FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
(X) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
OR
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended:
September 30, 1998 Commission File Number: 0-17286
PRIME BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2860688
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7111 Valley Green Road, Fort Washington, Pennsylvania 19034
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 836-2400
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 12 months
(or for shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
The number of shares outstanding of the Registrant's common
stock as of November 13, 1998:
Common Stock -- 10,984,538
<PAGE>
PRIME BANCORP, INC.
INDEX
Part I Financial Information
Item 1. Consolidated Financial Statements
Financial Highlights 1
Consolidated Statements of Financial 2
Condition:
September 30, 1998 (Unaudited)
and December 31, 1997
Consolidated Statements of Income, 3
Three Months Ended:
September 30, 1998 and 1997
(Unaudited)
Consolidated Statements of Income, 4
Nine Months Ended:
September 30, 1998 and 1997
(Unaudited)
Consolidated Statements of Cash Flows, 5 - 6
Nine Months Ended:
September 30, 1998 and 1997
(Unaudited)
Consolidated Statements of Shareholders' 7
Equity and Comprehensive Income,
Nine Months Ended:
September 30, 1998 and 1997
(Unaudited)
Notes to Consolidated Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of 11 - 21
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
Part II Other Information 23 - 24
Signatures 25
<PAGE>
FINANCIAL HIGHLIGHTS *
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement 1998 1997 $ Change % Change 1998 1997 $ Change % Change
- -------------------------------------------------------------------------------------------
Net Interest
Income $10,018 $9,590 $ 428 4.5% $29,880 $27,343 $2,537 9.3%
Provision for
Loan Losses 431 856 (425) -49.6% 1,592 2,574 (982) -38.2%
Non-Interest
Income 1,311 1,163 148 12.7% 4,167 3,798 369 9.7%
Non-Interest
Expense 6,107 5,708 399 7.0% 19,098 17,142 1,956 11.4%
- -------------------------------------------------------------------------------------------
Income Before
Taxes 4,791 4,189 602 14.4% 13,357 11,425 1,932 16.9%
Income Taxes 1,635 1,419 216 15.2% 4,583 3,824 759 19.8%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Net Income $3,156 $2,770 $ 386 13.9% $8,774 $7,601 $1,173 15.4%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Earnings per share $0.28 $0.25 $0.03 12.0% $0.78 $0.69 $0.09 13.0%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Dividends per share $0.095 $0.085 $0.010 11.8% $0.285 $0.255 $0.030 11.8%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
* The financial statements have been adjusted to reflect a 2 for 1 stock split
payable to shareholders on June 19, 1998.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -----------------
PERFORMANCE RATIOS 1998 1997 $ Change % Change 1998 1997 $ Change % Change
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Return on Average
Assets 1.21% 1.16% 0.05% 4.3% 1.17% 1.09% 0.08% 7.3%
Return on Average
Equity 14.60% 14.40% 0.20% 1.4% 14.12% 13.69% 0.43% 3.1%
Net Interest
Margin 4.08% 4.32% -0.24% -5.6% 4.24% 4.21% 0.03% 0.7%
Efficiency Ratio 54.14% 54.02% 0.12% 0.2% 56.65% 56.41% 0.24% 0.4%
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Balances Average Balances
Actual Balances Quarter Ended Nine Months Ended
September 30, September 30, September 30,
---------------------------------------------------------------------
STATEMENT OF
FINANCIAL CONDITION 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $1,037,978 $960,745 $1,036,067 $946,120 $1,006,361 $931,315
Loans Receivable 637,731 629,027 640,238 633,012 641,761 625,256
Investment Securities
Available for Sale 222,530 97,722 263,394 115,396 211,505 119,220
Investment Securities
Held to Maturity 68,985 144,341 77,784 138,960 96,188 130,005
Deposits 709,377 693,143 722,087 694,865 713,493 712,368
Total Borrowings 234,493 183,665 222,378 168,972 204,530 137,585
Shareholders' Equity 87,480 77,337 85,758 76,331 83,072 74,245
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------
ASSET QUALITY 1998 1997
---------------------------------------------------
<S> <C> <C>
Non-Performing Assets to
Total Assets 0.37% 0.80%
Allowance for Loan Losses to
Total Loans 1.50% 1.40%
Allowance for Loan Losses to
Non-Performing loans 295.63% 172.69%
Allowance for Loan Losses to
Non-Performing Assets 247.71% 114.78%
---------------------------------------------------
---------------------------------------------------
</TABLE>
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks................... $ 32,745 $ 23,068
Interest-bearing deposits................. 36,186 18,161
Federal funds sold........................ 10,000 --
---------- --------
Cash and cash equivalents.............. 78,931 41,229
---------- --------
Investment securities (market value of
$69,787 and $118,848).................. 68,985 117,988
Investment securities available for sale at
market value........................... 222,530 115,728
Loans receivable.......................... 637,731 639,333
Allowance for loan losses............... (9,537) (8,485)
---------- --------
Loans receivable, net................... 628,194 630,848
---------- --------
Loans held for sale ...................... 3,409 3,229
Accrued interest receivable............... 8,521 7,429
Real estate owned......................... 624 957
Land acquired for development and resale.. 3,257 5,925
Property and equipment, net............... 9,656 10,023
Other assets.............................. 13,871 20,069
---------- --------
Total assets........................ $1,037,978 $953,425
---------- --------
---------- --------
Liabilities and Shareholders' Equity
Liabilities:
Deposits............................... $ 709,377 $694,444
Repurchase agreements.................. 96,990 91,486
Borrowings from Federal Home Loan Bank of
Pittsburgh........................... 137,503 79,550
Advance payments by borrowers for taxes
and insurance........................ 696 1,716
Other liabilities...................... 5,932 6,365
---------- --------
Total liabilities................... 950,498 873,561
---------- --------
Commitments & contingencies
Shareholders' equity:
Serial preferred, $1 par value; 2,000,000
shares authorized and unissued....... -- --
Common stock, $1 par value; 13,000,000
shares authorized; 10,977,410 and
10,888,532 shares issued and
outstanding......................... 10,977 10,888
Additional paid-in capital............. 34,379 33,652
Retained earnings...................... 41,534 35,884
Accumulated other comprehensive income. 590 (560)
---------- --------
Total shareholders' equity.......... 87,480 79,864
---------- --------
Total liabilities and shareholders'
equity........................... $1,037,978 $953,425
---------- --------
---------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable...................... $ 14,246 $ 14,242
Investment securities................. 4,669 3,928
Interest-bearing deposits............. 547 149
--------- ---------
Total interest income.............. 19,462 18,319
--------- ---------
Interest expense:
Deposits.............................. 6,480 6,447
Short-term borrowings................. 1,433 2,282
Long-term borrowings.................. 1,531 --
--------- ---------
Total interest expense............. 9,444 8,729
--------- ---------
Net interest income................ 10,018 9,590
--------- ---------
Provision for loan losses................ 431 856
--------- ---------
Net interest income after provision
for loan losses.................... 9,587 8,734
--------- ---------
Non-interest income:
Fees and service charges.............. 679 608
Gain on sale of assets................ 50 186
Mortgage banking income............... 341 122
Other................................. 241 247
--------- ---------
Total non-interest income.......... 1,311 1,163
--------- ---------
Non-interest expense:
Salaries and employee benefits........ 3,281 2,772
Occupancy and equipment............... 1,414 1,400
Federal insurance premiums............ 102 99
Other................................. 1,310 1,437
--------- ---------
Total non-interest expense......... 6,107 5,708
--------- ---------
Income before income taxes............... 4,791 4,189
Income taxes............................. 1,635 1,419
--------- ---------
Net Income........................ $ 3,156 $ 2,770
--------- ---------
--------- ---------
Earnings Per Share:
Basic................................. $ 0.29 $ 0.26
Diluted............................... $ 0.28 $ 0.25
Weighted average number of shares
outstanding:
Basic................................. 10,968,873 10,818,124
Diluted............................... 11,285,915 11,059,062
Dividends declared per share............. $ 0.095 $ 0.085
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans receivable...................... $ 42,673 $ 41,027
Investment securities................. 13,343 11,663
Interest-bearing deposits............. 1,096 348
--------- ---------
Total interest income.............. 57,112 53,038
--------- ---------
Interest expense:
Deposits.............................. 19,048 20,146
Short-term borrowings................. 4,282 5,245
Long-term borrowings.................. 3,902 304
--------- ---------
Total interest expense............. 27,232 25,695
--------- ---------
Net interest income................ 29,880 27,343
--------- ---------
Provision for loan losses................ 1,592 2,574
--------- ---------
Net interest income after provision
for loan losses.................... 28,288 24,769
--------- ---------
Non-interest income:
Fees and service charges.............. 2,014 1,884
Gain on sale of assets................ 332 145
Securitization and sale of mortgages.. -- 606
Mortgage banking income............... 1,029 290
Other................................. 792 873
--------- ---------
Total non-interest income........... 4,167 3,798
--------- ---------
Non-interest expense:
Salaries and employee benefits........ 9,988 8,606
Occupancy and equipment............... 4,264 4,158
Federal insurance premiums............ 288 269
Other................................. 4,558 4,109
--------- ---------
Total non-interest expense.......... 19,098 17,142
--------- ---------
Income before income taxes............... 13,357 11,425
Income taxes............................. 4,583 3,824
--------- ---------
Net Income.......................... $ 8,774 $ 7,601
--------- ---------
--------- ---------
Earnings per share:
Basic................................ $ 0.80 $ 0.71
Diluted.............................. 0.78 0.69
Weighted average number of shares
outstanding:
Basic................................ 10,935,275 10,763,768
Diluted.............................. 11,246,029 10,943,178
Dividends declared per share............. $ 0.285 $ 0.255
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income................................. $ 8,774 $ 7,601
Adjustments to reconcile net income
to net cash from operating
activities:
Depreciation & amortization of
intangibles....................... 1,790 1,845
(Gain) loss on sale of:
Loans............................. (1,161) (240)
Investment securities............. 6 (704)
Land acquired for development and
resale.......................... 7 --
Real estate owned ................ -- (47)
Provision for loan losses........... 1,592 2,574
Loans held for sale:
Originations, net of repayments... (39,784) (17,928)
Sales............................. 40,765 14,078
Increase in accrued interest
receivable ..................... (1,092) (267)
Decrease in other assets............ 6,014 1,014
Decrease in other liabilities....... (442) (2,705)
--------- ---------
Net cash provided from operating activities.. 16,469 5,221
--------- ---------
Cash flows from investing activities:
Investment securities
Purchases................................ (9,757) (52,799)
Repayments............................... 58,760 19,224
Investment securities available for sale:
Purchases................................ (189,414) (32,383)
Repayments............................... 34,459 17,503
Sales.................................... 49,648 61,616
Loans receivable:
Originations, net of repayments.......... (20,052) (25,301)
Sales.................................... 21,041 --
Proceeds from sale of land acquired for
development and resale................... 3,688 2,975
Increase in land acquired for development
and resale............................... (1,027) (106)
Purchase of property and equipment......... (1,155) (1,303)
(Increase) decrease real estate owned...... (173) 927
Proceeds from sale of real estate owned.... 579 1,593
--------- ---------
Net cash used in investing activities........ (53,403) (8,054)
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits........ 14,933 (43,499)
Borrowings from the Federal Home Loan Bank
of Pittsburgh........................... 100,000 766,900
Repayments of borrowings from the Federal
Home Loan Bank of Pittsburgh ............ (42,047) (722,948)
Increase in repurchase agreements.......... 5,504 31,430
Decrease in advance payments by borrowers
for taxes and insurance.................. (1,020) (1,335)
Net proceeds from issuance of common stock. 381 758
Cash dividends paid........................ (3,115) (2,747)
--------- ---------
Net cash provided from financing activities.. 74,636 28,559
--------- ---------
Net change in cash and cash equivalents...... 37,702 25,726
Cash and cash equivalents at beginning of year 41,229 32,464
--------- ---------
Cash and cash equivalents at end of year..... $ 78,931 $ 58,190
--------- ---------
--------- ---------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest............................. $ 27,541 $ 26,898
Income taxes......................... 3,802 4,133
Non-cash activity consist of:
Securitization of residential loans.. $ -- $ 17,798
Transfer of mortgage sec to available
for sale........................... $ -- $ 15,709
Transfer of loans to real estate owned $ 73 $ 3,719
Tax benefit associated with the
exercise of stock options......... $ 435 $ 652
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PRIME BANCORP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------
1998 1997
(Unaudited)
Shareholders' Comprehensive Shareholders' Comprehensive
Equity Income Equity Income
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Common stock:
Beginning of period $ 10,888 $ 10,582
Stock options 89 260
-------- --------
End of period 10,977 10,842
-------- --------
Additional paid in capital:
Beginning of period 33,652 32,099
Stock options 292 515
Tax benefit associated with
exercise of stock options 435 652
-------- --------
End of period 34,379 33,266
-------- --------
Retained earnings:
Beginning of period 35,884 29,156
Net income 8,774 $ 8,774 7,601 $ 7,601
------- -------
Dividends declared (3,124) (2,754)
-------- --------
End of period 41,534 34,003
-------- --------
Accumulated comprehensive income:
Beginning of period (560) (1,321)
Unrealized holding gains
(losses) on securities arising
during the period, net of
income taxes 1,187 1,251
Less reclassification adjustment
for gains (losses) included in
net income 37 (704)
-------- ------- -------- -------
Other comprehensive income 1,150 1,150 547 547
-------- ------- -------- -------
End of period 590 (774)
-------- ------- -------- -------
Total shareholders' equity $ 87,480 $ 9,924 $ 77,337 $ 8,148
-------- ------- -------- -------
-------- ------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information. The financial
information included herein is unaudited, however, such information
reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of the management of Prime
Bancorp, Inc. necessary to present fairly the statement of results
for the interim periods. The December 31, 1997 statement of condition
was derived from the audited consolidated financial statements included
in the Company's 1997 Annual Report on Form 10-K. For further
information refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
Business
Prime Bancorp, Inc. ("the Company") was incorporated under
the laws of the Commonwealth of Pennsylvania in 1996. The Company's
principal subsidiary is Prime Bank, a commercial bank (the "Bank")
whose principal business consists of attracting deposits and
negotiating borrowings, then converting those deposits and
borrowings into various types of loans and investments.
The Company's corporate headquarters is in Fort Washington,
Pennsylvania. Its operations center is in northeast Philadelphia,
Pennsylvania. The Company's bank subsidiary has eight full service
branch offices in Philadelphia, five in Bucks County, Pennsylvania,
eight in Montgomery County, Pennsylvania, two in Delaware County,
Pennsylvania, and one in Chester County, Pennsylvania.
The Company follows a corporate strategy which focuses on
providing individuals, business, and communities with high quality
banking services. Banking services include lending money,
gathering money and other complimentary fee generating services.
The Company's loan products include commercial, commercial real
estate, construction, consumer loans and residential mortgages.
Deposits and funding are gathered along five major lines which are
checking, savings, retail CDs, jumbo CDs and commercial cash
management.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") 128, Earnings Per Share. SFAS 128, which supersedes APB
Opinion No. 15 ("APB 15"), Earnings Per Share, specifies the
computation, presentation, and disclosure requirements for earnings
per share ("EPS") for entities with publicly held common stock. It
replaces the presentation of primary EPS with basic EPS which,
unlike primary EPS, excludes dilution and is computed by dividing
income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is
computed similarly to fully diluted EPS under APB 15. The Company
adopted SFAS 128 on December 31, 1997 and, accordingly, all prior
EPS data presented has been restated.
8
<PAGE>
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table shows the computation of shares
outstanding for calculating earnings per share for the three months
and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic
Numerator
Net income available to
common shareholders $ 3,156 $ 2,770 $ 8,774 $ 7,601
Demoninator
Weighted average shares
outstanding 10,968,873 10,818,124 10,935,275 10,763,768
- -------------------------------------------------------------------------------------------
Basic EPS $ 0.29 $ 0.26 $ 0.80 $ 0.71
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Diluted
Numerator
Net income available to
common shareholders $ 3,156 $ 2,770 $ 8,774 $ 7,601
Demoninator
Weighted average shares
outstanding 10,968,873 10,818,124 10,935,275 10,763,768
Dilutive stock options 317,042 240,938 310,754 179,410
- -------------------------------------------------------------------------------------------
11,285,915 11,059,062 11,246,029 10,943,178
- -------------------------------------------------------------------------------------------
Diluted EPS $ 0.28 $ 0.25 $ 0.78 $ 0.69
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the
resulting designation. If certain conditions are met, a derivative
may be specifically designated as (a) a hedge of certain exposure
to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of
the foreign currency exposures. This Statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier adoption is permitted. The Company has not yet determined
the impact, if any, of this Statement, including its provisions for
the potential reclassifications of investment securities, on net
income, financial condition or equity.
9
<PAGE>
PRIME BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Forward-Looking Statements
This report contains certain forward looking statements,
either expressed or implied, which are provided to assist the
reader in making judgements about the Company's possible future
financial performance. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in
the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the
Company's market, competition and unexpected contingencies relating
to Year 2000 compliance that could cause actual results to differ
materially from historical earnings and those presently anticipated
or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak
only as of the date made. The Company wishes to advise readers
that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future
periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Assets of the Company increased 8.9% or $84.6 million to
$1.04 billion at September 30, 1998 from $953.4 million at
December 31, 1997. This increase is primarily attributable to
the growth in investments and interest-bearing deposits funded by
rising deposit levels (up $15 million or 2%) and increased
borrowings from the Federal Home Loan Bank ("FHLB") (up $58
million or 73%).
The mix of the Company's loans receivable continues to shift
from residential mortgages to commercial, commercial real estate
and consumer assets as the following table illustrates. The
decline in residential mortgages resulted from prepayments due to
lower borrowing costs for consumers and from loan sales the
Company consummated in May. This sale of residential mortgages
involved $21 million in principal and resulted in a gain of $315
thousand. Management believes the mortgages sold, which carried
relatively high rates, were likely to have been prepaid during
1998 and 1999 by consumers seeking lower rates. Consequently,
the gain may well exceed the earnings the Company would have
realized had it retained the assets until their eventual pre-
payment dates.
<TABLE>
<CAPTION>
Loan Portfolio
September 30, December 31,
1998 1997
- ------------------------------------------------------------------------------
Balance % Loans Balance % Loans Variance % Change
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial &
Commercial R.E. $ 392,064 61% $ 350,996 54% $ 41,068 12%
Consumer 114,237 18% 106,129 17% 8,108 8%
Residential 131,430 21% 182,208 29% (50,778) -28%
- -------------------------------------------------------------------------------
Total Loans $ 637,731 100% $ 639,333 100% $ (1,602) 0%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Year 2000 and the Company's State of Readiness
The Company has been pro-active in regard to the possible
consequences that the digital change to a new millennium may have
on computers and other operations. Prime is now primarily in the
testing phase in its program to avoid problems associated with this
worldwide concern sometimes referred to as the "Y2K issue".
Testing for all major systems is scheduled for substantial
completion by the end of the second quarter of 1999.
Late in 1997 Prime established a team of senior officers to
address Y2K issues. This company-wide effort involved an intense
review of all systems and functions that could be affected by the
date change in question. Aside from internal systems and
functions, outside servicers and customers were subject to review
in regard to their Y2K preparedness. The result of this process
was the identification of 71 internal systems (six non-information
technology related) that may be affected by Y2K and a small number
of customers whose systems would need still further review and
testing. See table II on page 12.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 and the Company's State of Readiness - Continued
Through September 30, 1998 the Company had incurred
approximately $200,000 in costs related to the Y2K issue, $25,000
of which was recorded in 1997. It is estimated that an additional
$1.9 million of expenditures will be made during the next eighteen
months. As some of these future expenditures are capital items,
the charge to operating results is less, as indicated in the table
that follows. Y2K project costs are being funded from operating
cash flows and are not expected to have a material adverse effect
on the Company's results of operations.
<TABLE>
<CAPTION>
TABLE I
ESTIMATED Y2K EXPENDITURES
Period Expenditures Charge to Expense
- -----------------------------------------------------------------
1997 1998 1999 2000
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 $ 25,000 $ 25,000 $ -- $ -- $ --
1998 609,300 -- 87,200 106,500 93,750
1999 1,360,700 -- -- 367,000 262,000
2000 55,000 -- -- -- 25,000
- -----------------------------------------------------------------
$2,050,000 $ 25,000 $ 87,200 $473,500 $380,750
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The relative completion status of all Y2K projects as of
October 1998 is reflected in the following table.
<TABLE>
<CAPTION>
TABLE II
RELATIVE COMPLETION PERCENTS
Testing/
Exposure Area Assessment Remediation[*] Validation
Implementation
- --------------------------------------------------------------------------------
- ------
<S> <C> <C> <C> <C>
Information Technology
(I/T) 92% 86% 45% 12%
Non-I/T (Vaults, phones,
fax machines, etc.) [**] 83% 67% 50% 33%
3rd parties - Clients [***] 100%
</TABLE>
[*] If a function is assessed as not Y2K compliant, develop an action plan
to correct the problem.
[**] Six areas of review, four complete.
[***] Only 2% of client base was of sufficient size and systems dependent to be
assessed as "high risk" exposures in regard to Y2K. These commercial
borrowers are being subject to interviews and other assessments of their
Y2K readiness. The current evaluation of this exposure does not lead
management to believe that any incremental loss provisions are necessary.
A major portion of the Company's Information Technology
budget has been devoted to the Y2K problem. This has resulted in
delayed implementation of certain upgrades in systems
capabilities that may have otherwise occurred. On the other
hand, certain Y2K resolution plans have accelerated the upgrade
of other system capabilities. The net result is that the Y2K
effort has not adversely delayed I/T projects and will not result
in a material loss of future revenues or material increases in
future expenses.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 and the Company's State of Readiness - Continued
Initially the Company used an outside vendor to help in the
assessment phase of major Y2K issues. In addition, the Company
is subject to independent review by banking regulators who
periodically make onsite visits. Based on these contacts,
management believes it is making satisfactory progress in its
efforts to avoid any material adverse consequences from the date
change to a new millennium.
If no further progress regarding the Company's efforts to
avoid Y2K consequences were made, it is possible that there would
be material adverse effects on operating results. Customer
deposit balances or loans payable may become inaccurate and lead
to losses, the magnitude of which is not reasonably possible to
estimate, especially given the alternatives developed in the
Company's contingency plans. However, given the level of
progress to date and the momentum of the effort, management does
not believe that material adverse consequences will develop in
the year 2000.
In regard to Y2K planning the Company has developed, or is
in the process of developing, contingency plans for "mission
critical" systems. Mission critical systems are those that are
essential to the Company's daily operating effectiveness. These
plans are designed to react in the event that the solutions now
in process to resolve Y2K issues, are unsuccessful. Such plans
involve manual process intervention, staffing increases,
outsourcing and other alternatives.
The Year 2000 statements contained herein and in other
securities or regulatory filings of the Company or Prime Bank may
not be relied upon as representations or warranties for any
purpose other than disclosure for federal securities law
compliance purposes.
Liquidity and Capital Resources
Liquidity for a financial institution is a measure of the
institution's ability to fund customers' needs for borrowings and
deposit withdrawals. The Company's policy has always been to
maintain a strong liquidity position. The Company's principal
sources of funds are deposits, principal repayments on loans,
proceeds from the sale of loans, funds from operations, advances
from the FHLB and other borrowed money.
Cash flows from operating activities provided $16.5 million
and $5.2 million for the nine months ended September 30, 1998 and
1997, respectively. This increase is primarily due to a decrease
in other assets of $6.0 million in 1998 compared to $1.0 million
in 1997, and a smaller decrease in other liabilities of $.4
million in 1998 compared to $2.7 million in 1997, partially
offset by a decrease in the provision for loan losses.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources - Continued
Cash flows used in investing activities were $53.4 million
for the nine months ended September 30, 1998 compared to $8.1
million for the same period in 1997. This change was primarily
attributable to an increase in the purchase of investment
securities available for sale of $189.4 million in 1998 compared
to $32.4 million in 1997, which was partially offset by increased
investment repayments and loan sales and decreased purchases of
investment securities.
Cash flows provided from financing activities were $74.6
million for the nine months ended September 30, 1998 compared to
$28.6 million for the same period in 1998. This change is
primarily attributable to an increase of $14.9 million in
deposits compared to a decrease of $43.5 million for the same
period in 1997. Net borrowings from the Federal Home Loan Bank
of Pittsburgh increased by $58.0 million in 1998 compared to
$44.0 million in 1997. These increases were partially offset by
an increase of only $5.5 million in repurchase agreements in 1998
compared to an increase of $31.4 million in 1997.
Capital
The Board of Governors of the Federal Reserve System (the
"FRB") has adopted risk-based capital and leverage ratio
requirements for bank holding companies and banks which are
members of the Federal Reserve System. At September 30, 1998,
the Bank met each of its capital requirements. The table below
sets forth the minimum capital ratios applicable to the Bank,
together with the actual dollar amounts and percentages of
capital for the Bank in each category at September 30, 1998:
<TABLE>
<CAPTION>
For To Be Well
Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes: Action Provisions:
-------------- -------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk
weighted
assets) $90,580 12.96% $55,929 8.00% $69,912 10.00%
Tier I Capital
(to risk
weighted
assets) 81,831 11.70% 27,965 4.00% 41,947 6.00%
Tier I Capital
(to average
assets) 81,831 7.92% 41,308 4.00% 51,635 5.00%
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Income
The Company reported net income of $8.8 million and $3.2
million for the nine month and three month periods ended
September 30, 1998. This represents an increase of $1.2 million
(15.4%) and $386 thousand (13.9%) when compared to the same
periods in 1997.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1998 1997 1998 1997
----------------- ------------------
<S> <C> <C> <C> <C>
Net interest income $10,018 $ 9,590 $29,880 $27,343
Provision for loan losses 431 856 1,592 2,574
Fees and service charges 2,014 1,884 679 608
Gain on sale of assets 332 145 50 186
Securization and sale of
mortgages -- -- -- 606
Mortgage banking activities 341 122 1,029 290
Other income 792 873 241 247
Operating expenses 6,107 5,708 19,098 17,142
Taxes 1,635 1,419 4,583 3 824
------- ------- ------- -------
Net income $ 3,156 $ 2,770 $ 8,774 $ 7,601
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Higher net interest income along with increased revenues
from mortgage banking and a lower loan loss provision were the
primary reasons for increased net revenues in both the nine month
and three month periods as summarized above. Higher operating
expenses and taxes partly offset the increase in net revenues.
On a diluted per share basis net income for the three month
period amounted to $0.28 compared to $0.25 in the similar period
of 1997, a 12% increase. For the nine month period, diluted
earnings per share were $0.78 compared to $0.69 in 1997, a 13%
increase.
The increases in net income helped to raise performance
ratios as the Company's return on average equity rose to 14.1% in
the nine month period ended September 30, 1998 compared to 13.7%
in the same period of 1997. The return on average assets was
1.17% compare to 1.09% in the year ago period.
Net Interest Income
Net interest income was $29.9 million and $10.0 million for
the nine months and three months ended September 30, 1998. This
represents a 9.3% and 4.5% increase when compared to net interest
income of $27.3 million and $9.6 million for the same periods in
1997. This is primarily the result of loan growth in commercial
and commercial real estate loans, offsetting declining levels of
lower yielding residential mortgages and lower deposit costs due
to demand deposits representing a larger portion of total
deposits.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income - Continued
The net interest margin decreased to 4.08% for the three
months ended September 30, 1998 from 4.32% for the same period in
1997. This is due in part to certain high-cost borrowings, since
paid off, which were used to fund investments earlier in the
year. These investments, made at yields not available in today's
market, were part of a strategy to invest funds that would not
become available until later in the year when yields were
expected to be lower.
The table below illustrates the changes in the net interest
rate margin and interest rate spread for the three months and
nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INCOME/EXPENSE AND RATES
(Dollars in thousands)
Three Months Ended September 30,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Average Interest Average Interest
Balance Inc/Exp Yield Balance Inc/Exp Yield
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Commercial & commercial
real estate $386,842 $ 9,003 9.23% $327,027 $ 7,834 9.50%
Consumer 113,010 2,628 9.23% 104,091 2,545 9.70%
Residential mortgages 140,386 2,615 7.45% 201,894 3,863 7.65%
- ------------------------------------------------------------------------------
Total loans 640,238 14,246 8.83% 633,012 14,242 8.93%
Investments 341,178 5,291 6.15% 254,356 4,152 6.48%
- ------------------------------------------------------------------------------
Total Earning assets 981,416 19,537 7.90% 887,368 18,394 8.22%
- ------------------------------------------------------------------------------
Allowance for loan loss (9,470) -- -- (8,803) -- --
Non-earning assets 64,121 -- -- 67,555 -- --
- ------------------------------------------------------------------------------
Total assets $1,036,067 $19,537 $946,120 $18,394
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand $160,856 $ 59 0.15% $134,707 $ 56 0.16%
Savings 212,022 1,675 3.13% 192,828 1,426 2,93%
Retail C/D's 297,008 4,031 5.38% 311,933 4,198 5.34%
Jumbo C/D's 52,201 715 5.43% 55,397 767 5.49%
- ------------------------------------------------------------------------------
Total deposits 722,087 6,480 3.56% 694,865 6,447 3.68%
- ------------------------------------------------------------------------------
Borrowings 222,378 2,964 5.29% 168,972 2,282 5.36%
- ------------------------------------------------------------------------------
Total interest-bearing
liabilities 944,465 9,444 3.97% 863,837 8,729 4.04%
- ------------------------------------------------------------------------------
Other liabilities 5,844 -- -- 5,952 -- --
Shareholders' equity 85,758 -- -- 76,331 -- --
- ------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $1,036,067 $ 9,444 $946,120 $ 8,729
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net interest income/interest
rate spread $10,093 3.93% $ 9,665 4.21%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net interest earning
assets/net yield $ 36,951 4.08% $ 23,531 4.32%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest earning assets to interest-
bearing liabilities 104% 103%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income - Continued
<TABLE>
<CAPTION>
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT
INCOME/EXPENSE AND RATES
(Dollars in thousands)
Nine Months Ended September 30,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Average Interest Average Interest
Balance Inc/Exp Yield Balance Inc/Exp Yield
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Commercial & commercial
real estate $372,156 $ 25,916 9.31% $309,121 $21,715 9.39%
Consumer 110,370 7,728 9.36% 103,985 7,226 9.29%
Residential mortgages 159,235 9,029 11.34% 212,150 12,086 11.39%
- ------------------------------------------------------------------------------
Total loans 641,761 42,673 8.89% 625,256 41,027 8.77%
- ------------------------------------------------------------------------------
Investments 307,693 14,664 6.37% 249,225 12,236 6.56%
- ------------------------------------------------------------------------------
Total Earning assets 949,454 57,337 8.07% 874,481 53,263 8.14%
- ------------------------------------------------------------------------------
Allowance for loan loss (9,055) -- -- (8,230) -- --
Non-earning assets 65,962 -- -- 65,064 -- --
- ------------------------------------------------------------------------------
Total assets $1,006,361 $ 57,337 $931,315 $53,263
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand $156,503 $ 182 0.16% $129,510 $ 194 0.20%
Savings 203,226 4,616 2.98% 194,609 4,313 2,96%
Retail C/D's 299,972 12,058 5.37% 332,784 13,428 5.39%
Jumbo C/D's 53,792 2,192 5.46% 55,465 2,211 5.33%
- ------------------------------------------------------------------------------
Total deposits 713,493 19,048 3.57% 712,368 20,146 3.78%
- ------------------------------------------------------------------------------
Borrowings 204,530 8,184 5.35% 137,585 5,549 5.39%
- ------------------------------------------------------------------------------
Total interest-bearing
liabilities 918,023 27,232 3.97% 849,953 25,695 4.04%
- ------------------------------------------------------------------------------
Other liabilities 5,266 -- -- 7,117 -- --
Shareholders' equity 83,072 -- -- 74,245 -- --
- ------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $1,006,361 $27,232 $931,315 $25,695
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net interest income/interest
rate spread $30,105 4.10% $27,568 4.10%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net interest earning
assets/net yield $ 31,431 4.24% $ 24,528 4.21%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest earning assets to interest-
bearing liabilities 103% 103%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
Provisions for Loan Losses
The allowance for loan losses is based on a periodic
evaluation of the loan portfolio and is maintained at a level
that management considers adequate to absorb estimated potential
losses. Management considers a variety of factors, and
recognizes the inherent risk of loss that always exists in the
lending process. Management uses a disciplined methodology to
estimate the appropriate level of allowance for loan losses.
This methodology includes, among other things, an evaluation of
loss potential from individual problem credits, as well as
anticipated specific and general economic factors that may
adversely affect collectibility.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Provisions for Loan Losses - Continued
Management's determination of the adequacy of the allowance
is based on periodic evaluations of the credit portfolio. This
evaluation is inherently subjective as it requires material
estimates, including, among others, the amounts and timing of
expected future cash flows on impaired loans, estimated losses on
the loan portfolio, and general amounts for historical loss
experience, economic conditions, uncertainties in estimating
losses and inherent risks in the various credit portfolios, all
of which may be susceptible to significant change. Pursuant to
Statement of Financial Accounting Standard ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, as amended,
impaired loans are considered in the methodology for determining
the allowance for credit losses. Impaired loans are generally
evaluated based on the present value of expected future cash
flows or the fair value of the underlying collateral if principal
repayment is expected to come from the sale or operation of such
collateral.
The following is a summary of the activity in the allowance
for loan losses for the nine months ended September 1998 and 1997
(Dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Balance at the beginning of period $ 8,485 $ 7,206
Provision for loan losses 1,592 2,574
Recoveries:
Commercial & Commercial Real Estate 93 394
Consumer 74 37
Residential 4 12
-------- --------
Total 171 443
-------- --------
Losses charged against allowance:
Commercial & Commercial Real Estate (24) (616)
Consumer (666) (575)
Residential (21) (197)
-------- --------
Total (711) (1,388)
-------- --------
Balance at the end of period $ 9,537 $ 8,835
-------- --------
-------- --------
</TABLE>
Credit Risk
The Bank manages credit risk by maintaining diversification
in its loan portfolio, by establishing and enforcing rigorous
underwriting standards, by intensive collection efforts, by
regular reviews by the loan review committees and by an internal
risk rating system.
Asset Quality
Non-performing assets, which include non-accruing loans and
real estate owned, totaled $3.9 million at September 30, 1998
compared to $4.0 million at December 31, 1997.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset Quality - Continued
The following table sets forth non-performing assets as of
September 30, 1998 and December 31, 1997 (Dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Non-accrual loans (1):
Commercial loans $ 1,491 $ 1,453
Consumer 528 380
Residential loans 1,207 1,170
-------- --------
Total non-accrual loans 3,226 3,003
Real estate owned 624 957
-------- --------
Total non-performing assets $ 3,850 $ 3,960
-------- --------
-------- --------
Total non-performing loans to
loans receivable 0.51% 0.47%
-------- --------
-------- --------
Total non-performing assets to
total assets 0.37% 0.42%
-------- --------
-------- --------
Ratio of allowance for loan
losses to non-performing loans 295.63% 282.55%
-------- --------
-------- --------
</TABLE>
(1) The above statistics do not include the impact of a
condominium project, which was acquired in 1995 by a deed in
lieu of foreclosure and classified as land acquired for
development and resale. Non-performing assets and the ratio
of non-performing assets to total assets would have been
$7.1 million and 0.68% at September 30, 1998 and $9.9
million and 1.04% at December 31, 1997 if the condominium
project was included in non-performing assets. The project
was valued at $3.3 million on the Company's books at
September 30, 1998, down from $5.9 million at December 31,
1997. The completion and sale of condominium units continues
to reduce the carrying value of this asset.
Non-Interest Income
Non-interest income was $1.3 million for the three months
ended September 30, 1998. This is an increase of 29% when
compared to the same period in 1997, excluding nonrecurring
income. The increase in income was principally due to higher
revenues from mortgage banking activities and more fee income
from increased commercial deposit relationships.
Mortgage banking income, including profits from the
origination and sale of residential mortgages, totaled $341
thousand in the current period, nearly three times the level of
such income in the same period of 1997 when the Company's
mortgage banking function was initially established.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Non-Interest Income - Continued
For the nine month period ended September 30, 1998, non-
interest income was $4.2 million or 10% higher than in the same
period of 1997. The 1997 numbers included a gain on an insurance
settlement and the securitization and sale of mortgages.
Excluding nonrecurring items from both years, 1998 non-interest
income would be $3.8 million compared to $2.8 million in 1997, a
36% increase. The major reason for the increase was a $739 thousand
increase in mortgage banking income.
Non-Interest Expense
The primary component of other expenses is salaries and
employee benefits, which increased 16.1% and 18.4% for the nine
months and three months ended September 30, 1998 to $10.0 million
and $3.3 million from $8.6 million and $2.8 million in 1997.
This increase is primarily attributable to the Company's expanded
commercial banking activities as well as increased staffing for
the Company's technology and operations departments, partly in
response to the year 2000 systems issues.
Occupancy and equipment expense increased 2.5% to $4.3
million for the nine months ended September 30, 1998 from $4.2
million for the same period in 1997. Occupancy and equipment
expenses for the three months ended September 30, 1998 and 1997
remained unchanged. The increase is primarily attributable to
technological enhancements involving the upgrading of data
processing and telecommunication systems and the addition of a
new branch in November 1997.
Other expenses increased to $4.8 million for the nine months
from $4.4 million for the same period in 1997. This increase was
primarily attributable to increased printing and supply costs
necessitated by the conversion to a commercial bank. For the
three month period there was a decrease from $1.5 million to $1.4
million.
Dividend Policy
The Board of Directors of the Company declared a cash
dividend of .95 cents ($.095) per share of common stock on
September 18, 1998, payable October 30, 1998, to shareholders of
record on September 30, 1998.
It is currently the Board's intention to continue to pay
dividends on a quarterly basis. The dividend declared on
September 18, 1998 was the Company's thirty-ninth consecutive
quarterly cash dividend.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Dividend Policy - Continued
Future payment of dividends, however, will be subject to
determination and declaration by the Board of Directors, which
will take into account the Company's financial condition, results
of operations, industry standards, economic conditions and other
factors including regulatory restrictions. Currently, the
Company must rely on the Banks' payment of dividends to the
Company in order to generate the cash and income to pay the
dividend. The Board may also consider the payment of stock
dividends from time to time in addition to, or in lieu of, cash
dividends.
Under Pennsylvania banking law, the Bank may declare and pay
dividends only out of accumulated net earnings, and a dividend
may not be declared or paid out of its surplus. Furthermore,
under federal and state banking laws, an institution may be
prevented from paying dividends under certain circumstances when
it is not adequately capitalized.
Stock Split
The Board of Directors of the Company, on May 14, 1998
declared a two-for one (2 for 1) stock split payable June 19,
1998 for shareholders of record on May 29, 1998. The stock split
was effected in the form of a tax-free stock dividend.
21
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk of loss from adverse interest rate changes is
monitored by evaluating the impact, if any, on the Company's net
interest income under a variety of rate assumptions. Management
attempts to limit the projected negative impact of interest rate
changes on its income. Consequently, if the Company's internal
analysis would suggest that a reasonably possible rate projection
would result in a significant loss of net interest income
(generally about 5% or more), it would act to mitigate this
potential future risk. The steps to mitigate possible interest
rate risk include changing the mix of assets and their scheduled
maturities. Among the assets most likely for these changes are
investment securities available for sale and short-term money
market investments. Changing the composition and maturity of
certain liabilities is also an alternative management may
consider as is the option of using derivative financial
instruments to adjust a given sensitivity position.
No material changes in market risk strategy occurred during
the current period. A detailed discussion of market risk is
provided in the SEC Form 10-K for the period ended December 31,
1997.
22
<PAGE>
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
The Company is not engaged in any legal proceedings of a
material nature at the present time. From time to time, the
Company is a party to legal proceedings wherein it enforces its
security interest in mortgage loans made by it.
Item 2 Changes in Securities
Not applicable.
Item 3 Defaults Upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
See the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1998 for a report on the Company's Annual
Shareholders' Meeting held April 17, 1998.
Item 5 Other Information
Shareholders of the Company are entitled to submit proposals
on matters appropriate for shareholder action consistent with
regulations of the Securities and Exchange Commission ("SEC") and
the Company's bylaws. Should a shareholder wish to have a proposal
considered for inclusion in the proxy statement for the Company's
1999 annual meeting, under Rule 14a-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), such proposal must be
received by the Company on or before November 20, 1998.
In connection with the Company's 1999 annual meeting and
pursuant to recently amended Rule 14a-4 under the Exchange Act, if
the shareholder's notice is not received by the Company on or
before February 1, 1999, the Company (through management proxy
holders) may exercise discretionary voting authority when the
proposal is raised at the annual meeting without any reference to
the matter in the proxy statement.
The above summary, which sets forth only the procedures by
which business may be properly brought before and voted upon at
the Company's annual meeting is qualified in its entirety by
reference to the Company's bylaws.
All shareholder proposals and notices should be directed to
the Company's secretary, Steven Santini, at 7111 Valley Green Road,
Fort Washington, PA 19034.
23
<PAGE>
PART II
OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
Report dated September 21, 1998 and amended September 30,
1998, relating to a change in registrant's certifying
accountant.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Prime Bancorp, Inc.
Date: November 13, 1998 /s/ James J. Lynch
--------------------------
James J. Lynch
President and Chief
Executive Officer
Date: November 13, 1998 /s/ Frank H. Reeves
--------------------------
Frank H. Reeves
Senior Vice President and
Chief Accounting Officer
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 32,745
<INT-BEARING-DEPOSITS> 36,186
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 222,530
<INVESTMENTS-CARRYING> 68,985
<INVESTMENTS-MARKET> 69,787
<LOANS> 637,731
<ALLOWANCE> 9,537
<TOTAL-ASSETS> 1,037,978
<DEPOSITS> 709,377
<SHORT-TERM> 96,990
<LIABILITIES-OTHER> 6,628
<LONG-TERM> 137,503
0
0
<COMMON> 10,977
<OTHER-SE> 76,503
<TOTAL-LIABILITIES-AND-EQUITY> 1,037,978
<INTEREST-LOAN> 42,673
<INTEREST-INVEST> 13,343
<INTEREST-OTHER> 1,096
<INTEREST-TOTAL> 57,112
<INTEREST-DEPOSIT> 19,048
<INTEREST-EXPENSE> 27,232
<INTEREST-INCOME-NET> 29,880
<LOAN-LOSSES> 1,592
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 19,098
<INCOME-PRETAX> 13,357
<INCOME-PRE-EXTRAORDINARY> 13,357
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,774
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 8.07
<LOANS-NON> 3,226
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<ALLOWANCE-OPEN> 8,485
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<ALLOWANCE-CLOSE> 9,537
<ALLOWANCE-DOMESTIC> 9,537
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,205
</TABLE>
