------
Total Stockholders' Equity:
Prime Bancorp $47,641 $56,247 $57,037
First Sterling 9,728 13,032 13,479
- -----------------------------------------------------------------
Combined $57,369 $69,279 $70,516
- -----------------------------------------------------------------
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
3. STOCKHOLDERS' EQUITY
OTS regulations require that mutual associations converting to stock form of
ownership establish a "Liquidation Account" in an amount equal to the total net
worth of the association as of the date of the latest balance sheet contained in
the final offering circular. Each eligible savings account holder is entitled to
a proportionate share (subaccount) of this amount in the event of a complete
liquidation of the association, and only in such event. This subaccount is
reduced if the subaccount holders' savings deposits fall below the amount at the
date of record and will cease to exist if the savings account is closed. The
liquidation account will never be increased despite any increase after
conversion in the related savings deposits of a subaccount holder. At the time
of its conversion to a stock form of ownership, Prime Bank's liquidation account
was approximately $18,737,000. Prime Bank's liquidation account at December 31,
1996 was approximately $4,500,000.
The creation and maintenance of the liquidation account does not restrict
use or application of any of the stockholders' equity accounts of Prime Bank
except that Prime Bank may not declare or pay any cash dividend on or repurchase
any of its common stock, if the effect of such dividend or repurchase would be
to cause the stockholders' equity of Prime Bank to be reduced below the
aggregate amount then required for the liquidation account or the regulatory net
worth requirement.
The Company offers to its stockholders a Dividend Reinvestment and Stock
Purchase Plan, which provides participants with a method of reinvesting all or a
portion of cash dividends paid on shares of common stock in additional shares of
common stock without the payment of brokerage commissions or charges. Shares
purchased under such plan are purchased in the open market.
4. STOCK OPTION PLAN
The Company's Incentive Stock Option Plan provides for the grant of incentive
options to directors and certain employees of the Company or its subsidiaries
and the grant of non-incentive options to directors who are not full-time
employees of the Company or its subsidiaries. The option plan is administered by
a stock option committee which consists of three directors of the Company, none
of whom are eligible to receive options. The exercise price under the option
plan must be at least equal to the fair market value of the shares on the date
of grant, and no option may be exercisable after the expiration of ten years
from the date it is granted.
Under the Company's original option plan, 367,356 shares of Common Stock
have been reserved for issuance, of which a total of 364,731 stock options have
been granted since inception of the plan at an option price of $4.32 per share.
The maximum number of shares subject to the option plan may be adjusted for a
change in capitalization or reorganization. The option plan is designed
primarily as an incentive for full time employees responsible for the decision
making, policy formation and personnel supervision functions that most directly
affect the earnings of the Company and the welfare of its subsidiaries. Since
the inception of the stock option plan, 245,173 stock options were exercised and
13,439 stock options have been forfeited.
On December 21, 1994, the Board of Directors of the Company adopted an
Incentive Stock Option Plan ("Option Plan") also for the benefit of officers and
other full-time employees of the Company or its subsidiaries. The Option Plan
provides for the grant of non-incentive options to directors who are not full
time employees of the Company. The Option Plan was approved by the shareholders
at the April 19, 1995 annual meeting. Under the Option Plan, 388,978 shares of
common stock, par value $1.00 per share, have been reserved for issuance of
which a total of 255,000 shares have been granted at an average option price of
$17.98 per share as of December 31, 1996. The Board of Directors has also
reserved 100,000 shares of common stock, par value $1.00 per share, for options
granted to one officer.
At December 31, 1996, there were 133,978 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1995 and 1996 was $556,000 and $872,100 on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1995--expected dividend yield 3.4%, risk-free interest rate of
5.5%, expected volatility of stock over the expected life of the options of
31.2%, and an expected life of 5 years; 1996--expected dividend yield 3.3%,
risk-free interest rate of 5.8%, expected volatility of stock over the expected
life of the options of 13.8%, and an expected life of 5 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below.
1995 1996
- ------------------------------------------------------------------------------
Net income As reported $7,469 $4,017
Pro forma 6,913 3,323
Earning per
share As reported $1.38 $0.74
Pro forma 1.28 0.61
- ------------------------------------------------------------------------------
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected over the options' vesting period of 2 years
and compensation cost for options granted prior to January 1, 1995 is not
considered.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 29
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
5. INVESTMENT SECURITIES
Investment securities at December 31, 1995 and 1996 were comprised of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State and municipal $ 400 $ 31 $ -- $ 431 $ 6,739 $ 63 $ (31) $ 6,771
Israel Bonds -- -- -- -- 100 -- -- 100
US Govt & US Govt Agency
obligations 11,830 141 -- 11,971 -- -- -- --
Marketable equity securities:
FHLB of Pittsburgh stock 4,120 -- -- 4,120 5,728 -- -- 5,728
FNMA stock 3 -- -- 3 3 -- -- 3
Federal Reserve Bank stock 243 -- -- 243 243 -- -- 243
Atlantic Central Bankers
Bank stock 75 -- -- 75 75 -- -- 75
Financial Institutions
Insurance Group stock 50 -- -- 50 -- -- -- --
Valley Forge Investment
Companies, Inc. -- -- -- -- 100 -- -- 100
Mortgage Backed Securities:
GNMA Pass through
certificates 217 -- (4) 213 136 2 (1) 137
FHLMC Pass through
certificates 207 -- (1) 206 202 1 -- 203
Collateralized Mortgage
Obligations 80,855 1,031 (69) 81,817 97,440 475 (401) 97,514
- ---------------------------------------------------------------------------------------------------------------------------
$98,000 $1,203 $(74) $99,129 $110,766 $541 $(433) $110,874
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Govt and U.S. Govt
Agency obligations $ 52,961 $646 $ (45) $ 53,562 $ 62,037 $235 $ (244) $ 62,028
SBA Certificates 17,233 55 (1) 17,287 8,340 -- (31) 8,309
Certificates of Deposit 477 -- -- 477 3,000 -- -- 3,000
Mortgage Backed Securities:
GNMA Pass through
certificates 11,773 87 (91) 11,769 10,174 92 (88) 10,178
FHLMC Pass through
certificates 4,962 16 (86) 4,892 3,707 11 (65) 3,653
FNMA Pass through
certificates 10,062 41 (32) 10,071 7,449 46 (54) 7,441
Mortgage Pass through
obligations 158 -- -- 158 -- -- -- --
Collateralized Mortgage
Obligations 28,615 27 (793) 27,849 31,939 33 (1,153) 30,819
- ---------------------------------------------------------------------------------------------------------------------------
$126,241 $872 $(1,048) $126,065 $126,646 $417 $(1,635) $125,428
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $0, $851,000, and $296,000 and gross losses of $285,000,
$403,000, and $8,000 were realized on sales of investment securities available
for sale for the years ended December 31, 1994, 1995, and 1996, respectively.
The amortized cost and estimated market value of investments securities at
December 31, 1996, by contractual maturity are shown on the next page (dollars
in thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $6,439 $6,446 5.15% $8,995 $9,001 5.54%
Due after one year through five years -- -- -- 51,901 51,899 6.24%
Due after five years through ten years -- -- -- 6,487 6,488 7.59%
Due after ten years 400 425 9.55% 5,994 5,949 8.06%
- ---------------------------------------------------------------------------------------------------------------------------
6,839 6,871 5.41% 73,377 73,337 6.42%
Marketable equity securities 6,149 6,149 5.98% -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
$12,988 $13,020 5.68% $73,377 $73,337 6.42%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
On December 22, 1995, the Company reclassified $50,978,000 in debt
securities from held to maturity to available for sale. The net unrealized gain
at the time of reclassification was $243,000.
Interest rate risk is reduced through investments in medium-term
Collateralized Mortgage Obligations ("CMOs") and Adjustable Rate Mortgages.
Approximately 86% of the CMO investments are U.S. Agency or backed by U.S.
Agency collateral and have average lives less than 3.07 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.
6. LOANS RECEIVABLE
Loans receivable at December 31, 1994, 1995, and 1996 were comprised of the
following (dollars in thousands):
1994 1995 1996
- -------------------------------------------------------------------------------
First mortgage loans:
Residential:
One to four units $ 185,409 $ 216,163 $ 235,023
Over four units 8,735 9,303 10,783
Commercial and land 88,767 102,958 120,841
Construction (net of loans
in process of $18,907,
$21,683, and $42,104) 36,154 29,881 44,598
- --------------------------------------------------------------------------------
Total first mortgage loans 319,065 358,305 411,245
- --------------------------------------------------------------------------------
Other loans:
Commercial 65,045 68,777 110,840
Installment 63,300 75,464 101,434
Loans on savings accounts 1,464 1,119 907
- --------------------------------------------------------------------------------
Total other loans 129,809 145,360 213,181
- --------------------------------------------------------------------------------
Total loans 448,874 503,665 624,426
- --------------------------------------------------------------------------------
Deferred loan fees (1,406) (549) (327)
Allowance for possible
loan losses (6,067) (6,082) (7,206)
- --------------------------------------------------------------------------------
Total loans receivable, net $441,401 $ 497,034 $ 616,893
- --------------------------------------------------------------------------------
As of December 31, 1995 and 1996, the Bank had impaired loans totaling
approximately $4,838,000 and $7,084,000, all of which had a related allowance
for impairment. The allowance for loan losses on impaired loans totalled
$345,000 and $707,000 as of December 31, 1995 and 1996, respectively. The
average balance of impaired loans was approximately $4,664,000 for 1995 and
$6,072,000 for 1996. Interest income not accrued for impaired loans for the
years ended December 31, 1994, 1995 and 1996 was approximately $380,000,
$366,000, and $414,000, respectively.
The Bank is principally a local lender and therefore has a significant
concentration of loans to borrowers who reside in and/or which are
collateralized by real estate located primarily in Philadelphia, Montgomery, and
Bucks counties.
In addition, the Company has taken a deed in lieu of foreclosure of a
condominium project of approximately $8.5 million. Such amounts are classified
as land acquired for development and resale.
The following is a summary of the activity in the allowance for loan losses
for the years ended December 31, 1994, 1995, and 1996 (dollars in thousands):
1994 1995 1996
- -------------------------------------------------------------------------------
Balance at beginning
of period $ 5,605 $ 6,067 $ 6,082
Provision for loan losses 1,594 1,129 3,837
Recoveries 127 338 190
Losses charged
against allowance (1,259) (1,452) (2,903)
- --------------------------------------------------------------------------------
Balance at end of period $ 6,067 $ 6,082 $ 7,206
- --------------------------------------------------------------------------------
The following is an analysis of loans to directors and officers for the year
ended December 31, 1996 (dollars in thousands):
1996
- -------------------------------------------------------------------------------
Balance at beginning of period $ 8,063
Additions 1,621
Repayments (2,883)
- --------------------------------------------------------------------------------
Balance at end of period $ 6,801
- --------------------------------------------------------------------------------
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 31
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
The loans to directors and officers are based upon substantially the same
underwriting criteria as those generally used by the Bank and do not involve
more than the normal risk of collectibility or present other unfavorable
features. At December 31, 1994, 1995, and 1996, the outstanding loans to
directors and officers were $11,433,000, $8,063,000, and $6,801,000
respectively.
At December 31, 1994, 1995, and 1996, the Bank was servicing loans for
others in the amount of $38,220,000, $22,775,000, and $34,755,000 respectively.
Loan servicing income for the years ended December 31, 1994, 1995, and 1996 was
$138,000, $228,000, and $1,000 respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment, less accumulated depreciation and amortization, are
summarized by major classification at December 31, 1995, and 1996 as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 606 $ 596
Buildings 7,166 7,194
Furniture and equipment 8,132 9,489
Leasehold improvements 1,611 1,716
- ---------------------------------------------------------------------------------------
17,515 18,995
Less accumulated depreciation and amortization (7,237) (8,704)
- ---------------------------------------------------------------------------------------
$10,278 $10,291
- ---------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995, and 1996 was
$1,281,000, $1,515,000, and $1,708,000, respectively.
8. DEPOSITS
Deposits at December 31, 1995 and 1996 consisted of the following (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
Interest % of Interest % of
Rate Amount Total Rate Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts 1.46% $ 37,602 5.84% 1.91% $ 44,444 6.03%
Money Market Deposit Accounts 3.69% 113,110 17.55% 3.30% 130,028 17.65%
Passbook and Club Accounts 2.05% 63,315 9.83% 2.05% 63,022 8.56%
Commercial Checking Accounts -- 59,799 9.28% -- 94,767 12.86%
- ---------------------------------------------------------------------------------------------------------------------------
273,826 42.50% 332,261 45.10%
- ---------------------------------------------------------------------------------------------------------------------------
IRA Accounts 5.87% 64,506 10.01% 5.79% 61,940 8.41%
14 to 31 Day Certificates 5.96% 462 0.07% 4.88% 227 0.03%
91 Day Certificate Accounts 5.21% 11,374 1.77% 4.96% 7,787 1.06%
Certificates with a $100,000
Minimum Balance 1 to 57
Month Maturities 5.74% 48,929 7.59% 5.44% 54,074 7.34%
6 Month Certificates 5.10% 74,562 11.57% 4.48% 74,395 10.10%
9 Month Certificates 5.06% 28,653 4.45% 4.87% 45,358 6.16%
18 Month Certificates 5.90% 11,335 1.76% 5.13% 9,488 1.29%
12 to 24 Month Certificates 5.18% 36,022 5.59% 5.01% 45,701 6.20%
30 to 60 Month Certificates 5.45% 83,108 12.90% 5.63% 81,683 11.09%
72 to 120 Month Certificates 5.98% 11,529 1.79% 5.95% 12,036 1.63%
180 Month Certificate callable in 2 years -- -- -- 7.30% 11,692 1.59%
- ---------------------------------------------------------------------------------------------------------------------------
370,480 57.50% 404,381 54.90%
- ---------------------------------------------------------------------------------------------------------------------------
$644,306 100.00% $736,642 100.00%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
A summary of certificates by maturity at December 31, 1996 follows (dollars in
thousands):
Years Ending December 31, Amount % of Total
- ------------------------------------------------------------------
1997 $251,608 62.22%
1998 70,567 17.45%
1999 34,650 8.57%
2000 26,128 6.46%
Thereafter 21,428 5.30%
- ------------------------------------------------------------------
$404,381 100.00%
- ------------------------------------------------------------------
Interest expense on deposit accounts for the years ended December 31, 1994,
1995, and 1996 as follows (dollars in thousands):
1994 1995 1996
- -------------------------------------------------------------------
NOW accounts $ 692 $ 737 $ 782
Money market deposit accounts 2,853 3,919 4,334
Passbook and club accounts 1,837 1,862 1,916
Time deposits 13,485 18,748 19,679
- -------------------------------------------------------------------
$18,867 $25,266 $26,711
- -------------------------------------------------------------------
9. ADVANCES FROM FEDERAL HOME LOAN BANK OF PITTSBURGH
Under terms of its collateral agreement, the Bank is required to maintain
otherwise unencumbered qualifying assets in an amount of at least as much as
advances from The Federal Home Loan Bank of Pittsburgh. The advances had
maturities and weighted interest rates as follows at December 31, 1995 and 1996
(dollars in thousands):
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------
1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------
1996 $35,048 5.79% $ -- --
1997 2,048 5.43% 15,048 5.50%
1998 48 5.12% 7,048 6.04%
1999 502 5.70% 502 5.70%
2000 -- -- 15,000 4.97%
- -----------------------------------------------------------------------------------------
$37,646 5.79% $37,598 5.39%
- -----------------------------------------------------------------------------------------
</TABLE>
10. OTHER BORROWED MONEY
Other borrowed money at December 31, 1994, 1995, and 1996 was comprised of the
following (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities sold under agreements to repurchase with a weighted average interest rate
of 6.18% in 1994, 5.60% in 1995 and 4.78% in 1996 $55,146 $37,622 $51,685
Repo plus agreements with the Federal Home Loan Bank of Pittsburgh with a weighted
average interest rate of 5.79% in 1995 and 6.08% in 1996 -- 20,000 19,000
Mortgage loans, secured by real estate payable in monthly installments, bearing
interest at a weighted interest rate of 6.38% in 1994 329 -- --
- ---------------------------------------------------------------------------------------------------------------------------
$55,475 $57,622 $70,685
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank has entered into repurchase agreements which are collateralized by
investment and mortgage-backed securities with a carrying value, including
accrued interest of $60,187,000, $49,176,000, and $53,450,000 at December 31,
1994, 1995, and 1996, respectively. The market value of the underlying
collateral was $56,643,000, $47,456,000, and $53,688,000 at December 31, 1994,
1995, and 1996, respectively. The maximum balance of repurchase agreements
outstanding at any month-end during the year was $55,771,000, $59,524,000, and
$124,981,000 for 1994, 1995, and 1996 and the average balance outstanding for
the year was $25,234,000, $51,959,000, and $59,158,000 for the years ended
December 31, 1994, 1995, and 1996, respectively.
The foregoing includes repurchase agreements with the Federal Home Loan
Bank of Pittsburgh under its repo plus program. These agreements do not identify
specific securities as collateral.
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 33
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
11. EMPLOYEE BENEFIT PLANS
The Banks have defined contribution plans pursuant to the provision of
401(k) of the Internal Revenue Code. The plans cover all employees who meet the
age and service requirements. Prime Bank's plan provides for elective employee
contributions up to 15% of compensation and a 66 2/3% matching company
contribution limited to 6%. First Sterling Bank's plan provides for elective
employee contributions up to 15% of compensation and a 40% matching company
contribution limited to 6%. The Banks contributed $235,000, $241,000, and
$176,000 to these plans during the years ended December 31, 1994, 1995, and
1996, respectively. Prime Bank's plan also includes a profit sharing feature.
Under this feature, all eligible employees share in the Company's profit sharing
contributions. The contributions for 1994, 1995, and 1996 were $135,000,
$134,000, and $135,000, respectively.
The Company has entered into a contract with one executive officer to
provide supplemental benefits after retirement pursuant to a new deferred
compensation agreement. Pursuant to the benefit plan, the Company will
contribute an amount representing the present value of the executive's accrued
benefit under the old plan to a trust established for his benefit with an
independent trustee. In the event of his death, the designated beneficiary would
receive distributions of principal and income of the trust over a period of ten
years, at which point the trust will be liquidated and the Company's obligations
to the executive under his plan shall terminate.
The Company does not provide post-retirement benefits nor post-employment
benefits to its employees other than the 401(k) Savings Plan as may be required
by applicable law.
12. INCOME TAXES
The provision (and benefit) for income taxes for the years ended December 31,
1994, 1995, and 1996 consisted of the following (dollars in thousands):
1994 1995 1996
- -----------------------------------------------------------------
Current:
State $ 286 $ 543 $ 297
Federal 3,109 3,720 1,890
- -----------------------------------------------------------------
3,395 4,263 2,187
- -----------------------------------------------------------------
Deferred:
Federal 230 74 (291)
- -----------------------------------------------------------------
230 74 (291)
- -----------------------------------------------------------------
$3,625 $4,337 $1,896
- -----------------------------------------------------------------
The provision for income taxes for the years ended December 31, 1994, 1995,
and 1996 differed from the statutory rate due to the following (dollars in
thousands):
1994 1995 1996
- -------------------------------------------------------------------
Pretax income $10,337 $11,806 $5,913
- -------------------------------------------------------------------
Tax at statutory rate 3,515 4,014 2,012
Tax exempt interest (97) (119) (127)
State taxes, net of federal
benefit and other 189 358 196
Merger Costs -- -- 222
Income tax credits -- (15) (370)
Other, net 18 99 (37)
- -------------------------------------------------------------------
$ 3,625 $ 4,337 $1,896
- -------------------------------------------------------------------
Deferred income taxes result from temporary differences in recording
certain revenues and expenses for financial reporting purposes. The deferred tax
assets at December 31, 1994, 1995, and 1996 consisted of the following debits
and (credits):
1994 1995 1996
- ---------------------------------------------------------------------
Deferred tax assets
Provision for loan losses
and REO losses $1,979 $1,882 $2,351
Deferred loan fees 626 427 170
Deferred compensation 525 514 537
Depreciation 80 92 233
Valuation adjustment
for debt securities 4,170 862 853
Other, net 327 455 298
- ---------------------------------------------------------------------
Gross deferred tax assets 7,707 4,232 4,442
- ---------------------------------------------------------------------
Deferred tax liabilities
Loss on sale of loans 36 23 16
Deferred loan costs 203 268 377
Valuation adjustment
for debt securities -- 213 42
FDIC insurance premium 179 -- 50
Depreciation 342 383 331
Other 38 31 79
- ---------------------------------------------------------------------
Gross deferred tax liabilities 798 918 895
- ---------------------------------------------------------------------
Net deferred tax assets $6,909 $3,314 $3,547
- ---------------------------------------------------------------------
Included in the table above is the effect of certain temporary differences
for which no deferred tax expense or benefit was recognized. Such items
consisted primarily of unrealized losses on certain investments in debt and
equity securities accounted for under SFAS 115.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Company will realize the benefits of these
deferred tax assets.
In January 1996 Prime Bank settled its outstanding case with the IRS in
connection with the examination of its 1980 and subsequent tax year returns. The
United States Tax Court ruled in favor of the IRS on the issue of the
permissibility of reducing the basis of assets by the early withdrawal penalty
on savings certificates. Prime Bank had previously accrued the estimated
liability for the amount of interest due relating to this issue, and the actual
amount paid was not materially different.
Retained earnings at December 31, 1996, the latest tax year end, include
earnings of approximately $7.7 million representing bad debt deductions for
which no provision for federal income taxes has been made.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose information about the fair value of
financial instruments.
The limitations on the making of estimates of fair value are: estimates are
made at a specific point in time, based upon, where available, relevant market
prices and information about the financial instruments. For a substantial
portion of the Company's financial instruments, no quoted market exists.
Therefore, estimates of "fair value" are based on a number of subjective
assumptions. Such assumptions include perceived risks associated with these
financial instruments, market rates of discount, and expected durations. Given
the uncertainties associated with these estimates, the reported "fair values"
represent estimates only and, therefore, cannot be compared to the historical
accounting model. Use of different assumptions would likely result in different
"fair value" estimates.
Under SFAS 107, the fair value of deposit accounts with no stated maturity
is equal to their carrying amount. This approach excludes significant benefits
that result from the low-cost funding provided by such deposits.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at December 31, 1996:
Cash and Short-Term Investments: Current carrying amounts approximate
estimated fair value.
<PAGE>
Securities: Current quoted market prices are used to determine fair value.
Net Loans: The fair value of loans was estimated using a duration method
which approximates the effect of discounting the estimated future cash
flows over the expected repayment periods for loans using rates which
consider credit risk, servicing costs and other relevant factors.
Deposits with no stated maturity: Current carrying amounts approximate
estimated fair value.
Time Deposits: Fair value was estimated using a duration method which
approximates the effect of discounting the estimated future cash flows over
the expected periods using rates which consider alternative borrowing
costs, servicing costs, and other relevant factors.
Other Borrowed Funds: Fair value was estimated using a duration method
which approximates the effect of discounting the estimated cash flows over
the expected periods using rates which consider alternative borrowing
costs.
Off-balance sheet financial instruments: Commitments to extend credit and
standby letters of credit carry current market interest rates if converted
to loans. Because commitments to extend credit and standby letters of
credit, the majority of which carry current interest rates, are generally
unassignable by either the Bank or the borrower, they only have value to
the Bank and the borrower. However, the estimated net amount payable
(receivable) represents the fees currently charged to enter into similar
agreements, taking into account the remaining term of the agreement and the
present credit risk assessment of the counter-party.
The Company enters into derivative instruments primarily to hedge the
interest rate risk associated with various assets and liabilities. Such hedge
instruments generally take the form of interest rate swaps. In part through the
use of these instruments, the Company strives to be essentially insensitive to
changes in interest rates within reasonable ranges (i.e., plus or minus 200
basis points). Such instruments are subject to the same type of credit and
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 35
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
market risk as other financial instruments, and are monitored and controlled in
accordance with the Company's credit and risk management policies.
On May 4, 1994, the Company entered into an interest rate swap with the
Federal Home Loan Bank of Pittsburgh ("FHLB" ) for $5,000,000 notional amount
with a term of 6 years due May 6, 2000. The swap hedges approximately $5,000,000
in 7 year fixed-rate retail CD's with a remaining term to maturity of 6.1 years.
FHLB pays the Company a fixed rate of 7.01% and the Company in turn pays FHLB a
floating rate based on the London Interbank Offered Rate ("Libor") which as of
December 31, 1996 was 5.375%.
In October through December 1996, the Company entered into three interest
rate swaptions with FHLB for a total notional amount of $15,000,000 with a term
of 15 years, with a call option of 2 years. The swaptions hedge approximately
$12,000,000 in 15 year fixed-rate retail CD's with a call option of 2 years.
FHLB pays a fixed rate ranging from 7.77% to 8.06% and the Company in turn pays
FHLB a floating rate based on Libor.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 52.9 $ 52.9 $ 32.5 $ 32.5
Investments 224.0 225.2 236.3 236.3
Net Loans (A) 503.8 507.5 616.9 618.9
Financial Liabilities:
Deposits with no stated maturity 273.9 273.9 332.2 332.2
Time Deposits 370.5 370.3 404.4 401.8
Other Borrowed Funds and FHLB Advances 95.2 95.2 108.3 108.3
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) The carrying amount of net loans includes loans receivable net and loans
held for sale.
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
Net Amount Net Amount
Contract or Payable Contract or Payable
Notional Amount (Receivable) Notional Amount (Receivable)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Off-balance sheet financial instruments:
Commitments to extend credit $ 21.9 0.1 $35.9 $ 0.3
Standby letters of credit 2.4 -- 1.8 --
Commercial loan commitments 28.5 0.5 34.5 0.5
Loan commitments 12.0 -- 12.3 --
Loans in process for construction loans 17.0 -- 42.1 --
Interest rate swaps 5.0 (0.3) 20.0 (0.1)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into financial instruments
which are not recorded in the consolidated financial statements but are required
to meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
The following is a summary of significant commitments and contingent
liabilities:
December 31,
- ----------------------------------------------------------------
1995 1996
- ----------------------------------------------------------------
Loan commitments:
Fixed rate (rates ranging $ 2,195,000 $ 687,000
from 6.13% to 8.50%
in 1995 and 6.88% to
8.13% in 1996)
Variable rate (rates ranging 9,883,000 11,591,000
from 6.38% to 9.95%
in 1995 and 4.75% to
8.75% in 1996)
Commercial loan commitments 28,482,000 34,496,000
Standby letters of credit 2,415,000 1,810,000
Commitments to extend credit 21,914,000 35,897,000
Commitments to sell
residential loans -- 49,000
Construction loans in process 17,033,000 42,104,000
- ----------------------------------------------------------------
The Bank is required to maintain certain average reserve balances as
established by the Federal Reserve Bank Board. The amounts of these reserve
balances for the reserve computation periods which included December 31, 1995
and 1996 were $3,538,000 and $5,890,000, respectively, which amounts were
satisfied through the restriction of vault cash.
The Company is party to certain claims and litigation arising in the
ordinary course of business. In the opinion of management, the resolution of
such claims and litigation will not materially affect the consolidated financial
position or results of operations. The Company has entered into employment
agreements with certain officers, which range from three to five years. Under
the terms of such agreements, the Company was obligated on December 31, 1996 to
pay, under current base salary levels, an aggregate amount of $2,966,000 over
the remaining term. In the event employment is terminated under circumstances as
defined by the agreements, the employees may be entitled to severance pay equal
to between 1.00 and 2.99 times their base salaries.
In connection with the operation of certain branch offices, the Bank has
entered into operating leases for periods ranging from one to five years. Total
rental expense for the years ended December 31, 1994, 1995, and 1996 was
$549,000, $753,000, and $1,246,000, respectively. Future minimum lease payments
under such operating leases are $1,029,000, $1,029,000, $1,027,000, $921,000,
and $788,000 for the years ended December 31, 1997 through 2001, respectively.
15. PARENT COMPANY FINANCIAL INFORMATION
Presented below are the parent company only financial statements as of
December 31, 1995, and 1996 (dollars in thousands):
PRIME BANCORP, INC.
(Parent company only)
STATEMENTS OF FINANCIAL CONDITION
December 31,
- ----------------------------------------------------------------
1995 1996
- ----------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 599 $ 99
Investments in bank subsidiaries 63,133 64,277
Investments in non-bank subsidiaries 6,048 6,826
- ----------------------------------------------------------------
Total Assets $69,780 $71,202
- ----------------------------------------------------------------
Liabilities and stockholders' equity:
Liabilities:
Other liabilities $ 501 $ 686
- ----------------------------------------------------------------
Total liabilities 501 686
- ----------------------------------------------------------------
Stockholders' equity:
Common stock 5,270 5,291
Additional paid-in capital 37,204 37,390
Retained earnings 26,805 27,835
- ----------------------------------------------------------------
Total stockholders' equity 69,279 70,516
- ----------------------------------------------------------------
Total liabilities and
stockholders' equity $69,780 $71,202
- ----------------------------------------------------------------
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 37
<PAGE>
PRIME BANCORP, INC. 1996 ANNUAL REPORT
STATEMENTS OF OPERATIONS
December 31,
- --------------------------------------------------------------------------------
1994 1995 1996
- --------------------------------------------------------------------------------
Income:
Dividends and interest
from subsidiary $ 2,928 $ 3,008 $ 2,109
Equity in undistributed
income of subsidiaries 3,823 4,491 2,097
- --------------------------------------------------------------------------------
Total income 6,751 7,499 4,206
Operating expense 39 30 189
- --------------------------------------------------------------------------------
Net income $ 6,712 $ 7,469 $ 4,017
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Cash flows from
operating activities:
Net income $ 6,712 $ 7,469 $ 4,017
Adjustments to reconcile
net income to net
cash provided by
operating activities:
Equity in undistributed
income of
subsidiaries (3,823) (4,491) (2,097)
Increase (decrease)
in liabilities (20) 3 (24)
- --------------------------------------------------------------------------------
Net cash provided
by net operating
activities 2,869 2,981 1,896
- --------------------------------------------------------------------------------
Cash flows from
investing activities:
Contribution to
subsidiaries (1,000) (750) --
- --------------------------------------------------------------------------------
Cash used in
investing activities (1,000) (750) --
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Stock options exercised 333 -- 133
Cash dividends paid (1,763) (2,292) (2,529)
- --------------------------------------------------------------------------------
Net cash used in
financing activities (1,430) (2,292) (2,396)
- --------------------------------------------------------------------------------
Net increase in cash 439 (61) (500)
Cash and cash equivalents:
Beginning of year 221 660 599
End of year $ 660 $ 599 $ 99
Supplemental disclosure of
cash flow information:
Tax benefit from
exercise of stock options $ 41 $ -- $ 74
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
Management of Prime Bancorp, Inc. is responsible for establishing and
maintaining an effective internal control structure over financial reporting
presented in conformity with both generally accepted accounting principles and
the Federal Financial Institutions Examination Council instructions for
Consolidated Reports of Condition and Income (call report instructions). The
structure contains monitoring mechanisms, and actions are taken to correct
deficiencies identified.
There are inherent limitations in the effectiveness of any internal control
structure, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1996. This assessment
was based on criteria for effective internal control over financial reporting
described in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that, as of December 31, 1996, the Company maintained an
effective internal control structure over financial reporting presented in
conformity with both generally accepted accounting principles and call report
instructions.
[SIGNATURE] [SIGNATURE]
James J. Lynch, President & C.E.O. Walter L. Tillman, Jr., EVP
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 39
<PAGE>
[KPMG LOGO]
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
PRIME BANCORP, INC.:
We have audited the accompanying consolidated statement of financial condition
of Prime Bancorp, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. We have also audited the accompanying consolidated
statement of financial condition of Prime Bancorp, Inc. and subsidiaries as of
December 31, 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the two-year
period then ended, prior to their restatement for the 1996 pooling-of-interests
transaction described in Note 2 to the consolidated financial statements. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The financial statements of First
Sterling Bancorp, Inc. included in the 1995 and 1994 restated consolidated
financial statements were audited by other auditors whose report dated February
23, 1996, expressed an unqualified opinion on those statements. The report of
the other auditors has been furnished to us, and our opinion, insofar as it
relates to the amounts included for First Sterling Bancorp, Inc., is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Prime Bancorp, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
We also audited the combination of the accompanying consolidated statement
of financial condition as of December 31, 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1995 and 1994, after restatement for the 1996
pooling-of-interests; in our opinion, such statements have been properly
combined on the basis described in Note 2 of the notes to the consolidated
financial statements.
[SIGNATURE]
January 24, 1997
<PAGE>
- --------------------------------------
PRIME BANCORP, INC.
Board of Directors
ERWIN T. STRAW
Chairman of the Board
JAMES J. LYNCH
President and
Chief Executive Officer
FREDERICK G. BETZ
President of Fred Betz
and Sons, Inc. a custom
home building company
WILLIAM J. CUNNINGHAM
Basketball Hall of Famer
and former championship
winning coach of the
Philadelphia 76ers and
former owner and founder
of the Miami Heat pro
basketball franchise
JOSEPH A. FLUEHR, III
Corporate Secretary,
Funeral Director and
owner of Fluehr Funeral Home
ROBERT A. FOX
President of R.A.F. Industries,
a private investment company
which acquires and manages a
diversified group of operating
companies and venture capital
investments
ERNEST LARENZ
President of Medicare Management
Nursing Homes,
Philadelphia, PA
JOSEPH G. MARKMANN, CPA
Associate Professor of Accounting
& former Chairman of Accounting Dept.
of LaSalle University
ROY T. PERAINO
Former Chairman and Chief Executive
Officer of Continental Bancorp
and Continental Bank and former
President of Midlantic
Corporation
DAVID H. PLATT
President of Somerton Springs
Golf Shoppes, Driving Ranges, and
President of Sycamore Ridge,
Inc. Golf Course
ARTHUR L. POWELL
President of Kravco, Inc.,
a real estate development company
which specializes in large
shopping malls
- --------------------------------------
PRIME BANK
Board of Directors
ERWIN T. STRAW
Chairman of the Board
JAMES J. LYNCH
President and
Chief Executive Officer
DOROTHY M. BERNHARD
Corporate Secretary, Retired,
former Vice President of
North East Federal Savings
and Loan Association
FREDERICK G. BETZ
President of Fred Betz and Sons, Inc.,
a custom home building company
JOSEPH A. FLUEHR, III
Funeral Director and owner
of Fluehr Funeral Home
ROBERT G. HESS, ESQ.
Partner in the law firm of
Howland, Hess, Guinan & Torpey
of Huntingdon Valley, PA
ERNEST LARENZ
President of Medicare
Management Nursing Homes,
Philadelphia, PA
JOSEPH G. MARKMANN, CPA
Associate Professor of Accounting
& former Chairman of Accounting
Dept. of LaSalle University
DAVID H. PLATT
President of Somerton Springs
Pro-Golf Shoppes, Driving Ranges,
and President of Sycamore Ridge,
Inc. Golf Course
JOSEPH SOKOL
Retired, former Vice Chairman
of Prime Bancorp, Inc.
and Prime Bank and
former President of
North East Federal Savings
and Loan Association
ROBERT G. STAHL
Past President of
Stahl Chevrolet, Inc.
RAYMOND L. WEINMANN
President, The Weinmann Group
Consulting Service
- --------------------------------------
FIRST STERLING BANK
Board of Directors
JAMES J. LYNCH
Chief Executive Officer
WILLIAM H. BROMLEY
President
WILLIAM J. CUNNINGHAM
Basketball Hall of Famer
and former championship
winning coach of the
Philadelphia 76ers and former
owner and founder of the
Miami Heat pro basketball
franchise
JAMES D. KANIA
Partner, Tri-Kan Associates,
a real estate investment company
ARTHUR L. POWELL
President of Kravco, Inc.,
a real estate development
company which specializes
in large shopping malls
THOMAS J. SCANLON, JR.
Director of Sales for
PPG Industries
ALLEN SPEISER
Certified Public Accountant
R. RICHARD WILLIAMS
Founder and President,
Valquip Corporation,
a manufacturer of
industrial controls
PRIME BANCORP, INC. o 1996 ANNUAL REPORT o PAGE 41
<PAGE>
OFFICERS
- --------------------------------------
PRIME BANCORP, INC.
Officers
JAMES J. LYNCH
President and Chief Executive Officer
WILLIAM H. BROMLEY
Executive Vice President
WALTER L. TILLMAN, JR.
Executive Vice President
FRANK H. REEVES
Senior Vice President, Finance
JOSEPH A. FLUEHR, III
Secretary
SETH L MACKLER
Assistant Secretary
MARISSA R. HACK
Treasurer
Commercial Lending
PRIME BANK
- --------------------------------------
TIMOTHY J. ABELL
Senior Vice President
MICHAEL B. DINDA
Vice President
ROBERT J. MULLIGAN
Vice President
DAVID W. GILL
Assistant Vice President
MICHAEL J. OKINO
Assistant Vice President
FIRST STERLING BANK
- --------------------------------------
STEVEN C. MCGILVERY
Vice President
DEWEY K. DIMARZIO
Vice President
STEVEN H. SANTINI
Vice President
DOROTHY A. HOERR
Assistant Vice President
PAULA S. HOOK
Assistant Vice President
Commercial Real Estate
Lending/Construction
GREGORY J. WEBSTER
Senior Vice President
JEFFREY T. CONNERS
Assistant Vice President
ROBERT C. KENNEY, JR.
Assistant Vice President
ELEANOR A. REMOLDE
Assistant Vice President
Consumer Lending
CURT T. SCHULMEISTER
Senior Vice President
ROBIN CARMODY
Assistant Vice President
JOSEPH E. MCNAMARA
Assistant Vice President
JANE PASSAGLIA
Assistant Vice President
PATRICIA BERK-HERMANN
Consumer Loan Officer
THOMAS J. BLAIR
Consumer Loan Officer
Residential Mortgage Lending
ROBERT T. STRONG
Senior Vice President
BRIAN MCGOVERN
Assistant Vice President
Credit Policy &
Administration
JOHN T. HENNESSY
Senior Vice President
CAROLYN J. DILTS
Assistant Vice President
BONNIE L. HALBREINER
Assistant Vice President
KENNETH W. HILBERT
Assistant Vice President
CHRISTIAN SCHWEIZER III
Assistant Vice President
Compliance
DOREEN M. BERDAN
Vice President
Data & Item Processing
BARBARA ANNE ERB
Vice President
Deposit Servicing
RITA A. TARR
Vice President
Executive Administration
CAROL M. SCHLACTER
Assistant Secretary
Finance
FRANK H. REEVES
Senior Vice President
MICHAEL J. SEXTON
Vice President & Controller
WILLIAM J. BOYCE
Assistant Controller
Human Resources
PEGGY GROGAN
Personnel Officer
Loan Review &
Community Reinvestment
SETH L MACKLER
Vice President
Loan Servicing
NICHOLAS J. BADAME
Vice President
ROBERT C. REIFF
Assistant Vice President
PATRICIA L. CAMPBELL
Loan Documentation Officer
Marketing/Community
Relations
JOHN F. DOWNES
Vice President
Treasury
MARISSA R. HACK
Vice President
WALTER J. MOLESKI
Assistant Treasurer
Branch Administration
JAN M. SMITH
Senior Vice President
WENDY F. BULLOTTA
Vice President
<PAGE>
PRIME
BANK
BRANCH
LOCATIONS
PHILADELPHIA COUNTY
- -------------------------------------------------------------------------------
BURHOLME
1000 Cottman Avenue
Philadelphia, PA 19111-3698
(215) 342-2425
Manager--Ann C. Mozzone
CHESTNUT HILL
8500 Germantown Avenue
Philadelphia, PA 19118-3317
(215) 248-1600
Manager--Missy Dannehower,
Assistant Vice President
18TH & JFK
18th & JFK Boulevard
Philadelphia, PA 19103-7421
(215) 972-7072
Manager--Edwin A. Bergin
GRANT
1695 Grant Avenue
Philadelphia, PA 19115-3199
(215) 673-9600
Manager--Kimberly A. Erwin
KENSINGTON
1841 E. Allegheny Avenue
Philadelphia, PA 19134-3192
(215) 426-9520
Manager--Frances Abel,
Assistant Vice President
LAWNDALE
6425 Rising Sun Avenue
Philadelphia, PA 19111-5299
(215) 742-5300
Manager--Robert A. Farrer,
Assistant Vice President
PENN TREATY
423 E. Girard Avenue
Philadelphia, PA 19125-3305
(215) 426-3303
Manager--Bridget A. Morsa
SOMERTON
O'Hanlon Plaza
14425 Bustleton Avenue
Philadelphia, PA 19116-1177
(215) 671-1232
Manager--Karen S. Sica
MONTGOMERY COUNTY
- -------------------------------------------------------------------------------
HORSHAM
301 Horsham Road
Horsham, PA 19044-2017
(215) 956-9333
Manager--Suzanne B. Shane
HUNTINGDON VALLEY
Bethayres Shopping Ctr.
618 Welsh Road
Huntingdon Valley, PA
19006-6302
(215) 938-7850
Manager--Elizabeth Lutz
JENKINTOWN
The Pavilion
261 Old York Road
Jenkintown, PA 19046-3254
(215) 572-0800
Manager--Lynn Levy Marks,
Assistant Vice President
MONTGOMERYVILLE
521 Stump Road
North Wales, PA 19454-1516
(215) 368-1160
Manager--Stephanie L. Jenkins
WILLOW GROVE
Moreland Plaza
Old York & Moreland Rds.
Willow Grove, PA 19090
(215) 659-5404
Manager--Gregory B. Morgan,
Assistant Vice President
BUCKS COUNTY
- -------------------------------------------------------------------------------
FAIRLESS HILLS
503 S. Oxford Valley Rd
Fairless Hills, PA 19030-2612
(215) 943-2200
Manager--Kathryn M. Geissel,
Assistant Vice President
OXFORD VALLEY
195 Bristol Oxford Valley Road
Langhorne, PA 19047-3011
(215) 943-1100
Manager--Kelly A. Colon
RICHBORO
984 Second Street Pike
Richboro, PA 18954-1527
(215) 322-4400
Manager--Wanda S. Albright,
Assistant Vice President
SOUTHAMPTON
723 Street Road
Southampton, PA 18966-3919
(215) 357-9090
Manager--Donna M. McKenna,
Assistant Vice President
YARDLEY
10 S. Main Street
Yardley, PA 19067-1511
(215) 493-7285
Manager--Deborah A. Zimmaro
FIRST STERLING BANK BRANCH LOCATIONS
MONTGOMERY COUNTY
- -------------------------------------------------------------------------------
BALA CYNWYD
50 Monument Road
Bala Cynwyd, PA 19004
(610) 617-0801
Manager--Marcia C. Gallagher,
Assistant Vice President
BRYN MAWR
22 North Bryn Mawr Ave
Bryn Mawr, PA 19010
(610) 520-0444
Manager--Janice B. Decker,
Assistant Vice President
CHESTER COUNTY
- -------------------------------------------------------------------------------
DEVON
80 West Lancaster Avenue
Devon, PA 19333
(610) 971-1800
Manager--Linda S. Hodges,
Assistant Vice President
DELAWARE COUNTY
- -------------------------------------------------------------------------------
ST. DAVIDS
558 East Lancaster Avenue
St. Davids, PA 19087
(610) 971-9430
Manager--Debra G. Palochak
MEDIA
101 W. Baltimore Pike
Media, PA 19063
(610) 892-2920
Manager--Peter W. Bendistis,
Vice President
<PAGE>
PRIME BANCORP, INC.
[COOPERS AND LYBRAND LLP. LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this annual report on
Form 10-K of our report dated February 23, 1996, on our audit of the
consolidated financial statements of First Sterling Bancorp, Inc. and
Subsidiary as of December 31, 1995 and 1994 and for each of the three years
ended December 31, 1995, 1994 and 1993, appearing in the registration statement
on Form S-4 (SEC No. 333-13741) of Prime Bancorp, Inc. filed with Securities and
Exchange Commission pursuant to the Securities Act of 1933.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 29,161
<INT-BEARING-DEPOSITS> 2,703
<FED-FUNDS-SOLD> 600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,428
<INVESTMENTS-CARRYING> 110,766
<INVESTMENTS-MARKET> 110,874
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 926,071
<DEPOSITS> 763,642
<SHORT-TERM> 80,172
<LIABILITIES-OTHER> 10,630
<LONG-TERM> 15,048
0
0
<COMMON> 5,291
<OTHER-SE> 65,225
<TOTAL-LIABILITIES-AND-EQUITY> 926,071
<INTEREST-LOAN> 49,462
<INTEREST-INVEST> 15,907
<INTEREST-OTHER> 295
<INTEREST-TOTAL> 65,664
<INTEREST-DEPOSIT> 26,711
<INTEREST-EXPENSE> 33,140
<INTEREST-INCOME-NET> 32,524
<LOAN-LOSSES> 3,837
<SECURITIES-GAINS> 288
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 5,913
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,017
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
<YIELD-ACTUAL> 8.21
<LOANS-NON> 7,084
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,082
<CHARGE-OFFS> 2,903
<RECOVERIES> 190
<ALLOWANCE-CLOSE> 7,206
<ALLOWANCE-DOMESTIC> 6,213
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 993
</TABLE>
