<PAGE>
================================================================================
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, 1998
-----------------
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
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 19034-2209
- -------------------------------------------- --------------------------
(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 ___
[ ] 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 $231.2 million.(1)
The number of shares of the registrant's Common Stock outstanding as of
March 18, 1999 was 11,001,806 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
(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 18, 1999. 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>
PRIME BANCORP, INC.
Part I
Item 1. Business
Introduction
Prime Bancorp, Inc. ("the Company" or "Prime") was incorporated under
the laws of the Commonwealth 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 is regulated as a bank holding company. Prior
to October 1, 1997, the Company's principal subsidiaries were Prime Bank, a
savings Bank ("Prime Savings") and First Sterling Bank, a commercial bank
("First Sterling"). On October 1, 1997, the Company completed the merger of the
Banks. The combined entity is one commercial bank called Prime Bank (the
"Bank"). The principal business of the Company and the Bank consists of
attracting deposits and obtaining borrowings, then converting those deposits and
borrowings into various types of loans and investments.
The Company's corporate headquarters is in Fort Washington,
Pennsylvania. Its operations center is in northeast Philadelphia, Pennsylvania.
The Company's bank subsidiary has eight additional full service branch offices
in Philadelphia, five full service branches in Bucks County, Pennsylvania, eight
full service branches in Montgomery County, Pennsylvania, two in Delaware
County, Pennsylvania, and one in Chester County, Pennsylvania.
On February 17, 1999, Prime entered into a definitive Agreement and
Plan of Merger pursuant to which Summit Bancorp, Inc. ("Summit") will acquire
Prime. Under the terms of the definitive agreement, Summit will exchange one (1)
share of Prime common stock for .675 shares of Summit common stock in a tax-free
exchange with a transaction value of approximately $292.0 million. Upon the
consummation of the merger with Summit Bancorp, the Bank will merge with Summit
Bank of Pennsylvania. The transaction is subject to customary regulatory
approvals and is anticipated to be completed in the third quarter of 1999. As a
result of the transaction, the Board of Directors has concluded that it is in
the best interest of the Company to defer the holding of the 1999 annual meeting
of shareholders indefinitely. A special meeting of shareholders will be held to
vote on the proposed transaction, and it is anticipated that the Board of
Directors will take action to set the date for this meeting prior to April 30,
1999.
In connection with the transaction, Prime and Summit entered into a
Stock Option Agreement dated February 18, 1999 pursuant to which Prime granted
to Summit an option to purchase 1,087,498 shares of Prime common stock at a
price of $18.00 per share (the closing price on February 17, 1999) upon the
occurrence of certain events. Prime also agreed to pay Summit a breakup fee of
$5,000,000 in the event the transaction is not completed for certain reasons.
Business
The Company follows a strategy which focuses on providing individuals,
businesses, and communities with high quality banking services. Banking services
includes lending money, gathering money and other complimentary fee generating
services. The Company's loan products include commercial, commercial real
estate, consumer and residential mortgages. Deposits and funding are gathered
along five major lines which are checking, savings, retail CDs, jumbo CDs and
commercial cash management.
Lending Activities
The Company's loan portfolio totaled $666.5 million at December 31,
1998. This represented approximately 64% of its total assets. At that date,
approximately 63% of the loan portfolio consisted of commercial and commercial
real estate loans and the remaining balance consisted of consumer loans (18%)
and residential mortgages (19%).
2
<PAGE>
Non-banking Subsidiary Activities
The Company presently conducts business through or has an investment in
eight non-banking subsidiaries. Of these, six are wholly owned by the Bank:
Prime Abstract, Inc. ("Prime Abstract"), Rowland Service Corporation
("Rowland"), Prime Financial Inc. ("Prime Financial"), NEFA Corporation
("NEFA"), 723 Service Corporation and 6524 Service Corporation. None of the
Company's non-banking subsidiaries generates net income which is individually or
in the aggregate, material to the consolidated financial results of the Company
on a consolidated basis.
o Prime Abstract, Inc.: Prime Abstract Inc., a wholly owned subsidiary of the
Bank, is a Delaware Corporation formed in 1988 for the purpose of performing
title searches and providing related permissible services for its banking
affiliates.
o Rowland Service Corporation: Rowland, a subsidiary of the Bank, was formed to
participate in a joint venture project with one local developer involving the
construction of a 15,000 square foot professional condominium complex.
o Prime Financial Inc.: Prime Financial, a subsidiary of the Bank, was formed to
oversee full-service brokerage operations at the Bank. It is currently
inactive.
o NEFA Corporation: NEFA, a subsidiary of the Bank, was formed to acquire land
currently held for development and resale.
o 723 Service Corporation: 723 Service Corporation, a subsidiary of the Bank,
was formed for the acquisition of property for debts previously contracted by
borrowers of the Bank.
o 6524 Service Corporation: 6524 Service Corporation was formed for the
acquisition of property for debts previously contracted by borrowers of the
Bank.
o 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.
o 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.
At December 31, 1998, the Company's aggregate debt and equity
investment in the non-banking subsidiaries was $3.7 million. (0.36% of the
Company's total assets)
REGULATION AND SUPERVISION
The Company and Prime 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 Bank when compared with competitors which are
substantially less regulated.
3
<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 regulated and subject to examination and supervision by the Board of
Governors of the Federal Reserve System ("FRB") and is subject to 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 any non-banking company or substantially all of 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.
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 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.
Other Capital Ratios. Furthermore, the FRB requires bank holding
companies to maintain 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% on the same basis
as required for member Banks.
The Company currently meets these minimum capital requirements.
4
<PAGE>
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.
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 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 Bank
Prime Bank became a Pennsylvania chartered commercial bank as of
October 1, 1997, and is a member of the Federal Reserve Bank System. Its deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). Most of its deposits are insured under the Bank Insurance
Fund ("BIF"), although some deposits are insured under the Savings Association
Insurance Fund ("SAIF"). Prime 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 are governed
by the PA Code. 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, the Bank is generally limited in making loans to any one
customer or group of related customers to an amount which equals 15% of the
Bank's unimpaired capital and surplus from time to time.
PADOB regulations establish minimum capital requirements for
Pennsylvania chartered financial institutions such as the Bank (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, 1998, Prime Bank met the Pennsylvania minimum capital
requirements.
5
<PAGE>
Federal Reserve System
Federal Reserve Membership. Prime 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 the Bank to maintain
non-interest earning reserves against the Bank's 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 Bank's assets.
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 a federal law enacted in 1996, the SAIF fund was
recapitalized, and the two funds were to be merged on or before January 1, 1999
if on that date no further savings associations exist.
Prompt Corrective Action. Federal banking laws and regulations
establish 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. An institution such as
the Bank must maintain capital of not less than the requirements established by
its primary federal regulator in order to be deemed "adequately capitalized".
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.
6
<PAGE>
Dividends
Dividend payments by the Bank to the Company are subject to the PA Code
and federal banking laws and regulations. Under the PA Code, dividends may be
paid from `accumulated net earnings' (generally, undivided profits) without
prior regulatory approval. Under federal banking law, 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. In addition, Banks which are not adequately
capitalized or otherwise fail to meet regulatory standards, including those for
safety and soundness, may be restricted in payment of dividends. The FRB and the
FDIC have formal and informal policies which provide that insured Banks and Bank
holding Companies should generally pay dividends only out of current operating
earnings.
Transactions with Affiliates and Other Related Parties
The Bank 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 ("FRA"). In
summary, Section 23A
(i) imposes individual and aggregate percentage of capital limits on the
dollar amount of a wide variety of affiliate dealings coming within the
definition of a "covered transaction" (in general, the aggregate amount of
transactions with any one non-bank affiliate is limited to 10% of the
capital and surplus of the Bank and the aggregate amount of 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) sales of securities or other assets to an affiliate including assets
subject to an agreement to repurchase;
(ii) a payment of money or the furnishing of services to an affiliate under
contract, lease, or otherwise;
(iii) any transaction in which an affiliate acts as an agent or broker or
receives a fee for its services to the association or to any other person;
or
(iv) any transaction or series of transactions with a third party if an
affiliate has an interest in the third party or participates in the
transaction.
The 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 the 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.
7
<PAGE>
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
The FRB has adopted risk-based capital and leverage ratio requirements
for member insured banks such as Prime Bank.
Risk-Based Capital Guidelines. The FRB's risk-based capital guidelines
for member 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 FRB has also established a minimum
level of Tier 1 capital to total assets of 3% for those member Banks which have
the highest regulatory examination ratings and are not contemplating or
experiencing significant growth or expansion. All other member Banks are
required to maintain a Tier 1 capital leverage ratio of at least 1% to 2% above
the 3% stated minimum.
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 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.
At December 31, 1998, Prime Bank met all of its capital requirements.
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. Generally, a member Bank with total
capital of at least 7.0% is placed in "Zone 1" and will be considered adequately
capitalized provided its "primary capital" is above the 5.5% minimum. In
contrast, a member Bank with total capital below 6.0% is placed in "Zone 3" and
will generally be considered undercapitalized, absent clear extenuating
circumstances. Member banks in "Zone 2" (having capital between the other two
zones) will be scrutinized for a variety of financial risks and capital adequacy
will be determined accordingly.
Prime Bank's total capital ratio would place it in "Zone 1" for these
purposes as of December 31, 1998.
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%.
8
<PAGE>
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 currently is not required to pay any deposit insurance.
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. The Bank pays these FICO assessments on its BIF and SAIF deposits.
There is no assurance whether the foregoing assessment rates will
remain constant or change.
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. Limited branch purchases are still subject to
state laws. On July 6, 1995, Pennsylvania adopted an interstate banking act (the
"PA Interstate Banking Act") to harmonize Pennsylvania banking laws with the
Federal Interstate Banking Act. The PA Interstate Banking Act "opts in" early
under the Federal Interstate Banking Act to permit interstate mergers,
non-Pennsylvania holding company acquisitions of Pennsylvania banks, branch
acquisitions and de novo branching in any of the manners contemplated by the
Federal Interstate Banking Act, subject to prior regulatory approvals or
filings. In general, the PA Interstate Banking Act permits out-of-state banking
institutions to establish branches in Pennsylvania with the approval of the
Pennsylvania Banking Department, provided the law of the state where the banking
institution is located would permit a Pennsylvania banking institution to
establish and maintain a branch in that state on substantially similar terms and
conditions. It also permits Pennsylvania banking institutions to maintain
branches in other states. Bank management anticipates that the federal and
Pennsylvania interstate banking legistration will increase competitive pressures
in the Bank's market by permitting entry of additional competitors, but
management is of the opinion that they will not have a material impact upon the
anticipated results of operations of the Bank.
9
<PAGE>
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 ("FHLB"). 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.
Other Laws and Regulations
The Company and the Bank 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 Bank is 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 the Bank.
Employees
At December 31, 1998, the Company had 314 full time equivalent
employees, including 288 full-time and 56 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 thrifts and commercial Banks
located in its primary market area. The Company faces additional competition for
investor funds from mutual funds, the stock market and other corporate and
governmental securities.
10
<PAGE>
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.
Effect of Government Monetary Policies
The earnings of the Company and the Bank 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.
The following table sets forth information regarding non-accrual loans
and real estate owned held by the Bank at the date indicated (dollars in
thousands).
Non-Accrual Loans and Real Estate Owned
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Single-family residential $1,302 $1,170 $1,003 $1,786 $1,859
Multi-family Residential and
commercial real estate loans 15 -- 3,087 -- -
- ------------------------------------------------------------------------------------------------------------------------
1,317 1,170 4,090 1,786 1,859
- ------------------------------------------------------------------------------------------------------------------------
Consumer 552 380 243 517 2,956
Commercial loans 1,042 1,453 2,751 2,535 2,153
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans $2,911 $3,003 $7,084 $4,838 $6,968
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans to loans receivable 0.44% 0.47% 1.14% 0.96% 1.55%
- ------------------------------------------------------------------------------------------------------------------------
Total real estate owned, net of allowance
for REO loss 702 957 1,335 419 323
- ------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans and real estate
owned to total assets 0.35% 0.42% 0.91% 0.64% 0.99%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, approximately $291,000 of interest would have
been recorded on loans accounted for on a non-accrual basis if such loans had
been current.
Potential problem loans consist of loans which are included in
performing loans at December 31, 1998, 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, 1998,
such potential problem loans amounted to approximately $2.9 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 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
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
Bank to 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.
11
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $8,485 $7,206 $6,082 $6,067 $5,605
Charge-offs:
Domestic:
Real estate--commercial -- (606) (813) (17) (197)
Real estate--mortgages (88) (354) (480) (118) (66)
Commercial business loans (78) (776) (1,119) (1,044) (614)
Consumer (1,021) (921) (491) (273) (382)
- --------------------------------------------------------------------------------------------------------------------
(1,187) (2,657) (2,903) (1,452) (1,259)
- --------------------------------------------------------------------------------------------------------------------
Recoveries
Domestic:
Real estate--commercial 50 3 11 155 4
Real estate--mortgages 6 19 20 7 62
Commercial business loans 68 415 61 167 48
Consumer 120 61 98 9 13
- --------------------------------------------------------------------------------------------------------------------
244 498 190 338 127
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs (943) (2,159) (2,713) (1,114) (1,132)
- --------------------------------------------------------------------------------------------------------------------
Additions charged to operations 2,027 3,438 3,837 1,129 1,594
Balance at the end of period $9,569 $8,485 $7,206 $6,082 $6,067
====================================================================================================================
Ratio of net charge-offs during the period
to average loans outstanding during the
period 0.15% 0.35% 0.49% 0.24% 0.27%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
December 31 - 1998 1997 1996 1995 1994
---------------------------------------------------------------
dollars in thousands Amount Amount Amount Amount Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans $3,086 $ 3,267 $ 2,251 $ 1,954 $ 1,301
Commercial real estate 2,247 1,130 918 696 1,234
Consumer 1,267 1,334 963 1,066 1,035
Residential mortgage 1,965 1,280 2,081 1,728 1,856
Allowance for loan loss (unallocated) 1,004 1,474 993 638 641
---------------------------------------------------------------
$9,569 $ 8,485 $ 7,206 $ 6,082 $ 6,067
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Investment Activities
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 has 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.
At December 31, 1998, 29.6% of the total assets of the Company were
investment securities. See Note 4 of the Notes to the Company's Consolidated
Financial Statements.
12
<PAGE>
The following table presents the composition of the investment
securities portfolio of the Company at the dates indicated (dollars in
thousands).
Investment Securities Portfolio
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Fair Fair Fair
Cost Value Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
Held to Maturity
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
State and municipal $ 6,732 $ 7,078 $ 6,735 $ 7,002 $ 6,739 $ 6,771
Mortgage-backed securities 34,304 34,692 106,563 107,156 97,778 97,854
- -------------------------------------------------------------------------------------------------------------
Total debt securities 41,036 41,770 113,298 114,158 104,517 104,625
Other securities 15,400 15,401 4,690 4,690 6,249 6,249
- -------------------------------------------------------------------------------------------------------------
$56,436 $ 57,171 $117,988 $118,848 $110,766 $110,874
=============================================================================================================
Available for Sale
- -------------------------------------------------------------------------------------------------------------
U.S. Govt & US Govt Agency $123,380 $124,354 $64,483 $64,573 $62,037 $62,028
Mortgage-backed Securities 108,861 108,612 51,544 50,855 53,269 52,091
Corporate Bonds 17,316 17,648 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total debt securities 249,557 250,614 116,027 115,428 115,306 114,119
Other Securities 300 321 300 300 11,340 11,309
- -------------------------------------------------------------------------------------------------------------
$249,857 $250,935 $116,327 $115,728 $126,646 $125,428
=============================================================================================================
</TABLE>
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, sales and
maturities of investment securities, borrowings from the Federal Home Loan Bank
("FHLB") of Pittsburgh, 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 borrowings
from the FHLB of Pittsburgh and other borrowed funds to support expanded lending
activities or where otherwise advantageous to the Company.
Deposits
The Company has a stable base of core deposits, with approximately
9.05% of its deposits held in passbook and statement savings accounts which
currently earn 1.82%. The Company also offers short-term certificates of deposit
and other money market alternatives that are more responsive to market
conditions than passbook deposits and longer maturity fixed-rate 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.
13
<PAGE>
The following table sets forth deposit accounts in dollar amounts and
weighted average rates at the dates indicated (dollars in thousands).
<TABLE>
<CAPTION>
At December 31,
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement $ 63,631 1.82% $ 64,297 1.83% $ 63,022 2.05%
NOW and Super NOW 50,369 0.48% 43,988 0.57% 44,444 1.91%
Money market accounts 164,194 3.15% 130,959 3.46% 130,028 3.30%
Fixed-rate certificates 202,213 5.23% 233,352 5.50% 288,367 5.16%
Jumbo certificates 37,665 4.96% 47,578 5.41% 54,074 5.44%
Individual retirement
accounts (1) 56,626 5.56% 58,537 5.60% 61,940 5.79%
Checking accounts (2) 128,195 -- 115,733 -- 94,767 --
- ----------------------------------------------------------------------------------------------------------------
Total deposits $702,893 $694,444 $736,642
================================================================================================================
</TABLE>
(1) Funds in IRA accounts are invested primarily in certificates of deposit.
(2) Non-interest bearing.
Domestic Time Deposits of $100,000 or More
The following table sets forth remaining maturities of domestic time deposits of
$100,000 or more.
<TABLE>
<CAPTION>
Jumbo Other Time
December 31, 1998 - in thousands C/D Deposits Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $23,088 $ 5,388 $28,476
Over three through six months 10,840 3,855 14,695
Over six through twelve months 3,286 8,586 11,872
Over twelve months 451 100 551
- ---------------------------------------------------------------------------------------------
Total $37,665 $17,929 $55,594
=============================================================================================
</TABLE>
Borrowings
The FHLB System functions as a reserve credit facility for financial
institutions and certain other home financing institutions. It also provides
certain special purpose loan and service programs for its members. As a member
of the FHLB System, the Bank is required to own capital stock in the FHLB of
Pittsburgh and is 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 Bank's capital or on the FHLB of Pittsburgh's assessment of the Bank's
creditworthiness. See "Regulation of the Bank - Federal Home Loan Bank System".
At December 31, 1998, the Bank had $134.5 million in borrowings from the FHLB of
Pittsburgh.
14
<PAGE>
The Company uses borrowings and repurchase agreements as a funding
alternative. Included in such borrowings are fundings from commercial cash
management relationships.
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advances from FHLB of Pittsburgh $124,503 $ 79,550 $ 37,598
Repo plus agreements with the FHLB of Pittsburgh 10,000 -- 19,000
Repurchase agreements 103,852 91,486 51,685
- ---------------------------------------------------------------------------------------------------
$238,355 $171,036 $108,283
===================================================================================================
</TABLE>
Item 2. Properties.
The Company neither owns nor leases any real property. At present, it
uses the premises, equipment and furniture of Prime Bank, subject to payment of
such reasonable compensation, if any, as may be determined from time to time.
Prime Bank has eight offices in Philadelphia County, five in Bucks
County, one office in Chester County, two offices in Delaware County, and eight
in Montgomery County, Pennsylvania. Of the twenty-four offices, eight are owned,
and sixteen offices are subject to leases. At its home office, Prime Bank offers
a full range of customer banking services. Except for safe deposit boxes, these
same services are available at each of Prime Bank's other offices. Prime Bank
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.
Twelve offices are equipped with ATMs owned by Prime.
Item 3. Legal Proceedings.
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, other than ordinary routine litigation incidental to its
business.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company's common stock is traded on the NASDAQ National Market
System under the symbol "PBNK." On March 18, 1999 there were 11,001,806 shares
of common stock issued and outstanding, which were held by approximately 900
shareholders of record and approximately 2,600 beneficial owners. 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.
15
<PAGE>
Dividends
Declared
For The Quarter Ended High Low (Per Share)
- ------------------------------------------------------------------
March 31, 1996 $9.13 $8.88 $0.085
June 30, 1996 9.38 9.00 0.085
September 30, 1996 9.75 9.38 0.085
December 31, 1996 10.25 9.38 0.085
==================================================================
March 31, 1997 $11.88 $9.88 $0.085
June 30, 1997 12.63 10.25 0.085
September 30, 1997 13.75 11.94 0.085
December 31, 1997 18.63 13.75 0.095
==================================================================
March 31, 1998 $19.56 $17.38 $0.095
June 30, 1998 24.75 19.38 0.095
September 30, 1998 26.25 15.50 0.095
December 31, 1998 20.00 15.50 0.110
==================================================================
The listed market makers of Prime's stock are:
- ----------------------------------------------------------------
F.J. Morrissey & Co., Inc. Janney Montgomery Scott, Inc.
- ----------------------------------------------------------------
Advest, Inc. Troster Singer Corp.
- ----------------------------------------------------------------
Wheat First Securities, Inc. Knight Securities
- ----------------------------------------------------------------
Ryan Beck & Co. Inc. Sandler O'Neill & Partners
- ----------------------------------------------------------------
Tucker Anthony Incorporated
- ----------------------------------------------------------------
The Board of Directors of the Company, on May 14, 1998, declared a 2
for 1 stock split payable as a dividend on June 19, 1998 to shareholders of
record on May 29, 1998. The trading information set forth above has been
adjusted to reflect this stock dividend.
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
other factors including regulatory and tax considerations. Funds for the payment
of the dividends by the Company are generally obtained from the Bank. The amount
of dividends that may be declared or paid by the Bank are subject to certain
regulatory restrictions.
Item 6. Selected Financial Data.
FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
As of December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $1,039,340 $953,425 $926,071 $819,961 $739,231
Loans receivable, net 656,914 630,848 616,893 497,034 441,401
Investment securities and interest-bearing
deposits 317,677 251,877 239,497 259,328 117,193
Land acquired for development and resale 1,705 5,925 8,858 10,405 694
Deposits 702,893 694,444 736,642 644,306 585,066
Borrowings from Federal Home Loan Bank of
Pittsburgh 134,503 79,550 37,598 37,646 24,694
Other borrowed money 103,852 91,486 70,685 57,622 56,525
Shareholders' equity 89,803 79,864 70,516 69,279 57,369
Offices open 24 24 23 22 20
===========================================================================================================================
</TABLE>
16
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 (1) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.20% 1.13% 0.46% 0.97% 1.02%
Return on average equity 14.42% 13.97% 5.72% 11.89% 11.57%
Average equity to average assets 8.33% 8.07% 8.13% 8.29% 8.80%
Book value per share $8.18 $7.33 $6.66 $6.58 $5.60
Dividends per share $0.395 $0.350 $0.340 $0.310 $0.270
Dividend payout ratio 36.57% 36.65% 91.89% 44.93% 42.86%
</TABLE>
OPERATING DATA
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Interest income $76,263 $71,364 $65,664 $58,979 $47,068
Interest expense 35,910 34,232 33,140 30,557 21,280
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 40,353 37,132 32,524 28,422 25,788
Provision for loan losses 2,027 3,438 3,837 1,129 1,594
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 38,326 33,694 28,687 27,293 24,194
Fees, service charges and other income 3,892 3,535 2,625 2,530 2,398
Gain (loss) on sale of:
Securitization and sale of mortgages -- 606 -- -- --
Mortgage loans 315 -- -- -- --
Investments (6) 135 288 448 (285)
REO and land acquired for development & resale (152) 33 14 (44) (17)
Mortgage banking activities 1,475 561 294 509 81
Non-interest expense 25,402 22,756 25,995(1) 18,930 16,034
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 18,448 15,808 5,913 11,806 10,337
Income tax expense 6,305 5,289 1,896 4,337 3,625
- -------------------------------------------------------------------------------------------------------------------------
Net income $12,143 $10,519 $ 4,017 $ 7,469 $ 6,712
=========================================================================================================================
Dividends declared $ 4,331 $ 3,791 $ 2,811 $ 2,351 $ 1,949
=========================================================================================================================
Diluted earnings per share (2) $ 1.08 $ .96 $ .37 $ .70 $ 0.64
=========================================================================================================================
</TABLE>
(1) Includes a one time FDIC special insurance assessment of $2.71 million
($1.66 million net of taxes) and restructuring charges of $2.66 million
($1.70 million net of taxes). Excluding these adjustments, return on
assets, return on average equity, and average equity to average assets,
would have been .85%, 10.48%, 7.98% for the twelve months ended December
31, 1996, respectively.
(2) Earnings per share have been adjusted to reflect stock splits and stock
dividend.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
During 1998 Prime has continued its strategy to grow commercial assets
by increasing its penetration into the small business markets in the
Philadelphia region. The continuing goal, which began prior to the 1997
conversion to a commercial Bank charter, is to establish Prime as the premier
lender to the small business community. In doing so, the Company has changed the
mix of assets in order to improve overall profitability. Results for the year
1998 suggest that these strategies are working as the Company reported record
earnings, significant growth in commercial assets and improved performance
ratios. It is also noteworthy that this was accomplished during a year in which
the Company needed to invest in back room technologies, including plans to avoid
problems that may be associated with the Y2K issue.
SUMMARY OPERATING RESULTS
Net income at $12.1 million was the highest in the Company's history,
exceeding last year's record of $10.5 million. The increased earnings were 15%
ahead of 1997 results and amounted to $1.08 per diluted share compared to $.96
in 1997. Net income per share in 1997 was considerably above the $.37 reported
in 1996, which included certain adjustments, a portion of which was related to
the acquisition of First Sterling Bancorp, Inc.
The return on average equity was 14.42 % in 1998, up from 13.97% in
1997 and 5.72% in 1996. The return on average assets was 1.20%, up from 1.13% in
1997 and .46% in 1996.
The improvement in reported earnings is primarily due to $3.2 million
more in net interest income resulting from the increased levels of earning
assets and a similar margin (4.26% versus 4.27% in 1997). A lower loan loss
provision ($1.4 million less than in 1997) was also a factor although this was
partly offset by $.6 million less in gains on the sale of assets. Comparing 1997
to 1996, earnings increased due to higher net interest income (up $4.6 million),
gains on the sale of assets and the absence of non-recurring charges related to
the acquisition of First Sterling Bancorp and a special Bank insurance
assessment.
NET INTEREST INCOME
Growth in net interest income was the largest factor in the growth in
earnings from year to year. Net interest income increased 9% to $40.4 million
from $37.1 million in 1997. In 1997 net interest income increased 14% over
1996's $32.5 million. The higher levels of net interest income reflect a shift
to a higher yielding commercial asset mix from the savings Bank structure under
which Prime previously operated and which emphasized residential lending assets.
The Company continues to strive for a balanced loan portfolio with an emphasis
on commercial relationships but with a growing consumer portfolio and continued
servicing to the residential mortgage market.
The net interest margin remained consistent, 4.26% in 1998 versus 4.27%
in 1997. Lower asset yields (8.02% down from 8.17% in 1997) were generally
caused by market conditions and were largely offset by reduced funding costs
(3.76% of earning assets, down from 3.90% in 1997). 1997's margin was a
significant improvement over 1996's 4.06%.
One major factor in improved net interest income, aside from a larger
volume and a richer mix of earning assets, was the increase in average demand
deposits, largely non-interest bearing, of $26.9 million. This increase more
than offset decreases in the average of all other deposits amounting to $22.7
million. The decrease in other deposits was mainly attributable to relatively
higher cost retail certificates of deposit that were generally not part of an
overall banking relationship with Prime Bank (non-core customers). The net
result was a decrease in deposit costs as interest bearing deposits declined in
favor of non-interest balances. Therefore, despite a $65.4 million increase in
borrowed funds, overall interest costs were, as a percent of earnings assets,
lower in 1998 than in 1997.
18
<PAGE>
The increase in borrowed funds on average, $25.9 million represents
increased customer funds in the form of repurchase agreements. This relationship
funding is another reflection of increased commercial business activity.
A more detailed analysis of the mix of assets and liabilities and their
related interest rates is presented on pages 27 and 28.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased $1.4 million in 1998 from
1997's $3.4 million primarily due to reduced charge-offs and the improved
quality of the loan portfolio. 1997 had shown a slight decrease from 1996. A
more detailed explanation of the factors considered in determining the proper
provision for loan losses is presented in the section "Banking Risks".
NON-INTEREST INCOME
Non-interest income, excluding gains on the sale of assets increased
$1.2 million to $5.3 million in 1998 from $4.1 million in 1997, a 31% increase.
Mortgage banking activities accounted for most of this increase as this source
of revenues increased from $.56 million in 1997 to $1.48 million in 1998.
Deposit fees and other service charges rose by $.57 million from 1997 primarily
due to increases in transaction deposit accounts and an increase in standard
charges for services. These increases partially offset by a decrease of $.57
million in gains on the sale of assets and $.23 million less in loan fees.
In 1997 non-interest income was $1.6 million over 1996 levels due
primarily to gains on the sale of assets and increased fees and service charges.
NON-INTEREST EXPENSE
Non-interest expense increased $2.6 million or 12% from $22.8 million
in 1997. The major factors contributing to this increase were higher salary and
benefit costs, which increased $1.8 million, from $11.4 million to $13.2
million. These costs are largely associated with new employees. The new
employees were used to compliment Prime's continuing penetration of the regional
commercial markets plus technical staff needed to more effectively serve our
customers and to respond to the year 2000 systems issues. In 1997 an increase of
$1.8 million compared to the prior year was recorded, excluding certain
adjustments recognized in 1996. The adjustments related to Prime's acquisition
of First Sterling Bancorp and a special Bank insurance assessment, both
recognized in 1996. The expense increase in 1997 included $1.0 million in salary
and benefit costs largely as a consequence of the Company's expanded commercial
banking activities and a $.6 million increase in occupancy and equipment expense
due to technology enhancements and the first full year of costs for certain new
operating facilities.
The Company's efficiency ratios (operating expenses as a percent of net
revenues) were 56% in 1998, 55% in 1997 and 59% in 1996.
BALANCE SHEET REVIEW
Total assets at year-end grew by 9% compared to 1997 versus 3% growth
in 1997 compared to 1996. Assets were $1.04 billion at December 31, 1998
compared to $953 million at December 31, 1997 and $926 million at December 31,
1996. The growth in assets, $86 million, was funded by increased customer
balances in deposits and other liability products plus $55 million in additional
borrowings from the Federal Home Loan Bank (FHLB). Much of the increase in
funding was used for loan growth in the commercial and consumer portfolios.
Reductions in residential mortgage loans, through loan sales, regular
amortization and early payments, amounted to $53 million and were invested in
securities at fixed spreads.
19
<PAGE>
Average total assets for 1998 increased by $77 million, including $72
million in commercial and consumer loans. Residential mortgage prepayments and
other actions reduced that portfolio, on average, by $54 million and was
replaced by investment portfolio additions.
LOANS
The emphasis on building commercial relationships resulted in
commercial and commercial real estate loans growing a further 20% in 1998
following 27% growth in 1997. As of the respective year ends these loans grew
from $276 million in 1996 to $351 million in 1997 and $420 million in 1998. The
increases were partially offset by a decrease in residential mortgages from $246
million in 1996 to $182 million in 1997 and $129 million in 1998. The decreases
were the result of the policy adopted by management in 1996 to sell certain
mortgages in the portfolio and not to retain on the Company's books most new
mortgage originations, which were instead sold into the secondary markets.
Another factor in the declining mortgage portfolio was a rate environment that
fostered a strong refinancing market.
INVESTMENTS
Growth in the investment portfolios arose from liquidity provided from
declining residential mortgage loans and from increases in funding not needed
for commercial and consumer loan increases. All incremental portfolio additions,
and any reinvestment of maturities in the portfolios, were placed in the
"available for sale" category. Consequently, the "held until maturity" portfolio
declined from $118 million at the end of 1997 to $56 million at year-end 1998.
The larger "available for sale" portfolio provides more flexibility in
asset/liability management.
DEPOSITS
While there was only a 1% increase in overall deposits from December
31, 1997 to December 31, 1998 ($694 million to $703 million), there was a
significant change in the mix of the deposits. Demand and savings accounts,
which are lower cost accounts, increased from $355 million to $406 million while
higher cost certificates of deposit decreased from $339 million to $297 million.
The reduced reliance on higher cost certificates of deposit and more emphasis on
relationship banking began in 1997. This resulted in overall deposits decreasing
from $737 million at December 31, 1996 to $703 million at the end of 1998.
REPURCHASE AGREEMENTS
Through cash management and other support services to commercial
clients, Prime gathers funding in the form of repurchase agreements, borrowings
for which Prime offers investment securities as collateral. At December 31, 1998
this activity provided $104 million in funding at an average cost of 4.22%. This
compares to $71 million at the end of 1997 at an average cost of 4.92%.
FHLB BORROWINGS
The Company uses FHLB borrowings as a liquidity tool, including funding
for investment opportunities created by market conditions. As of December 31,
1998 $135 million in borrowings from the FHLB were outstanding, most of which
were specifically matched to investments and resulted in spreads of from 60 to
170 basis points. At the end of 1997 $80 million in FHLB borrowings were
outstanding.
20
<PAGE>
BANKING RISKS
CREDIT RISK
Credit risk arises from the potential that a borrower or counterparty
will fail to perform according to contractual terms. Such risk exists in
numerous financial instruments and off-balance sheet items including loans and
leases, investments, letters of credit and derivative instruments. The Company
strives to maintain strong credit quality through the management of this risk.
In its endeavor, the Company attempts to identify, monitor, and control credit
risk through the adoption of high underwriting standards and good risk
management practices.
A key element in the establishment of these standards and practices is
the implementation of sound lending policies and procedures. The Company's board
approved lending policies are comprehensive and are designed to establish
accountability for appropriate personnel. Loan approvals are made by at least
two experienced banking loan officers with loan officer approval authority based
on the size and risk in the credit relationship.
As part of the credit risk monitoring process, various committees have
been established. These committees are intended to ensure that sound
underwriting practices are sustained and that management and the Board of
Directors are aware of the level of risk in the portfolio. One such committee is
the Senior Loan Officers Committee. The committee of officers meets on a monthly
basis to review approved and renewed credit relationships that exceed $750
thousand. The review includes, but is not limited to, a discussion on the
structure, terms, and repayment ability of these credit relationships.
The Credit Committee, a committee of directors and senior management,
meets six times a year to discuss similar items on credit relationships
exceeding $1 million. This committee also reviews relationships above $250
thousand that are considered to have an inordinate amount of risk and
relationships that warrant exception to lending policies. In addition to
reviewing individual credit relationships, the committee is informed on
aggregate portfolio issues such as possible concentrations of credit and
potential portfolio exposure arising from Year 2000 risk.
The Company's independent Loan Review Department provides further
assurance that credit risk is identified and controlled. The loan portfolio is
monitored closely for any indication of deteriorating credit quality. Individual
lending relationships are assessed regularly and provided with a numerical grade
based on the estimated level of risk in the relationship. Some of the criteria
considered in the evaluation include the borrowing entity's ability to repay the
debt, the adequacy of its management, and the industry in which it operates.
Also considered in the evaluation is the adequacy of collateral, the ability of
guarantors to provide support and the overall structure of the obligation. While
it is the loan officer's responsibility to inform management of any change in
the credit quality of an individual lending relationship, the independent loan
review function provides an additional level of control in the monitoring
process.
The Loan Review Department also examines the portfolio on an aggregate
basis by reviewing overall portfolio quality and trends. Management and the
Board are regularly informed of the condition of the portfolio and of any
situation that may exceed the Company's risk tolerance.
NON-PERFORMING ASSETS
Non-performing assets decreased to $3.6 million at December 31, 1998
from $4 million at December 31, 1997. The reduction represents the second
consecutive year of declines in non-performing assets. The reduction primarily
resulted from the sale of real estate owned and repossessed autos. Repossessed
assets totaled $702 thousand at December 31, 1998, representing a $255 thousand
reduction from year-end 1997. Non-accrual loans, the largest component of
non-performing assets, totaled $2.9 million at December 31, 1998 and reduced by
$92 thousand from the prior year-end amount.
21
<PAGE>
ALLOWANCE FOR LOAN LOSSES
While management endeavors to minimize the possibility of loss in its
portfolio, it recognizes that losses are intrinsic to the lending process. As
such, the adequacy of the allowance for loan losses is monitored closely and is
maintained at a level that management believes is sufficient to protect against
anticipated and unforeseen losses.
At December 31, 1998, the allowance for loan losses totaled $9.6
million, or 1.44% of total loans, as compared to $8.5 million, or 1.33% of total
loans at December 31, 1997. The increased reserves reflects, in part, growth in
the total amount of loans outstanding as well as the changing mix of loan
assets. At December 31, 1998, 63% of the loan portfolio was in commercial and
commercial real estate receivables as compared to 55% at the end of 1997.
A detailed and systematic approach is applied in assessing the adequacy
of the allowance for losses. Numerous factors are considered in the analysis
including economic conditions, portfolio growth and composition, credit quality,
delinquency and charge-off trends, historical performance and possible
concentrations of credit. The evaluation of the allowance for losses
incorporates both identified loss potential among specific loans and the
underlying risks inherent in the portfolio. Reserves are allocated to
deteriorated commercial and commercial real estate portfolios based on the
perceived level of risk in the individual credits. Reserves allocated for
consumer and residential portfolios are based on historical losses as well as
projected trends. Potential losses are monitored monthly to ensure that an
adequate level of reserves is maintained. Given the numerous variables, an
increase in the size of the portfolio or a change in any of the assessed
components could result in an increase in the allowance for losses despite an
overall improvement in credit quality.
Also incorporated in the analysis is an assessment of Statement of
Financial Accounting Standards ("SFAS") 114. Pursuant to SFAS 114, Accounting by
Creditors for Impairment of a Loan, as amended, impaired loans are 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. At December 31, 1998, impaired loans
totaled $1.5 million and required reserves of $507 thousand. These loans
consisted primarily of commercial non-accrual loans.
NET CHARGE-OFFS
Net charge-offs totaled $943 thousand in 1998, representing a
significant decrease from the $2.2 million recognized in 1997. The reduction
resulted from strong collection efforts coupled with a favorable economy and
improved credit quality. Charge-offs in the commercial, commercial real estate
and residential portfolios were minimal while charge-offs in the consumer
portfolio remained in line with the prior year. The majority of charge-offs were
in the credit card and indirect auto portfolios. The Company is no longer active
in the indirect auto lending business.
22
<PAGE>
The following table provides key asset quality trends (dollars in thousands).
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net charge-offs $ 943 $ 2,159 $ 2,713 $ 1,114 $ 1,132
Net charge-offs as % of loans 0.14% 0.34% 0.43% 0.22% 0.25%
Non-performing loans $ 2,911 $ 3,003 $ 7,084 $ 4,838 $ 6,968
Allowance as % of non-performing
loans 328.72% 282.55% 101.72% 125.71% 87.07%
Non-performing assets $ 3,613 $ 3,960 $ 8,509 $5,755 $ 7,291
Non-performing assets as % of assets 0.35% 0.42% 0.92% 0.64% 0.99%
Allowance for loan losses $ 9,569 $ 8,485 $ 7,206 $6,082 $ 6,067
Allowance as % loans 1.44% 1.33% 1.15% 1.21% 1.36%
Allowance as % non-performing assets 264.92% 214.21% 84.69% 105.68% 83.21%
================================================================================================================================
</TABLE>
*Statistics do not include the impact of a condominium project which was
acquired by a deed in lieu of foreclosure in 1995 and classified as land
acquired for development and resale. The balance of the condominium project as
of December 31, 1998, 1997, 1996 and 1995 was $1.6 million , $5.9 million, $8.9
million and $10.1 million, respectively. Non-performing assets, and the ratio of
non-performing assets as a percentage would have been $5.2 million and 0.50% in
1998, $9.9 million and 1.04% in 1997, $17.4 million and 1.88% in 1996, and $15.9
million and 1.93% in 1995.
YEAR 2000 RISK 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 mid-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 need
still further review and testing. See table II below.
In accordance with the Company's year 2000 commercial credit policy, an
analysis was performed on the commercial and commercial real estate loans to
access the Y2K risk inherent in the loan portfolios and to determine whether
additional reserves are required to mitigate this risk. This analysis was based
on questionnaires as well as interviews with the customers, which were performed
by the Company's account officers. The results of the analysis and a second
interview with all borrowers rated high or medium risk based on the first
interview resulted in the conclusion that less than 9% of the commercial and
commercial real estate portfolios is rated high or medium risk and therefore no
additional reserves are required.
Through December 31, 1998, the Company had expensed $126,000 in costs
related to the Y2K issue, $25,000 of which was recorded in 1997. It is estimated
that an additional $2.0 million of expenditures will be made during the next
fourteen months. As some of these future expenditures are capital items, the
charge to current 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. The estimates set forth herein of the amounts and timing of
projected costs do not incorporate any cost efficiencies or extra costs which
might arise in connection with the pending merger with Summit Bancorp. Any cost
savings or increases will depend upon the timing of consummation of the merger
with Summit Bancorp and a corresponding merger of Prime Bank with Summit Bank of
Pennsylvania, as well as a number of other technological and operations factors,
which have not yet been fully evaluated. Consequently, management is not able to
predict, at this time, whether overall Y2K compliance costs will increase or
decrease from these estimates.
23
<PAGE>
TABLE I
ESTIMATED Y2K EXPENDITURES
<TABLE>
<CAPTION>
Period Expenditures Charge to Expense
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 $ 25,000 $25,000 $ -- $ -- $ --
1998 376,800 -- 101,100 58,100 60,300
1999 1,561,000 -- -- 478,200 263,600
2000 87,200 -- -- -- 83,000
- ------------------------------------------------------------------------------------------------------------------------------------
$2,050,000 25,000 101,100 536,300 406,900
</TABLE>
The relative completion status of all Y2K projects as of December 31,
1998 is reflected in the following table.
TABLE II
RELATIVE COMPLETION PERCENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Testing/
Exposure Area Assessment Remediation Validation Implementation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information Technology
(I/T) 100% 98% 63% 29%
Non-I/T (Vaults, phones,
fax machines, etc.) 100% 100% 100% 100%
3RD parties - Clients [*]
</TABLE>
[*] 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.
As of December 31, 1998, of the total seventy-one (71) systems
identified for remediation and testing, twenty-five (25) systems had been
remediated with testing also completed. An additional forty-one (41) systems had
been remediated but were subject to the completion of testing. Only one system
had not yet been remediated. Four (4) PC related systems will be corrected in
early 1999 when the PC's are replaced.
A major portion of the Company's Information Technology ("I/T") 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.
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 receivable 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.
The Company has developed a Year 2000 Corporate Contingency Plan for
"mission critical" systems which was approved at the March 1999 Board Meeting..
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.
24
<PAGE>
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.
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report contains certain
forward-looking statements, either expressed or implied, which are provided to
assist the reader in making judgments 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 and competition 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.
- --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
INTEREST RATE RISK
The risk of losses from adverse interest rate changes is monitored by
evaluating the impact, if any, on the Company's net interest income (NII) 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 NII (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 interest sensitivity position. At
December 31, 1998 and 1997, net interest income simulations using a 200 basis
point change in short-term interest rates show that net interest income
volatility over the next twelve months would be 2% for both periods.
In 1998 the Company did not engage in trading account activities and
has no current plans to do so. Trading account activities include security
positions, generally held for only short-terms, that are primarily intended to
generate short term profits.
GAP ANALYSIS
A starting point for analyzing the possible impact of changing interest
rates on NII is a table that groups assets and liabilities according to their
expected repricing dates, the periods in which the contractual terms allow for a
change in the interest rate. The table that follows displays, as of December 31,
1998, the Company's balance sheet grouped into repricing periods beginning with
those assets and liabilities that may be subject to rate changes in the first
quarter of 1999. The indicated excess of liabilities subject to change suggests
that income may be favorably impacted in the event of lower rates but negatively
impacted if rates increase. This conclusion, however, is inappropriate if based
solely on the GAP analysis. Other factors, such as the expected pace of rate
changes on components of the balance sheet need to be considered. Therefore,
management applies computer based modeling that takes into account the GAP
information as well as the pace of rate changes in a variety of economic
scenarios. The result is an estimate of changes to NII in each of the scenarios
and, as indicated above, management would take certain actions if a reasonably
possible scenario results in a projected loss of NII of 5% or more.
25
<PAGE>
GAP ANALYSIS
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
3 Mo More 3 Mo More 6 Mo More 1 Yr More 3 Yr More 5 Yr More
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>
Assets:
Loans $311,222 $26,771 $47,452 $109,339 $90,689 $65,135 $15,045 $665,653
Investments 56,644 35,642 56,712 79,417 25,779 29,733 23,444 307,371
Interest bearing deposits 10,306 -- -- -- -- -- -- 10,306
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 378,172 62,413 104,164 188,756 116,468 94,868 38,489 983,330
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accruing loans 291 582 582 728 728 -- -- 2,911
Real estate owned 211 211 211 69 -- -- -- 702
Allowance for loan losses -- (957) (1,914) (2,871) (3,827) -- -- (9,569)
Other assets -- -- -- -- -- -- 61,966 61,966
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $378,674 $62,249 $103,043 $186,682 $113,369 $94,868 $100,455 $1,039,340
====================================================================================================================================
Liabilities and equity
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $237,577 $64,980 $75,635 $ 132,718 $88,534 $ 103,449 $ -- $702,893
Borrowings 112,355 2,000 -- -- 109,000 15,000 -- 238,355
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 349,932 66,980 75,635 132,718 197,534 118,449 -- 941,248
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities -- -- -- -- -- -- 8,289 8,289
Equity -- -- -- -- -- -- 89,803 89,803
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and $349,932 $66,980 $75,635 $ 132,718 $197,534 $ 118,449 $98,092 $1,039,340
equity
====================================================================================================================================
GAP $ 28,240 $(4,567) $28,529 $ 56,038 $(81,066) $(23,581) $38,489 $42,082
Cumulative GAP $ 28,240 $23,673 $52,202 $ 108,240 $ 27,174 $ 3,593 $42,082
</TABLE>
26
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES (Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Balance Inc./Exp. Yield Balance Inc./Exp. Yield Balance Inc./Exp. Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)(2)
Commercial & commercial
real estate $380,898 $34,844 9.15% $316,006 $29,663 9.39% $250,334 $23,104 9.23%
Consumer 111,494 10,330 9.27% 104,375 9,853 9.44% 87,163 7,789 8.94%
Residential 152,829 11,648 7.62% 206,631 15,807 7.65% 221,952 18,569 8.37%
- ------------------------------------------------------------------------------------------------------------------------------------
645,221 56,822 8.81% 627,012 55,323 8.82% 559,449 49,462 8.84%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities (3) 287,841 18,483 6.44% 241,824 15,734 6.51% 241,489 16,207 6.71%
Interest-bearing deposits 22,078 1,258 5.43% 8,313 607 7.30% 8,485 295 3.48%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning
assets 955,140 76,563 8.02% 877,149 71,664 8.17% 809,423 65,964 8.15%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (9,188) -- (8,393) -- (6,421) --
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest earning
assets 64,753 -- 64,988 -- 63,500 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,010,705 $76,563 $933,744 $71,664 $866,502 $65,964
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook/statement $63,304 $1,159 1.83% $62,396 $1,169 1.87% $63,827 $1,338 2.10%
Money market 146,181 5,180 3.54% 132,436 4,313 3.41% 120,817 4,334 3.59%
Checking accounts 115,887 7 0.01% 92,853 281 0.28% 73,627 578 0.79%
N.O.W. accounts 43,277 239 0.55% 39,389 247 0.63% 40,720 782 1.92%
Time deposits 343,713 18,386 5.35% 381,129 20,496 5.38% 371,773 19,679 5.29%
- ------------------------------------------------------------------------------------------------------------------------------------
712,362 24,971 3.51% 708,203 26,506 3.74% 670,764 26,711 3.98%
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances and other
borrowings 208,852 10,939 5.24% 143,421 7,726 5.39% 116,289 6,429 5.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 921,214 35,910 3.90% 851,624 34,232 4.02% 787,053 33,140 4.21%
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities 5,300 -- -- 6,810 -- -- 8,977 -- --
Shareholders' equity 84,191 -- -- 75,310 -- -- 70,472 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,010,705 $35,910 $933,744 $34,232 $866,502 $33,140
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/interest
rate spread $40,653 4.12% $37,432 4.15% $32,824 3.94%
====================================================================================================================================
Net interest earning assets/
net yield on interest-earning
assets $33,926 4.26% $25,525 4.27% $22,370 4.06%
====================================================================================================================================
Interest earning assets
to interest-bearing liabilities 104% 103% 103%
====================================================================================================================================
</TABLE>
(1) Non-accrual loans are included in loans.
(2) Yields on loans include income from origination fees, net of costs.
(3) Tax free interest income is calculated on a tax equivalent basis.
27
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability
changes in interest income or expense not arising solely as a result of volume
or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 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
Commercial & commercial real
estate $ 6,578 $ (1,397) $ 5,181 $5,992 $ 567 $6,559
Consumer 672 (195) 477 1,539 525 2,064
Residential (4,116) (43) (4,159) (1,282) (1,480) (2,762)
- ------------------------------------------------------------------------------------------------------------------------------------
3,134 (1,635) 1,499 6,249 (388) 5,861
- ------------------------------------------------------------------------------------------------------------------------------------
Investments 2,994 (186) 2,749 22 (495) (473)
Interest earning deposits 1,005 (413) 651 (6) 318 312
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7,133 (2,234) 4,899 6,265 (565) 5,700
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Passbook/statement 17 (27) (10) (30) (139) (169)
Money market 448 419 867 417 (438) (21)
Checking accounts 70 (344) (274) 152 (449) (297)
N.O.W. accounts 24 (32) (8) (26) (509) (535)
Time deposits (2,012) (98) (2,110) 495 322 817
- ------------------------------------------------------------------------------------------------------------------------------------
(1,453) (82) (1,535) 1,008 (1,213) (205)
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank
advances and other borrowings 3,525 (312) 3,213 1,500 (203) 1,297
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,072 (394) 1,678 2,508 (1,416) 1,092
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 5,061 $ (1,840) $ 3,221 $ 3,757 $ 851 $ 4,608
====================================================================================================================================
</TABLE>
28
<PAGE>
LIQUIDITY RISK
The management process in this regard is to preserve stable, reliable
and cost effective sources of cash to fund loan growth as well as unexpected
outflows of deposits or other liabilities. As part of our liquidity management
we seek to avoid concentrations in a limited number of liability sources and
minimize reliance on volatile large liabilities. The following table summarizes
Prime Bancorp's funding profile at December 31, 1998.
Product Category % of Total
- ---------------- Funding
Retail transaction deposits 43.2%
Time deposits 31.5%
Customer repurchase agreements 11.0%
Other borrowings 14.3%
-----
100.0%
=====
From the above table, management concludes that 85.7% of its funding is
from core, local relationships. In addition to the above, the Company has access
to certain capital markets and can use funding vehicles such as securitizations
or large dollar liabilities. Core deposits, however, remain the Company's main
source of liquidity. Accordingly, branch development, including possible branch
expansion is always a planning consideration.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except for share data)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from Banks $ 31,027 $ 23,068
Interest-bearing deposits 10,306 18,161
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents 41,333 41,229
- --------------------------------------------------------------------------------------------------------
Investment securities (market value of $57,171 and $118,848) 56,436 117,988
Investment securities available for sale 250,935 115,728
Loans receivable 666,483 639,333
Allowance for loan losses (9,569) (8,485)
- --------------------------------------------------------------------------------------------------------
Loans receivable, net 656,914 630,848
- --------------------------------------------------------------------------------------------------------
Loans held for sale 2,081 3,229
Accrued interest receivable 7,659 7,429
Real estate owned 702 957
Land acquired for development and resale 1,705 5,925
Property and equipment, net 9,652 10,023
Other assets 11,923 20,069
- --------------------------------------------------------------------------------------------------------
Total assets $ 953,425 1,039,340
========================================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Deposits $ 702,893 $694,444
Repurchase agreements 103,852 91,486
Borrowings from Federal Home Loan Bank of Pittsburgh 134,503 79,550
Other liabilities 8,289 8,081
- --------------------------------------------------------------------------------------------------------
Total liabilities 949,537 873,561
- --------------------------------------------------------------------------------------------------------
Commitments & contingencies (Note 16)
Shareholders' equity:
Serial preferred, $1 par value; 2,000,000 shares authorized unissued -- --
Common stock, $1 par value; 13,000,000 shares authorized
10,984,833 and 10,888,532 shares issued and outstanding 10,985 10,888
Additional paid-in capital 34,435 33,652
Retained earnings 43,696 35,884
Accumulated other comprehensive income 687 (560)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 89,803 79,864
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,039,340 $953,425
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands. except for share data) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans and fees $ 56,822 $ 55,323 $ 49,462
Investment securities 18,183 15,434 15,907
Interest-bearing deposits 1,258 607 295
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 76,263 71,364 65,664
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 24,971 26,506 26,711
Short-term borrowings 5,258 7,422 5,272
Long-term borrowings 5,681 304 1,157
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 35,910 34,232 33,140
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 40,353 37,132 32,524
- ---------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2,027 3,438 3,837
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 38,326 33,694 28,687
- ---------------------------------------------------------------------------------------------------------------------
Non-interest income:
Fees and service charges 2,778 2,433 1,864
Gain on sale of assets 200 774 302
Mortgage banking income 1,475 561 294
Other 1,071 1,102 761
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income 5,524 4,870 3,221
- ---------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits 13,262 11,436 10,437
Occupancy and equipment 5,667 5,584 4,985
Federal insurance premiums 339 365 753
FDIC special insurance assessment -- -- 2,713
Restructuring and other merger related expenses -- -- 2,260
Other 6,134 5,371 4,847
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense 25,402 22,756 25,995
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 18,448 15,808 5,913
Income taxes 6,305 5,289 1,896
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 12,143 $ 10,519 $ 4,017
=====================================================================================================================
Earnings per share:
Basic $ 1.11 $ 0.97 $ 0.38
Diluted 1.08 0.96 0.37
Weighted average number of shares outstanding:
Basic 10,947,717 10,802,888 10,481,364
Diluted 11,254,925 10,988,018 10,823,462
Dividends declared per share $ 0.395 $ 0.350 $ 0.340
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock:
Beginning of period $10,888 $10,582 $10,540
Stock Options 97 306 42
------- ------- -------
End of period 10,985 10,888 10,582
------- ------- -------
Additional paid in capital:
Beginning of period 33,652 32,099 31,934
Stock options 281 844 91
Tax benefit associated with the exercise
of stock options 502 709 74
------- ------- -------
End of period 34,435 33,652 32,099
------- ------- -------
Retained earnings
Beginning of period 35,884 29,156 27,950
Net Income 12,143 $12,143 10,519 $10,519 $ 4,017 $4,017
------- ------- ------
Dividends declared (4,331) (3,791) (2,811)
------- ------- -------
End of period 43,696 35,884 29,156
------- ------- -------
Accumulated comprehensive income:
Beginning of period (560) (1,321) (1,145)
Unrealized holding gains on securities
arising during period, net of taxes 1,243 1,243 11
Less reclassification adjustment for
(gains) losses included in net income 4 (482) (187)
------- ------- ------
Other comprehensive income 1,247 1,247 761 761 (176) (176)
------- ------- ------- ------- ------- ------
Comprehensive income $13,390 $11,280 $3,841
------- ------- ------
End of period 687 (560) (1,321)
======= ======= =======
Total shareholders' equity $89,803 79,864 $70,516
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,143 $ 10,519 $ 4,017
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization of intangibles 2,417 2,462 2,443
(Gain) loss on:
Loans held for sale (1,522) (418) (99)
Sale of investment securities 6 (741) (288)
Land acquired for development and resale and REO 152 (33) (14)
Provision for loan losses 2,027 3,438 3,837
Loans held for sale:
Originations, net of repayments (57,496) (27,839) (7,855)
Sales 60,166 22,988 9,492
(Increase) decrease in other assets and accrued
interest receivable 7,651 (7,023) (1,565)
Increase (decrease) in other liabilities 188 (2,284) (462)
- -----------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 25,732 1,069 9,506
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investment securities (10,710) (44,682) (35,314)
Repayment of investment securities 72,262 25,212 23,029
Sales of investment securities -- 12,285 --
Purchases of investment securities available for sale (226,411) (54,165) (63,087)
Repayments of investment securities available for sale 43,206 32,882 24,333
Sales of investment securities available for sale 49,648 50,104 40,443
Loans receivable (28,294) (36,813) (121,829)
Proceeds from sale of land acquired for development
and resale 5,546 3,443 2,735
Increase in land acquired for development and resale (1,478) (1,831) (1,188)
Purchase of property and equipment (1,731) (510) (2,077)
Proceeds from sale of property and equipment 43 -- --
(Increase) decrease in real estate owned (1,064) 823 --
Proceeds from sale of real estate owned 1,520 3,299 367
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (97,463) (9,953) (132,588)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in deposits 8,449 (42,198) 92,336
Borrowings from the FHLB of Pittsburgh 221,200 557,276 46,200
Repayments of borrowings from the FHLB of Pittsburgh (166,247) (534,324) (46,248)
Increase in repurchase agreements 12,366 39,801 13,063
Decrease in advance payments by borrowers for taxes and
insurance (153) (388) (299)
Net proceeds from issuance of common stock 378 1,150 133
Cash dividends paid (4,158) (3,668) (2,529)
- -----------------------------------------------------------------------------------------------------------
Net cash provided from financing activities 71,835 17,649 102,656
- -----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 104 8,765 (20,426)
Cash and cash equivalents:
Beginning of year 41,229 32,464 52,890
End of year $ 41,333 $ 41,229 $ 32,464
===========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 36,590 $ 36,011 $ 33,165
Income taxes 5,602 2,818 3,100
Securitization of residential loans -- 17,798 2,091
Transfer of loans held for sale to loans receivable -- -- 3,136
Transfer of loans to real estate owned -- 3,711 1,269
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
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 subsidiary is Prime Bank (the "Bank") whose
principal business consists of attracting deposits and obtaining borrowings,
then converting those deposits and borrowings into various types of loans and
investments. These operations are conducted through a branch network in
Southeastern Pennsylvania. The Bank is subject to competition from other
financial institutions and is also subject to the regulations of certain
government agencies and undergoes periodic examinations by those regulatory
authorities.
Prime Bank, a savings Bank, merged with First Sterling Bank, a
commercial Bank, on October 1, 1997. The Bank operates under the name Prime Bank
and functions as a commercial Bank and is a member of the Federal Reserve System
whose deposits are insured by the Bank Insurance Fund ("BIF") administered by
the Federal Deposit Insurance Corporation ("FDIC"). Prior to this, on 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 continued to be insured by the Savings Association
Insurance Fund ("SAIF") administered by the FDIC until its merger with First
Sterling Bank.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-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.
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 cost, adjusted for the amortization and accretion 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 shareholders' equity until realized.
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.
34
<PAGE>
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 cost or fair value less estimated costs to sell.
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
Loans are stated at the principal amount outstanding, less unearned
discounts and net deferred loan origination fees. 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 collectibility 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 Bank sells loans and continues 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.
The Company defers loan origination fees less certain direct costs, and
subsequently recognizes them as an adjustment of the loan's yield over the
contractual life of the loan using the level-yield method.
ALLOWANCE 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 inherent in the portfolio. 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 an evaluation of loss potential from individual problem credits, as
well as anticipated specific and general economic factors that may adversely
affect collectibility.
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 consumer loans and residential mortgages, 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.
35
<PAGE>
Pursuant to SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended, impaired loans, consisting of nonaccrual and restructured
commercial and commercial real estate 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, discounted
at the loan's effective interest rate, or the fair value of the underlying
collateral if principal repayment is expected to come from the sale or operation
of such collateral. All payments received are applied to the principal balance.
LOANS HELD FOR SALE
As part of its mortgage banking activities the Bank originates and
subsequently securitizes or sells single family residential mortgage loans which
meet the underwriting and securitization characteristics of certain market
makers. Loans originated for sale are recorded as loans held for sale and are
valued at the lower of aggregate cost or market.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is amortized on a straight-line basis over periods ranging
from 10 to 15 years. Other intangible assets are amortized using accelerated or
straight-line methods over their respective estimated useful lives. On a
periodic basis, management reviews goodwill and other intangible assets and
evaluates events or changes in circumstances that may indicate impairment in the
carrying amount of such assets. In such instances, the Company measures
impairment on a discounted future cash flow basis.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS (DERIVATIVE CONTRACTS)
The Company uses off-balance sheet financial derivatives as part of the
overall asset/liability management process and also to manage risk related to
changes in interest rates. Financial derivatives primarily consist of interest
rate swaps.
Interest rate swaps are agreements with a counterparty to exchange
periodic interest payments calculated on a notional principal amount.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
variable index to another) of designated interest-bearing assets or liabilities
are accounted for under the accrual method. Under this method, the net amount
payable or receivable from the derivative contract is accrued as an adjustment
to interest income or expense of the designated instrument.
Changes in fair value of financial derivatives accounted for under the
accrual method are not reflected in the financial results. Realized gains and
losses, except losses on terminated interest rate caps and floors, are deferred
as an adjustment to the carrying amount of the designated instruments and
amortized over the shorter of the remaining original life of the agreements or
the designated instruments.
MORTGAGE SERVICING RIGHTS
The Company recognizes as separate assets the right to service mortgage
loans based on the fair value of those rights. Fair value is 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 mortgage servicing rights ("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. The MSRs are amortized over a period generally not in excess of 7 years.
36
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles are 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.
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 basis. 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.
EARNINGS PER SHARE
SFAS No. 128, Earnings Per Share, which superseded Accounting
Principles Board ("APB") No. 15, Earnings Per Share, establishes standards for
the computation, presentation, and disclosure requirements for earnings per
share ("EPS") for entities with publicly held common stock. It replaced the
presentation of primary EPS with basic EPS which, unlike primary EPS, excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed similarly to fully diluted EPS under APB 15. All prior period
EPS amounts have been restated to reflect the provisions of this statement.
All share amounts reflected in these financial statements have been
restated to reflect the effect of stock splits and stock dividends.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and presentation of comprehensive income and its components in
financial statements. The Company adopted this statement in the first quarter of
1998 and has presented the required information about comprehensive income in
the consolidated statement of shareholders' equity.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, Financial Reporting for Segments of a Business Enterprise. SFAS
131 establishes standards for the reporting, disclosure and presentation of the
Company's operating segments, products and services, geographic areas, and major
customers. SFAS 131 supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise but retains the requirement to report information about
major customers. It amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries, to remove the special disclosure requirements for previously
unconsolidated subsidiaries. This Statement is effective for fiscal years
beginning after December 15, 1997. Management considers the Company to have only
one segment under the guidelines of SFAS 131 and reports accordingly.
In June 1998, the FASB 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
"derivaties") 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 December 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.
37
<PAGE>
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of 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 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.
1. ACQUISITION
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 3.32 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 221,020 shares of Prime
stock. The transaction was tax-free to the shareholders for federal income tax
purposes. The above shares have been adjusted for 2 for 1 stock split.
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.
Year Ended
December 31,
- -------------------------------------------------
1996
- -------------------------------------------------
Net interest income:
Prime Bancorp $23,808
First Sterling 8,716
- -------------------------------------------------
Combined $32,524
=================================================
Net income:
Prime Bancorp $ 3,265
First Sterling 752
- -------------------------------------------------
Combined $ 4,017
=================================================
Total shareholders' equity:
Prime Bancorp $57,037
First Sterling 13,479
- -------------------------------------------------
Combined $70,516
=================================================
3. STOCK OPTION PLAN
The Company's Incentive Stock Option Plan provides for the grant of
stock options to directors and certain employees of the Company or its
subsidiaries. The option plan is administered by a compensation committee of the
board of directors of the Company. 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.
38
<PAGE>
The following table presents stock option data related to the plan:
Weighted-
Average
Shares in thousands Exercise Price Shares
- ----------------------------------------------------------
- ----------------------------------------------------------
December 31, 1995 $ 5.52 654,186
Granted 9.01 323,000
Options Exercised 3.20 (41,582)
December 31, 1996 6.82 935,604
Granted 17.61 99,000
Options Exercised 3.76 (306,218)
December 31, 1997 9.54 728,386
Granted 18.03 67,250
Options Exercised 6.69 (115,978)
December 31, 1998 10.85 679,658
==========================================================
The fair value of stock options granted during 1998, 1997 and 1996 was
$243, $260 and $436 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: 1998--expected dividend
yield 2.8%, risk-free interest rate of 4.58%, expected volatility of stock over
the expected life of the options of 31.6%, and an expected life of five years;
1997--expected dividend yield 2.2%, risk-free interest rate of 5.46%, expected
volatility of stock over the expected life of the options of 25.2%, and an
expected life of five years; 1996--expected dividend yield 3.3%, risk-free
interest rate of 5.80%, expected volatility of stock over the expected life of
the options of 13.8%, and an expected life of five years. Shares of common stock
available for the granting of options under the plan at December 31, 1998, 1997
and 1996 were 101,706, 168,956 and 267,956, respectively.
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
on the following table.
1998 1997 1996
- ---------------------------------------------------------------------
Net income As reported $12,143 $10,519 $4,017
Pro forma 11,985 10,181 3,323
Earnings per share:
Basic As reported 1.11 0.97 0.38
Pro forma 1.09 0.94 0.32
Diluted As reported 1.08 0.96 0.37
Pro forma 1.06 0.93 0.31
=====================================================================
Pro forma net income reflects only options granted from 1996 through
1998. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected over the applicable vesting period
for the options and compensation cost for options granted prior to January 1,
1996 is not considered.
The following table summarizes information about options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisible
- ----------------------------------------------------------------------------------- ---------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.39 to $10.25 518,408 7.00 $ 8.70 435,908 $ 8.65
14.82 to 18.00 97,250 9.59 16.80 97,250 16.80
18.63 to 26.00 64,000 9.05 19.20 64,000 19.20
- ------------------------------------------------------------------------------------------------------------------------------
$ 7.39 to $26.00 679,658 7.56 $10.85 597,158 $ 7.56
==============================================================================================================================
</TABLE>
39
<PAGE>
4. INVESTMENT SECURITIES
Investment securities at December 31, 1998 and 1997 were comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
State and municipal $ 6,732 $ 346 $ -- $ 7,078 $ 6,735 $267 $ -- $ 7,002
Mortgage backed securities 34,304 397 (9) 34,692 106,563 726 (133) 107,156
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities 41,036 743 (9) 41,770 113,298 993 (133) 114,158
Other securities 15,400 1 -- 15,401 4,690 -- -- 4,690
- ------------------------------------------------------------------------------------------------------------------------------------
$ 56,436 $ 744 $ (9) $ 57,171 $117,988 $993 $(133) $118,848
====================================================================================================================================
Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Govt & U.S. Govt agency $123,380 $ 975 $ (1) $124,354 $ 64,483 $129 $ (39) $ 64,573
Mortgage-backed securities 108,861 298 (547) 108,612 51,544 135 (824) 50,855
Corporate Bonds 17,316 332 -- 17,648 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities 249,557 1,605 (548) 250,614 116,027 264 (863) 115,428
Other securities 300 21 -- 321 300 -- -- 300
- ------------------------------------------------------------------------------------------------------------------------------------
$249,857 $1,626 $(548) $250,935 $116,327 $264 $(863) $115,728
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of $45, $294, and $296 and gross losses of $51, $159, and
$8 were realized on sales of investment securities available for sale for the
years ended December 31, 1998, 1997, and 1996 respectively.
The amortized cost and estimated market value of investment securities
at December 31, 1998, by contractual maturity are shown below. 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>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Within 1 to 5 to After 10
1 Year 5 Years 10 Years Years Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Held to Maturity
- -------------------------------------------------------------------------------------------------------------------------
State and municipal $ -- $ -- $ 6,732 $ -- $ 6,732
Mortgage backed securities -- 1,350 4,718 28,236 34,304
- -------------------------------------------------------------------------------------------------------------------------
Total debt securities -- 1,350 11,450 28,236 41,036
- -------------------------------------------------------------------------------------------------------------------------
Fair value $ -- $ 1,357 $11,887 $ 28,526 $ 41,770
Weighted-average yield -- 7.10% 5.79% 6.82% 6.55%
=========================================================================================================================
Available for Sale
- -------------------------------------------------------------------------------------------------------------------------
U.S. Govt & U.S. Govt agency $33,497 $44,936 $44,947 $ -- $123,380
Mortgage-backed securities -- -- 3,621 105,240 108,861
Corporate bonds -- 7,033 -- 10,283 17,316
- -------------------------------------------------------------------------------------------------------------------------
Total debt securities 33,497 51,969 48,568 115,523 249,557
- -------------------------------------------------------------------------------------------------------------------------
Fair value $33,729 $52,402 $48,834 $115,649 $250,614
Weighted-average yield 5.82% 6.07% 6.43% 6.63% 6.36%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The carrying value of investment securities pledged to secure public
funds on deposit and securities sold under agreements to repurchase is as
follows:
December 31,
- -----------------------------------------------------------
1998 1997
- -----------------------------------------------------------
Secure public funds on deposit $25,962 $19,480
Secure repurchase agreements 115,521 94,708
- -----------------------------------------------------------
$141,483 $114,188
===========================================================
40
<PAGE>
5. LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 were comprised of the following:
1998 1997
- -----------------------------------------------------------------
First mortgage loans:
Residential:
One to four units $129,622 $181,375
Over four units 564 932
Commercial real estate loans(1) 243,846 211,395
- -----------------------------------------------------------------
Total first mortgage loans 374,032 393,702
- -----------------------------------------------------------------
Other loans:
Commercial 175,432 139,989
Consumer 116,905 105,870
- -----------------------------------------------------------------
Total other loans 292,337 245,859
- -----------------------------------------------------------------
Total loans 666,369 639,561
- -----------------------------------------------------------------
Deferred loan fees 114 (228)
Allowance for loan losses (9,569) (8,485)
- -----------------------------------------------------------------
Total loans receivable, net $656,914 $630,848
=================================================================
(1) Includes construction loans of $51.9 million in 1998 and $38.2 million in
1997.
As of December 31, 1998 and 1997, the Bank had impaired loans totaling
approximately $1,474 and $1,677, all of which had a related allowance for
impairment. The allowance for loan losses on impaired loans totaled $507 and
$593 as of December 31, 1998 and 1997, respectively. The average balance of
impaired loans was approximately $1,576 for 1998, $3,283 for 1997 and $3,712 for
1996. Interest income not accrued for impaired loans for the years ended
December 31, 1998, 1997 and 1996 was approximately $175, $193, and $289,
respectively.
Substantially all of the Company's loan portfolio is to borrowers
located in Southeastern Pennsylvania.
In addition, the Company took a deed in lieu of foreclosure of a
condominium project in 1995. The balance of the condominium project as of
December 31, 1998 and 1997 was $1.7 million and $5.9 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, 1998, 1997, and 1996:
1998 1997 1996
- --------------------------------------------------------------
Balance at beginning
of period $ 8,485 $ 7,206 $ 6,082
Provision for loan losses 2,027 3,438 3,837
Recoveries 244 498 190
Losses charged
against allowance (1,187) (2,657) (2,903)
- --------------------------------------------------------------
Balance at end of period $ 9,569 $ 8,485 $ 7,206
==============================================================
The loans to directors and officers are based upon substantially the
same underwriting criteria, and on substantially the same terms as those
generally offered by the Bank and do not involve more than the normal risk of
collectibility or present other unfavorable features.
The following is an analysis of loans to directors and officers for
the year ended December 31, 1998:
1998
- ----------------------------------------------------------------
Balance at beginning of period $3,358
Additions 10,530
Repayments 2,711
- ----------------------------------------------------------------
Balance at end of period $11,177
================================================================
41
<PAGE>
The Bank services mortgage loans for investors which are not included
in the acCompanying consolidated statements of financial condition. Fees earned
for servicing loans are reported as income when the related mortgage payments
are collected. Mortgage Servicing Rights ("MSRs") are amortized as a reduction
to loan service fee income on a method that approximates the level-yield basis
over the estimated remaining life of the underlying mortgage loans. MSRs are
carried at fair value and impairment, if any, is recognized through a valuation
allowance. For the year ended December 31, 1998, 1997 and 1996, no impairment
existed in the MSRs and as a result, no valuation allowance was required.
MSR activity is summarized as follows:
Year ended December 31,
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Balance at beginning of year $ 730 $339 $266
Capitalized 656 553 154
Amortized (259) (162) (81)
- -----------------------------------------------------------------
Balance at end of year $1,127 $730 $339
=================================================================
6. PROPERTY AND EQUIPMENT
Property and equipment, less accumulated depreciation and amortization,
are summarized by major classification at December 31, 1998 and 1997 as follows:
1998 1997
- ---------------------------------------------------------------
Land $ 597 $ 596
Buildings 7,375 7,333
Furniture and equipment 12,692 11,229
Leasehold improvements 1,751 1,751
- ---------------------------------------------------------------
22,415 20,909
Less accumulated depreciation and
amortization (12,763) (10,886)
- ---------------------------------------------------------------
$ 9,652 $ 10,023
===============================================================
Depreciation expense for the years ended December 31, 1998, 1997, and
1996 was $2,062, $2,182, and $1,708, respectively.
7. DEPOSITS
Deposits at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Interest % of Interest % of
Rate Amount Total Rate Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts 0.48% $ 50,369 7.17% 0.57% $ 43,988 6.33%
Money market deposit accounts 3.15% 164,194 23.36% 3.46% 130,959 18.86%
Passbook/statement 1.82% 63,631 9.05% 1.83% 64,297 9.26%
Checking accounts 0.00% 128,195 18.24% 0.00% 115,733 16.67%
- ---------------------------------------------------------------------------------------------------------------------------
406,389 57.82% 354,977 51.12%
- ---------------------------------------------------------------------------------------------------------------------------
IRA accounts 5.56% 56,626 8.06% 5.60% 58,537 8.43%
Certificates of deposit 5.23% 202,213 28.76% 5.50% 233,352 33.60%
Certificates with a $100,000 minimum
balance 4.96% 37,665 5.36% 5.41% 47,578 6.85%
- ---------------------------------------------------------------------------------------------------------------------------
296,504 42.18% 339,467 48.88%
- ---------------------------------------------------------------------------------------------------------------------------
$702,893 100.00% $694,444 100.00%
===========================================================================================================================
</TABLE>
42
<PAGE>
A summary of certificates by maturity at December 31, 1998 follows:
Years Ending December 31, Amount % of Total
- -----------------------------------------------------------------
1999 $ 205,589 69.33%
2000 46,543 15.70%
2001 15,760 5.32%
2002 8,094 2.73%
Thereafter 20,518 6.92%
- -----------------------------------------------------------------
$ 296,504 100.00%
=================================================================
8. BORROWINGS FROM FEDERAL HOME LOAN BANK OF PITTSBURGH
Under terms of its collateral agreement securing borrowings from the
Federal Home Loan Bank of Pittsburgh, the Bank is required to maintain otherwise
unencumbered qualifying assets (mainly certain loans and investments) 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, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
Weighted Weighted
Interest Interest
Maturing Period Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ -- -- $ 7,048 6.03%
1999 10,503 4.99% 502 5.70%
2000 -- -- -- --
2002 72,000 5.52% 72,000 5.50%
2003 37,000 5.06% -- --
2005 15,000 5.35% -- --
- -------------------------------------------------------------------------------------------------
$134,503 5.33% $79,550 5.55%
=================================================================================================
</TABLE>
9. OTHER BORROWED MONEY
The following table presents information regarding other borrowed money
at December 31, 1998, 1997 and 1996 which was comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities sold under agreements to repurchase:
Average balance during the year $ 79,367 $ 77,369 $ 59,158
Average interest rate during the year 4.83% 5.22% 4.78%
Maximum month-end balance during the year 103,852 101,473 124,981
Balance at the end of the year 103,852 91,486 51,685
Investment securities pledged as collateral :
Carrying value 115,521 94,708 53,450
Estimated fair value 115,103 94,397 53,688
=======================================================================================================================
</TABLE>
10. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." which establishes new standards for computing and
presenting earnings per share ("EPS"). All earnings per share amounts have been
restated to conform to the new requirements.
Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding.
43
<PAGE>
Diluted EPS is computed by dividing net income by the weighted average
number of common shares and common equivalent shares outstanding during the
year. For the diluted EPS calculation, the weighted average number of common
shares and common equivalent shares outstanding include the average number of
shares of common stock outstanding adjusted for the dilutive effect of
unexercised stock options using the treasury stock method. When applying the
treasury stock method, the Company's average stock price is utilized, and the
Company adds to the proceeds the tax benefit that would have been credited to
additional paid-in capital assuming exercise of non-qualified stock options.
The computation of basic and diluted EPS for the fiscal years ended
December 31, 1998, 1997 and 1996 are presented in the following table.
- ----------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------
Basic
Numerator
Net income $ 12,143 $ 10,519 $ 4,017
Denominator
Weighted average
common shares 10,947,717 10,802,888 10,481,364
- ----------------------------------------------------------------------
Basic EPS $ 1.11 $ 0.97 $ 0.38
======================================================================
Diluted
Numerator
Net income $ 12,143 $ 10,519 $ 4,017
Denominator
Weighted average
common shares 10,947,717 10,802,888 10,481,364
Effect of dilutive 307,208 185,130 342,098
stock options
- ----------------------------------------------------------------------
11,254,925 10,988,018 10,823,462
- ----------------------------------------------------------------------
Diluted EPS $ 1.08 $ 0.96 $ 0.37
======================================================================
11. 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 "well capitalized," an institution must generally have
a leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least
6%, and a total risk-based capital ratio of at least 10%. 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 Prime Bank exceed those requirements.
44
<PAGE>
REGULATORY CAPITAL SCHEDULE
as of December 31, 1998
<TABLE>
<CAPTION>
For Capital To be Well
Actual Adequacy Minimum Capitalized
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets):
Prime Bancorp $86,287 11.74% $29,398 4.00% $44,097 6.00%
Prime Bank 84,233 11.47% $29,366 4.00% 44,050 6.00%
Total capital (to risk-weighted assets):
Prime Bancorp 95,479 12.99% 58,797 8.00% 73,496 10.00%
Prime Bank 93,405 12.72% 58,733 8.00% 73,416 10.00%
Total leverage (to total assets):
Prime Bancorp 86,287 8.48% 40,682 4.00% 50,853 5.00%
Prime Bank 84,223 8.28% 40,682 4.00% 50,852 5.00%
</TABLE>
as of December 31, 1997
<TABLE>
<CAPTION>
For Capital To be Well
Actual Adequacy Minimum Capitalized
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital (to risk-weighted assets):
Prime Bancorp $77,277 11.76% $26,277 4.00% $39,416 6.00%
Prime Bank 66,129 10.20% 25,943 4.00% 38,914 6.00%
Total capital (to risk-weighted assets):
Prime Bancorp 85,492 13.01% 52,554 8.00% 65,693 10.00%
Prime Bank 74,241 11.45% 51,885 8.00% 64,856 10.00%
Total leverage (to total assets):
Prime Bancorp 77,277 8.26% 37,431 4.00% 46,789 5.00%
Prime Bank 66,129 7.32% 36,151 4.00% 45,188 5.00%
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan pursuant to the provisions
of 401(k) of the Internal Revenue Code. The plan covers all employees who meet
the age and service requirements. The Company's plan provides for elective
employee contributions up to 15% of compensation and a 66 2/3% matching Company
contribution limited to the first 6% of the employee's contribution. The Company
contributed $296, $199, and $176 to this plan during the years ended December
1998, 1997, and 1996, respectively. The Company also has a profit sharing plan.
Under this feature, all eligible employees share in the Company's profit sharing
contributions. The contributions for 1998, 1997, and 1996 were $371, $360, and
$135, respectively.
The Company does not provide post-retirement benefits nor
post-employment benefits to its employees.
13. INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31, 1998, 1997, and 1996 consisted of the following:
1998 1997 1996
- --------------------------------------------------------------
Current:
State $ 28 $ 343 $ 297
Federal 6,293 4,748 1,890
- --------------------------------------------------------------
6,321 5,091 2,187
- --------------------------------------------------------------
Deferred:
Federal (16) 198 (291)
- --------------------------------------------------------------
$6,305 $5,289 $1,896
==============================================================
45
<PAGE>
The provision for income taxes for the years ended December 31, 1998,
1997, and 1996 differed from the statutory rate due to the following:
1998 1997 1996
- --------------------------------------------------------------
Pretax income $18,448 $15,808 $5,913
- --------------------------------------------------------------
Tax at statutory rate 6,457 5,533 2,012
Tax exempt interest (104) (160) (127)
State taxes, net of federal
benefit and other 18 223 196
Merger costs -- -- 222
Income tax credits (243) (238) (370)
Other, net (177) (69) (35)
- --------------------------------------------------------------
$6,305 $5,289 $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, 1998 and 1997 consisted of the following:
1998 1997
- --------------------------------------------------------------
Deferred tax assets
Provision for loan losses
and REO losses $3,144 $2,870
Deferred loan fees 80 177
Deferred compensation 45 54
Valuation adjustment
for debt securities -- 314
Other, net 420 283
- --------------------------------------------------------------
Gross deferred tax assets 3,689 3,698
- --------------------------------------------------------------
Deferred tax liabilities
Deferred loan costs 544 467
FDIC insurance premium 69 57
Depreciation 14 32
Mortgage servicing rights 379 234
Valuation adjustment
for debt securities 368 --
Other 200 56
- --------------------------------------------------------------
Gross deferred tax liabilities 1,574 846
- --------------------------------------------------------------
Net deferred tax assets $2,115 $2,852
==============================================================
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 gains and losses on certain investments
in debt and equity securities accounted for under SFAS 115.
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.
46
<PAGE>
14. 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,
1998:
Cash, Short-Term Investments, Accrued Interest Receivable and Accrued
Interest Payable: Current carrying amounts approximate estimated fair value.
Securities: Current quoted market prices are used to determine fair value.
Net Loans: The fair value of loans was estimated using a discounted cash flow
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 discounted cash flow 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
market risk as other financial instruments, and are monitored and controlled in
accordance with the Company's credit and risk management policies.
47
<PAGE>
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
(Dollars in millions)
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 41.3 $ 41.3 $ 41.2 $ 41.2
Investments 307.4 308.1 233.7 234.6
Net loans (1) 659.0 675.0 634.1 639.1
Accrued interest receivable 7.7 7.7 7.4 7.4
Financial liabilities:
Deposits with no stated maturity 406.4 406.4 355.0 355.0
Time deposits 296.5 299.9 339.5 340.8
Other borrowed funds and FHLB borrowings 238.4 241.9 171.0 171.4
Accrued interest payable 1.1 1.1 1.8 1.8
=======================================================================================================
</TABLE>
(1) The carrying amount of net loans includes loans receivable, net and loans
held for sale.
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
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 $51.5 $0.4 $51.0 $0.4
Standby letters of credit 8.0 -- 3.0 --
Commercial loan commitments 15.8 0.3 17.9 0.3
Loan commitments 8.0 -- 2.9 --
Loans in process for construction loans 87.3 -- 63.6 --
Interest rate swaps (see note 15) 15.0 (0.2) 30.0 (0.6)
=========================================================================================================================
</TABLE>
15. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In addition to the financial assets and liabilities discussed above,
Prime's financial instruments include off-balance sheet items used to manage
risks associated with changes in interest rates from on-balance sheet assets and
liabilities. These contracts are financial derivatives and, in Prime's case,
include interest rate swaps and a variation referred to as a swaption involving
a future change in the swap contract in the event of a specified change in a
rate component.
The table below presents the Company's outstanding derivative contracts
as of December 31, 1998.
<TABLE>
<CAPTION>
Derivative Contracts as of December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Next
Notional Stated Optional Receive Pay Market Repricing
Type Amount Maturity Call Date Rate Rate Spread Value Date
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swap $ 5,000 5/06/00 -- 7.01% 6.00% 1.01% $132 1/6/99
Swaption 5,000 7/30/07 7/29/99 7.21% 5.97% 1.24% 48 1/29/99
Swaption 5,000 2/27/12 2/25/99 7.51% 5.96% 1.55% 16 1/26/99
- ----------------------------------------------------------------------------------------------------------------
$15,000 $196
================================================================================================================
</TABLE>
1997 off balance sheet derivative contracts consisted of interest rate
swaps of $5,000, with a market value of $121 and interest rate swaptions of
$25,000, with a market value of $137.
Pay rate rates are based on three month Libor and will be reset on the
repricing dates noted above. Optional call dates are at the discretion of the
counterparty to the contract and are likely to be called if general market rates
remain at current levels or decline further.
48
<PAGE>
16. 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.
The following is a summary of significant commitments and contingent
liabilities:
December 31,
- -----------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------
Residential mortgage commitments $ 8,024 $ 2,945
Commercial loan commitments 15,774 17,939
Standby letters of credit 8,020 2,955
Commitments to extend credit 51,495 51,023
Commitments to sell
residential loans 2,081 3,229
Construction loans in process 87,342 63,590
=================================================================
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 1998 and
1997 were $10,868 and $7,820, respectively, which amounts were satisfied through
the restriction of vault cash.
In connection with the operation of certain branch offices, the Bank
has entered into operating leases for periods ranging from one to more than ten
years. Total rental expense for the years ended December 31, 1998, 1997, and
1996 was $1,446, $1,342, and $1,246, respectively. Future minimum lease payments
under such operating leases are $1,356, $1,196, $1,050, 1,056, and $989 for the
years ended December 31, 1999 through 2003, respectively.
17. SUBSEQUENT EVENTS
On February 17, 1999, Prime entered into a definitive Agreement and
Plan of Merger pursuant to which Summit Bancorp, Inc. ("Summit") will acquire
Prime. Under the terms of the definitive agreement, Summit will exchange one (1)
share of Prime common stock for .675 shares of Summit common stock in a tax-free
exchange with a transaction value of approximately $292.0 million. The
transaction is subject to customary regulatory approvals and is anticipated to
be completed in the third quarter of 1999.
49
<PAGE>
18. PARENT COMPANY FINANCIAL INFORMATION
Presented below are the parent company only financial statements as of
December 31, 1998, and 1997:
PRIME BANCORP, INC.
(Parent company only)
STATEMENTS OF FINANCIAL CONDITION
December 31,
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 1,818 $ 635
Investment securities 505 499
Investments in Bank subsidiaries 89,456 73,886
Investments in non-Bank subsidiaries 227 5,838
Other assets 550 1
- -------------------------------------------------------------------------
Total assets $92,556 $80,859
=========================================================================
Liabilities and shareholders' equity:
Liabilities:
Other liabilities $2,753 $ 995
- -------------------------------------------------------------------------
Total liabilities 2,753 995
- -------------------------------------------------------------------------
Total shareholders' equity 89,803 79,864
- -------------------------------------------------------------------------
Total liabilities and shareholders' equity $92,556 $80,859
=========================================================================
STATEMENTS OF INCOME
Year ended December 31,
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
Income:
Dividends and interest
from subsidiaries $12,362 $5,297 $2,109
Equity in undistributed
income of subsidiaries (187) 5,296 2,097
- -----------------------------------------------------------------
Investment securities 30 -- --
12,205 10,593 4,206
- -----------------------------------------------------------------
Operating expense 62 74 189
- -----------------------------------------------------------------
Net income $12,143 $10,519 $4,017
=================================================================
<PAGE>
Years ended December 31,
- -------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------
Statement of Cash Flows
Cash flows from operating activities:
Net income $12,143 $10,519 $4,017
Adjustments to reconciles net
income to net cash provided by
operating activities:
Equity in undistributed income of
subsidiaries 187 (5,296) (2,097)
Increase (decrease) in other
assets (549) (1) --
Increase (decrease)
in other liabilities 2,085 956 (24)
- -------------------------------------------------------------------
Net cash provided by
operating activities 13,866 6,178 1,896
- -------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities (3) (499) --
Sale of subsidiary to affiliate -- 75 --
Contribution to subsidiaries (8,900) (2,700) --
- -------------------------------------------------------------------
Cash used in investing
activities (8,903) (3,124) --
- -------------------------------------------------------------------
Cash flows from financing activities:
Stock options exercised 378 1,150 133
Cash dividends paid (4,158) (3,668) (2,529)
- -------------------------------------------------------------------
Net cash used in financing
activities (3,780) (2,518) (2,396)
- -------------------------------------------------------------------
Net increase in cash 1,183 536 (500)
Cash and cash equivalents:
Beginning of year 635 99 599
- -------------------------------------------------------------------
End of year $1,818 $ 635 $ 99
===================================================================
50
<PAGE>
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
Management of Prime Bancorp, Inc. is responsible for establishing and
maintaining effective internal control 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 internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed the Company's internal control over
financial reporting presented in conformity with both generally accepted
accounting principles and call report instructions as of December 31, 1998. 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, 1998, the Company
maintained effective internal control over financial reporting
presented in conformity with both generally accepted accounting principles and
call report instructions.
/s/ James J. Lynch /s/ James E. Kelly
- -------------------------------- -------------------------------
James J. Lynch, President & CEO James E. Kelly, EVP & CFO
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
PRIME BANCORP, INC.
We have audited the accompanying consolidated statement of financial condition
of Prime Bancorp, Inc. as of December 31, 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Prime Bancorp, Inc.
for the years ended December 31, 1997 and 1996 were audited by other auditors
whose report dated January 16, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prime Bancorp,
Inc. at December 31, 1998, and the consolidated results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 19, 1999, except for Note 17,
as to which the date is February 17, 1999.
52
<PAGE>
LOAN PORTFOLIO HISTORY
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Permanent first mortgage loans:
One-to four-family $ 129,622 19.7% $ 181,375 28.7% $235,023 38.1% $216,163 43.5% $185,409 42.0%
Multi-family 564 0.1% 932 0.1% 10,783 1.7% 9,303 1.9% 8,735 2.0%
Commercial 141,593 21.6% 150,411 23.8% 120,841 19.6% 102,958 20.7% 88,767 20.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Total permanent loans 271,779 41.4% 332,718 52.6% 59.4% 328,424 66.1% 282,911 64.1%
Allowance for loan losses (1965) -0.3% (2,811) -0.4% (2,081) -0.2% (1,728) -0.3% (1,856) -0.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total permanent first mortgage
loans, net 269,814 41.1% 329,907 52.2% 364,566 59.2% 326,696 65.8% 281,055 63.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial real estate loans 102,253 15.6% 60,984 9.7% 44,598 7.2% 29,881 6.0% 36,154 8.2%
Allowance for loan losses (2,247) -0.3% (1,130) -0.2% (918) -0.2% (696) -0.1% (1,234) -0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial real estate
loans, net 100,006 15.3% 59,854 9.5% 43,680 7.0% 29,185 5.9% 34,920 7.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans 175,432 26.7% 139,989 22.2% 110,840 18.0% 68,777 13.8% 65,045 14.7%
Allowance for loan losses (3,086) -0.5% (1,736) -0.3% (2,251) -0.4% (1,954) -0.5% (1,301) -0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial business
loans, net 172,346 26.2% 138,253 21.9% 108,589 17.6% 66,823 13.3% 63,744 14.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer loans:
Personal/lines of credit 16,931 2.6% 32,678 5.2% 27,296 4.4% 20,063 4.0% 21,582 4.9%
Second mortgage/equity 68,729 10.5% 44,248 7.0% 44,229 7.2% 40,618 8.2% 31,492 7.1%
Auto 18,519 2.8% 19,718 3.1% 22,499 3.7% 10,046 2.0% 7,110 1.6%
Education 9,454 1.4% 6,163 1.0% 3,504 0.6% 2,992 0.6% 1,697 0.4%
Home improvement and other 2,295 0.3% 2,290 0.4% 3,906 0.6% 1,745 0.4% 1,419 0.3%
Savings account 977 0.2% 773 0.1% 907 0.1% 1,119 0.2% 1,464 0.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 116,905 17.8% 105,870 16.8% 102,341 16.6% 76,583 15.4% 64,764 14.6%
Allowance for loan losses (1,267) -0.2% (1,334) -0.2% (963) -0.2% (1,066) -0.2% (1,035) -0.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans, net 115,638 17.6% 104,536 16.6% 101,378 16.4% 75,517 15.2% 63,729 14.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total unamortized loan
origination
fees and costs 114 0.0% (228) 0.0% (327) 0.0% (549) -0.1% (1,406) -0.3%
Allowance for loan loss
(unallocated) (1,004) -0.2% (1,474) -0.2% (993) -0.2% (638) -0.1% (641) -0.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $ 656,914 100.0% $630,848 100.0% $616,893 100.0% $497,034 100.0% $441,401 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Loan Maturities and Interest Sensitivity
The following table sets forth the maturities and sensitivity to
changes in interest rates of loans of the Company's loan portfolio at December
31, 1998:
<TABLE>
<CAPTION>
1 Year 1 Through After 5 Gross
or Less 5 Years Years Loans
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $179,140 $ 89,999 $48,860 $317,999
Commercial real estate 77,174 10,610 14,115 101,899
- ------------------------------------------------------------------------------------------------------
$256,314 $100,609 $62,975 $419,898
- ------------------------------------------------------------------------------------------------------
Loans with predetermined rate 23,445 91,308 62,711 177,464
Loans with floating rate 232,869 9,301 264 242,434
- ------------------------------------------------------------------------------------------------------
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On September 17, 1998, the Board of Directors of Prime Bancorp, Inc.
(the "Company") approved the appointment of Ernst & Young LLP as its independent
auditors for the fiscal year ending December 31, 1998. The Company's independent
accountant in prior years was KPMG LLP.
The decision to change independent accountants was recommended by the
Company's management, approved by the Company's Audit Committee and reviewed by
its Board of Directors.
53
<PAGE>
The reports of KPMG LLP on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audits of the Company's financial
statements for each of the two fiscal years ended December 31, 1997, and in the
subsequent interim period, there were no disagreements with KPMG LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
KPMG LLP, would have caused KPMG LLP to make reference to the matter in their
report.
During the two most recent fiscal years and through September 21, 1998,
there have been no reportable events as defined in Regulation S-K Item 304 (a)
(1) (v).
During the fiscal years ended December 31, 1997 and 1996 and the
subsequent interim periods preceding the decision to change independent
accountants, neither the Company nor anyone on its behalf consulted Ernst &
Young LLP regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, and
neither a written report nor oral advice was provided to the Company by Ernst &
Young LLP.
The Company requested KPMG LLP to furnish a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements. A copy of the letter dated September 21, 1998 is filed as Exhibit 16
on Form 8-K which was filed with the Securities and Exchange Commission on
September 23, 1998.
54
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS
The Bylaws of the Company currently provide that the Board of Directors
shall consist of not less than seven (7) or more than fifteen (15) members.
Currently, there are twelve (12) members of the Board. In accordance with the
Articles of Incorporation and the Bylaws, the Board of Directors is divided into
three (3) classes as nearly equal in number as possible. One class of directors
is to be elected annually. The members of each class are to be elected for a
term of three (3) years or until their successors are elected and qualified.
The class of directors serving until the 2000 Annual Meeting consists
of Frederick G. Betz, Robert A. Fox, James J. Lynch and David H. Platt. The
class of directors serving until the 2001 Annual Meeting consists of Fred Blume,
Joseph A. Fluehr, III, Michael B. Laign and Ernest Larenz. The directors with
terms expiring at the 1999 Annual Meeting are William J. Cunningham, Arthur J.
Kania, Roy T. Peraino and Erwin T. Straw. Pursuant to the retirement policy for
directors contained in the Company's Bylaws, Messrs. Peraino and Straw will
retire from the Board of Directors effective at the 1999 Annual Meeting. The
Board of Directors has concluded that it is in the best interest of the Company
to defer the holding of the 1999 Annual Meeting indefinitely as a result of the
proposed merger with Summit Bancorp. A Special Meeting of Shareholders will be
held to vote on the proposed transaction, and it is anticipated that the Board
of Directors will take action to set the date for this meeting prior to April
30, 1999.
BUSINESS BACKGROUND OF DIRECTORS
The following table sets forth certain information regarding the
members of the Board of Directors of the Company. The business experience during
at least the last five years for each of the directors is described below.
Frederick G. Betz, age 68, served as a director of Cheltenham Federal
Savings & Loan Association and subsequently the Company since 1988. Mr. Betz is
also Past President of Fred Betz and Sons, Inc., a land development and custom
home building Company located in Southampton, Pennsylvania.
Fred Blume, age 58, is an attorney and is the Administrative Partner of
the law firm of Blank Rome Comisky & McCauley, LLP. He joined the firm in 1967
and was admitted to the partnership in 1972. Mr. Blume serves on the Board of
Overseers of the Law School of the University of Pennsylvania.
William J. Cunningham, age 55, had been a Director of First Sterling
Bancorp, Inc. since 1988 and became a director of the Company when it merged
with First Sterling Bancorp, Inc. in 1996. He was a co-founder and managing
partner of the Miami Heat, a National Basketball Association (NBA) team from
1988 until the sale of his interest in 1995. From 1986 to 1988 Mr. Cunningham
was a national analyst and sports commentator for CBS, Inc. He served as the
Coach of the Philadelphia 76ers from 1977 through 1984, leading the team to an
NBA championship in 1983. Throughout the period from 1965 through 1978 he played
professionally for the Philadelphia 76ers, including the 1967 NBA Championship
team.
55
<PAGE>
Joseph A. Fluehr, III, age 53, served as a director of North East
Federal Savings & Loan Association and subsequently the Company since 1983. He
is a funeral director and the owner of the Joseph A. Fluehr, III Funeral Homes,
Inc. in Richboro and New Britain, Pennsylvania. He is also a member of the
Pennsylvania State Board of Funeral Directors, Harrisburg, PA; a member of the
Entities Board of St. Mary's Medical Center, a division of Catholic Health
Initiatives, Langhorne, PA and a Director of St. Joseph's Home for the Aged,
Holland, PA.
Robert A. Fox, age 69, is President of R.A.F. Industries, a private
investment Company which acquires and manages a diversified group of operating
Companies and venture capital investments. He is a former Chairman of the Board
of Warner Company and Waste Resources Corporation. Mr. Fox serves as a member of
the Board of Directors of Safeguard Scientifics, Inc. and Children's Concept,
Inc. (Zany Brainy). He is a Trustee of the University of Pennsylvania and a
member of the Board of Managers of the Wistar Institute.
Arthur J. Kania, age 67, is a principal of Trikan Associates, which
owns and manages various real estate holdings and is active in venture capital
investments. He is also a partner of the law firm Kania, Lindner, Lasak and
Feeney. Mr. Kania is a former member of the Boards of Directors of PNC Bank,
Midlantic Corporation and Continental Bank. He is a member of the Boards of
Directors of Opt-Sciences Corporation and Piasecki Aircraft Corporation. He also
serves on the Board of Consultors of Villanova University School of Law and is
past Vice-Chairman of the Board of Trustees of Villanova University and past
Chairman of the Board of Trustees of the University of Scranton. He was
co-founder of AID Inc., a leading health care provider, and was its Chairman and
Chief Executive Officer from 1970 through 1974. Mr. Kania was also co-founder of
Greate Bay Country Club and the Brighton Hotel (now Sands Hotel and Casino,
Atlantic City).
Michael B. Laign, age 48, is the President and Chief Executive Officer
of the Holy Redeemer Health System in Huntingdon Valley, Pennsylvania. He also
serves on the Board of Directors of Holy Redeemer Health System and each of its
subsidiary corporations. Mr. Laign previously served as Executive Vice President
of Frankford Healthcare System, Inc., from 1984 until 1993, when he joined Holy
Redeemer Health System. He serves on the Board of Governors of the American
Heart Association, the Board of Directors of the Delaware Valley Healthcare
Council of The Hospital & Health System Association of Pennsylvania, and the
Board of Directors of The Hospital & Healthsystem Association of Pennsylvania.
Ernest Larenz, age 67, served as a director of North East Federal
Savings & Loan Association and subsequently the Company since 1976. He is the
President of Medicare Management Nursing Homes who are consultants for the
operation of various nursing homes. He is also a builder/developer of
residential and commercial properties.
James J. Lynch, age 49, served as Executive Vice President of Midlantic
Bank from 1994 to 1995. From 1976 through 1994, Mr. Lynch held various positions
with Continental Bank, culminating as President from 1992 to 1994. Mr. Lynch's
banking career spans thirty (30) years starting with First Pennsylvania Bank as
a part-time employee while attending college and entering its management
training program in 1971. Mr. Lynch currently serves as Chairman of the Central
Philadelphia Development Corporation, a non-profit business advocacy
organization, a member of the Executive Committee of the Pennsylvania Bankers
Association, a member of the Board of Trustees and Executive Committee of
LaSalle University, a member of the Board of Trustees of Holy Redeemer Health
System and a director of various other civic and community organizations.
Roy T. Peraino, age 70, is the former Chairman and Chief Executive
Officer of Continental Bancorp and Continental Bank. He is also the former
President of Midlantic Corporation. Mr. Peraino had worked for more than 40
years in the Philadelphia banking community.
David H. Platt, age 50, served as a director of North East Federal
Savings & Loan Association and subsequently the Company since 1983. He is the
President of Somerton Springs Golf Shoppes which has twenty-two golf shops and
eight golf facilities throughout the Delaware Valley area. He is also President
of the Newtown Swim Club Inc. and is President and owner of Sycamore Ridge Golf
Club Inc.
Erwin T. Straw, age 70, served as President and Chief Executive Officer
of Cheltenham Federal Savings & Loan Association since January 1985. In November
1988, he forged the merger between Cheltenham and North East Federal, creating
what subsequently was named Prime Savings Bank, later changed to Prime Bank. At
the same time he formed a holding Company, Prime Bancorp. He served as it's
Chairman of the Board until January 1999. Mr. Straw continues to serve as a
member of Prime's Board of Directors.
56
<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following information is provided with respect to the executive
officers of the Company who do not serve on the Board of Directors.
William H. Bromley, age 48, became Executive Vice President of the
Company on December 31, 1996 in connection with the merger with First Sterling
Bancorp, Inc. He had served as President, Chief Executive Officer and a director
of First Sterling Bancorp Inc. and First Sterling Bank since 1988. Before
joining First Sterling, Mr. Bromley was employed for seven years by Industrial
Valley Bank and Trust Company ("IVB") from 1979 through 1986 as a commercial
loan officer and as a Regional Vice President for Chester County, Lancaster
County and central and western Delaware County. Prior to joining IVB, Mr.
Bromley worked for three years (1976 to 1979) with Midlantic National Bank in
Haddonfield, N.J. Mr. Bromley currently serves as a member of the Board of
Directors, Treasurer and a member of the Executive Committee of the Upper Main
Line YMCA. He is a member of the Board of Directors of the Pennsylvania
Community Bankers Association and is Vice President and a member of the Board of
Directors of Insured Financial Institutions of the Delaware Valley.
James E. Kelly, age 54, became Executive Vice President and Chief
Financial Officer of the Company in November, 1997. Previously, he was corporate
controller and Senior Vice President of Finance for Midlantic Corporation for
five (5) years. Prior to his tenure at Midlantic, Mr. Kelly was chief financial
officer of Continental Bancorp Inc., a $7.5 billion Bank holding Company at the
time it was acquired by Midlantic.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of the Company's common stock to file reports of beneficial ownership
and changes in beneficial ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, for the period January 1,
1998 through December 31, 1998, all filing requirements related to its officers
and directors were complied with in all material respects except for the
following: Robert A. Fox filed a late Form 3 and Joseph A. Fluehr, III reported
a transaction from March 1994 late on a Form 5.
Item 11. Executive Compensation.
EXECUTIVE COMPENSATION
REMUNERATION
The Company is a Bank holding Company whose business is essentially
conducted by Prime Bank, its wholly-owned, Pennsylvania-chartered Bank
subsidiary. The officers of the Company are also officers of Prime Bank, and all
cash compensation for the officers is paid by the Bank. The following table sets
forth information as to compensation paid to the Company's chief executive
officer and the other executive officers as determined by SEC rules
(collectively, the "named executive officers") for the three (3) fiscal years
ended December 31, 1998, whose annual cash compensation exceeded $100,000 during
that period.
57
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (1)
Annual Compensation
----------------------------
Securities All Other
Salary Bonus Underlying Compensation
Name and Principal Position Year Amount Amount Options (2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
James J. Lynch 1998 $345,000 $120,750 -- $25,362
President & CEO 1997 345,000 100,000 -- 24,980
1996 277,000 100,000 220,000 1,330
William H. Bromley (3) 1998 200,000 45,000 -- 17,387
Executive Vice President 1997 200,000 50,000 -- 15,448
1996 200,000 85,000 66,000 5,090
James E. Kelly 1998 155,000 34,875 35,000 13,225
Executive Vice President
and CFO
</TABLE>
- ------------------
(1) This table does not include columns for Other Annual Compensation,
Restricted Stock Awards and Long-Term Incentive Plan Payouts. The Company
had no amounts to report in the columns for Restricted Stock Awards and
Long-Term Incentive Plan Payouts. The amount of Other Annual Compensation
paid to the named executive officers was in each case for perquisites or
other fringe benefits which are not reportable since they did not exceed
the lesser of $50,000 or ten percent (10%) of salary and bonus as reported
for each named executive officer. The Company furnishes Messrs. Lynch and
Bromley with automobiles and also pays certain club dues for the purpose of
promoting the business of the Company.
(2) Includes contributions made for named executive officers under the
Company's 401(k) Plan and term life insurance premiums paid on behalf of
each executive.
(3) The compensation in 1996 for Mr. Bromley was paid by First Sterling Bank
which was acquired by the Company as of the close of business on December
31, 1996.
STOCK OPTIONS
The following table sets forth information on stock options granted
during 1998 to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------
Number of % of total Value at Assumed Annual
Securities Options/SARs Rates of Stock Price
Underlying Granted to Exercise Appreciation
Options/SARs Employees in or Expiration for Option Term
Name Granted Fiscal Year Base Price Date -----------------------
5% %10
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James E. Kelly 10,000 15% $17.38 12/16/08 $256,700 $408,800
</TABLE>
58
<PAGE>
The following table sets forth certain information regarding individual
exercises of stock options during 1998 by the named executive officers and the
value of such officers' unexercised options at December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised in-the-Money
Acquired Options at Fiscal Year End (1) Options at Fiscal Year End (2)
On Value ------------------------------------------------------------------------------------
Exercise Realized Total Exercisable Unexercisable Total Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James J. Lynch None -- 220,000 154,000 66,000 1,565,300 1,095,710 469,590
William H. Bromley None -- 66,000 49,500 16,500 90,750 363,000 272,250
James J. Kelly None -- 35,000 35,000 -- -- -- --
</TABLE>
- -------------------
(1) The number of shares have been restated to reflect both the 10% stock
dividend paid on February 1, 1996 to shareholders of record on January 2,
1996 and the 2 for 1 stock split paid on June 19, 1998 to shareholders of
record May 29, 1998.
(2) This column represents the difference on December 31, 1998 between the
market price of the Common Stock ($15.75) and the option exercise price.
EMPLOYMENT AGREEMENTS
The Company and Prime Bank have entered into employment agreements with
James J. Lynch and William H. Bromley. Mr. Lynch's agreement is for a term of
five years and provides for automatic one-year extensions on each anniversary of
the date of commencement of the agreement unless notice to the contrary is given
by Mr. Lynch or the Company to the other. The base salary payment under the
agreement is $300,000. In addition, Mr. Lynch will be entitled to a bonus of not
less than $100,000 per annum provided that the overall performance of the
Company is reasonably consistent with that of previous years. Also, Mr. Lynch is
entitled to participate in the Company's Incentive Stock Option Plan and was
awarded options to purchase 220,000 shares upon commencement of his employment
with the Company on January 29, 1996. Options to acquire 110,000 shares were
immediately vested, while the options for the remaining 110,000 shares vest
equally, one-fifth per year, over five years on the anniversary date of the
commencement of his employment.
Mr. Bromley's agreement is for a term of three years commencing
December 31, 1996 and provides for automatic one-year extensions on each
anniversary date of the commencement of the agreement unless notice to the
contrary is given by Mr. Bromley or the Company to the other. The base salary
payment under the agreement is $200,000. In addition, Mr. Bromley was entitled
to a bonus of not less than $50,000 for 1997 provided that the overall
performance of the Company was reasonably consistent with that of previous
years. Also, Mr. Bromley is entitled to participate in the Company's Incentive
Stock Option Plan and was granted options to purchase 66,000 shares on December
31, 1996 one-half of which vested immediately, an additional 16,500 shares
vested on January 15, 1998, and the remaining shares vested on January 15, 1999.
The employment agreements for both of Messrs. Lynch and Bromley also
provide, among other things, for participation in any bonuses which the Board of
Directors, in its discretion, may authorize from time to time, as well as
participation in stock options and other benefits applicable to executive
personnel.
In connection with a termination of employment by Messrs. Lynch or
Bromley for "good reason," other than in connection with a change of control,
such as for breach of contract or a purported termination not effected pursuant
to a notice of termination, the agreements provide for severance payments.
59
<PAGE>
Mr. Lynch's agreement provide that such payments would be equal to the
total annual compensation in effect as of the date of termination multiplied by
the greater of the number of years (including partial years) remaining under the
agreement or the number 2.99. The agreement for Mr. Bromley provides that such
payments would be equal to the employee's total annual compensation in effect as
of the date of termination multiplied by the greater of the number of years
(including partial years) remaining under the agreement or the number 1.5. If
Mr. Lynch terminates his employment for "good reason" in connection with a
change in control, he would receive severance payments equal to 2.99 times his
average aggregate annual compensation. If Mr. Bromley similarly terminates his
employment for "good reason", he is entitled to severance payments equal to the
product of the number 2 multiplied by his average aggregate annual compensation
includable in his gross income for federal income tax purposes for the past
three years. All such severance payments will be paid in a lump sum on or before
the fifth day following the date of termination. However, if the severance
payments would be deemed to constitute "parachute payments" under Section 280G
of the Internal Revenue Code of 1986, as amended, (the "Code") the severance
payments will be reduced to the extent necessary to ensure that no portion of
the severance payments are subject to the excise tax imposed by Section 4999 of
the Code.
"Good reason," according to the agreements, also includes, subsequent
to a change in control of the Company and without the employee's express written
consent, the assignment of the employee to duties inconsistent with those
performed immediately prior to the change in control, a change in the employee's
reporting responsibilities, title or office, any removal of the employee from,
or any failure to re-elect the employee to, any such position, a reduction in
annual salary, the failure of the Company to continue for him any bonus, benefit
or compensation plan or any action that would affect adversely participation in
or materially reduce his benefits under any such plan. The agreements define
"change in control" to include any of the following: (1) any change in control
required to be reported pursuant to item 6(e) of Schedule 14A, promulgated under
the Exchange Act; (2) the acquisition of beneficial ownership by any person (as
defined in Sections 13(d) and 14(d) of the Exchange Act) of 25% or more of the
combined voting power of the Company's then outstanding securities; or (3)
during any period of two consecutive years, there is a change in the majority of
the Board of Directors for any reason, unless the election of each new director
was approved by at least two-thirds of the directors then still in office who
were directors at the beginning of the period.
The Company, Prime Bank and Mr. Kelly have entered into a Change of
Control Agreement as of November 17, 1997, which obligates the Company to make
certain payments to Mr. Kelly in the event that either (i) his employment with
the Company is terminated, or (ii) he terminates his employment with the Company
for "good reason", in each case after a "change in control", both as defined in
a manner substantially similar to the definitions in the preceding paragraph.
Upon such termination of employment, Mr. Kelly will be entitled to receive
severance payments equal to the sum of (A) the product of the number 2
multiplied by his highest annual base salary includable in his gross income for
federal income tax purposes for the past five years and (B) a prorated portion
of the cash bonus received by Mr. Kelly for the prior fiscal year. Such
severance payment will be paid in a lump sum within one (1) calendar week
following the date of termination. However, if the severance payments would be
deemed to constitute "parachute payments" under Section 280G of the Code, the
severance payments will be reduced to the extent necessary to ensure that no
portion of the payments are subject to the excise tax imposed by Section 4999 of
the Code.
Assuming that Messrs. Lynch, Bromley and Kelly continue to earn their
1998 base salaries, plus bonuses, their maximum severance payments, upon a
termination for good reason in connection with a change in control, and without
consideration of the excise tax imposed by Section 4999 of the Code, would be,
respectively, $1,283,458, $520,000 and $344,875.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN GROUP DECISIONS
The Compensation Committee of the Board of Directors is responsible for
setting the compensation for executive officers of the Company. The members of
the Compensation Committee during 1998 were William J. Cunningham, Joseph A.
Fluehr, III, Robert A. Fox, Arthur J. Kania, Ernest Larenz and Erwin T. Straw.
Mr. Straw was chief executive officer of the Company and Prime Bank until
January 29, 1996 and an employee of Prime Bank until January 29, 1997. In 1998,
Prime Bank leased certain real property from Dominion Properties, L.P., the
majority ownership interest in which is owned by a trust established by Mr.
Kania for the benefit of his children. The law firm in which Mr. Kania is a
partner performed legal services for Prime Bank in 1998. These transactions are
described in "Certain Relationships and Related Transactions" on page 61.
60
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
(The information under this caption shall not be deemed "filed"
with the SEC or "soliciting material")
COMPENSATION POLICIES APPLICABLE TO EXECUTIVE OFFICERS
The Compensation Committee administers the Company's executive
compensation programs and has responsibility for recommending to the Board of
Directors for approval the compensation of all officers. The 1998 members of the
Compensation Committee were William J. Cunningham, Joseph A. Fluehr, III, Robert
A. Fox, Arthur J. Kania, Ernest Larenz and Erwin T. Straw.
The purpose of the Company's executive compensation program is to
attract and retain key executives responsible for the success of the Company so
as to maximize profits and shareholder value. The Company's executive
compensation program is made up principally of annual base salary and benefits,
incentive cash compensation and stock options awarded under the Company's
Incentive Stock Option Plan (the "Plan").
The Committee believes that the Company's overall financial performance
should be an important factor in the compensation of its executive officers. The
Committee seeks to align executives' goals with the shareholders' goals of stock
appreciation and yield by having a policy, at the executive officer level, that
a significant proportion of total compensation consist of variable,
performance-based components, such as stock options, bonuses, and profit sharing
plans, the value of which will rise or fall depending on the Company's
performance. These incentive compensation programs are intended to reinforce
management's commitment to enhancement of profitability and shareholder value.
The Committee takes into account various qualitative and quantitative
indicators of corporate and individual performance in determining the level and
composition of compensation for the chief executive officer and other executive
officers. The corporate performance measures which the Committee considers
include net income growth, earnings per common share, return on average common
shareholders' equity and return on average total assets. The Committee also
considers the executive's responsibilities, individual contribution to the
Company's profits and achievement of any goals and objectives that may have been
established for such executive. The Committee does not rely on any fixed
formulae or specific numerical criteria in determining an executive's aggregate
compensation, but does utilize peer group studies to determine the fairness and
adequacy of aggregate compensation.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The base salary of and cash bonus for Mr. Lynch, the Chief Executive
Officer, are fixed largely by his Employment Agreement. However, in reviewing
the fairness of his cash bonus and the level of his base salary, the Committee
considered the following criteria: the Company's financial performance, which
continues to be comparable or superior to many peer institutions and its capital
position, which continues to be strong. The Committee also reviewed Mr. Lynch's
experience, knowledge, leadership and management skills, and his communication
and interaction with the Board of Directors. The Committee believes that Mr.
Lynch has demonstrated the competency to continue above average growth of the
Company and to position it strategically for strong future performance, while at
all times taking into consideration its overall financial condition and the
welfare of its shareholders.
61
<PAGE>
Finally, the Committee consulted surveys of executive compensation in
the banking industry and considered the already established obligations under
Mr. Lynch's Employment Agreement. In light of the number of stock options
awarded to Mr. Lynch upon the commencement of his employment, a portion of which
will vest through 2001, no additional options were granted to Mr. Lynch in 1998.
In accordance with the compensation philosophy and process described above, the
Committee concluded that a cash bonus of $120,750.00 was appropriate in the case
of Mr. Lynch for 1998 and that his salary for 1999 remain at $345,000.00. These
recommendations were approved by the Board of Directors and the cash bonus was
paid in 1999.
Compensation Committee
Arthur J. Kania,
Chairman
William J. Cunningham
Joseph A. Fluehr, III
Robert A. Fox
Ernest Larenz
Erwin T. Straw
COMPENSATION OF DIRECTORS
In 1998, each director received a $12,500 annual retainer. Directors
received $600 for each Board meeting attended and $400 for each Committee
Meeting attended. The Chairman of each committee received an additional $750
annual retainer. Mr. Straw received $50,000 in 1998 for his services as Chairman
of the Board.
In April 1998, the Directors' Deferred Compensation Plan was
established. Under this plan, directors may elect to defer all or a portion of
their director's fees, which are allocated monthly to a book account maintained
by the Company. The two investment elections permitted are Prime common stock
and Prime 30-day certificates of deposit. No stock or C/Ds are actually
purchased, but earnings and appreciation thereon are calculated as if the
elected investment were purchased as of the end of each month. Benefits are
payable in cash either in a lump sum or in not more than 10 installments at the
election of the director, generally upon retirement from the Board. At December
31, 1998, eight (8) directors were participating and had elected Prime common
stock, and an amount equal to the equivalent of 6,577 shares of Prime common
stock was accrued under the plan for the benefit of the directors.
62
<PAGE>
PERFORMANCE GRAPH
(The information under this caption shall not be deemed "filed" with the SEC or
"Soliciting Material".)
The graph below summarizes the cumulative return experienced by the
Company's shareholders for the period from December 31, 1993 through December
31, 1998, compared to the NASDAQ Stock Market Index and the NASDAQ Bank Stocks
Index.
The points on the graph represent the following numbers:
Prime NASDAQ NASDAQ
Year Bancorp Stock Market Bank Stock
- ---------------- ------------- ------------- -------------
1993 100 100 100
1994 317 210 206
1995 397 292 307
1996 413 363 406
1997 717 444 685
1998 630 672 613
The lines and numbers represent index levels derived from compounded
daily returns that include reinvestment of all dividends. Returns on Prime
Bancorp, Inc. common stock have been adjusted to account for the 10% stock
dividends distributed to shareholders on November 1, 1994 and February 1, 1996
and for the 2 for 1 stock split payable as a dividend to shareholders on June
19, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The Company does not know of any person or group that is the beneficial
owner of more than five percent of the outstanding shares of Common Stock,
except as indicated herein. The following table reflects as of February 26,
1999, the Common Stock beneficially owned by holders of more than five percent
of the outstanding Common Stock, directors, the named executive officers listed
in the Summary Compensation Table at Item 11 above, and all officers and
directors as a group. Except as otherwise noted, each beneficial owner listed
has sole investment and voting power with respect to the Common Stock owned by
him or her.
<PAGE>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP (1) OF CLASS
----------------------------------------------------------------------------
Arthur J. Kania Trust, Allen Speiser
and Stanley J. Kania Trustees 1,007,832 (3) 9.17%
Erwin T. Straw 547,157 (2,4) 4.94%
Frederick G. Betz 98,353 (2,5) *
Fred Blume 6,700 (6) *
William J. Cunningham 218,315 (7) 1.99%
Joseph A. Fluehr, III 99,092 (2,8) *
Robert A. Fox 45,000 (9) *
Arthur J. Kania 245,630 (10) 2.24%
Michael B. Laign 2,608
Ernest Larenz 278,994 (11) 2.54%
James J. Lynch 214,570 (2,12) 1.92%
Roy T. Peraino 20,000 (13)
David H. Platt 6,178 *
William H. Bromley 198,338 (2,14) 1.79%
James E. Kelly, Jr 41,084 (2,15) *
All directors and officers as a group
consisting of 14 persons (16) 2,022,019 17.78%
- ----------------------------
* Less than 1%.
(1) The information contained in this table is based on information furnished
by the respective shareholders or contained in filings made with the
Securities and Exchange Commission. The securities "beneficially owned" by
an individual are determined in accordance with the definition of
"beneficial ownership" set forth in the regulations of the Securities and
Exchange Commission and, accordingly, may include securities owned by or
for, among others, the spouse and/or minor children of the individual and
any other relative who has the same home as such individual, as well as
other securities as to which the individual has or shares voting or
investment power or which the individual has the right to acquire under
outstanding stock options within 60 days after March 31, 1999. Beneficial
ownership may be disclaimed as to certain of the securities.
(2) Based on 10,984,833 shares outstanding on February 26, 1999; except when
the percentage reported relates to shares of Common Stock that a person has
a right to acquire, in which case it is based on the number of shares of
Common Stock that would be outstanding after the exercise of such right.
The following persons own presently exercisable stock options for the
amount of shares indicated: Erwin T. Straw -- 100,748; Frederick G. Betz --
14,736; William H. Bromley -- 66,000; Joseph A. Fluehr, III -- 11,000;
James J. Lynch -- 176,000; and James E. Kelly -- 35,000.
63
<PAGE>
(3) Includes 933,000 shares owned by the Trust, 55,496 shares owned by trusts
or Allen Speiser's benefit, and 9,336 shares owned by a trust of which Mr.
Speiser is trustee for the benefit of third parties. Excludes 245,630
shares owned directly by Mr. Arthur J. Kania, grantor of and counsel to the
Arthur J. Kania Trust and a director of the Company. The address for the
Trust is Two Bala Plaza, Fifth Floor, 333 City Line Avenue, Bala Cynwyd, PA
19004.
(4) 183,340 shares are held jointly by Mr. Straw and his wife. 92,890 shares
are owned by Mr. Straw's wife. 2,315 shares are held for Mr. Straw in the
Company's 401(k) plan. Also includes 30,924 shares which are owned by
Eastern Telephone Systems, Inc., on the Board of Directors of which Mr.
Straw serves and in which Mr. Straw has an equity interest.
(5) 7,270 shares of Common Stock are held by Fred Betz & Sons Profit Sharing
Trust of which Mr. Betz is the Trustee, 47,514 shares are held by Mr. Betz'
wife and 5,687 shares are held in an IRA account for Mr. Betz' wife.
(6) Includes 300 shares owned by Mr. Blume's wife.
(7) Includes 15,578 shares owned by a pension plan for the benefit of
Mr. Cunningham.
(8) 49,860 shares are held jointly by Mr. Fluehr and his wife. 2,904 shares are
held in the Joseph A. Fluehr, III Funeral Homes, Inc. Profit Sharing Trust.
Mr. and Mrs. Fluehr share investment control of these shares
(9) Includes 5,000 shares owned by a trust for which Mr. Fox is co-trustee and
beneficiary.
(10) Excludes 933,000 shares owned by the Arthur J. Kania Trust established by
Mr. Kania as grantor (See Note 3 above) and 198,228 shares owned by members
of Mr. Kania's family. Mr. Kania disclaims beneficial ownership of all such
shares.
(11) 8,521 shares are held in an IRA account for Mr. Larenz' wife.
(12) 4,224 shares are held for Mr. Lynch in the Company's 401(k) Plan.
(13) 20,000 shares are held in an IRA account.
(14) Includes 8,076 shares held for Mr. Bromley in the Company's 401(k) Plan.
Also includes 1,450 shares held in an IRA account for the benefit of Mr.
Bromley's wife, 420 shares owned directly by Mr. Bromley's wife and 475
shares owned directly by Mr. Bromley's children.
(15) Includes 1,157 shares held for Mr. Kelly in the Company's 401(k) Plan.
(16) This amount includes an aggregate of 403,484 shares of Common Stock
issuable upon the exercise of presently exercisable stock options held by
certain officers and directors of the Company. See Note 2 above. The
address for each officer and director is c/o Prime Bancorp, Inc., 7111
Valley Green Road, Fort Washington, Pennsylvania 19034.
Item 13. Certain Relationships and Related Transactions.
INDEBTEDNESS OF MANAGEMENT
Loans to directors and executive officers are made only in conformance
with, and subject to the limitations of, applicable banking regulations. Such
loans are made in the ordinary course of business and are made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other borrowers. These loans do not
involve more than normal collection risk, nor do they present any other features
more favorable than loans made to unaffiliated third parties.
64
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prime Bank, the Company's wholly-owned subsidiary, leased three (3)
Bank branch offices and some administrative office space from Dominion
Properties, L.P. ("Dominion") in 1998. The majority ownership interest in
Dominion is held by the Arthur J. Kania Trust. Arthur J. Kania, a director of
the Company, is grantor of the Trust and legal counsel to the Trust and
Dominion. Mr. Kania's children are the beneficiaries of the Trust. Dominion sold
one of the offices to an unrelated third party in December 1998 and sold a
second property to an unrelated third party in March 1999..
The leases with Dominion have original terms which expire on December
31, 2005. The leases provide for certain renewal options and rent escalation
based upon increases in the Consumer Price Index. Total rent and other charges
paid by the Company to Dominion under the leases in 1998 were approximately
$419,000. Payments under individual leases may vary due to increases in the
Consumer Price Index, real estate taxes, utilities and common area maintenance
charges.
In 1998, the law firm of Kania, Lindner, Lasak and Feeney performed
legal services for the Company's subsidiaries and received compensation
therefor. Mr. Kania is a partner in such firm.
In 1998, the law firm of Blank Rome Comisky & McCauley, LLP performed
legal services for the Company's subsidiaries and received compensation
therefor. Mr. Blume is a partner in such firm. Mr. Blume's firm is also
providing legal services to the Company in connection with the merger with
Summit Bancorp.
65
<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:
(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:
Exhibit No. Description
2.1 Agreement and Plan Of Merger dated February 17, 1999 between Summit
Bancorp., a New Jersey business corporation ("Summit"), and Prime
Bancorp, Inc., a Pennsylvania business corporation ("Prime"). Prime
will supplementally provide a copy of the exhibits and disclosure
schedules to the SEC upon request.
2.2 Stock Option Agreement, dated February 18, 1999 (this "Agreement"),
between Summit Bancorp., a New Jersey corporation ("Grantee"), and
Prime Bancorp, Inc., a Pennsylvania corporation ("Issuer").
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.
4.1 Form of Registrant's Stock Certificate for common stock. -
Incorporated herein by reference to Exhibit 4.2 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* Change in Control Agreement between the Company, Prime Bank and James
E. Kelly dated November 17, 1997.
10.3* Directors Deferred Compensation Plan
10.4* 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.
10.5* First Sterling 1988 Non-Qualified Stock Option Plan - Incorporated
herein by reference to Exhibit 10.6 to Registration Statement
#333-13741.
10.6 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.
10.7 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 then lease term for a
portion of such space. - Incorporated herein by reference to Exhibit
10.8 to Registration Statement #333-13741.
66
<PAGE>
Exhibit No. Description
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12* Executive Benefit Plan for Erwin T. Straw - Trust Agreement by and
between Prime Bank and Investors Trust Company dated March 11, 1997.
10.13* 1995 Incentive Stock Option Plan - Incorporated herein by reference
to Exhibit 10.14 filed with the Securities and Exchange Commission on
March 30, 1998.
10.14* 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.
10.15 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.
10.16 Prime Bancorp, Inc. Retirement Savings Plan as amended and restated
effective January 1, 1998.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
67
<PAGE>
Exhibit No. Description
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 Report on Form 11-K, Prime Bancorp, Inc. Retirement Savings Plan for
the year ended December 31, 1998. (to be filed by amendment)
22.1 Subsidiaries
23.1 Consent of Ernst & Young, LLP
23.2 Consent of KPMG LLP
27 Financial Data Schedule
* Denotes a management contract or compensatory plan.
(b) Reports on Form 8-K
1) Report dated February 18, 1999 relating to changes in control
of registrant
68
<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, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Frederick G. Betz Director March 28, 1999
- ---------------------------
Frederick G. Betz
/s/ Fred Blume, Esq. Director March 28, 1999
- ---------------------------
Fred Blume, Esq.
/s/ William J. Cunningham Director March 28, 1999
- ---------------------------
William J. Cunningham
/s/ Joseph A. Fluehr, III Director March 28, 1999
- ---------------------------
Joseph A. Fluehr, III
/s/ Robert A. Fox Director March 28, 1999
- ---------------------------
Robert A. Fox
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Arthur J. Kania Director March 28, 1999
- ---------------------------
Arthur J. Kania
/s/ James E. Kelly Executive Vice President and March 28, 1999
- --------------------------- Chief Financial Officer
James E. Kelly.
/s/ Michael B. Laign Director March 28, 1999
- ---------------------------
Michael B. Laign
/s/ Ernest Larenz Director March 28, 1999
- ---------------------------
Ernest Larenz
/s/ James J. Lynch Chairman, President and Chief March 28, 1999
- --------------------------- Executive Officer (Principal
James J. Lynch Executive Officer)
/s/ Roy T. Peraino Director March 28, 1999
- ---------------------------
Roy T. Peraino
/s/ David H. Platt Director March 28, 1999
- ---------------------------
David H. Platt
/s/ Frank H. Reeves Senior Vice President March 28, 1999
- --------------------------- Chief Accounting Officer
Frank H. Reeves
/s/ Erwin T. Straw Director March 28, 1999
- ---------------------------
Erwin T. Straw
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated February 17, 1999 between Summit
Bancorp., a New Jersey business corporation ("Summit"), and Prime Bancorp, Inc.,
a Pennsylvania business corporation ("Prime").
W I T N E S S E T H :
WHEREAS, the respective boards of directors of Summit and Prime deem it
advisable and in the best interests of their respective shareholders to adopt a
plan of reorganization in accordance with the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended ( "Code") providing for the
acquisition of Prime by Summit on the terms and conditions provided for in this
Agreement and Plan of Merger ("Agreement");
WHEREAS, the Board of Directors of Summit and Prime have each determined
that the reorganization contemplated by this Agreement ("Reorganization") is
consistent with, and in furtherance of, their respective business strategies and
goals;
WHEREAS, Summit and Prime intend on the day after the date of this
Agreement and in consideration of this Agreement to enter into the Stock Option
Agreement ("Option Agreement") attached hereto as Exhibit B; and
WHEREAS, the parties desire to make certain representations, warranties
and agreements in connection with the Reorganization and also to prescribe
certain other terms and conditions of the Reorganization.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements contained herein and in the Option
Agreement, the parties hereto, intending to be legally bound, agree as follows:
ARTICLE I.
GENERAL PROVISIONS
Section 1.01. The Reorganization.
(a) Upon the terms and subject to the conditions contained in this
Agreement, at the Effective Time (as defined at Section 1.06), the
Reorganization shall be effected as follows:
(1) Prime shall be merged with and into Summit pursuant to and in
accordance with the provisions of, and with the effect provided in, the New
Jersey Business Corporation Act, as amended ("New Jersey Act") and the
Pennsylvania Business Corporation Law, as amended ("Pennsylvania Law"); or
(2) Prime shall be merged into a wholly owned subsidiary of Summit
or a wholly owned subsidiary of Summit shall be merged into Prime, in either
case pursuant to and in accordance with the provisions of, and with the effect
provided in, the corporate laws of the jurisdiction of incorporation of each of
the constituent corporations in such merger ("Applicable Corporation Laws").
<PAGE>
(b) Summit shall prior to the Effective Time elect the method for
carrying out the Reorganization from among those methods set forth at Section
1.01(a) ("Reorganization Election") and following an election of the
Reorganization method provided for at Section 1.01(a)(2) Summit shall (i) cause
the wholly owned subsidiary of Summit designated as the constituent corporation
in the Reorganization ("Designated Summit Subsidiary") to approve, execute and
deliver this Agreement in accordance with all Applicable Corporation Laws, (ii)
cause this Agreement to be approved by the sole shareholder of the Designated
Summit Subsidiary, (iii) attach as Exhibit A to this Agreement (A) any
additional terms and conditions to this Agreement required by Applicable
Corporation Laws to effect the Reorganization and other transactions
contemplated by this Agreement, (B) the terms and conditions of any agreement or
plan of merger required by Applicable Corporation Laws, (C) the date and time
that the merger shall be effective or the mechanism for determining the date and
time that the merger shall be effective and (D) such other terms and conditions
as Summit shall determine in its discretion to be desirable and not contrary to
this Agreement or Applicable Corporation Laws regarding the corporate governance
of the corporation surviving the merger contemplated by Section 1.01(a),
including without limitation terms and conditions governing certificates or
articles of incorporation and amendments thereto or restatements thereof,
by-laws of the corporation surviving the merger and amendments thereto, and
directors and officers of the corporation surviving the merger; provided,
however, that no provision of Exhibit A shall (x) alter or change the amount or
kind of consideration to be received by Prime Shareholders (as defined at
Section 1.07(c) below) as provided for in this Agreement, (y) adversely affect
the tax treatment of the Reorganization Consideration (as defined in Section
1.03(a)(2) below) to be received by Prime Shareholders or (z) materially impede
or delay consummation of the transactions contemplated by this Agreement and
(iv) cause the Designated Summit Subsidiary to take all actions appropriate to
accomplish the Reorganization and the other transactions contemplated by this
Agreement. Exhibit A as so constituted shall constitute a part of this Agreement
as fully as if attached hereto on the date hereof without separate execution by
Summit or Prime.
Section 1.02. Capital Stock of Summit. All shares of the capital stock of
Summit issued or issued and outstanding immediately prior to the Effective Time,
including the Common Stock, par value $.80 per share, of Summit and the rights
attached thereto ("Summit Rights") pursuant to the Rights Agreement dated as of
August 16, 1989 between Summit and First Chicago Trust Company of New York, as
Rights Agent ("Summit Rights Agreement") (references to "Summit Stock" herein
shall mean the Common Stock of Summit with Summit Rights attached thereto),
shall be unaffected by the Reorganization and shall remain issued or issued and
outstanding, as the case may be, immediately thereafter.
Section 1.03. Terms of Conversion of Prime Capital Stock.
(a) At the Effective Time, by virtue of the Reorganization and without
any action on the part of any shareholder of Prime:
(1) All shares of the Common Stock, par value $1.00 per share, of
Prime ("Prime Stock") which immediately prior to the Effective Time are
beneficially owned either directly, or indirectly through a Bank, broker or
other nominee, by Summit or a subsidiary of Summit or Prime or a subsidiary of
Prime (other than Prime Stock held as a result of foreclosures or debts
previously contracted and Prime Stock held in trust, managed, custodial or other
nominee accounts or held by mutual funds for which Prime or any subsidiary of
Prime acts as investment advisor), if any, or held in the treasury of Prime, if
any, shall be canceled and retired and no cash, securities or other
consideration shall be payable or paid or delivered under this Agreement in
exchange for such Prime Stock; and
2
<PAGE>
(2) Subject to Section 1.03(a)(1), outstanding shares of Prime
Stock held as of the Effective Time by each Prime Shareholder shall be converted
in accordance with the New Jersey Act and the Pennsylvania Law into the right to
receive whole shares of Summit Stock and cash in lieu of fractional shares of
Summit Stock as follows: the aggregate number of shares of Prime Stock held by
each Prime Shareholder shall be multiplied by the Exchange Ratio (as defined at
Section 1.03(c) below) and (i) a Prime Shareholder shall become entitled to
receive whole shares of Summit Stock pursuant to this Section 1.03(a)(2) equal
in number to the whole number which results from the foregoing multiplication,
and (ii) a Prime Shareholder shall become entitled to receive cash pursuant to
this Section 1.03(a)(2) in lieu of a fractional share of Summit Stock, if any,
equal in amount to the product obtained by multiplying the fraction, if any,
which results from the foregoing multiplication by the closing price of one
share of Summit Stock on the New York Stock Exchange ("NYSE") Composite
Transactions List (as reported in The Wall Street Journal or, in the absence
thereof, as reported by another authoritative source mutually agreed upon by
Prime and Summit) on the last trading day ending prior to the Effective Time
("Cash In Lieu Amount"). (The shares of Summit Stock issuable in accordance with
this Section 1.03(a)(2) are sometimes referred to herein as the "Shares"). (The
Shares and any Cash In Lieu Amounts payable in the Reorganization, both adjusted
as and if necessary in accordance with Section 1.03(b), are sometimes
collectively referred to herein as the "Reorganization Consideration").
(b) In the event that, from the date hereof to the Effective Time, the
outstanding Summit Stock shall have been increased, decreased, changed into or
exchanged for a different number or kind of shares or securities through
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or there occur other like changes in the outstanding shares
of Summit Stock ("Capital Change"), the Exchange Ratio and, if necessary, the
form and amount of Summit capital stock issuable in the Reorganization in
exchange for Prime Stock shall be appropriately adjusted to give effect to the
Capital Change.
(c) The "Exchange Ratio" is hereby defined to be six hundred seventy-five
thousandths (.675).
(d) Summit agrees that any Summit Rights issued pursuant to the Summit
Rights Agreement shall be issued with respect to each share of Summit Stock
issued pursuant to the terms hereof under the terms of such Summit Rights
Agreement prior to the Effective Time, as well as to take all action necessary
or advisable to enable the holder of each such share of Summit Stock to obtain
the benefit of such Summit Rights Agreement notwithstanding their prior
distribution, including, without limitation, amendment of the Summit Rights
Agreement.
Section 1.04. Reservation of Summit Stock; Issuance of Shares Pursuant to
the Reorganization. Summit shall reserve and make available for issuance to
holders of Prime Stock in connection with the Reorganization, on the terms and
subject to the conditions of this Agreement, sufficient shares of Summit Stock
to effect the conversion contemplated by Section 1.03 and related terms of this
Agreement, which shares, when issued and delivered, will be duly authorized,
legally and validly issued, fully paid and non-assessable and subject to no
preemptive rights. Upon the terms and subject to the conditions of this
Agreement, particularly Sections 1.03 and 1.07, Summit shall issue the Shares
after the Effective Time to Prime Shareholders.
3
<PAGE>
Section 1.05. Exchange Agent Arrangements. Prior to the Effective Time,
Summit shall appoint Equiserve - First Chicago Trust Division, or another entity
reasonably satisfactory to Prime, as the exchange agent ("Exchange Agent")
responsible for exchanging, in connection with and upon consummation of the
Reorganization and subject to Sections 1.03 and 1.07, certificates representing
whole shares of Summit Stock ("Summit Certificates") and Cash In Lieu Amounts
for certificates representing shares of Prime Stock ("Prime Certificates") and
Summit shall deliver to the Exchange Agent sufficient Summit Certificates and
cash as shall be required to satisfy Summit's obligations to Prime Shareholders
under Section 1.07(c), prior to the time such obligations arise.
Section 1.06. Effective Time. In the event that pursuant to the
Reorganization Election Summit elects the Reorganization method provided for at
Section 1.01(a)(1), the "Effective Time" of the Reorganization shall be the hour
and the date specified in the certificate of merger of Summit and Prime filed
with the Secretary of State of the State of New Jersey in accordance with
Section 14A:10-4.1 of the New Jersey Act ("NJ Certificate") and the articles of
merger filed with the Department of State of the Commonwealth of Pennsylvania
("Pennsylvania Articles") in accordance with Section 1927 of the Pennsylvania
Law, which such hour and date shall be identical in both the NJ Certificate and
the Pennsylvania Articles. In the event that pursuant to the Reorganization
Election Summit elects the Reorganization method provided for at Section
1.01(a)(2), the "Effective Time" of the Reorganization shall be the date and
time specified in Exhibit A or determined in accordance with Exhibit A.
Section 1.07. Exchange of Prime Certificates.
(a) After the Effective Time and subject to Section 1.07(c) below, each
Prime Shareholder (except as provided otherwise in Section 1.03(a)(1) above),
upon surrender to the Exchange Agent of all Prime Certificates registered to the
Prime Shareholder, shall be entitled to receive in exchange therefor a Summit
Certificate representing the number of whole shares of Summit Stock such Prime
Shareholder becomes entitled to receive pursuant to Section 1.03(a)(2) and the
Cash In Lieu Amount, payable by check, such Prime Shareholder may become
entitled to receive pursuant to Section 1.03(a)(2). Until so surrendered,
outstanding Prime Certificates held by each Prime Shareholder, other than Prime
Certificates governed by Section 1.03(a)(1), shall be deemed for all purposes
(other than as provided below with respect to unsurrendered Prime Certificates
and Summit's right to refuse payment of dividends or other distributions, if
any, in respect of Summit Stock) to represent only the right to receive the
number of whole shares of Summit Stock and the Cash In Lieu Amount, if any,
without interest, determined in accordance with Section 1.03(a)(2). Until so
surrendered, Summit may, at its option, refuse to pay to the holders of the
unsurrendered Prime Certificates dividends or other distributions, if any, on
Summit Stock declared after the Effective Time; provided, however, that upon the
surrender and exchange of Prime Certificates following a dividend or other
distribution on Summit Stock there shall be paid to such Prime Shareholders the
amount, without interest, of dividends and other distributions, if any, which
became payable prior to such surrender and exchange but which were not paid.
(b) Holders of Prime Certificates as of the Effective Time shall cease to
be, and shall have no further rights as, shareholders of Prime.
(c) As promptly as practicable, but in no event more than 10 days, after
the Exchange Agent receives an accurate and complete list of all holders of
record of outstanding Prime Stock as of the Effective Time ("Prime
Shareholders") (including the address and social security number of and the
number of shares of Prime Stock held by each Prime Shareholder) from Prime
("Final Shareholder List"), Summit shall cause the Exchange Agent to send to
each Prime Shareholder instructions and transmittal materials for use in
surrendering and exchanging Prime Certificates for the Reorganization
Consideration. Summit shall consult with Prime with respect to the form and
content of the transmittal instructions and materials and incorporate reasonable
suggestions. If Prime Certificates are properly presented to the Exchange Agent
(with proper presentation including satisfaction of all requirements of the
letter of transmittal), Summit shall as soon as practicable, but in no event
more than 10 days, after the later to occur of such presentment or the receipt
by the Exchange Agent of an accurate and complete Final Shareholder List from
Prime cause the Exchange Agent to cancel and exchange Prime Certificates for
Summit Certificates and Cash In Lieu Amounts, if any; provided, however, that if
the Exchange Agent, in order to satisfy its obligations under the Code with
respect to the reporting of dividend income to former shareholders of Prime,
must suspend the exchange process provided for in the second sentence of this
Section 1.07(c) in order to preserve and report the required reporting
information, the 10-day exchange requirement shall be extended 5 business days
for exchanges being processed by the Exchange Agent at the commencement of, or
which are received during, the period of the suspension.
4
<PAGE>
(d) At and after the Effective Time there shall be no transfers on the
stock transfer books of Prime of the shares of Prime Stock which were
outstanding immediately prior to the Effective Time.
Section 1.08. Restated Certificate of Incorporation and By-Laws. In the
event that pursuant to the Reorganization Election Summit elects the
Reorganization method provided for at Section 1.01(a)(1): the Restated
Certificate of Incorporation of Summit in effect immediately prior to the
Effective Time shall be the Restated Certificate of Incorporation of the
corporation surviving the Reorganization ("Surviving Corporation"), except as
duly amended thereafter and except to the extent such is deemed by law to be
affected by the NJ Certificate; and the By-Laws of Summit in effect immediately
prior to the Effective Time shall be the By-Laws of the Surviving Corporation,
except as duly amended thereafter. In the event that pursuant to the
Reorganization Election Summit elects the Reorganization method provided for at
Section 1.01(a)(2), the certificate or articles of incorporation and by-laws of
the Surviving Corporation shall be as set forth in Exhibit A.
Section 1.09. Board of Directors and Officers. In the event that pursuant
to the Reorganization Election Summit elects the Reorganization method provided
for at Section 1.01(a)(1): the Board of Directors of the Surviving Corporation
shall consist of the members of the Board of Directors of Summit at the
Effective Time; the officers of the Surviving Corporation shall consist of the
officers of Summit at the Effective Time; and such directors and officers shall
serve as such for the terms prescribed in the Restated Certificate of
Incorporation and By-Laws of Summit, or as otherwise provided by law or until
their earlier deaths, resignation or removal. In the event that pursuant to the
Reorganization Election Summit elects the Reorganization method provided for at
Section 1.01(a)(2), the members of the Board of Directors and the officers of
the Surviving Corporation shall be as set forth in Exhibit A.
Section 1.10. Prime Stock Options.
(a) At the Effective Time, each Prime Option (as defined in Section
1.10(b) below) shall be deemed to constitute, and shall automatically be
converted on the terms set forth in this Section 1.10 into, options to purchase
Summit Stock and a corresponding number of Summit Rights in the event of the
prior distribution contemplated by Section 1.03(d) ("Converted Options") and
each Converted Option (i) shall immediately vest to the extent the related Prime
Option was vested or as provided in the Prime Stock Compensation Plan (as
defined at Section 2.01(d)(3) below) under which the related Prime Option was
granted and in the stock option agreement by which it was evidenced, and (ii)
shall be administered in all material respects in accordance with the terms and
conditions provided for in the Prime Stock Compensation Plan under which the
related Prime Option was granted and in the stock option agreement by which it
was evidenced. The number of shares of Summit Stock which may be purchased upon
exercise of a particular Converted Option shall be the number of shares of Prime
Stock which would have been issuable upon exercise in full of the related Prime
Option multiplied by the Exchange Ratio and rounded down to the nearest whole
number ("Converted Number"). The exercise price per share of Summit Stock
purchasable upon exercise of a Converted Option shall equal the aggregate
exercise price that would have been payable upon an exercise in full of the
related Prime Option divided by the Converted Number and rounded up to the
nearest ten-thousandth of a dollar. In the event a Capital Change shall occur
prior to the Effective Time, an appropriate adjustment shall be made to the
terms of the Prime Options at the time of the foregoing conversion so that
Converted Options give effect to the Capital Change. Within 45 days after the
receipt by Summit of an accurate and complete list of all holders of Prime
Options, all information about the Prime Options and the holders thereof
(including the address and social security number of each such holder and a
description of the Prime Options held by such holder specifying, at a minimum,
the plan under which issued, type (incentive or nonqualified), grant date,
expiration date, exercise price and the number of shares of Prime Stock subject
thereto) and copies of each form of option agreement, warrant agreement or
letter agreement entered into between Prime and a holder of a Prime Option (all
of the foregoing being collectively referred to as the "Final Option List and
Materials"), Summit shall issue to the holders of such Prime Options appropriate
instruments confirming the rights of such holders with respect to Summit Stock,
on the terms and conditions provided by this Section 1.10, upon surrender of the
outstanding instruments representing such Prime Options; provided, however, that
Summit shall not be obligated to issue any such confirming instruments which
relate to the issuance of Summit Stock, or issue any shares of Summit Stock,
until such time as the shares of Summit Stock issuable upon exercise of
Converted Options shall have been registered with the Securities and Exchange
Commission (the "SEC") pursuant to an effective registration statement and
authorized for listing on the NYSE and for sale by any appropriate state
securities regulators, which such registrations and authorizations Summit shall
use its best efforts to effect within 45 days after Prime shall have delivered
to Summit the Final Option List and Materials, and Summit knows of no reason why
it will not be able to do so. Summit shall use its best efforts to maintain the
effectiveness of such registration statement (and maintain the current status of
the prospectus or prospectuses contained therein) for so long as any Converted
Options remain outstanding. Summit shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of Summit Stock for delivery
upon exercise of Converted Options. Notwithstanding anything in the foregoing to
the contrary, Prime Options intended to qualify as "incentive stock options"
under the Code shall be converted into Converted Options in a manner consistent
with the preservation of such qualification under the Code.
5
<PAGE>
(b) For purposes of this Section 1.10, "Prime Option" is hereby defined
to mean an option relating to the purchase of Prime Stock, and any rights
appurtenant thereto including Equity Based Rights (as defined at Section
2.01(d)(2) below), granted under a Prime Stock Compensation Plan (as defined at
Section 2.01(d)(3) below), outstanding both on the date hereof and at the
Effective Time.
Section 1.11. Additional Actions. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of Prime acquired or to be acquired by the
Surviving Corporation as a result of, or in connection with, the Reorganization
or otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of Prime or otherwise, all such deeds, bills of sale, assignments
and assurances and to take, in the name and on behalf of Prime, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise to carry out this Agreement.
6
<PAGE>
Section 1.12. Unclaimed Reorganization Consideration. If, upon the
expiration of one year following the Effective Time, Reorganization
Consideration remains with the Exchange Agent due to the failure of Prime
Shareholders to surrender and exchange Prime Certificates for Reorganization
Consideration, Summit may, at its election, continue to retain the Exchange
Agent for purposes of the surrender and exchange of Prime Certificates or take
possession of such unclaimed Reorganization Consideration, in which such latter
case, Prime Shareholders who have theretofore failed to surrender and exchange
Prime Certificates shall thereafter look only to Summit for payment of the
Reorganization Consideration and the unpaid dividends and distributions on
Summit Stock declared after the Effective Time, without any interest thereon.
Notwithstanding the foregoing, none of Summit, Prime, the Exchange Agent or any
other person shall be liable to any former holder of shares of Prime Stock for
any property properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
Section 1.13. Lost Prime Certificates. In the event any Prime Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Prime Certificate to be lost, stolen or
destroyed and the posting by such person of a personal, nonsurety bond in such
amount as Summit may determine is reasonably necessary as indemnity against any
claim that may be made against it with respect to such Prime Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed Prime
Certificate the Reorganization Consideration deliverable in respect thereof
pursuant to this Agreement.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF PRIME
Prime represents and warrants to Summit as follows (where an item
required to be disclosed on a Prime Schedule is required to be disclosed on one
or more additional Prime Schedules, or where a copy of an item required to be
attached to a Prime Schedule is required to be attached to one or more
additional Prime Schedules, such disclosure or copy need not be provided on more
than one Prime Schedule provided the Prime Schedules with respect to which the
disclosure or copy is required but not provided contain a cross reference to the
location of the required disclosure or copy in the Prime Schedules which is
clear and unambiguous):
7
<PAGE>
Section 2.01. Organization, Capital Stock.
(a) Each of Prime and its nonbank subsidiaries, including the nonbank
subsidiaries of Bank (as defined in Section 2.01(e) (the term "subsidiary", as
used in this Agreement, shall mean any corporation or other organization of
which 10% or more of the shares or other interests having by their terms
ordinary voting power to elect a majority of the Board of Directors or other
group performing similar functions with respect to such corporation or other
organization is directly or indirectly owned by Prime or a "subsidiary" of
Prime; the term "indirect" ownership means ownership through a succession of one
or more other subsidiaries), all of which are listed, together with their
respective states of incorporation and direct and indirect beneficial owners, on
Prime Schedule 2.01(a), is a corporation duly organized, validly subsisting and
in good standing under the laws of the state of its incorporation, qualified to
transact business under the laws of all jurisdictions where it does business
except where the failure to be so qualified could not reasonably be expected to
have a material adverse effect on (i) the business, results of operations,
assets or financial condition of Prime and its subsidiaries on a consolidated
basis, or (ii) the ability of Prime to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement ("Prime Material
Adverse Effect"). However, a Prime Material Adverse Effect or Prime Material
Adverse Change (as defined at Section 2.03 below) will not include a change
resulting from a change in law, rule, regulation, generally accepted or
regulatory accounting principle or other matter affecting banking institutions
or their holding Companies generally or from charges or expenses incident to the
Reorganization. Each of Prime and its nonbank subsidiaries has all corporate
power and authority and all material licenses, franchises, certificates, permits
and other governmental authorizations which are legally required to own and
lease its properties and assets, to occupy its premises and to engage in its
business and activities as presently engaged in, and each has complied in all
material respects with all applicable laws, regulations and orders.
(b) Prime is registered as a Bank holding Company under the Bank Holding
Company Act of 1956, as amended ("BHCA").
(c) Prime or one of its subsidiaries is the holder and beneficial owner
of all of the outstanding capital stock of all of Prime's direct and indirect
nonbank subsidiaries.
(d) (1) The authorized capital stock of Prime consists of 13,000,000
shares of Common Stock, par value $1.00 per share, of which 10,984,833 shares
are issued and outstanding as of the date hereof, and 2,000,000 shares of
Preferred Stock, par value $1.00 per share, of which no shares are issued or
outstanding. All issued and outstanding shares of the capital stock of Prime and
of each of its nonbank subsidiaries have been fully paid, were duly authorized
and validly issued, are nonassessable and have been issued pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act") or to the best of Prime's knowledge an appropriate
exemption from registration under the Securities Act and were not issued in
violation of the preemptive rights of any shareholder.
(2) Except as set forth in Section 2.01(d)(1), all Equity
Securities (as defined at Section 2.01(d)(4) below) of Prime and its nonbank
subsidiaries outstanding, in existence, the subject of an agreement or reserved
for issuance ("Current Equity Securities"), and all rights or entitlements
appurtenant to, based upon, derived from or valued based on the performance or
value of Equity Securities of Prime outstanding, in existence, the subject of an
agreement or reserved for issuance ("Equity Based Rights") are listed on Prime
Schedule 2.01(d)(2) and all significant information relating to such Current
Equity Securities (other than Common Stock) and Equity Based Rights is listed on
Prime Schedule 2.01(d)(2) including without limitation, where applicable, name
of holder, address and relationship to Prime if not an employee of Prime or a
subsidiary, date of grant, award or issuance, expiration dates, vesting dates,
the Prime Stock Plan (as defined in Section 2.01(d)(3) below) under which
granted, awarded or issued, any intended qualification or nonqualification or
other status under the Code, those Current Equity Securities or Equity Based
Rights granted in tandem with other Current Equity Securities or Equity Based
Rights, exercise price, number of shares, valuation formula and performance
goals. All Current Equity Securities have been (to the extent such is capital
stock or similar equity interest) fully paid, were duly authorized and validly
issued, are (to the extent such is capital stock or similar equity interest)
nonassessable and have been issued pursuant to an effective registration
statement under the Securities Act or to the best of Prime's knowledge an
appropriate exemption from registration under the Securities Act and were not
issued in violation of the preemptive rights of any shareholder.
8
<PAGE>
(3) All agreements, contracts, plans and arrangements, whether
oral or written or formal or informal, pursuant to which Current Equity
Securities or Equity Based Rights were granted, awarded or issued or which
provide for the granting, awarding or issuance of Equity Securities or Equity
Based Rights or are relevant in any fashion to Current Equity Securities or
Equity Based Rights ("Prime Stock Plan") are listed in Prime Schedule
2.01(d)(3). All Prime Stock Plans constituting a compensatory contract, plan or
arrangement ("Prime Stock Compensation Plan"), including all amendments thereto,
are separately identified on Prime Schedule 2.01(d)(3) and except as disclosed
thereon have been duly approved by the shareholders of Prime and such approvals
have been obtained in compliance with all applicable laws and with all
applicable regulations of governmental or self-regulatory authorities.
(4) "Equity Securities" of an issuer means (i) the capital stock
or other equity securities or equity interests of such issuer, (ii) options,
warrants, scrip, interests in, rights (including preemptive rights) to subscribe
to, purchase or acquire, calls on or commitments of any character whatsoever
relating to, or securities or rights convertible into or exchangeable for,
capital stock or other equity securities or equity interests or any security or
right convertible into or exchangeable for the capital stock or other equity
security or equity interests of such issuer, and (iii) contracts, commitments,
obligations, agreements, understandings or arrangements entitling anyone to
acquire from the issuer, or by which such issuer is or may become bound to
issue, capital stock or other equity security or equity interest or any security
or right convertible into or exchangeable for the capital stock or other equity
security or equity interest of such issuer.
(e) Prime owns no Bank subsidiary other than the Prime Bank ("Bank").
("Bank" is hereby defined to include commercial Banks, savings Banks, private
Banks, trust Companies, savings and loan associations, building and loan
associations and similar institutions receiving deposits and making loans). Bank
is a Bank duly organized, validly subsisting, and in good standing under the
laws of the jurisdiction of its organization and is qualified to transact
business under the laws of all jurisdictions where the failure to be so
qualified would be likely to have a Prime Material Adverse Effect. Bank is duly
authorized to conduct all activities and exercise all powers of a commercial
Bank contemplated by the laws of its jurisdiction of organization. Bank is an
insured Bank as defined in the Federal Deposit Insurance Act, and has all
corporate power and authority and all material licenses, franchises,
certificates, permits and other governmental authorizations which are legally
required to own and lease its properties and assets, to occupy its premises, and
to engage in its business and activities as presently engaged in, and has
complied in all material respects with all applicable laws, regulations and
orders.
(f) The authorized and outstanding capital stock of Bank is as set forth
on Prime Schedule 2.01(f). Prime is the holder and beneficial owner of all of
the issued and outstanding Equity Securities of Bank. All issued and outstanding
shares of the capital stock of Bank have been fully paid, were duly authorized
and validly issued, are non-assessable, and were not issued in violation of the
preemptive rights of any shareholder. All Equity Securities of Bank outstanding,
in existence, the subject of an agreement or reserved for issuance are described
in all material respects on Prime Schedule 2.01(f).
9
<PAGE>
(g) All Equity Securities of its direct and indirect subsidiaries
beneficially owned by Prime or a subsidiary of Prime are held free and clear of
any claims, liens, encumbrances or security interests.
Section 2.02. Financial Statements. The financial statements (and related
notes and schedules thereto) contained in or incorporated by reference into
Prime's (a) annual report to shareholders for the fiscal year ended December 31,
1997, (b) annual report on Form 10-K filed pursuant to the Securities Exchange
Act of 1934, as amended ("Exchange Act") for the fiscal year ended December 31,
1997 and (c) quarterly reports on Form 10-Q filed pursuant to the Exchange Act
for the fiscal quarters ended March 31, 1998, June 30, 1998 and September 30,
1998 and the financial statements (and related notes and schedules thereto)
contained in Prime's draft annual report to shareholders for the fiscal year
ended December 31, 1998 attached hereto as Prime Schedule 2.02 (all of the
foregoing financial statements being collectively referred to as the "Prime
Financial Statements") are true and correct in all material respects as of their
respective dates and each fairly presents in all material respects (subject, in
the case of unaudited statements, to recurring audit adjustments normal in
nature and amount), in accordance with generally accepted accounting principles,
the consolidated statements of condition, income, changes in stockholders'
equity and cash flows of Prime and its subsidiaries at its respective date and
for the period to which it relates, except as may otherwise be described therein
and except that, in the case of unaudited statements, no consolidated statements
of changes in stockholders' equity are included. The Prime Financial Statements
do not, as of the dates thereof, include any material asset or omit any material
liability, absolute or contingent, or other fact, the inclusion or omission of
which renders the Prime Financial Statements, in light of the circumstances
under which they were made, misleading in any respect.
Section 2.03. No Conflicts. Except as set forth on Prime Schedule 2.03,
Prime and each of its subsidiaries is not in violation or breach of or default
under, and has received no notice of violation, breach, revocation or threatened
or contemplated revocation of or default or denial of approval under, nor will
the execution, delivery and performance of this Agreement by Prime, or the
consummation of the transactions contemplated hereby including the
Reorganization by Prime upon the terms provided herein (assuming receipt of the
Required Consents, as that term is defined in Section 4.01), violate, conflict
with, result in the breach of, constitute a default under, give rise to a claim
or right of termination, cancellation, revocation of, or acceleration under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
of the material rights, permits, licenses, assets or properties of Prime or any
of its subsidiaries or upon any of the Equity Securities of Prime or any of its
subsidiaries, or constitute an event which could, with the lapse of time, action
or inaction by Prime or any of its subsidiaries or a third party, or the giving
of notice and failure to cure, result in any of the foregoing, under any of the
terms, conditions or provisions, as the case may be, of:
(i) the certificate or articles of incorporation or articles of
association, as appropriate, or by-laws of Prime or any of its subsidiaries;
(ii) any applicable law, statute, rule, ruling, determination, ordinance
or regulation of or agreement with any governmental or regulatory authority;
10
<PAGE>
(iii) any judgment, order, writ, award, injunction or decree of any court
or other governmental authority; or
(iv) any material note, bond, mortgage, indenture, lease, policy of
insurance or indemnity, license, contract, agreement or other instrument;
to which Prime or any of its subsidiaries is a party or by which Prime or any of
its subsidiaries or any of their assets or properties are bound or committed,
the consequences of which individually or in the aggregate would result in a
material adverse change in the business, results of operations, assets or
financial condition of Prime and its subsidiaries, on a consolidated basis, from
that reflected in the Prime Financial Statements as of and for the year ended
December 31, 1998 ("Prime Material Adverse Change"), or enable any person to
enjoin the transactions contemplated hereby.
Section 2.04. Absence of Undisclosed Liabilities. Except as set forth on
Schedule 2.04, Prime and its subsidiaries have no liabilities, whether
contingent or absolute, direct or indirect, matured or unmatured (including but
not limited to liabilities for federal, state and local taxes, penalties,
assessments, lawsuits or claims against Prime or any of its subsidiaries), and
no loss contingency (as defined in Statement of Financial Accounting Standards
No. 5), other than (a) those reflected in the Prime Financial Statements or
disclosed in the notes thereto, (b) commitments made by Prime or any of its
subsidiaries in the ordinary course of its business, and (c) liabilities arising
in the ordinary course of its business since December 31, 1998, which are not in
the aggregate material to Prime and its subsidiaries, on a consolidated basis.
Other than as may be set forth on Prime Schedule 2.04, neither Prime nor any of
its subsidiaries has, since December 31, 1998, become obligated on any debt due
in more than one year from the date of this Agreement in excess of $100,000,
other than intra-corporate debt and deposits received, repurchase agreements and
borrowings from the Federal Home Loan Bank of Pittsburgh entered into in the
ordinary course of business.
Section 2.05. Absence of Litigation; Agreements with Bank Regulators.
There is no outstanding order, injunction or decree of any court or governmental
or self-regulatory body against or affecting Prime or any of its subsidiaries
which materially and adversely affects Prime and its subsidiaries, on a
consolidated basis, and there are no actions, arbitrations, claims, charges,
suits, investigations or proceedings (formal or informal) material to Prime and
its subsidiaries, on a consolidated basis, pending or, to the best of Prime's
knowledge, threatened, against or involving Prime or any of its subsidiaries or
their officers or directors (in their capacity as such) in law or equity or
before any court, panel or governmental agency, except as may be disclosed in
the Forms 10-K and 10-Q of Prime referred to in Section 2.02 or set forth in
Prime Schedule 2.05. Except as set forth on Prime Schedule 2.05, neither Prime
nor any subsidiary of Prime is a party to any agreement or memorandum of
understanding with, or is a party to any commitment letter to, or has submitted
a board of directors resolution or similar undertaking to, or is subject to any
order or directive by, or is a recipient of any extraordinary supervisory letter
from, any governmental or regulatory authority which restricts materially the
conduct of its business, or in any manner relates to material statutory or
regulatory noncompliance discovered in any regulatory examinations, its capital
adequacy, its credit or reserve policies or its management. Except as set forth
on Prime Schedule 2.05, neither Prime nor any subsidiary of Prime has been
advised by any governmental or regulatory authority that it is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any of the foregoing. Neither Prime nor any subsidiary of Prime has
failed to resolve to the satisfaction of the applicable regulatory agency any
significant deficiencies cited by any such agency in its most recently completed
examination of each aspect of Prime's or a Prime subsidiary's business nor has
Prime or any subsidiary of Prime been advised of any significant deficiencies by
any such agency in connection with any current examination of either Prime or a
subsidiary of Prime by any such agency.
11
<PAGE>
Section 2.06. Brokers' Fees. Prime has entered into this Agreement with
Summit as a result of direct negotiations without the assistance or efforts of
any finder, broker, financial advisor or investment banker, other than Fox-Pitt,
Kelton Inc. ("Fox-Pitt"). Prime Schedule 2.06 consists of true and complete
copies of all agreements between Prime and Fox-Pitt with respect to the
transactions contemplated by this Agreement or similar transactions.
Section 2.07. Regulatory Filings. All filings made by Prime and its
subsidiaries after December 31, 1995 with the SEC and the appropriate Bank
regulatory authorities did not at the time of filing contain any untrue
statement of a material fact and did not omit to state any material fact
required to be stated herein or therein or necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading. To the extent such filings were subject to the Securities Act or
Exchange Act, such filings complied in all material respects with the Securities
Act or Exchange Act, as appropriate, and all applicable rules and regulations
thereunder of the SEC or the Federal Bank regulatory agency having securities
regulatory jurisdiction, as appropriate. Each of the financial statements
(including related notes and schedules thereto) contained in or incorporated by
reference into such filings are true and correct in all material respects as of
their respective dates and each fairly presents (subject, in the case of
unaudited statements, to recurring audit adjustments normal in nature and
amount), in accordance with generally accepted accounting principles, the
consolidated statements of condition, income, changes in stockholders' equity
and cash flows of Prime and its subsidiaries at its respective date or for the
period to which it relates, except as may otherwise be described therein and
except that, in the case of unaudited statements, no consolidated statements of
changes in stockholders' equity are included. Except as set forth on Prime
Schedule 2.07, Prime and its subsidiaries have since December 31, 1995, to the
extent legally required, timely made all filings required by the Securities Act
and the Exchange Act, Federal and state banking laws and regulations and the
rules and regulations of the NASD and any other self-regulatory organization,
and have paid all fees and assessments due and payable in connection therewith.
Section 2.08. Corporate Action. Assuming due execution and delivery by
Summit, and subject to the requisite approval by the shareholders of Prime of
this Agreement, the Reorganization and the other transactions contemplated
hereby in accordance with Prime's Articles of Incorporation and the Pennsylvania
Law at a meeting of such holders to be duly called and held, Prime has the
corporate power and is duly authorized by all necessary corporate action to
execute, deliver and perform this Agreement. The Board of Directors of Prime has
taken all action required by law, its Articles of Incorporation, its By-Laws or
otherwise (i) to authorize the execution and delivery of this Agreement and (ii)
for shareholders of Prime to approve this Agreement and the transactions
contemplated hereby including the Reorganization by a simple majority of the
shares entitled to vote at the meeting held in accordance with Section 4.03.
Assuming due execution and delivery by and the enforceability against Summit of
this Agreement, this Agreement is a valid and binding agreement of Prime
enforceable in accordance with its terms except as such enforcement may be
limited by applicable principles of equity, and by bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or other laws of general
applicability presently or hereafter in effect affecting the enforcement of
creditors' rights generally or institutions the deposits of which are insured by
the Federal Deposit Insurance Corporation, or the affiliates of such
institutions. The Board of Directors of Prime in authorizing the execution of
this Agreement has determined to recommend to the shareholders of Prime the
approval of this Agreement, the Reorganization and the other transactions
contemplated hereby.
12
<PAGE>
Section 2.09. Absence of Changes. There has not been, since December 31,
1998, any Prime Material Adverse Change except as may be set forth in Prime
Schedule 2.09. Except as may be set forth in Prime Schedule 2.09, neither Prime
nor any of its subsidiaries has since December 31, 1998: (a) (i) declared, set
aside or paid any dividend or other distribution in respect of its Equity
Securities, other than dividends from subsidiaries to Prime or other
subsidiaries of Prime, and an ordinary cash dividend to Prime shareholders of
$0.11 per share or less per fiscal quarter, or, (ii) directly or indirectly
purchased, redeemed or otherwise acquired any shares of any Equity Securities;
(b) incurred current liabilities since that date other than in the ordinary
course of business; (c) sold, exchanged or otherwise disposed of any of their
assets except in the ordinary course of business; (d) made any officers' salary
increase or wage increase not consistent with past practices, entered into any
employment, consulting, severance or change of control contract with any present
or former director, officer or salaried employee, or instituted any employee or
director welfare, bonus, stock option, profit-sharing, retirement, severance or
other benefit plan or arrangement or modified any of the foregoing so as to
increase its obligations thereunder in any material respect; (e) suffered any
taking by condemnation or eminent domain or other damage, destruction or loss in
excess of $75,000, whether or not covered by insurance, adversely affecting its
business, property or assets, or waived any rights of value in excess of
$75,000; (f) entered into transactions other than in the ordinary course of
business which in the aggregate exceeded $150,000; or (g) acquired assets or
capital stock of another Company of whatsoever amount, except in a fiduciary
capacity or in the course of securing or collecting loans or leases.
Section 2.10. Allowance for Credit Losses. At December 31, 1998 and
thereafter the allowances for credit losses of Prime and its subsidiaries were
and are adequate in all material respects to provide for all losses on loans and
leases outstanding and, to the best of Prime's knowledge, the loan and lease
portfolios of Prime in excess of such allowances are collectible in the ordinary
course of business. Prime Schedule 2.10 constitutes a list of all loans and
leases made by Prime or any of its subsidiaries that have been "classified" as
to quality by any internal or external auditor, accountant or examiner, and such
list is accurate and complete in all material respects.
Section 2.11. Taxes and Tax Returns. Subject to the exceptions set forth
on Prime Schedule 2.11:
13
<PAGE>
Neither Prime nor any of its subsidiaries has at any time filed a consent
pursuant to Section 341(f) of the Code or consented to have the provisions of
Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset
(as such term is defined in Section 341(f)(4) of the Code) owned by Prime or any
of its subsidiaries. None of the property being acquired by Summit or its
subsidiaries in the Reorganization is property which Summit or its subsidiaries
will be required to treat as being owned by any other person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately prior to the enactment of the Tax Reform Act of 1986
or is "tax-exempt use property" within the meaning of Section 168(h)(1) of the
Code. All amounts required to be withheld have been withheld from employees by
Prime and each of its subsidiaries for all periods in compliance with the tax,
social security, unemployment and other applicable withholding provisions of
applicable federal, state and local law. All federal, state and local returns
(as defined below) required to be filed have been timely filed by Prime and each
of its subsidiaries for all periods for which returns were due, including with
respect to employee income tax withholding, social security, unemployment and
other applicable taxes (as defined below), are accurate, and the amounts shown
thereon to be due and payable, as well as any interest, additions, and penalties
due with respect to completed and settled examinations or concluded litigation
relating to Prime or any of its subsidiaries, have been paid in full or adequate
provision therefor has been included on the books of Prime or its appropriate
subsidiary. Neither Prime nor any of its subsidiaries is required to file tax
returns with any state other than the Commonwealth of Pennsylvania. Provision
has been made on the books of Prime or its appropriate subsidiary for all unpaid
taxes, whether or not disputed, that may become due and payable by Prime or any
of its subsidiaries in future periods in respect of transactions, sales or
services occurring or performed prior to the date of this Agreement. The
Internal Revenue Service ("IRS") has never audited the consolidated federal
income tax returns of Prime and the Commonwealth of Pennsylvania has never
audited the Pennsylvania income tax returns of Prime and its subsidiaries.
Neither Prime nor any of its subsidiaries is subject to an audit or review of
its tax returns by any state other than the Commonwealth of Pennsylvania or the
State of Delaware. Neither Prime nor any of its subsidiaries is currently a
party to any tax sharing or similar agreement with any third party. There are no
material matters, claims, assessments, examinations, notices of deficiency,
demands for taxes, refund litigation, proceedings, audits or proposed
deficiencies pending or, to the best of Prime's knowledge, threatened against
Prime or any of its subsidiaries, including a claim or assessment by any
authority in a jurisdiction where Prime or any of its subsidiaries do not file
tax returns and Prime or any such subsidiary is subject to taxation, and there
have been no waivers of statutes of limitations or agreements related to
assessments or collection in respect of any federal, state or local taxes.
Neither Prime nor any of its subsidiaries has agreed to or is required to make
any adjustment pursuant to Section 481(a) of the Code by reason of a change in
accounting method initiated by Prime or any of its subsidiaries, and neither
Prime nor any of its subsidiaries has any knowledge that the IRS has proposed
any such adjustment or change in accounting method. Prime and its subsidiaries
have complied in all material respects with all requirements relating to
information reporting, including tax identification number reporting, and
withholding (including back-up withholding) and other requirements relating to
the reporting of interest, dividends and other reportable payments under the
Code and state and local tax laws and the regulations promulgated thereunder and
other requirements relating to reporting under federal law including record
keeping and reporting on monetary instruments transactions.
For purposes of this Agreement, "taxes" shall mean all taxes, charges,
fees, levies, penalties or other assessments imposed by any United States
Federal, state, local, or foreign taxing authority, including, but not limited
to, income, excise, property, sales, transfer, franchise, payroll, withholding,
social security or other taxes, including any interest, penalties or additions
attributable thereto; and "return" shall mean any return, report, information
return or other documents (including any related or supporting information) with
respect to taxes.
Section 2.12. Properties. Except as set forth in Prime Schedule 2.12,
Prime has, directly or through its subsidiaries, good and marketable title to
all of its properties and assets, tangible and intangible, including those
reflected in the Prime Financial Statements (except individual properties and
assets disposed of since December 31, 1998 in the ordinary course of business),
which properties and assets are not subject to any mortgage, pledge, lien,
charge or encumbrance other than as reflected in the Prime Financial Statements
or which in the aggregate do not materially adversely affect or impair the
operation of Prime and its subsidiaries on a consolidated basis. Prime and each
of its subsidiaries enjoys peaceful and undisturbed possession under all
material leases under which it is the lessee, where the failure to enjoy such
peaceful and undisturbed possession would be likely to have a Prime Material
Adverse Effect, and none of such leases contains any unusual or burdensome
provision which would be likely to materially and adversely affect or impair the
operations of Prime and its subsidiaries, on a consolidated basis.
14
<PAGE>
Section 2.13. Condition of Properties; Insurance. All real and tangible
personal properties owned or leased by Prime or any of its subsidiaries are in a
good state of maintenance and repair, are in good operating condition, subject
to normal wear and tear, conform (as to owned properties only) in all material
respects to all applicable ordinances, regulations and zoning laws, and are
adequate for the business conducted by Prime or such subsidiary subject to
exceptions which are not, in the aggregate, material to Prime and its
subsidiaries, on a consolidated basis. Prime and each of its subsidiaries
maintains insurance (with Companies which, to the best of Prime's knowledge, are
approved by all appropriate state insurance regulators to sell such insurance
where purchased by Prime) against loss relating to such properties and to the
best of Prime's knowledge such other risks as Companies engaged in similar
business located in Pennsylvania, would, in accordance with good business
practice, be customarily insured in amounts which are customary, usual and
prudent for corporations or Banks, as the case may be, of their size. Such
policies are in full force and effect and are carried in an amount and form and
are otherwise adequate to protect Prime and each of its subsidiaries from any
adverse loss resulting from risks and liabilities reasonably foreseeable at the
date hereof, and are disclosed on Prime Schedule 2.13. All material claims
thereunder have been filed in a due and timely fashion. Since December 31, 1994,
neither Prime nor any of its subsidiaries has been refused insurance for which
it has applied or had any policy of insurance terminated (other than at its
request) nor has Prime or any subsidiary received notice from any insurance
carrier that (i) such insurance will be canceled or that coverage thereunder
will be reduced or eliminated or (ii) premium costs with respect to such
insurance will be increased, other than premium increases in the ordinary course
of business applicable on their terms to all insureds.
Section 2.14. Contracts.
(a) Except as set forth in Prime Schedule 2.14(a), neither Prime nor any
of its subsidiaries is a party to and neither they nor any of their assets are
bound by any written or oral lease or license with respect to any property, real
or personal, as tenant or licensee involving an annual consideration in excess
of $75,000.
(b) Except as set forth in, and, in Prime Schedule 2.03 or Prime Schedule
2.14(b), neither Prime nor any of its subsidiaries is a party to and neither
they nor any of their assets are bound by any written or oral: (i) employment or
severance contract (including, without limitation, any Prime bargaining contract
or union agreement) or other agreement with any director or any officer or other
employee of Prime or any subsidiary, the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a transaction
involving Prime or any of its subsidiaries of the nature contemplated by this
Agreement which is not terminable without penalty by Prime or a subsidiary, as
appropriate, on 60 days or less notice; (ii) contract or commitment for capital
expenditures in excess of $75,000 for any one project or in excess of $150,000
in the aggregate for all projects; (iii) contract or commitment whether for the
purchase of materials or supplies or for the performance of services involving
consideration in excess of $75,000 (including advertising and consulting
agreements, data processing agreements, and retainer agreements with attorneys,
accountants, actuaries, or other professionals); (iv) contract or option to
purchase or sell any real or personal property, other than to sell OREO
property, involving consideration in excess of $75,000; (v) agreement or plan,
including any stock option plan, stock appreciation rights plan, restricted
stock plan, stock purchase plan, or any other non-qualified compensation plan,
any of the benefits of which will be increased, or the vesting of the benefits
of which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement, (vi) agreement containing covenants that limit the ability of Prime
or any of its subsidiaries to compete in any line of business or with any
person, or that involve any restriction on the geographic area in which or
method by which Prime (including any successor thereof) or any of its
subsidiaries may carry on its business (other than as may be required by law or
any regulatory agency), (vii) agreement which by its terms limits the payment of
dividends by Prime or any of its subsidiaries, (viii) contract (other than this
Agreement) limiting the freedom of Prime or its subsidiaries to engage in any
type of banking or Bank-related business permissible under law; (ix) contract,
plan or arrangement which provides for payments of benefits payable to any
participant therein or party thereto, and which might render any portion of any
such payments or benefits subject to disallowance of deduction therefor as a
result of the application of Section 280G of the Code or (x) any other contract
material to the business of Prime and its subsidiaries, on a consolidated basis,
and not made in the ordinary course of business.
15
<PAGE>
(c) Neither Prime nor any of its subsidiaries is a party to or otherwise
bound by any contract, agreement, plan, lease, license, commitment or
undertaking which, in the reasonable opinion of management of Prime, is
materially adverse, onerous, or harmful to any aspect of the business of Prime
and its subsidiaries, on a consolidated basis.
Section 2.15. Pension and Benefit Plans.
(a) Neither Prime nor any of its subsidiaries maintains an employee
pension benefit plan, within the meaning of Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or has made any
contributions to any such employee pension benefit plan maintained after
December 31, 1995, except employee pension benefit plans listed in Prime
Schedule 2.15(a) (individually a "Prime Pension Plan" and collectively the
"Prime Pension Plans"). In its present form each Prime Pension Plan complies in
all material respects with all applicable requirements under ERISA and the Code.
Each Prime Pension Plan and the trust created thereunder which is intended to be
qualified and exempt under Sections 401(a) and 501(a) of the Code is so
qualified and exempt, and Prime or the subsidiary whose employees are covered by
such Prime Pension Plan has received from the IRS a determination letter to that
effect and such determination letter may still be relied on. No event has
occurred and there has been no omission or failure to act which would adversely
affect such qualification or exemption. Each Prime Pension Plan has been
administered and communicated to the participants and beneficiaries in all
material respects in accordance with its terms and ERISA. No employee or agent
of Prime or any subsidiary whose employees are covered by a Prime Pension Plan
has engaged in any action or failed to act in such manner that, as a result of
such action or failure, (i) the IRS could revoke, or refuse to issue (as the
case may be), a favorable determination as to such Prime Pension Plan's
qualification and the associated trust's exemption or impose any liability or
penalty under the Code, or (ii) a participant or beneficiary or a
nonparticipating employee has been denied benefits properly due or to become due
under such Prime Pension Plan or has been misled as to his or her rights under
such Prime Pension Plan. No Prime Pension Plan is subject to Section 412 of the
Code or Title IV of ERISA. Except as set forth on Prime Schedule 2.15(c), no
person has engaged in any prohibited transaction involving any Prime Pension
Plan or associated trust within the meaning of Section 406 of ERISA or Section
4975 of the Code. There are no pending or threatened claims (other than routine
claims for benefits) against the Prime Pension Plans or any fiduciary thereof
which would subject Prime or any of its subsidiaries to a material liability.
All reports, filings, returns and disclosures and other communications which
have been required to be made to the participants and beneficiaries, other
employees, the Pension Benefit Guaranty Corporation ("PBGC"), the SEC, the IRS,
the U.S. Department of Labor or any other governmental agency pursuant to the
Code, ERISA, or other applicable statute or regulation have been made in a
timely manner and all such reports, communications, filings, returns and
disclosures were true and correct in all material respects. No liability has
been, or is likely to be, incurred on account of delinquent or incomplete
compliance or failure to comply with such requirements. "ERISA Affiliate" where
used in this Agreement means any trade or business (whether or not incorporated)
which is a member of a group of which Prime is a member and which is under
common control within the meaning of Section 414 of the Code. Neither Prime nor
any of its subsidiaries has any material liability under ERISA or the Code as a
result of its being a member of a group described in Sections 414(b), (c), (m)
or (o) of the Code. Except as set forth in Prime Schedule 2.15(a), there are no
unfunded benefit or pension plans or arrangements, or any individual agreements
whether qualified or not, to which Prime or any of its subsidiaries or ERISA
Affiliates has any obligation to contribute and the present value of all
benefits vested and all benefits accrued under each Prime Pension Plan which is
subject to Title IV of ERISA did not, in each case, as of the last applicable
annual valuation date, exceed the value of the assets of the Prime Pension Plan
allocable to such vested or accrued benefits. No Prime Pension Plan or any trust
created thereunder has been terminated, nor has there been any "reportable
events" with respect to any Prime Pension Plan, as that term is defined in
Section 4043 of ERISA since December 31, 1992. No Prime Pension Plan or any
trust created thereunder has incurred any "accumulated funding deficiency" as
such term is defined in Section 302 of ERISA (whether or not waived). No Prime
Pension Plan is a "multiemployer plan" as that term is defined in Section 3(37)
of ERISA. There has been no change in control of any Prime Pension Plan.
16
<PAGE>
(b) All bonus, deferred compensation, profit-sharing, retirement,
pension, stock option, stock award and stock purchase plans and all other
employee benefit, health and welfare plans, arrangements or agreements,
including without limitation the Prime Stock Compensation Plans and medical,
major medical, disability, life insurance or dental plans covering employees
generally, other than the Prime Pension Plans, maintained by Prime or any of its
subsidiaries with an annual cost in excess of $75,000 (collectively "Prime
Benefit Plans") are listed in Prime Schedule 2.15(b) (unless already listed in
Prime Schedule 2.15(a) or Prime Schedule 2.01(d)(3)) and comply in all material
respects with all applicable requirements imposed by the Securities Act, the
Exchange Act, ERISA, the Code, and all applicable rules and regulations
thereunder. The Prime Benefit Plans have been administered and communicated to
the participants and beneficiaries in all material respects in accordance with
their terms and ERISA, as applicable, and no employee or agent of Prime or any
of its subsidiaries has engaged in any action or failed to act in such manner
that, as a result of such action or failure: (i) the IRS could revoke, or refuse
to issue, a favorable determination as to a Prime Benefit Plan's qualification
and any associated trust's exemption or impose any liability or penalty under
the Code; or (ii) a participant or beneficiary or a nonparticipating employee
has been denied benefits properly due or to become due under the Prime Benefit
Plans or has been misled as to their rights under the Prime Benefit Plans. There
are no pending or threatened claims (other than routine claims for benefits)
against the Prime Benefit Plans which would subject Prime or any of its
subsidiaries to liability. Any trust which is intended to be tax-exempt has
received a determination letter from the IRS to that effect and no event has
occurred which would adversely affect such exemption. All reports, filings,
returns and disclosures required to be made to the participants and
beneficiaries, other employees of Prime or any of its subsidiaries, the PBGC,
the SEC, the IRS, the U.S. Department of Labor and any other governmental agency
pursuant to the Code, ERISA, or other applicable statute or regulation, if any,
have been made in a timely manner and all such reports, filings, returns and
disclosures were true and correct in all material respects. No material
liability has been, or is likely to be, incurred on account of delinquent or
incomplete compliance or failure to comply with such requirements.
17
<PAGE>
(c) There is no pending or, to the best of Prime's knowledge, threatened
litigation, administrative action or proceeding relating to any Prime Benefit
Plan or Prime Pension Plan. There has been no announcement or commitment by
Prime or any subsidiary of Prime to create an additional Prime Benefit Plan or
Prime Pension Plan, or to amend a Prime Benefit Plan or Prime Pension Plan,
except for amendments required by applicable law, which may materially increase
the cost of such Prime Benefit Plan or Prime Pension Plan and, except for any
plans or amendments expressly described on Prime Schedule 2.01(d)(3), Prime
Schedule 2.15(a) or Prime Schedule 2.15(b), Prime and its subsidiaries do not
have any obligations for post-retirement or post-employment benefits under any
Prime Benefit Plan (exclusive of any coverage mandated by the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA") that cannot be amended or
terminated upon more than sixty (60) days' notice without incurring any
liability thereunder. Disclosed on Prime Schedule 2.15(c) with respect to each
Prime Benefit Plan and Prime Pension Plan, to the extent applicable, is (A) the
most recent annual report on the applicable form of the Form 5500 series filed
with the IRS with all the attachments filed, (B) such Prime Benefit Plan or
Prime Pension Plan, including all amendments thereto, (C) each trust agreement
and insurance contract relating to such plan, including amendments thereto, (D)
the most recent summary plan description for such plan, including amendments
thereto, if the plan is subject to Title I of ERISA, (E) the most recent
actuarial report or valuation if such plan is a pension plan and (F) the most
recent determination letter issued by the IRS if such plan is qualified under
Section 401(a) of the Code.
Section 2.16. Fidelity Bonds. Since December 31, 1995, Prime and each of
its subsidiaries has continuously maintained fidelity bonds insuring them
against acts of dishonesty in such amounts as are customary, usual and prudent
for organizations of its size and business. All material claims thereunder have
been filed in a timely fashion. Since December 31, 1992, there has been no
individual claim under such bonds in excess of $1 million and since December 31,
1995 the aggregate amount of all claims under such bonds has not exceeded the
policy limits of such bonds (excluding, except in the case of excess coverage, a
deductible amount of not more than $100,000), neither Prime nor any of its
subsidiaries is aware of any facts which would form the basis of a claim or
claims under such bonds aggregating in excess of the applicable deductible
amounts under such bonds, the cost of which has not been reserved or expensed in
the Prime Financial Statements, and aggregate deductible amounts both incurred
and reserved or expensed since December 31, 1995 have not exceeded $1 million.
Neither Prime nor any of its subsidiaries has reason to believe that its
respective fidelity coverage will not be renewed by its carrier on substantially
the same terms as the existing coverage, except for possible premium increases
unrelated to Prime's and its subsidiaries' past claim experience.
Section 2.17. Labor Matters. Hours worked by and payment made to
employees of Prime and each of its subsidiaries have not been in violation of
the Fair Labor Standards Act or any applicable law dealing with such matters;
and all payments due from Prime and each of its subsidiaries on account of
employee health and welfare insurance have been paid or accrued as a liability
on the books of Prime or its appropriate subsidiary. Prime is in compliance in
all material respects with all other laws and regulations relating to the
employment of labor, including all such laws and regulations relating to Prime
bargaining, discrimination, civil rights, safety and health, plant closing
(including the Worker Adjustment Retraining and Notification Act), workers'
compensation and the collection and payment of withholding and Social Security
and similar taxes. No labor dispute, strike or other work stoppage has occurred
and is continuing or is to its knowledge threatened with respect to Prime or any
of its subsidiaries. Since December 31, 1994, no employee of Prime or any of its
subsidiaries has been terminated, suspended, disciplined or dismissed under
circumstances which could constitute a material claim, suit, action, complaint
or proceeding likely to result in a material liability. No employees of Prime or
any of its subsidiaries are unionized nor has union representation been
requested by any group of employees or any other person within the last two
years. There are no organizing activities involving Prime pending with, or, to
the knowledge of Prime, threatened by, any labor organization or group of
employees of Prime.
18
<PAGE>
Section 2.18. Books and Records. The minute books of Prime and each of
its subsidiaries contain complete and accurate records of and fairly reflect all
actions taken at all meetings of the shareholders and of the boards of directors
and committees thereof and accurately reflect all other corporate action of the
shareholders and the boards of directors and each committee thereof. The books
and records of Prime and each of its subsidiaries fairly and accurately reflect
the transactions to which Prime and each of its subsidiaries is or has been a
party or by which their properties are subject or bound, and such books and
records have been properly kept and maintained.
Section 2.19. Concentrations of Credit. No customer or affiliated group
(as defined by applicable banking laws and regulations) of customers (a) is owed
by Prime or any subsidiary of Prime an aggregate amount equal to more than 10%
of the shareholders' equity of Prime or such subsidiary (including deposits,
other debts and contingent liabilities) or (b) owes to Prime or any of its
subsidiaries an aggregate amount equal to more than 10% of the shareholders'
equity of Prime or such subsidiary (including loans and other debts, guarantees
of debts of third parties, and other contingent liabilities) other than as set
forth in Prime Schedule 2.19.
Section 2.20. Trademarks and Copyrights. Neither Prime nor any of its
subsidiaries has received written notice that the manner in which Prime or any
of its subsidiaries conducts its business including its current use of any
material trademark, trade name, service mark or copyright violates asserted
rights of others in any trademark, trade name, service mark, copyright or other
proprietary right.
Section 2.21. Equity Interests. Neither Prime nor any of its subsidiaries
owns, directly or indirectly, except for the equity interests of Prime in Bank
and the equity interests disclosed on Prime Schedule 2.01(a) and Prime Schedule
2.21, any equity interest, other than by virtue of a security interest securing
an obligation not presently in default, in any Bank, corporation, partnership or
other entity, except: (a) in a fiduciary capacity; or (b) an interest valued at
less than $35,000 acquired in connection with a foreclosure or debt previously
contracted. None of the investments reflected in the consolidated balance sheet
of Prime as of December 31, 1998, and none of such investments made by it or any
of its subsidiaries since December 31, 1998, is subject to any restriction
(contractual or statutory), other than applicable securities laws, that would
materially impair the ability of the entity holding such investment freely to
dispose of such investment at any time, except to the extent any such
investments are pledged in the ordinary course of business (including in
connection with hedging arrangements or programs or reverse repurchase
arrangements) consistent with prudent banking practice to secure obligations of
Prime or any of its subsidiaries.
19
<PAGE>
Section 2.22. Environmental Matters.
(a) Except as disclosed on Prime Schedule 2.22 or as may be disclosed in
the Forms 10-K and 10-Q of Prime referred to in Section 2.02 hereof:
(1) To Prime's actual knowledge, no Hazardous Substances (as
hereinafter defined) have been stored, treated, dumped, spilled, disposed,
discharged, released or deposited at, under or on (1) any property now owned,
occupied, leased or held or managed in a representative or fiduciary capacity
("Present Property") by Prime or any of its subsidiaries, (2) any property
previously owned, occupied, leased or held or managed in a representative or
fiduciary capacity ("Former Property") by Prime or any of its subsidiaries
during the time of such previous ownership, occupancy, lease; holding or
management or (3) any Participation Facility (as hereinafter defined) during the
time that Prime or any of its subsidiaries participated in the management of, or
may be deemed to be or to have been an owner or operator of, such Participation
Facility;
(2) Neither Prime nor any of its subsidiaries has disposed of, or
arranged for the disposal of, Hazardous Substances from any Present Property,
Former Property or Participation Facility, and no owner or operator of a
Participation Facility disposed of, or arranged for the disposal of, Hazardous
Substances from a Participation Facility during the time that Prime or any of
its subsidiaries participated in the management of, or may be deemed to be or to
have been an owner or operator of, such Participation Facility;
(3) To Prime's actual knowledge (with Summit waiving any duty of
inquiry, if applicable), other than loans to known gasoline service stations and
loans to industrial enterprises where the storage of Hazardous Substances occurs
in the normal course of business or is generally permitted by applicable laws,
no Hazardous Substances have been stored, treated, dumped, spilled, disposed,
discharged, released or deposited at, under or on any Loan Property (as
hereinafter defined), nor is there, with respect to any such Loan Property, any
violation of environmental law which could materially adversely affect the value
of such Loan Property to an extent which could prevent or delay Prime or any of
its subsidiaries from recovering the full value of its loan in the event of a
foreclosure on such Loan Property.
(b) Except as disclosed on Prime Schedule 2.22, neither Prime nor any
subsidiary (i) is aware of any investigations contemplated, pending or completed
by any environmental regulatory authority with respect to any Present Property,
Former Property, Loan Property or Participation Facility, (ii) has received any
information requests from any environmental regulatory authority, or (iii) has
been named as a potentially responsible or liable party in any Superfund,
Resource Conservation and Recovery Act, Toxic Substances Control Act or Clean
Water Act proceeding or other equivalent state or federal proceeding.
(c) As used in this Agreement, (a) "Participation Facility" shall mean
any property or facility of which the relevant person or entity (i) has at any
time participated in the management or (ii) may be deemed to be or to have been
an owner or operator, (b) "Loan Property" shall mean any real property in which
the relevant person or entity holds a security interest in an amount greater
than $50,000 and (c) "Hazardous Substances" shall mean (i) any flammable
substances, explosives, radioactive materials, hazardous materials, hazardous
substances, hazardous wastes, toxic substances, pollutants, contaminants and any
related materials or substances specified in any applicable Federal or state law
or regulation relating to pollution or protection of human health or the
environment (including, without limitation, ambient or indoor air, surface
water, groundwater, land surface or subsurface strata) and (ii) friable
asbestos, polychlorinated biphenyls, urea formaldehyde, and petroleum and
petroleum-containing products and wastes.
20
<PAGE>
Section 2.23. Accounting, Tax and Regulatory Matters. Neither Prime nor
any of its subsidiaries has taken or agreed to take any action or has any
knowledge of any fact or circumstance that would (i) prevent the transactions
contemplated hereby from qualifying (A) for pooling-of-interest accounting
treatment, or (B) as a reorganization within the meaning of Section 368(a) of
the Code, or (ii) materially impede or delay receipt of any approval referred to
in Section 4.01 or the consummation of the transactions contemplated by this
Agreement.
Section 2.24. Interest of Management and Affiliates.
(a) All loans presently on the books of Prime or any of its subsidiaries
to present or former directors or executive officers of Prime or any subsidiary
of Prime, or their associates, or any members of their immediate families, have
been made in the ordinary course of business and on the same terms and interest
rates as those prevailing for comparable transactions with others and do not
involve more than the normal risk of repayment or present other unfavorable
features.
(b) Except as set forth and described in Prime Schedule 2.24(b), no
present or former officer or director of Prime or any of its subsidiaries or any
Associated Person (as defined in Section 2.24(d) below):
(1) has any interest in any property, real or personal, tangible
or intangible, used in or pertaining to the business of Prime or any of its
subsidiaries except for the normal rights of a shareholder;
(2) has an agreement, understanding, contract, commitment or
pending transaction relating to the purchase, sale or lease of real or personal
property, goods, materials, supplies or services, whether or not in the ordinary
course of business, with Prime or any of its subsidiaries ("Insider
Agreements");
(3) has received from Prime or any of its subsidiaries any
commitment, whether written or oral, to lend any funds to any such person;
(4) is owed any amounts by Prime or any of its subsidiaries except
for deposits taken in the ordinary course of business and amounts due for normal
compensation or reimbursement of expenses incurred in furtherance of the
business of such person's employer and reimbursable according to a policy of
Prime or such subsidiary, as appropriate, as in effect immediately prior to the
date hereof ("Insider Indebtedness").
(c) Except as set forth in Prime Schedule 2.24(c), the consummation of
the transactions contemplated hereby will not (either alone, or upon the
occurrence of any act or event, the lapse of time, or the giving of notice and
failure to cure) result in any payment (severance or other) or provision of a
benefit becoming due from Prime or any of its subsidiaries or any successor or
assign thereof to any director, officer or employee of Prime or any of its
subsidiaries or any successor or assign of such subsidiary, other than payments
and benefits due under the contracts and agreements set forth in Prime Schedule
2.14(b).
21
<PAGE>
(d) "Associated Person" means (i) any holder of 10% of more of the
outstanding shares of Prime Stock, (ii) any associate (as "associate" is defined
at Rule 14a-1(a) of the SEC) or relative ("relative" for purposes of this
Section 2.24 is defined as any person having a family relationship with the
subject person, as family relationship is defined in the Instruction to
Paragraph 401(d) of Regulation S-K of the SEC) of a present or former director
or executive officer of Prime or any of its subsidiaries, (iii) any entity
controlled, directly or indirectly, individually or in the aggregate, by any
present or former director or executive officer of Prime or any of its
subsidiaries or any relative or associate of any of such persons and (iv) any
entity 25% or more or the equity interests of which are owned individually or in
the aggregate by any present or former director or executive officer of Prime or
any of its subsidiaries or any relative or associate of any of such persons.
Section 2.25 Registration Obligations. Neither the Prime nor any of its
subsidiaries is under any contractual obligation, contingent or otherwise, to
register any of its securities under the Securities Act.
Section 2.26 Corporate Documents. Prime has previously provided Summit
with true and complete copies of the articles or certificate of incorporation
and by-laws, as amended to date, which are currently in full force and effect,
of Prime and of each of its subsidiaries.
Section 2.27 Community Reinvestment Act Compliance. Prime and its
subsidiaries are in substantial compliance with the applicable provisions of the
Community Reinvestment Act of 1977 and the regulations promulgated thereunder,
and received a CRA rating of at least satisfactory as of their last completed
examination. As of the date of this Agreement, Prime has not been advised of the
existence of any fact or circumstance or set of facts or circumstances which, if
true, would cause Prime or any subsidiary to fail to be in substantial
compliance with such provisions.
Section 2.28 Business of Prime. Since December 31, 1998, Prime has
conducted its business only in the ordinary course. For purposes of the
foregoing, Prime has not, since December 31, 1998, controlled expenses through
(i) elimination of employee benefits, (ii) deferral of routine maintenance of
real property or leased premises, (iii) elimination of reserves where the
liability related to such reserve has remained, (iv) reduction of capital
improvements from previous levels, (v) failure to depreciate capital assets in
accordance with past practice or to eliminate capital assets which are no longer
used in the business of Prime, (vi) capitalized loan production expenses other
than in accordance with Statement of Financial Accounting Standard No. 91, or
(vii) extraordinary reduction or deferral of ordinary or necessary expenses.
Section 2.29 Interest Rate Risk Management Instruments.
(a) Set forth on Prime Schedule 2.29(a) is a list as of the date hereof
of all interest rate swaps, caps, floors and option agreements, and other
interest rate risk management arrangements to which Prime or any of its
subsidiaries is a party or by which any of their properties or assets may be
bound.
22
<PAGE>
(b) All such interest rate swaps, caps, floors and option agreements and
other interest rate risk management arrangements to which Prime or any of its
subsidiaries is a party or by which any of their properties or assets may be
bound were entered into the ordinary course of business and, in accordance with
prudent banking practice and applicable rules, regulations and policies of
regulatory authorities and with counterparties believed, at the time entered
into and at the date of this Agreement, to be financially responsible and are
legal, valid and binding obligations of Prime or a subsidiary and are in full
force and effect. Prime and each of its subsidiaries has duly performed in all
material respects all of its obligations thereunder to the extent that such
obligations to perform have accrued, and there are no material breaches,
violations or defaults or allegations or assertions of such by any party
thereunder.
Section 2.30. Takeover Laws; Dissenters' Rights. Prime has taken all
action required to be taken by it in order to exempt this Agreement, the Option
Agreement and the transactions contemplated by each from, and this Agreement,
the Option Agreement and the transactions contemplated by each are exempt from,
the requirements of any "moratorium", "control share", "fair price", "affiliate
transaction", "control transaction", business combination" or other antitakeover
laws and regulations of the Commonwealth of Pennsylvania, including, without
limitation, Chapter 25 of the Pennsylvania Law except Subchapter F, which is
applicable.
Section 2.31. Year 2000 Compliant. To the best knowledge of Prime, all
computer software and hardware owned or licensed by Prime or any of its
subsidiaries is, or Prime has taken or is taking all required steps to be, Year
2000 compliant, which, for purposes of this Agreement, shall mean that the data
outside the range 1900-1999 will be correctly processed in any level of computer
hardware or software including, but not limited to, microcode, firmware,
applications programs, files and databases. All computer software owned or
licensed by Prime is, or Prime has taken steps or is taking steps (including
obtaining warranties from the vendors thereof in respect of compliance) to
ensure that all computer software will be, designed to be used prior to, during
and after the calendar year 2000 AD and such software will operate during each
such time period, without error relating to date data, specifically including
any error relating to, or the product of, date data that represents or
references different centuries or more than one century.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF SUMMIT
Summit represents and warrants to Prime as follows:
Section 3.01. Organization, Capital Stock.
(a) Summit is a corporation duly organized, validly existing and in good
standing under the laws of the State of New Jersey with authorized capital stock
consisting of (i) 390,000,000 shares of Common Stock, par value $.80 per share,
with the Summit Rights attached thereto pursuant to the Rights Agreement, of
which 173,756,531 shares were issued and outstanding as of December 31, 1998 and
(ii) 6,000,000 shares of Preferred Stock, each without par value, of which no
shares are issued and outstanding and 1,500,000 shares of Series R Preferred
Stock are reserved for issuance as of the date hereof
23
<PAGE>
(b) Summit is qualified to transact business in and is in good standing
under the laws of all jurisdictions where the failure to be so qualified could
reasonably be expected to have a material adverse effect on (i) the business,
results of operations, assets or financial condition of Summit and its
subsidiaries on a consolidated basis, or (ii) the ability of Summit to perform
its obligations under, and to consummate the transactions contemplated by, this
Agreement (a "Summit Material Adverse Effect"). However, a Summit Material
Adverse Effect or Summit Material Adverse Change (as defined at Section 3.03)
will not include a change resulting from a change in law, rule, regulation,
generally accepted or regulatory accounting principle or other matter affecting
financial institutions or their holding Companies generally or from charges or
expenses incident to the Reorganization. The Bank subsidiaries of Summit are
duly organized, validly existing and in good standing under the laws of their
jurisdiction of organization. Summit and its Bank subsidiaries have all
corporate power and authority and all material licenses, franchises,
certificates, permits and other governmental authorizations which are legally
required to own and lease their respective properties, occupy their respective
premises, and to engage in their respective businesses and activities as
presently engaged in and each has complied with all applicable laws, regulations
and orders except where the failure to comply would not constitute a Summit
Material Adverse Effect. Summit is duly registered as a Bank holding Company
under the BHCA.
(c) All issued shares of the capital stock of Summit and of each of its
Bank subsidiaries have been fully paid, were duly authorized and validly issued,
are non-assessable, have been issued pursuant to an effective registration
statement under the Securities Act or to the best of Summit's knowledge an
appropriate exemption from registration under the Securities Act and were not
issued in violation of the preemptive rights of any shareholder. Summit or one
of its subsidiaries is the holder and beneficial owner of all of the issued and
outstanding Equity Securities of its Bank subsidiaries. There are no Equity
Securities of Summit outstanding, in existence, the subject of an agreement, or
reserved for issuance, except as set forth at Section 3.01(a) and except for
Summit Stock issuable upon the exercise of employee stock options granted under
stock option plans of Summit, Summit Stock issuable pursuant to Summit's
Dividend Reinvestment and Stock Purchase Plan, Savings Incentive Plan and 1993
Incentive Stock and Option Plan and Series R Preferred Stock issuable pursuant
to the Summit Rights Agreement.
(d) All Equity Securities of its direct and indirect subsidiaries
beneficially owned by Summit or a subsidiary of Summit are held free and clear
of any claims, liens, encumbrances or security interests.
(e) Each Bank subsidiary of Summit is duly authorized to conduct all
activities and exercise all powers of a commercial Bank or savings Bank
contemplated by the laws of its jurisdiction of organization. Each such Bank
subsidiary is an insured Bank as defined in the Federal Deposit Insurance Act.
Section 3.02. Financial Statements. The financial statements (and related
notes and schedules thereto) contained in or incorporated by reference into
Summit's (a) annual report to shareholders for the fiscal year ended December
31, 1997, (b) annual report on Form 10-K pursuant to the Exchange Act for the
fiscal year ended December 31, 1997 and (c) quarterly reports on Form 10-Q filed
pursuant to the Exchange Act for the fiscal quarters ended March 31, 1998, June
30, 1998 and September 30, 1998 (the "Summit Financial Statements") are true and
correct in all material respects as of their respective dates and each fairly
presents in all material respects (subject, in the case of unaudited statements,
to recurring audit adjustments normal in nature and amount), in accordance with
generally accepted accounting principles consistently applied, the consolidated
balance sheets, statements of income, statements of shareholders' equity and
statements of cash flows of Summit and its subsidiaries at its respective date
or for the period to which it relates, except as may otherwise be described
therein and except that, in the case of unaudited statements, no consolidated
statements of changes in stockholders' equity are included. The Summit Financial
Statements do not, as of the dates thereof, include any material asset or omit
any material liability, absolute or contingent, or other fact, the inclusion or
omission of which renders the Summit Financial Statements, in light of the
circumstances under which they were made, misleading in any respect.
24
<PAGE>
Section 3.03. No Conflicts. Summit is not in violation or breach of or
default under, and has received no notice of violation, breach, revocation or
threatened or contemplated revocation of or default or denial of approval under,
nor will the execution, delivery and performance of this Agreement by Summit, or
the consummation of the Reorganization by Summit upon the terms and conditions
provided herein (assuming receipt of the Required Consents), violate, conflict
with, result in the breach of, constitute a default under, give rise to a claim
or right of termination, cancellation, revocation of, or acceleration under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
rights, permits, licenses, assets or properties material to Summit and its
subsidiaries, on a consolidated basis, or upon any of the capital stock of
Summit, or constitute an event which could, with the lapse of time, action or
inaction by Summit, or a third party, or the giving of notice and failure to
cure, result in any of the foregoing, under any of the terms, conditions or
provisions, as the case may be, of:
(i) the Restated Certificate of Incorporation or the By-Laws of
Summit;
(ii) any law, statute, rule, ruling, determination, ordinance, or
regulation of any governmental or regulatory authority;
(iii) any judgment, order, writ, award, injunction, or decree of any
court or other governmental authority; or
(iv) any material note, bond, mortgage, indenture, lease, policy of
insurance or indemnity, license, contract, agreement, or other
instrument;
to which Summit is a party or by which Summit or any of its assets or properties
are bound or committed, the consequences of which would be a material adverse
change in the business, results of operations, assets or financial condition of
Summit and its subsidiaries, on a consolidated basis, from that reflected in the
Summit Financial Statements as of and for the nine months ended September 30,
1998 (a "Summit Material Adverse Change"), or enable any person to enjoin the
transactions contemplated hereby.
Section 3.04. Absence of Litigation, Agreements with Bank Regulators.
There is no outstanding order, injunction, or decree of any court or
governmental or self-regulatory body against or affecting Summit or its
subsidiaries which materially and adversely affects Summit and its subsidiaries,
on a consolidated basis, and there are no actions, arbitrations, claims,
charges, suits, investigations or proceedings (formal or informal) material to
Summit and its subsidiaries, on a consolidated basis, pending or, to Summit's
knowledge, threatened, against or involving Summit or their officers or
directors (in their capacity as such) in law or equity or before any court,
panel or governmental agency, except as may be disclosed in the Forms 10-K and
10-Q of Summit referred to in Section 3.02. Neither Summit nor any Bank
subsidiary of Summit is a party to any agreement or memorandum of understanding
with, or is a party to any commitment letter to, or has submitted a board of
directors resolution or similar undertaking to, or is subject to any order or
directive by, or is a recipient of any extraordinary supervisory letter from,
any governmental or regulatory authority which restricts materially the conduct
of its business, or in any manner relates to its capital adequacy, its credit or
reserve policies or its management. Neither Summit nor any Bank subsidiary of
Summit, has been advised by any governmental or regulatory authority that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any of the foregoing. Summit and the Bank subsidiaries of
Summit have resolved to the satisfaction of the applicable regulatory agency any
significant deficiencies cited by any such agency in its most recent
examinations of each aspect of Summit or such Bank subsidiary's business except
for examinations, if any, received within the 30 days prior to the date hereof
[as to which Summit has not been advised of any significant deficiencies].
25
<PAGE>
Section 3.05. Regulatory Filings. At the time of filing, all filings made
by Summit and its subsidiaries after December 31, 1995 with the SEC and
appropriate Bank regulatory authorities did not contain any untrue statement of
a material fact and did not omit to state any material fact required to be
stated herein or therein or necessary to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading. To the extent such filings were subject to the Securities Act or
Exchange Act, such filings complied in all material respects with the Securities
Act or Exchange Act, as appropriate, and all applicable rules and regulations
thereunder of the SEC. Summit has since December 31, 1995 timely made all
filings required by the Securities Act and the Exchange Act, as appropriate, and
all applicable rules and regulations thereunder of the SEC or the Federal Bank
regulatory agency having securities regulatory jurisdiction, as appropriate.
Each of the financial statements (including related notes and schedules thereto)
contained in or incorporated by reference into such filings are true and correct
in all material respects as of their respective dates and each fairly presents
(subject, in the case of unaudited statements, to recurring audit adjustments
normal in nature and amount), in accordance with generally accepted accounting
principles, the consolidated statements of condition, income, changes in
stockholders' equity and cash flows of Summit and its subsidiaries at its
respective date and for the period to which it relates, except as may otherwise
be described therein and except that in the case of unaudited statements, no
consolidated statements of changes in stockholders equity is included.
Section 3.06. Corporate Action.
(a) Assuming due execution and delivery by Prime, Summit has the
corporate power and is duly authorized by all necessary corporate action to
execute, deliver, and perform this Agreement. The Board of Directors of Summit
has taken all action required by law or by the Restated Certificate of
Incorporation or By-Laws of Summit or otherwise to authorize the execution and
delivery of this Agreement. Approval by the shareholders of Summit of this
Agreement, the Reorganization or the transactions contemplated by this Agreement
is not required by applicable law. Assuming due execution and delivery by and
the enforceability against Prime of this Agreement, this Agreement is a valid
and binding agreement of Summit enforceable in accordance with its terms except
as such enforcement may be limited by applicable principles of equity, and by
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other
laws of general applicability presently or hereafter in effect affecting the
enforcement of creditors' rights generally or institutions the deposits of which
are insured by the Federal Deposit Insurance Corporation, or the affiliates of
such institutions.
26
<PAGE>
(b) In the event that pursuant to the Reorganization Election Summit
elects the Reorganization method provided for at Section 1.01(a)(2), the
Designated Summit Subsidiary will prior to Closing (i) have the corporate power
and be duly authorized by all necessary corporation action to execute, deliver
and perform this Agreement and (ii) the Board of Directors and sole shareholder
of the Designated Summit Subsidiary will have taken all action required by law,
its certificate or articles of incorporation and by-laws and otherwise to
authorize the execution and delivery of this Agreement and to approve this
Agreement and the transactions contemplated hereby including the Reorganization.
Assuming due execution and delivery by and the enforceability against each of
the other parties hereto, this Agreement will be a valid and binding agreement
of the Designated Summit Subsidiary enforceable in accordance with its terms
except as such enforcement may be limited by applicable principles of equity,
and by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium
or other laws of general applicability presently or hereafter in effect
affecting the enforcement of creditors' rights generally or institutions, the
deposits of which are insured by the Federal Deposit Insurance Corporation, or
the affiliates of such institutions.
Section 3.07. Absence of Changes. There has not been, since September 30,
1998, any Summit Material Adverse Change and there is no matter or fact known to
Summit which may result in any such Summit Material Adverse Change in the
future.
Section 3.08 Absence of Undisclosed Liabilities. There are no
liabilities, whether contingent or absolute, direct or indirect, or loss
contingencies (as defined in Statement of Financial Accounting Standards No. 5)
other than (a) disclosed in the Summit Financial Statements or disclosed in the
notes thereto, (b) commitments made by Summit or any of its subsidiaries in the
ordinary course of its business which are not in the aggregate material to
Summit and its subsidiaries, on a consolidated basis, and (c) liabilities
arising in the ordinary course of its business since September 30, 1998 which
are not in the aggregate material to Summit and its subsidiaries, on a
consolidated basis.
Section 3.09. Allowance for Credit Losses. At September 30, 1998 and
thereafter, the allowances for credit losses of Summit and its subsidiaries are
adequate in all material respects to provide for all losses on loans and leases
outstanding, and to the best of Summit's knowledge, the loan and lease
portfolios of Summit and its subsidiaries in excess of such allowances are
collectible in the ordinary course of business.
Section 3.10. Accounting, Tax and Regulatory Matters. Neither Summit nor
any of its subsidiaries has taken or agreed to take any action or has any
knowledge of any fact or circumstance that would (i) prevent the transactions
contemplated hereby from qualifying as a reorganization within the meaning of
Section 368(a) the Code, or (ii) materially impede or delay receipt of any
approval referred to in Section 4.01 or the consummation of the transactions
contemplated by this Agreement.
Section 3.11. Community Reinvestment Act Compliance. Summit and its
subsidiaries are in substantial compliance with the applicable provisions of the
Community Reinvestment Act of 1977 and the regulations promulgated thereunder,
and received a CRA rating of at least satisfactory as of their last completed
examination. As of the date of this Agreement, Summit and its subsidiaries have
not been advised of the existence of any fact or circumstance or set of facts or
circumstances which, if true, would cause Summit or any Bank subsidiary to fail
to be in substantial compliance with such provisions.
27
<PAGE>
Section 3.12. Year 2000 Compliant. To the best knowledge of Summit, all
computer software and hardware owned or licensed by Summit or any of its
subsidiaries is, or Summit has taken or is taking all required steps to be, Year
2000 compliant, which, for purposes of this Agreement, shall mean that the data
outside the range 1900-1999 will be correctly processed in any level of computer
hardware or software including, but not limited to, microcode, firmware,
applications programs, files and databases, except where the failure to be so
compliant would not have a Summit Material Adverse Effect. All computer software
owned or licensed by Summit is, or Summit has taken steps or is taking steps
(including obtaining warranties from the vendors thereof in respect of
compliance) to ensure that all computer software will be designed to be used
prior to, during and after the calendar year 2000 AD and that such software will
operate during each such time period, without error relating to date data,
specifically including any error relating to, or the product of, date data that
represents or references different centuries or more than one century, except
where the failure to be so designed or to so operate would not have a Summit
Material Adverse Effect.
Section 3.13. Beneficial Ownership of Prime Stock. Summit is the
beneficial owner of 106,700 shares of Prime Stock on the date hereof.
ARTICLE IV.
COVENANTS OF PRIME
Prime hereby covenants and agrees with Summit that:
Section 4.01. Preparation of Registration Statement and Applications for
Required Consents. Prime will cooperate with Summit in the preparation of a
Registration Statement on Form S-4 (the "Registration Statement") to be filed
with the SEC under the Securities Act for the registration of the offering of
Summit Stock to be issued as Reorganization Consideration and the proxy
statement-prospectus constituting part of the Registration Statement
("Proxy-Prospectus") that will be used by Prime to solicit shareholders of Prime
for approval of the Reorganization. In connection therewith, Prime will furnish
all financial or other information, including using reasonable best efforts to
obtain customary consents, certificates, opinions of counsel and other items
concerning Prime, deemed reasonably necessary by counsel to Summit for the
filing or preparation for filing under the Securities Act and the Exchange Act
of the Registration Statement (including the Proxy-Prospectus). Prime will
cooperate with Summit and provide such information as may be advisable and
reasonably available to Prime in obtaining an order of effectiveness for the
Registration Statement, appropriate permits or approvals under state securities
and "blue sky" laws, the required approval under the BHCA of the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and any
other governmental or regulatory consents or approvals or the taking of any
other governmental or regulatory action necessary to consummate the
Reorganization that would not have a Summit Material Adverse Effect following
the Reorganization (the "Required Consents"). Summit, reasonably in advance of
making such filings, will provide Prime and its counsel a reasonable opportunity
to comment on such filings and regulatory applications and will give due
consideration to any comments of Prime and its counsel before making any such
filing or application, and Summit will provide Prime and its counsel with copies
of all such filings and applications at the time filed if such filings and
applications are made at any time before the Effective Time. Prime covenants and
agrees that all information furnished in writing by Prime expressly for
inclusion in the Registration Statement, the Proxy-Prospectus, and all
applications to appropriate regulatory agencies for approval of the
Reorganization will comply in all material respects with the provisions of
applicable law, including the Securities Act and the Exchange Act and the rules
and regulations of the SEC thereunder, and together with all information
furnished in writing by Prime to Summit in connection with obtaining Required
Consents will not contain any untrue statement of a material fact and will not
omit to state any material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading. Prime will furnish to Fox-Pitt such information
about Prime reasonably available to it as Fo Pitt may reasonably request for
purposes of the opinion referred to in Section 8.07.
28
<PAGE>
Section 4.02. Notice of Adverse Changes. Prime will promptly advise
Summit in writing of (a) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of Prime contained
in this Agreement or the Prime Schedules or the materials furnished pursuant to
the Post-Signing Document List (as defined in Section 4.09), if made on or as of
the date of such event or the Closing Date, untrue or inaccurate in any material
respect, (b) any Prime Material Adverse Change, (c) any inability or perceived
inability of Prime to perform or comply with the terms or conditions of this
Agreement, (d) the institution or threat of institution of litigation or
administrative proceedings involving Prime or any of its subsidiaries or assets,
which, if determined adversely to Prime or any of its subsidiaries, would have a
Prime Material Adverse Effect or an adverse material effect on the ability of
the parties to timely consummate the Reorganization and the related
transactions, (e) any governmental complaint, investigation, hearing, or
communication indicating that such litigation or administrative proceeding is
contemplated, (f) any written notice of, or other communication relating to, a
default or event which, with notice or lapse of time or both, would become a
default, received by Prime or a subsidiary subsequent to the date hereof and
prior to the Effective Time, under any agreement, indenture or instrument to
which Prime or a subsidiary is a party or is subject and which is material to
the business, operation or condition (financial or otherwise) of Prime and its
subsidiaries on a consolidated basis, and (g) any written notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement including the Reorganization. Prime agrees that the delivery of such
notice shall not constitute a waiver by Summit of any of the provisions of
Articles VI or VII.
Section 4.03. Meeting of Shareholders. Prime will call a meeting of its
shareholders for the purpose of voting upon this Agreement, the Reorganization
and the transactions contemplated hereby. The meeting of Prime shareholders
contemplated by this Section 4.03 will be held as promptly as practicable and,
in connection therewith, will comply with the Pennsylvania Law and the Exchange
Act and all regulations promulgated thereunder governing shareholder meetings
and proxy solicitations. In connection with such meeting, Prime shall mail the
Proxy-Prospectus to Prime shareholders and use its reasonable best efforts to
obtain shareholder approval of this Agreement, the Reorganization and the
transactions contemplated hereby; provided, however, that no director of Prime
shall be obligated to take any action under this Section 4.03 in such person's
capacity as a director which such person reasonably believes on the advice of
counsel to be contrary to his fiduciary duty as a director.
Section 4.04. Copies of Filings. Without limiting the provisions of
Section 4.01, Prime will deliver to Summit, at least 48 hours prior to an
anticipated date of filing or distribution or as soon thereafter as practicable,
all documents to be filed with the SEC or any Bank regulatory authority or to be
distributed in any manner to the shareholders of Prime or to the news media or
to the public, other than the press releases and other information subject to
Section 10.01.
29
<PAGE>
Section 4.05. No Material Transactions. Until the Effective Time, Prime
will not and will not allow any of its subsidiaries to, without the prior
written consent of Summit:
(a) pay (or make a declaration which creates an obligation to pay) any
cash dividends, other than dividends from subsidiaries of Prime to Prime or
other subsidiaries of Prime except that Prime may declare, set aside and pay a
dividend of $0.11 per share of Prime Stock per quarter; provided, however, if
the Effective Time has not occurred by November 30, 1999, Prime shall be
permitted to increase the amount of its quarterly dividend to $.13 per share of
Prime Stock per quarter;
(b) declare or distribute any stock dividend or authorize or effect a
stock split;
(c) merge with, consolidate with, or sell any material asset to any other
corporation, Bank, or person (except for mergers of subsidiaries of Prime into
other subsidiaries of Prime) or enter into any other transaction not in the
ordinary course of the banking business;
(d) except as set forth on Prime Schedule 4.05(d), incur any liability or
obligation other than intraCompany obligations, make or agree to make any
commitment or disbursement, acquire or dispose or agree to acquire or dispose of
any property or asset (tangible or intangible), make or agree to make any
contract or agreement or engage or agree to engage in any other transaction,
except (i) transactions in the ordinary course of business or other transactions
involving not more than $75,000, and (ii) costs and expenses incurred in
connection with the Reorganization and other transactions contemplated by this
Agreement;
(e) subject any of its properties or assets to any lien, claim, charge,
option or encumbrance, except in the ordinary course of business and for amounts
not material in the aggregate to Prime and its subsidiaries, on a consolidated
basis;
(f) except as set forth in Prime Schedule 4.05(f), pay any employee
bonuses or increase or enter into any agreement to increase the rate of
compensation of any employee at the date hereof which is not consistent with
past practices and policies and which when considered with all such increases or
agreements to increase constitutes an average annualized rate not exceeding four
percent (4%);
(g) except as set forth in Prime Schedule 4.05(g), create, adopt or
modify any employment, termination, severance pension, supplemental pension,
profit sharing, bonus, deferred compensation, death benefit, retirement, stock
option, stock award, stock purchase or other employee or director benefit or
welfare plan, arrangement or agreement of whatsoever nature, including without
limitation the Prime Pension Plans and the Prime Benefit Plans (collectively,
"Prime Plans"), or change the level of benefits, reduce eligibility, performance
or participation standards, increase any payment or benefit under any Prime
Plan;
(h) distribute, issue, sell, award, grant, permit to become outstanding
or enter into any agreement respecting any Equity Securities or any Equity Based
Rights except pursuant to the Option Agreement, the Prime Bancorp, Inc.
Directors Deferred Compensation Plan or the exercise of director and employee
stock options and warrants granted prior to the date hereof under the Prime
Stock Compensation Plans and exercisable and outstanding under the terms of a
Prime Stock Compensation Plan at the date of such exercise;
30
<PAGE>
(i) except in a fiduciary capacity, purchase, redeem, retire, repurchase,
or exchange, or otherwise acquire or dispose of, directly or indirectly, any of
its Equity Securities or Equity Based Rights, whether pursuant to the terms of
such Equity Securities or Equity Based Rights or otherwise, or enter into any
agreement providing for any of the foregoing transactions;
(j) amend its certificate or articles of incorporation or articles of
association, as appropriate, charter or by-laws;
(k) modify, amend or cancel any of its existing borrowings other than in
the ordinary course of business and other than intra-corporate borrowings and
borrowings of federal funds from correspondent Banks and the Federal Home Loan
Bank of Pittsburgh or enter into any contract, agreement, lease or
understanding, or any contracts, agreements, leases or understandings other than
those in the ordinary course of business or which do not involve the creation of
any material obligation or release of any material right of Prime or any of its
subsidiaries, on a consolidated basis;
(l) create, amend, increase, enhance, accelerate the exercisability of,
or release or waive any forfeitures, terminations or expirations of or
restrictions on any rights, awards, benefits, entitlements, options or warrants
under the Prime Plans including Equity Securities and Equity Based Rights
outstanding;
(m) make any employer contribution to a Prime Plan which under the terms
of the particular plan is voluntary and within the discretion of Prime to make,
other than regular contributions to Prime's 401(k) Plan and except as provided
for in Prime Schedule 4.05(m);
(n) make any determination or take any action, discretionary or
otherwise, under or with respect to any Prime Plan other than routine
administration in accordance with past precedent;
(o) notwithstanding any other provision of this Agreement, enter into or
amend, renew, extend, give any notice or consent with respect to, waive any
provision under, or accept any new fees, rates or other costs or charges of
whatsoever nature, schedule, exhibit or other attachment under (whether through
an action or inaction) any Insider Agreement or any agreement, understanding,
contract, commitment or transaction relating to any Insider Indebtedness, except
to the extent permitted by Section 4.12 or disclosed in Prime Schedule 2.24(b);
(p) other than in the ordinary course of business and in compliance with
applicable laws and regulations, enter into, increase or renew any loan or
credit commitment (including standby letters of credit) to any executive officer
or director of Prime or any of its subsidiaries, any holder of 10% of more of
the outstanding shares of Prime Stock, or any entity controlled, directly or
indirectly, by any of the foregoing or engage in any transaction with any of the
foregoing which is of the type or nature sought to be regulated in 12 U.S.C.
ss.371c and 12 U.S.C. ss.371c-1. For purposes of this Section 4.05(p), "control"
shall have the meaning associated with that term under 12 U.S.C. ss.371c; or
31
<PAGE>
(q) take or fail to take any discretionary action provided for under the
terms of any plan or agreement affecting one or more directors or employees or
any affiliates of such where the effect of such act or failure to act is or
would be to give or confer a right or benefit not existing on the date hereof.
Section 4.06. Operation of Business in Ordinary Course. Prime, on behalf
of itself and its subsidiaries, covenants and agrees that from and after the
date hereof and until the Effective Time, it and its subsidiaries: (a) will
carry on their business substantially in the same manner as heretofore and will
not institute any unusual or novel methods of management or operation of their
properties or business and will maintain such in their customary manner; (b)
will use their best efforts to continue in effect their present insurance
coverage on all properties, assets, business and personnel; (c) will use their
best efforts to preserve their business organization intact, preserve their
present relationships with customers, suppliers, and others having business
dealings with them, and keep available their present employees, provided,
however, that Prime or any of its subsidiaries may terminate any employee for
unsatisfactory performance or other reasonable business purpose, and provided
further, however, that Prime will notify and consult with Summit prior to
terminating any of the five highest paid employees of Prime; (d) will use their
best efforts to continue to maintain fidelity bonds insuring Prime and its
subsidiaries against acts of dishonesty by each of their employees in such
amounts (not less than present coverage) as are customary, usual and prudent for
corporations or Banks, as the case may be, of their size; and (e) will not
change their methods of accounting in effect at December 31, 1998, or change any
of their methods of reporting income and deductions for Federal income tax
purposes from those employed in the preparation of their Federal income tax
returns for the taxable year ended December 31, 1998, except as required by
changes in laws, regulations or generally accepted accounting principles or
changes that are to a preferable accounting method, and approved in writing by
Prime's independent certified public accountants.
Section 4.07. Further Actions. Prime will: (a) execute and deliver such
instruments and take such other actions as Summit may reasonably require to
carry out the intent of this Agreement; (b) use its reasonable best efforts to
obtain consents of all third parties and governmental bodies necessary or
reasonably desirable for the consummation of the transactions contemplated by
this Agreement; (c) diligently support this Agreement in any proceeding before
any regulatory authority whose approval of any of the transactions contemplated
hereby is required or reasonably desirable or before any court in which
litigation in respect thereof is pending; and (d) use its reasonable best
efforts so that the other conditions precedent to the obligations of Summit set
forth in Articles VI and VII hereof are satisfied.
Section 4.08. Cooperation. Until the Effective Time, Prime will give to
Summit and to its representatives, including its accountants, KPMG Peat Marwick
LLP, and its legal counsel, full access during normal business hours to all of
its property, documents, contracts and records relevant to this Agreement and
the Reorganization, will provide such information with respect to its business
affairs and properties as Summit from time to time may reasonably request, and
will cause its managerial employees, and will use its reasonable best efforts to
cause its counsel and independent certified public accountants, to be available
on reasonable request to answer questions of Summit's representatives covering
the business and affairs of Prime or any of its subsidiaries.
Section 4.09. Copies of Documents. As promptly as practicable, but not
later than 30 days after the date hereof, Prime will furnish to or make
available to Summit all the documents, contracts, agreements, papers, and
writings referred to in the Prime Schedules or called for by the list attached
hereto as Exhibit C (the "Post-Signing Document List"), except where prohibited
by law.
32
<PAGE>
Section 4.10. Applicable Laws. Prime and its subsidiaries will use their
reasonable best efforts to comply promptly with all requirements which federal
or state law may impose on Prime or any of its subsidiaries with respect to the
Reorganization and will promptly cooperate with and furnish information to
Summit in connection with any such requirements imposed upon Summit or on any of
its subsidiaries in connection with the Reorganization.
Section 4.11. Agreements of Affiliated Shareholders. Prime agrees to
furnish to Summit, not later than 10 business days prior to the date of mailing
of the Proxy-Prospectus, a writing setting forth the names of those persons
(which will include all individual and beneficial ownership of Prime Stock by
such persons and also identifies the manner in which all such beneficially owned
shares of Prime Stock are registered on the stock record books of Prime) who in
the written opinion of counsel to Prime (which opinion need not be furnished to
Summit), constitute all the affiliates of Prime for the purposes of Rule 145
under the Securities Act (an "Prime Affiliate"). Prime agrees to use its
reasonable best efforts (i) to cause each Prime Affiliate to enter into an
agreement effective upon the execution thereof, satisfactory in form and
substance to Summit and (y) substantially in the form of Exhibit D-1 with
respect to Affiliates who are directors or officers of Prime or a subsidiary of
Prime, or (z) substantially in the form of Exhibit D-2 with respect to
Affiliates who are not directors or officers of Prime or a subsidiary of Prime
(an "Affiliate Agreement"), and (ii) to furnish such Affiliate Agreements to
Summit no later than 5 business days prior to the date of mailing of the
Proxy-Prospectus.
Section 4.12. Loans and Leases to Affiliates. All loans and leases
hereafter made by Prime or any of its subsidiaries to any of its present or
former directors or executive officers or their respective related interests
shall be made only in the ordinary course of business and on the same terms and
at the same interest rates as those prevailing for comparable transactions with
others and shall not involve more than the normal risk of repayment or present
other unfavorable features.
Section 4.13. Confidentiality. All information furnished by Summit to
Prime or its representatives pursuant hereto shall be treated as the sole
property of Summit and, if the Reorganization shall not occur, Prime and its
representatives shall return to Summit all of such written information and all
documents, notes, summaries or other materials containing, reflecting or
referring to, or derived from, such information, except that any such
confidential information or notes or abstracts therefrom presented to the Board
of Directors of Prime or any committee thereof for the purpose of considering
this Agreement, the Reorganization and the related transactions may be kept and
maintained by Prime with other records of Board, and Board committee, meetings
subject to a continuing obligation of confidentiality. Prime shall, and shall
use its reasonable best efforts to cause its representatives to, keep
confidential all such information, and shall not directly or indirectly use such
information for any purposes other than the performance of this Agreement. The
obligation to keep such information confidential shall continue for five years
from the date the proposed Reorganization is abandoned and shall not apply to:
(i) any information which (x) was legally in Prime's possession prior to the
disclosure thereof by Summit, (y) was then generally known to the public, or (z)
was disclosed to Prime by a third party not bound by an obligation of
confidentiality; or (ii) disclosures made as required by law. It is further
agreed that if, in the absence of a protective order or the receipt of a waiver
hereunder, Prime is nonetheless, in the written opinion of its outside counsel,
compelled to disclose information concerning Summit to any tribunal or
governmental body or agency or else stand liable for contempt or suffer other
censure or penalty, Prime may disclose such information to such tribunal or
governmental body or agency without liability hereunder and shall so notify
Summit in advance to the extent practicable. This Section 4.13 shall survive any
termination of this Agreement.
33
<PAGE>
Section 4.14. Dividends. Prime will coordinate with Summit the
declaration of any dividends and the record and payment dates thereof so that
the holders of Prime Stock will not be paid two dividends for a single calendar
quarter with respect to their shares of Prime Stock and any shares of Summit
Stock they become entitled to receive in the Reorganization or fail to be paid
one dividend in each calendar quarter between the date hereof and the Effective
Time. Prime will notify Summit at least five business days prior to any proposed
dividend declaration date.
Section 4.15. Acquisition Proposals. Prime agrees that neither Prime nor
any of its subsidiaries nor any of the respective officers and directors of
Prime or its subsidiaries shall, and Prime shall direct and use its best effort
to cause its employees, affiliates, agents and representatives (including,
without limitation, any investment banker, broker, financial or investment
advisor, attorney or accountant retained by Prime or any of its subsidiaries)
not to, initiate, solicit or encourage, directly or indirectly, any inquiries,
proposals or offers with respect to, or engage in any negotiations or
discussions with any person, provide any nonpublic information, or authorize or
enter into any agreement or agreement in principle concerning, or recommend,
endorse or otherwise facilitate any effort or attempt to induce or implement,
any Acquisition Proposal (as defined below). "Acquisition Proposal" is hereby
defined to be any offer, including an exchange offer or tender offer, or
proposal concerning a merger, consolidation, or other business combination or
takeover transaction involving Prime or any of its subsidiaries or the
acquisition of any assets (otherwise than as permitted by Section 4.05) or
securities of Prime or any of its subsidiaries. Prime will immediately cease and
cause to be terminated any existing activities, discussion or negotiations with
any parties conducted heretofore with respect to any of the foregoing. Prime
will take the necessary steps to inform the individuals or entities referred to
in the first sentence hereof of the obligations undertaken in this Section. In
addition, Prime will notify Summit by telephone to its chief executive officer
or general counsel promptly upon receipt of any communication with respect to a
proposed Acquisition Proposal with another person or receipt of a request for
information from any governmental or regulatory authority with respect to a
proposed acquisition of Prime or any of its subsidiaries or assets by another
party, and will immediately deliver as soon as possible by facsimile
transmission, receipt acknowledged, to the Summit officer notified as required
above a copy of any document relating thereto promptly after any such document
is received by Prime.
Section 4.16 Tax Opinion Certificates. Prime shall execute and deliver to
Thompson Coburn any tax opinion certificate reasonably required by Thompson
Coburn in connection with the issuance of the Tax Opinions (as defined at
Section 6.03), dated as of the date of effectiveness of the Registration
Statement and as of the Closing Date (and as of the date the Closing occurs if
different than the Closing Date), and Prime shall use its reasonable best
efforts to cause each of its executive officers, directors and holders of five
percent (5%) or more of outstanding Prime Stock (including shares beneficially
held) to execute and deliver to Thompson Coburn any tax opinion certificate
reasonably required by Thompson Coburn in connection with the issuance of one or
more of the Tax Opinions, dated as of the date of effectiveness of the
Registration Statement and as of the Closing Date (and as of the date the
Closing occurs if different than the Closing Date).
Section 4.17. Directors' and Officers' Insurance. Prime and each of its
subsidiaries has taken or will take all requisite action (including, without
limitation, the making of claims and the giving of notices) pursuant to its
directors' and officers' liability insurance policy or policies ("D&O
Insurance") in order to preserve all rights thereunder with respect to all
matters (other than matters arising in connection with this Agreement and the
transactions contemplated hereby) occurring prior to the Effective Time that are
known to Prime. Prime shall renew any existing D&O Insurance or purchase any
"discovery period" D&O Insurance provided for thereunder at Summit's request.
34
<PAGE>
Section 4.18. Conforming Entries.
(a) Notwithstanding that Prime believes that Prime and its subsidiaries
have established reserves and taken all provisions for possible loan and lease
losses required by generally accepted accounting principles and applicable laws,
rules and regulations, Prime recognizes that Summit may have adopted different
loan, accrual and reserve policies (including loan classification and levels of
reserves for possible loan and lease losses). From and after the date of this
Agreement, Prime and Summit shall consult and cooperate with each other with
respect to conforming the loan, accrual and reserve policies of Prime and its
subsidiaries to those policies of Summit, as specified in each case in writing
to Prime, based upon such consultation and as hereinafter provided.
(b) In addition, from and after the date of this Agreement, Prime and
Summit shall consult and cooperate with each other with respect to determining
appropriate accruals, reserves and charges for Prime to establish and take in
respect of excess equipment write-off or write-down of various assets and other
appropriate charges and accounting adjustments taking into account the parties'
business plan following the Reorganization, as specified in each case in writing
to Prime, based upon such consultation and as hereinafter provided.
(c) Prime and Summit shall consult and cooperate with each other with
respect to determining the amount and the timing for recognizing for financial
accounting purposes Prime's expenses of the Reorganization and the restructuring
charges, if any, related to or to be incurred in connection with the
Reorganization.
(d) With respect to clauses (a) through (c) of this Section 4.18, (i) it
is the objective of Prime and Summit that such reserves, accruals, charges and
divestitures, if any, to be taken shall be consistent with generally accepted
accounting principles, and (ii) Prime shall not be obligated to make a
particular conforming entry if the particular entry is not capable of being
reversed upon a termination of this Agreement or if the entry would have a
material adverse effect on Prime.
Section 4.19 Cooperation with Policies and Procedures. Prime, prior to
the Effective Time, shall (i) consult and cooperate with Summit regarding the
implementation of those policies and procedures established by Summit for its
governance and that of its subsidiaries and not otherwise referenced in Section
4.18 of this Agreement, including, without limitation, policies and procedures
pertaining to the accounting, asset/liability management, audit, credit, human
resources, treasury and legal functions, and (ii) at the reasonable request of
Summit, conform Prime's existing policies and procedures in respect thereof,
provided that Prime shall not be required to conform a policy or procedure (y)
if such would cause Prime or any of its subsidiaries to be in violation of any
law, rule, regulation or requirement of any governmental regulatory authority
having jurisdiction over Prime or any of its subsidiaries affected thereby, or
(z) if such conforming change is not capable of being reversed upon a
termination of this Agreement or if the change would have a material adverse
effect on Prime.
35
<PAGE>
Section 4.20 Environmental Reports. Prime shall disclose to Summit all
matters of the types described in Section 2.22 hereof which Prime would have
been required to disclose to Summit on the date hereof if known to Prime on the
date hereof, as such become known to Prime between the date hereof and the
Effective Time. In addition, Summit may at its expense perform, or cause to be
performed, a phase one environmental investigation, an asbestos survey, or both
of the foregoing, (i) within 90 days following the date of this Agreement, on
all real property owned, leased or operated by Prime or any of its subsidiaries
as of the date of this Agreement (but excluding space in retail or similar
establishments leased by Prime for automatic teller machines or leased Bank
branch facilities where the space leased by Prime comprises less than 20% of the
total space leased to all tenants of such property), and (ii) within 15 days
after being notified by Prime of the acquisition or lease of any real property
by it or its subsidiaries after the date of this Agreement, on the real property
so acquired or leased (but excluding space in retail or similar establishments
leased by Prime for automatic teller machines or leased Bank branch facilities
where the space leased by Prime comprises less than 20% of the total space
leased to all tenants of such property). If the results of a phase one
investigation (whether requested by Prime or Summit) indicate, in the reasonable
opinion of Summit, that additional investigation is warranted, Summit may at its
expense, within 15 days after receipt of the particular phase one report,
perform or cause to be performed a phase two investigation on the property or
properties deemed by Summit to warrant such additional study or notify Prime and
an environmental consulting firm within 15 days after the receipt of the
particular phase one report that the environmental consulting firm should
promptly commence a phase two investigation. If the cost of taking all remedial
or other corrective actions and measures (as required by applicable law, as
recommended or suggested by phase one or phase two investigation reports
(without regard to who requested such reports) or as may be prudent in light of
serious life, health or safety concerns), if any, is in the aggregate in excess
of $3,000,000, as reasonably estimated by an environmental expert retained for
such purpose by Summit at its sole expense, or if the cost of such actions and
measures cannot be so reasonably estimated by such expert to be such amount or
less with any reasonable degree of certainty, Summit shall have the right
pursuant to Section 9.02(d)(3) of this Agreement to terminate this Agreement.
Section 4.21 Best Efforts to Ensure Pooling. Prime agrees to use, and
agrees to cause each of its subsidiaries to use, its and their best efforts to
cause the Reorganization to qualify for pooling-of-interests accounting
treatment.
ARTICLE V.
COVENANTS OF SUMMIT
Summit hereby covenants and agrees with Prime that:
Section 5.01. Approvals and Registrations. Based on such assistance and
cooperation of Prime as Summit shall reasonably request, Summit will use its
reasonable best efforts to prepare and file (a) with the SEC, the Registration
Statement, (b) with the Federal Reserve Board, an application for approval of
the Reorganization, and (c) with the NYSE, an application for the listing of the
shares of Summit Stock issuable upon the Reorganization, subject to official
notice of issuance, and (d) with any state regulatory authority having
jurisdiction over the Reorganization, applications for such consents or
approvals as may be required for consummation of the transactions contemplated
by this Agreement, except that Summit shall have no obligation to file a new
registration statement or a post-effective amendment to the Registration
Statement covering any reoffering of Summit Stock by Prime Affiliates. Summit
covenants and agrees that all information furnished by Summit for inclusion in
the Registration Statement, the Proxy-Prospectus, and all applications and
submissions for the Required Consents will comply in all material respects with
the provisions of applicable law, including the Securities Act and the Exchange
Act and the rules and regulations of the SEC and the Federal Reserve Board and
will not contain any untrue statement of a material fact and will not omit to
state any material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading. Summit will use its reasonable best efforts to seek
the effectiveness of the Registration Statement. Summit will furnish to Fox-Pitt
such information about Summit reasonably available to it as Fox-Pitt may
reasonably request for purposes of the opinion referred to in Section 8.07.
36
<PAGE>
Section 5.02. Notice of Adverse Changes. Summit will promptly advise
Prime in writing of (a) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of Summit contained
in this Agreement or the Summit Schedules, if made on or as of the date of such
event or the Closing Date, untrue or inaccurate in any material respect, (b) any
Summit Material Adverse Change, (c) any inability or perceived inability of
Summit to perform or comply with the terms or conditions of this Agreement, (d)
the institution or threat of institution of litigation or administrative
proceeding involving Summit or its assets which, if determined adversely to
Summit, would have a Summit Material Adverse Effect or a material adverse effect
on the parties' ability to consummate the Reorganization, (e) any governmental
complaint, investigation, or hearing or communication indicating that such
litigation or administrative proceeding is contemplated, (f) any written notice
of, or other communication relating to, a default or event which, with notice or
lapse of time or both, would become a default, received by Summit subsequent to
the date hereof and prior to the Effective Time, under any agreement, indenture
or instrument to which Summit is a party or is subject and which is material to
the business, operation or condition (financial or otherwise) of Summit and its
subsidiaries on a consolidated basis, and (g) any written notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement including the Reorganization. Summit agrees that the delivery of such
notice shall not constitute a waiver by Prime of any of the provisions of
Articles VI or VIII.
Section 5.03. Copies of Filings. Summit shall promptly provide to Prime
and its counsel copies of the application filed with the Federal Reserve Board,
all reports filed by it with the SEC on Forms 10-Q, 8-K and 10-K and all
documents to be distributed in any manner to the shareholders of Summit.
Section 5.04. Further Actions. Summit will: (a) execute and deliver such
instruments and take such other actions as Prime may reasonably require to carry
out the intent of this Agreement; (b) use its reasonable best efforts to obtain
consents of all third parties and governmental bodies necessary or reasonably
desirable for the consummation of the transactions contemplated by this
Agreement; (c) diligently support this Agreement in any proceeding before any
regulatory authority whose approval of any of the transactions contemplated
hereby is required or reasonably desirable or before any court in which
litigation in respect thereof is pending; and (d) use its reasonable best
efforts so that the other conditions precedent to the obligations of Prime set
forth in Articles VI and VIII hereof are satisfied.
Section 5.05. Applicable Laws. Summit will use its reasonable best
efforts to comply promptly with all requirements which federal or state law may
impose on Summit with respect to the Reorganization and will promptly cooperate
with and furnish information to Prime in connection with any such requirements
imposed upon Prime or on any of its subsidiaries in connection with the
Reorganization.
37
<PAGE>
Section 5.06. Unpaid Prime Dividends. By virtue of the Reorganization and
without further action on anyone's part, Summit shall assume the obligation of
Prime to pay dividends, if any, on Prime Stock which have a record date prior to
the Effective Time but which are not payable until after the Effective Time.
Section 5.07. Cooperation. Until the Effective Time, Summit will provide
such information with respect to its business affairs and properties as Prime
from time to time may reasonably request, and will cause its managerial
employees, counsel and independent certified public accountants to be available
on reasonable request to answer questions of Prime's representatives covering
the business and affairs of Summit or any of its subsidiaries.
Section 5.08. Confidentiality. All information furnished by Prime to
Summit or its representatives pursuant hereto shall be treated as the sole
property of Prime and, if the Reorganization shall not occur, Summit and its
representatives shall return to Prime all of such written information and all
documents, notes, summaries or other materials containing, reflecting or
referring to, or derived from, such information, except that any such
confidential information or notes or abstracts therefrom presented to the Board
of Directors of Summit or any committee thereof for the purpose of considering
this Agreement, the Reorganization and the related transactions may be kept and
maintained by Summit with other records of Board, and Board committee, meetings
subject to a continuing obligation of confidentiality. Summit shall, and shall
use its reasonable best efforts, to cause its representatives to, keep
confidential all such information, and shall not directly or indirectly use such
information for any purposes other than the performance of this Agreement. The
obligation to keep such information confidential shall continue for five years
from the date the proposed Reorganization is abandoned and shall not apply to:
(i) any information which (x) was legally in Summit's possession prior to the
disclosure thereof by Prime, (y) was then generally known to the public, or (z)
was disclosed to Summit by a third party not bound by an obligation of
confidentiality; or (ii) disclosures made as required by law. It is further
agreed that if, in the absence of a protective order or the receipt of a waiver
hereunder, Summit is nonetheless, in the written opinion of its counsel,
compelled to disclose information concerning Prime to any tribunal or
governmental body or agency or else stand liable for contempt or suffer other
censure or penalty, Summit may disclose such information to such tribunal or
governmental body or agency without liability hereunder and shall so notify
Prime in advance to the extent practicable. This Section 5.08 shall survive any
termination of this Agreement.
Section 5.09. Further Transactions. Summit continually evaluates possible
acquisitions and may prior to the Effective Time enter into one or more
agreements providing for, and may consummate the acquisition by it of another
Bank, association, Bank holding Company, savings and loan holding Company or
other Company (or the assets thereof) for consideration that may include Summit
Stock. In addition, prior to the Effective Time, Summit may, depending on market
conditions and other factors, otherwise determine to issue Equity Securities or
other securities for financing purposes. Notwithstanding the foregoing, Summit
will not take any such action that would (i) prevent the transactions
contemplated hereby from qualifying as a reorganization within the meaning of
Section 368(a) of the Code or (ii) materially impede or delay receipt of any
Required Consent or the consummation of the transactions contemplated by this
Agreement for more than 60 days.
38
<PAGE>
Section 5.10. Indemnification.
(a) Summit shall indemnify persons who served as directors and officers
of Prime or any subsidiary of Prime on or before the Effective Time with respect
to liabilities and claims (and related expenses, including fees and
disbursements of counsel) made against them resulting from their service as such
prior to the Effective Time in accordance with and subject to the requirements
and other provisions of the Restated Certificate of Incorporation and By-Laws of
Summit and the certificate or articles of incorporation and by-laws of Prime or
the applicable subsidiary of Prime, all as in effect on the date of this
Agreement and to the extent permitted by law, and Summit shall advance expenses
in matters that may be subject to indemnification in accordance with its
Restated Certificate of Incorporation and By-Laws in effect on the date of this
Agreement and any applicable provisions of law.
(b) Subject to Prime's obligation set forth at Section 4.17: For a period
of six (6) years after the Effective Time, Summit will use its reasonable best
efforts to provide to the persons who served as directors or officers of Prime
or any subsidiary of Prime on or before the Effective Time insurance against
liabilities and claims (and related expenses) made against them resulting from
their service as such prior to the Effective Time comparable in coverage to that
provided by Summit to its own directors and officers, but, if not available on
commercially reasonable terms, then coverage substantially similar in all
material respects to the insurance coverage provided to them in such capacities
at the date hereof; provided, however, that in no event shall Summit be required
to expend more than 200% of the current amount expended by Prime on an annual
basis (the "Insurance Amount") to maintain or procure insurance coverage
pursuant hereto, and, further provided, that if Summit is unable to maintain or
obtain the insurance called for by this Section 5.10, Summit shall use its
reasonable best efforts to obtain as much comparable insurance as is available
for the Insurance Amount.
(c) This Section 5.10 shall be construed as an agreement as to which the
directors and officers of Prime and its subsidiaries referred to herein are
intended to be third party beneficiaries and shall be enforceable by the such
persons and their heirs and representatives. Summit's obligations under this
Section 5.10 shall survive the Effective Time.
Section 5.11. Employee Matters. After the Effective Time, Summit may in
its discretion maintain, terminate, merge or dispose of the Prime Plans;
provided, however, that any action taken by Summit shall comply with ERISA and
any other applicable laws, including laws regarding the preservation of employee
pension benefit plan benefits and, provided further, that if Summit maintains a
defined contribution plan, defined benefit plan or health and welfare plan
available to all its employees generally which is similar to a Prime Plan which
is, respectively, a defined contribution plan, defined benefit plan or health
and welfare plan available to all Prime employees generally, then, if such Prime
Plan is terminated by Summit or is otherwise rendered inactive by Summit, Summit
shall offer to the former employees of Prime affected by such plan termination
or cessation of activity the opportunity to participate in the similar plan of
Summit.
Section 5.12. Tax Opinion Certificates. Summit shall execute and deliver
to Thompson Coburn any tax opinion certificate reasonably required by Thompson
Coburn in connection with the issuance of the Tax Opinions, dated as of the date
of effectiveness of the Registration Statement and as of the Closing Date (and
as of the date the Closing occurs if different than the Closing Date).
39
<PAGE>
ARTICLE VI.
CONDITIONS PRECEDENT TO THE RESPECTIVE OBLIGATIONS OF
SUMMIT AND PRIME
The respective obligations of Summit and Prime under this Agreement to
consummate the Reorganization are subject to the simultaneous satisfaction of
all the following conditions, compliance with which or the occurrence of which
may only be waived in whole or in part in writing by Summit and Prime in
accordance with Section 10.09:
Section 6.01. Receipt of Required Consents. Summit and Prime shall have
received the Required Consents; the Required Consents shall not, in the
reasonable opinion of Summit, contain restrictions or limitations which would
materially adversely affect the financial condition of Summit after consummation
of the Reorganization; the Required Consents and the transactions contemplated
hereby shall not be contested by any federal or state governmental authority;
and the Required Consents needed for the Reorganization shall have been obtained
and shall not have been withdrawn or suspended.
Section 6.02. Effective Registration Statement. The Registration
Statement shall have been declared effective by the SEC; no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and remain in effect; and no proceeding for that purpose shall have been
initiated or, to the knowledge of Summit or Prime, shall be contemplated or
threatened by the SEC.
Section 6.03. Tax Matters. At the time of effectiveness of the
Registration Statement and at the Closing Date (and at the date the Closing
occurs if different than the Closing Date), Summit and Prime shall have received
from Thompson Coburn an opinion addressed to Prime, Summit and all shareholders
of Prime (the "Tax Opinion"), reasonably satisfactory in form and substance to
Prime and Summit, to the effect that (a) the Reorganization will constitute a
tax-free reorganization within the meaning of Section 368(a) of the Code, (b)
except with respect to fractional share interests, holders of Prime Stock who
receive solely Summit Stock in the Reorganization will not recognize gain or
loss for federal income tax purposes, (c) the basis of such Summit Stock
(including any fractional share for which cash is received) will equal the basis
of the Prime Stock for which it is exchanged and (d) the holding period of such
Summit Stock (including any fractional share for which cash is received) will
include the holding period of the Prime Stock for which it is exchanged,
assuming that such Prime Stock is a capital asset in the hands of the holder
thereof at the Effective Time.
In addition, no condition or set of facts or circumstances shall exist
which will either (y) preclude any of the parties to this Agreement from
satisfying the terms or conditions of, or assumptions made in, the Tax Opinion,
as the case may be, or (z) result in any of the factual assumptions contained in
the Tax Opinion being untrue.
40
<PAGE>
Section 6.04. Absence of Litigation. No investigation by any state or
federal agency, and no action, suit, arbitration or proceeding before any court,
state or federal agency, panel or governmental or regulatory body or authority,
shall have been instituted or threatened against Summit or any of its
subsidiaries, or Prime or any of its subsidiaries, that is material to the
Reorganization or to the financial condition of Summit and its subsidiaries on a
consolidated basis or Prime and its subsidiaries on a consolidated basis, as the
case may be. No order, decree, judgment, or regulation shall have been entered
or law or regulation adopted by any such agency, panel, body or authority which
enjoined or has a material adverse effect upon the Reorganization or on the
financial condition of Summit and its subsidiaries on a consolidated basis or
Prime and its subsidiaries on a consolidated basis, as the case may be.
Section 6.05. NYSE Listing. The NYSE shall have indicated that the shares
of Summit Stock to be issued in the Reorganization are to be listed on the NYSE,
subject to official notice of issuance.
ARTICLE VII.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SUMMIT
The obligation of Summit to consummate the Reorganization is subject to
the simultaneous satisfaction of all of the following conditions, compliance
with which or the occurrence of which may be waived in whole or in part by
Summit in writing in accordance with Section 10.09:
Section 7.01. No Adverse Changes. There shall not have occurred at any
time after December 31, 1998 any Prime Material Adverse Change or any material
loss or damage to the properties of Prime or any of its subsidiaries, whether or
not insured, which materially affects the ability of Prime and its subsidiaries,
on a consolidated basis, to conduct their business.
Section 7.02. Representations and Covenants. Except with respect to
matters resulting from transactions specifically contemplated by this Agreement,
changes resulting from a change in law, rule, regulation, generally accepted or
regulatory accounting principle or other matter affecting banking institutions
or their holding Companies generally or from charges or expenses incident to the
Reorganization, all representations and warranties made by Prime in this
Agreement and the Prime Schedules and the material furnished pursuant to the
Post-Signing Document List shall be true and correct in all material respects on
the date of this Agreement and on the date the Closing occurs with the same
force and effect as if such representations and warranties were being made on
such date. Prime shall have complied in all material respects with all covenants
and agreements contained herein to be performed by Prime.
Section 7.03. Secretary's/Assistant Secretary's Certificate. Prime shall
have furnished to Summit a certificate dated the date the Closing occurs to
which shall be attached copies of all resolutions adopted or minutes of actions
taken by the Board of Directors (including committees thereof) and shareholders
of Prime relating to this Agreement, the Option Agreement and the Reorganization
and related transactions, which such certificate shall be signed by the
Secretary or an Assistant Secretary of Prime and certify to the satisfaction of
the condition set forth in Section 7.09 and the truth, correctness, completeness
and continuing effectiveness of all resolutions and actions contained or
referenced in the aforementioned attachments.
Section 7.04. Officer's Certificate. Prime shall have furnished to Summit
a certificate signed by the Chief Executive Officer of Prime, dated the date the
Closing occurs, certifying to the satisfaction of the conditions set forth at
Sections 6.01, 6.02 (last clause), 6.03 (last paragraph) and Section 6.04, as
they relate to Prime, and at Sections 7.01, 7.02, 7.07 and 7.10.
41
<PAGE>
Section 7.05. Opinion of Prime's Counsel. Summit shall have received an
opinion of Stradley, Ronon, Stevens & Young, LLP or Blank, Rome, Comisky &
McCauley, LLP, counsel to Prime, dated the date the Closing occurs and
reasonably satisfactory in form and substance to counsel for Summit,
substantially to the effect provided in Exhibit E.
Section 7.06. Approvals of Legal Counsel. All actions, proceedings,
instruments and documents required to carry out the transactions contemplated by
this Agreement or incidental thereto and all related legal matters shall be
reasonably satisfactory to counsel to Summit, and such counsel shall have been
furnished with certified copies of actions and proceedings and such other
documents and instruments as they shall have reasonably requested.
Section 7.07. Consents to Prime Contracts. All consents, approvals or
waivers, in form and substance reasonably satisfactory to Summit, required to be
obtained in connection with the Reorganization from other parties to each
mortgage, note, lease, permit, franchise, loan or other agreement or contract to
which Prime or any of its subsidiaries is a party or by which they or any of
their assets or properties may be bound or committed, which contract is material
to the business, franchises, operations, assets or condition (financial or
otherwise) of Prime and its subsidiaries on a consolidated basis, shall have
been obtained.
Section 7.08. FIRPTA Affidavit. Prime shall have delivered to Summit an
affidavit of an executive officer of Prime dated the date the Closing occurs
stating, under penalties of perjury, that Prime is not and has not been a United
States real property holding Company (as defined in Section 897(c)(2) of the
Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.
Section 7.09. Shareholder Approval. The shareholders of Prime, at the
meeting contemplated by this Agreement, shall have authorized and approved the
Reorganization and this Agreement and all transactions contemplated by this
Agreement as and to the extent required by all applicable laws and regulations
and the provisions of Prime's Articles of Incorporation and By-Laws.
Section 7.10. Absence of Regulatory Agreements. Neither Prime nor Bank
shall be a party to any agreement or memorandum of understanding with, or
commitment letter to, or board of directors resolution submitted to or similar
undertaking made to, or be subject to any order or directive by, or be a
recipient of any extraordinary supervisory letter from, any governmental or
regulatory authority which restricts materially the conduct of its respective
business or has a material adverse effect upon the Reorganization or upon the
financial condition of Bank or of Prime and its subsidiaries on a consolidated
basis, and neither Prime nor Bank shall have been advised by any governmental or
regulatory authority that such authority is contemplating issuing or requesting,
or considering the appropriateness of issuing or requesting, any of the
foregoing.
Section 7.11. Affiliate Agreements. In the event Summit shall elect to
account for the Reorganization on a pooling-of-interest basis, Prime shall use
its best efforts to have a sufficient number of Prime Affiliates execute and
deliver Affiliate Agreements to Summit such that, in the reasonable opinion of
Summit based on consultation with its independent accounting firm, the
Reorganization may be accounted for on a pooling-of-interests basis.
42
<PAGE>
The receipt of the documents required by this Article VII by Summit shall in no
way constitute a waiver by Summit of any of the provisions of or its rights
under this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION OF PRIME
The obligation of Prime to consummate the Reorganization is subject to
the simultaneous satisfaction of all of the following conditions, compliance
with which or the occurrence of which may be waived in whole or in part by Prime
in writing in accordance with Section 10.09:
Section 8.01. No Adverse Changes. There shall not have occurred at any
time after September 30, 1998 any Summit Material Adverse Change or any material
loss or damage to the properties of Summit or its subsidiaries, whether or not
insured, which materially affects the ability of Summit and its subsidiaries, on
a consolidated basis, to conduct their business.
Section 8.02. Representations and Covenants. Except with respect to
matters resulting from transactions specifically contemplated by this Agreement,
all representations and warranties made by Summit in this Agreement and in the
Summit Schedules shall be true and correct in all material respects on the date
of this Agreement and on the date the Closing occurs with the same force and
effect as if such representations and warranties were made on such date and
Summit shall have complied in all material respects with all covenants and
agreements contained herein or therein to be performed by Summit; provided,
however, that no representation, warranty or covenant of Summit shall be
construed to limit or prohibit any business or financing activities of Summit
including by way of illustration and not limitation, the entry by Summit after
the date hereof into any agreement to acquire any assets or any Company or other
entity, the issuance of any debt or equity securities in public or private
offerings, the issuance of Series R Preferred Stock pursuant to the Summit
Rights Agreement, the redemption or repurchase by Summit of its capital stock,
the Summit Rights or the Series R Preferred Stock issuable pursuant to the
Summit Rights Agreement, and any transactions reasonably necessary or
appropriate in connection therewith, and no such business or financing activity
shall constitute a breach of any representation, warranty or covenant of Summit;
provided further, however, that Summit agrees that it will not permit any such
transaction to cause any delay in the consummation of the Reorganization in
excess of 60 days.
Section 8.03. Secretary's Certificate.
(a) Summit shall have furnished to Prime a certificate dated the date the
Closing occurs to which shall be attached copies of all resolutions adopted or
minutes of actions taken by the Board of Directors (including committees
thereof) of Summit relating to this Agreement, the Option Agreement and the
Reorganization and related transactions, which such certificate shall be signed
by the Secretary of Summit and certify to the truth, correctness, completeness
and continuing effectiveness of all resolutions and actions contained or
referenced in the aforementioned attachments.
(b) In the event that pursuant to the Reorganization Election Summit
elects the Reorganization method provided for at Section 1.01(a)(2), the
Designated Summit Subsidiary shall have furnished to Prime a certificate dated
the date the Closing occurs to which shall be attached copies of all resolutions
adopted or minutes of actions taken by the Board of Directors and shareholders
(including committees thereof) of the Designated Summit Subsidiary relating to
this Agreement, the Reorganization and related transactions, which such
certificate shall be signed by the Secretary of the Designated Summit Subsidiary
and certify to satisfaction of the condition set forth at Section 8.09
applicable to the Designated Summit Subsidiary and to the truth, correctness,
completeness and continuing effectiveness of all resolutions and actions
contained or referenced in the aforementioned attachments.
43
<PAGE>
Section 8.04. Officer's Certificate. Summit shall have furnished to Prime
a certificate signed by the Chairman, Vice Chairman, President or an Executive
Vice President of Summit, dated the date the Closing occurs, certifying to the
satisfaction of the conditions set forth at Sections 6.01 and 6.02, the last
paragraph of Section 6.03, and Sections 6.04 and 6.05, as they relate to Summit,
and Sections 8.01, 8.02, 8.08 and 8.11.
Section 8.05. Opinion of Summit Counsel. Prime shall have received an
opinion of the General Counsel of Summit, dated the date the Closing occurs and
reasonably satisfactory in form and substance to counsel for Prime,
substantially to the effect provided in Exhibit F.
Section 8.06. Approvals of Legal Counsel. All actions, proceedings,
instruments and documents required to carry out the transactions contemplated by
this Agreement or incidental thereto and all related legal matters shall be
reasonably satisfactory to counsel to Prime, and such counsel shall have been
furnished with certified copies of actions and proceedings and such other
documents and instruments as they shall have reasonably requested.
Section 8.07. Fairness Opinion. The Proxy-Prospectus shall have contained
the favorable signed opinion of Fox-Pitt, dated the date of the Proxy-Prospectus
or a date not more than five business days prior thereto, regarding the fairness
from a financial point of view of the Exchange Ratio to the shareholders of
Prime in the Reorganization.
Section 8.08. Absence of Regulatory Agreements. Neither Summit nor any of
its Bank subsidiaries shall be a party to any agreement or memorandum of
understanding with, or commitment letter to, or board of directors resolution
submitted to or similar undertaking made to, or be subject to any order or
directive by, or be a recipient of any extraordinary supervisory letter from,
any governmental or regulatory authority which restricts materially the conduct
of Summit's business or has a material adverse effect upon the Reorganization or
upon the financial condition of Summit and its subsidiaries on a consolidated
basis, and neither Summit nor any of its Bank subsidiaries shall have been
advised by any governmental or regulatory authority that such authority is
contemplating issuing or requesting, or considering the appropriateness of
issuing or requesting, any of the foregoing.
Section 8.09. Prime Shareholder Approval. The shareholders of Prime, at
the meeting contemplated by this Agreement, shall have authorized and approved
the Reorganization and this Agreement and all transactions contemplated by this
Agreement as and to the extent required by all applicable laws and regulations
and the provisions of Prime's Articles of Incorporation and By-laws and in the
event that pursuant to the Reorganization Election Summit elects the
Reorganization method provided for at Section 1.01(a)(2) the sole shareholder of
the Designated Summit Subsidiary shall have authorized and approved the
Reorganization and this Agreement and all transactions contemplated by this
Agreement as and to the extent required by all applicable laws and regulations
and the provisions of the Designated Summit Subsidiary's certificate or articles
of incorporation and by-laws.
44
<PAGE>
Section 8.10. Severance/Termination Agreements. Summit and James J. Lynch
shall each have executed a participation letter for the Summit Bancorp.
Executive Severance Plan in the form attached hereto as Exhibit G-1 and a
termination agreement in the form attached hereto as Exhibit G-2, provided that
at the Effective Time Mr. Lynch is able to serve as an executive officer of
Bank.
Section 8.11. Consents to Summit Contracts. All consents, approvals or
waivers required to be obtained in connection with the Reorganization from other
parties to each mortgage, note, lease, permit, franchise, loan or other
agreement or contract to which Summit is a party or by which its assets or
properties may be bound or committed, which contract is material to the
business, franchises, operations, assets or condition (financial or otherwise)
of Summit and its subsidiaries on a consolidated basis, shall have been
obtained.
The receipt of the documents required by this Article VIII by Prime shall in no
way constitute a waiver by Prime of any of the provisions of or its rights under
this Agreement.
ARTICLE IX
CLOSING; TERMINATION RIGHTS
Section 9.01. Closing. The closing of the Reorganization (the "Closing")
shall take place on the date which is 45 business days after the last to occur
of the following ("Scheduled Date"), unless Summit shall designate a date for
the Closing which is prior to the Scheduled Date in a writing ("Closing Notice")
designating a Determination Date in accordance with Section 9.02(e)(i) below
delivered to Prime at least five (5) business days prior to the date designated
therein for Closing, or unless prior to the Scheduled Date the parties agree to
a different date:
(i) the date of the approval of the Reorganization by the shareholders
of Prime in accordance with Section 7.09;
(ii) if the transactions contemplated by this Agreement are being
contested in any legal proceeding, the date that such proceeding
has been brought to a conclusion favorable, in the judgment of
Summit and Prime, to the consummation of the transactions
contemplated herein or such prior date as Summit and Prime shall
elect, whether or not such proceeding has been brought to a
conclusion; or
(iii) the date of receipt of the last of the Required Consents or the
date that all waiting periods required by statute or incorporated
into such Required Consents have expired;
and the date of Closing determined in accordance with the foregoing provisions
is referred to herein as the "Closing Date". The Closing shall take place at the
office of Summit, 301 Carnegie Center, Princeton, New Jersey, commencing at
10:00 a.m. on the date the Closing is held, unless the parties agree to a
different place or commencement time. At the Closing, the parties will exchange
certificates, legal opinions and other documents for the purpose of determining
whether the conditions precedent to the obligations of the parties set forth
herein have been satisfied or waived. In the event that pursuant to the
Reorganization Election Summit elected the Reorganization method provided for at
Section 1.01(a)(1), Summit shall, after all such conditions to Closing have been
satisfied or waived, cause the NJ Certificate to be filed with the Secretary of
State of the State of New Jersey and the Pennsylvania Articles to be filed with
the Department of State of the Commonwealth of Pennsylvania. In the event that
pursuant to the Reorganization Election Summit elected the Reorganization method
provided for at Section 1.01(a)(2), Summit shall, after all such conditions to
Closing have been satisfied or waived, cause the appropriate certificate of
merger, articles of merger, or both to be filed with the proper state
jurisdictional authorities to effect the Reorganization intended by this
Agreement. All proceedings to be taken and all documents to be executed and
delivered by all parties at the Closing shall be deemed so taken, executed and
delivered simultaneously, and no proceedings shall be deemed taken or any
documents executed or delivered until all have been taken, executed or
delivered.
45
<PAGE>
Section 9.02. Termination Rights.
(a) The Board of Directors of Prime or Summit may terminate this
Agreement in the event that:
(1) the shareholders of Prime at the meeting of shareholders
contemplated by Section 4.03, called for the purpose of approving the
Reorganization, this Agreement and the transactions contemplated by this
Agreement, upon voting, shall have failed to approve the Reorganization, this
Agreement and the transactions contemplated hereby by the requisite vote;
(2) a material breach of a warranty, representation, covenant or
agreement made by the other party in this Agreement shall have occurred and such
breach has not been cured, or is not capable of being cured, within 30 days
after written notice of the existence thereof shall have been given to the other
party (a "Material Breach") (provided that the terminating party is not then in
Material Breach of this Agreement);
(3) Prime's investment banker is unable to deliver the opinion
required by Section 8.07 to Prime by the day which is three business days prior
to the date the Registration Statement is declared effective by the SEC; or
(4) the Closing is not consummated on or before the later of (i)
January 3, 2000, unless the failure of such occurrence shall be due solely to a
Material Breach by the party seeking to terminate this Agreement or the failure
of such party to fulfill a condition to Closing provided for herein, or (ii) the
Scheduled Date, if the last event required to occur pursuant to the first
sentence of Section 9.01 for the setting of the Scheduled Date shall have
occurred on or before January 3, 2000.
(b) If either party shall refuse to close on the Closing Date because all
the conditions to its obligation to close set forth in Article VI shall not have
been met, the parties shall conduct the Closing as promptly as practicable after
all such conditions have been satisfied. In the event the failure of such a
condition is due to one or more Material Breaches, the Board of Directors of a
party not in Material Breach may, during the period any such Material Breach
remains uncured, terminate this Agreement by giving written notice of such
termination to the other party.
(c) If either party shall refuse to close on the Closing Date because all
the conditions to its obligation to close set forth in Article VII or VIII shall
not have been met (other than a failure of the condition set forth at Section
7.09 or 8.09 due to the circumstances set forth in Section 9.02(a)(1) hereof or
a failure of the condition set forth at Section 8.07 due to the circumstances
set forth at Section 9.02(a)(3) hereof): (i) the parties shall conduct the
Closing as promptly as practicable after all such conditions have been
satisfied, and (ii) the Board of Directors of such party may, during the period
the failed condition continues, terminate this Agreement by giving written
notice of such termination to the other party unless such party itself has
failed to satisfy a condition to the other party's Closing obligation or is in
Material Breach.
46
<PAGE>
(d) The Board of Directors of Summit may terminate this Agreement:
(1) at any time if Prime does not execute and deliver the Option
Agreement by the day immediately following the date hereof;
(2) at any time prior to the meeting of Prime shareholders
contemplated by Section 4.03, if the Board of Directors of Prime fails to
recommend approval of this Agreement and the Reorganization and other
transactions contemplated hereby in the Proxy-Prospectus ("Recommendation") or
withdraws, modifies or changes, or votes to withdraw, modify or change, its
Recommendation or its intention to make the Recommendation as represented and
warranted at Section 2.08; and
(3) as provided at Section 4.20.
(e) In the event the Summit Price is less than $32.68125 and the quotient
obtained by dividing the Summit Price by $39.375 is more than .17 less than the
quotient obtained by dividing the Determination Date Index Price (as defined at
(iii) below) by the Starting Date Index Price (as defined at (iv) below), the
Board of Directors of Prime shall have the right, exercisable only until 11:59
p.m. on the third business day following the Determination Date to terminate
this Agreement by giving Summit notice of such termination, referring to this
Section 9.02(e), and this Agreement shall be terminated provided Summit receives
such notice prior to the time and day set forth above in this Section 9.02(e).
For purposes of this Section 9.02(e):
(i) "Determination Date" means the date that the last approval of the
Reorganization and the transactions contemplated hereby required of a
Bank regulatory agency is received from the applicable Bank regulatory
agency.
(ii) "Summit Price" means the average of the closing prices of a share of
Summit Stock on the NYSE Composite Transactions List (as reported in
The Wall Street Journal or, in the absence thereof, as reported by
another authoritative source mutually agreed upon by Prime and Summit)
for the 10 consecutive full trading days, ending on the Determination
Date, on which one share of Summit Stock is traded.
(iii) "Determination Date Index Price" means the average of the closing
prices of the common stock of the Companies in the Index Group (as
defined at (v) below) on the NYSE Composite Transactions List (as
reported in The Wall Street Journal or, in the absence thereof, as
reported by another authoritative source mutually agreed upon by Prime
and Summit) for the 10 consecutive full trading days ending on the
Determination Date.
(iv) "Starting Date Index Price" means the average of the closing prices on
the Starting Date (as defined at (vi) below) of the common stock of
the Companies in the Index Group on the NYSE Composite Transactions
List (as reported in The Wall Street Journal) as of the Determination
Date.
47
<PAGE>
(v) "Index Group" means the Bank holding Companies listed below; provided,
however, that if between the Starting Date and the Determination Date
the common stock of any such Company ceases to be publicly traded, an
announcement is made of a proposal for such Company to be acquired or
an announcement is made of a proposal by such Company to acquire
another Company or Companies in transactions with a value exceeding
25% of such acquiror's market capitalization as of the Starting Date,
then, in such event, for purposes of calculating the Index Price in
all cases, such Company will be removed from the Index Group. If any
Company in the Index Group or Summit declares or effects a stock
dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between the Starting Date
and the Determination Date, the closing price of the common stock of
such Company or Summit, as the case may be, on the Starting Date shall
be appropriately adjusted for the purposes of applying this Section
9.02(e). The Bank holding Companies in the Index Group are as follows:
Bank Holding Companies
AmSouth Bancorp
BB&T Corporation
Comerica Incorporated
Fifth Third Bancorp
First Security Corp.
Huntington Bancshares, Inc.
Keystone Financial, Inc.
Marshall & Ilsley Corporation
Mercantile Bancorp
Mellon Bank Corporation
Old Kent Financial Corporation
Regions Financial Corporation
SouthTrust Corporation
Star Banc Corporation
Union Planters Corp.
Wilmington Trust Corporation
(vi) "Starting Date" means the date of the last trading day ending before
the public announcement of the execution of this Agreement.
Section 9.03. Effects of a Termination; Certain Expenses.
(a) Upon a termination of this Agreement pursuant to this Section 9.02
hereof:
(1) the obligations of the parties under this Agreement (except
for those under this Section 9.03 and Sections 4.13 and 5.08) shall terminate
and be of no further force or effect and each party shall be mutually released
and discharged from liability to the other party or to any third parties
hereunder, and
48
<PAGE>
(2) no party shall be liable to any other party for any costs or
expenses paid or incurred in connection herewith by such other party, except
that expenses incurred in connection with printing the Proxy-Prospectus and the
Registration Statement, and the filing fees of regulatory authorities or
self-regulatory organizations, shall be borne equally by Summit and Prime;
provided, however, that: (A) if Prime terminates this Agreement pursuant to
Section 9.02(a)(2) or Section 9.02(c), Summit shall reimburse Prime for its
out-of-pocket expenses reasonably incurred in connection with this Agreement,
including counsel fees and the printing and filing fees referred to above, but
excluding any brokers', finders' or investment bankers' fees; and (B) if Summit
terminates this Agreement pursuant to Section 9.02(a)(2), Section 9.02(c) or
Section 9.02(d), Prime shall reimburse Summit for its out-of-pocket expenses
reasonably incurred in connection with this Agreement, including counsel fees
and the printing and filing fees referred to above, but excluding any brokers',
finders' or investment bankers' fees.
(b) Notwithstanding any termination of this Agreement, (i) Prime shall
indemnify and hold Summit harmless from and against any claim by any broker or
finder asserting a right to brokerage commissions or finders' fees as a result
of any action allegedly taken by or understanding allegedly reached with Prime
and (ii) Summit shall indemnify and hold Prime harmless from and against any
claim by any broker or finder asserting a right to brokerage commissions or
finders' fees as a result of any action allegedly taken by or understanding
allegedly reached with Summit.
(c) Except as provided otherwise herein in the event of a termination of
this Agreement, Prime and its subsidiaries shall bear their own expenses
incident to preparing, entering into and carrying out this Agreement and to
consummating the Reorganization, provided, however, that Summit shall pay all
printing expenses and filing fees associated with the Registration Statement,
the Proxy-Prospectus and regulatory applications.
ARTICLE X
MISCELLANEOUS
Section 10.01. Press Releases. At all times until the Closing Date or the
termination of this Agreement, each party shall promptly advise and consult with
the other prior to issuing, or permitting any of its subsidiaries, directors,
officers, employees or agents to issue, any press release or other information
to the press or any third party with respect to this Agreement or the
transactions contemplated hereby.
Section 10.02. Article and Section Headings. Article and section headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
Section 10.03. Entire Agreement; Amendments. This Agreement, the Prime
Schedules and the Exhibits hereto and the Option Agreement to be entered into by
the parties hereto constitute the entire agreement between the parties
pertaining to the subject matter hereof and supersede all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties, and there are no warranties,
representations or other agreements between the parties in connection with the
subject matter hereof except as specifically set forth herein or therein. No
supplement, modification, waiver or termination of this Agreement shall be
binding unless executed in writing by the party to be bound thereby (or in the
case of a termination occurring pursuant to Section 9.02 hereof by the party
exercising a right to terminate this Agreement). No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof or thereof (whether or not similar), nor shall any waiver
constitute a continuing waiver unless otherwise expressly provided in the
instrument granting such waiver. The parties hereto may amend or modify this
Agreement in such manner as may be agreed upon by a written instrument executed
by the parties, except that, after the meeting described in Section 7.09 hereof,
no such amendment or modification shall reduce the amount of, or change the
forms of consideration to be received by the shareholders of Prime contemplated
by this Agreement, unless such modification is submitted to a vote of the
shareholders of Prime.
49
<PAGE>
Section 10.04. Survival of Representations, Warranties and Covenants. No
investigation made by the parties hereto made heretofore or hereafter shall
affect the representations and warranties of the parties which are contained
herein and each such representation and warranty shall survive such
investigation. None of the representations, warranties, covenants and agreements
in this Agreement or in any instrument delivered pursuant to this Agreement
shall survive the Effective Time, except for those representations, covenants
and agreements contained herein and therein which by their terms apply in whole
or in part after the Effective Time.
Section 10.05. Notices. Any notice or other communication required or
permitted hereunder shall be in writing, and shall be deemed to have been given,
unless otherwise specified in a particular provision of this Agreement, if
placed in the mail, registered or certified, postage prepaid, or if delivered
personally or by courier, receipt requested, or by facsimile transmission,
receipt acknowledged addressed as follows:
Summit: Summit Bancorp.
Attn: John G. Collins
301 Carnegie Center, P.O. Box 2066
Princeton, NJ 08543-2066
Telephone No.: 609-987-3422
Facsimile No.: 609-987-3435
With a copy to: Richard F. Ober, Jr., Esq.
Summit Bancorp.
301 Carnegie Center
P.O. Box 2066
Princeton, NJ 08543-2066
Telephone No.: 609-987-3430
Facsimile No.: 609-987-3435
Prime: Prime Bancorp, Inc.
7111 Valley Green Road
Fort Washington, Pennsylvania 19034
Attention: James J. Lynch
Telephone No.: 215-836-4060
Facsimile No.: 215-836-0957
With a copy to: David F. Scranton, Esq.
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, Pennsylvania 19103
Telephone No.: 215-564-8000
Facsimile No.: 215-564-8120
and Fred Blume, Esq.
Blank, Rome, Comisky & McCauley, LLP
One Logan Square
Philadelphia, Pennsylvania 19103
Telephone No.: 215-569-5500
Facsimile No.: 215-988-6910
50
<PAGE>
or to such other address as such party may designate by notice to the others,
which change of address shall be deemed to have been given upon receipt.
A notice or other communication hereunder shall be deemed delivered (i)
if mailed by certified or registered mail to the proper address, with adequate
postage prepaid, on the fifth business day following posting, (ii) if hand
delivered, when received by the person to whom directed, (iii) if delivered by
overnight courier, on the next business day following shipment, or (iv) if
delivered via facsimile, on the business day transmitted.
Section 10.06. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New Jersey,
without giving effect to the provisions, policies or principles thereof relating
to choice or conflict of laws.
Section 10.07. Counterparts. This Agreement is being executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same agreement.
Section 10.08. Binding Effect. All of the terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.
Section 10.09. Extensions; Waivers and Consents. Either party hereto, by
written instrument signed by its Chairman, Vice Chairman, President, or Chief
Financial Officer, may extend the time for the performance of any of the
obligations of the other party hereto, and may waive, at any time before or
after approval of this Agreement and the transactions contemplated hereby by the
shareholders of Prime, subject to the provisions of Section 10.03 hereof: (i)
any inaccuracies of the other party in the representations and warranties in
this Agreement or any other document delivered pursuant hereto or thereto; (ii)
compliance with any of the covenants or agreements of the other party contained
in this Agreement; (iii) the performance (including performance to the
satisfaction of a party or its counsel) by the other party of any of its
obligations hereunder or thereunder; and (iv) the satisfaction of any conditions
to the obligations of the waiving party hereunder or thereunder. Any consent or
approval of a party hereunder shall be effective only if signed by the Chairman,
Vice Chairman, President or Chief Financial Officer of such party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
in counterparts by their duly authorized officers as of the date first above
written.
SUMMIT BANCORP.
By: /s/ John G. Collins
------------------------------------
John G. Collins
Vice Chairman
PRIME BANCORP, INC.
By: /s/ James J. Lynch
-------------------------------------
James J. Lynch
President and Chief Executive Officer
51
<PAGE>
In the event that pursuant to the Reorganization Election Summit elects the
Reorganization method provided for at Section 1.01(a)(2), the Designated Summit
Subsidiary indicated below agrees to be legally bound by all terms of this
Agreement and Plan of Merger as if an original party hereto.
Designated Summit Subsidiary:
-----------------------------------------
By
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
Date:
----------------------------------
52
<PAGE>
PRIME BANCORP, INC. STOCK OPTION AGREEMENT
THE TRANSFER OF THE OPTION GRANTED BY THIS AGREEMENT IS SUBJECT TO RESALE
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
STOCK OPTION AGREEMENT, dated as of the 18th day of February, 1999
(this "Agreement"), between Summit Bancorp., a New Jersey corporation
("Grantee"), and Prime Bancorp, Inc., a Pennsylvania corporation ("Issuer").
WITNESSETH:
WHEREAS, Grantee and Issuer have on a date prior to the date hereof,
entered into an Agreement and Plan of Merger, dated as of the 17th day of
February, 1999 (the "Merger Agreement"). (Capitalized terms used in this
Agreement and not defined herein but defined in the Merger Agreement shall have
the meanings assigned thereto in the Merger Agreement); and
WHEREAS, as a condition and inducement to Grantee's entering into the
Merger Agreement and in consideration therefor, Grantee has required that Issuer
agree, and Issuer has agreed, to grant Grantee an option and to pay a breakup
fee on the terms set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
SECTION 1. Grant of Option; Breakup Fee.
(a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 1,087,498
fully paid and nonassessable shares of the common stock, par value $1.00 per
share, of Issuer ("Common Stock") at a price equal to $18.00 per share (such
price, as adjusted as hereinafter provided, the "Option Price"). The number of
shares of Common Stock that may be received upon the exercise of the Option and
the Option Price are subject to adjustment as herein set forth. In no event
shall the number of shares of Common Stock for which this Option is exercisable
exceed 9.9% of the number of shares of Common Stock then issued and outstanding
(without consideration of any shares of Common Stock subject to or issued
pursuant to the Option).
(b) In the event the Option becomes exercisable and Summit exercises
the Option in full, Prime shall pay to Summit $5,000,000 (the "Breakup Fee") in
accordance with Section 2.
SECTION 2. Exercise of Option; Payment of Breakup Fee.
(a) Grantee may exercise the Option in whole at any time following the
occurrence of a Purchase Event (as defined below); provided that the Option
shall terminate and be of no further force and effect upon the earliest to occur
of (i) the time immediately prior to the Effective Time, (ii) the termination of
the Merger Agreement in accordance with the terms thereof prior to the
occurrence of an Extension Event, other than a termination of the Merger
Agreement by the Grantee pursuant to Section 9.02(a)(2) or Sections 9.02 (c) or
(d)(2) thereof (with the understanding that Section 9.02(d)(2) does not
encompass the situation where the Board of Directors of Prime recommends the
Reorganization but the shareholders of Prime at the meeting held pursuant to
Section 4.03 of the Merger Agreement fail to approve the Reorganization), or
(iii) 15 months after the termination of the Merger Agreement following the
occurrence of an Extension Event (as defined below), or the termination of the
Merger Agreement by Grantee pursuant to Section 9.02(a)(2) or Sections 9.02 (c)
or (d)(2) thereof (with the same understanding with respect to Section
9.02(d)(2) as set forth in clause (ii) above), and provided further, that any
purchase of Common Stock upon exercise of the Option shall be subject to
applicable law, and provided further, that the Option may not be exercised, nor
may Grantee require Issuer to repurchase the Option (as set forth in Section 7
hereof), if, at the time of exercise or repurchase, Grantee is in Material
Breach of any material covenant or obligation contained in the Merger Agreement
and, if the Merger Agreement has not terminated prior thereto, such breach would
entitle Issuer to terminate the Merger Agreement. The events described in
clauses (i) - (iii) in the preceding sentence are hereinafter collectively
referred to as Exercise Termination Events. As provided in Section 8, the rights
set forth therein shall terminate upon an Exercise Termination Event and, as
provided in Sections 6 and 7 hereof, the rights to deliver requests pursuant to
Sections 6 or 7 shall terminate 12 months after an Exercise Termination Event,
subject, in such case, to the provisions of Section 9.
<PAGE>
(b) The term "Extension Event" shall mean any of the following events
or transactions occurring without the Grantee's prior written consent after the
date hereof:
(i) Issuer or any of its subsidiaries (each an "Issuer
Subsidiary"), shall have entered into an agreement to engage in an Acquisition
Transaction (as defined below) with any person (the term "person" for purposes
of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Securities
Exchange Act"), and the rules and regulations thereunder) other than Grantee or
any of its subsidiaries (each a "Grantee Subsidiary") or the Board of Directors
of Issuer shall have recommended that the shareholders of Issuer approve or
accept any Acquisition Transaction with any person other than Grantee or any
Grantee Subsidiary. For purposes of this Agreement, "Acquisition Transaction"
shall mean (w) a merger or consolidation, or any similar transaction, involving
Issuer or any of Issuer's banking subsidiaries ("Bank Subsidiaries"), (x) a
purchase, lease or other acquisition of 10% or more of the aggregate value of
the assets or deposits of Issuer or any Bank Subsidiary, (y) a purchase or other
acquisition (including by way of merger, consolidation, share exchange or
otherwise) of securities representing 10% or more of the voting power of Issuer
or a Bank Subsidiary, or (z) any substantially similar transaction, provided,
however, that in no event shall (i) any merger, consolidation or similar
transaction involving Issuer or any Bank Subsidiary in which the voting
securities of Issuer outstanding immediately prior thereto continue to represent
(either by remaining outstanding or being converted into voting securities of
the surviving entity of any such transaction) at least 75% of the combined
voting power of the voting securities of the Issuer or the surviving entity
outstanding after the consummation of such merger, consolidation, or similar
transaction, or (ii) any internal merger or consolidation involving only Issuer
and/or Issuer Subsidiaries, be deemed to be an Acquisition Transaction, provided
that any such transaction is not entered into in violation of the terms of the
Merger Agreement;
(ii) Any person (other than Grantee or any Grantee Subsidiary)
shall have acquired after the date hereof beneficial ownership or the right to
acquire beneficial ownership of securities representing 10% or more of the
aggregate voting power of Issuer or any Bank Subsidiary (the term "beneficial
ownership" for purposes of this Agreement having the meaning assigned thereto in
Section 13(d) of the Securities Exchange Act, and the rules and regulations
thereunder); except that notwithstanding the foregoing shareholders of Prime
described in the proxy statement of Prime dated March 18, 1998 as beneficially
owning 5% or more of the outstanding common stock of Prime and directors of
Prime shall each be permitted to acquire beneficial ownership of up to an
additional 2% of the outstanding Common Stock in addition to their respective
current holdings;
(iii) Any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its shareholders, by public
announcement or written communication that is or becomes the subject of public
disclosure, to engage in an Acquisition Transaction (including, without
limitation, any situation in which any person other than Grantee or any Grantee
Subsidiary shall have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), or shall have filed a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to, a tender offer
or exchange offer to purchase any shares of Common Stock such that, upon
consummation of such offer, such person would own or control securities
representing 10% or more of the aggregate voting power of Issuer or any Bank
Subsidiary);
-2-
<PAGE>
(iv) After any person other than Grantee or any Grantee
Subsidiary has made or disclosed an intention to make a proposal to Issuer or
its shareholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or obligation contained in the Merger Agreement and such
breach (x) would entitle Grantee to terminate the Merger Agreement and (y) shall
not have been cured prior to the Notice Date (as defined below);
(v) Any person other than Grantee or any Grantee Subsidiary
shall have filed an application with, or given a notice to, whether in draft or
final form, the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") or other governmental authority or regulatory or administrative
agency or commission, domestic or foreign (each, a "Governmental Authority"),
for approval to engage in an Acquisition Transaction; or
(vi) any Purchase Event (as defined below).
(c) The term "Purchase Event" shall mean either of the following events
or transactions occurring after the date hereof:
(i) The acquisition by any person other than Grantee or any
Grantee Subsidiary of beneficial ownership of securities representing 25% or
more of the aggregate voting power of Issuer or any Bank Subsidiary;
(ii) The occurrence of the event described in Section 2(b)(i),
except that for purposes of determining whether the event described in Section
2(b)(i) has occurred for purposes of this subsection (ii) the percentage
referred to in clauses (x) and (y) of the definition of Acquisition Transaction
which is incorporated into said Section 2(b)(i) shall be 25%; or
(iii) the meeting of Prime shareholders required by Section
4.03 of the Merger Agreement shall not have been called by the Board of
Directors of Issuer or held or shall have been canceled prior to termination of
the Merger Agreement or Issuer's Board of Directors shall have withdrawn or
modified in a manner adverse to the consummation of the Reorganization the
recommendation of Issuer's Board of Directors with respect to the Merger
Agreement as set forth therein, in each case after an Extension Event.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Extension Event or Purchase Event; provided however, that the giving of
such notice by Issuer shall not be a condition to the right of Grantee to
exercise the Option.
(e) In the event that Grantee is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) a place and date not earlier
than three business days nor later than 90 business days from the Notice Date
for the closing of such purchase (the "Closing Date") and (ii) that the proposed
exercise of the Option shall be revocable by Grantee in the event that the
transaction constituting a Purchase Event that gives rise to such written notice
shall not have been consummated prior to exercise of the Option; provided that
if prior notification to or approval of the Federal Reserve Board or any other
Governmental Authority is required in connection with such purchase, Grantee
shall promptly file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise would run
pursuant to this sentence shall run from the later of (x) the date on which any
required notification periods have expired or been terminated and (y) the date
on which such approvals have been obtained and any requisite waiting period or
periods shall have expired. For purposes of Section 2(a), any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto. Grantee
shall have the right to revoke its proposed exercise of the Option in the event
that the transaction constituting a Purchase Event that gives rise to such right
to exercise shall not have been consummated prior to exercise of the Option,
pursuant to the statement of such right in the written notice exercising the
Option as provided in clause 2(e)(iii) above.
-3-
<PAGE>
(f) At the closing referred to in Section 2(e), Grantee shall surrender
this Agreement (and the Option granted hereby) to Issuer and pay to Issuer the
Aggregate Option Price (as defined in this Section 2(f) below) for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a Bank account designated by Issuer;
provided, however, that failure or refusal of Issuer to designate such a Bank
account shall not preclude Grantee from exercising the Option. "Aggregate Option
Price" means the amount obtained by subtracting (b) from (a) where (b) is the
Breakup Fee and (a) is the amount obtained by multiplying the number of shares
with respect to which the Option is being exercised by the Option Price. The
terms of this Section 2(f) are specifically intended not to provide a discount
from the fair market value of Issuer's Common Stock on the date the Option is
granted and this Agreement signed, but instead to provide for a procedure which
(i) aligns Grantee's right to receive the Breakup Fee with its right to exercise
the Option and (ii) offsets the obligation of Grantee to pay the aggregate
purchase price provided for in connection with an exercise of the Option with
the obligation of Issuer to pay the Breakup Fee and thereby facilitates and
assures Grantee's receipt of the benefits of this Agreement which the parties
have mutually agreed Grantee is entitled to on the terms provided for herein.
(g) At such closing, simultaneously with the delivery of the Aggregate
Option Price in immediately available funds as provided in Section 2(f), Issuer
shall deliver to Grantee a certificate or certificates representing the number
of shares of Common Stock purchased by Grantee.
(h) Certificates for Common Stock delivered at a closing hereunder
shall be endorsed with a restrictive legend substantially as follows:
"The transfer of the shares represented by this certificate is subject
to resale restrictions arising under the Securities Act of 1933, as
amended, and to certain provisions of an agreement between Summit
Bancorp. and Prime Bancorp, Inc. ("Issuer") dated as of the 18th day of
February, 1999. A copy of such agreement is on file at the principal
office of Issuer and will be provided to the holder hereof without
charge upon receipt by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if Grantee shall have delivered
to Issuer a copy of a letter from the staff of the Securities and Exchange
Commission (the "SEC"), or an opinion of counsel, in form and substance
satisfactory to Issuer, to the effect that the transfer qualifies for an
exemption from the Securities Act and applicable state securities laws and such
legend is not required for purposes of the Securities Act and applicable state
securities laws; (ii) the reference to the provisions of this Agreement in the
above legend shall be removed by delivery of substitute certificate(s) without
such reference if the shares have been sold or transferred in compliance with
the provisions of this Agreement and under circumstances that do not require the
retention of such reference; and (iii) the legend shall be removed in its
entirety if the conditions in the preceding clauses (i) and (ii) are both
satisfied. In addition, such certificates shall bear any other legend as may be
required by law.
(i) Upon the giving by Grantee to Issuer of the written notice of
exercise of the Option provided for in Section 2(e) and the tender of the
Aggregate Option Price on the Closing Date in immediately available funds,
Grantee shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then actually be delivered to Grantee. Issuer shall pay
all expenses and any and all United States federal, state and local taxes and
other charges that may be payable in connection with the preparation, issue and
delivery of stock certificates under this Section 2 in the name of Grantee or
its nominee.
-4-
<PAGE>
SECTION 3. Reservation of Shares. Issuer agrees: (i) that it shall at
all times until the termination of this Agreement have reserved for issuance
upon the exercise of the Option that number of authorized shares of Common Stock
equal to the maximum number of shares of Common Stock issuable hereunder, all of
which shares will, upon issuance pursuant hereto, be duly authorized, validly
issued, fully paid, nonassessable, and delivered free and clear of all claims,
liens, encumbrances and security interests and not subject to any preemptive
rights; (ii) that it will not, by amendment of its articles of incorporation or
through reorganization, consolidation, merger, dissolution or sale of assets, or
by any other voluntary act, avoid or seek to avoid the observance or performance
of any of the covenants, stipulations or conditions to be observed or performed
hereunder by Issuer; (iii) promptly to take all action as may from time to time
be required (including (x) complying with all premerger notification, reporting
and waiting period requirements specified in 15 U.S.C. ss.18a and regulations
promulgated thereunder and (y) in the event, under the Bank Holding Company Act
of 1956, as amended (the "BHC Act"), or the Change in Bank Control Act of 1978,
as amended, or any state banking law, prior approval of or notice to the Federal
Reserve Board or to any other Governmental Authority is necessary before the
Option may be exercised, cooperating with Grantee in preparing such applications
or notices and providing such information to the Federal Reserve Board and each
other Governmental Authority as they may require) in order to permit Grantee to
exercise the Option and Issuer duly and effectively to issue shares of Common
Stock pursuant hereto; and (iv) to take all action provided herein to protect
the rights of Grantee against dilution.
SECTION 4. Division of Option. In conjunction with or following an
assignment permitted by Section 11 hereunder, this Agreement (and the Option
granted hereby) are exchangeable, without expense, at the option of Grantee,
upon presentation and surrender of this Agreement at the principal office of
Issuer, for other agreements providing for Options of different denominations
entitling the holder thereof to purchase, on the same terms and subject to the
same conditions as are set forth herein, in the aggregate the same number of
shares of Common Stock purchasable hereunder. The terms "Agreement" and "Option"
as used herein include any agreements and related options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction
or mutilation of this Agreement, and (in the case of loss, theft or destruction)
of reasonably satisfactory indemnification, and upon surrender and cancellation
of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement
of like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer, whether
or not the Agreement so lost, stolen, destroyed or mutilated shall at any time
be enforceable by anyone.
SECTION 5. Adjustment upon Change of Capitalization. The number of
shares of Common Stock purchasable upon the exercise of the Option shall be
subject to adjustment from time to time as follows:
(a) Subject to the last sentence of Section 1, in the event of any
change in the Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares
or the like, the type and number of shares of Common Stock purchasable upon
exercise hereof shall be appropriately adjusted and proper provision shall be
made so that, in the event that any additional shares of Common Stock are to be
issued or otherwise to become outstanding as a result of any such change (other
than pursuant to an exercise of any option or right under a Prime Stock
Compensation Plan or an exercise of the Option), the number of shares of Common
Stock subject to the Option shall be increased so it equals 9.9% of the number
of shares of Common Stock then issued and outstanding (without consideration of
any shares of Common Stock subject to or issued pursuant to the Option or
subject to or issued pursuant to options outstanding on the date hereof under a
Prime Stock Compensation Plan).
(b) Whenever the number of shares of Common Stock purchasable upon
exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the numerator
of which shall be equal to the number of shares of Common Stock purchasable
prior to the adjustment and the denominator of which shall be equal to the
number of shares of Common Stock purchasable after the adjustment. In no event
shall the Option Price be adjusted to less than the par value of the Common
Stock to be issued at such Option Price.
-5-
<PAGE>
(c) It is intended by the parties hereto that the adjustments provided
by this Section 5 shall fully preserve the economic benefits of this Agreement
for Grantee.
SECTION 6. Registration Rights.
(a) Demand Registration Rights. After the occurrence of a Purchase
Event that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee (whether on its own behalf or on behalf of any subsequent
holder of the Option (or part thereof) delivered prior to an Exercise
Termination Event or at the request of a holder of any of the shares of Common
Stock issued pursuant hereto) delivered no later than 12 months after an
Exercise Termination Event, promptly prepare, file and keep current a
registration statement on such form as is available and the Issuer is eligible
to use under the Securities Act relating to a delayed or continuous offering (as
contemplated by Rule 415 of the SEC under the Securities Act or any successor
rule or regulation) (a "shelf registration") covering this Option and any shares
issued and issuable pursuant to the Option (the "Option Shares") and shall use
its best efforts to cause such registration statement to become effective and
remain current and to qualify this Option or any such Option Shares or other
securities for sale under any applicable state securities laws in order to
permit the sale or other disposition of this Option or any Option Shares in
accordance with any plan of disposition requested by Grantee; provided, however,
that Issuer may postpone filing a registration statement relating to a
registration request by Grantee under this Section 6 for a period of time (not
in excess of 90 days) if in its judgment such filing would require the
disclosure of material information that Issuer has a bona fide business purpose
for preserving as confidential. Issuer will use its best efforts to cause such
registration statement first to become effective as soon as practicable after
the filing thereof and then to remain effective for such period not in excess of
135 days from the day such registration statement first becomes effective, or
such shorter time as may be necessary to effect such sales or other
dispositions. Grantee shall have the right to demand one such registration
(notwithstanding the number of Grantees). Grantee shall provide all information
reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. In connection with any such registration, Issuer and Grantee
shall provide each other with representations, warranties, and other agreements
customarily given in connection with such registrations. If requested by any
Grantee in connection with such registration, Issuer and Grantee shall become a
party to any underwriting agreement relating to the sale of Option Shares, but
only to the extent of obligating themselves in respect of representations,
warranties, indemnities and other agreements customarily included in such
underwriting agreements. Notwithstanding the foregoing, if Grantee revokes any
exercise notice or fails to exercise any Option with respect to any exercise
notice pursuant to Section 2(e), Issuer shall not be obligated to continue any
registration process with respect to the sale of Option Shares.
(b) Additional Persons With Registration Rights. Upon receiving any
request under this Section 6 from any Grantee, Issuer agrees to send a copy
thereof to any other person known to Issuer to be entitled to registration
rights under this Section 6, in each case by promptly mailing the same, postage
prepaid, to the address of record of the persons entitled to receive such
copies. Notwithstanding anything to the contrary contained herein, in no event
shall Issuer be obligated to effect more than one registration pursuant to this
Section 6 by reason of the fact that there shall be more than one Grantee as a
result of an assignment permitted by Section 11 hereof.
(c) Expenses. Except where applicable state law prohibits such
payments, Issuer will pay all expenses (including without limitation
registration fees, qualification fees, blue sky fees and expenses (including the
fees and expenses of counsel), legal expenses of the Company (but not any
Grantee), printing expenses and the costs of special audits or "cold comfort"
letters, expenses of underwriters, excluding discounts and commissions, and the
reasonable fees and expenses of any necessary special experts) in connection
with the registration pursuant to this Section 6 (including the related
offerings and sales by holders of Option Shares) and all other qualifications,
notification or exemptions pursuant to Section 6.
-6-
<PAGE>
(d) Indemnification. In connection with any registration under this
Section 6, Issuer hereby indemnifies the Grantee, and each officer, director and
controlling person of Grantee, and each underwriter thereof, including each
person, if any who controls such holder or underwriter within the meaning of
Section 15 of the Securities Act, against all expenses, losses, claims, damages
and liabilities caused by any untrue, or alleged untrue, statement contained in
any registration statement or prospectus or notification or offering circular
(including any amendments or supplements thereto) or any preliminary prospectus,
or caused by any omission, or alleged omission, to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such expenses, losses, claims, damages or
liabilities of such indemnified party are caused by any untrue statement or
alleged untrue statement that was included by Issuer in any such registration
statement or prospectus or notification or offering circular (including any
amendments or supplements thereto) in reliance upon and in conformity with,
information furnished in writing to Issuer by such indemnified party expressly
for use therein, and Issuer and each officer, director and controlling person of
Issuer shall be indemnified by such Grantee, or by such underwriter, as the case
may be, for all such expenses, losses, claims, damages and liabilities caused by
any untrue, or alleged untrue, statement, that was included by Issuer in any
such registration statement or prospectus or notification or offering circular
(including any amendments or supplements thereto) in reliance upon, and in
conformity with, information furnished in writing to Issuer by such holder or
such underwriter, as the case may be, expressly for such use.
Promptly upon receipt by a party indemnified under this Section 6(d) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this Section 6(d), such indemnified party shall notify
the indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may otherwise have to any indemnified party under this
Section 6(d). In case notice of commencement of any such action shall be given
to the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and reasonably satisfactory
to such indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (i) the
indemnifying party either agrees to pay the same, (ii) the indemnifying party
fails to assume the defense of such action with counsel satisfactory to the
indemnified party, or (iii) the indemnified party has been advised by counsel
that one or more legal defenses may be available to the indemnifying party that
may be contrary to the interests of the indemnified party. No indemnifying party
shall be liable for the fees and expenses of more than one separate counsel for
all indemnified parties or for any settlement entered into without its consent,
which consent may not be unreasonably withheld.
If the indemnification provided for in this Section 6(d) is unavailable
to a party otherwise entitled to be indemnified in respect of any expenses,
losses, claims, damages or liabilities referred to herein, then the indemnifying
party, in lieu of indemnifying such party otherwise entitled to be indemnified,
shall contribute to the amount paid or payable by such party to be indemnified
as a result of such expenses, losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative fault of Issuer, the
Grantee and the underwriters in connection with the statements or omissions
which resulted in such expenses, losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The amount paid or payable by a
party as a result of the expenses, losses, claims, damages and liabilities
referred to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim; provided, however, that in no case shall any Grantee be
responsible, in the aggregate, for any amount in excess of the net offering
proceeds attributable to its Option Shares included in the offering. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. Any obligation by any Grantee
to indemnify shall be several and not joint with other Grantees.
-7-
<PAGE>
(e) Miscellaneous Reporting. Issuer shall comply with all reporting
requirements and will do all such other things as may be necessary to permit the
expeditious sale at any time of any Option Shares by the Grantee thereof in
accordance with and to the extent permitted by any rule or regulation
promulgated by the SEC from time to time, including, without limitation, Rule
144A. Issuer shall at its expense provide the Grantee with any information
necessary in connection with the completion and filing of any reports or forms
required to be filed by Grantee under the Securities Act or the Exchange Act, or
required pursuant to any state securities laws or the rules of any stock
exchange.
SECTION 7. Repurchase at the Option of Grantee or Owner.
(a) Upon the occurrence of a Repurchase Event (as defined below), (i)
at the request (the date of such request being the "Request Date") of Grantee,
delivered prior to an Exercise Termination Event, Issuer (or any successor
thereto) shall repurchase the Option from Grantee at a price (the "Option
Repurchase Price") equal to the amount by which (A) the market/offer price (as
defined below) exceeds (B) the Option Price, multiplied by the number of shares
for which this Option may then be exercised and shall pay to Grantee the Breakup
Fee; and (ii) at the request (the date of such request being the "Request Date")
of the owner of Option Shares from time to time (the "Owner"), delivered within
12 months of the occurrence of a Repurchase Event (or such later period as
provided in Section 9), Issuer shall repurchase such number of the Option Shares
from the Owner as the Owner shall designate at a price (the "Option Share
Repurchase Price") equal to the market/offer price multiplied by the number of
Option Shares so designated. The term "market/offer price" shall mean the
highest of (i) the price per share of Common Stock at which a tender offer or
exchange offer therefor has been made by a third party after the date hereof and
on or prior to the Request Date, (ii) the price per share of Common Stock paid
or to be paid by any third party pursuant to an agreement with Issuer (whether
by way of a merger, consolidation or otherwise), (iii) the average of the last
sale prices for a share of Common Stock during the 90-day period ending on the
Request Date quoted on the Nasdaq National Market (as reported by The Wall
Street Journal, or, if not reported thereby, another authoritative source), (iv)
in the event of a sale of all or substantially all of Issuer's assets, the sum
of the price paid in such sale for such assets and the current market value of
the remaining assets of Issuer as determined by a nationally-recognized
independent investment banking firm selected by Grantee or the Owner, as the
case may be, divided by the number of shares of Common Stock outstanding at the
time of such sale. In determining the market/offer price, the value of
consideration other than cash shall be determined by a nationally-recognized
independent investment banking firm selected by Grantee or the Owner, as the
case may be, whose determination shall be conclusive and binding on all parties.
(b) Grantee or the Owner, as the case may be, may exercise its right to
require Issuer to repurchase the Option and/or any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that Grantee or
the Owner, as the case may be, elects to require Issuer to repurchase the Option
and/or the Option Shares in accordance with the provisions of this Section 7. As
promptly as practicable, and in any event within the later to occur of (x) five
business days after the surrender of the Option and/or certificates representing
Option Shares and the receipt of such notice or notices relating thereto and (y)
the time that is immediately prior to the occurrence of a Repurchase Event,
Issuer shall deliver or cause to be delivered to Grantee the Option Repurchase
Price and the Breakup Fee or to the Owner the Option Share Repurchase Price or
with respect to the Option Repurchase Price or the Option Share Repurchase Price
the portion thereof that Issuer is not then prohibited from so delivering under
applicable law and regulation.
-8-
<PAGE>
(c) Each of Issuer and Grantee hereby undertake to use its reasonable
efforts to obtain all required regulatory and legal approvals and to file any
required notices as promptly as practicable in order to accomplish any
repurchase contemplated by this Section 7. Nonetheless, to the extent that
Issuer is prohibited under applicable law or regulation from repurchasing the
Option and/or the Option Shares in full, Issuer shall promptly so notify Grantee
and/or the Owner and shall deliver to the Grantee the Breakup Fee as provided in
Section 7(b) above, and thereafter shall deliver or cause to be delivered from
time to time, to Grantee and/or the Owner, as appropriate, the portion of the
Option Repurchase Price and the Option Share Repurchase Price, respectively,
that it is no longer prohibited from delivering, within five business days after
the date on which Issuer is no longer so prohibited; provided, however, that if
Issuer at any time after delivery of a notice of repurchase pursuant to Section
7(b) is prohibited under applicable law or regulation, from delivering to
Grantee and/or the Owner, as appropriate, the Option Repurchase Price or the
Option Share Repurchase Price, respectively, in full or in any substantial part,
Grantee or the Owner, as appropriate, may revoke its notice of repurchase of the
Option or the Option Shares either in whole or in part whereupon, in the case of
a revocation in part, Issuer shall promptly (i) deliver to Grantee and/or the
Owner, as appropriate, that portion of the Option Purchase Price or the Option
Share Repurchase Price that Issuer is not prohibited from delivering after
taking into account any such revocation and (ii) deliver, as appropriate, either
(A) to Grantee, a new Agreement evidencing the right of Grantee to purchase that
number of shares of Common Stock equal to the number of shares of Common Stock
purchasable immediately prior to the delivery of the notice of repurchase less
the number of shares of Common Stock covered by the portion of the Option
repurchased or (B) to the Owner, a certificate for the number of surrendered
Option Shares covered by the revocation.
(d) For purposes of this Section 7, a Repurchase Event shall be deemed
to have occurred (i) upon the consummation of any Acquisition Transaction, or
(ii) upon the acquisition by any person of beneficial ownership of securities
representing 25% or more of the aggregate voting power of Issuer or any Bank
Subsidiary, provided that no such event shall constitute a Repurchase Event
unless an Extension Event shall have occurred prior to an Exercise Termination
Event. The parties hereto agree that Issuer's obligations to repurchase the
Option or Option Shares under this Section 7 shall not terminate upon the
occurrence of an Exercise Termination Event if an Extension Event shall have
occurred prior to the occurrence of an Exercise Termination Event.
(e) Issuer shall not enter into any agreement with any party (other
than Grantee or a Grantee Subsidiary) for an Acquisition Transaction unless the
other party thereto assumes all the obligations of Issuer pursuant to this
Section 7 in the event that Grantee or the Owner elects, in its sole discretion,
to require such other party to perform such obligations.
SECTION 8. Substitute Option in the Event of Corporate Change.
(a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate or merge with any person, other
than Grantee or a Grantee Subsidiary, and shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or a Grantee Subsidiary, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the aggregate voting power of the merged
Company, or (iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or a Grantee Subsidiary, then, and in
each such case, the agreement governing such transaction shall make proper
provision so that the Option shall, upon the consummation of such transaction
and upon the terms and conditions set forth herein, be converted into, or
exchanged for, an option (the "Substitute Option"), at the election of Grantee,
of either (x) the Acquiring Corporation (as defined below) or (y) any person
that controls the Acquiring Corporation (the Acquiring Corporation and any such
controlling person being hereinafter referred to as the Substitute Option
Issuer)
-9-
<PAGE>
(b) The Substitute Option shall provide for payment of the Breakup Fee
on terms as identical as possible to those provided for herein unless the
Breakup Fee has been paid under the circumstances described in Section 7(c).
Furthermore, the Substitute Option shall be exercisable for such number of
shares of the Substitute Common Stock (as is hereinafter defined) as is equal to
the market/offer price (as defined in Section 7) multiplied by the number of
shares of the Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as is hereinafter defined). The exercise price of
the Substitute Option per share of the Substitute Common Stock (the "Substitute
Purchase Price") shall then be equal to the Option Price multiplied by a
fraction in which the numerator is the number of shares of the Common Stock for
which the Option was theretofore exercisable and the denominator is the number
of shares of Substitute Common Stock for which the Substitute Option is
exercisable.
(c) The Substitute Option shall otherwise have the same terms as the
Option (including terms governing the Breakup Fee as provided in the first
sentence of Section 8(b) above), provided that if the terms of the Substitute
Option cannot, for legal reasons, be the same as the Option, such terms shall be
as similar as possible and in no event less advantageous to Grantee, provided
further that the terms of the Substitute Option shall include (by way of example
and not limitation) provisions for the repurchase of the Substitute Option and
Substitute Common Stock by the Substitute Option Issuer on the same terms and
conditions as provided in Section 7.
(d) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if
other than Issuer), (ii) Issuer in a merger in which Issuer is the
continuing or surviving person, and (iii) the transferee of all or any
substantial part of the Issuer's assets (or the assets of Issuer
Subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock
issued by the Substitute Option Issuer upon exercise of the Substitute
Option.
(iii) "Average Price" shall mean the average last sale price
of a share of the Substitute Common Stock (as reported by The Wall
Street Journal or, if not reported therein, by another authoritative
source) for the one year immediately preceding the consolidation,
merger or sale in question, but in no event higher than the last sale
price of the shares of the Substitute Common Stock on the day preceding
such consolidation, merger or sale; provided that if Issuer is the
issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by Issuer, the person
merging into Issuer or by any Company which controls or is controlled
by such person, as Grantee may elect.
-10-
<PAGE>
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 9.9% of the aggregate of the
shares of the Substitute Common Stock outstanding prior to the exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 9.9% of the aggregate of the shares of Substitute Common Stock but
for this clause (e), the Substitute Option Issuer shall make a cash payment to
Grantee equal to the excess of (i) the value of the Substitute Option without
giving effect to the limitation in this clause (e) over (ii) the value of the
Substitute Option after giving effect to the limitation in the clause (e). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by Grantee and the Substitute Option Issuer.
SECTION 9. Extension of Time for Regulatory Approvals. Notwithstanding
Sections 2(e), 6, 7 and 11, if Grantee has given the notice referred to in one
or more of such Sections, the exercise of the rights specified in any such
Section shall be extended (a) if the exercise of such rights requires obtaining
regulatory approvals, to the extent necessary to obtain all regulatory approvals
for the exercise of such rights, and (b) to the extent necessary to avoid
liability under Section 16(b) of the Securities Exchange Act by reason of such
exercise; provided that in no event shall any closing date occur more than 12
months after the related Notice Date, and, if the closing date shall not have
occurred within such period due to the failure to obtain any required approval
by the Federal Reserve Board or any other Governmental Authority despite the
reasonable efforts of Issuer or the Substitute Option Issuer, as the case may
be, to obtain such approvals, the exercise of the Option shall be deemed to have
been rescinded as of the related Notice Date. In the event (a) Grantee receives
official notice that an approval of the Federal Reserve Board or any other
Governmental Authority required for the purchase and sale of the Option Shares
will not be issued or granted or (b) a closing date has not occurred within 12
months after the related Notice Date due to the failure to obtain any such
required approval, Grantee shall be entitled to exercise the Option in
connection with the resale of the Option Shares pursuant to a registration
statement as provided in Section 6. Nothing contained in this Agreement shall
restrict Grantee from specifying alternative exercising of rights pursuant to
Sections 2(e), 6, 7 and 11, hereof in the event that the exercising of any such
rights shall not have occurred due to the failure to obtain any required
approval referred to in this Section 9.
SECTION 10. Issuer Warranties. Issuer hereby represents and warrants to
Grantee as follows:
(a) Issuer has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly approved by the Board of
Directors of Issuer and no other corporate proceedings on the part of Issuer are
necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly executed and delivered by, and
constitutes a valid and binding obligation of, Issuer, enforceable against
Issuer in accordance with its terms, except as enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the enforcement of creditors' rights generally and
institutions the deposits of which are insured by the Federal Deposit Insurance
Corporation and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and not subject to any preemptive rights.
-11-
<PAGE>
(c) Upon receipt of the necessary regulatory approvals as contemplated
by this Agreement, the execution, delivery and performance of this Agreement
does not or will not, and the consummation by Issuer of any of the transactions
contemplated hereby will not, constitute or result in (i) a breach or violation
of, or a default under, its articles of incorporation or by-laws, or the
comparable governing instruments of any of its subsidiaries, or (ii) a breach or
violation of, or a default under, any material agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation of it or any of its
subsidiaries (with or without the giving of notice, the lapse of time or both)
or under any law, rule, ordinance or regulation or judgment, decree, order,
award or governmental or non-governmental permit or license to which it or any
of its subsidiaries is subject, that would in any case give any other person the
ability to prevent or enjoin Issuer's performance under this Agreement in any
material respect.
SECTION 11. Assignment of Option by Grantee.
(a) Neither of the parties hereto may assign any of its rights or
delegate any of its obligations under this Agreement or the Option created
hereunder to any other person without the express written consent of the other
party, except that Grantee may assign this Agreement in whole or in part to one
or more subsidiaries directly or indirectly wholly-owned by Grantee (as
"indirect" ownership is defined at Section 2.01(a) of the Merger Agreement)
(other than director qualifying shares, if any) . The term "Grantee" as used in
this Agreement shall also be deemed to refer to Grantee's permitted assigns.
(b) Any assignment of rights of Grantee to any permitted assignee of
Grantee hereunder shall bear the restrictive legend at the beginning thereof
substantially as follows:
"The transfer of the option represented by this assignment and the
related option agreement is subject to resale restrictions arising
under the Securities Act of 1933, as amended and to certain provisions
of an agreement between Summit Bancorp. and Prime Bancorp, Inc.
("Issuer") dated as of the 18th day of February, 1999. A copy of such
agreement is on file at the principal office of Issuer and will be
provided to any permitted assignee of the Option without change upon
receipt by Issuer of a written request therefor."
It is understood and agreed that (i) the reference to the resale restrictions of
the Securities Act in the above legend shall be removed by delivery of
substitute assignments without such reference if Grantee shall have delivered to
Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel,
in form and substance satisfactory to Issuer, to the effect that the transfer
qualifies for an exemption from the Securities Act and applicable state
securities laws and such legend is not required for purposes of the Securities
Act and applicable state securities laws; (ii) the reference to the provisions
of this Agreement in the above legend shall be removed by delivery of substitute
assignments without such reference if the Option has been sold or transferred in
compliance with the provisions of this Agreement and under circumstances that do
not require the retention of such reference; and (iii) the legend shall be
removed in its entirety if the conditions in the preceding clauses (i) and (ii)
are both satisfied. In addition, such assignments shall bear any other legend as
may be required by law.
SECTION 12. Application for Regulatory Approval. If Grantee is entitled
to exercise the Option and has sent a notice to Issuer pursuant to Section 2(e),
each of Grantee and Issuer will use its reasonable efforts to make all filings
with, and to obtain consents of, all third parties and the Federal Reserve Board
and other Governmental Authorities necessary to the consummation of the
transactions contemplated by this Agreement, including, without limitation,
making application for listing or quotation, as the case may be, of the shares
of Common Stock issuable hereunder on the NASDAQ National Market System and
applying to the Federal Reserve Board under the BHC Act and to state banking
authorities for approval to acquire the shares issuable hereunder.
-12-
<PAGE>
SECTION 13. Specific Performance. The parties hereto acknowledge that
damages would be an inadequate remedy for a breach of this Agreement by either
party hereto and that the obligations of the parties shall hereto be enforceable
by either party hereto through injunctive or other equitable relief. Both
parties further agree to waive any requirement for the securing or posting of
any bond in connection with the obtaining of any such equitable relief and that
this provision is without prejudice to any other rights that the parties hereto
may have for any failure to perform this Agreement.
SECTION 14. Separability of Provisions. If any term, provision,
covenant or restriction contained in this Agreement is held by a court or a
federal or state regulatory agency of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and effect,
and shall in no way be affected, impaired or invalidated. If for any reason such
court or regulatory agency determines that Grantee is not permitted to acquire,
or Issuer is not permitted to repurchase, pursuant to Section 7, the full number
of shares of Common Stock provided in Section 1 (as adjusted pursuant hereto),
it is the express intention of Issuer to allow Grantee to acquire or to require
Issuer to repurchase such lesser number of shares as may be permissible, without
any amendment or modification hereof.
SECTION 15. Notices. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when delivered
in person, by cable, telegram, telecopy or telex, or by registered or certified
mail (postage prepaid, return receipt requested) at the respective addresses of
the parties set forth in the Merger Agreement.
SECTION 16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
SECTION 17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 18. Expenses. Except as otherwise expressly provided herein,
each of the parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
SECTION 19. Entire Agreement; No Third-Party Beneficiaries. Except as
otherwise expressly provided herein or in the Merger Agreement, this Agreement
contains the entire agreement between the parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereof, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto, and their respective successors and assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
SECTION 20. Merger Agreement. Nothing contained in this Agreement shall
be deemed to authorize Issuer or Grantee to breach any provision of the Merger
Agreement.
SECTION 21. Majority in Interest. In the event that any selection or
determination is to be made by Grantee or the Owner hereunder and at the time of
such selection or determination there is more than one Grantee or Owner, such
selection shall be made by a majority in interest of such Grantees or Owners.
-13-
<PAGE>
SECTION 22. Further Assurances. In the event of any exercise of the
Option by Grantee, Issuer and such Grantee shall execute and deliver all other
documents and instruments and take all other action that may be reasonably
necessary in order to consummate the transactions provided for by such exercise.
SECTION 23. No Rights as Shareholder. Except to the extent Grantee
exercises the Option, Grantee shall have no rights to vote or receive dividends
or have any other rights as a shareholder with respect to shares of Common Stock
covered hereby.
SECTION 24. Grantee Representation. The Option and any Option Shares or
other securities acquired by Grantee upon exercise of the Option are not being,
and will not be, as the case may be, acquired with a view to the public
distribution thereof in the United States except as provided for in Section 6
hereof and neither the Option nor any Option Shares or other securities acquired
by Grantee upon exercise of the Option will be transferred or otherwise disposed
of by Grantee except in a transaction registered or exempt from registration
under the Securities Act.
-14-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Prime Stock
Option Agreement between Prime Bancorp, Inc., as Issuer, and Summit Bancorp., as
Grantee, to be executed on its behalf by their officers thereunto duly
authorized, all as of the 18th day of February, 1999.
SUMMIT BANCORP.
By /s/ John G. Collins
--------------------------------------
John G. Collins
Vice Chairman
PRIME BANCORP, INC.
By /s/ James J. Lynch
--------------------------------------
James J. Lynch
President and Chief Executive Officer
-15-
<PAGE>
PRIME BANCORP, INC.
DIRECTORS DEFERRED COMPENSATION PLAN
<PAGE>
ARTICLE I
ESTABLISHMENT OF THE PLAN
Prime Bancorp, Inc. (the "Prime") hereby establishes this Directors
Deferred Compensation Plan ("Plan") upon the terms and conditions hereinafter
stated.
ARTICLE II
PURPOSE OF THE PLAN
The purpose of this Plan is to provide a mechanism for each non-officer
member of Prime's Board of Directors to defer receipt of retainer and meeting
fees to be earned for services to be performed as a member of the Board.
ARTICLE III
DEFINITIONS
3.01 "Account" means the unfunded deferred compensation account in the name of
the Participant established by Prime on its books.
3.02 "Agreement" means a Plan agreement executed by a Director memorializing
participation in the Plan.
3.03 "Beneficiary Designation" shall mean the selection made by the Participant
in the Agreement regarding the beneficiary to receive unpaid amounts in
the Participation Account. In the event that a Participation designates
his beneficiary to receive such unpaid amounts and the beneficiary dies
before the payment of all amounts in the Participant's Account, the
beneficiary's estate shall be entitled to receive such unpaid amounts,
absent a contingent beneficiary or an amended beneficiary designation
submitted by the Participant.
3.04 "Board" means Board of Directors of the Prime.
3.05 "Common Stock" means the shares of common stock of Prime.
3.06 "Compensation" means retainer and meeting fees for services to be
performed as a Director.
3.07 "Delivered" or "Delivery" means delivery by a Director of the Agreement to
the Secretary of Prime.
3.08 "Director" means a member of the Board.
3.09 "Fee Election" shall mean the selection made by Participant in the
Agreement to elect or designate a percentage of Compensation or absolute
dollar amount not less than five thousand dollars ($5,000.00) to be
deferred; the Plan does not enable a Participant to elect a different
deferral percentage for each of the retainer and meeting fees.
3.10 "Investment Election" shall mean the selection made by the Participant in
the Agreement to elect or designate an investment alternative for the
balance in the Account.
3.11 "Participant" means each Director whose Agreement is Delivered.
3.12 "Payment Date" means the date on which Compensation shall be credited to
the Account and is the date on which Compensation would otherwise be
payable to the Participant had he not elected to defer all or a portion of
the Compensation.
3.13 "Payment Election" shall mean the selection made by the Participant in the
Agreement regarding the event or date when Compensation and any investment
amounts credited thereon shall be paid and whether the payout shall be in
a lump sum or in a designated number of annual installments (not to exceed
ten annual installments).
3.14 "Plan Year" shall commence on January 1 and end on December 31.
3.15 "Valuation Date" means December 31, March 31, June 30 and September 30.
1
<PAGE>
ARTICLE IV
DEFERRAL OF COMPENSATION
Deferral of Compensation shall be effected by completing the then
current Agreement, which must be signed and dated by the Director and Delivered
to the Secretary of Prime. Compensation shall not be deferred until the next
Plan Year after Delivery, or, in the case of a newly elected or appointed
Director or the initial offer to defer compensation upon adoption of this Plan
by the Board, Compensation shall be immediately deferred provided his Agreement
is Delivered within 45 days after election, appointment or Plan adoption,
respectively. Once an Agreement has been Delivered, the deferral election shall
become irrevocable for the next Plan Year and, unless revoked in writing or
superseded by a new election effective for Plan Years after the year in which
such revocation or new election is Delivered, shall continue in effect for each
Plan Year thereafter.
ARTICLE V
INVESTMENT OPTIONS
The amount credited to a Participant's Account shall be based on one of
the following two investment options:
5.01 Prime Common Stock Investment Option:
The value of which on any given date will be the then market value of
(i) the number of shares (including fractional shares) of Prime Common Stock
which could have been purchased at market value with deferred Compensation on
the Payment Date, (ii) plus the number of shares (including fractional shares)
of Common Stock which could have been purchased had all dividends that would
have been paid on shares of Common Stock described in clause (i) and this clause
(ii) been used to purchase additional shares at market value on each dividend
payment date. Market value on all dates means the closing price of the Common
Stock on the date in question, as reported with respect to the principal market
in which such shares are then traded, or if no such closing prices are reported,
the mean between the high bid and low asked price that day on the principal
market or national quotation system then in use. Appropriate adjustments shall
be made in the case of capital changes, such as stock dividends, stock splits,
or merger, consolidation, reorganization, liquidation or recapitalization of
Prime.
2
<PAGE>
5.02 Prime Interest Rate Option
The value of which will be determined by the deferred Compensation
which would have been paid to the Participant, plus an amount equal to the
interest which would have been earned thereon had the amounts been invested in
Prime Bank's 30 day Certificate of Deposit, and compounded in accordance with
the provisions of said account.
ARTICLE VI
DEFAULT ELECTIONS
Failure to complete the Agreement shall not void a Participant's
election to defer all or a portion of his Compensation provided that the
Agreement is executed and Delivered. However, in the event that one or more of
the four categories is not chosen by the Participant, then the following
"default" elections or designation for such incomplete category or categories
shall be deemed to have been made:
Fee Election 100% deferral of Compensation;
Investment Election Prime Common Stock Investment Option;
Payment Election Lump-sum payment upon retirement from
the Board; and
Beneficiary Election The Participant's surviving spouse, or
if none, Participant's legal
representatives.
ARTICLE VII
AMENDMENT/TERMINATION BY PARTICIPANT
7.01 A participant may amend or terminate his elections or designation at any
time upon completing the appropriate provisions of the Agreement, signing and
dating it and submitting it to the Secretary or assistant thereto. Such
amendment or termination is subject to the following:
(a) Fee Election -
Amendments to the percentage level of Compensation to be deferred or
termination of deferral shall not be effective until January 1 of the next Plan
Year.
(b) Investment Election -
Amendments shall not be effective until the next Valuation Date, which
will also be the date that the balance (s) in the Account will be calculated. A
Participant who retires from the Board and who has a balance in his Account may
amend (or his designated beneficiary may amend) his investment election once per
year.
3
<PAGE>
(c) Payment Election -
Amendments shall be effective on the next Payment Date. Except as
provided below, such amendment shall only apply to Compensation earned and
credited (plus the amount that would have been earned had such Compensation been
invested in accordance with the related investment election) to the
Participant's Account after the effective date of the amendment. The balance in
the Account immediately prior to the effective date of the Payment Election
shall be paid in accordance with the prior Payment Election or Elections.
(d) Beneficiary Designation -
Effective upon receipt of a properly amended Agreement by the Secretary
of Prime.
ARTICLE VIII
ACCOUNT STATEMENTS
No later than January 31, April 30, July 31 and October 31 of each
year, a statement of account shall be sent to each Participant with a balance in
his Account listing the aggregate amount of Compensation in the Account plus the
aggregate investment amount credited thereto as of the prior Valuation Date. If
any such Valuation Date is not a date on which the principal market for the
Common Stock is open for business, then the next preceding date on which such
market is open for business shall serve as the Valuation Date.
ARTICLE IX
PAYMENT OF DEFERRED AMOUNTS
9.01 All payments from an Account shall be made solely in cash. Payment shall
commence on or before thirty days after the Valuation Date immediately following
the designated date or the date on which the designated event occurs and the
amount to be paid shall be based on the Account balance on such Valuation Date.
If a Participant elects the equal annual installment payment option, the amount
of each installment to be paid shall be determined by dividing the balance in
the Account by the number of installments remaining to be paid. The balance in
an Account subject to installment payouts shall continue to be credited with
additional investment amounts in accordance with the applicable Investment
Election or Elections. In the event of the death or disability of a Participant,
the Executive Compensation Committee of the Board may accelerate the payment of
any installment or lump sum payment because of hardship or other circumstances
deemed in the sole discretion of such Committee to warrant such acceleration.
4
<PAGE>
9.02 Notwithstanding the foregoing, (i) at any time earlier than 12 months prior
to the date on which payment of all or a portion of an account would be payable,
a Participant may elect to extend the deferral of all of his Account, or of such
portion of his Account as would otherwise be paid; and (ii) at any time earlier
than 12 months prior to the date on which a payment of all or a portion of an
Account would be payable, a Participant may modify his prior payment election
for the Account; provided that such modified payment date is on or after the
earlier of the date that he expects to retire from the Board or reaches the age
of seventy.
ARTICLE X
UNSECURED CREDITORS; NO ASSIGNMENTS
10.1 No assets of Prime shall be segregated or earmarked with respect to
compensation and investment amounts (i.e. stock price appreciation, dividend
equivalents and/or interest payments) credited to the Accounts and the balances
in such Account shall constitute unsecured contractual obligations of Prime.
10.2 Unless otherwise required by law, balances in Participant's Accounts may
not be assigned, sold, transferred, alienated, pledged or encumbered nor may
such balances be attached or otherwise subjected to legal process arising from
Participant's debts or other obligations.
ARTICLE XI
MISCELLANEOUS
11.1 The Board or the Executive Compensation Committee may amend or terminate
the Plan without the consent of any Participant (or beneficiary); provided,
however, that any amendment or termination shall be of general application to
all Participants (and beneficiaries) and shall not, without the consent of the
Participant (or beneficiary) adversely affect (i) any amount theretofore
deferred or credited to the Participant's (or beneficiary's) Account, or (ii)
the right of the Participant (or beneficiary) to receive all amounts credited to
his Account.
11.2 The Executive Compensation committee, or any successor committees as
determined by the Board, shall be the Plan Administrator.
11.3 The provisions of the Plan shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania.
11.4 Wherever appropriate, the masculine pronouns shall include the feminine
pronoun, and the singular shall include the plural.
5
<PAGE>
EXHIBIT 22.1
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
Del-Prime, Inc. Delaware
Del-Prime Investments, Inc. Delaware
Prime Abstract, Inc. Delaware
6524 Service Corporation Pennsylvania
723 Service Corporation Pennsylvania
NEFA Corporation Pennsylvania
Prime Financial, Inc. Pennsylvania
Rowland Service Corporation Pennsylvania
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (no. 33-50363) pertaining to the Prime Bancorp, Inc. Retirement Savings
Plan of our report dated January 19, 1999, except for Note 17, as to which the
date is February 17, 1999, with respect to the consolidated financial statements
of Prime Bancorp, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1998.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 26, 1999
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
Prime Bancorp, Inc.:
We consent to incorporation by reference in the Form 10-K of Prime Bancorp, Inc.
of our report dated January 16, 1998, relating to the consolidated statement of
financial condition of Prime Bancorp, Inc. and subsidiaries as of December 31,
1997, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the two year
period ended December 31, 1997, which report is incorporated by reference in the
December 31, 1998 annual report on Form 10-K of Prime Bancorp, Inc.
/s/ KPMG LLP
-------------
Philadelphia, PA
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 31,027
<INT-BEARING-DEPOSITS> 10,306
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 250,935
<INVESTMENTS-CARRYING> 56,436
<INVESTMENTS-MARKET> 57,171
<LOANS> 666,483
<ALLOWANCE> 9,569
<TOTAL-ASSETS> 1,039,340
<DEPOSITS> 702,893
<SHORT-TERM> 103,852
<LIABILITIES-OTHER> 8,289
<LONG-TERM> 134,503
0
0
<COMMON> 10,985
<OTHER-SE> 78,818
<TOTAL-LIABILITIES-AND-EQUITY> 1,039,340
<INTEREST-LOAN> 56,822
<INTEREST-INVEST> 18,183
<INTEREST-OTHER> 1,258
<INTEREST-TOTAL> 76,263
<INTEREST-DEPOSIT> 24,971
<INTEREST-EXPENSE> 35,910
<INTEREST-INCOME-NET> 40,353
<LOAN-LOSSES> 2,027
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 25,427
<INCOME-PRETAX> 18,448
<INCOME-PRE-EXTRAORDINARY> 18,448
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,143
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 8.81
<LOANS-NON> 2,911
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,474
<ALLOWANCE-OPEN> 8,485
<CHARGE-OFFS> 1,187
<RECOVERIES> 244
<ALLOWANCE-CLOSE> 9,569
<ALLOWANCE-DOMESTIC> 9,569
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,004
</TABLE>
