As filed with the Securities and Exchange Commission on October 6, 1994
Registration No. 33-_____
- ----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________________
CRESTAR FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 6711 54-0722175
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
919 East Main Street
P.O. Box 26665
Richmond, Virginia 23261-6665
(804) 782-5000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JOHN C. CLARK, III
Corporate Senior Vice President, General Counsel
and Secretary
Crestar Financial Corporation
919 East Main Street
P.O. Box 26665
Richmond, Virginia 23261-6665
(804) 782-7445
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies To:
LATHAN M. EWERS, JR. GERARD L. HAWKINS
Hunton & Williams Elias, Matz, Tiernan & Herrick L.L.P.
951 East Byrd Street 734 15th Street, N.W.
Richmond, Virginia 23219-4074 Washington, D.C. 20005
(804) 788-8269 (202) 347-0300
Approximate date of commencement of the proposed sale of the securities to the
public: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. ( )
<TABLE>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities To Be Maximum Amount Offering Price Aggregate Offering Registration
Registered To Be Registered Per Unit Price Fee
<S> <C> <C> <C> <C>
Common Stock, $5.00 par
value per share 564,000 shares(1) $16.625(2) $9,376,500 $3,234
Preferred Share Purchase
Rights(3) 564,000 rights N/A N/A N/A
(1) This Registration Statement covers the maximum number of shares of common stock of the Registrant which are
expected to be issued in connection with the transactions described herein.
(2) Estimated in accordance with Rule 457(f)(1) for the purpose of calculating the registration fee, with the market
value of Jefferson Common Stock being exchanged in the transaction for Crestar Common Stock being based upon the
average of the bid and asked prices for Jefferson Common Stock as reported by NASDAQ on October 3, 1994.
(3) The Rights to purchase Participating Cumulative Preferred Stock, Series C will be attached to and will trade with
shares of the Common Stock of Crestar Financial Corporation.
</TABLE>
_______________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant will
file a further amendment which specifically states that this Registration
Statement will thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement will become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CRESTAR FINANCIAL CORPORATION
CROSS-REFERENCE SHEET
Item of Form S-4 Location in Prospectus
1. Forepart of Facing Page; Cross Reference
Registration Statement Sheet; Outside Front Cover
and Outside Front Cover Page of Prospectus
Page of Prospectus
2. Inside Front and Inside Front Cover Page of
Outside Back Cover Prospectus; Table of Contents;
Pages of Prospectus Available Information;
Incorporation of Certain
Information by Reference
3. Risk Factors, Ratio of Summary; Comparative Per Share
Earnings to Fixed Data
Charges and Other
Information
4. Terms of the Merger Summary; The Merger;
Comparative Rights of
Shareholders; Annex I;
Annex II
5. ProForma Financial Not Applicable
Information
6. Material Contracts with Not Applicable
the Company Being
Acquired
7. Additional Information Not Applicable
Required for Reoffering
by Persons and Parties
Deemed to be
Underwriters
8. Interests of Named Not Applicable
Experts and Counsel
9. Disclosure of Not Applicable
Commission's Position
on Indemnification for
Securities Act
Liabilities
10. Information with Available Information;
Respect to S-3 Incorporation of Certain
Registrants Information by Reference;
Summary
11. Incorporation of Incorporation of Certain
Certain Information by Information by Reference
Reference
12. Information with Not Applicable
Respect to S-2 or S-3
Registrants
13. Incorporation of Not Applicable
Certain Information by
Reference
Item of Form S-4 Location in Prospectus
14. Information with Not Applicable
Respect to Registrants
Other than S-2 or S-3
Registrants
15. Information with Not Applicable
Respect to S-3
Companies
16. Information with Not Applicable
Respect to S-2 or S-3
Companies
17. Information with Summary; Supervision and
Respect to Companies Regulation; Business of
other than S-2 or S-3 Jefferson; Market for and
Companies Dividends Paid on Jefferson
Common Stock; Jefferson
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Experts; Financial
Statements of Jefferson
18. Information if Proxies, Incorporation of Certain
Consents or Information By Reference;
Authorizations are to Summary -- Shareholder
be Solicited Meeting; The Merger
19. Information if Proxies, Not Applicable
Consents or
Authorizations are not
to be Solicited, or in
an Exchange Offer
<PAGE>
[Jefferson Savings & Loan Association, F.A. Letterhead]
________ __, 1994
Dear Shareholder:
You are cordially invited to attend a Special Meeting of
Shareholders of Jefferson Savings & Loan Association, F.A. ("Jefferson")
on November 10, 1994 at 4:00 p.m., Eastern Time, at the Fauquier Springs
Country Club, located at 9236 Tournament Drive, Warrenton, Virginia
22186. This is a very important meeting regarding your investment in
Jefferson.
The purpose of the meeting is to consider and vote upon the
Agreement and Plan of Reorganization, dated as of September 1, 1994,
among Crestar Financial Corporation ("Crestar"), Crestar Bank and
Jefferson, and the related Plan of Merger (together, the "Agreement"),
pursuant to which, among other things, Jefferson will be merged with and
into Crestar Bank. In connection with the Merger, each share of common
stock of Jefferson outstanding immediately prior to consummation of the
Merger (other than shares held by Crestar) will be converted into shares
of common stock of Crestar and/or, subject to certain limitations, cash,
as described in the accompanying Proxy Statement/Prospectus.
Your Board of Directors unanimously recommends that you vote in
favor of the Agreement and the Merger, which the Board believes is in
the best interests of the shareholders of Jefferson.
Enclosed is a Notice of Special Meeting of Shareholders, a Proxy
Statement/Prospectus containing a discussion of the Agreement and the
Merger, a proxy card, and a Cash Option Form, which is described in the
Proxy Statement/Prospectus. Please complete, sign and date the enclosed
proxy card and return it as soon as possible in the envelope provided.
If you decide to attend the special meeting, you may vote your shares in
person whether or not you have previously submitted a proxy. It is
important to understand that the Agreement and Merger must be approved
by the holders of two-thirds of all outstanding shares of common stock
of Jefferson and that the failure to vote will have the same effect as a
vote against the proposal. On behalf of the Board, thank you for your
attention to this important matter.
Very truly yours,
[___________________] [_____________________]
Thomas W. Winfree Robin C. Gulick
President and Chief Chairman of the Board
Executive Officer
JEFFERSON SAVINGS & LOAN ASSOCIATION, F.A.
550 Broadview Avenue
Warrenton, Virginia 22186
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on November 10, 1994
TO THE SHAREHOLDERS OF JEFFERSON SAVINGS & LOAN ASSOCIATION, F.A.:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders has
been called by the Board of Directors of Jefferson Savings & Loan
Association, F.A. ("Jefferson") and will be held at the Fauquier Springs
Country Club, located at 9236 Tournament Drive, Warrenton, Virginia
22186, on November 10, 1994 at 4:00 p.m. for the purpose of considering
and voting upon the following matters:
1. Proposed Merger. To consider and vote upon the Agreement and
Plan of Reorganization dated as of September 1, 1994 (the "Agreement")
and a related Plan of Merger providing for the merger of Jefferson with
and into Crestar Bank (the "Merger"). The Agreement is attached to the
accompanying Proxy Statement/Prospectus as Annex I.
2. Other Business. To consider and vote upon such other matters
as may properly come before the meeting.
Only those Jefferson shareholders of record at the close of
business on September 27, 1994 will be entitled to notice of and to vote
at the meeting. The affirmative vote of the holders of two-thirds of
the issued and outstanding shares of Jefferson common stock entitled to
vote at the meeting is required to approve the Merger. Pursuant to the
regulations of the Office of Thrift Supervision, shareholders of
Jefferson will not be permitted to exercise dissenter's rights and
demand "fair value" for their shares. See "No Dissenter's Rights" and
"Comparative Rights of Shareholders -- Dissenter's Rights" in the
accompanying Proxy Statement/Prospectus.
By Order of the Board of Directors,
William M. Rider
Secretary
________ __, 1994
Warrenton, Virginia
THE BOARD OF DIRECTORS OF JEFFERSON UNANIMOUSLY RECOMMENDS THAT THE
HOLDERS OF JEFFERSON COMMON STOCK VOTE TO APPROVE THE MERGER PROPOSAL.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING
POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE
MEETING. SHAREHOLDERS ATTENDING THE MEETING MAY PERSONALLY VOTE ON ALL
MATTERS WHICH ARE CONSIDERED, IN WHICH EVENT THE SIGNED PROXIES ARE
REVOKED.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
OF
JEFFERSON SAVINGS & LOAN ASSOCIATION, F.A.
To Be Held On November 10, 1994
_______________
PROSPECTUS OF
CRESTAR FINANCIAL CORPORATION
Common Stock
par value $5.00
_______________
This Proxy Statement/Prospectus is being furnished to the holders
of common stock, par value $3.00 per share (the "Jefferson Common
Stock") of Jefferson Savings & Loan Association, F.A., a federally
chartered savings association ("Jefferson"), in connection with the
solicitation of proxies by the Jefferson Board of Directors (the
"Jefferson Board") for use at a special meeting of Jefferson
shareholders to be held at 4:00 p.m. on November 10, 1994, at the
Fauquier Springs Country Club, located at 9236 Tournament Drive,
Warrenton, Virginia 22186 (the "Jefferson Shareholders Meeting").
At the Jefferson Shareholders Meeting, the shareholders of record
of Jefferson Common Stock as of the close of business on September 27,
1994, will consider and vote upon a proposal to approve the Agreement
and Plan of Reorganization (the "Agreement"), dated as of September 1,
1994, by and among Crestar Financial Corporation ("Crestar"), Crestar
Bank, a Virginia banking corporation wholly owned by Crestar ("Crestar
Bank"), and Jefferson, pursuant to which, among other things, Jefferson
will merge with and into Crestar Bank (the "Merger"). Upon consummation
of the Merger, which is expected to occur in December 1994, each
outstanding share of Jefferson Common Stock (other than shares held by
Crestar) will be converted into and represent the right to receive (upon
a Jefferson shareholder's election) either (i) the number of shares of
Crestar Common Stock determined by dividing $17.00 per share of
Jefferson Common Stock (the "Price Per Share") by the average closing
price of Crestar Common Stock (the "Average Closing Price") as reported
on the New York Stock Exchange ("NYSE") for each of the 10 trading days
ending on the tenth day prior to the day of the Effective Time of the
Merger (as defined in the Agreement) (the result of the quotient
determined by dividing the Price Per Share by the Average Closing Price
and rounded to the nearest thousandths decimal point being hereinafter
called the "Exchange Ratio"), or (ii) $17.00 in cash (provided that the
number of shares of Jefferson Common Stock for which shareholders elect
to receive cash will not exceed 40% of the outstanding shares of
Jefferson Common Stock). Based on the Average Closing Price of Crestar
Common Stock on the NYSE for the ten trading days prior to August 31,
1994 of $48.25, each share of Jefferson Common Stock would have been
exchanged for .352 shares of Crestar Common Stock if such date had been
the Effective Time of the Merger. Such number of shares of Crestar
Common Stock may increase or decrease depending on the Average Closing
Price as described herein. See "The Merger -- Determination of Exchange
Ratio and Exchange for Crestar Common Stock." For a description of the
Agreement, which is included herein in its entirety as Annex I to this
Proxy Statement/Prospectus, see "The Merger."
This Proxy Statement/Prospectus also constitutes a prospectus of
Crestar relating to the shares of common stock of Crestar, $5.00 par
value per share (together with the Preferred Share Purchase Rights as
hereinafter defined) that are issuable to holders of the Jefferson
Common Stock upon consummation of the Merger. Based on the 1,310,876
shares of Jefferson Common Stock and options to purchase 74,512 shares
of Jefferson Common Stock outstanding on the date hereof, a maximum of
564,000 shares of Crestar Common Stock will be issuable upon
consummation of the Merger.
_______________
This Proxy Statement/Prospectus and the accompanying proxy card are
first being mailed to shareholders of Jefferson on or about ________ __,
1994.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF CRESTAR COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
_______________
The date of this Proxy Statement/Prospectus is ________ __, 1994.
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 1
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . 2
CERTAIN INFORMATION REGARDING JEFFERSON . . . . . . . . . . . . . . . 3
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Parties to the Merger. . . . . . . . . . . . . . . . . . . . . . 4
Shareholders Meeting . . . . . . . . . . . . . . . . . . . . . . 5
Vote Required; Record Date . . . . . . . . . . . . . . . . . . . 5
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Exchange Ratio . . . . . . . . . . . . . . . . . . . . . . . 6
Cash Election. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Effective Time of the Merger . . . . . . . . . . . . . . . . . . 7
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . 7
Conditions to Consummation . . . . . . . . . . . . . . . . . . . 8
Conduct of Business Pending the Merger . . . . . . . . . . . . . 8
Interests of Certain Persons in the Merger . . . . . . . . . . . 8
Resale of Crestar Common Stock . . . . . . . . . . . . . . . . . 8
Certain Federal Income Tax Consequences of the Merger. . . . . . 9
Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . 9
Market Prices Prior to Announcement of the Merger. . . . . . . . 9
Comparative Per Share Data . . . . . . . . . . . . . . . . . . . 10
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 12
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 16
THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Background and Reasons . . . . . . . . . . . . . . . . . . . . . 18
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . 19
Effective Time of the Merger . . . . . . . . . . . . . . . . . . 24
Determination of Exchange Ratio and Exchange for Crestar
Common Stock. . . . . . . . . . . . . . . . . . . . . . . . 24
Cash Election; Election Procedures . . . . . . . . . . . . . . . 25
Business of Jefferson Pending the Merger . . . . . . . . . . . . 26
Conditions to Consummation of the Merger . . . . . . . . . . . . 27
Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . 28
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . 30
Operations After the Merger. . . . . . . . . . . . . . . . . . . 30
Interest of Certain Persons in the Merger. . . . . . . . . . . . 31
Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Effect on Jefferson Employee Benefits Plans. . . . . . . . . . . 34
Certain Federal Income Tax Consequences. . . . . . . . . . . . . 35
No Dissenter's Rights. . . . . . . . . . . . . . . . . . . . . . 40
BUSINESS OF CRESTAR . . . . . . . . . . . . . . . . . . . . . . . . . 40
BUSINESS OF JEFFERSON . . . . . . . . . . . . . . . . . . . . . . . . 43
PRICE RANGE OF COMMON STOCK
AND DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . 44
JEFFERSON SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS . . . . . . . . . . . . . . . . . . . . . . 45
SUPERVISION AND REGULATION OF CRESTAR . . . . . . . . . . . . . . . . 48
Bank Holding Companies . . . . . . . . . . . . . . . . . . . . . 48
Capital Requirements . . . . . . . . . . . . . . . . . . . . . . 49
Limits on Dividends and Other Payments . . . . . . . . . . . . . 51
Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Other Safety and Soundness Regulations . . . . . . . . . . . . . 53
DESCRIPTION OF CRESTAR CAPITAL STOCK. . . . . . . . . . . . . . . . . 54
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . 55
Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Virginia Stock Corporation Act . . . . . . . . . . . . . . . . . 56
COMPARATIVE RIGHTS OF SHAREHOLDERS. . . . . . . . . . . . . . . . . . 58
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 58
Amendment of Articles or Bylaws. . . . . . . . . . . . . . . . . 58
Required Shareholder Vote for Certain Actions. . . . . . . . . . 59
Director Nominations . . . . . . . . . . . . . . . . . . . . . . 59
Directors and Classes of Directors; Vacancies and Removal of
Directors . . . . . . . . . . . . . . . . . . . . . . . . . 60
Anti-Takeover Provisions . . . . . . . . . . . . . . . . . . . . 61
Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . 61
Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Conversion; Redemption; Sinking Fund . . . . . . . . . . . . . . 62
Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . 62
Dividends and Other Distributions. . . . . . . . . . . . . . . . 62
Special Meetings of Shareholders . . . . . . . . . . . . . . . . 63
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 64
Shareholder Proposals. . . . . . . . . . . . . . . . . . . . . . 64
Shareholder Inspection Rights; Shareholder Lists . . . . . . . . 65
Shareholder Rights Plan. . . . . . . . . . . . . . . . . . . . . 66
Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . 66
RESALE OF CRESTAR COMMON STOCK. . . . . . . . . . . . . . . . . . . . 67
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
LEGAL OPINIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
ANNEX I - Agreement and Plan of Reorganization dated September 1,
1994; Plan of Merger
ANNEX II - Stock Option Agreement dated September 1, 1994
ANNEX III - Opinion of Scott & Stringfellow Inc.
ANNEX IV - Jefferson Form 10-KSB for the year ended September 30, 1993
ANNEX V - Jefferson's 1993 Annual Report to Shareholders
ANNEX VI - Jefferson Form 10-QSB for the quarter ended June 30, 1994
AVAILABLE INFORMATION
Crestar and Jefferson are subject to the reporting and
informational requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and in accordance therewith Crestar files reports, proxy
statements and other information with the Securities and Exchange
Commission (the "SEC") and Jefferson files reports, proxy statements and
other information with the Office of Thrift Supervision ("OTS").
Reports, proxy statements and other information of Crestar filed with
the SEC can be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its Regional Offices located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611-
2511 or Seven World Trade Center (13th Floor), New York, New York
10048. Copies of such material can be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such reports, proxy statements and other
information also may be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. Reports, proxy
statements and other information filed by Jefferson can be inspected and
copied at the public reference facilities of the OTS at 1700 G Street,
N.W., Washington, D.C. 20552 and at the Southeast Regional Office, 1475
Peachtree Street, N.E., Atlanta, Georgia 30348, and at the offices of
the National Association of Securities Dealers, Inc. located at 1735 K
Street, N.W., Washington, D.C. 20006. As permitted by the Rules and
Regulations of the SEC, this Proxy Statement/Prospectus does not contain
all the information set forth in the Registration Statement on Form S-4,
of which this Proxy Statement/Prospectus is a part, and exhibits thereto
(together with the amendments thereto, the "Registration Statement"),
which has been filed by Crestar with the SEC under the Securities Act of
1933 (the "1933 Act") with respect to Crestar Common Stock and to which
reference is hereby made.
No person has been authorized to give any information or to make
any representation other than as contained herein in connection with the
offer contained in this Proxy Statement/Prospectus, and if given or
made, such information or representation must not be relied upon as
having been authorized by Crestar or Jefferson. This Proxy
Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities
to which it relates, nor does it constitute an offer to or solicitation
of any person in any jurisdiction to whom it would be unlawful to make
such an offer or solicitation. Neither the delivery of this Proxy
Statement/Prospectus nor the distribution of any of the securities to
which this Proxy Statement/Prospectus relates shall, at any time, imply
that the information herein is correct as of any time subsequent to the
date hereof.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE CERTAIN
DOCUMENTS RELATING TO CRESTAR AND JEFFERSON THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. CRESTAR DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE UPON REQUEST FROM CRESTAR'S INVESTOR RELATIONS DEPARTMENT,
CRESTAR FINANCIAL CORPORATION, 919 EAST MAIN STREET, RICHMOND, VIRGINIA
23261-6665, (804) 782-7152. JEFFERSON DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE UPON REQUEST FROM WILLIAM M. RIDER, SECRETARY, JEFFERSON SAVINGS
& LOAN ASSOCIATION, F.A., 550 BROADVIEW AVENUE, WARRENTON, VIRGINIA
22186, (703) 347-3531. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY ________ __, 1994.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by Crestar with the SEC are
incorporated by reference in this Proxy Statement/Prospectus: (i)
Crestar's Annual Report on Form 10-K for the year ended December 31,
1993; (ii) Crestar's Quarterly Reports on Form 10-Q for the periods
ended March 31, 1994 and June 30, 1994; (iii) the description of Crestar
Common Stock in Crestar's registration statement filed under the
Exchange Act with respect to Crestar Common Stock, including all
amendments and reports filed for the purpose of updating such
description; (iv) Crestar's Current Report on Form 8-K, dated March 10,
1994; and (v) Crestar's Current Report on Form 8-K, dated September 23,
1994, which includes as Exhibits 99(i), 99(ii), 99(iii) and 99(iv),
which are Jefferson's Form 10-KSB for the year ended September 30, 1993,
Jefferson's 1993 Annual Report to Shareholders, Notice of Meeting and
Proxy Statement for Jefferson's 1994 Annual Meeting of Stockholders held
on January 27, 1994, and Jefferson's Form 10-QSB for the quarter ended
June 30, 1994, respectively.
All documents filed by Crestar and Jefferson pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date hereof and prior to the date of the Jefferson Shareholder Meeting
are hereby incorporated by reference in this Proxy Statement/Prospectus
and will be deemed a part hereof from the date of filing of such
documents. Any statement contained herein, in any supplement hereto or
in a document incorporated or deemed to be incorporated by reference
herein will be deemed to be modified or superseded for purposes of the
Registration Statement and this Proxy Statement/Prospectus to the extent
that a statement contained herein, in any supplement hereto or in any
subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded will not be deemed, except
as so modified or superseded, to constitute a part of the Registration
Statement, this Proxy Statement/Prospectus or any supplement hereto.
Also incorporated by reference herein is the Agreement and Plan of
Reorganization among Crestar, Crestar Bank, and Jefferson, dated
September 1, 1994, which is attached to this Proxy Statement/Prospectus
as Annex I.
CERTAIN INFORMATION REGARDING JEFFERSON
Selected portions of certain reports filed by Jefferson with the
OTS are included (without the exhibits thereto) as Annexes to this Proxy
Statement/Prospectus. Portions of Jefferson's Annual Report on Form 10-
KSB for the fiscal year ended September 30, 1993 (the "Jefferson Form
10-K") appear as Annex IV; portions of Jefferson's 1993 Annual Report to
Stockholders (the "Jefferson Annual Report"), including the audited
financial statements of Jefferson and notes thereto, appear as Annex V;
and portions of Jefferson's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1994 appears as Annex VI. Such Annexes
(excluding any documents incorporated by reference therein or exhibits
thereto) are part of this Proxy Statement/Prospectus and should be
carefully reviewed for the information regarding Jefferson contained
therein. The portions of the reports which do not appear in the
Annexes, as well as the documents incorporated by reference by, or
included as exhibits to, such reports are NOT a part of this Proxy
Statement/Prospectus or the Registration Statement.
SUMMARY
The following summary is not intended to be a complete description
of all material facts regarding Crestar, Jefferson and the matters to be
considered at the Jefferson Shareholder Meeting and is qualified in all
respects by the information appearing elsewhere or incorporated by
reference in this Proxy Statement/Prospectus, the Annexes hereto and the
documents referred to herein. Shareholders are urged to carefully read
all such information.
Parties to the Merger
Crestar. Crestar is the holding company for Crestar Bank
(Virginia), Crestar Bank NA (Washington, D.C.) and Crestar Bank MD
(Maryland). At June 30, 1994, Crestar had approximately $14.3 billion
in total assets, $11.4 billion in total deposits, and $1.1 billion in
total shareholders' equity.
In 1963, six Virginia banks combined to form United Virginia
Bankshares Incorporation ("UVB"), a bank holding company formed under
the Bank Holding Company Act of 1956 (the "BHCA"). UVB (parent company
of United Virginia Bank) extended its operations into the District of
Columbia by acquiring NS&T Bank, N.A. on December 27, 1985 and into
Maryland by acquiring Bank of Bethesda on April 1, 1986. On September
1, 1987, UVB became Crestar Financial Corporation and its bank
subsidiaries adopted their present names.
Crestar serves customers through a network of 332 banking offices
and 272 automated teller machines (as of June 30, 1994). Crestar offers
a broad range of banking services, including various types of deposit
accounts and instruments, commercial and consumer loans, trust and
investment management services, bank credit cards and international
banking services. Crestar's subsidiary, Crestar Insurance Agency, Inc.,
offers a variety of personal and business insurance products.
Securities brokerage and investment banking services are offered by
Crestar's subsidiary, Crestar Securities Corporation. Mortgage loan
origination, servicing and wholesale lending are offered by Crestar
Mortgage Corporation, and investment advisory services are offered by
Capitoline Investment Services Incorporated, both of which are
subsidiaries of Crestar Bank. These various Crestar subsidiaries
provide banking and non-banking services throughout Virginia, Maryland
and Washington, D.C., as well as certain non-banking services to
customers in other states.
The executive offices of Crestar are located in Richmond, Virginia
at Crestar Center, 919 East Main Street. Regional headquarters are
located in Norfolk and Roanoke, Virginia and in Washington, D.C.
Crestar's principal Operations Center is located in Richmond.
Jefferson. Jefferson Savings & Loan Association, F.A. is a
federally chartered stock savings association which attracts deposits
from the general public and uses such funds, together with borrowings,
to originate loans secured primarily by first liens on residential real
estate, and, to a lesser extent, investing such funds in mortgage-backed
securities, commercial real estate, nonresidential real estate and
consumer loans.
Jefferson commenced operations in 1960, and through a number of
mergers and acquisitions, expanded its branch network into Culpeper,
Leesburg, Luray, Charlottesville and Front Royal, Virginia. Jefferson
adopted its federal charter in 1990.
At June 30, 1994, Jefferson had total assets of approximately $289
million, total deposits of approximately $269 million and total
stockholders' equity of approximately $11.7 million. At such date,
Jefferson failed to meet its risk-based capital requirement by
approximately $535,000. As a result, on September 16, 1994, Jefferson
filed a Capital Restoration Plan with the OTS in which Jefferson
proposed to return to risk-based capital compliance by September 30,
1994. Management of Jefferson believes that the OTS will accept and
approve such Plan.
Shareholders Meeting
The Jefferson Shareholders Meeting will be held on November 10,
1994 at 4:00 p.m. at the Fauquier Springs Country Club, located at 9236
Tournament Drive, Warrenton, Virginia 22186 for the purpose of
considering and voting upon a proposal to approve the Agreement and the
related Plan of Merger.
Vote Required; Record Date
Only Jefferson shareholders of record at the close of business on
September 27, 1994 (the "Record Date") will be entitled to vote at the
Jefferson Shareholder Meeting. The affirmative vote of the holders of
two-thirds of the shares outstanding on such date entitled to vote at
the meeting is required to approve the Merger. As of the Record Date,
there were 1,310,876 shares of Jefferson Common Stock entitled to be
voted, held by approximately __ shareholders of record.
The directors of Jefferson and their affiliates beneficially owned,
as of the Record Date, 418,635 shares or approximately 31.9% of the
1,310,876 outstanding shares of Jefferson Common Stock. The directors
of Jefferson have agreed with Crestar to recommend the approval of the
Merger to the stockholders of Jefferson and to vote the shares of
Jefferson Common Stock beneficially owned by them, and with respect to
which they have the power to vote, in favor of the Merger.
The Board of Directors of Crestar has approved the Merger and
approval of the Merger by Crestar shareholders is not required by the
Virginia Stock Corporation Act ("VSCA").
The Merger
Pursuant to the Agreement, at the Effective Time of the Merger,
Jefferson will merge with and into Crestar Bank in accordance with the
Agreement and the Plan of Merger whereby the separate existence of
Jefferson will cease. At the Effective Time of the Merger, each
outstanding share of Jefferson Common Stock (other than shares held by
Crestar) will be converted into and represent the right to receive (upon
a Jefferson shareholder's election) either (i) a number of shares of
Crestar Common Stock, determined by the Exchange Ratio, or (ii) $17.00
in cash (provided that the number of shares of Jefferson Common Stock
for which shareholders elect to receive cash will not exceed 40% of the
outstanding shares of Jefferson Common Stock). The Merger is intended
to qualify as an "Oakar" transaction to avoid the payment of FDIC exit
and entrance fees in accordance with Section 5(d)(3) of the Federal
Deposit Insurance Act ("FDIA"). Pursuant to the regulations of the OTS,
Jefferson stockholders will not be permitted to exercise dissenter's
rights with respect to the Merger or seek the payment of the "fair
value" of their shares of Jefferson Common Stock. See "No Dissenter's
Rights" and "Comparative Rights of Shareholders -- Dissenter's Rights."
The Exchange Ratio
For the purpose of determining the Exchange Ratio, each share of
Jefferson Common Stock has been valued at $17.00 (the "Merger
Consideration"). The number of shares of Crestar Common Stock to be
delivered for each share of Jefferson Common Stock will be determined by
dividing $17.00 per share of Jefferson Common Stock by the average
closing price of Crestar Common Stock as reported on the New York Stock
Exchange ("NYSE") for each of the 10 trading days ending on the 10th day
prior to the day of the Effective Time of the Merger (as defined in the
Agreement). The Exchange Ratio would be appropriately adjusted in the
event of any distribution (other than cash dividends) with respect to
Crestar Common Stock which occurs prior to the Effective Time of the
Merger. Holders of options to purchase Jefferson Common Stock will be
given the opportunity to: (i) allow such options to terminate and
receive the difference between the Price Per Share and the option
exercise price in cash; (ii) exercise the options before the Effective
Time of the Merger and receive the Merger Consideration; or (iii) have
such options assumed by Crestar to become options to purchase Crestar
Common Stock. See "The Merger -- Determination of Exchange Ratio and
Exchange for Crestar Common Stock."
Cash Election
Holders of Jefferson Common Stock will be given the option of
exchanging all or any part of their shares for $17.00 cash per share of
Jefferson Common Stock. The number of shares exchanged for cash may not
exceed 40% of the outstanding shares of Jefferson Common Stock. Because
the number of shares exchanged for cash may not exceed 40% of the
outstanding shares of Jefferson Common Stock, the extent to which the
cash elections will be accommodated will depend upon the number of
Jefferson shareholders who elect to receive cash. Accordingly, a
Jefferson shareholder who elects to receive cash may instead receive a
portion of such cash election and/or shares of Crestar Common Stock
(plus cash in lieu of fractional shares).
IF A JEFFERSON SHAREHOLDER ELECTS TO SURRENDER SHARES FOR CASH, HE
MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS PROXY
STATEMENT/PROSPECTUS PRIOR TO OR AT THE JEFFERSON SHAREHOLDER MEETING.
ANY JEFFERSON SHAREHOLDER WHO DOES NOT COMPLETE AND RETURN A CASH OPTION
FORM PRIOR TO OR AT THE JEFFERSON SHAREHOLDER MEETING CAN ONLY RECEIVE
CRESTAR COMMON STOCK IN THE MERGER. ONCE THE VOTE ON THE MERGER HAS
BEEN TAKEN AT THE JEFFERSON SHAREHOLDER MEETING, THE CASH ELECTION IS
IRREVOCABLE. THE CASH OPTION FORM MUST BE ACCOMPANIED BY THE STOCK
CERTIFICATES TO BE EXCHANGED FOR CASH. Jefferson will hold the
certificates for safekeeping pending the Effective Time of the Merger,
at which time they will be exchanged for cash, or in the event of
proration, cash and Crestar Common Stock. If the Merger is not
consummated, Jefferson will return the certificates. See "The Merger --
Cash Election; Election Procedures."
Effective Time of the Merger
The Merger is expected to be consummated in December 1994.
Jefferson and Crestar each has the right, acting unilaterally, to
terminate the Agreement should the Merger not be consummated by June 30,
1995. See "The Merger -- Termination."
Opinion of Financial Advisor
Jefferson has received the opinion of Scott & Stringfellow, Inc.
("Scott & Stringfellow") that the Merger Consideration to be received by
the holders of Jefferson Common Stock pursuant to the terms of the
Merger is fair to the Jefferson shareholders from a financial point of
view. Scott & Stringfellow's opinion is directed only to the Merger
Consideration and does not constitute a recommendation to any holders of
Jefferson Common Stock as to how such holders of Jefferson Common Stock
should vote at the Jefferson Shareholder Meeting or as to any other
matter. Scott & Stringfellow will be paid a fee for its services at the
closing of the Merger. For additional information concerning Scott &
Stringfellow and its opinion, see "The Merger -- Opinion of Financial
Advisor" and the opinion of such firm attached as Annex III to this
Proxy Statement/Prospectus.
Conditions to Consummation
Consummation of the Merger would be accomplished by the statutory
merger of Jefferson into Crestar Bank. The Merger is contingent upon
the approvals of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") and the Bureau of Financial Institutions
of the State Corporation Commission of Virginia (the "SCC") and the
Office of Thrift Supervision (the "OTS"), which approvals have been
applied for and are expected to be received. The Merger is also subject
to other usual conditions, including receipt by Crestar and Jefferson of
the legal opinion of Hunton & Williams that the Merger will constitute a
tax-free reorganization under Section 368(a) of the Internal Revenue
Code (the "Code"). See "The Merger -- Conditions to Consummation of the
Merger."
Conduct of Business Pending the Merger
Pursuant to the terms of the Agreement, Jefferson has agreed not to
take certain actions relating to the operation of its business pending
consummation of the Merger, including the payment of cash dividends,
without the prior approval of Crestar, except as otherwise permitted by
the Agreement. See "The Merger -- Business of Jefferson Pending the
Merger."
Interests of Certain Persons in the Merger
Certain members of Jefferson's management and the Jefferson Board
have interests in the Merger in addition to their interests as
shareholders of Jefferson generally. These include, among other things,
provisions in the Agreement relating to the employment by Crestar of the
President and Chief Executive Officer of Jefferson, severance agreements
for certain officers of Jefferson, election to Crestar advisory boards
for certain directors of Jefferson, indemnification and eligibility for
certain Crestar employee benefits and provisions in other proposed
agreements between Crestar and certain of Jefferson's directors,
officers or employees relating to employment terms, directors' fees and
bonuses. See "The Merger -- Interests of Certain Persons in the
Merger."
Resale of Crestar Common Stock
Shares of Crestar Common Stock received in the Merger will be
freely transferable by the holders thereof, except for those shares held
by those holders who may be deemed to be "affiliates" (generally
including directors, certain executive officers and ten percent or more
shareholders) of Jefferson or Crestar under applicable federal
securities laws. See "Resale of Crestar Common Stock."
Certain Federal Income Tax Consequences of the Merger
The Merger is intended to be a tax-free "reorganization" as defined
in Section 368(a) of the Code, but the receipt of cash by a Jefferson
shareholder for any shares of Jefferson Common Stock or in lieu of a
fractional share of Crestar Common Stock will be a taxable transaction.
A condition to consummation of the Merger is the receipt by Crestar and
Jefferson of an opinion from Hunton & Williams, counsel to Crestar, as
to the qualification of the Merger as a tax-free reorganization and
certain other federal income tax consequences of the Merger. See "The
Merger -- Certain Federal Income Tax Consequences."
Stock Option Agreement
Pursuant to a Stock Option Agreement, dated as of September 1, 1994
(the "Stock Option Agreement"), Jefferson has granted Crestar an option
to purchase up to 260,864 shares of Jefferson Common Stock at $15 per
share exercisable upon the occurrence of a Purchase Event (as
hereinafter defined). The Stock Option Agreement terminates in
accordance with its terms on the date on which occurs the earliest of:
(i) the Effective Time of the Merger; (ii) a termination of the
Agreement in accordance with its terms (other than by Crestar under
certain circumstances) prior to the occurrence of a Purchase Event or a
Preliminary Purchase Event (as hereinafter defined); (iii) 12 months
following a termination of the Agreement by Crestar under certain
circumstances; or (iv) 12 months after the termination of the Agreement
in accordance with its terms following the occurrence of a Purchase
Event or a Preliminary Purchase Event. The Stock Option Agreement is
attached hereto as Annex II. See also "The Merger - Stock Option
Agreement."
Market Prices Prior to Announcement of the Merger
The following is information regarding the last reported sale price
per share of Crestar Common Stock on the NYSE Composite Transaction Tape
on August 31, 1994, and the closing price per share of Jefferson Common
Stock on the Nasdaq National Market System on August 31, 1994.
Equivalent
Historical Proforma
Crestar Jefferson Jefferson(a)
Common Stock $48.25 $12.00 $16.98
_______________
(a) The amount of the equivalent price for Jefferson Common Stock is
the product of multiplying an assumed Exchange Ratio of .352 shares
of Crestar Common Stock (the result of dividing $17.00 by the last
sale price of Crestar Common Stock on August 31, 1994 of $48.25) by
$48.25 per share.
Comparative Per Share Data
The following table presents historical and pro forma per share
data for Crestar, and historical and equivalent pro forma per share data
for Jefferson. The pro forma combined amounts give effect to an assumed
Exchange Ratio of .352 shares of Crestar Common Stock for each share of
Jefferson Common Stock (based on the last sale price of Crestar Common
Stock on August 31, 1994 of $48.25). The equivalent pro forma Jefferson
share amounts allow comparison of historical information about one share
of Jefferson Common Stock to the corresponding data about what one share
of Jefferson Common Stock will equate to in the combined corporation and
are computed by multiplying the pro forma combined amounts by an assumed
Exchange Ratio of .352. As discussed in "The Merger -- Determination of
Exchange Ratio and Exchange for Crestar Common Stock," the final
Exchange Ratio will be determined based on the average closing price for
Crestar Common Stock as reported on the New York Stock Exchange for each
of the 10 trading days ending on the 10th day prior to the day of the
Effective Time of the Merger (as defined in the Agreement).
Crestar's fiscal year ends December 31 and Jefferson's fiscal year
ends September 30. In the following table, Jefferson financial data are
presented consistent with the fiscal year of Crestar. Under the heading
"Years Ended December 31, 1993 and 1992," Jefferson book value per share
is as of December 31, 1993 and 1992, and net income and dividend data
reflect results for the twelve months then ended. Under the heading
"Six Months Ended June 30, 1994 and 1993, Jefferson book value per share
is as of June 30, 1994 and 1993, and net income and dividend data
reflect results for the six months then ended.
The per share data included in the following table should be read
in conjunction with the consolidated financial statements of Crestar
incorporated by reference herein and the financial statements of
Jefferson included herein and the notes accompanying all such financial
statements. The data presented below are not necessarily indicative of
the results of operations which would have been obtained if the Merger
had been consummated in the past or which may be obtainable in the
future.
COMPARATIVE PER SHARE DATA
<TABLE>
Six Months Ended Years Ended
June 30, December 31,
1994 1993 1993 1992
<S> <C> <C> <C> <C>
Book Value Per Share at Period End:(4)(5)(6)
Crestar historical . . . . . . . . . . . . . . . . . $29.29 $27.04 $28.32 $25.24
Jefferson historical . . . . . . . . . . . . . . . . 8.94 9.55 9.69 9.16
Pro forma combined per Crestar common share(1) . . . 29.24 27.04 28.31 25.25
Equivalent pro forma per Jefferson common share . . 10.29 9.52 9.97 8.89
Cash Dividends Declared Per Share:(4)(5)(6)
Crestar historical . . . . . . . . . . . . . . . . . $ .73 $ .53 $ 1.14 $ .80
Jefferson historical . . . . . . . . . . . . . . . . .00 .00 .00 .00
Pro forma combined per Crestar common share(2) . . . .71 .51 1.11 .80
Equivalent pro forma per Jefferson common share . . .25 .18 .39 .28
Net Income (Loss) Per Share:(4)(5)(6)
Crestar historical . . . . . . . . . . . . . . . . . $ 2.19 $ 1.71 $ 3.68 $ 2.32
Jefferson historical . . . . . . . . . . . . . . . . (.17) .22 .28 (2.11)
Pro forma combined per Crestar common share(3) . . . 2.16 1.70 3.64 2.28
Equivalent pro forma per Jefferson common share . . .76 .60 1.28 .80
_______________
(1) Pro forma combined book value per Crestar common share represents combined common shareholders'
equity amounts, divided by pro forma combined period-end common shares outstanding.
(2) Pro forma combined dividends per Crestar common share represent combined common dividends declared,
divided by pro forma combined average common shares outstanding.
(3) Pro forma combined net income per Crestar common share represents combined net income available to
common shareholders, divided by pro forma combined average common shares outstanding.
(4) Jefferson historical, pro forma combined per Crestar common share, and equivalent pro forma per
Jefferson share have been retroactively adjusted to reflect a one-for-three reverse stock split,
effected in April 1993 by Jefferson.
(5) Pro forma combined book value per share, cash dividends declared per share and net income (loss) per
share amounts for Crestar and Jefferson do not reflect exercise of stock options to acquire shares of
Jefferson common stock. Options to acquire 75,250 shares at an average price per share of $6.00 were
outstanding at June 30, 1994. Assumed exercise of these options does not have a significant impact
upon the combined shareholders' equity of Crestar and Jefferson or the pro forma combined cash
dividends declared per share or combined net income per share.
(6) Crestar's fiscal year ends December 31 and Jefferson's fiscal year ends September 30. In the above
table, Jefferson financial data is presented consistent with the fiscal year of Crestar. Jefferson's
book value per share is as of the dates presented, and net income and dividend data reflect results
for the periods presented.
</TABLE>
Selected Financial Data
CRESTAR FINANCIAL CORPORATION
The following Crestar consolidated financial data is qualified in
its entirety by the information included in the documents incorporated
in this Proxy Statement/Prospectus by reference. Interim financial
results, in the opinion of Crestar management, reflect all adjustments
necessary for a fair presentation of the results of operations,
including adjustments related to completed acquisitions. All such
adjustments are of a normal nature. The results of operations for an
interim period are not necessarily indicative of results that may be
expected for a full year or any other interim period. See
"Incorporation of Certain Information by Reference."
<TABLE>
Six Months Ended
June 30, Years ended December 31,
(Dollars in millions) 1994 1993 1993 1992 1991 1990 1989
except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings: (1)
Net interest income . . . . . . . $285.6 $253.4 $527.0 $482.1 $421.1 $414.2 $380.2
Provision for loan losses . . . . 18.9 21.5 48.8 99.2 209.5 131.1 44.8
Net interest income after provision
for loan losses. . . 266.7 231.9 478.2 382.9 211.6 283.1 335.3
Noninterest income . . . . . . . 131.6 123.2 248.3 218.4 233.8 166.8 148.4
Noninterest expense . . . . . . . 274.7 263.6 523.0 501.8 405.6 378.8 362.8
Income before income taxes . . . 123.6 91.5 203.5 99.5 39.8 71.1 120.9
Income tax expense . . . . . . . 40.5 26.9 63.0 19.7 6.1 9.9 17.1
Net income . . . . . . . . . . . $83.1 $64.6 $140.5 $79.8 $33.8 $61.1 $103.8
Net income applicable to common
shares. . . . . . . . $83.1 $63.4 $138.3 $77.3 $31.2 $58.5 $101.0
Per Common Share Data:
Net income (primary) . . . . . . $2.19 $1.71 $3.68 $2.32 $0.98 $1.87 $3.28
Dividends declared (2) . . . . . 0.73 0.53 1.14 0.80 0.86 1.32 1.20
Book value . . . . . . . . . . . 29.29 27.04 28.32 25.24 23.23 23.15 22.73
Average primary shares
(thousands). . . . . . . 37,901 37,061 37,587 33,286 31,921 31,218 30,739
Selected Period-End Balances:
Total assets . . . . . . . . . . $14,325.2 $13,242.2 $13,286.9 $12,674.7 $11,828.3 $11,881.2 $11,360.8
Loans (net of unearned income) . 8,588.8 7,222.8 7,287.1 6,581.7 7,065.8 7,680.2 7,769.3
Allowance for loan losses . . . . 226.7 213.0 211.0 205.0 210.0 149.4 93.2
Nonperforming assets (3). . . . 102.4 162.8 96.8 220.8 350.0 237.2 75.1
Total deposits . . . . . . . . . 11,396.5 10,049.5 10,165.8 9,581.5 8,889.6 8,506.1 8,467.3
Long-term debt . . . . . . . . . 222.4 260.8 191.2 210.4 161.9 168.4 170.1
Common shareholders' equity . . . 1,104.7 1,021.2 1,062.5 913.9 749.9 726.3 705.3
Total shareholders' equity . . . 1,104.7 1,066.2 1,062.5 958.9 794.9 771.3 750.3
Average Balances:
Total assets. . . . . . . . . . $13,487.9 $12,265.4 $12,585.4 $11,920.4 $11,440.7 $11,673.7 $10,659.4
Loans (net of unearned income) . 7,908.7 6,599.6 6,836.5 6,725.3 7,275.3 7,767.2 7,682.1
Total deposits . . . . . . . . . 10,765.2 9,404.6 9,682.8 9,540.6 8,596.9 8,296.8 8,143.6
Long-term debt . . . . . . . . . 211.8 223.7 215.4 185.9 162.8 170.1 175.1
Common shareholders' equity . . . 1,085.4 948.8 994.8 794.6 744.1 731.7 670.5
Total shareholders' equity . . . 1,085.4 993.8 1,038.7 839.6 789.1 776.7 719.7
Ratios:
Return on average assets . . . . 1.23% 1.05% 1.12% 0.67% 0.30% 0.52% 0.97%
Return on average
shareholders' equity . . . . . . 15.31 13.00 13.53 9.50 4.28 7.87 14.43
Return on average common
shareholders' equity . . . . . . 15.31 13.36 13.90 9.73 4.19 7.99 15.06
Net interest margin (4). . . . . 4.77 4.71 4.78 4.67 4.29 4.22 4.36
Nonperforming assets to
loans and foreclosed
properties at period end . . . . 1.19 2.24 1.32 3.32 4.90 3.08 0.97
Net charge-offs to average loans 0.48 1.08 0.95 1.69 2.07 0.99 0.55
Allowance for loan losses to:
Loans at period end . . . . . . 2.64 2.95 2.89 3.11 2.97 1.94 1.20
Nonperforming loans
at period end . . . . . . . . . 293 181 264 144 78 68 137
Nonperforming assets
at period end . . . . . . . . . 221 131 218 93 60 63 124
Total shareholders' equity
to total assets at
period end . . . . . . . . . . . 7.71 8.05 8.00 7.57 6.72 6.49 6.60
Capital ratios at period end:
Tier 1 risk-adjusted capital . . 9.3 10.5 10.5 10.4 7.9 7.5 7.3
Total risk-adjusted capital . . 12.0 13.6 13.5 13.7 10.6 10.1 9.6
Tier 1 leverage. . . . . . . . 7.5 8.3 7.9 7.7 6.7 6.2 6.8
_______________
(1) Amounts may not add due to rounding.
(2) In April 1991, Crestar announced that, thereafter, its dividend
declaration would be made in the month following the end of each quarter
instead of in the last month of each quarter. As a result, 1991
included only three dividend declarations; however, four dividend
payments were made.
(3) Nonperforming assets include nonaccrual loans, restructured loans and
foreclosed properties.
(4) Net interest margin is calculated on a taxable equivalent basis, using a
tax rate of 35% for 1994 and 1993 and 34% for 1992, 1991, 1990, and
1989.
</TABLE>
JEFFERSON SAVINGS & LOAN ASSOCIATION, F.A.
The following Jefferson consolidated financial data is qualified in
its entirety by the information included in the documents included in
this Proxy Statement/Prospectus. Interim financial results, in the
opinion of management of Jefferson, reflect all adjustments necessary
for a fair presentation of the results of operations. All such
adjustments are of a normal recurring nature. The results of operations
for an interim period are not necessarily indicative of results that may
be expected for a full year or any other interim period. See "Certain
Information Regarding Jefferson."
<TABLE>
Nine Months Ended
June 30, Years ended September 30,
1994 1993 1993 1992 1991 1990 1989
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net interest income $ 4,969 $ 5,766 $ 7,443 $ 6,705 $ 5,837 $ 4,679 $ 4,058
Provision for loan losses 70 229 533 1,115 498 667 603
Net interest income after
provision for loan losses 4,899 5,537 6,910 5,590 5,339 4,012 3,455
Noninterest income 829 1,730 3,090 2,257 2,549 1,577 1,761
Noninterest expense 5,798 5,979 8,239 8,820 7,206 6,253 8,771
Income (loss) before
income taxes and
extraordinary item (70) 1,288 1,761 (973) 682 (664) (3,555)
Income tax expense (benefit) 135 500 915 - 500 (504) (1,430)
Income (loss) before
extraordinary item (205) 788 846 (973) 182 (160) (2,125)
Extraordinary item(1) - - - - 460 - -
Net income (loss) $ (205) $ 788 $ 846 $ (973) $ 642 $ (160) $(2,125)
Per Common Share Data:
Net income $(.16) $ .60 $ .65 $ (5.45) $ 3.60 $ (.90) $(11.91)
Dividends declared - - - - - - -
Book value $8.94 $9.55 $9.67 $8.95 $36.64 $33.04 $33.93
Outstanding shares(2)(3) 1,310,876 1,310,876 1,310,876 1,310,876 178,377 178,377 178,377
Selected Period-End
Balances:
Total assets $ 298,114 $288,683 $ 284,250 $ 301,620 $ 324,190 $363,119 $384,084
Loans receivable, net(4) 201,944 170,186 169,965 186,185 208,641 234,848 245,522
Allowance for loan losses 1,515 1,502 1,602 1,288 1,135 873 798
Nonperforming assets(5) 9,716 12,573 10,985 12,414 16,141 11,657 11,217
Total deposits 268,920 244,582 241,467 249,166 244,139 236,780 257,983
Borrowings 14,789 26,984 24,079 34,158 68,256 112,437 111,612
Shareholder's equity 11,714 12,523 12,682 11,738 6,535 5,893 6,053
Average Balances:
Total assets $ 291,182 $295,152 $ 292,935 $ 312,905 $ 343,655 $373,602 $ 400,262
Loans receivable, net(4) 185,955 178,186 178,075 197,413 221,745 240,185 250,440
Total deposits 255,194 246,874 245,317 246,653 240,460 247,382 265,973
Borrowings 19,434 30,471 29,119 51,207 90,347 112,025 117,723
Total shareholders' equity 12,198 12,131 12,210 9,137 6,214 5,973 7,116
Ratios:
Return on average assets(6) (.09)% .36% .29% (.31)% .19% (.04)% (.53)%
Return on average
shareholders' equity(6) (2.24) 8.66 6.93 (10.65) 10.33 (2.68) (29.86)
Nonperforming assets to
loans receivable, net
and foreclosed
properties at period end 4.64 7.03 6.16 6.31 7.74 4.81 4.39
Net charge-offs to
average loans(6) .12 .02 .12 .49 .11 .25 .75
Allowance for loan losses to:
Loans receivable, net at
period end .75 .88 .94 .69 .54 .37 .33
Nonperforming loans at
period end 63.47 39.45 60.09 65.51 17.65 20.95 67.34
Nonperforming assets at
period end 15.59 11.94 14.58 10.38 7.03 7.49 7.11
Total shareholders' equity
to total assets at
period end 3.93 4.34 4.46 3.89 2.02 1.62 1.58
Capital ratios at period
end:(7)
Tangible capital 3.87 4.34 4.46 3.89 2.02 1.62 N/A
Core capital 3.87 4.34 4.46 3.89 2.02 1.62 N/A
Risk-based capital 7.67 9.40 9.77 7.40 3.88 3.22 N/A
Number of Offices 8 6 6 6 7 7 7
(1) Extraordinary items represented income tax benefit arising from
carryforward of net operating losses.
(2) All periods presented have been adjusted to give effect to the one-for-
three reverse stock split in April, 1993.
(3) At September 30, 1992, outstanding shares totaled 1,310,876, while the
weighted average shares outstanding for the year end September 30, 1992 totaled 178,377.
(4) Loans receivable, net are net of undisbursed amounts of loans in
process, deferred loan fees, unearned discounts and allowance for loan
losses.
(5) Nonperforming assets include nonaccrual loans, restructured loans and
foreclosed properties.
(6) For the nine months ended June 30, 1994 and 1993, the ratios
for return on average assets, return on average shareholders'
equity and net charge-offs to average loans are shown in the
above table on an annualized basis. Computed using results
for the nine months ended June 30, 1994 and 1993
(non-annualized), return on average assets was (.07)% and
.27%, respectively; return on average shareholders' equity
was (1.68%) and 6.50%, respectively; and net charge-offs to
average loans was .09% and .02%, respectively.
(7) Based on capital guidelines as provided by the Office of Thrift
Supervision. At June 30, 1994, Jefferson failed to meet its risk-based
capital ratio by 0.33% or approximately $535,000. See "Business of
Jefferson."
</TABLE>
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Jefferson Board of Directors, to be voted
at the Jefferson Shareholders Meeting to be held at the Fauquier Springs
Country Club, located at 9236 Tournament Drive, Warrenton, Virginia
22186 on November 10, 1994, at 4:00 p.m. and at any adjournment thereof.
At the Jefferson Shareholders Meeting, Jefferson shareholders will
consider and vote upon the Agreement and the related Plan of Merger.
Pursuant to the Agreement, Jefferson will merge with and into Crestar
Bank, and Crestar Bank will succeed to the business of Jefferson. Only
shareholders of record of Jefferson at the close of business on
September 27, 1994 are entitled to notice of and to vote at the
Jefferson Shareholder Meeting. This Proxy Statement/Prospectus is being
mailed to all such holders of record of Jefferson Common Stock on or
about ________ __, 1994.
The affirmative vote of the holders of two-thirds of the
outstanding shares entitled to vote at the meeting is required for
approval of the Merger.
The proxies solicited hereby, if properly signed and returned and
not revoked prior to their use, will be voted in accordance with the
instructions given thereon by the shareholders. If no instructions are
so specified, the proxies will be voted for the proposed Merger. Any
shareholder giving a proxy has the power to revoke it at any time before
it is exercised by (i) filing written notice of revocation with the
Secretary of Jefferson (William M. Rider, Jefferson Savings & Loan
Association, F.A., 550 Broadview Avenue, Warrenton, VA 22186);
(ii) submitting a duly executed proxy bearing a later date; or
(iii) appearing at the Jefferson Shareholder Meeting and notifying the
Secretary of his or her intention to vote in person. Proxies solicited
by this Proxy Statement/Prospectus may be exercised only at the
Jefferson Shareholder Meeting and any adjournment of the Jefferson
Shareholder Meeting and will not be used for any other meeting.
The accompanying proxy is being solicited by the Jefferson Board.
The cost of such solicitation will be borne by Jefferson. In addition
to the use of the mails, proxies may be solicited by personal interview,
telephone or telegram by directors, officers and employees of Jefferson
or Crestar without additional compensation. Arrangements may also be
made with brokerage houses and other custodians, nominees and
fiduciaries for forwarding of solicitation material to beneficial owners
of stock held of record by such persons.
The Jefferson Board has no information that other matters will be
brought before the meeting. If, however, other matters are presented,
the accompanying proxy will be voted in accordance with the
recommendations of the Jefferson Board with respect to such matters.
As of the Record Date, the directors and executive officers of
Jefferson beneficially owned a total of 418,635 shares (representing
31.9% of the outstanding shares of Jefferson Common Stock), and the
directors of Crestar owned no Jefferson Common Stock. The Jefferson
directors have agreed with Crestar to recommend that Jefferson
stockholders vote in favor of the Merger and to vote shares beneficially
owned by such directors, and shares with respect to which they have the
power to vote, in favor of the Merger. See "Jefferson Security
Ownership of Certain Beneficial Owners."
For the reasons described below, the Jefferson Board has adopted
the Agreement, believes the Merger is in the best interest of Jefferson
and its shareholders and recommends that shareholders of Jefferson vote
FOR approval of the Agreement. In making its recommendation, the
Jefferson Board considered, among other things, the opinion of Scott &
Stringfellow that the Merger Consideration was fair to Jefferson
shareholders from a financial point of view. See "The Merger --
Background of the Merger," "-- Reasons and Basis for the Merger," and
"-- Opinion of Financial Advisor."
The address of Crestar is 919 East Main Street, Richmond, Virginia
23219 and its telephone number is (804) 782-5000. The address of
Jefferson is 550 Broadview Avenue, Warrenton, Virginia 22186 and its
telephone number is (703) 347-3531.
THE MERGER
The detailed terms of the Merger are contained in the Agreement and
Plan of Reorganization, attached as Annex I to this Proxy
Statement/Prospectus. The following discussion describes the more
important aspects of the Merger and the terms of the Agreement. This
description is not complete and is qualified by reference to the
Agreement which is incorporated by reference herein.
Background and Reasons
In early 1994, the Jefferson Board of Directors came to a
determination that additional capital was required in order to effect
and maintain profitable growth and to eliminate regulatory threats to
its viability resulting from its marginal capital levels. However, the
Board determined that there was no present market interest in the
purchase of additional shares of Jefferson Common Stock and that, given
the current trend in the consolidation of financial institutions within
the Commonwealth of Virginia, the maximum value to shareholders could be
recognized only by the sale of the institution.
In February 1994, a member of the Jefferson Board had preliminary
discussions with representatives of Scott & Stringfellow on the possible
sale of Jefferson to maximize shareholder value. At a meeting of the
Board of Directors held on March 1, 1994, the Board reviewed a proposal
by Scott & Stringfellow to solicit offers to purchase Jefferson.
Following that review, Jefferson entered into a contract with Scott &
Stringfellow to perform a valuation analysis and plan of sale which were
presented to the Board on April 5, 1994. The Board of Directors, as of
April 14, 1994, unanimously authorized Scott & Stringfellow to solicit
purchase offers.
In May 1994, Scott & Stringfellow prepared a confidential
information memorandum and request for bids and submitted it to twenty
potential acquirers. In response to that invitation, Crestar and
another Virginia financial institution submitted letters of interest
both dated June 28, 1994. In addition, one other financial institution
expressed an interest in purchasing only the Charlottesville branches,
but did not indicate a value for such transaction.
On July 5, 1994, the Board of Directors met with the
representatives of Scott & Stringfellow to review the bidding process,
the two letters of interest as well as the general financial condition
and other information concerning the two potential acquirers. The
Board then authorized the Chairman to appoint a Merger and Acquisition
Committee to meet with representatives of the two interested potential
acquirers. On July 11, 1994, the Merger and Acquisition Committee met
with representatives of each of the potential acquirers to discuss their
respective interests in acquiring Jefferson. Thereafter, the interested
parties conducted their due diligence examination of Jefferson. By
August 11, 1994, both Crestar and the other interested party had
submitted their written bids.
On August 12, 1994, the Jefferson Board of Directors met with
representatives of Crestar and then with representatives of the other
bidder to discuss the respective bid offers. The Board then discussed
the offers with the representatives of Scott & Stringfellow as well as
Jefferson's special counsel. At the direction of the Board, Scott &
Stringfellow then engaged in further negotiations with representatives
of both entities at which time both institutions submitted final offers.
After considering the respective offers and the respective strengths of
each bidder, the value of their respective stock, and each bidder's
plans for the employees of Jefferson, the Board unanimously approved the
Crestar offer subject to the negotiation and execution of an acceptable
definitive merger agreement. At that time, Jefferson entered into an
agreement with Crestar not to solicit or seek offers for the acquisition
of Jefferson pending negotiations of the definitive agreement and to
negotiate such a definitive agreement in good faith. During the period
of negotiation, representatives of Jefferson, its independent
accountants, special counsel and Scott & Stringfellow performed a
limited due diligence review of Crestar.
On September 1, 1994, the Board of Directors of Jefferson met and
considered the results of the review of Crestar and received Scott &
Stringfellow's favorable fairness opinion regarding the proposed
transaction. The Board at that time unanimously approved the Agreement,
directed that the President and Chief Executive Officer execute and
deliver the Agreement, called for a special meeting of Jefferson
stockholders to consider and vote on the Agreement and unanimously
adopted a resolution recommending that the Agreement be approved by the
stockholders of Jefferson.
Opinion of Financial Advisor
Jefferson retained Scott & Stringfellow to act as Jefferson's
financial advisor and to obtain bids from qualified entities interested
in purchasing Jefferson. Scott & Stringfellow is a full service
investment banking and brokerage firm headquartered in Richmond,
Virginia, that provides a broad array of services to individuals,
corporations, financial institutions and state and local governments.
The Financial Institutions Group of Scott & Stringfellow actively works
with financial institutions in Virginia, North Carolina, the District of
Columbia, Maryland, and West Virginia on these and other matters. As
part of its investment banking practice, it is continually engaged in
the valuation of financial institutions and their securities in
connection with mergers and acquisitions, negotiated underwritings, and
secondary distributions of listed and unlisted securities. Scott &
Stringfellow was selected by the Jefferson Board of Directors based upon
its expertise and reputation in providing valuation and merger and
acquisition and advisory services to financial institutions. Scott &
Stringfellow makes a market in the Jefferson Common Stock and its
analysts follow and publish reports about Jefferson.
On September 1, 1994, at the meeting at which the Jefferson Board
of Directors approved and adopted the Agreement, Scott & Stringfellow
delivered a written opinion ("Opinion") to the Jefferson Board that as
of such date, the Merger Consideration to be received by Jefferson
shareholders, $17.00 per share in cash, Crestar Common Stock, or a mix
thereof (subject to certain limitations on the cash component of the
consideration), was fair to the shareholders of Jefferson from a
financial point of view. Such Opinion was updated as of the date of
this Proxy Statement/Prospectus. No instructions or limitations were
given or imposed by Jefferson's Board upon Scott & Stringfellow with
respect to the investigations made or procedures followed by them in
rendering the Opinion.
The full text of the Opinion, which sets forth the assumptions made,
matters considered and limits on the review undertaken, is set forth and
attached hereto in Annex III to this Proxy Statement/Prospectus and is
incorporated herein by reference. Jefferson shareholders are urged to read the
Opinion in its entirety. The following is a summary of certain analyses
performed by Scott & Stringfellow which were the bases of such Opinion.
In developing its Opinion, Scott & Stringfellow reviewed and
analyzed: (i) the Agreement; (ii) the Registration Statement and this
Proxy Statement/Prospectus; (iii) Jefferson's audited financial
statements for the four years ended September 30, 1993; (iv) Jefferson's
unaudited financial statements for the quarter and nine months ended
June 30, 1993 and 1994, and other internal information relating to
Jefferson prepared by Jefferson's management; (v) information regarding
the trading market for the Jefferson Common Stock and the Crestar Common
Stock and the price ranges within which the respective stocks have
traded; (vi) the relationship of prices paid to relevant financial data
such as net worth, earnings, deposits and assets in certain thrift and
thrift holding company mergers and acquisitions in the southeastern
United States and in Virginia in recent years; (vii) Crestar's annual
reports to shareholders and its audited financial statements for the
four years ended December 31, 1993; and (viii) Crestar's unaudited
financial statements for the quarter and six months ended June 30, 1993
and 1994 and other internal information relating to Crestar prepared by
Crestar's management. Scott & Stringfellow has discussed with members
of Jefferson's and Crestar's management past and current business
operations, the background of the Merger, the reasons and basis for the
Merger, results of regulatory examinations, and the business and future
prospects of Jefferson and Crestar individually and as combined entity,
as well as other matters relevant to its inquiry. Scott & Stringfellow
has conducted such other studies, analysis and investigations
particularly of the banking and thrift industries, and considered such
other information as it deemed appropriate, the material portion of
which is described below. Finally, Scott & Stringfellow also took into
account its assessment of general economic, market and financial
conditions and its experience in other transactions, as well as its
experience in securities valuations and knowledge of the commercial
banking and thrift industries generally.
Scott & Stringfellow relied without independent verification upon
the accuracy and completeness of all of the financial and other
information reviewed by it and discussed with it for purposes of its
Opinion. With respect to financial forecasts reviewed by Scott &
Stringfellow in rendering its Opinion, Scott & Stringfellow assumed that
such financial forecasts were reasonably prepared on the basis
reflecting the best currently available estimates and judgement of the
managements of Jefferson and Crestar as to the future financial
performance of Jefferson and Crestar, respectively. Scott &
Stringfellow did not make an independent evaluation or appraisal of the
assets or liabilities of Jefferson and Crestar nor was it furnished with
any such appraisal.
The summary set forth below does not purport to be a complete
description of the analyses performed by Scott & Stringfellow in this
regard. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the
particular circumstances and, therefor, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the
separate factors discussed below, Scott & Stringfellow believes that its
analyses must be considered as a whole and that selecting portions of
its analysis and of the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the
evaluation process underlying its Opinion. In performing its analyses,
Scott & Stringfellow made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of
which are beyond Jefferson's and Crestar's control. The analyses
performed by Scott & Stringfellow are not necessarily indicative of
actual values or future results which may be significantly more or less
favorable than suggested by such analyses. Additionally, analyses
relating to the values of businesses do not purport to be appraisals or
to reflect the prices at which business actually may be sold. No
company or transaction utilized in Scott & Stringfellow's analyses was
identical to Jefferson or Crestar. Accordingly, such analyses are not
based solely upon arithmetic calculations; rather they involve complex
considerations and judgements concerning differences in financial and
operating characteristics of the relevant companies, the timing of
relevant transactions, and prospective buyer interest, as well as other
factors that could affect public trading values of the company or
companies to which they are being compared.
Scott & Stringfellow evaluated the financial terms of the
transaction using standard valuation methods, including a discounted
cash flow analysis, a market comparable analysis, a comparable
acquisition analysis, and a dilution analysis.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a
discounted cash flow analysis under various projections to estimate the
fair market value of Jefferson Common Stock. Among other things, Scott
& Stringfellow considered a range of asset and earnings growth for
Jefferson of between 3% and 10% and required equity capital levels of
between 4.25% and 5.00% of assets. A range of discount rates from 10%
to 12% were applied to the cash flows resulting from the projections
during the first five years and the residual values. The residual
values were estimated by capitalizing the projected final year earnings
by the discount rates, less the projected long-term growth rate of
Jefferson's earnings. The discount rates, growth rates and capital
levels were chosen based on what Scott & Stringfellow, in its judgement,
considered to be appropriate taking into account, among other things,
Jefferson's past and current financial performance and conditions, the
general level of inflation, rates of return for fixed income and equity
securities in the marketplace generally and particularly in the banking
industry. In all scenarios considered, the present value of Jefferson
Common Stock was calculated at less than the value of the consideration
to be received from Crestar pursuant to the Merger.
Comparable Acquisition Analysis. Scott & Stringfellow compared the
relationship of prices paid to relevant financial data such as tangible
net worth, assets, deposits and earnings in twenty-nine thrift and
thrift holding company mergers and acquisitions in the Southeastern
United States (defined for this purpose as the states of Virginia, the
District of Columbia, Maryland, North Carolina, South Carolina, Georgia
and West Virginia) since January 1, 1993, representing all such
transactions known to Scott & Stringfellow to have occurred during this
period involving thrift and thrift holding companies with assets of less
than $1 billion, and in particular to all such transactions that have
been announced since January 1, 1993 in Virginia, with the proposed
Merger and found the consideration to be received from Crestar to be
within the relevant pricing ranges acceptable for such recent
transactions. Specifically, based upon the eight most recent
transactions announced in Virginia since January 1, 1993, other than the
Jefferson Merger, the average price to tangible book value in these
transactions was 131%, compared with 177% for Jefferson, the average
price to earnings ratio was 11.0x, compared to reported losses for
Jefferson over the last twelve months prior to the announcement of the
Merger, the average premium to deposits was 11.7% compared with 9.0% for
Jefferson, and the average premium to assets was 8.7% compared with 7.9%
for Jefferson. For purposes of computing the information with respect
to the Merger, $17.00 per share of consideration for each share of
Jefferson Common Stock was used.
Analysis of Crestar and Virginia Bank Group. Scott & Stringfellow
analyzed the performance and financial condition of Crestar relative to
the Virginia Bank Group consisting of Crestar, Central Fidelity Banks,
Inc., F&M National Corp., First Virginia Banks, Inc., George Mason
Bankshares, Inc., Jefferson Bankshares, Inc., Piedmont BankGroup, Inc.,
Premier Bankshares, Corp., and Signet Banking Corp. Certain financial
information compared was, among other things, information relating to
tangible equity to assets, loans to deposits, net interest margin,
nonperforming assets, total assets, non-accrual loans, and efficiency
ratio, as well as a comparison of common stock liquidity and common
stock prices as of August 10, 1994. Additional valuation information
compared for the twelve-month period ended June 30, 1994, and stock
prices as of August 10, 1994, was (i) price to tangible book value ratio
which was 1.94x for Crestar, compared to an average of 1.68x for the
Virginia Bank Group, (ii) price to earnings ratio which was 11.0x for
Crestar, compared to an average of 11.2x for the Virginia Bank Group,
(iii) return on average assets which was 1.25% for Crestar, compared to
an average of 1.31% for the Virginia Bank Group, (iv) return on average
equity which was 15.8% for Crestar, compared to an average of 14.8% for
the Virginia Bank Group, and (v) a dividend yield of 3.24% for Crestar,
compared to an average of 3.03% for the Virginia Bank Group. Overall,
in the opinion of Scott & Stringfellow, Crestar's operating performance,
financial condition, and liquidity for the Crestar Common Stock were
better than the Virginia Bank Group average and Crestar's market value
was reasonable when compared to the Virginia Bank Group.
Dilution Analysis. Based upon publicly available financial
information on Jefferson and Crestar, Scott & Stringfellow considered
the effect of the transaction on the book value, earnings, and market
value of Jefferson and Crestar. Scott & Stringfellow concluded from
this analysis that the transaction would have a significant positive
effect on Jefferson and the Jefferson Shareholders in that, the Merger
Consideration to be received by Jefferson stockholders would represent a
substantial increase in the historical dividends per share (Jefferson
pays no dividend), net income per share (Jefferson had a loss from
operations for the twelve months ended June 30, 1994), and book value
per share of Jefferson Common Stock (book value will increase $1.29 per
share or 14.4%). There can be no assurance that pro forma amounts are
indicative of future results. See "Comparative Per Share Data."
Pursuant to an engagement letter dated April 14, 1994 between
Jefferson and Scott & Stringfellow, in exchange for its services, Scott
& Stringfellow will receive a fee of 1% of the total market value of
consideration received by Jefferson Shareholders or $231,143, payable at
closing, provided that the fee shall be reduced by $3,600 for services
previously billed and paid. If the Merger is not consummated, Jefferson
also has agreed to reimburse Scott & Stringfellow for its reasonable
out-of-pocket expenses, including all reasonable fees and disbursements
of counsel.
Effective Time of the Merger
The Merger will become effective at the time the Articles of Merger
to be filed with the SCC on the date of the closing of the Merger are
made effective (the "Effective Time of the Merger"). The Effective Time
of the Merger is expected to occur in December 1994. Either Jefferson
or Crestar may terminate the Agreement if the Merger has not been
consummated by June 30, 1995. See "Termination."
Until the Effective Time of the Merger occurs, Jefferson
shareholders will retain their rights as shareholders to vote on matters
submitted to them by the Jefferson Board.
Determination of Exchange Ratio and Exchange for Crestar Common Stock
Crestar valued Jefferson Common Stock for purposes of the exchange
at $17 per share. The valuation of Jefferson Common Stock was based
upon the potential value of Jefferson Common Stock, the nature of
Jefferson's banking and savings bank businesses, and Jefferson's deposit
base, market share and market franchise in and around the Warrenton,
Charlottesville, Luray, Leesburg, Front Royal and Culpeper areas. Each
share of Jefferson Common Stock (other than shares held by Crestar and
shares to be exchanged for cash) will be converted into the number of
shares of Crestar Common Stock determined by dividing $17.00 per share
of Jefferson Common Stock (the "Price Per Share") by the Average Closing
Price (the result of the quotient determined by dividing the Price Per
Share by the Average Closing Price being called the Exchange Ratio),
subject to adjustment in certain circumstances. The Exchange Ratio at
the Effective Time of the Merger will be adjusted to reflect any
consolidation, split-up, other subdivisions or combinations of Crestar
Common Stock, any dividend payable in Crestar Common Stock, or any
capital reorganization involving the reclassification of Crestar Common
Stock subsequent to the date of the Agreement. Based on the $48.25
closing price for Crestar Common Stock on the NYSE on August 31, 1994,
the Exchange Ratio would have been .352 shares of Crestar Common Stock
per share of Jefferson Common Stock. Based on the 1,310,876 shares of
Jefferson Common Stock outstanding as of the Record Date, and assuming
that no cash is to be paid to Jefferson shareholders in connection with
the Merger, such Exchange Ratio would have resulted in the issuance of
approximately 461,428 shares of Crestar Common Stock. Such number of
shares will vary to the extent that (i) shares of Jefferson Common Stock
are exchanged for cash and (ii) the components of the Exchange Ratio
calculation change prior to the Effective Time of the Merger. The
number of shares of Crestar Common Stock to be issued in connection with
the Merger also will vary to the extent that outstanding options to
purchase 74,512 shares of Jefferson Common Stock are exercised prior to
the Effective Time of the Merger.
Following the Effective Time of the Merger, former shareholders of
Jefferson will be mailed a Letter of Transmittal which will set forth
the procedures that should be followed for exchange of Jefferson Common
Stock for Crestar Common Stock.
Shareholders of Jefferson who elect to receive Crestar Common Stock
or who fail to return the Cash Option Form in a timely manner, upon
surrender of their certificates for cancellation, will be entitled to
receive certificates representing the number of whole shares of Crestar
Common Stock for which such shares have been submitted for exchange and
cash in lieu of any fractional share interest on the basis of the
Exchange Ratio.
Cash Election; Election Procedures
Holders of shares of Jefferson Common Stock will be given the
option of exchanging their shares for the Price Per Share ($17.00) in
cash (subject to all applicable withholding taxes), provided that the
number of shares that may be exchanged for cash will not exceed 40% of
the outstanding shares of Jefferson Common Stock immediately prior to
the Effective Time of the Merger. The cash election must be made at the
time Jefferson shareholders vote on the Merger, and, once such vote has
been taken, cash elections will be irrevocable. If the aggregate number
of shares for which a cash election is made exceeds 40% of the
outstanding shares of Jefferson Common Stock immediately prior to the
Effective Time of the Merger, Crestar first will pay cash for shares
submitted for cash exchange by each holder of 100 or fewer Jefferson
shares (if such holder has submitted all his shares for cash exchange)
and then will pay cash for the remaining shares submitted for cash pro
rata. Shares not exchanged for cash after proration will be exchanged
for Crestar Common Stock at the Exchange Ratio.
An election to receive cash will be properly made only if Jefferson
has received a properly completed Cash Option Form in accordance with
the procedures and within the time period set forth in the form. A Cash
Option Form will be properly completed only if accompanied by
certificates representing all shares of Jefferson Common Stock covered
thereby.
IF A JEFFERSON SHAREHOLDER ELECTS TO SURRENDER SHARES FOR CASH, HE
MUST FILE THE CASH OPTION FORM ACCOMPANYING THIS PROXY
STATEMENT/PROSPECTUS PRIOR TO OR AT THE JEFFERSON SHAREHOLDER MEETING.
ANY JEFFERSON SHAREHOLDER WHO DOES NOT COMPLETE AND RETURN A CASH OPTION
FORM PRIOR TO OR AT THE JEFFERSON SHAREHOLDER MEETING CAN ONLY RECEIVE
CRESTAR COMMON STOCK IN THE MERGER. ONCE THE VOTE ON THE MERGER HAS
BEEN TAKEN AT THE JEFFERSON SHAREHOLDER MEETING, THE CASH ELECTION IS
IRREVOCABLE. Jefferson will hold the certificates in safekeeping
pending the Effective Time of the Merger, at which time they will be
exchanged for cash by Crestar, or in the event of proration, cash and
Crestar Common Stock. If the Merger is not consummated, Jefferson will
return the certificates.
Business of Jefferson Pending the Merger
Jefferson has agreed that until the Effective Time of the Merger,
it will operate its business substantially as presently operated, in the
ordinary course, and in general conformity with applicable laws and
regulations, and, consistent with such operation, it will use its best
efforts to preserve intact its present business organizations and its
relationships with persons having business dealings with it. Without
limiting the generality of the foregoing, Jefferson has agreed that it
will not, without the prior written consent of Crestar, (i) make any
change in the salaries, bonuses or title of any officer; (ii) make any
change in the title, salaries or bonuses of any other employee, other
than those permitted by current employment policies in the ordinary
course of business, any of which changes will be reported promptly to
Crestar; (iii) enter into any bonus, incentive compensation, deferred
compensation, profit sharing, thrift, retirement, pension, group
insurance or other benefit plan or any employment or consulting
agreement or increase benefits under existing plans; (iv) create or
otherwise become liable with respect to any indebtedness for money
borrowed or purchase money indebtedness except in the ordinary course of
business; (v) amend its Charter or By-laws; (vi) issue or contract to
issue any shares of Jefferson capital stock or securities exchangeable
for or convertible into capital stock except (x) up to 75,250 shares of
Jefferson Common Stock issuable pursuant to options to purchase
Jefferson Common Stock ("Jefferson Options") outstanding as of June 30,
1994, or (y) pursuant to the Stock Option Agreement; (vii) purchase any
shares of Jefferson capital stock; (viii) enter into or assume any
material contract or obligation, except in the ordinary course of
business; (ix) waive, release, compromise or assign any right or claim
involving $75,000 or more; (x) propose or take any other action which
would make any representation or warranty in Section 3.1 of the
Agreement untrue; (xi) introduce any new products or services or change
the rate of interest on any deposit instrument to above-market interest
rates; (xii) make any change in policies respecting extensions of credit
or loan charge-offs; (xiii) change reserve requirement policies; (xiv)
change securities portfolio policies; (xv) acquire a policy or enter
into any new agreement, amendment or endorsement or make any changes
relating to insurance coverage, including coverage for its directors and
officers, which would result in an additional payment obligation of
$50,000 or more; (xvi) propose or take any action with respect to the
closing of any branches; (xvii) amend the terms of the Jefferson
Options; (xviii) amend the terms of the written severance agreements
identified in the Agreement except that such agreements may be amended
to extend their term to no later than September 30, 1995; or (xix) make
any change in any tax election or accounting method or system of
internal accounting controls, except as may be appropriate to conform to
any change in regulatory accounting requirements or generally accepted
accounting principles. Jefferson has further agreed that, between the
date of the Agreement and the Effective Time of the Merger, it will
consult and cooperate with Crestar regarding (i) loan portfolio
management, including management and work-out of nonperforming assets,
and credit review and approval procedures, including notice to Crestar's
Credit Review Department Management of any new nonresidential loans in
excess of $500,000, and (ii) securities portfolio and funds management,
including management of interest rate risk.
Conditions to Consummation of the Merger
Consummation of the Merger is conditioned upon the approval of the
holders of two-thirds of the outstanding Jefferson Common Stock entitled
to vote at the Jefferson Shareholder Meeting. The Merger must be
approved by the Federal Reserve Board, the OTS and the SCC, which
approvals are expected to be received. The obligations of Jefferson and
Crestar to consummate the Merger are further conditioned upon (i) the
accuracy of the representations and warranties of Jefferson and Crestar
contained in the Agreement, including without limitation the
representation and warranty that there has been no material adverse
change in the condition (financial or otherwise) of Crestar or Jefferson
from June 30, 1994 (except with respect to Jefferson's failure to meet
the risk-based capital requirement as of such date); (ii) the
performance of all covenants and agreements contained in the Agreement,
including without limitation the establishment of the accruals, reserves
and charge-offs as may be necessary to conform Jefferson's accounting
and credit loss reserve practices and methods to those of Crestar Bank
as such practices and methods are to be applied from and after the
Effective Time of the Merger; (iii) the receipt of an opinion of
Hunton & Williams, counsel to Crestar and Crestar Bank, with respect to
certain of the tax consequences of the Merger described herein under "--
Certain Federal Income Tax Consequences;" (iv) the receipt by Crestar of
certain evidence of title relating to Jefferson's branches; (v) the
approval for listing on the NYSE of the shares of Crestar Common Stock
at the Effective Time of the Merger; (vi) the receipt of opinions of
counsel with respect to certain legal matters; and (vii) the shares of
Crestar Common Stock to be issued in the Merger will have been duly
registered under the 1933 Act and applicable state securities laws, and
such registration will not be subject to a stop order or any threatened
stop order by the SEC or any applicable state securities authority.
Crestar and Jefferson may waive any condition to their obligations
to consummate the Merger except the requisite approval of Jefferson's
shareholders and regulatory authorities.
Stock Option Agreement
Crestar and Jefferson entered into the Stock Option Agreement,
dated as of September 1, 1994, pursuant to which Jefferson issued to
Crestar an option to purchase up to 260,864 shares of Jefferson Common
Stock at a purchase price of $15 per share.
The option is exercisable only upon the occurrence of a Purchase
Event (as defined below). A Purchase Event means any of the following
events: (i) without Crestar's prior written consent, Jefferson shall
have authorized, recommended or publicly proposed, or entered into an
agreement with any person (other than Crestar or any subsidiary thereof)
(A) to effect a merger, consolidation or similar transaction, (B) for
the disposition, by sale, lease, exchange or otherwise, of 25% or more
of the consolidated assets of Jefferson and its subsidiaries or (C) for
the issuance, sale or other disposition of securities representing 25%
or more of the voting power of Jefferson or any of its subsidiaries
(collectively referred to as an "Acquisition Transaction"); or (ii) any
person (other than Crestar or any subsidiary thereof) shall have
acquired beneficial ownership of 25% or more of Jefferson Common Stock.
The Stock Option Agreement terminates in accordance with its terms
on the date on which occurs the earliest of: (i) the Effective Time of
the Merger (as defined in the Agreement); (ii) a termination of the
Agreement in accordance with its terms (other than by Crestar under
certain circumstances) prior to the occurrence of a Purchase Event or a
Preliminary Purchase Event (as defined below); (iii) 12 months following
a termination of the Agreement by Crestar under certain circumstances;
or (iv) 12 months after the termination of the Agreement in accordance
with its terms following the occurrence of a Purchase Event or a
Preliminary Purchase Event.
A Preliminary Purchase Event means any of the following events: (i)
any person (other than Crestar) shall have commenced a tender offer or
exchange offer to acquire 10% or more of Jefferson Common Stock (a
"Tender Offer"); or (ii) Jefferson's shareholders shall have failed to
adopt the Agreement at a meeting called for such purpose or such meeting
shall not have been held or shall have been canceled or the Jefferson
Board shall have withdrawn its recommendation to shareholders, in each
case following the public announcement of (A) a Tender Offer, (B) a
proposal to engage in an Acquisition Transaction, or (C) the filing of
an application or notice to engage in an Acquisition Transaction.
Termination
The Agreement will be terminated, and the Merger abandoned, if the
shareholders of Jefferson will not have given the approval of the
Merger. Notwithstanding such approval by such shareholders, the
Agreement may be terminated at any time prior to the Effective Time of
the Merger, by: (i) the mutual consent of Crestar, Crestar Bank and
Jefferson, as expressed by their respective Boards of Directors; (ii)
either Crestar or Crestar Bank on the one hand or Jefferson on the other
hand, as expressed by their respective Boards of Directors, if the
Merger has not occurred by June 30, 1995, provided that the failure of
the Merger to so occur will not be due to a willful breach of any
representation, warranty, covenant or agreement by the party seeking to
terminate the Agreement; (iii) by Crestar and Crestar Bank in writing
authorized by its respective Board of Directors if Jefferson has, or by
Jefferson in writing authorized by its Board of Directors, if Crestar or
Crestar Bank has, in any material respect, breached (A) any covenant or
agreement contained in the Agreement, or (B) any representation or
warranty contained in the Agreement, in any case if such breach has not
been cured by the earlier of 30 days after the date on which written
notice of such breach is given to the party committing such breach or
the Closing Date; provided that it is understood and agreed that either
party may terminate the Agreement on the basis of any such material
breach of any representation or warranty contained in the Agreement
notwithstanding any qualification therein relating to the knowledge of
the other party; (iv) either Crestar or Crestar Bank on the one hand or
Jefferson on the other hand, as expressed by their respective Boards of
Directors, in the event that any of the conditions precedent to the
obligations of such parties to consummate the Merger have not been
satisfied or fulfilled or waived by the party entitled to so waive on or
before the Closing Date, provided that no party will be entitled to
terminate the Agreement pursuant to this provision if the condition
precedent or conditions precedent which provide the basis for
termination can reasonably be and are satisfied within a reasonable
period of time, in which case, the Closing Date will be appropriately
postponed; (v) Crestar and Crestar Bank, if the Boards of Directors of
Crestar and Crestar Bank will have determined in their sole discretion,
exercised in good faith, that the Merger, has become inadvisable or
impracticable by reason of (A) the threat or the institution of any
litigation, proceeding or investigation to restrain or prohibit the
consummation of the transactions contemplated by the Agreement or to
obtain other relief in connection with the Agreement or (B) public
commencement of a competing offer for Jefferson Common Stock which is
significantly better than Crestar's offer, and which Crestar certifies
to Jefferson, in writing, it is unwilling to meet; (vi) Crestar, Crestar
Bank or Jefferson, if the Federal Reserve Board, the OTS, or the SCC
deny approval of the Merger and the time period for all appeals or
requests for reconsideration has run; or (vii) Crestar if, following
Crestar's pre-merger review of Jefferson's loan portfolio, such pre-
merger review reveals that there are potential losses in the loan
portfolio since June 30, 1994 which would cause a reduction of
Jefferson's shareholders' equity by 10% or more from that reflected in
the Jefferson financial statements at June 30, 1994; provided, however,
that such reduction in Jefferson's shareholder equity will be exclusive
of any change in Jefferson's shareholder equity resulting from any
credit or reserve adjustments of which Crestar has informed Jefferson as
disclosed in a Schedule attached to the Agreement.
In the event of the termination and abandonment of the Agreement
and the Merger pursuant to the above, the Agreement, other than
provisions relating to confidentiality of information obtained by the
parties and to the payment of expenses relating to the Merger, shall
become void and of no effect, without any liability on the part of any
party or its directors or officers, provided that nothing contained in
the Agreement will serve to relieve any party from liability for a
willful breach of the Agreement.
Accounting Treatment
The Merger is to be accounted for as a purchase in accordance with
generally accepted accounting principles as outlined in Accounting
Principles Board Opinion No. 16, "Business Combinations."
Operations After the Merger
After consummation of the Merger, Crestar Bank will continue
generally to conduct the business presently conducted by Jefferson, with
the additional services discussed above.
Crestar Bank will undertake to continue employment of all branch
personnel who meet Crestar's employment qualification requirements and
needs, either at existing Jefferson offices or at Crestar offices.
Jefferson non-branch personnel terminated as a result of the Merger will
be interviewed prior to the Effective Time of the Merger for open
positions within Crestar Bank or a subsidiary of Crestar. Crestar or
Crestar Bank will pay a severance benefit to each person, other than
those persons who have entered into written severance agreements with
Jefferson and that are identified in the Agreement, who is an employee
of Jefferson at the Effective Time of the Merger and who (x) is not
offered a comparable position with Crestar Bank or a subsidiary of
Crestar (the acceptance of a position with Crestar Bank or a subsidiary
of Crestar will establish that such position was comparable) or (y) is
terminated without cause within six months after the Effective Time of
the Merger. The amount of such severance benefit will equal one week of
such employee's base pay (as in effect immediately before the Effective
Time of the Merger) for each full year of service with Jefferson up to
20 years and two weeks of such base pay for each full year of service
with Jefferson over 20 years, but in no case less than four weeks' base
pay. Each person who is a Jefferson employee at the Effective Time of
the Merger will be paid promptly after the Effective Time of the Merger
for all accrued but unused vacation time through December 31, 1994, or,
if earlier, the Effective Time of the Merger as set forth on the books
of Jefferson. Out-placement counseling will be available through the
Virginia Employment Commission for any Jefferson employees who are
entitled to severance benefits from Crestar under the Agreement or under
a written severance agreement.
Interest of Certain Persons in the Merger
Certain members of Jefferson's management may be deemed to have
interests in the Merger in addition to their interests as shareholders
of Jefferson generally. In each case, the Board of Directors of
Jefferson was aware of their potential interests, and considered them,
among other matters, in approving the Agreement and the transactions
contemplated thereby.
Indemnification. After the Effective Time of the Merger, Crestar
acknowledges its obligation to provide, and has agreed to provide,
indemnification to the directors, employees and officers of Jefferson as
if they had been directors, employees or officers of Crestar prior to
the Effective Time of the Merger, to the extent permitted under the VSCA
and the Articles of Incorporation and Bylaws of Crestar as in effect as
of the date of the Agreement. Such indemnification will continue for
six years after the Effective Time of the Merger, provided that any
right to indemnification in respect of any claim asserted or made within
such six year period will continue until final disposition of such
claim. Crestar will provide officers and directors liability insurance
coverage to all Jefferson directors and officers, whether or not they
become part of the Crestar organization after the Effective Time of the
Merger, to the same extent it is provided to Crestar's officers and
directors, provided that coverage will not extend to acts as to which
notice has been given prior to the Effective Time of the Merger.
Employment Agreements. Jefferson has a written employment
agreement ("Employment Agreement") with Thomas W. Winfree, Jefferson's
President and Chief Executive Officer, for the period ending September
30, 1995. Mr. Winfree's base salary under the contract for fiscal 1994
is $115,000 per year subject to annual upward adjustment by Jefferson's
Board of Directors, but in no case more than an amount allowed by the
OTS. Mr. Winfree is entitled to additional compensation equal to two
percent of Jefferson's net income after taxes for the then current
fiscal year provided that the Board of Directors makes an annual
determination that such additional compensation is not the result of
unreasonable risk-taking to achieve short-term profits. The contract
also states that should Jefferson be merged with or acquired by another
financial institution and that financial institution does not offer Mr.
Winfree comparable employment, then he may, at his option, terminate the
employment agreement and: (i) be paid an amount equal to his annual
salary times 2.99, which sum may be spread over a thirty six month
period, at Mr. Winfree's option, for tax purposes; (ii) be paid
additional compensation equal to 130,000 times the per share price of
the merger or acquisition times two percent; and (iii) maintain his
vested interest in any Jefferson pension plan, 401(k) plan or any stock
option agreement as well as his group health plan continuation of
coverage rights under Section 4980B(f) of the Internal Revenue Code
(COBRA).
Crestar and Thomas W. Winfree have agreed to negotiate in good
faith and, prior to the Effective Time of the Merger, will use their
best efforts to enter into a services agreement for the employment of
Mr. Winfree, which employment will become effective upon the Effective
Time of the Merger. Any such services agreement will supersede in its
entirety the rights and obligations of the parties pursuant to the
existing Employment Agreement between Jefferson and Mr. Winfree. Should
Crestar and Mr. Winfree not enter into a new employment agreement prior
to the Effective Time of the Merger, Crestar will honor the terms of the
Employment Agreement.
Thirteen officers of Jefferson have entered into severance
agreements with Jefferson which state that if Jefferson is acquired by
some other party, the Board of Directors of Jefferson will attempt to
negotiate with the acquirer to provide such officers with a position of
equal or greater status with the acquirer at the time of the
acquisition. The agreement further states that, if within 90 days after
the acquisition, for reasons other than unsatisfactory performance, such
officer's employment with the acquirer is terminated, there is a
material reduction in the officer's position, status, working
conditions, responsibilities or place of employment or at the end of the
90 days the officer voluntarily terminates his or her employment, such
officer shall be entitled to six months' salary as of the time of
termination as severance pay. If such officer, at the end of the 90 day
period, decides not to terminate such employment, the severance
agreement becomes null and void. These severance agreements expire on
September 30, 1995.
Crestar Bank will assume Jefferson's obligation under the above-
described written severance agreements and Crestar Bank will pay any
severance benefits that may become payable under such agreements.
Except for such written severance agreements, Jefferson will take or
cause to be taken such actions as are necessary to terminate its
severance pay policies or plans effective prior to the Effective Time of
the Merger.
Prior to the Effective Time of the Merger, members of Jefferson's
senior management group will be interviewed by Crestar with the goal of
determining if there are mutually beneficial employment opportunities
available within Crestar.
Advisory Board of Directors. Crestar Bank will offer (a) up to six
members of the Jefferson Board of Directors a position on Crestar Bank's
local advisory board in Warrenton, Virginia, and (b) one member of
Jefferson's Board of Directors a position on Crestar Bank's Greater
Washington Region ("GWR") advisory board, for a term of one year
commencing at the Effective Time of the Merger. The Board of Directors
of Jefferson will select such persons prior to the Effective Time of the
Merger.
Other than as set forth above, no director or executive officer of
Jefferson, Crestar or Crestar Bank has any direct or indirect material
interest in the Merger, except in the case of directors and executive
officers of Jefferson insofar as ownership of Jefferson Common Stock
might be deemed such an interest.
Stock Options
Each holder of outstanding Jefferson Options will elect, by giving
notice to Jefferson prior to the Closing Date, either to (a) allow the
Jefferson Options to terminate at the Effective Time of the Merger and
promptly following the Effective Time of the Merger receive a cash
payment (subject to all applicable withholding taxes) equal to the
excess of (i) the aggregate Price Per Share of the Jefferson Common
Stock represented by his Jefferson Options less (ii) the aggregate
exercise price of such Jefferson Options, (b) exercise the Jefferson
Options for Jefferson Common Stock prior to the Closing Date and convert
such Common Stock into Crestar Common Stock or elect to receive the
Merger Consideration as provided in the Agreement, or (c) have the
Jefferson Options assumed by Crestar. Crestar agrees to make any cash
payment required under the Agreement promptly following consummation of
the Merger. Jefferson Options that are assumed by Crestar will be
converted into options to purchase Crestar Common Stock, the number and
price of which will be determined in accordance with the Internal
Revenue Code and the regulations promulgated thereunder.
Effect on Jefferson Employee Benefits Plans
All employees of Jefferson immediately prior to the Effective Time
of the Merger who are employed by Crestar, Crestar Bank or another
Crestar subsidiary immediately following the Effective Time of the
Merger ("Transferred Employees") will be covered by Crestar's employee
benefit plans as to which they are eligible based on their length of
service, compensation, job classification, and position, including,
where applicable, any incentive compensation plan. Notwithstanding the
foregoing, Crestar may determine to continue any of the Jefferson
benefit plans for Transferred Employees in lieu of offering
participation in Crestar's benefit plans providing similar benefits
(e.g., medical and hospitalization benefits), to terminate any of the
Jefferson benefit plans, or to merge any such benefit plans with
Crestar's benefit plans. Except as specifically provided in the
Agreement and as otherwise prohibited by law, Transferred Employees'
service with Jefferson will be recognized as service with Crestar for
purposes of eligibility to participate and vesting, if applicable (but
not for purposes of benefit accrual) under Crestar's benefit plans,
subject to applicable break-in-service rules.
Crestar agrees that any pre-existing condition, limitation or
exclusion in its health plans will not apply to Transferred Employees or
their covered dependents who are covered under a medical or
hospitalization indemnity plan maintained by Jefferson on the date of
the Merger and who then change coverage to Crestar's medical or
hospitalization indemnity health plan at the time such Transferred
Employees are first given the option to enroll in Crestar's health
plans.
Crestar agrees that immediately following the Merger, all
participants who then have accounts in the 401(k) profit sharing plan
maintained by Jefferson (the "401(k) Plan") will be fully vested in
their account balances. Crestar, at its election, may continue the
401(k) Plan for the benefit of Transferred Employees (as such plan may
be amended as of the Effective Time of the Merger to provide current
contributions and eligibility provisions identical to those under the
Crestar Employees' Thrift and 401(k) Plan), may merge the 401(k) Plan
into the Crestar Employees' Thrift and Profit Sharing Plan (the "Crestar
Thrift Plan") or the Crestar Merger Plan for Transferred Employees, or
may cease additional benefit accruals under and contributions to the
401(k) Plan and continue to hold the assets of such Plan until they are
distributable in accordance with its terms. In the event of a merger of
the 401(k) Plan into the Crestar Thrift Plan or a cessation of accruals
and contributions under the 401(k) Plan, the Crestar Thrift Plan will
recognize for purposes of eligibility to participate, early retirement,
and eligibility for vesting, all Transferred Employees' service with
Jefferson, subject to applicable break-in-service rules.
Crestar agrees that the Retirement Plan for Employees of Crestar
Financial Corporation and Affiliated Corporations (the "Crestar
Retirement Plan") will recognize for purposes of eligibility to
participate, vesting and eligibility for early retirement, but not for
benefit accrual purposes, all Transferred Employees' service with
Jefferson, subject to applicable break-in-service rules. Crestar, at
its option, may continue the Jefferson Savings and Loan Association
Employees' Pension Plan (the "Pension Plan") as a frozen plan, or may
terminate the Pension Plan and pay out benefits, or may merge the
Pension Plan into the Crestar Retirement Plan. In the event of a plan
merger, former participants in the Pension Plan will receive benefits
from the Crestar Retirement Plan equal to (x) their respective benefit
under the Pension Plan as of the plan merger date plus (y) any vested
accrued benefit earned under the Crestar Retirement Plan on and after
the Effective Time of the Merger for service thereafter with Crestar and
its affiliates (subject to applicable break-in-service rules).
Certain Federal Income Tax Consequences
Crestar and Jefferson have received an opinion of Hunton &
Williams, counsel to Crestar, to the effect that for federal income tax
purposes, the Merger will be a reorganization under Section 368(a) of
the Code and, consequently, (i) none of Crestar, Crestar Bank, or
Jefferson will recognize any taxable gain or loss upon consummation of
the Merger (but income may be recognized as a result of (a) the
termination of the bad-debt reserve maintained by Jefferson for federal
income tax purposes and (b) other possible changes in tax accounting
methods), and (ii) the Merger will result in the tax consequences
summarized below for Jefferson shareholders who receive Crestar Common
Stock in exchange for Jefferson Common Stock pursuant to the Merger.
Receipt of substantially the same opinion of Hunton & Williams as of the
Closing Date is a condition to consummation of the Merger. The opinion
of Hunton & Williams is based on, and the opinion to be given as of the
Closing Date will be based on, certain customary assumptions and
representations regarding, among other things, the lack of previous
dealings between Jefferson and Crestar, the existing and future
ownership of Jefferson stock and Crestar stock, and the future business
plans for Crestar.
As described below, the federal income tax consequences to a
Jefferson shareholder will depend on whether the shareholder exchanges
shares of Jefferson Common Stock for Crestar Common Stock, cash, or a
combination of Crestar Common Stock and cash and, if the shareholder
exchanges any shares of Jefferson Common Stock for cash, on whether
certain related shareholders receive Crestar Common Stock or cash. The
following summary does not discuss all potentially relevant federal
income tax matters, consequences to any shareholders subject to special
tax treatment (for example, tax-exempt organizations and foreign
persons), or consequences to shareholders who acquired their Jefferson
Common Stock through the exercise of employee stock options or otherwise
as compensation.
Exchange of Jefferson Common Stock for Crestar Common Stock
A Jefferson shareholder who receives solely Crestar Common Stock in
exchange for all his shares of Jefferson Common Stock will not recognize
any gain or loss on the exchange. If a shareholder receives Crestar
Common Stock and cash in lieu of a fractional share of Crestar Common
Stock, the shareholder will recognize taxable gain or loss solely with
respect to such fractional share as if the fractional share had been
received and then redeemed for the cash. A shareholder who exchanges
all his shares of Jefferson Common Stock for Crestar Common Stock will
have a tax basis in the shares of Crestar Common Stock (including any
fractional share interest) equal to his tax basis in the shares of
Jefferson Common Stock exchanged therefor. A shareholder's holding
period for shares of Crestar Common Stock (including any fractional
share interest) received in the Merger will include his holding period
for the shares of Jefferson Common Stock exchanged therefor if they are
held as a capital asset at the Effective Time of the Merger.
Exchange of Jefferson Common Stock for Cash and Crestar Common Stock
A Jefferson shareholder who receives cash for some shares of
Jefferson Common Stock and exchanges other shares of Jefferson Common
Stock for shares of Crestar Common Stock (including any fractional share
interest) will recognize any gain realized up to the amount of cash
received (excluding cash paid in lieu of a fractional share of Crestar
Common Stock) but will not recognize any loss. If the shareholder holds
his Jefferson Common Stock as a capital asset at the time of the Merger,
the amount of gain recognized generally will be treated as capital gain
unless the receipt of cash is treated as having the effect of a
dividend. If the recognized gain is treated as a dividend, it will be
taxed as ordinary income.
A shareholder's receipt of cash will not be treated as a dividend
if (after taking into account the constructive ownership rules of
Section 318 of the Code summarized below) the requirements for a stock
redemption to be treated as a sale of stock under Section 302 of the
Code are satisfied. Under a Supreme Court decision (Clark v.
Commissioner), to determine whether those requirements are satisfied, a
shareholder should be treated as receiving shares of Crestar Common
Stock in the Merger (instead of the cash actually received) and then
receiving cash from Crestar in a hypothetical redemption of those
shares. That hypothetical redemption will satisfy the requirements
under Section 302 if it (i) is "not essentially equivalent to a
dividend" within the meaning of Section 302(b)(1) of the Code or
(ii) has the effect of a "substantially disproportionate" redemption of
Crestar Common Stock within the meaning of Section 302(b)(2) of the
Code. Whether the hypothetical redemption of shares of Crestar Common
Stock will be essentially equivalent to a dividend depends on the
individual shareholder's circumstances; to avoid dividend treatment in
any case, the hypothetical redemption must result in a "meaningful
reduction" in the percentage of Crestar Common Stock actually and
constructively owned by the shareholder (including any Crestar Common
Stock deemed received in the Merger). The Internal Revenue Service has
indicated in a published ruling that any reduction in percentage
ownership of a publicly-held corporation by a small minority shareholder
who exercises no control over corporate affairs constitutes a meaningful
reduction. The hypothetical redemption of shares of Crestar Common
Stock will be substantially disproportionate if the percentage of
Crestar Common Stock actually and constructively owned by the
shareholder after that redemption is less than 80% of the percentage of
Crestar Common Stock actually and constructively owned by the
shareholder (including Crestar Common Stock deemed received in the
Merger) immediately before the hypothetical redemption.
A shareholder's tax basis in the shares of Crestar Common Stock
(including any fractional share interest) received will equal his tax
basis in his shares of Jefferson Common Stock exchanged therefor,
reduced by the amount of cash received (excluding cash paid in lieu of a
fractional share of Crestar Common Stock) and increased by the amount of
gain recognized (including any gain treated as a dividend). A
shareholder's holding period for shares of Crestar Common Stock
(including any fractional share interest) received in the Merger will
include his holding period for the shares of Jefferson Common Stock
exchanged therefor if they are held as a capital asset at the time of
the Merger. When a shareholder receives cash in lieu of a fractional
share of Crestar Common Stock, the shareholder will recognize gain or
loss as if the fractional share had been received and then redeemed for
the cash.
Exchange of Jefferson Common Stock for Cash
Any shareholder who exchanges all of his shares of Jefferson Common
Stock for cash should consult his tax advisor to determine whether the
exchange is to be taxed as a sale of stock or whether the cash received
is to be taxed as a dividend. In addition, any shareholder who makes an
election to receive cash for all his shares should be aware that he may,
in fact, receive some Crestar Common Stock under the proration
provisions of the Agreement. Such a holder should therefore be familiar
with the rules, described above, that apply to a holder who receives
cash and some Crestar Common Stock.
The criteria for determining the tax treatment of exchanging all of
a shareholder's shares of Jefferson Common Stock for cash are not
certain. The Supreme Court's decision in the Clark case suggests that a
Jefferson shareholder who receives solely cash for all his shares of
Jefferson Common Stock should be treated as receiving shares of Crestar
Common Stock in the Merger, rather than the cash actually received, and
then receiving cash from Crestar in a hypothetical redemption of those
shares. The treatment of the cash received in that hypothetical
redemption then would depend first on whether the shareholder is treated
as owning any shares of Crestar Common Stock (taking into account the
constructive ownership rules of Section 318 of the Code). If a
shareholder receiving solely cash in the Merger does not actually or
constructively own any shares of Crestar Common Stock, the shareholder
should recognize gain or loss equal to the difference between the amount
of cash received and his tax basis in his shares of Jefferson Common
Stock surrendered in the Merger. Such gain or loss will be capital gain
or loss if the shares of Jefferson Common Stock are held as a capital
asset at the time of the Merger. If the shareholder actually or
constructively owns shares of Crestar Common Stock, the cash received in
a hypothetical redemption should result in the recognition of gain or
loss as described above unless the redemption is treated as a dividend
distribution. The redemption should not be treated as a dividend
distribution if it meets the requirements to be (i) not essentially
equivalent to a dividend within the meaning of Section 302(b)(1) of the
Code or (ii) a substantially disproportionate redemption of Crestar
Common Stock within the meaning of Section 302(b)(2) of the Code. See
the discussion above under "Exchange of Jefferson Common Stock for Cash
and Crestar Common Stock" for a summary of those requirements.
Despite the Clark decision, the Internal Revenue Service might
assert that the receipt of solely cash in the Merger is to be treated as
a distribution in redemption of the shareholder's Jefferson Common Stock
before, and separate from, the Merger. The Internal Revenue Service
apparently has taken such a position in private letter rulings, which
are not legal precedent, issued after the Clark decision. Under that
position, if a Jefferson shareholder receiving solely cash does not
constructively own (within the meaning of Section 318 of the Code)
shares of Jefferson Common Stock held by another shareholder who
exchanges such shares for Crestar Common Stock, the shareholder
receiving solely cash generally will recognize gain or loss equal to the
difference between the amount of cash received and his tax basis in his
shares of Jefferson Common Stock. Such gain or loss will be capital
gain or loss if the shares of Jefferson Common Stock are held as a
capital asset at the time of the Merger. If the Jefferson shareholder
does constructively own shares of Jefferson Common Stock exchanged for
Crestar Common Stock, the cash received in a hypothetical redemption of
the Jefferson Common Stock generally will be taxable as a dividend
unless the redemption meets the requirements to be (i) not essentially
equivalent to a dividend within the meaning of Section 302(b)(1) of the
Code or (ii) a substantially disproportionate redemption of Jefferson
Common Stock within the meaning of Section 302(b)(2) of the Code. Those
requirements would be applied to the shareholder's actual and
constructive ownership of Jefferson Common Stock, in contrast to the
approach discussed above where they are applied to the shareholder's
actual and constructive ownership of Crestar Common Stock.
Section 318 of the Code
Under Section 318(a) of the Code, a shareholder is treated as
owning (i) stock that the shareholder has an option or other right to
acquire, (ii) stock owned by the shareholder's spouse, children,
grandchildren, and parents, and (iii) stock owned by certain trusts of
which the shareholder is a beneficiary, any estate of which the
shareholder is a beneficiary, any partnership or "S corporation" in
which the shareholder is a partner or shareholder, and any non-S
corporation of which the shareholder owns at least 50% in value of the
stock. A shareholder that is a partnership or S corporation, estate,
trust, or non-S corporation is treated as owning stock owned (as the
case may be) by partners or S corporation shareholders, by estate
beneficiaries, by certain trust beneficiaries, and by 50% shareholders
of a non-S corporate shareholder. Stock constructively owned by a
person generally is treated as being owned by that person for the
purpose of attributing ownership to another person. In certain cases, a
shareholder who will actually own no Crestar Common Stock may be able to
avoid application of the family attribution rules of Section 318 of the
Code by filing a timely waiver agreement with the Internal Revenue
Service pursuant to Section 302(c)(2) of the Code and applicable
regulations.
The preceding discussion summarizes for general information the
material federal income tax consequences of the Merger to Jefferson
shareholders. The tax consequences to any particular shareholder may
depend on the shareholder's circumstances. Jefferson shareholders are
urged to consult their own tax advisors with regard to federal, state,
and local tax consequences.
No Dissenter's Rights
Jefferson Common Stock is quoted on the NASDAQ National Market
System, and in accordance with the provisions of 12 C.F.R. section 552.14,
holders of Jefferson Common Stock do not have the right to exercise
dissenter's rights with respect to the Merger and, demand and receive
payment of the "fair value" of their shares of Jefferson Common Stock
instead of the consideration to be paid by Crestar in the Merger. See
"Comparative Rights of Shareholders -- Dissenter's Rights."
THE BOARD OF DIRECTORS OF JEFFERSON UNANIMOUSLY RECOMMENDS A VOTE
FOR THE MERGER.
BUSINESS OF CRESTAR
Crestar is the holding company for Crestar Bank, Crestar Bank N.A.
of Washington, D.C. and Crestar Bank MD of Maryland. At June 30, 1994,
Crestar had approximately $14.3 billion in total assets, $11.4 billion
in total deposits and $1.1 billion in total shareholders' equity.
In 1963, six Virginia banks combined to form United Virginia
Bankshares Incorporated ("UVB"), a bank holding company formed under the
Bank Holding Company Act of 1956 (the "BHCA"). UVB (parent company of
United Virginia Bank) extended its operations into the District of
Columbia by acquiring NS&T Bank, N.A. on December 27, 1985 and into
Maryland by acquiring Bank of Bethesda on April 1, 1986. On September
1, 1987, UVB became Crestar Financial Corporation and its bank
subsidiaries adopted their present names.
Crestar serves customers through a network of 332 banking offices
and 272 automated teller machines (as of June 30, 1994). Crestar's
subsidiary banks (the "Bank Subsidiaries") offer a broad range of
banking services, including various types of deposit accounts and
instruments, commercial and consumer loans, trust and investment
management services, bank credit cards and international banking
services. Crestar's subsidiary, Crestar Insurance Agency, Inc., offers
a variety of personal and business insurance products. Securities
brokerage and investment banking services are offered by Crestar's
subsidiary, Crestar Securities Corporation. Mortgage loan origination,
servicing and wholesale lending are offered by Crestar Mortgage
Corporation, and investment advisory services are offered by Capitoline
Investment Services Incorporated, both of which are subsidiaries of
Crestar Bank. These various Crestar subsidiaries provide banking and
non-banking services throughout Virginia, Maryland and Washington, D.C.,
as well as certain non-banking services to customers in other states.
The executive offices of Crestar are located in Richmond, Virginia
at Crestar Center, 919 East Main Street. Crestar's Operations Center is
located in Richmond. Regional headquarters are located in Norfolk and
Roanoke, Virginia and in Washington, D.C.
Recent Developments
Acquisitions Completed in 1994. On September 16, 1994, Crestar
Bank acquired from the Resolution Trust Corporation approximately $17
million in deposits related to two branches of Second National Federal
Savings Association, Salisbury, Maryland located in Fairfax and
Woodbridge, Virginia. Upon acquisition, the Woodbridge branch was
closed and its deposits assumed by an existing Crestar Bank branch in
Woodbridge, Virginia.
On June 10, 1994, Crestar acquired Annapolis Bancorp, Inc., the
holding company for Annapolis Federal Savings Bank, headquartered in
Annapolis, Maryland. Approximately $300 million in total assets, $210
million in loans, $275 million in deposits, and nine branches were
originally added to Crestar's existing branch network. Crestar issued
264,208 shares of Crestar Common Stock and made cash payments of
approximately $3 million in the transaction.
On May 14, 1994, Crestar Bank acquired from the Resolution Trust
Corporation approximately $150 million in deposits related to Piedmont
Federal Savings Association, Manassas, Virginia.
On March 18, 1994, Crestar acquired Providence Savings and Loan
Association, F.A. ("Providence") headquartered in Vienna, Virginia.
Approximately $300 million in deposits, $250 million in loans and 6
branches were initially added to Crestar's existing branch network.
Crestar paid approximately $27 million in cash in the transaction.
On March 18, 1994, Crestar Bank acquired substantially all of the
assets (approximately $425 million) and assumed certain liabilities of
NVR Federal Savings Bank, headquartered in McLean, Virginia.
Approximately $340 million in deposits, $210 million in loans and two
branches were initially added to Crestar's operations. Crestar Bank
paid approximately $42 million in cash in the transaction.
On January 28, 1994, Crestar acquired Virginia Federal Savings
Bank, headquartered in Richmond, Virginia. Approximately $500 million
in deposits, $550 million in loans and 10 branches were initially added
to Crestar's existing branch network. Crestar paid approximately $52
million in cash in the transaction.
On January 11, 1994, Crestar Mortgage Corporation acquired the
stock of Mortgage Capital Corporation, a wholesale mortgage loan
production company, with an initial purchase payment of $5.2 million.
Under terms of the purchase agreement, an additional $2.4 million may be
paid to the former owners, depending on the future performance of
Mortgage Capital's operations over the next five years.
Pending Acquisitions
On September 20, 1994, Crestar entered into a binding letter
agreement with TideMark Bancorp Inc. ("TideMark") of Newport News,
Virginia, providing for the acquisition of TideMark and its subsidiary
TideMark Bank, F.S.B. ("TideMark Bank") in which TideMark shareholders
will receive Crestar Common Stock or cash. TideMark Bank has nine
branches in Hampton Roads, with approximately $230 million in deposits,
and one branch in Kilmarnock, Virginia, which TideMark has agreed to
sell to the Bank of Lancaster. TideMark had previously entered into an
agreement to acquire eight branches, with approximately $70 million in
deposits, from Bay Savings, a division of FirstFed Michigan Corp., which
acquisition is expected to be completed by December 31, 1994. Crestar's
acquisition of TideMark, which is expected to be completed during the
first quarter of 1995, will initially bring to Crestar approximately
$300 million in deposits. The acquisition of TideMark is subject to
negotiation of a definitive agreement and receipt of regulatory and
shareholder approvals.
On August 26, 1994, Crestar and Crestar Bank entered into an
agreement and plan of reorganization with Independent Bank
("Independent"), headquartered in Manassas, Virginia, providing for the
merger of Independent into Crestar Bank in which Independent
shareholders will receive Crestar Common Stock or cash. At June 30,
1994, Independent had total assets of $92.6 million and total deposits
of $85.4 million. The acquisition of Independent, which is subject to
the receipt of regulatory and shareholder approvals, is expected to be
completed in December 1994.
Crestar continually seeks acquisition opportunities with other
financial institutions in which it may pay cash or issue common stock or
other equity or debt securities. As of the date of this Proxy
Statement/Prospectus, Crestar has no present agreements or
understandings to acquire or merge with any other businesses other than
as described in "Business of Crestar -- Recent Developments."
BUSINESS OF JEFFERSON
Jefferson is a federally chartered stock savings and loan
association headquartered in Warrenton, Virginia with eight branch
offices in Warrenton, Luray, Leesburg, Culpeper, Front Royal and
Charlottesville, Virginia, as well as a mortgage loan production office
located in Manassas, Virginia. The deposit accounts of Jefferson are
insured by the Savings Association Insurance Fund ("SAIF"), which is
administered by the FDIC. Jefferson was incorporated in Virginia in
October 1959 and opened for business in October, 1960 as Fauquier
Savings and Loan Association. Jefferson was involved in several mergers
and acquisitions over the years, including Jefferson Savings & Loan
Association of Culpeper in 1972, Home Savings and Loan Association of
Roanoke in 1975 and Charlottesville Savings and Loan Association in
1982. Jefferson converted to a federal stock charter in 1990. At June
30, 1994, Jefferson had total assets of approximately $298 million,
deposits of approximately $269 million, and stockholders' equity of
approximately $11.7 million or 3.93% of total assets at such date. At
June 30, 1994, Jefferson did not meet its regulatory risk based capital
requirements by $535,000. On September 16, 1994, Jefferson filed its
Capital Restoration Plan with the OTS pursuant to which it proposed to
return to risk-based capital compliance by September 30, 1994.
Management of Jefferson believes that the OTS will accept and approve
such plan. Jefferson's executive offices are located at 550 Broadview
Avenue, Warrenton, Virginia 22186 and its telephone number is (703) 347-
3531.
Jefferson's principal business currently consists of attracting
deposits from the general public and using such funds together with
borrowings, to originate loans secured primarily by first liens on
residential real estate located in its market area and to invest in
mortgage-backed securities. To a significantly lesser extent, Jefferson
also originates consumer loans, residential construction loans and
nonresidential loans consisting primarily of commercial real estate
loans. In addition to the origination of loans and investments in
mortgage-backed securities, Jefferson invests its funds in the
securities of the U.S. government and its agencies and other investments
permitted by law. Jefferson also operates four wholly-owned
subsidiaries. Two of such subsidiaries, Jefferson Insurance Services,
Inc. and Jefferson Investment Service Corp. are involved to a limited
extent in insurance brokerage or as acting as trustee for deeds of trust
securing loans originated by Jefferson. The other two subsidiaries,
Jefferson Funding Corporation and Jefferson Funding Corporation II are
finance subsidiaries which have issued notes payable and mortgage
collateral bonds, respectively.
Jefferson's principal lending area consists of the areas
surrounding its various offices. Jefferson also makes loans outside its
main lending area in areas throughout the Commonwealth of Virginia, and
on a very limited basis, in other states of close proximity.
Jefferson is subject to examination and comprehensive regulation by
the OTS and the FDIC. Jefferson is a member of the Federal Home Loan
Bank of Atlanta. Jefferson is further subject to the regulations of the
Federal Reserve Board governing reserves required to be maintained
against deposits and certain other matters.
PRICE RANGE OF COMMON STOCK
AND DIVIDEND POLICY
Jefferson's Common Stock is traded on the NASDAQ National Market
System under the symbol "JEFF." The following table sets forth, for the
calendar periods indicated, the high and low closing prices of the
Jefferson Common Stock as reported by the NASDAQ National Market System.
1994 High Low
Fourth Quarter (through
October __, 1994). . . . . . $17.50 $9.00
Third Quarter . . . . . . . . . 9.75 7.50
Second Quarter. . . . . . . . . 9.75 8.50
First Quarter . . . . . . . . . 8.00 7.00
1993 High Low
Fourth Quarter. . . . . . . . . 7.00 6.00
Third Quarter . . . . . . . . . 6.75 6.00
*Second Quarter. . . . . . . . 6.00 6.00
__________
*Jefferson's Common Stock began to trade on the NASDAQ
National Market System on June 22, 1993. Prior to such
date, the Jefferson Common Stock was privately traded.
On September 27, 1994, the Record Date, there were approximately
_____ holders of record of the Company's Common Stock. Based on the
Company's review of its "street name" account listings, the Company
estimates that the outstanding shares of its Common Stock are held by
approximately _______ beneficial owners. The closing price per share of
the Common Stock on September 28, 1994 on the NASDAQ National Market was
$16.00.
Jefferson has not paid a dividend since 1984. See "Comparative
Rights of Shareholders - Dividends and Other Distributions."
JEFFERSON SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the
beneficial ownership of Jefferson Common Stock as of September 27, 1994
by each of Jefferson's directors and by all directors and executive
officers of Jefferson as a group.
Shares Beneficially Owned
Name as of September 27, 1994(1)
Amount Percent
Saul Robinson 2,033 0.15%
Robert F. Kube 10,943 0.83
Thomas W. Winfree 9,231(2) 0.70
William M. Rider 2,676(3) 0.17
Robin C. Gulick 5,828(4) 0.44
Arthur J. Shadek 135,332 10.32
Calvin P. Burton 2,206 0.17
Charles H. Jones, Jr. 137,600(5) 10.50
John Sheldon Clark 118,238(6) 8.97
William Savage 1,000 0.01
All directors and executive
officers as a group (14
persons) 434,801(7) 33.0%
___________________________
(1) Unless otherwise noted, all shares are owned directly by the named
individuals or by their spouse and minor children residing with the
named individual, over which shares the named individuals
effectively exercise voting and investment power.
(2) Includes 4,500 shares of Jefferson Common Stock subject to stock
options which are currently exercisable. Such shares are deemed to
be beneficially owned by Mr. Winfree but are not deemed to be
outstanding for the purpose of computing the percentage of
Jefferson Common Stock owned by any other person or group.
(3) Includes 381 shares held by R.L. Rider Construction Company.
(4) Includes 2,498 shares held in trusts for which Mr. Gulick serves as
trustee and 1,666 shares held by a corporation of which Mr. Gulick
is a director.
(5) Includes 87,600 shares owned by Edge Partners, Ltd. of which Mr.
Jones is the managing partner.
(6) Includes 6,917 shares of Jefferson Common Stock subject to stock
options which are currently exercisable. Such shares are deemed to
be beneficially owned by Mr. Clark but are not deemed to be
outstanding for the purpose of computing the percentage of Common
Stock owned by any other person or group. It also includes 5,031
shares held in five separate trusts for which Mr. Clark acts as co-
trustee.
(7) All directors and executive officers as a group (14 persons)
beneficially own 434,801 shares or approximately 33.0% of the
issued and outstanding Jefferson Common Stock, which includes 9,249
shares subject to currently exercisable and outstanding stock
options granted to officers and directors under Jefferson's 1988
and 1993 stock option plans and 6,917 shares of Jefferson Common
Stock subject to currently exercisable and outstanding stock
options held by Director Clark.
The following persons are known to Jefferson to be the beneficial
owner of more than 5% of the issued and outstanding shares of
Jefferson's Common Stock:
<TABLE>
Amount and Nature
Name and Address of of Beneficial Percent of
Beneficial Owner Ownership(1)(2) Class
<S> <C> <C>
Charles H. Jones, Jr. 137,600(3) 10.50%
Rock Hedge Farm
Route 1, Box 110
Bluemont, Virginia 22012
Arthur J. Shadek 135,332 10.32
Katherine F. Shadek
688 Ocean Road
Vero Beach, Florida 32963
Value Partners, Ltd. 131,011 9.99
2200 Ross Avenue, Suite 4600W
Dallas, Texas 75201
Josiah T. Austin 138,164 10.54
Valer C. Austin
El Coronado Ranch Star Route
Pearce, Arizona 85625
John Sheldon Clark 118,238(4) 8.97
4311 W. Lawther Drive
Dallas, Texas 75214
____________________________
(1) Information is based on Schedule 13D filings made pursuant
to the Exchange Act or other information available to
Jefferson.
(2) Unless otherwise noted, all shares are owned directly by the
named individuals or by their spouse and minor children
residing with the named individual, over which shares the
named individuals effectively exercise voting and investment
power.
(3) Includes 87,600 shares owned by Edge Partners, Ltd. of which
Mr. Jones is the Managing Partner.
(4) Includes 6,917 shares of Common Stock subject to options
which are currently exercisable. Such shares are deemed to
be beneficially owned by Mr. Clark but are not deemed to be
outstanding for the purpose of computing the percentage of
Common Stock owned by any other person or group. It also
includes 5,031 shares held in five separate trusts for which
Mr. Clark acts as co-trustee.
</TABLE>
SUPERVISION AND REGULATION OF CRESTAR
Bank holding companies and banks are extensively regulated under
both federal and state law. The following description briefly discusses
certain provisions of federal and state laws and certain regulations and
proposed regulations and the potential impact of such provisions on
Crestar and its Bank Subsidiaries. To the extent that the following
information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions.
Bank Holding Companies
As a bank holding company registered under the BHCA, Crestar is
subject to regulation by the Federal Reserve Board. The Federal Reserve
Board has jurisdiction under the BHCA to approve any bank or nonbank
acquisition, merger or consolidation proposed by a bank holding company.
The BHCA generally limits the activities of a bank holding company and
its subsidiaries to that of banking, managing or controlling banks, or
any other activity which is so closely related to banking or to managing
or controlling banks as to be a proper incident thereto.
The BHCA currently prohibits the Federal Reserve Board from
approving an application from a bank holding company to acquire shares
of a bank located outside the state in which the operations of the
holding company's banking subsidiaries are principally conducted, unless
such an acquisition is specifically authorized by statute of the state
in which the bank whose shares are to be acquired is located. However,
under recently enacted federal legislation, the restriction on
interstate acquisitions will be abolished effective one year from
enactment of such legislation and thereafter, bank holding companies
from any state will be able to acquire banks and bank holding companies
located in any other state. Banks also will be able to branch across
state lines effective June 1, 1997, provided certain conditions are met,
including that applicable state law must expressly permit such
interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by
federal law and regulatory policy that are designed to reduce potential
loss exposure to the depositors of such depository institutions and to
the FDIC insurance fund in the event the depository institution becomes
in danger of default or in default. For example, under a policy of the
Federal Reserve Board with respect to bank holding company operations, a
bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee"
provisions of federal law, require insured depository institutions under
common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund ("SAIF") or
the Bank Insurance Fund ("BIF") as a result of the default of a commonly
controlled insured depository institution or for any assistance provided
by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the
SAIF or the BIF or both. The FDIC's claim for damages is superior to
claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured
creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The Federal Deposit Insurance Act also provides that amounts
received from the liquidation or other resolution of any insured
depository institution by any receiver must be distributed (after
payment of secured claims) to pay the deposit liabilities of the
institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder.
This provision would give depositors a preference over general and
subordinated creditors and stockholders in the event a receiver is
appointed to distribute the assets of any of the Bank Subsidiaries.
Crestar is registered under the bank holding company laws of
Virginia. Accordingly, Crestar and its Bank Subsidiaries are subject to
regulation and supervision by the State Corporation Commission of
Virginia.
Capital Requirements
The Federal Reserve Board, the Office of the Comptroller of the
Currency and the FDIC have issued substantially similar risk-based and
leverage capital guidelines applicable to United States banking
organizations. In addition, those regulatory agencies may from time to
time require that a banking organization maintain capital above the
minimum levels because of its financial condition or actual or
anticipated growth. Under the risk-based capital requirements of these
federal bank regulatory agencies, Crestar and its Bank Subsidiaries are
required to maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%. At least half of the total capital is required
to be "Tier 1 capital", which consists principally of common and
certain qualifying preferred shareholders' equity, less certain
intangibles and other adjustments. The remainder "Tier 2 capital"
consists of a limited amount of subordinated and other qualifying debt
(including certain hybrid capital instruments) and a limited amount of
the general loan loss allowance. The Tier 1 and total capital to
risk-weighted asset ratios of Crestar Financial Corporation as of June
30, 1994 were 9.3% and 12.0%, respectively, exceeding the minimums
required.
In addition, each of the federal regulatory agencies has
established a minimum leverage capital ratio (Tier 1 capital to average
tangible assets). These guidelines provide for a minimum ratio of 3%
for banks and bank holding companies that meet certain specified
criteria, including that they have the highest regulatory examination
rating and are not contemplating significant growth or expansion. All
other institutions are expected to maintain a leverage ratio of at least
100 to 200 basis points above the minimum. The leverage ratio of Crestar
as of June 30, 1994, was 7.5%. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each federal banking agency, to revise its risk-
based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the
risks of nontraditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family mortgages. The
Federal Reserve Board, the FDIC and the OCC have issued a joint advance
notice of proposed rulemaking, and have issued a revised proposal,
soliciting comments on a proposed framework for implementing the
interest rate risk component of the risk-based capital guidelines.
Under the proposal, an institution's assets, liabilities, and off-
balance sheet positions would be weighed by risk factors that
approximate the instruments' price sensitivity to a 100 basis point
change in interest rates. Institutions with interest rate risk exposure
in excess of a threshold level would be required to hold additional
capital proportional to that risk. The Federal Reserve Board, the FDIC,
the OCC and the OTS also issued a joint notice of proposed rulemaking
soliciting comments on a proposed revision to the risk-based capital
guidelines to take account of concentration of credit risk and the risk
of non-traditional activities. The proposal would amend each agency's
risk-based capital standards by explicitly identifying concentration of
credit risk and the risk arising from non-traditional activities, as
well as an institution's ability to manage those risks, as important
factors to be taken into account by the agency in assessing an
institution's overall capital adequacy. The proposal was adopted
without modification as a final rule by the Federal Reserve Board on
August 3, 1994, and by the FDIC on August 9, 1994. Publication of a
final interagency rule is subject to the completion of each agency's
approval process. The final rule will not become effective until 30
days after publication. Crestar does not expect the final rule to have
a material impact on its capital requirements.
Limits on Dividends and Other Payments
Crestar is a legal entity separate and distinct from its subsidiary
institutions. Most of the revenues of Crestar result from dividends
paid to Crestar by its Bank Subsidiaries. There are various legal
limitations applicable to the payment of dividends to Crestar as well as
the payment of dividends by Crestar to its respective shareholders.
Under federal law, the Bank Subsidiaries may not, subject to
certain limited exceptions, make loans or extensions of credit to, or
investments in the securities of, Crestar, as the case may be, or take
securities of Crestar, as the case may be, as collateral for loans to
any borrower. The Bank Subsidiaries are also subject to collateral
security requirements for any loans or extensions of credit permitted by
such exceptions.
The Bank Subsidiaries are subject to various statutory restrictions
on their ability to pay dividends to Crestar. Under the current
supervisory practices of the Bank Subsidiaries' regulatory agencies,
prior approval from those agencies is required if cash dividends
declared in any given year exceed net income for that year plus retained
earnings of the two preceding years. Under these supervisory practices,
at January 1, 1994, the Bank Subsidiaries could have paid additional
dividends to Crestar of approximately $106.0 million, without obtaining
prior regulatory approval. The payment of dividends by the Bank
Subsidiaries or Crestar may also be limited by other factors, such as
requirements to maintain capital above regulatory guidelines. Bank
regulatory agencies have authority to prohibit any Bank Subsidiary or
Crestar from engaging in an unsafe or unsound practice in conducting
their business. The payment of dividends, depending upon the financial
condition of the Bank Subsidiary in question, or Crestar, could be
deemed to constitute such an unsafe or unsound practice. The Federal
Reserve Board has stated that, as a matter of prudent banking, a bank or
bank holding company should not maintain its existing rate of cash
dividends on common stock unless (1) the organization's net income
available to common shareholders over the past year has been sufficient
to fund fully the dividends and (2) the prospective rate of earnings
retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition.
Under the FDIA, insured depository institutions such as the Bank
Subsidiaries are prohibited from making capital distributions, including
the payment of dividends, if, after making such distribution, the
institution would become "undercapitalized" (as such term is used in the
statute). Based on the Bank Subsidiaries' current financial condition,
Crestar does not expect that this provision will have any impact on its
ability to obtain dividends from its Bank Subsidiaries.
Banks
The Bank Subsidiaries are supervised and regularly examined by the
Federal Reserve Board, the SCC, the Maryland State Bank Commissioner and
the OCC, as the case may be. The various laws and regulations
administered by the regulatory agencies affect corporate practices, such
as payment of dividends, incurring debt and acquisition of financial
institutions and other companies, and affect business practices, such as
payment of interest on deposits, the charging of interest on loans,
types of business conducted and location of offices.
The Bank Subsidiaries also are subject to the requirements of the
Community Reinvestment Act (the "CRA"). The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit
needs of their local communities, including low- and moderate-income
neighborhoods, consistent with the safe and sound operation of those
institutions. Each financial institution's efforts in meeting community
credit needs currently are evaluated as part of the examination process
pursuant to twelve assessment factors. These factors also are
considered in evaluating mergers, acquisitions and applications to open
a branch or facility.
As a result of a Presidential initiative, each of the federal
banking agencies, including the FDIC, has issued a notice of proposed
rulemaking that would replace the current CRA assessment system with a
new evaluation system that would rate institutions based on their actual
performance (rather than efforts) in meeting community credit needs.
Crestar is currently studying the proposal (which is expected to be
substantially revised) and determining whether the regulation, if
enacted, would require changes to the CRA action plans of its Bank
Subsidiaries.
As institutions with deposits insured by the BIF, the Bank
Subsidiaries also are subject to insurance assessments imposed by the
FDIC. The FDIC has implemented a risk-based assessment schedule,
imposing assessments ranging from 0.23% to 0.31% of an institution's
average assessment base. The actual assessment to be paid by each BIF
member is based on the institution's assessment risk classification,
which is determined based on whether the institution is considered "well
capitalized," "adequately capitalized" or "undercapitalized," as such
terms have been defined in applicable federal regulations, and whether
such institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns. Because a portion of
the Bank Subsidiaries' deposits are treated as being insured by the
SAIF, however, Crestar's future deposit insurance premium expenses may
be affected by changes in the SAIF assessment rate. Under current law,
the SAIF assessment is determined pursuant to the same risk-based
assessment system that applies to BIF-insured institutions. In
addition, current federal law provides that the SAIF assessment rate may
not be less than 0.18% from January 1, 1994 through December 31, 1997.
After December 31, 1997, the SAIF assessment rate must be a rate
determined by the FDIC to be appropriate to increase the SAIF's reserve
ratio to 1.25% of insured deposits or such higher percentage as the FDIC
determines to be appropriate, but the assessment rate may not be less
than 0.15%. As of June 30, 1994, approximately 31% of the total
deposits of the Bank Subsidiaries were SAIF-insured and subject to the
SAIF assessment rate.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current
federal law to take prompt corrective action to resolve problems of
insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," as such terms are
defined under uniform regulations defining such capital levels issued by
each of the federal banking agencies.
In addition, FDIC regulations now require that management report on
its institution's responsibility for preparing financial statements, and
establishing and maintaining an internal control structure and
procedures for financial reporting and compliance with designated laws
and regulations concerning safety and soundness; and that independent
auditors attest to and report separately on assertions in management's
reports concerning compliance with such laws and regulations, using
FDIC-approved audit procedures.
Current federal law also requires each of the federal banking
agencies to develop regulations addressing certain safety and soundness
standards for insured depository institutions and depository institution
holding companies, including operational and managerial standards, asset
quality, earnings and stock valuation standards, as well as compensation
standards (but not dollar levels of compensation). Each of the federal
banking agencies have issued a joint notice of proposed rulemaking,
which requested comment on the implementation of these standards. The
proposed rule sets forth general operational and managerial standards in
the areas of internal controls, information systems and internal audit
systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. The
proposal contemplates that each federal agency would determine
compliance with these standards through the examination process, and if
necessary to correct weaknesses, require an institution to file a
written safety and soundness compliance plan. Crestar has not yet
determined the effect that the proposed rule would have on their
respective operations and the operations of their depository institution
subsidiaries if it is enacted substantially as proposed.
DESCRIPTION OF CRESTAR CAPITAL STOCK
The capital stock of Crestar consists of 100,000,000 authorized
shares of Common Stock and 2,000,000 authorized shares of Preferred
Stock. The shares of Preferred Stock are issuable in series, with
relative rights, preferences and limitations of each series fixed by
Crestar's Board of Directors. The following summary does not purport to
be complete and is subject in all respects to applicable Virginia law,
Crestar's Restated Articles of Incorporation and Bylaws, and the Rights
Agreement dated June 23, 1989 (described below) (the "Rights
Agreement").
Common Stock
Crestar had 37,717,023 shares of Common Stock outstanding at June
30, 1994. Each share of Common Stock is entitled to one vote on all
matters submitted to a vote of shareholders. Holders of Common Stock
are entitled to receive dividends when and as declared by Crestar's
Board of Directors out of funds legally available therefor. Dividends
may be paid on the Common Stock only if all dividends on any outstanding
Preferred Stock have been paid or provided for.
The issued and outstanding shares of Common Stock are fully paid
and non-assessable. Holders of Common Stock have no preemptive or
conversion rights and are not subject to further calls or assessments by
Crestar.
In the event of the voluntary or involuntary dissolution,
liquidation or winding up of Crestar, holders of Common Stock are
entitled to receive, pro rata, after satisfaction in full of the prior
rights of creditors and holders of Preferred Stock, if any, all the
remaining assets of Crestar available for distribution.
Directors are elected by a vote of the holders of Common Stock.
Holders of Common Stock are not entitled to cumulative voting rights.
Mellon Bank, N.A. acts as the transfer agent and registrar for the
Common Stock.
Preferred Stock
Crestar's Board of Directors is authorized to designate with
respect to each new series of Preferred Stock the number of shares in
each series, the dividend rates and dates of payment, voluntary and
involuntary liquidation preferences, redemption prices, whether or not
dividends shall be cumulative and, if cumulative, the date or dates from
which the same shall be cumulative, the sinking fund provisions, if any,
for redemption or purchase of shares, the rights, if any, and the terms
and conditions on which shares can be converted into or exchanged for,
or the rights to purchase, shares of any other class or series, and the
voting rights, if any. Any Preferred Stock issued will rank prior to
the Common Stock as to dividends and as to distributions in the event of
liquidation, dissolution or winding up of Crestar. The ability of
Crestar's Board of Directors to issue Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting powers
of holders of Common Stock and, under certain circumstances, may
discourage an attempt by others to gain control of Crestar.
Pursuant to Crestar's Restated Articles of Incorporation, the Board
of Directors has designated a series of 100,000 shares of Participating
Cumulative Preferred Stock, Series C (the "Series C Preferred Stock"),
none of the shares of which are currently outstanding. The Series C
Preferred Stock was created in connection with Crestar's shareholder
rights plan which is described below.
Rights
In 1989, pursuant to the Rights Agreement, Crestar distributed as a
dividend one Right for each outstanding share of Common Stock. Each
Right entitles the holder to buy one one-thousandth of a share of Junior
Preferred Stock at an exercise price of $115, subject to adjustment.
The Rights will become exercisable only if a person or group acquires or
announces a tender offer for 10% or more of the outstanding Common
Stock. When exercisable, Crestar may issue a share of Common Stock in
exchange for each Right other than those held by such person or group.
If a person or group acquires 30% or more of the outstanding Common
Stock, each Right will entitle the holder, other than the acquiring
person, upon payment of the exercise price, to acquire Series C
Preferred Stock or, at the option of Crestar, Common Stock, having a
value equal to twice the Right's exercise price. If Crestar is acquired
in a merger or other business combination or if 50% of its earnings
power is sold, each Right will entitle the holder, other than the
acquiring person, to purchase securities of the surviving company having
a market value equal to twice the exercise price of the Right. The
Rights will expire on June 23, 1999, and may be redeemed by Crestar at
any time prior to the tenth day after an announcement that a 10%
position has been acquired, unless such time period has been extended by
the Board of Directors.
Until such time as a person or group acquires or announces a tender
offer for 10% or more of the Common Stock, (i) the Rights will be
evidenced by the Common Stock certificates and will be transferred with
and only with such Common Stock certificates, and (ii) the surrender for
transfer of any certificate for Common Stock will also constitute the
transfer of the Rights associated with the Common Stock represented by
such certificate. Rights may not be transferred, directly or indirectly
(i) to any person or group that has acquired, or obtained the right to
acquire, beneficial ownership of 10% or more of the Rights (an
"Acquiring Person"), (ii) to any person in connection with a transaction
in which such person becomes an Acquiring Person or (iii) to any
affiliate or associate of any such person. Any Right that is the
subject of a purported transfer to any such person will be null and
void.
The Rights may have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that acquires more than
10% of the outstanding shares of Common Stock of Crestar if certain
events thereafter occur without the Rights having been redeemed.
However, the Rights should not interfere with any merger or other
business combination approved by the Board of Directors and the
shareholders because the Rights are redeemable under certain
circumstances.
Virginia Stock Corporation Act
The Virginia Stock Corporation Act ("VSCA") contains provisions
governing "Affiliated Mergers." These provisions, with several
exceptions discussed below, require approval of material acquisition
transactions between a Virginia corporation and any holder of more than
10% of any class of its outstanding voting shares (an "Interested
Shareholder") by the holders of at least two-thirds of the remaining
voting shares. Affiliated Mergers subject to this approval requirement
include mergers, share exchanges, material dispositions of corporate
assets not in the ordinary course of business, any dissolution of the
corporation proposed by or on behalf of an Interested Shareholder, or
any reclassification, including reverse stock splits, recapitalization
or merger of the corporation with its subsidiaries which increases the
percentage of voting shares owned beneficially by an Interested
Shareholder by more than 5%.
For three years following the time that an Interested Shareholder
becomes an owner of 10% of the outstanding voting shares, a Virginia
corporation cannot engage in an Affiliated Merger with such Interested
Shareholder without approval of two-thirds of the voting shares other
than those shares beneficially owned by the Interested Shareholder, and
majority approval of the "Disinterested Directors." A Disinterested
Director means, with respect to a particular Interested Shareholder, a
member of Crestar's Board of Directors who was (1) a member on the date
on which an Interested Shareholder became an Interested Shareholder and
(2) recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Disinterested
Directors then on the Board. At the expiration of the three year
period, the statute requires approval of Affiliated Mergers by two-
thirds of the voting shares other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
transactions proposed after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy
the fair-price requirements of the statute. In general, the fair-price
requirement provides that in a two-step acquisition transaction, the
Interested Shareholder must pay the shareholders in the second step
either the same amount of cash or the same amount and type of
consideration paid to acquire the Virginia corporation's shares in the
first step.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder whose
acquisition of shares making such person an Interested Shareholder was
approved by a majority of the Virginia corporation's Disinterested
Directors.
These provisions were designed to deter certain takeovers of
Virginia corporations. In addition, the statute provides that, by
affirmative vote of a majority of the voting shares other than shares
owned by any Interested Shareholder, a corporation can adopt an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Mergers provisions will not apply to the corporation.
Crestar has not "opted out" of the Affiliated Mergers provisions.
Virginia law also provides that shares acquired in a transaction
that would cause the acquiring person's voting strength to meet or
exceed any of three thresholds (20%, 331/3% or 50%) have no voting
rights unless granted by a majority vote of shares not owned by the
acquiring person or any officer or employee-director of the Virginia
corporation. This provision empowers an acquiring person to require the
Virginia corporation to hold a special meeting of shareholders to
consider the matter within 50 days of its request.
COMPARATIVE RIGHTS OF SHAREHOLDERS
At the Effective Time of the Merger, Jefferson shareholders (except
any Jefferson shareholder properly electing the cash option)
automatically will become shareholders of Crestar, and their rights as
shareholders will be determined by Crestar's Restated Articles of
Incorporation and Bylaws. The following is a summary of the material
differences in the rights of shareholders of Crestar and Jefferson.
This summary does not purport to be a complete discussion of, and is
qualified in its entirety by reference to, the governing law and the
Articles of Incorporation or Charter and Bylaws of each entity.
Capitalization
Jefferson. Jefferson's Charter authorizes the issuance of up to
7,500,000 shares of Jefferson capital stock, of which 5,000,000 shares
are Jefferson Common Stock, par value $3 per share, of which 1,310,876
shares were issued and outstanding as of the Record Date and of which
2,500,000 shares are Jefferson preferred stock, par value $1.00 per
share, of which no shares were issued and outstanding as of the Record
Date.
Crestar. Crestar's authorized capital is set forth under
"Description of Crestar Capital Stock."
Amendment of Articles or Bylaws
Jefferson. No amendment of Jefferson's Charter may be made unless
it is first proposed by the Board of Directors of Jefferson, then
preliminarily approved by the OTS, and thereafter approved by the
holders of a majority of the total votes eligible to be cast at a legal
meeting.
The Bylaws of Jefferson may be amended by a majority vote of the
full Board of Directors of Jefferson or by a majority vote of the votes
cast by the shareholders of Jefferson at any legal meeting, subject to
either objection by the OTS or, in certain cases, approval by the OTS
pursuant to governing regulations.
Crestar. As permitted by the VSCA, Crestar's Articles provide
that, unless a greater vote is required by law, by the Articles of
Crestar or by a resolution of the Board of Directors, Crestar's Articles
may be amended if the amendment is adopted by the Board of Directors and
approved by a vote of the holders of a majority of the votes entitled to
be cast on the amendment by each voting group entitled to vote thereon.
The Article providing for a classified Board of Directors and
establishing criteria for removing Directors requires the approving vote
of a majority of "Disinterested Directors" and the holders of at least
two-thirds of the votes entitled to be cast on the amendment.
Crestar's Bylaws generally provide that the Board of Directors may,
by a majority vote, amend its Bylaws.
Required Shareholder Vote for Certain Actions
Jefferson. A regulation of the OTS generally requires the approval
of the Board of Directors of Jefferson and the holders of two-thirds of
the outstanding stock of Jefferson entitled to vote thereon for mergers,
consolidations and sales of all or substantially all of Jefferson's
assets. Such regulation permits Jefferson to merge with another
corporation without obtaining the approval of its shareholders if: (i)
it does not involve an interim savings association; (ii) Jefferson's
Charter is not changed; (iii) each share of Jefferson Common Stock
outstanding immediately prior to the effective date of the transaction
is to be an identical outstanding share or a treasury share of Jefferson
after such effective date; and (iv) either: (A) no shares of voting
stock of Jefferson and no securities convertible into such stock are to
be issued or delivered under the plan of combination or (B) the
authorized unissued shares or the treasury shares of voting stock of
Jefferson to be issued or delivered under the plan of combination, plus
those initially issuable upon conversion of any securities to be issued
or delivered under such plan, do not exceed 15% of the total shares of
voting stock of Jefferson outstanding immediately prior to the effective
date of the transaction.
Crestar. The VSCA generally requires the approval of a majority of
a corporation's Board of Directors and the holders of more than two-
thirds of all the votes entitled to be cast thereon by each voting group
entitled to vote on any plan of merger or consolidation, plan of share
exchange or sale of substantially all of the assets of a corporation not
in the ordinary course of business. The VSCA also specifies additional
voting requirements for Affiliated Mergers and transactions that would
cause an acquiring person's voting power to meet or exceed specified
thresholds, as discussed under "Description of Crestar Capital Stock --
Virginia Stock Corporation Act."
None of the additional voting requirements contained in the Crestar
Restated Articles of Incorporation or the VSCA are applicable to the
Merger.
Director Nominations
Jefferson. Pursuant to the Bylaws of Jefferson, the Board of
Directors acts as the nominating committee for selecting Board nominees
for election as directors. The Board generally delivers its written
nominations to the Secretary of Jefferson at least twenty days prior to
the date of the annual meeting. Upon delivery, such nominations are
posted in a conspicuous place in each of Jefferson's branch offices.
Nominations for election as a director of Jefferson may be made by
stockholders, but such nominations must be in writing and delivered to
the Secretary of Jefferson at least five days prior to the annual
meeting.
Crestar. The Bylaws of Crestar provide that any nomination for
director made by a shareholder must be made in writing to the Secretary
of Crestar not less than 15 days prior to the meeting of shareholders at
which directors are to be elected. If mailed, such notice shall be sent
by certified mail, return receipt requested, and shall be deemed to have
been given when received by the Secretary of Crestar. A shareholder's
nomination for director shall set forth (a) the name and business
address of the shareholder's nominee, (b) the fact that the nominee has
consented to his name being placed in nomination, (c) the name and
address, as they appear on Crestar's books, of the shareholder making
the nomination, (d) the class and number of shares of Crestar's stock
beneficially owned by the shareholder, and (e) any material interest of
the shareholder in the proposed nomination.
Directors and Classes of Directors; Vacancies and Removal of Directors
Jefferson. Jefferson's Charter and Bylaws require the Board of
Directors of Jefferson to be divided into three classes as nearly equal
in number as possible and that the members of each class be elected for
a term of three years and until their successors are elected and
qualified, with one class being elected annually. The Bylaws of
Jefferson provide that the number of directors shall be ten.
Any vacancy occurring in the Board of Directors of Jefferson,
whether by death, resignation, removal or increase in the number of
directors, may be filled by the affirmative vote of a majority of the
remaining directors. A director elected to fill a vacancy shall serve
for the unexpired portion of the term or until his successor is elected
and qualified.
Under Jefferson's Bylaws, any director may be removed for cause by
the holders of a majority of the outstanding shares at a meeting of
shareholders called expressly for such purpose but if less than the
entire Board is to be removed, such directors shall not be removed if
the votes cast against his removal, voting cumulatively, would have been
sufficient to elect him.
Crestar. Crestar's Articles provide that the number of Directors
shall be set forth in the Bylaws, but the number of directors set forth
in the Bylaws may not be increased by more than four during any 12-month
period except by the affirmative vote of more than two-thirds of the
votes entitled to be cast. The Bylaws provide for a Board of Directors
consisting of not less than five nor more than 26 members, with the
number to be fixed by the Board. The Board currently has fixed the
number of directors at 18. Crestar's Board of Directors is divided into
three classes, each as nearly equal in number as possible, with one
class being elected annually.
The Articles of Incorporation of Crestar provide that any vacancy
occurring on the Board of Directors, including a vacancy resulting from
an increase in the number of Directors, may be filled by the affirmative
vote of a majority of the remaining directors, though less than a quorum
of the Board of Directors. If at the time any such vacancy is filled,
any person, or any associate or affiliate of such person (as those terms
are defined in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act, or any successor rule or regulation) is directly or
indirectly the beneficial owner of 10% (or more) of outstanding voting
shares, the vacancy shall be filled by the affirmative vote of a
majority of the remaining directors in the class of directors in which
the vacancy has occurred. Directors so chosen shall hold office for a
term expiring at the next following annual meeting of shareholders at
which directors are elected. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any
incumbent director.
Subject to the rights of the holders of preferred stock then
outstanding, any director may be removed, with cause, only by the
affirmative vote of the holders of at least two-thirds of outstanding
voting shares.
Anti-Takeover Provisions
For a description of certain provisions of the VSCA, applicable to
Crestar, which may be deemed to have an anti-takeover effect, see
"Description of Crestar Capital Stock -- Virginia Stock Corporation
Act."
Preemptive Rights
Neither the shareholders of Crestar nor the shareholders of
Jefferson have preemptive rights. Thus, if additional shares of Crestar
Common Stock, Crestar preferred stock or Jefferson Common or preferred
stock are issued, holders of such stock, to the extent they do not
participate in such additional issuance of shares, would own
proportionately smaller interests in a larger amount of outstanding
capital stock.
Assessment
All shares of Crestar Common Stock presently issued are, and those
to be issued pursuant to the Agreement will be, fully paid and
nonassessable.
All outstanding shares of Jefferson Common Stock are deemed to be
fully paid and nonassessable.
Conversion; Redemption; Sinking Fund
Neither Crestar Common Stock nor Jefferson Common Stock is
convertible, redeemable or entitled to any sinking fund.
Liquidation Rights
Jefferson. Subject to the prior rights of the holders of any
shares of preferred stock that may be outstanding, in the event of any
liquidation, dissolution or winding up of Jefferson, the holders of the
Common Stock would be entitled to receive, after payment of all debts
and liabilities of Jefferson (including all deposit accounts and accrued
interest thereon) all assets of Jefferson available for distribution.
Crestar. The VSCA generally provides that a corporation's board of
directors may propose dissolution for submission to shareholders and
that to be authorized dissolution must be approved by the holders of
more than two-thirds of all votes entitled to be cast on the proposal,
unless the articles of incorporation of the corporation require a
greater or lesser vote. There are no provisions in the Articles of
Incorporation of Crestar which would modify the statutory requirements
for dissolution under the VSCA.
Dividends and Other Distributions
Jefferson. The ability of a federally-chartered savings
association such as Jefferson to pay dividends on its capital stock is
restricted by regulatory considerations. Dividends by Jefferson are
subject to the requirements of an OTS regulation which governs capital
distributions by savings associations. This regulation creates a safe
harbor for specified levels of capital distributions by savings
associations which meet at least their minimum capital requirements, so
long as such associations notify the OTS and receive no objection from
the OTS to the distribution, and provides that savings associations that
do not qualify for the safe harbor are required to obtain prior OTS
approval before making any capital distributions.
Generally, Tier 1 associations, which are savings associations that
before and after the proposed distribution meet or exceed their fully
phased-in capital requirements, may make capital distributions during
any calendar year equal to the greater of: (i) 100% of net income for
the calendar year-to-date plus 50% of its "surplus capital ratio," as
defined, at the beginning of the calendar year, and (ii) 75% of its net
income over the most recent four quarter period. Tier 2 associations,
which are associations that before and after the proposed distribution
meet or exceed their current minimum capital requirements but do not
exceed their fully phased-in capital requirements, may make capital
distributions totaling up to 75% of net income over the most recent four
quarter period. Tier 3 associations, which are associations that do not
meet current minimum capital requirements, or that have capital in
excess of either their fully phased-in requirement or minimum capital
requirement but which have been notified by the OTS that it will be
treated as a Tier 3 association for purposes of the OTS capital
distribution regulation, may not make any capital distribution without
obtaining prior OTS approval. Because Jefferson did not meet its
minimum risk-based capital requirement as of June 30, 1994, management
believes that it is currently considered by the OTS to be a Tier 3
association for purposes of the OTS capital distribution regulation and
thus it may not make any capital distribution without obtaining prior
OTS approval. Jefferson filed its Capital Restoration Plan with the OTS
as required by the prompt corrective action requirements of the Federal
Deposit Insurance Corporation Improvements Act of 1991 on September 16,
1994. The Capital Restoration Plan does not contemplate the paying of
dividends by Jefferson in the foreseeable future. Moreover, the
Agreement prohibits Jefferson from paying any cash dividends prior to
the Effective Time of the Merger without the prior written consent of
Crestar.
Crestar. The VSCA generally provides that a corporation may make
distributions to its shareholders unless, after giving effect to the
distribution, (i) the corporation would not be able to pay its debts as
they become due in the usual course of business or (ii) the
corporation's total assets would be less than the sum of its total
liabilities plus (unless the articles of incorporation permit otherwise,
which in the case of Crestar they do not) the amount that would be
needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving
the distribution.
In addition to the limitations set forth in the VSCA, there are
various regulatory requirements which are applicable to distributions by
bank holding companies such as Crestar. For a description of the
regulatory limitations on distributions by Crestar, see "Supervision and
Regulation -- Limits on Dividends and Other Payments."
Special Meetings of Shareholders
Jefferson. Jefferson's Bylaws provide that special meetings of the
shareholders of Jefferson may be called by the Chairman of the Board,
the President or a majority of the Board of Directors of Jefferson and
shall be called by the Chairman, President or Secretary of Jefferson
upon the written request of the holders of not less than 10% of the
outstanding capital stock of Jefferson entitled to vote at the meeting.
Crestar. The Bylaws of Crestar provide that special meetings of
the shareholders for any purpose or purposes may be called at any time
by the Chairman of the Board of Directors, by the President, or by a
majority of the Board of Directors.
Indemnification
Jefferson. Federal savings associations are required by OTS
regulation to indemnify their directors, officers and employees against
any action brought or threatened because that person is or was a
director, officer or employee for: (i) any amount for which such person
becomes liable under a judgment in such action, and (ii) reasonable
costs and expenses, including reasonable attorney's fees, actually paid
or incurred by that person in defending or settling such action or in
enforcing such person's rights under the applicable regulation if he or
she attains a favorable judgment in such enforcement action.
Indemnification shall be made to such person only if: (i) final judgment
on the merits is in such person's favor, or (ii) in the case of: (A)
settlement, (B) final judgment against such person, or (C) final
judgment in such person's favor, other than on the merits, if a majority
of the disinterested directors of the savings association determine that
such person was acting in good faith within the scope of such person's
employment or authority as such person could reasonably have perceived
it under the circumstances and for a purpose such person could
reasonably have believed under the circumstances was in the best
interests of the savings association or its stockholders. No
indemnification shall be made unless the association gives the OTS at
least 60 days' notice of its intentions to make such indemnification and
the OTS, within such notice period, advises the association in writing
of its objection thereto.
Crestar. The Articles of Incorporation of Crestar provide that to
the full extent permitted by the VSCA and any other applicable law,
Crestar shall indemnify a director or officer of Crestar who is or was a
party to any proceeding by reason of the fact that he is or was such a
director or officer or is or was serving at the request of the
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise. The Board of Directors is empowered, by majority vote
of a quorum of disinterested directors, to contract in advance to
indemnify any director or officer.
Shareholder Proposals
Jefferson. The Bylaws of Jefferson generally provide that
stockholders of Jefferson must provide Jefferson with written notice of
stockholder nominations for election as directors and stockholder
proposals at least five days prior to the date of the annual meeting of
the stockholders of Jefferson at which these matters will be considered.
Stockholder proposals which are proposed to be included in the Jefferson
proxy materials must be submitted in accordance with the notice and
other requirements of Rule 14a-8 under the Exchange Act.
Crestar. The Bylaws of Crestar provide that at any meeting of
shareholders of Crestar, only that business that is properly brought
before the meeting may be presented to and acted upon by the
shareholders. To be properly brought before the meeting, business must
be brought (a) by or at the direction of the Board of Directors or (b)
by a shareholder who has given written notice of business he expects to
bring before the meeting to the Secretary of Crestar not less than 15
days prior to the meeting. If mailed, such notice shall be sent by
certified mail, return receipt requested, and shall be deemed to have
been given when received by the Secretary of Crestar. A shareholder's
notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the meeting (a) a brief description
of the business to be brought before the meeting and the reasons for
conducting such business at the meeting, (b) the name and address, as
they appear on Crestar's books, of the shareholder proposing such
business, (c) the class and number of shares of Crestar's stock
beneficially owned by the shareholder, and (d) any material interest of
the shareholder in such business. No business will be conducted at a
meeting of shareholders except in accordance with the procedures set
forth in Crestar's Bylaws.
Shareholder Inspection Rights; Shareholder Lists
Jefferson. The Bylaws of Jefferson provide that the list of
stockholders shall be available for inspection by any stockholder
entitled to vote for a period of twenty days before, and during, each
meeting of stockholders. In lieu thereof, the Bylaws provide that
Jefferson may choose to make its stockholders' list available pursuant
to Rule 14a-7 under the Exchange Act. In addition, an OTS regulation
also provides that certain stockholders of a federally-chartered savings
association such as Jefferson may, upon making written demand stating a
proper purpose and, if requested, providing specified affidavits,
inspect its books and records of account, minutes and record of
stockholders. Such right of examination pursuant to the OTS regulations
is limited to a stockholder or group of stockholders holding of record
(i) voting shares having a cost of not less than $100,000 or
constituting not less than 1% of the total outstanding voting shares,
provided in either case that the stockholder or group of stockholders
have held of record such voting shares for at least six months, or (ii)
not less than 5% of the total outstanding voting shares.
Crestar. The Articles of Incorporation and By-Laws of Crestar do
not contain any provisions which govern shareholder inspection rights or
shareholder lists. Under the VSCA, the shareholder of a Virginia
corporation is entitled to inspect and copy certain books and records of
the corporation, including a list of shareholders, if (i) the
shareholder has been a shareholder of record for at least six months
immediately preceding his or her written demand or is the holder of at
least 5% of the corporation's outstanding shares, (ii) the shareholder's
demand is made in good faith and for a proper purpose, (iii) the
shareholder describes with reasonable particularity the purpose of the
request and the records desired to be inspected and (iv) the records are
directly connected with the stated purpose. The VSCA also provides that
a corporation shall make available for inspection by any shareholder
during usual business hours, at least 10 days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at
such meeting.
Shareholder Rights Plan
Jefferson. Jefferson does not have a shareholders' rights plan.
Crestar. For a description of a shareholder rights agreement which
has been adopted by Crestar, see "DESCRIPTION OF CRESTAR CAPITAL STOCK -
- - Rights." Each Jefferson shareholder who elects to receive shares of
Crestar Common Stock in exchange for Jefferson Common Stock will receive
one Right for each share of Crestar Common Stock received.
Dissenters' Rights
Jefferson. A regulation of the OTS provides that a stockholder of
a federally-chartered savings association such as Jefferson which
engages in a merger, consolidation, sale of all or substantially all of
its assets shall have the right to demand from such savings association
payment of the fair or appraised value of his or her stock in the
savings association, subject to specified procedural requirements. This
regulation also provides, however, that the stockholders of a federally-
chartered savings association with stock that is listed on a national
securities exchange or quoted on the NASDAQ System are not entitled to
dissenters' rights in connection with a merger involving such savings
association if the stockholder is required to accept only "qualified
consideration" for the stockholder's stock, which is defined to include
cash, shares of stock of any savings association or corporation which at
the effective date of the merger will be listed on a national securities
exchange or quoted on the NASDAQ System or any combination of such
shares of stock and cash. For this reason, Jefferson stockholders will
not be entitled to exercise their dissenter's rights regarding the
Merger and obtain payment of the fair value of their shares of Jefferson
Common Stock. See also "THE MERGER -- Dissenting Shares."
Crestar. The provisions of Article 15 of the VSCA which provide
shareholders of a Virginia corporation the right to dissent from, and
obtain payment of the fair value of his shares in the event of, mergers,
consolidations and certain other corporate transactions are applicable
to both Crestar and Jefferson as Virginia corporations. However,
because Crestar has more than 2,000 record shareholders, shareholders of
Crestar are less likely to have rights to dissent from mergers,
consolidations and certain other corporate transactions to which Crestar
is a party because Article 15 of the VSCA provides that holders of
shares of a Virginia corporation which has shares listed on a national
securities exchange or which has at least 2,000 record shareholders are
not entitled to dissenters' rights unless certain requirements are met.
RESALE OF CRESTAR COMMON STOCK
Crestar Common Stock has been registered under the Securities Act,
thereby allowing such shares to be traded freely and without restriction
by those holders of Jefferson Common Stock who receive such shares
following consummation of the Merger and who are not deemed to be
"affiliates" (as defined under the Securities Act, but generally
including directors, certain executive officers and 10% or more
shareholders) of Jefferson or Crestar. The Agreement provides that each
holder of Jefferson Common Stock who is deemed by Jefferson to be an
affiliate of it will enter into an agreement with Crestar prior to the
Effective Date of the Merger providing, among other things, that such
affiliate will not transfer any Crestar Common Stock received by such
holder in the Merger except in compliance with the Securities Act. This
Proxy Statement/Prospectus does not cover any resales of Crestar Common
Stock received by affiliates of Jefferson.
EXPERTS
The consolidated financial statements of Crestar Financial
Corporation and Subsidiaries incorporated in this Proxy
Statement/Prospectus by reference to Crestar's Annual Report on
Form 10-K for the year ended December 31, 1993 and Crestar's current
report on Form 8-K dated March 10, 1994 have been so incorporated in
reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
incorporated herein by reference, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Jefferson for the years
ended September 30, 1993, 1992 and 1991, included in this Proxy
Statement/Prospectus have been audited by BDO Seidman, independent
certified public accountants, to the extent and for the periods set
forth in their report appearing herein, and included in reliance upon
such report given upon authority of said firm as experts in accounting
and auditing.
LEGAL OPINIONS
The legality of the Crestar Common Stock to be issued in the Merger
will be passed on for Crestar by Hunton & Williams, Richmond, Virginia.
Gordon F. Rainey, Jr., a partner in Hunton & Williams, is a director of
Crestar.
A condition to consummation of the Merger is the delivery by Hunton
& Williams, counsel for Crestar, of an opinion to Crestar concerning
certain federal income tax consequences of the Merger. See "The
Merger -- Certain Federal Income Tax Consequences."
Legal matters will be passed on for Jefferson by Elias, Matz,
Tiernan & Herrick L.L.P. Washington, D.C.
<PAGE>
Annex I
AGREEMENT AND PLAN OF REORGANIZATION
among
CRESTAR FINANCIAL CORPORATION,
CRESTAR BANK,
and
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
September 1, 1994
INDEX
Page
ARTICLE I
General
1.1. Merger. . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2. Issuance of Crestar Common Stock and Payment of Cash. . 2
1.3. Taking of Necessary Action. . . . . . . . . . . . . . . 2
ARTICLE II
Effect of Merger on Common Stock, Assets, Liabilities
and Capitalization of Crestar, Crestar Bank and Jefferson
2.1. Conversion of Stock; Exchange Ratio; Cash Election. . . 2
2.2. Manner of Exchange. . . . . . . . . . . . . . . . . . . 3
2.3. No Fractional Shares. . . . . . . . . . . . . . . . . . 5
2.4. Dissenting Shares . . . . . . . . . . . . . . . . . . . 5
2.5. Assets. . . . . . . . . . . . . . . . . . . . . . . . . 5
2.6. Liabilities . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
Representations and Warranties
3.1. Representations and Warranties of Jefferson . . . . . . 6
(a) Organization, Standing and Power . . . . . . . . . 6
(b) Capital Structure. . . . . . . . . . . . . . . . . 6
(c) Authority. . . . . . . . . . . . . . . . . . . . . 6
(d) Investments. . . . . . . . . . . . . . . . . . . . 7
(e) Financial Statements . . . . . . . . . . . . . . . 8
(f) Absence of Undisclosed Liabilities . . . . . . . . 9
(g) Tax Matters. . . . . . . . . . . . . . . . . . . . 9
(h) Options, Warrants and Related Matters. . . . . . . 10
(i) Property . . . . . . . . . . . . . . . . . . . . . 10
(j) Additional Schedules Furnished to Crestar. . . . . 11
(k) Agreements in Force and Effect . . . . . . . . . . 12
(l) Legal Proceedings; Compliance with Laws. . . . . . 12
(m) Employee Benefit Plans . . . . . . . . . . . . . . 13
(n) Insurance. . . . . . . . . . . . . . . . . . . . . 15
(o) Loan Portfolio . . . . . . . . . . . . . . . . . . 16
(p) Absence of Changes . . . . . . . . . . . . . . . . 17
(q) Brokers and Finders. . . . . . . . . . . . . . . . 17
(r) Subsidiaries . . . . . . . . . . . . . . . . . . . 17
(s) Reports. . . . . . . . . . . . . . . . . . . . . . 18
(t) Environmental Matters. . . . . . . . . . . . . . . 18
(u) Disclosure . . . . . . . . . . . . . . . . . . . . 20
(v) Accounting; Tax; Regulatory Matters. . . . . . . . 20
(w) Regulatory Approvals . . . . . . . . . . . . . . . 20
3.2. Representations and Warranties of Crestar and Crestar
Bank. . . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) Organization, Standing and Power . . . . . . . . . 20
(b) Capital Structure. . . . . . . . . . . . . . . . . 21
(c) Authority. . . . . . . . . . . . . . . . . . . . . 21
(d) Financial Statements . . . . . . . . . . . . . . . 22
(e) Absence of Undisclosed Liabilities . . . . . . . . 23
(f) Absence of Changes . . . . . . . . . . . . . . . . 23
(g) Brokers and Finders. . . . . . . . . . . . . . . . 23
(h) Subsidiaries . . . . . . . . . . . . . . . . . . . 24
(i) Reports. . . . . . . . . . . . . . . . . . . . . . 24
(j) Tax Matters. . . . . . . . . . . . . . . . . . . . 24
(k) Property . . . . . . . . . . . . . . . . . . . . . 25
(l) Agreements in Force and Effect . . . . . . . . . . 25
(m) Legal Proceedings; Compliance with Laws. . . . . . 25
(n) Employee Benefit Plans . . . . . . . . . . . . . . 26
(o) Regulatory Approvals . . . . . . . . . . . . . . . 27
(p) Disclosure . . . . . . . . . . . . . . . . . . . . 28
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Merger
4.1. Access to Records and Properties of Crestar, Crestar
Bank and Jefferson; Confidentiality . . . . . . . . . . 28
4.2. Registration Statement, Proxy Statement, Shareholder
Approval. . . . . . . . . . . . . . . . . . . . . . . . 29
4.3. Operation of the Business of Jefferson. . . . . . . . . 30
4.4. No Solicitation . . . . . . . . . . . . . . . . . . . . 31
4.5. Dividends . . . . . . . . . . . . . . . . . . . . . . . 32
4.6. Regulatory Filings; Best Efforts. . . . . . . . . . . . 32
4.7. Public Announcements. . . . . . . . . . . . . . . . . . 32
4.8. Operating Synergies; Conformance to Reserve Policies,
Etc.. . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.9. Crestar Rights Agreement. . . . . . . . . . . . . . . . 33
4.10. Agreement as to Efforts to Consummate . . . . . . . . . 33
4.11. Adverse Changes in Condition. . . . . . . . . . . . . . 33
4.12. NYSE Listing. . . . . . . . . . . . . . . . . . . . . . 33
4.13. Updating of Schedules . . . . . . . . . . . . . . . . . 33
4.14. Market for Jefferson Common Stock . . . . . . . . . . . 34
4.15. Transactions in Crestar Common Stock. . . . . . . . . . 34
ARTICLE V
Conditions of Merger
5.1. Conditions of Obligations of Crestar and Crestar Bank . 34
(a) Representations and Warranties; Performance of
Obligations. . . . . . . . . . . . . . . . . . . . 34
(b) Authorization of Merger. . . . . . . . . . . . . . 35
(c) Opinion of Counsel . . . . . . . . . . . . . . . . 35
(d) The Registration Statement . . . . . . . . . . . . 35
(e) Tax Opinion. . . . . . . . . . . . . . . . . . . . 35
(f) Regulatory Approvals . . . . . . . . . . . . . . . 36
(g) Affiliate Letters. . . . . . . . . . . . . . . . . 36
(h) Title Matters. . . . . . . . . . . . . . . . . . . 36
(i) NYSE Listing . . . . . . . . . . . . . . . . . . . 36
(j) Acceptance by Crestar and Crestar Bank Counsel . . 36
5.2. Conditions of Obligations of Jefferson. . . . . . . . . 36
(a) Representations and Warranties; Performance of
Obligations. . . . . . . . . . . . . . . . . . . . 37
(b) Authorization of Merger. . . . . . . . . . . . . . 37
(c) Opinion of Counsel . . . . . . . . . . . . . . . . 37
(d) The Registration Statement . . . . . . . . . . . . 37
(e) Regulatory Approvals . . . . . . . . . . . . . . . 37
(f) Tax Opinion. . . . . . . . . . . . . . . . . . . . 38
(g) NYSE Listing . . . . . . . . . . . . . . . . . . . 39
(h) Fairness Opinion . . . . . . . . . . . . . . . . . 39
(i) Acceptance by Jefferson's Counsel. . . . . . . . . 39
ARTICLE VI
Closing Date; Effective Time
6.1. Closing Date. . . . . . . . . . . . . . . . . . . . . . 39
6.2. Filings at Closing. . . . . . . . . . . . . . . . . . . 39
6.3. Effective Time. . . . . . . . . . . . . . . . . . . . . 39
ARTICLE VII
Termination; Survival of Representations,
Warranties and Covenants; Waiver and Amendment
7.1. Termination . . . . . . . . . . . . . . . . . . . . . . 40
7.2. Effect of Termination . . . . . . . . . . . . . . . . . 41
7.3. Survival of Representations, Warranties and Covenants . 41
7.4. Waiver and Amendment. . . . . . . . . . . . . . . . . . 42
ARTICLE VIII
Additional Covenants
8.1. Indemnification of Jefferson Officers and Directors;
Liability Insurance . . . . . . . . . . . . . . . . . . 42
8.2. Employee Matters. . . . . . . . . . . . . . . . . . . . 42
8.3. Employee Benefit Matters. . . . . . . . . . . . . . . . 44
8.4. Crestar Bank/Warrenton Local Advisory Board of
Directors . . . . . . . . . . . . . . . . . . . . . . . 46
8.5. Stock Options . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE IX
Miscellaneous
9.1. Expenses. . . . . . . . . . . . . . . . . . . . . . . . 46
9.2. Entire Agreement. . . . . . . . . . . . . . . . . . . . 46
9.3. Descriptive Headings. . . . . . . . . . . . . . . . . . 47
9.4. Notices . . . . . . . . . . . . . . . . . . . . . . . . 47
9.5. Counterparts. . . . . . . . . . . . . . . . . . . . . . 47
9.6. Governing Law . . . . . . . . . . . . . . . . . . . . . 47
Exhibit A - Plan of Merger of Jefferson into Crestar
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement")
dated as of September 1, 1994 among CRESTAR FINANCIAL CORPORATION, a
Virginia corporation ("Crestar"), CRESTAR BANK, a Virginia banking
corporation wholly-owned by Crestar ("Crestar Bank"), and JEFFERSON
SAVINGS AND LOAN ASSOCIATION, F.A., a federal savings association
("Jefferson"), recites and provides:
A. Simultaneously with the execution hereof, Jefferson and
Crestar have entered into a Stock Option Agreement (the "Option
Agreement") dated August __, 1994, pursuant to which Jefferson has
granted an option to Crestar to purchase shares of Jefferson Common
Stock in certain events. The Option Agreement shall survive the
execution of this Agreement for the term provided in the Option
Agreement.
B. The boards of directors of Crestar, Crestar Bank and
Jefferson deem it advisable to merge Jefferson into Crestar Bank (the
"Merger") pursuant to this Agreement and the Plan of Merger attached as
Exhibit A (the "Plan of Merger") whereby the holders of shares of common
stock of Jefferson ("Jefferson Common Stock") will receive common stock
of Crestar ("Crestar Common Stock") and/or cash in exchange therefor.
C. To effectuate the foregoing, the parties desire to adopt
this Agreement and the Plan of Merger, which shall represent a plan of
reorganization in accordance with the provisions of Section 368(a) of
the United States Internal Revenue Code, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual benefits to be
derived from this Agreement, and of the representations, warranties,
conditions and promises herein contained, Crestar, Crestar Bank, and
Jefferson hereby adopt this Agreement whereby at the "Effective Time of
the Merger" (as defined in Article VI hereof) Jefferson shall be merged
into Crestar Bank in accordance with the Plan of Merger. The
outstanding shares of Jefferson Common Stock shall be converted into
shares of Crestar Common Stock and/or cash as provided in this Agreement
on the basis, terms and conditions contained herein and in the Plan of
Merger. At the Effective Time of the Merger, the outstanding shares of
Jefferson Common Stock shall be canceled. In connection therewith, the
parties hereto agree as follows:
ARTICLE I
General
1.1. Merger. Subject to the provisions of this Agreement and
the Plan of Merger, at the Effective Time of the Merger the separate
existence of Jefferson shall cease and Jefferson shall be merged with
and into Crestar Bank (the "Surviving Bank"), which merger shall qualify
as an "Oakar" transaction in accordance with Section 5(d)(3)(A) of the
Federal Deposit Insurance Act.
1.2. Issuance of Crestar Common Stock and Payment of Cash.
Crestar agrees that at the Effective Time of the Merger it will issue
Crestar Common Stock and/or pay cash to the extent set forth in, and in
accordance with, the terms of this Agreement and the Plan of Merger.
1.3. Taking of Necessary Action. In case at any time after
the Effective Time of the Merger any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the
Surviving Bank with full title to all properties, assets, rights,
approvals, immunities and franchises of Jefferson, the officers and
directors of the Surviving Bank shall take all such necessary action.
ARTICLE II
Effect of Merger on Common Stock, Assets, Liabilities
and Capitalization of Crestar, Crestar Bank and Jefferson
2.1. Conversion of Stock; Exchange Ratio; Cash Election. At
the Effective Time of the Merger:
(a) Conversion of Stock. Each share of Jefferson
Common Stock which is issued and outstanding at the Effective
Time of the Merger (other than shares held by Crestar, which
shall be cancelled without payment therefore, and shares to be
exchanged for cash) shall, and without any action by the
holder thereof, be converted into the number of shares of
Crestar Common Stock determined in accordance with subsection
2.1(b). All such shares shall be validly issued, fully paid
and nonassessable.
(b) Exchange Ratio. Each share of Jefferson Common
Stock (other than shares held by Crestar and shares to be
exchanged for cash) shall be converted into the number of
shares of Crestar Common Stock determined by dividing $17.00
per share of Jefferson Common Stock (the "Price Per Share") by
the average closing price of Crestar Common Stock as reported
on the New York Stock Exchange for each of the 10 trading days
ending on the 10th day prior to the day of the Effective Time
of the Merger (the "Average Closing Price") (the result of the
quotient determined by dividing the Price Per Share by the
Average Closing Price and rounded to the nearest thousandths
decimal point being hereinafter called the "Exchange Ratio").
The Exchange Ratio at the Effective Time of the Merger
shall be adjusted to reflect any consolidation, split-up,
other subdivisions or combinations of Crestar Common Stock,
any dividend payable in Crestar Common Stock, or any capital
reorganization involving the reclassification of Crestar
Common Stock subsequent to the date of this Agreement.
(c) Cash Election. Holders of shares of Jefferson
Common Stock will be given the option of exchanging their
shares for the Price Per Share in cash (subject to all
applicable withholding taxes), provided that the number of
shares that may be exchanged for cash shall not exceed 40% of
the outstanding shares of Jefferson Common Stock immediately
prior to the Effective Time of the Merger. The cash election
must be made at or prior to the time Jefferson shareholders
vote on the Merger, and, once such vote has been taken, cash
elections shall be irrevocable. If the aggregate number of
shares for which a cash election is made exceeds 40% of the
outstanding shares of Jefferson Common Stock immediately prior
to the Effective Time of the Merger, Crestar first will pay
cash for shares submitted for cash exchange by each holder of
100 or fewer Jefferson shares (if such holder has submitted
all his shares for cash exchange) and then will pay cash for
the remaining shares submitted for cash pro rata. Shares not
exchanged for cash after proration will be exchanged for
Crestar Common Stock at the Exchange Ratio.
2.2. Manner of Exchange.
(a) Shareholders who elect to exchange some or all of
their shares of Jefferson Common Stock for cash must submit to
Jefferson certificates for the shares being exchanged for cash
at or prior to the meeting of Jefferson's shareholders
referred to in Section 4.2. If the Merger is approved by
Jefferson's shareholders at this meeting, a shareholder's
election to receive cash is irrevocable and Jefferson will
retain certificates for shares submitted for cash purchase
until either (1) termination of this Agreement, upon which
Jefferson will return such certificates, or (ii) the Effective
Time of the Merger, when Crestar Bank (which shall act as
exchange agent) will exchange such certificates for cash to
the extent required by this Agreement and the Plan of Merger.
(b) After the Effective Time of the Merger, each holder
of a certificate for theretofore outstanding shares of
Jefferson Common Stock, upon surrender of such certificate to
Crestar Bank (which shall act as exchange agent), unless
previously surrendered to Jefferson in connection with
exercise of the cash option, and a Letter of Transmittal,
which shall be mailed to each holder of a certificate for
theretofore outstanding shares of Jefferson Common Stock by
Crestar Bank promptly following the Effective Time of the
Merger, shall be entitled to receive in exchange therefor a
certificate or certificates representing the number of full
shares of Crestar Common Stock for which shares of Jefferson
Common Stock theretofore represented by the certificate or
certificates so surrendered shall have been exchanged as
provided in this Article II or cash if the cash option
provided in subsection 2.1(c) is properly elected, or, in the
event of proration, a combination of cash and Crestar Common
Stock. Until so surrendered, each outstanding certificate
which, prior to the Effective Time of the Merger, represented
Jefferson Common Stock will be deemed to evidence the right to
receive either (i) the number of full shares of Crestar Common
Stock into which the shares of Jefferson Common Stock
represented thereby may be converted in accordance with the
Exchange Ratio or (ii) the Price Per Share multiplied by the
number of shares represented by such certificate (subject to
all applicable withholding taxes) in cash if the cash option
provided in subsection 2.1(c) was properly elected, or (iii) a
combination thereof; and, after the Effective Time of the
Merger (unless the cash option was properly elected) will be
deemed for all corporate purposes of Crestar to evidence
ownership of the number of full shares of Crestar Common Stock
into which the shares of Jefferson Common Stock represented
thereby were converted.
(c) For shares of Jefferson Common Stock to be
converted into Crestar Common Stock, until such outstanding
certificates formerly representing Jefferson Common Stock are
surrendered, no dividend payable to holders of record of
Crestar Common Stock for any period as of any date subsequent
to the Effective Time of the Merger shall be paid to the
holder of such outstanding certificates in respect thereof.
After the Effective Time of the Merger, there shall be no
further registry of transfer on the records of Jefferson of
shares of Jefferson Common Stock. If a certificate
representing such shares is presented to Crestar, it shall be
canceled and exchanged for a certificate representing shares
of Crestar Common Stock as herein provided. Upon surrender of
certificates of Jefferson Common Stock in exchange for Crestar
Common Stock, there shall be paid to the recordholder of the
certificates of Crestar Common Stock issued in exchange
therefor (i) the amount of dividends theretofore paid for such
full shares of Crestar Common Stock as of any date subsequent
to the Effective Time of the Merger which have not yet been
paid to a public official pursuant to abandoned property laws
and (ii) at the appropriate payment date the amount of
dividends with a record date after the Effective Time of the
Merger but prior to surrender and a payment date subsequent to
surrender. No interest shall be payable for such dividends
upon surrender of outstanding certificates.
(d) At the Effective Time of the Merger, each share of
Jefferson Common Stock held by Crestar shall be canceled,
retired and cease to exist.
2.3. No Fractional Shares. No certificates or scrip for
fractional shares of Crestar Common Stock will be issued. In lieu
thereof, Crestar will pay the value of such fractional shares in cash on
the basis of the Average Closing Price.
2.4. Dissenting Shares. Jefferson Common Stock is quoted on
NASDAQ, and in accordance with the provisions of 12 C.F.R. section 552.14,
holders of Jefferson Common Stock do not have the right to demand and
receive payment of the fair value of their shares of Jefferson Common
Stock instead of the consideration to be paid by Crestar in the Merger.
2.5. Assets. At the Effective Time of the Merger, the
corporate existence of Jefferson shall be merged into and continued in
Crestar Bank as the Surviving Bank. All rights, franchises and
interests of Jefferson in and to any type of property and choses in
action shall be transferred to and vested in the Surviving Bank by
virtue of the Merger without any deed or other transfer. The Surviving
Bank without any order or other action on the part of any court or
otherwise, shall hold and enjoy all rights of property, franchises and
interests, including appointments, designations and nominations, and all
other rights and interests as trustee, executor, administrator, transfer
agent or registrar of stocks and bonds, guardian of estates, assignee,
receiver and committee, and in every other fiduciary capacity, in the
same manner and to the same extent as such rights, franchises and
interests were held or enjoyed by Jefferson at the Effective Time of the
Merger, as provided in Section 13.1-721 of the Virginia Stock
Corporation Act ("VSCA").
2.6. Liabilities. At the Effective Time of the Merger, the
Surviving Bank shall be liable for all liabilities of Jefferson, as
provided in Section 13.1-721 of the VSCA. All deposits, debts,
liabilities and obligations of Jefferson, accrued, absolute, contingent
or otherwise, and whether or not reflected or reserved against on
balance sheets, books of accounts, or records of Jefferson shall be
those of the Surviving Bank and shall not be released or impaired by the
Merger. All rights of creditors and other obligees and all liens on
property of Jefferson shall be preserved unimpaired.
ARTICLE III
Representations and Warranties
3.1. Representations and Warranties of Jefferson. Jefferson
represents and warrants to Crestar and Crestar Bank as follows:
(a) Organization, Standing and Power. Jefferson is a
federal savings association duly organized, validly existing
and in good standing under the laws of the United States and
has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now
being conducted and to perform this Agreement to effect the
transactions contemplated thereby. Jefferson's deposits are
insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation ("FDIC") to the maximum
extent permitted by law. Jefferson has delivered to Crestar
complete and correct copies of (i) its Charter and (ii) its
By-laws.
(b) Capital Structure. The authorized capital stock of
Jefferson consists of 5,000,000 shares of Jefferson Common
Stock and 2,500,000 shares of preferred stock. On the date
hereof, 1,310,876 shares of Jefferson Common Stock were
outstanding. All of the outstanding shares of Jefferson
Common Stock were validly issued, fully paid and
nonassessable. No shares of Jefferson preferred stock are
issued and outstanding.
Jefferson knows of no person who beneficially owns 5% or
more of the outstanding Jefferson Common Stock as of the date
hereof, except as disclosed on Schedule A-1.
(c) Authority. Subject to the approval of this
Agreement and the Plan of Merger by the shareholders of
Jefferson as contemplated by Section 4.2, the execution and
delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary action on the part of
Jefferson, and this Agreement is a valid and binding
obligation of Jefferson, enforceable in accordance with its
terms, except as enforceability may be limited by laws
affecting insured depository institutions and similar laws
affecting the enforcement of creditors' rights generally and
subject to any equitable principles limiting the right to
obtain specific performance. The execution and delivery of
this Agreement, the consummation of the transactions
contemplated hereby and by the Plan of Merger and compliance
by Jefferson with any of the provisions hereof or thereof will
not (i) conflict with or result in a breach of any provision
of its Charter or By-laws or a default (or give rise to any
right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond,
debenture, mortgage, indenture, license, material agreement or
other material instrument or obligation to which Jefferson is
a party, or by which it or any of its properties or assets may
be bound, or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Jefferson or any of
its properties or assets. No consent or approval by any
governmental authority, other than compliance with applicable
federal and state securities and banking laws, and regulations
of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), the FDIC, the Office of Thrift
Supervision ("OTS") and the Bureau of Financial Institutions
of the Virginia State Corporation Commission ("SCC"), is
required in connection with the execution and delivery by
Jefferson of this Agreement or the consummation by Jefferson
of the transactions contemplated hereby or by the Plan of
Merger.
(d) Investments. All securities owned by Jefferson of
record and beneficially are free and clear of all mortgages,
liens, pledges, encumbrances or any other restriction, whether
contractual or statutory, which would materially impair the
ability of Jefferson freely to dispose of any such security at
any time, except as noted on Schedule A-1. Any securities
owned of record by Jefferson in an amount equal to 5% or more
of the issued and outstanding voting securities of the issuer
thereof have been noted on such Schedule A-1. There are no
voting trusts or other agreements or undertakings of which
Jefferson is a party with respect to the voting of such
securities. With respect to all repurchase agreements to
which Jefferson is a party, Jefferson has a valid, perfected
first lien or security interest in the government securities
or other collateral securing the repurchase agreement, and the
value of the collateral securing each such repurchase
agreement equals or exceeds the amount of the debt secured by
such collateral under such agreement. As of the Effective
Time of the Merger, the fair market value of the portfolio of
securities of Jefferson will not be 85% or less than the fair
market value of the securities portfolio as of June 30, 1994.
(e) Financial Statements. Schedule A-2 contains copies
of the following financial statements of Jefferson (the
"Jefferson Financial Statements"):
(i) Consolidated Balance Sheets as of September
30, 1993, 1992 and 1991 (audited) and as of June 30,
1994, and 1993 (unaudited);
(ii) Consolidated Statements of Operations for
each of the three years ended September 30, 1993, 1992,
and 1991 (audited) and the three months and the nine
months ended June 30, 1994 and 1993 (unaudited);
(iii) Consolidated Statements of Stockholders'
Equity for each of the three years ended September 30,
1993, 1992 and 1991 (audited) and the nine months ended
June 30, 1994 and 1993 (unaudited); and
(iv) Consolidated Statements of Cash Flows for
each of the three years ended September 30, 1993, 1992
and 1991 (audited) and the nine months ended June 30,
1994 and 1993 (unaudited).
Such financial statements and the notes thereto have been
prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the
periods indicated unless otherwise noted in the Jefferson
Financial Statements. Each of such balance sheets, together
with the notes thereto, presents fairly as of its date the
financial condition and assets and liabilities of Jefferson.
The statements of operations, stockholders' equity and cash
flows, together with the notes thereto, present fairly the
results of operations, stockholders' equity and cash flows of
Jefferson for the periods indicated.
At June 30, 1994, the limitations imposed by federal laws and
regulations applicable to savings associations such as
Jefferson precluded Jefferson from paying dividends.
(f) Absence of Undisclosed Liabilities. At June 30,
1994 and September 30, 1993, Jefferson had no material
obligations or liabilities (contingent or otherwise) of any
nature which were not reflected in the Jefferson Financial
Statements or in the Jefferson periodic reports filed with the
OTS under the 1934 Act as of such dates, or disclosed in the
notes thereto, except for those which are disclosed in
Schedules specifically referred to herein or which in the
aggregate are immaterial.
(g) Tax Matters. Jefferson and each subsidiary have
filed or caused to be filed or (in the case of returns or
reports not yet due) will file all tax returns and reports
required to have been filed by or for them before the
Effective Time of the Merger, and all information set forth in
such returns or reports is or (in the case of such returns or
reports not yet due) will be accurate and complete. Jefferson
and each subsidiary have paid or made adequate provision for,
or (with respect to returns or reports not yet filed) before
the Effective Time of the Merger will pay or make adequate
provision for, all taxes, additions to tax, penalties, and
interest for all periods covered by those returns or reports.
Except as set forth on Schedule B, there are, and at the
Effective Time of the Merger will be, no unpaid taxes,
additions to tax, penalties, or interest due and payable by
Jefferson or any subsidiary that are or could become a lien on
any asset, or otherwise materially adversely affect the
business, property or financial condition, of Jefferson or any
subsidiary except for taxes and any such related liability (a)
incurred in the ordinary course of business for which adequate
provision has been made by Jefferson or (b) being contested in
good faith and disclosed in Schedule B. Jefferson and each
subsidiary have collected or withheld, or will collect or
withhold before the Effective Time of the Merger, all amounts
required to be collected or withheld by them for any taxes,
and all such amounts have been, or before the Effective Time
of the Merger will have been, paid to the appropriate
governmental agencies or set aside in appropriate accounts for
future payment when due. Jefferson and each subsidiary is in
material compliance with, and their records contain all
information and documents (including, without limitation,
properly completed IRS Forms W-9) necessary to comply in all
material respects with, all applicable information reporting
and tax withholding requirements under federal, state, and
local laws, rules, and regulations, and such records identify
with specificity all accounts subject to backup withholding
under Section 3406 of the Code. The balance sheets contained
in the Jefferson Financial Statements fully and properly
reflect, as of the dates thereof, the aggregate liabilities of
Jefferson and each subsidiary for all accrued taxes, additions
to tax, penalties and interest. For periods ending after
December 31, 1993, the books and records of Jefferson and each
subsidiary fully and properly reflect their liability for all
accrued taxes, additions to tax, penalties and interest.
Except as disclosed in Schedule B, neither Jefferson nor any
subsidiary has granted (nor is it subject to) any waiver of
the period of limitations for the assessment of tax for any
currently open taxable period, and no unpaid tax deficiency
has been asserted in writing against or with respect to
Jefferson or any subsidiary by any taxing authority. Neither
Jefferson nor any subsidiary has made or entered into, nor
does Jefferson or any subsidiary hold any asset subject to, a
consent filed pursuant to Section 341(f) of the Code and the
regulations thereunder or a "safe harbor lease" subject to
former Section 168(f)(8) of the Code and the regulations
thereunder. Schedule B describes all tax elections, consents
and agreements affecting Jefferson or any subsidiary. To the
best knowledge of Jefferson, no Jefferson shareholder is a
"foreign person" for purposes of Section 1445 of the Code.
(h) Options, Warrants and Related Matters. There are
no outstanding unexercised options, warrants, calls,
commitments or agreements of any character to which Jefferson
is a party or by which it is bound, calling for the issuance
of securities of Jefferson or any security representing the
right to purchase or otherwise receive any such security,
except (i) as set forth on Schedule C and (ii) the Option
Agreement.
(i) Property. Jefferson owns (or enjoys use of under
capital leases) all property reflected on the Jefferson
Financial Statements as of June 30, 1994 and September 30,
1993 (except property sold or otherwise disposed of in the
ordinary course of business). All property shown as being
owned is owned free and clear of all mortgages, liens,
pledges, charges or encumbrances of any nature whatsoever,
except those referred to in such Jefferson Financial
Statements or the notes thereto, liens for current taxes not
yet due and payable, any unfiled mechanics' liens and such
encumbrances and imperfections of title, if any, as are not
substantial in character or amount or otherwise materially
impair Jefferson's consolidated business operations. The
leases relating to leased property are fairly reflected in
such Jefferson Financial Statements.
Except for Other Real Estate Owned, all property and
assets material to the business or operations of Jefferson are
in substantially good operating condition and repair and such
property and assets are adequate for the business and
operations of Jefferson as currently conducted.
(j) Additional Schedules Furnished to Crestar. In
addition to any Schedules furnished to Crestar pursuant to
other provisions of this Agreement, Jefferson has furnished to
Crestar the following Schedules which are correct and complete
as of the date hereof:
(1) Employees. Schedule C lists as of the date
hereof (A) the names of and current annual salary rates
for all present employees of Jefferson who received,
respectively, $60,000 or more in aggregate compensation,
whether in salary or otherwise, during the year ended
December 31, 1993, or are presently scheduled to receive
salary in excess of $60,000 during the year ending
December 31, 1994, (B) the number of shares of Jefferson
Common Stock owned beneficially by each director of
Jefferson as of the date hereof, (C) the names of and
the number of shares of Jefferson Common Stock owned by
each person known to Jefferson who beneficially owns 5%
or more of the outstanding Jefferson Common Stock as of
the date hereof, and (D) the names of and the number of
outstanding options and agreements to make stock awards
granted to each person under the Jefferson 1988 Stock
Option and Incentive Plan and 1993 Stock Incentive Plan
or any option granted to a director of Jefferson
(collectively, "Jefferson Options") and the exercise
price of each such Jefferson Option.
(2) Certain Contracts. Schedule D lists all
notes, bonds, mortgages, indentures, licenses, lease
agreements and other contracts and obligations to which
Jefferson is an indebted party or a lessee, licensee or
obligee as of the date hereof except for those entered
into by Jefferson in the ordinary course of its business
consistent with its prior practice and that do not
involve an amount greater than $100,000.
(3) Employment Contracts and Related Matters.
Except in all cases as set forth on Schedule E,
Jefferson is not a party to any employment contract not
terminable at the option of Jefferson without liability.
Except in all cases as set forth on Schedule E,
Jefferson is not a party to (A) any retirement, profit
sharing or pension plan or thrift plan or agreement or
employee benefit plan (as defined in Section 3 of the
Employee Retirement Income Security Act of 1974
("ERISA")), (B) any management or consulting agreement
not terminable at the option of Jefferson without
liability or (C) any union or labor agreement.
(4) Real Estate. Schedule F describes, as of the
date hereof, all interests in real property owned,
leased or otherwise claimed by Jefferson, including
Other Real Estate Owned.
(5) Affiliates. Schedule G sets forth the names
and number of shares of Jefferson Common Stock owned as
of the date hereof beneficially or of record by any
persons Jefferson considers to be affiliates of
Jefferson ("Jefferson Affiliates") as that term is
defined for purposes of Rule 145 under the 1933 Act.
(k) Agreements in Force and Effect. All contracts,
agreements, plans, leases, policies and licenses referred to
in any Schedule of Jefferson referred to herein are valid and
in full force and effect, and Jefferson has not breached any
provision of, nor is in default in any respect under the terms
of, any such contract, agreement, lease, policy or license,
the effect of which breach or default would have a material
adverse effect upon either the financial condition, results of
operations, or business of Jefferson.
(l) Legal Proceedings; Compliance with Laws. Schedule
H describes all legal, administrative, arbitration or other
proceeding or governmental investigation known to Jefferson
pending or, to the knowledge of Jefferson's management,
threatened or probable of assertion against Jefferson. Except
as set forth on Schedule H, no such proceeding or
investigation, if decided adversely, would have a material
adverse effect on either the financial condition, results of
operations or business of Jefferson. Except as set forth in
Schedule H, Jefferson has complied in all material respects
with any laws, ordinances, requirements, regulations or orders
applicable to its business except where noncompliance would
not have a material adverse effect on either the financial
condition, results of operations or business of Jefferson.
Jefferson has all licenses, permits, orders or approvals
(collectively, the "Permits") of any federal, state, local or
foreign governmental or regulatory body that are necessary for
the conduct of its business and the absence of which would
have a material adverse effect on the financial condition,
results of operations or business of Jefferson; the Permits
are in full force and effect; no violations are or have been
recorded in respect of any Permits nor has Jefferson received
written notice of any violations; and no proceeding is pending
or, to the knowledge of Jefferson, threatened to revoke or
limit any Permit. Except as set forth in Schedule H,
Jefferson has not entered into any agreements or written
understandings with the OTS, the FDIC or any other regulatory
agency having authority over it. Jefferson is not subject to
any judgment, order, writ, injunction or decree which
materially adversely affects, or might reasonably be expected
materially adversely to affect either the financial condition,
results of operations, or business of Jefferson.
(m) Employee Benefit Plans.
(1) Schedule E includes a correct and complete
list of, and Crestar has been furnished a true and
correct copy of (or an accurate written description
thereof in the case of oral agreements or arrangements)
(A) all qualified pension and profit-sharing plans, all
deferred compensation, consultant, severance, thrift,
option, bonus and group insurance contracts and all
other incentive, welfare and employee benefit plans,
trust, annuity or other funding agreements, and all
other agreements (including oral agreements) that are
presently in effect, or have been approved prior to the
date hereof, maintained for the benefit of employees or
former employees of Jefferson or the dependents or
beneficiaries of any employee or former employee of
Jefferson, whether or not subject to ERISA (the
"Employee Plans"), (B) the most recent actuarial and
financial reports prepared or required to be prepared
with respect to any Employee Plan and (C) the most
recent annual reports filed with any governmental
agency, the most recent favorable determination letter
issued by the Internal Revenue Service, and any open
requests for rulings or determination letters, that
pertain to any such qualified Employee Plan. Schedule E
identifies each Employee Plan that is intended to be
qualified under Section 401(a) of the Code and each such
plan is qualified.
(2) Neither Jefferson nor any employee pension
benefit plan (as defined in Section 3(2) of ERISA (a
"Pension Plan")) maintained or previously maintained by
it, has incurred any material liability to the Pension
Benefit Guaranty Corporation ("PBGC") or to the Internal
Revenue Service with respect to any Pension Plan. There
is not currently pending with the PBGC any filing with
respect to any reportable event under Section 4043 of
ERISA nor has any reportable event occurred as to which
a filing is required and has not been made.
(3) Full payment has been made (or proper accruals
have been established) of all contributions which are
required for periods prior to the Closing Date, as
defined in Section 6.1 hereof, under the terms of each
Employee Plan, ERISA, or a collective bargaining
agreement, no accumulated funding deficiency (as defined
in Section 302 of ERISA or Section 412 of the Code)
whether or not waived, exists with respect to any
Pension Plan (including any Pension Plan previously
maintained by Jefferson), and except as set forth on
Schedule E, there is no "unfunded current liability" (as
defined in Section 412 of the Code) with respect to any
Pension Plan.
(4) No Employee Plan is a "multiemployer plan" (as
defined in Section 3(37) of ERISA). Jefferson has not
incurred any liability under Section 4201 of ERISA for a
complete or partial withdrawal from a multiemployer plan
(as defined in Section 3(37) of ERISA). Jefferson has
not participated in or agreed to participate in, a
multiemployer plan (as defined in Section 3(37) of
ERISA).
(5) All Employee Plans that are "employee benefit
plans," as defined in Section 3(3) of ERISA, that are
maintained by Jefferson or previously maintained by
Jefferson comply and have been administered in
compliance in all material respects with ERISA and all
other applicable legal requirements, including the terms
of such plans, collective bargaining agreements and
securities laws. Jefferson has no material liability
under any such plan that is not reflected in the
Jefferson Financial Statements or on Schedule E hereto.
(6) No prohibited transaction has occurred with
respect to any Employee Plan that is an "employee
benefit plan" (as defined in Section 3(3) of ERISA)
maintained by Jefferson or previously maintained by
Jefferson that would result, directly or indirectly, in
material liability under ERISA or in the imposition of a
material excise tax under Section 4975 of the Code.
(7) Schedule E identifies each Employee Plan that
is an "employee welfare benefit plan" (as defined in
Section 3(1) of ERISA) and which is funded. The funding
under each such plan does not exceed the limitations
under Section 419A(b) or 419A(c) of the Code. Jefferson
is not subject to taxation on the income of any such
plan or any such plan previously maintained by
Jefferson.
(8) Schedule E identifies the method of funding
(including any individual accounting) for all post-
retirement medical or life insurance benefits for the
employees of Jefferson. Schedule E also discloses the
funded status of these Employee Plans.
(9) Schedule E identifies each corporate owned
life insurance policy, including any key man insurance
policy and policy insuring the life of any director or
employee of Jefferson, and indicates for each such
policy, the face amount of coverage, cash surrender
value, if any, and annual premiums.
(10) No trade or business is, or has ever been,
treated as a single employer with Jefferson for employee
benefit purposes under ERISA and the Code.
(n) Insurance. All policies or binders of fire,
liability, product liability, workmen's compensation,
vehicular and other insurance held by or on behalf of
Jefferson are described on Schedule I and are valid and
enforceable in accordance with their terms, are in full force
and effect, and insure against risks and liabilities to the
extent and in the manner customary for the industry and are
deemed appropriate and sufficient by Jefferson. Jefferson is
not in default with respect to any provision contained in any
such policy or binder and has not failed to give any notice or
present any claim under any such policy or binder in due and
timely fashion. Jefferson has not received notice of
cancellation or non-renewal of any such policy or binder.
Jefferson has no knowledge of any inaccuracy in any
application for such policies or binders, any failure to pay
premiums when due or any similar state of facts that might
form the basis for termination of any such insurance.
Jefferson has no knowledge of any state of facts or of the
occurrence of any event that is reasonably likely to form the
basis for any material claim against it not fully covered
(except to the extent of any applicable deductible) by the
policies or binders referred to above. Jefferson has not
received notice from any of its insurance carriers that any
insurance premiums will be materially increased in the future
or that any such insurance coverage will not be available in
the future on substantially the same terms as now in effect.
(o) Loan Portfolio. Each loan outstanding on the books
of Jefferson is in all respects what it purports to be, was
made in the ordinary course of business, was not known to be
uncollectible at the time it was made, accrues interest
(except for loans recorded on Jefferson's books as non-
accrual) in accordance with the terms of the loan, and was
made in accordance with Jefferson's standard loan policies
except for loans to facilitate the sale of Other Real Estate
Owned or loans with renegotiated terms and conditions. The
records of Jefferson regarding all loans outstanding and Other
Real Estate Owned by Jefferson on its books are accurate in
all material respects and the risk classifications for the
loans outstanding are, in the best judgment of the management
of Jefferson, appropriate. The reserves for possible loan
losses on the outstanding loans of Jefferson, as reflected in
the Jefferson Financial Statements, have been established in
accordance with generally accepted accounting principles and
with the requirements of the OTS and the FDIC. In the best
judgment of the management of Jefferson such reserves are
adequate as of the date hereof and will be adequate as of the
Effective Time of the Merger to absorb all known and
anticipated loan losses in the loan portfolio of Jefferson.
Except as identified on Schedule J, no loan in excess of
$50,000 has been classified by examiners (regulatory or
internal) as "Special Mention", "Substandard", "Doubtful",
"Loss", or words of similar import. The Other Real Estate
Owned included in any nonperforming asset of Jefferson is
recorded at the lower of cost or fair value less estimated
costs to sell at the time of the acquisition based on
independent appraisals that comply with the requirements of
the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 and Uniform Standards of Professional Appraisal
Practice. Except as identified on Schedule J, to the best
knowledge of the management of Jefferson, each loan reflected
as an asset on the Jefferson Financial Statements is the
legal, valid and binding obligation of the obligor and any
guarantor, subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to
or affecting creditors' rights and to general principles of
equity, and no defense, offset or counterclaim has been
asserted with respect to any such loan, which if successful
would have a material adverse effect on the financial
condition, results of operation or business of Jefferson,
(p) Absence of Changes. Except as identified on
Schedule K, since June 30, 1994, there has not been any
material adverse change in the aggregate assets or
liabilities, earnings or business of Jefferson, other than
changes resulting from or attributable to (i) changes since
such date in laws or regulations, generally accepted
accounting principles or interpretations of either thereof
that affect the banking or savings and loan industries
generally, (ii) changes since such date in the general level
of interest rates, (iii) expenses since such date incurred in
connection with the transactions contemplated by this
Agreement (estimated at $400,000), (iv) accruals and reserves
by Jefferson since such date pursuant to the terms of Section
4.8 hereof, or (v) any other accruals, reserves or expenses
incurred by Jefferson since such date with Crestar's prior
written consent. Since June 30, 1994, the business of
Jefferson has been conducted only in the ordinary course.
(q) Brokers and Finders. Neither Jefferson nor its
officers, directors or employees have employed any broker or
finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with the
transactions contemplated herein except for the engagement of
Scott & Stringfellow, Inc., whose fee for its engagement shall
not exceed approximately $231,700.
(r) Subsidiaries; Partnerships and Joint Ventures.
Jefferson's only subsidiaries, direct or indirect, are
Jefferson Insurance Services, Inc., Jefferson Investment
Service Corporation, Jefferson Funding Corporation and
Jefferson Funding Corporation II. Such corporations are duly
organized, validly existing and in good standing under the
laws of their jurisdiction of incorporation and have all
requisite corporate power and authority to own, lease and
operate their properties and to carry on their business as now
being conducted in all material respects. Jefferson owns,
directly or indirectly, all of the issued and outstanding
common stock of its subsidiaries free and clear of any liens,
claims, encumbrances, charges or rights of third parties of
any kind whatsoever and is not a party to any joint venture
agreement or partnership.
(s) Reports. Since January 1, 1990 Jefferson has filed
all material reports and statements, together with any
amendments required to be made with respect thereto, that were
required to be filed with (i) the FDIC, (ii) the OTS and
(iii) any other governmental or regulatory authority or agency
having jurisdiction over their operations. Each of such
reports and documents, including the financial statements,
exhibits and schedules thereto, filed with the OTS pursuant to
the Securities Exchange Act of 1934, as amended (the "1934
Act") was in form and substance in compliance with the 1934
Act. No such report or statement, or any amendments thereto,
contains any statement which, at the time and in light of the
circumstances under which it was made, was false or misleading
with respect to any material fact necessary in order to make
the statements contained therein not false or misleading.
Jefferson is a reporting company under Section 12(g) or 15(d)
of the 1934 Act and the regulations of the OTS.
(t) Environmental Matters. For purposes of this
subsection, the following terms shall have the indicated
meaning:
"Environmental Law" means any federal, state or local
law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, order, judgment,
decree, injunction or agreement with any governmental entity
relating to (i) the protection, preservation or restoration of
the environment (including, without limitation, air, water
vapor, surface water, groundwater, drinking water supply,
surface soil, subsurface soil, plant and animal life or any
other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of
Hazardous Substances. The term "Environmental Law" includes
without limitation (i) the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, 42
U.S.C. Section 9601, et seq; the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. Section 6901, et seq; the
Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq; the
Federal Water Pollution Control Act, as amended, 33 U.S.C.
Section 1251, et seq; the Toxic Substances Control Act, as
amended, 15 U.S.C. Section 9601, et seq; the Emergency
Planning and Community Right to Know Act, 42 U.S.C.
Section 11001, et seq; the Safe Drinking Water Act, 42 U.S.C.
Section 300f, et seq; and all comparable state and local laws,
and (ii) any common law (including without limitation common
law that may impose strict liability) that may impose
liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of or exposure to any
Hazardous Substance.
"Hazardous Substance" means any substance presently
listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, under any
Environmental Law, whether by type or by quantity, including
any material containing any such substance as a component.
Hazardous Substances include without limitation petroleum or
any derivative or by-product thereof, asbestos, radioactive
material, and polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned"
means those properties owned or operated by Jefferson or any
of their subsidiaries, including those properties serving as
collateral for any loans made by Jefferson or for which
Jefferson serves in a trust relationship.
Except as disclosed in Schedule L, to the best knowledge
of Jefferson,
(i) Jefferson has not been or is not in
violation of or liable under any Environmental Law;
(ii) Other Properties Owned by Jefferson has been or is
in violation of or liable under any Environmental Law; and
(iii) there are no actions, suits, demands,
notices, claims, investigations or proceedings pending
or threatened relating to the liability of the Loan
Portfolio Properties and Other Properties Owned by
Jefferson under any Environmental Law, including without
limitation any notices, demand letters or requests for
information from any federal or state environmental
agency relating to any such liabilities under or
violations of Environmental Law.
(u) Disclosure. Except to the extent of any subsequent
correction or supplement with respect thereto furnished prior
to the date hereof, no written statement, certificate,
schedule, list or other written information furnished by or on
behalf of Jefferson at any time to Crestar, in connection with
this Agreement, when considered as a whole, contains or will
contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make
the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
Each document delivered or to be delivered by Jefferson to
Crestar is or will be a true and complete copy of such
document, unmodified except by another document delivered by
Jefferson.
(v) Accounting; Tax; Regulatory Matters. Subject to
action taken by the Board of Directors of Jefferson pursuant
to or as a result of the exception clause to the first
sentence of Section 4.4 hereof, Jefferson has not taken or
agreed to take any action or has any knowledge of any fact or
circumstance that would prevent the Merger from qualifying as
a reorganization within the meaning of Section 368 of the
Code, or materially impede or delay receipt of any approval
referred to in Section 4.6.
(w) Regulatory Approvals. Jefferson does not know of
any reason why the approvals, consents and waivers of
governmental authorities referred to in Sections 5.1(f) and
5.2(e) hereof should not be obtained on a timely basis without
the imposition of any condition of the type referred to in
Section 5.1(f) hereof.
3.2. Representations and Warranties of Crestar and Crestar
Bank. Crestar and Crestar Bank represent and warrant to Jefferson as
follows:
(a) Organization, Standing and Power. Crestar is a
corporation duly organized, validly existing and in good
standing under the laws of Virginia and has all requisite
corporate power and authority to own, lease and operate its
properties and to carry on its business as now being
conducted. Crestar has delivered to Jefferson complete and
correct copies of its Articles of Incorporation and all
amendments thereto to the date hereof and its Bylaws as
amended to the date hereof.
(b) Capital Structure. The authorized capital stock of
Crestar consists of 100,000,000 shares of Common Stock, of
which 37,717,023 shares were issued and outstanding as of June
30, 1994, and no shares of Preferred Stock were issued and
outstanding as of June 30, 1994. All of such issued and
outstanding shares of Crestar Common Stock were validly
issued, fully paid and nonassessable at such date.
The authorized capital stock of Crestar Bank consists of
1,500,000 shares of common stock, $150 par value, of which
1,400,000 shares were issued and outstanding as of June 30,
1994, all of which shares are owned by Crestar free and clear
of any liens, claims, encumbrances, charges or rights of third
parties of any kind whatsoever. All such issued and
outstanding shares of common stock of Crestar Bank were
validly issued, fully paid and nonassessable.
(c) Authority. The execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by
all necessary action on the part of Crestar; and this
Agreement is a valid and binding obligation of Crestar,
enforceable in accordance with its terms. The execution and
delivery of this Agreement, the consummation of the
transactions contemplated hereby and compliance by Crestar
with any of the provisions hereof will not (i) conflict with
or result in a breach of any provision of its Articles of
Incorporation or By-laws or a default (or give rise to any
right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license, agreement or other instrument or
obligation to which Crestar is a party, or by which it or any
of its properties or assets may be bound or (ii) violate any
order, writ, injunction, decree, statute, rule or regulation
applicable to Crestar or any of its properties or assets. No
consent or approval by any governmental authority, other than
compliance with applicable federal and state securities and
banking laws, the rules of the New York Stock Exchange and
regulations of the Federal Reserve Board, the OTS, the FDIC
and the SCC is required in connection with the execution and
delivery by Crestar of this Agreement or the consummation by
Crestar of the transactions contemplated hereby or by the Plan
of Merger.
The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and by
the Plan of Merger have been duly and validly authorized by
all necessary action on the part of Crestar Bank, and this
Agreement is a valid and binding obligation of Crestar Bank,
enforceable in accordance with its terms. The execution and
delivery of this Agreement, the consummation of the
transactions contemplated hereby and by the Plan of Merger and
compliance by Crestar Bank with any of the provisions hereof
or thereof will not (i) conflict with or result in a breach of
any provision of its Articles of Incorporation or By-laws or a
default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms,
conditions or provisions of any note, bond, mortgage,
indenture, license, agreement or other instrument or
obligation to which Crestar Bank is a party, or by which it or
any of its properties or assets may be bound, or (ii) violate
any order, writ, injunction, decree, statute, rule or
regulation applicable to Crestar Bank or any of its properties
or assets. No consent or approval by any government
authority, other than compliance with applicable federal and
state securities and banking laws, and regulations of the
Federal Reserve Board, the OTS, the FDIC and the SCC, is
required in connection with the execution and delivery by
Crestar Bank of this Agreement or the consummation by Crestar
Bank of the transactions contemplated hereby or by the Plan of
Merger.
(d) Financial Statements. Crestar has on or prior to
the date hereof delivered to Jefferson copies of the following
consolidated financial statements of Crestar (the "Crestar
Financial Statements"):
(i) Consolidated Balance Sheets as of December 31,
1993 and 1992 (audited) and as of June 30, 1994 and 1993
(unaudited);
(ii) Consolidated Income Statements for each of the
three years ended December 31, 1993, 1992, and 1991
(audited) and the three months and the six months ended
June 30, 1994 and 1993 (unaudited);
(iii) Consolidated Statements of Changes in
Shareholders' Equity for each of the three years ended
December 31, 1993, 1992 and 1991 (audited) and the three
and six months ended June 30, 1994 and 1993 (unaudited);
and
(iv) Consolidated Statements of Cash Flows for each
of the three years ended December 31, 1993, 1992 and
1991 (audited) and the six months ended June 30, 1994
and 1993 (unaudited).
Such consolidated financial statements and the notes thereto
have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout
the periods indicated unless otherwise noted in the Crestar
Financial Statements. Each of such consolidated balance
sheets, together with the notes thereto, presents fairly as of
its date the financial condition and assets and liabilities of
Crestar. The consolidated income statements, statements of
changes in shareholders' equity and statements of cash flows,
together with the notes thereto, present fairly the results of
operations, shareholders' equity and cash flows of Crestar for
the periods indicated.
(e) Absence of Undisclosed Liabilities. At June 30,
1994 and December 31, 1993, Crestar and its consolidated
subsidiaries had no material obligations or liabilities,
(contingent or otherwise) of any nature which were not
reflected in the Crestar Financial Statement as of such dates,
or disclosed in the notes thereto, except for those which are
disclosed in Schedules specifically referred to herein or
which in the aggregate are immaterial.
(f) Absence of Changes. Since June 30, 1994 there has
not been any material adverse change in the condition
(financial or otherwise), aggregate assets or liabilities,
earnings or business of Crestar, other than changes resulting
from or attributable to (i) changes since such date in laws or
regulations, generally accepted accounting principles or
interpretations of either thereof that affect the banking or
savings and loan industries generally, (ii) changes since such
date in the general level of interest rates, and (iii)
expenses since such date incurred in connection with the
transactions contemplated by this Agreement. Since June 30,
1994 the business of Crestar has been conducted only in the
ordinary course.
(g) Brokers and Finders. Neither Crestar, Crestar Bank
nor any of their respective officers, directors or employees
has employed any broker or finder or incurred any liability
for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated herein.
(h) Subsidiaries. Crestar's first-tier subsidiaries
are Crestar Bank, Crestar Bank N.A., Crestar Bank MD, Crestar
Insurance Agency, Inc., and Crestar Securities Corporation.
Such corporations are duly organized, validly existing and in
good standing under the laws of their respective jurisdictions
of incorporation and have all requisite corporate power and
authority to own, lease and operate their properties and to
carry on their business as now being conducted in all material
respects. As of the date hereof, neither Crestar nor Crestar
Bank (other than in a fiduciary capacity) directly or
indirectly own, or have any rights to acquire, any shares of
Jefferson Common Stock, other than pursuant to the Option
Agreement.
(i) Reports. Since January 1, 1990, Crestar has filed
all material reports and statements, together with any
amendments required to be made with respect thereto, that were
required to be filed with (i) the Federal Reserve Board, (ii)
the FDIC, (iii) the SCC, (iv) the SEC and (v) any other
governmental or regulatory authority or agency having
jurisdiction over their operations. Each of such reports and
documents, including the financial statements, exhibits and
schedules thereto, filed with the SEC pursuant to the 1934 Act
was in form and substance in compliance with the 1934 Act. No
such report or statement, or any amendments thereto, contains
any statement which, at the time and in light of the
circumstances under which it was made, was false or misleading
with respect to any material fact necessary in order to make
the statements contained therein not false or misleading.
(j) Tax Matters. Each of Crestar, Crestar Bank, and
all other corporations that are members of the same
"affiliated group," as defined in Section 1504(a)(1) of the
Code, as Crestar (collectively, the "Crestar Group") has filed
or caused to be filed or (in the case of returns or reports
not yet due) will file all tax returns and reports required to
have been filed by or for it before the Effective Time of the
Merger. Each member of the Crestar Group has paid or made
adequate provision for or (with respect to returns or reports
not yet filed) before the Effective Time of the Merger will
pay or make adequate provision for all taxes, additions to
tax, penalties, and interest for all periods covered by those
returns or reports. The consolidated balance sheets contained
in the Crestar Financial Statements fully and properly
reflect, as of the dates thereof, the aggregate liabilities of
the members of the Crestar Group for all accrued taxes,
additions to tax, penalties and interest. For periods ending
after June 30, 1994, the books and records of each member of
the Crestar Group fully and properly reflect its liability for
all accrued taxes, additions to tax, penalties and interest.
Except as disclosed in Schedule M, no member of the Crestar
Group has granted (nor is it subject to) any waiver of the
period of limitations for the assessment of tax for any
currently open taxable period, and no unpaid tax deficiency
has been asserted in writing against or with respect to any
member of the Crestar Group by any taxing authority.
(k) Property. Crestar and Crestar Bank own (or enjoy
use of under capital leases) all property reflected on the
Crestar Financial Statements as of June 30, 1994 and December
31, 1993 as being owned by them (except property sold or
otherwise disposed of in the ordinary course of business).
All property shown as being owned is owned free and clear of
mortgages, liens, pledges, charges or encumbrances of any
nature whatsoever, except those referred to in such Crestar
Financial Statements or the notes thereto, liens for current
taxes not yet due and payable, any unfiled mechanic's liens
and such encumbrances and imperfections of title, if any, as
are not substantial in character or amount or otherwise would
materially impair Crestar's consolidated business operations.
The leases relating to leased property are fairly reflected in
such Crestar Financial Statements.
All property and assets material to the business or
operations of Crestar and Crestar Bank are in substantially
good operating condition and repair, and such property and
assets are adequate for the business and operations of Crestar
and Crestar Bank.
(l) Agreements in Force and Effect. All material
contracts, agreements, plans, leases, policies and licenses of
Crestar and Crestar Bank are valid and in full force and
effect; and Crestar and Crestar Bank have not breached any
material provision of, or are in default in any material
respect under the terms of, any such contract, agreement,
lease, policy or license, the effect of which breach or
default would have a material adverse effect upon the
financial condition, results of operations or business of
Crestar and its subsidiaries taken as a whole.
(m) Legal Proceedings; Compliance with Laws. There is
no legal, administrative, arbitration or other proceeding or
governmental investigation pending, or, to the knowledge of
Crestar's and Crestar Bank's management, threatened or
probable of assertion which, if decided adversely, would have
a material adverse effect on the financial condition, results
of operations, business or prospects of Crestar on a
consolidated basis. Crestar and Crestar Bank have complied
with any laws, ordinances, requirements, regulations or orders
applicable to their respective businesses, except where
noncompliance would not have a material adverse effect on the
financial condition, results of operations, business or
prospects of Crestar on a consolidated basis. Crestar and
Crestar Bank have all licenses, permits, orders or approvals
of any federal, state, local or foreign governmental or
regulatory body that are necessary for the conduct of the
respective businesses of Crestar and Crestar Bank and the
absence of which would have a material adverse effect on the
financial condition, results of operations, business or
prospects of Crestar on a consolidated basis; the Permits are
in full force and effect; neither Crestar nor Crestar Bank is
aware of any material violations that are or have been
recorded in respect of any Permit nor has Crestar or Crestar
Bank received notice of any violations; and no proceeding is
pending or, to the knowledge of Crestar or Crestar Bank,
threatened to revoke or limit any Permit. Neither Crestar nor
Crestar Bank is subject to any judgment, order, writ,
injunction or decree which materially adversely affects, or
might reasonably be expected to materially adversely affect,
the financial condition, results of operations, business or
prospects of Crestar on a consolidated basis.
(n) Employee Benefit Plans.
(1) Neither Crestar nor any of its subsidiaries,
nor any employee benefit pension plan (as defined in
Section 3(2) of ERISA (a "Pension Plan")) maintained by
it, has incurred any material liability to the PBGC or
to the Internal Revenue Service with respect to any
Pension Plan, deferred compensation, consultant,
severance, thrift, option, bonus and group insurance
contract or any other incentive, welfare and employee
benefit plan and agreement presently in effect, or
approved prior to the date hereof, for the benefit of
employees or former employees of Crestar and its
subsidiaries or the dependents or beneficiaries of any
employee or former employee of Crestar or any subsidiary
(the "Crestar Employee Plans"). There is not currently
pending with the PBGC any filing with respect to any
reportable event under Section 4043 of ERISA nor has any
reportable event occurred as to which a filing is
required and has not been made.
(2) Full payment has been made (or proper accruals
have been established) of all contributions which are
required for periods prior to the Closing Date under the
terms of each Crestar Employee Plan, ERISA, or a
collective bargaining agreement, and no accumulated
funding deficiency (as defined in Section 302 of ERISA
or Section 412 of the Code) whether or not waived,
exists with respect to any Pension Plan.
(3) No Crestar Employee Plan is a "multiemployer
plan" (as defined in Section 3(37) of ERISA). Neither
Crestar nor Crestar Bank has incurred any material
liability under Section 4201 of ERISA for a complete or
partial withdrawal from a multiemployer plan (as defined
in Section 3(37) of ERISA). Neither Crestar nor Crestar
Bank has participated in or agreed to participate in, a
multiemployer plan (as defined in Section 3(37) of
ERISA).
(4) All "employee benefit plans," as defined in
Section 3(3) of ERISA, that are maintained by Crestar
comply and have been administered in compliance in all
material respects with ERISA and all other applicable
legal requirements, including the terms of such plans,
collective bargaining agreements and securities laws.
Neither Crestar nor Crestar Bank has any material
liability under any such plan that is not reflected in
the Crestar Financial Statements.
(5) No prohibited transaction has occurred with
respect to any "employee benefit plan" (as defined in
Section 3(3) of ERISA) maintained by Crestar or Crestar
Bank that would result, directly or indirectly, in
material liability under ERISA or in the imposition of a
material excise tax under Section 4975 of the Code.
(o) Regulatory Approvals. Neither Crestar nor Crestar
Bank knows of any reason why the approvals, consents and
waivers of governmental authorities referred to in Sections
5.1(f) and 5.2(e) hereof should not be obtained on a timely
basis without the imposition of any condition of the type
referred to in Section 5.1(f) hereof.
(p) Disclosure. Except to the extent of any subsequent
correction or supplement with respect thereto furnished prior
to the date hereof, no written statement, certificate,
schedule, list or other written information furnished by or on
behalf of Crestar at any time to Jefferson, in connection with
this Agreement when considered as a whole, contains or will
contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make
the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
Each document delivered or to be delivered by Crestar to
Jefferson is or will be a true and complete copy of such
document, unmodified except by another document delivered by
Crestar.
ARTICLE IV
Conduct and Transactions Prior to
Effective Time of the Merger
4.1. Access to Records and Properties of Crestar, Crestar
Bank and Jefferson; Confidentiality. Between the date of this Agreement
and the Effective Time of the Merger, each of Crestar and Crestar Bank
on the one hand, and Jefferson on the other, agree to give to the other
reasonable access to all the premises and books and records (including
tax returns filed and those in preparation) of it and its subsidiaries
and to cause its officers to furnish the other with such financial and
operating data and other information with respect to the business and
properties as the other shall from time to time request for the purposes
of verifying the representations and warranties set forth herein,
preparing the Registration Statement (as defined in Section 4.2) and
applicable regulatory filings (as set forth in Section 4.6), and
preparing unaudited financial statements of Jefferson as of a date prior
to the Effective Time of the Merger in order to facilitate Crestar in
performance of its post-Closing Date financial reporting requirements;
and pre-merger review as permitted in Section 7.1(g) provided, however,
that any such investigation shall be conducted in such manner as not to
interfere unreasonably with the operation of the respective business of
the other. Crestar and Jefferson shall each maintain the
confidentiality of all confidential information furnished to it by the
other party hereto concerning the business, operations, and financial
condition of the party furnishing such information, and shall not use
any such information except in furtherance of the Merger. If this
Agreement is terminated, each party hereto shall promptly return all
documents and copies of, and all workpapers containing, confidential
information received from the other party hereto. The obligations of
confidentiality under this Section 4.1 shall survive any such
termination of this Agreement and shall remain in effect, except to the
extent that (a) one party shall have directly or indirectly acquired the
assets and business of the other party; (b) as to any particular
confidential information with respect to one party, such information (i)
shall become generally available to the public other than as a result of
an unauthorized disclosure by the other party or (ii) was available to
the other party on a nonconfidential basis prior to its disclosure by
the first party; (c) disclosure by any party is required by subpoena or
order of a court of competent jurisdiction or by order of a regulatory
authority of competent jurisdiction; or (d) disclosure is required by
the SEC or bank or thrift regulatory authorities in connection with the
transactions contemplated by this Agreement, provided that the
disclosing party has, prior to such disclosure, advised the other party
of the circumstances necessitating such disclosure and have reached
mutually agreeable arrangements relating to such disclosure.
4.2. Registration Statement, Proxy Statement, Shareholder
Approval. Jefferson will duly call and will hold a meeting of its
shareholders as soon as practicable for the purpose of approving the
Merger and will comply fully with the provisions of the Home Owners Loan
Act ("HOLA") and the regulations promulgated hereunder, the 1933 Act and
the 1934 Act and the rules and regulations of the SEC and the OTS under
such acts to the extent applicable, and the Charter and By-laws of
Jefferson relating to the call and holding of a meeting of shareholders
for such purpose. Subject to action taken by its Board of Directors
pursuant to or as a result of the exception clause to the first sentence
of Section 4.4 hereof, the Board of Directors of Jefferson will
recommend to and actively encourage shareholders that they vote in favor
of the Merger. Crestar and Jefferson will jointly prepare the proxy
statement-prospectus to be used in connection with such meeting (the
"Proxy Statement-Prospectus") and Crestar will prepare and file with the
SEC a Registration Statement on Form S-4 (the "Registration Statement"),
of which such Proxy Statement-Prospectus shall be a part, and use its
best efforts promptly to have the Registration Statement declared
effective. In connection with the foregoing, Crestar will comply with
the requirements of the 1933 Act, the 1934 Act, the New York Stock
Exchange and the rules and regulations of the SEC under such acts with
respect to the offering and sale of Crestar Common Stock in connection
with the Merger and with all applicable state Blue Sky and securities
laws. The notices of such meetings and the Proxy Statement-Prospectus
shall not be mailed to Jefferson shareholders until the Registration
Statement shall have become effective under the 1933 Act. Jefferson
covenants that none of the information supplied by Jefferson and Crestar
covenants that none of the information supplied by Crestar in the Proxy
Statement-Prospectus will, at the time of the mailing of the Proxy
Statement-Prospectus to Jefferson shareholders, contain any untrue
statement of a material fact nor will any such information omit any
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which they
were made, not misleading; and at all times subsequent to the time of
the mailing of the Proxy Statement-Prospectus, up to and including the
date of the meeting of Jefferson shareholders to which the Proxy
Statement-Prospectus relates, none of such information in the Proxy
Statement-Prospectus, as amended or supplemented, will contain an untrue
statement of a material fact or omit any material fact required to be
stated therein in order to make the statements therein, in light of the
circumstances in which they were made, not misleading.
Crestar, as the sole shareholder of Crestar Bank, hereby
approves this Agreement and the Plan of Merger.
4.3. Operation of the Business of Jefferson. Jefferson
agrees that from June 30, 1994 to the Effective Time of the Merger, it
has operated, and it will operate, its business substantially as
presently operated and only in the ordinary course and in general
conformity with applicable laws and regulations, and, consistent with
such operation, it will use its best efforts to preserve intact its
present business organizations and its relationships with persons having
business dealings with it. Without limiting the generality of the
foregoing, Jefferson agrees that it will not, without the prior written
consent of Crestar, (i) make any change in the salaries, bonuses or
title of any officer; (ii) make any change in the title, salaries or
bonuses of any other employee, other than those permitted by current
employment policies in the ordinary course of business, any of which
changes shall be reported promptly to Crestar; (iii) enter into any
bonus, incentive compensation, deferred compensation, profit sharing,
thrift, retirement, pension, group insurance or other benefit plan or
any employment or consulting agreement or increase benefits under
existing plans; (iv) create or otherwise become liable with respect to
any indebtedness for money borrowed or purchase money indebtedness
except in the ordinary course of business; (v) amend its Charter or By-
laws; (vi) issue or contract to issue any shares of Jefferson capital
stock or securities exchangeable for or convertible into capital stock
except (x) up to 75,250 shares of Jefferson Common Stock issuable
pursuant to Jefferson Options outstanding as of June 30, 1994, or (y)
pursuant to the Option Agreement; (vii) purchase any shares of Jefferson
capital stock; (viii) enter into or assume any material contract or
obligation, except in the ordinary course of business; (ix) waive,
release, compromise or assign any right or claim involving $75,000 or
more; (x) propose or take any other action which would make any
representation or warranty in Section 3.1 hereof untrue; (xi) introduce
any new products or services or change the rate of interest on any
deposit instrument to above-market interest rates; (xii) make any change
in policies respecting extensions of credit or loan charge-offs; (xiii)
change reserve requirement policies; (xiv) change securities portfolio
policies; (xv) acquire a policy or enter into any new agreement,
amendment or endorsement or make any changes relating to insurance
coverage, including coverage for its directors and officers, which would
result in an additional payment obligation of $50,000 or more; (xvi)
propose or take any action with respect to the closing of any branches;
(xvii) amend the terms of the Jefferson Options; (xviii) amend the terms
of the written severance agreements identified in Schedule E except that
such agreements may be amended to extend their term to no later than
September 30, 1995; or (xix) make any change in any tax election or
accounting method or system of internal accounting controls, except as
may be appropriate to conform to any change in regulatory accounting
requirements or generally accepted accounting principles. Jefferson
further agrees that, between the date of this Agreement and the
Effective Time of the Merger, it will consult and cooperate with Crestar
regarding (i) loan portfolio management, including management and work-
out of nonperforming assets, and credit review and approval procedures,
including notice to Crestar's Credit Review Department Management of any
new nonresidential loans in excess of $500,000, and (ii) securities
portfolio and funds management, including management of interest rate
risk.
4.4. No Solicitation. Unless and until this Agreement shall
have been terminated pursuant to its terms, neither Jefferson nor any of
its executive officers, directors, representatives, agents or affiliates
shall, directly or indirectly, encourage, solicit or initiate
discussions or negotiations (with any person other than Crestar)
concerning any merger, sale of substantial assets, tender offer, sale of
shares of stock or similar transaction involving Jefferson or disclose,
directly or indirectly, any information not customarily disclosed to the
public concerning Jefferson, afford to any other person access to the
properties, books or records of Jefferson or otherwise assist any person
preparing to make or who has made such an offer, or enter into any
agreement with any third party providing for a business combination
transaction, equity investment or sale of significant amount of assets,
except in a situation in which a majority of the full Board of Directors
of Jefferson has determined in good faith, upon advice of counsel, that
such Board has a fiduciary duty to consider and respond to a bona fide
proposal by a third party (which proposal was not directly or indirectly
solicited by Jefferson or any of its officers, directors,
representatives, agents or affiliates) and provides written notice of
its intention to consider such proposal and the material terms thereof
to Crestar at least five days before responding to the proposal.
Jefferson will promptly communicate to Crestar the terms of any proposal
which it may receive in respect to any of the foregoing transactions.
4.5. Dividends. Jefferson agrees that since June 30, 1994 it
has not, and prior to the Effective Time of the Merger it will not,
declare any cash dividends without the prior written consent of Crestar.
4.6. Regulatory Filings; Best Efforts. Crestar and Jefferson
shall jointly prepare all regulatory filings required to consummate the
transactions contemplated by the Agreement and the Plan of Merger and
submit the filings for approval with the Federal Reserve Board, the OTS,
the FDIC and the SCC as soon as practicable after the date hereof.
Crestar and Jefferson shall use their best efforts to obtain approvals
of such filings.
4.7. Public Announcements. Each party will consult with the
other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not issue any press
release or make any such public statement prior to such consultations
and approval of the other party, which approval shall not be
unreasonably withheld, except as may be required by law.
4.8. Operating Synergies; Conformance to Reserve Policies,
Etc. Between the date hereof and the Effective Time of the Merger,
Jefferson's management will work with Crestar Bank to achieve
appropriate operating efficiencies following the Closing Date. Crestar
notification to Jefferson's customers and Crestar's direct contact with
customers will commence following receipt of Federal Reserve Board
approval but not earlier than 30 days prior to the Closing Date. At the
request of Crestar Bank and upon receipt by Jefferson of written
confirmation from Crestar and Crestar Bank that there are no conditions
to the obligations of Crestar and Crestar Bank under this Agreement set
forth in Article V which they believe will not be fulfilled so as to
permit them to consummate the Merger and the other transactions
contemplated hereby, not more than three days before the Effective Time
of the Merger Jefferson shall establish such additional accruals,
reserves and charge-offs, through appropriate entries in its accounting
books and records, as may be necessary to conform Jefferson's accounting
and credit loss reserve practices and methods to those of Crestar Bank
(as such practices and methods are to be applied from and after the
Effective Time of the Merger) and to Crestar Bank's plans with respect
to the conduct of the business of Jefferson following the Merger, as
well as for the anticipated recapture of the bad debt reserve
established by Jefferson for federal income tax purposes (and state
income tax purposes, if applicable) prior thereto and the costs and
expenses relating to the consummation by Jefferson of the Merger and the
other transactions contemplated hereby. Any such accruals, reserves and
charge-offs shall not be deemed to cause any representation and warranty
of Jefferson to be untrue or inaccurate as of the Effective Time of the
Merger.
At the same time that the accruals referred to in the next two
preceding sentences are established, Jefferson will convey any OREO
properties that are titled in its name to a Jefferson subsidiary to be
identified by Crestar.
4.9. Crestar Rights Agreement. Crestar agrees that any
rights issued pursuant to the Rights Agreement adopted by it in 1989
shall be issued with respect to each share of Crestar Common Stock
issued pursuant to the terms hereof and the Plan of Merger, regardless
whether there has occurred a Distribution Date under the terms of such
Rights Agreement prior to the occurrence of the Effective Time of the
Merger.
4.10. Agreement as to Efforts to Consummate. Subject to
action taken by the Board of Directors of Jefferson pursuant to or as a
result of the exception clause to the first sentence of Section 4.4
hereof and to the other terms and conditions of this Agreement, each of
Crestar and Jefferson agrees to use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective, as soon as practicable
after the date of this Agreement, the transactions contemplated by this
Agreement, including, without limitation, using reasonable effort to
lift or rescind any injunction or restraining order or other order
adversely affecting the ability of the parties to consummate the
transactions contemplated herein. Each of Crestar and Jefferson shall
use its best efforts to obtain consents of all third parties and
governmental bodies necessary or desirable for the consummation of the
transactions contemplated by this Agreement.
4.11. Adverse Changes in Condition. Crestar and Jefferson
each agrees to give written notice promptly to the other concerning any
event or circumstance which would cause or constitute a breach of any of
the representations, warranties or covenants of such party contained
herein. Each of Crestar and Jefferson shall use its best efforts to
prevent or promptly to remedy the same.
4.12. NYSE Listing. If the shares of Crestar Common Stock to
be issued in the Merger are not repurchased on the open market, Crestar
will file with the New York Stock Exchange a Supplemental Listing
Application for the shares of Crestar Common Stock to be issued in the
Merger and have such shares approved for listing on the New York Stock
Exchange prior to the Effective Time of the Merger.
4.13. Updating of Schedules. Jefferson shall notify Crestar,
and Crestar shall notify Jefferson, of any changes, additions or events
which may cause any change in or addition to any Schedules delivered by
it under this Agreement, promptly after the occurrence of same and at
the Closing Date by delivery of updates of all Schedules, including
future quarterly and annual Jefferson Financial Statements. No
notification made pursuant to this Section 4.13 shall be deemed to cure
any breach of any representation or warranty made in this Agreement or
any Schedule unless Crestar or Jefferson, as the case may be,
specifically agree thereto in writing, nor shall any such notification
be considered to constitute or give rise to a waiver by Jefferson on the
one hand, or Crestar or Crestar Bank on the other hand of any condition
set forth in this Agreement.
4.14. Market for Jefferson Common Stock. Jefferson shall use
its best efforts to ensure that the Jefferson Common Stock continues to
be quoted on the National Association of Securities Dealers Automated
Quotation System at all times between the date hereof and the Effective
Time of the Merger.
4.15. Transactions in Crestar Common Stock. Other than the
issuance or acquisition of Crestar Common Stock pursuant to Crestar
employee benefit plans, or the purchase or sale of Crestar Common Stock
by Crestar Bank in its capacity as trustee under Crestar employee
benefit plans or in any other fiduciary capacity in which it is directed
to sell or purchase Crestar Common Stock, none of Crestar, Crestar Bank,
or Jefferson will, directly or indirectly, purchase, publicly sell or
publicly acquire any shares of Crestar Common Stock during the 10
trading days ending on the 10th day prior to the Effective Time of the
Merger.
ARTICLE V
Conditions of Merger
5.1. Conditions of Obligations of Crestar and Crestar Bank.
The obligations of Crestar and Crestar Bank to perform this Agreement
are subject to the satisfaction at or prior to the Effective Time of the
Merger of the following conditions unless waived by Crestar and Crestar
Bank.
(a) Representations and Warranties; Performance of
Obligations. The representations and warranties of Jefferson
set forth in Section 3.l hereof shall be true and correct in
all material respects as of the date of this Agreement and as
of the Effective Time of the Merger as though made on and as
of the Effective Time of the Merger (or on the date when made
in the case of any representation and warranty which
specifically relates to an earlier date); Jefferson shall have
in all material respects performed all obligations required to
be performed by it and satisfied all conditions required to be
satisfied by it under this Agreement prior to the Effective
Time of the Merger; and Crestar and Crestar Bank shall have
received a certificate signed by the Chief Executive Officer
and by the Chief Financial Officer of Jefferson, which may be
to their best knowledge after due inquiry, to such effects.
(b) Authorization of Merger. All action necessary to
authorize the execution, delivery and performance of this
Agreement by Jefferson and the consummation of the
transactions contemplated herein (including the shareholder
action referred to in Section 4.2) shall have been duly and
validly taken by the Board of Directors of Jefferson and by
the shareholders of Jefferson and Jefferson shall have full
power and right to merge on the terms provided herein.
(c) Opinion of Counsel. Crestar and Crestar Bank shall
have received an opinion of Elias, Matz, Tiernan & Herrick,
L.L.P., special counsel to Jefferson, dated the Closing Date
and satisfactory in form and substance to counsel to Crestar
and Crestar Bank, in the form attached hereto as Exhibit B.
(d) The Registration Statement. The Registration
Statement shall be effective under the 1933 Act and Crestar
shall have received all state securities laws or "blue sky"
permits and other authorizations or there shall be exemptions
from registration requirements necessary to offer and issue
the Crestar Common Stock in connection with the Merger, and
neither the Registration Statement nor any such permit,
authorization or exemption shall be subject to a stop order or
threatened stop order by the SEC or any state securities
authority.
(e) Tax Opinion. Crestar and Crestar Bank shall have
received, in form and substance satisfactory to them, an
opinion of Hunton & Williams to the effect that, for federal
income tax purposes, the Merger will qualify as a
"reorganization" under Section 368(a) of the Code, and no
taxable gain will be recognized by Crestar, Crestar Bank or
Jefferson in the Merger (i) upon the transfer of Jefferson's
assets to Crestar Bank in exchange for Crestar Common Stock,
cash and the assumption of Jefferson's liabilities (but
Jefferson or Crestar Bank may be required to include certain
amounts in income as a result of the termination of any bad-
debt reserve maintained by Jefferson for federal income tax
purposes and other possible required changes in tax accounting
methods) or (ii) upon the distribution of such Crestar Common
Stock and cash to Jefferson shareholders.
(f) Regulatory Approvals. All required approvals from
federal and state regulatory authorities having jurisdiction
to permit Crestar and Crestar Bank to consummate the Merger
and to issue Crestar Common Stock to Jefferson shareholders
shall have been received and shall have contained no
conditions deemed in good faith to be materially
disadvantageous by Crestar, including such approval necessary
to consummate the Merger in an "Oakar" transaction as
described in Section 1.1 hereof.
(g) Affiliate Letters. Within 60 days of the date
hereof, each shareholder of Jefferson who is a Jefferson
Affiliate shall have executed and delivered a commitment and
undertaking in the form of Exhibit D to the effect that
(1) such shareholder will dispose of the shares of Crestar
Stock received by him in connection with the Merger only in
accordance with the provisions of paragraph (d) of Rule 145
under the 1933 Act; (2) such shareholder will not dispose of
any of such shares until Crestar has received, at its expense,
an opinion of counsel acceptable to it that such proposed
disposition will not violate the provisions of paragraph (d)
of Rule 145 and any applicable securities laws which opinion
shall be rendered promptly following counsel's receipt of such
shareholder's written notice of its intent to sell shares of
Crestar Common Stock; and (3) the certificates representing
said shares may bear a legend referring to the foregoing
restrictions.
(h) Title Matters. Crestar shall have received
evidence reasonably satisfactory to it as to the accuracy of
the representations made by Jefferson with respect to branch
real estate in Section 3.1(i).
(i) NYSE Listing. If the shares of Crestar Common
Stock to be issued in the Merger are not repurchased on the
open market, such shares to be issued in the Merger shall have
been approved for listing, upon notice of issuance, on the New
York Stock Exchange.
(j) Acceptance by Crestar and Crestar Bank Counsel.
The form and substance of all legal matters contemplated
hereby and of all papers delivered hereunder shall be
reasonably acceptable to counsel for Crestar and Crestar Bank.
5.2. Conditions of Obligations of Jefferson. The obligations
of Jefferson to perform this Agreement are subject to the satisfaction
at or prior to the Effective Time of the Merger of the following
conditions unless waived by Jefferson:
(a) Representations and Warranties; Performance of
Obligations. The representations and warranties of Crestar
and Crestar Bank set forth in Section 3.2 hereof shall be true
and correct in all material respects as of the date of this
Agreement and as of the Effective Time of the Merger as though
made on and as of the Effective Time of the Merger (or on the
date when made in the case of any representation and warranty
which specifically relates to an earlier date); Crestar and
Crestar Bank shall have in all material respects performed all
obligations required to be performed by them and satisfied all
conditions required to be satisfied by them under this
Agreement prior to the Effective Time of the Merger; and
Jefferson shall have received a certificate signed by the
Chief Executive Officer and by the Chief Financial Officer of
Crestar and Crestar Bank, which may be to their best knowledge
after due inquiry, to such effects.
(b) Authorization of Merger. All action necessary to
authorize the execution, delivery and performance of this
Agreement by Crestar and Crestar Bank and the consummation of
the transactions contemplated hereby shall have been duly and
validly taken by the Boards of Directors of Crestar and
Crestar Bank and the shareholders of Jefferson and Crestar
Bank and Jefferson shall have full power and right to merge on
the terms provided herein.
(c) Opinion of Counsel. Jefferson shall have received
an opinion of Hunton & Williams, counsel to Crestar and
Crestar Bank, dated the Closing Date and satisfactory in form
and substance to counsel to Jefferson, in the form attached
hereto as Exhibit C.
(d) The Registration Statement. The Registration
Statement shall be effective under the 1933 Act and Crestar
shall have received all state securities laws or "blue sky"
permits and other authorizations or there shall be exemptions
from registration requirements necessary to offer and issue
the Crestar Common Stock in connection with the Merger, and
neither the Registration Statement nor any such permit,
authorization or exemption shall be subject to a stop order or
threatened stop order by the SEC or any state securities
authority.
(e) Regulatory Approvals. All required approvals from
federal and state regulatory authorities having jurisdiction
to permit Jefferson to consummate the Merger and to permit
Crestar to issue Crestar Common Stock to Jefferson
shareholders shall have been received, including such approval
necessary to consummate the Merger in an "Oakar" transaction
as described in Section 1.1 hereof.
(f) Tax Opinion. Crestar, Crestar Bank and Jefferson
shall have received, in form and substance reasonably
satisfactory to them, an opinion of Hunton & Williams to the
effect that, for federal income tax purposes, the Merger will
qualify as a "reorganization" under Section 368(a) of the
Code; no taxable gain will be recognized by Crestar, Crestar
Bank or Jefferson in the Merger (i) upon the transfer of
Jefferson's assets to Crestar in exchange for Crestar Common
Stock, cash and the assumption of Jefferson's liabilities (but
Jefferson or Crestar Bank may be required to include certain
amounts in income as a result of the termination of any bad-
debt reserve maintained by Jefferson for federal income tax
purposes and other possible required changes in tax accounting
methods) or (ii) upon the distribution of such Crestar Common
Stock and cash to Jefferson shareholders; no taxable gain will
be recognized by a Jefferson shareholder on the exchange by
such shareholder of shares of Jefferson Common Stock solely
for shares of Crestar Common Stock (including any fractional
share interest) in the Merger; a Jefferson shareholder who
receives cash and shares of Crestar Common Stock (including
any fractional share interest) for shares of Jefferson Common
Stock in the Merger pursuant to the cash election will
recognize any gain realized (including any gain treated as a
dividend) up to the amount of cash received (excluding cash in
lieu of a fractional share of Crestar Common Stock), but will
not recognize any loss; a Jefferson shareholder's basis in
Crestar Common Stock (including any fractional share interest)
received in the Merger will be the same as the shareholder's
basis in the Jefferson Common Stock surrendered in exchange
therefor, decreased by the amount of any cash received
(excluding cash in lieu of a fractional share of Crestar
Common Stock) and increased by the amount of any gain
recognized (including any gain treated as a dividend) by the
shareholder; the holding period of such Crestar Common Stock
(including any fractional share interest) for a Jefferson
shareholder will include the holding period of the Jefferson
Common Stock surrendered in exchange therefor, if such
Jefferson Common Stock is held as a capital asset by the
shareholder at the Effective Time of the Merger; and a
Jefferson shareholder who receives cash in lieu of a
fractional share of Crestar Common Stock will recognize gain
or loss equal to any difference between the amount of cash
received and the shareholder's basis in the fractional share
interest.
(g) NYSE Listing. If the shares of Crestar Common
Stock to be issued in the Merger are not repurchased on the
open market, such shares to be issued in the Merger shall have
been approved for listing, upon notice of issuance, on the New
York Stock Exchange.
(h) Fairness Opinion. The opinion of Scott &
Stringfellow, Inc., dated the date hereof, to the effect that
the consideration to be received by the shareholders of
Jefferson as a result of the Merger is fair to the
shareholders of Jefferson from a financial point of view, and
shall not have been withdrawn prior to the mailing of the
Proxy Statement for the meeting of shareholders of Jefferson
referred to in Section 4.2 hereof.
(i) Acceptance by Jefferson's Counsel. The form and
substance of all legal matters contemplated hereby and of all
papers delivered hereunder shall be acceptable to counsel for
Jefferson.
ARTICLE VI
Closing Date; Effective Time
6.1. Closing Date. Unless another date or place is agreed to
in writing by the parties, the closing of the transactions contemplated
in this Agreement shall take place at the offices of Crestar, 919 East
Main Street, Richmond, Virginia, at 10:00 o'clock A.M., local time, on
such date as Crestar shall designate to Jefferson at least 10 days prior
to the designated Closing Date and as reasonably acceptable to
Jefferson; provided, that the date so designated shall not be earlier
than 30 days after Federal Reserve Board approval, and shall not be
later than 60 days after such approvals and, in no event, shall be later
than June 30, 1995 (the "Closing Date").
6.2. Filings at Closing. Subject to the provisions of
Article V, at the Closing Date, Crestar shall cause Articles of Merger
relating to the Plan of Merger to be filed in accordance with the
Virginia Stock Corporation Act, and each of Crestar and Jefferson shall
take any and all lawful actions to cause the Merger to become effective.
6.3. Effective Time. Subject to the terms and conditions set
forth herein, including receipt of all required regulatory approvals,
the Merger shall become effective at the time Articles of Merger filed
with the SCC are made effective (the "Effective Time of the Merger").
ARTICLE VII
Termination; Survival of Representations,
Warranties and Covenants; Waiver and Amendment
7.1. Termination. This Agreement shall be terminated, and
the Merger abandoned, if the shareholders of Jefferson shall not have
given the approval required by Section 4.2. Notwithstanding such
approval by such shareholders, this Agreement may be terminated at any
time prior to the Effective Time of the Merger, by:
(a) The mutual consent of Crestar, Crestar Bank and
Jefferson, as expressed by their respective Boards of
Directors;
(b) Either Crestar or Crestar Bank on the one hand or
Jefferson on the other hand, as expressed by their respective
Boards of Directors, if the Merger has not occurred by June
30, 1995, provided that the failure of the Merger to so occur
shall not be due to a willful breach of any representation,
warranty, covenant or agreement by the party seeking to
terminate this Agreement;
(c) By Crestar and Crestar Bank in writing authorized
by its respective Board of Directors if Jefferson has, or by
Jefferson in writing authorized by its Board of Directors, if
Crestar or Crestar Bank has, in any material respect, breached
(i) any covenant or agreement contained herein, or (ii) any
representation or warranty contained herein, in any case if
such breach has not been cured by the earlier of 30 days after
the date on which written notice of such breach is given to
the party committing such breach or the Closing Date; provided
that it is understood and agreed that either party may
terminate this Agreement on the basis of any such material
breach of any representation or warranty contained herein
notwithstanding any qualification therein relating to the
knowledge of the other party;
(d) Either Crestar or Crestar Bank on the one hand or
Jefferson on the other hand, as expressed by their respective
Boards of Directors, in the event that any of the conditions
precedent to the obligations of such parties to consummate the
Merger have not been satisfied or fulfilled or waived by the
party entitled to so waive on or before the Closing Date,
provided that no party shall be entitled to terminate this
Agreement pursuant to this subparagraph (d) if the condition
precedent or conditions precedent which provide the basis for
termination can reasonably be and are satisfied within a
reasonable period of time, in which case, the Closing Date
shall be appropriately postponed;
(e) Crestar and Crestar Bank, if the Boards of
Directors of Crestar and Crestar Bank shall have determined in
their sole discretion, exercised in good faith, that the
Merger, has become inadvisable or impracticable by reason of
(A) the threat or the institution of any litigation,
proceeding or investigation to restrain or prohibit the
consummation of the transactions contemplated by this
Agreement or to obtain other relief in connection with this
Agreement or (B) public commencement of a competing offer for
Jefferson Common Stock which is significantly better than
Crestar's offer, and which Crestar certifies to Jefferson, in
writing, it is unwilling to meet;
(f) Crestar, Crestar Bank or Jefferson, if the Federal
Reserve Board, the OTS, the FDIC or the SCC deny approval of
the Merger and the time period for all appeals or requests for
reconsideration has run.
(g) Crestar if, following Crestar's pre-merger review
of Jefferson's loan portfolio, such pre-merger review reveals
that there are potential losses in the loan portfolio since
June 30, 1994 which would cause a reduction of Jefferson's
shareholders' equity by 10% or more from that reflected in the
Jefferson Financial Statements at June 30, 1994; provided,
however, that such reduction in Jefferson's shareholder equity
shall be exclusive of any change in Jefferson's shareholder
equity resulting from any credit or reserve adjustments of
which Crestar has informed Jefferson as disclosed in Schedule
N attached hereto.
7.2. Effect of Termination. In the event of the termination
and abandonment of this Agreement and the Merger pursuant to Section
7.1, this Agreement, other than the provisions of Sections 4.1 (last
three sentences) and 9.1, shall become void and have no effect, without
any liability on the part of any party or its directors, officers or
shareholders, provided that nothing contained in this Section 7.2 shall
relieve any party from liability for any willful breach of this
Agreement.
7.3. Survival of Representations, Warranties and Covenants.
The respective representations and warranties, obligations, covenants
and agreements (except for those contained in Sections 1.2, 1.3, 2.1,
2.2, 2.3, 2.5, 2.6, 4.1 (second sentence), 8.1, 8.2, 8.3, 8.4, 8.5 and
9.1, which shall survive the effectiveness of the Merger) of Crestar,
Crestar Bank and Jefferson contained herein shall expire with, and be
terminated and extinguished by, the effectiveness of the Merger and
shall not survive the Effective Time of the Merger.
7.4. Waiver and Amendment. Any term or provision of this
Agreement may be waived in writing at any time by the party which is, or
whose shareholders are, entitled to the benefits thereof and this
Agreement may be amended or supplemented by written instructions duly
executed by all parties hereto at any time, whether before or after the
meeting of Jefferson shareholders referred to in Section 4.2 hereof,
excepting statutory requirements and requisite approvals of shareholders
and regulatory authorities, provided that any such amendment or waiver
executed after shareholders of Jefferson have approved this Agreement
and the Plan of Merger shall not modify either the amount or form of the
consideration to be received by such shareholders for their shares of
Jefferson Common Stock or otherwise materially adversely affect such
shareholders without their approval.
ARTICLE VIII
Additional Covenants
8.1. Indemnification of Jefferson Officers and Directors;
Liability Insurance. After the Effective Time of the Merger, Crestar
acknowledges its obligation to provide, and agrees to provide,
indemnification to the directors, employees and officers of Jefferson as
if they had been directors, employees or officers of Crestar prior to
the Effective Time of the Merger, to the extent permitted under the
Virginia Stock Corporation Act and the Articles of Incorporation and
Bylaws of Crestar as in effect as of the date of this Agreement. Such
indemnification shall continue for six years after the Effective Time of
the Merger, provided that any right to indemnification in respect of any
claim asserted or made within such six year period shall continue until
final disposition of such claim. Crestar will provide officers and
directors liability insurance coverage to all Jefferson directors and
officers, whether or not they become part of the Crestar organization
after the Effective Time of the Merger, to the same extent it is
provided to Crestar's officers and directors, provided that coverage
will not extend to acts as to which notice has been given prior to the
Effective Time of the Merger. The right to indemnification and
insurance provided in this Section 8.1 is intended to be for the benefit
of directors, employees and officers of Jefferson and as such may be
personally enforced by them at law or in equity.
8.2. Employee Matters. (a) Jefferson Senior Management
Group. Each member of Jefferson's senior management who might
be displaced as a result of the Merger, will be interviewed by
his/her Crestar Bank counterpart with the goal of determining
if there are mutually beneficial employment opportunities
available within Crestar Bank or another subsidiary of
Crestar.
(b) Winfree Agreement. Crestar and Thomas W. Winfree
shall negotiate in good faith and, prior to the Effective Time
of the Merger, shall use their best efforts to enter into a
services agreement for the employment of Mr. Winfree, which
employment shall become effective upon the Effective Time of
the Merger. Any such services agreement shall supersede in
its entirety the rights and obligations of the parties
pursuant to the existing Employment Agreement between
Jefferson and Mr. Winfree dated June 7, 1994 (the "Employment
Agreement"). Should Crestar and Mr. Winfree not enter into a
new employment agreement prior to the Effective Time of the
Merger, Crestar shall honor the terms of the Employment
Agreement.
(c) Other Employees. Crestar Bank will undertake to
continue employment of all branch personnel who meet Crestar's
employment qualification requirements and needs, either at
existing Jefferson offices or at Crestar offices. Jefferson
non-branch personnel terminated as a result of the Merger will
be interviewed prior to the Effective Time of the Merger for
open positions within Crestar Bank or a subsidiary of Crestar.
Crestar or Crestar Bank will pay a severance benefit to each
person, other than those persons who have entered into written
severance agreements with Jefferson and that are identified on
Schedule E, who is an employee of Jefferson at the Effective
Time of the Merger and who (x) is not offered a comparable
position with Crestar Bank or a subsidiary of Crestar (the
acceptance of a position with Crestar Bank or a subsidiary of
Crestar shall establish that such position was comparable) or
(y) is terminated without cause within six months after the
Effective Time of the Merger. The amount of such severance
benefit will equal one week of such employee's base pay (as in
effect immediately before the Effective Time of the Merger)
for each full year of service with Jefferson up to 20 years
and two weeks of such base pay for each full year of service
with Jefferson over 20 years; provided, however, that the
severance benefit shall not be less than four weeks of base
pay. Crestar Bank shall assume Jefferson's obligation under
the written severance agreements that are identified on
Schedule E and Crestar Bank shall pay any severance benefits
that may become payable under such agreements. Each person
who is a Jefferson employee at the Effective Time of the
Merger shall be paid promptly after the Effective Time of the
Merger for all accrued but unused vacation time through
December 31, 1994, or, if earlier, the Effective Time of the
Merger as set forth on the books of Jefferson. Except for
written severance agreements identified in Schedule E hereto,
which may be renewed for one year effective September 30,
1994, Jefferson shall take or cause to be taken such actions
as are necessary to terminate its severance pay policies or
plans effective prior to the Effective Time of the Merger.
Out-placement counseling will be available through the
Virginia Employment Commission for any Jefferson employees who
are entitled to severance benefits from Crestar under this
Section 8.2(c) or under a written severance agreement that is
identified on Schedule E.
8.3. Employee Benefit Matters. (a) Transferred Employees.
All employees of Jefferson immediately prior to the Effective
Time of the Merger who are employed by Crestar, Crestar Bank
or another Crestar subsidiary immediately following the
Effective Time of the Merger ("Transferred Employees") will be
covered by Crestar's employee benefit plans as to which they
are eligible based on their length of service, compensation,
job classification, and position, including, where applicable,
any incentive compensation plan. Notwithstanding the
foregoing, Crestar may determine to continue any of the
Jefferson benefit plans for Transferred Employees in lieu of
offering participation in Crestar's benefit plans providing
similar benefits (e.g., medical and hospitalization benefits),
to terminate any of the Jefferson benefit plans, or to merge
any such benefit plans with Crestar's benefit plans. Except
as specifically provided in this Section 8.3 and as otherwise
prohibited by law, Transferred Employees' service with
Jefferson shall be recognized as service with Crestar for
purposes of eligibility to participate and vesting, if
applicable (but not for purposes of benefit accrual) under
Crestar's benefit plans, subject to applicable break-in-
service rules.
(b) Health Plans. Crestar agrees that any pre-existing
condition, limitation or exclusion in its health plans shall
not apply to Transferred Employees or their covered dependents
who are covered under a medical or hospitalization indemnity
plan maintained by Jefferson on the date of the Merger and who
then change coverage to Crestar's medical or hospitalization
indemnity health plan at the time such Transferred Employees
are first given the option to enroll in Crestar's health
plans.
(c) Jefferson 401(k) Profit Sharing Plan. Crestar
agrees that immediately following the Merger, all participants
who then have accounts in the 401(k) profit sharing plan
maintained by Jefferson (the "401(k) Plan") shall be fully
vested in their account balances. Crestar, at its election,
may continue the 401(k) Plan for the benefit of Transferred
Employees (as such plan may be amended as of the Effective
Time of the Merger to provide current contributions and
eligibility provisions identical to those under the Crestar
Employees' Thrift and 401(k) Plan), may merge the 401(k) Plan
into the Crestar Employees' Thrift and Profit Sharing Plan
(the "Crestar Thrift Plan") or the Crestar Merger Plan for
Transferred Employees, or may cease additional benefit
accruals under and contributions to the 401(k) Plan and
continue to hold the assets of such Plan until they are
distributable in accordance with its terms. In the event of a
merger of the 401(k) Plan into the Crestar Thrift Plan or a
cessation of accruals and contributions under the 401(k) Plan,
the Crestar Thrift Plan will recognize for purposes of
eligibility to participate, early retirement, and eligibility
for vesting, all Transferred Employees' service with
Jefferson, subject to applicable break-in-service rules.
Jefferson agrees to cooperate with Crestar in implementing any
decision under this subsection (c) with respect to the 401(k)
Plan. Jefferson agrees that by December 31, 1994, but in all
events prior to the Effective Time of the Merger, it will file
an application with the Internal Revenue Service requesting a
new favorable determination letter for the 401(k) Plan.
(d) Crestar Retirement Plan. The Retirement Plan for
Employees of Crestar Financial Corporation and Affiliated
Corporations ("Crestar's Retirement Plan") will recognize for
purposes of eligibility to participate, vesting and
eligibility for early retirement, but not for benefit accrual
purposes, all Transferred Employees' service with Jefferson,
subject to applicable break-in-service rules. Jefferson
agrees that by December 31, 1994, but in all events prior to
the Effective Time of the Merger, it will file an application
with the Internal Revenue Service requesting a new favorable
determination letter for the Jefferson Savings and Loan
Association Employees' Pension Plan (the "Pension Plan").
Crestar, at its option, may continue the Pension Plan as a
frozen plan, or may terminate the Pension Plan and pay out
benefits, or may merge the Pension Plan into Crestar's
Retirement Plan. In the event of a plan merger, former
participants in the Pension Plan will receive benefits from
Crestar's Retirement Plan equal to (x) their respective
benefit under the Pension Plan as of the plan merger date plus
(y) any vested accrued benefit earned under Crestar's
Retirement Plan on and after the Effective Time of the Merger
for service thereafter with Crestar and its affiliates
(subject to break in service rules).
8.4. Crestar Bank/Warrenton Local Advisory Board of
Directors. Crestar Bank will offer (a) up to six members of the
Jefferson board of directors a position on Crestar Bank's local advisory
board in Warrenton, and (b) one member of the Jefferson board of
directors a position on Crestar Bank's Greater Washington Regional
("GWR") Board, for a term of one year commencing at the Effective Time
of the Merger. Members who agree to serve on the Warrenton advisory
board will be paid on the usual terms and conditions that Crestar pays
members of its other, similar, advisory boards, and in the case of the
GWR Board, such member shall be paid the same as the other members of
the GWR Board.
8.5. Stock Options. Each holder of outstanding Jefferson
Options shall elect, by giving notice to Jefferson prior to the Closing
Date, either to (a) allow the Jefferson Options to terminate at the
Effective Time of the Merger and promptly following the Effective Time
of the Merger receive a cash payment (subject to all applicable
withholding taxes) equal to the excess of (i) the aggregate Price Per
Share of the Jefferson Common Stock represented by his Jefferson Options
less (ii) the aggregate exercise price of such Jefferson Options, (b)
exercise the Jefferson Options for Jefferson Common Stock prior to the
Closing Date and convert such Common Stock into Crestar Common Stock or
elect to receive cash as provided in Section 2.1 hereof, or (c) have the
Jefferson Options assumed by Crestar. Crestar (on behalf of the
Surviving Bank) agrees to make any cash payment required under this
Section promptly following consummation of the Merger. Jefferson
Options that are assumed by Crestar shall be converted into options to
purchase Crestar Common Stock, the number and price of which shall be
determined in accordance with Code section 424 and the regulations
promulgated under Code section 424 and any predecessor section.
ARTICLE IX
Miscellaneous
9.1. Expenses. Each party hereto shall bear and pay the
costs and expenses incurred by it relating to the transactions
contemplated hereby.
9.2. Entire Agreement. This Agreement contains the entire
agreement among Crestar, Crestar Bank and Jefferson with respect to the
Merger and the related transactions and supersedes all prior
arrangements or understandings with respect thereto.
9.3. Descriptive Headings. Descriptive headings are for
convenience only and shall not control or affect the meaning or
construction of any provisions of this Agreement.
9.4. Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if
delivered personally or sent by registered or certified mail, postage
prepaid, addressed as follows:
If to Crestar or Crestar Bank:
Crestar Financial Corporation
P. O. Box 26665
919 East Main Street
Richmond, Virginia 23261-6665
Attention: John C. Clark III
Corporate Senior Vice President,
Secretary and General Counsel
Copy to:
Lathan M. Ewers, Jr.
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
If to Jefferson:
Jefferson Savings & Loan Association
550 Broad View Avenue
Warrenton, Virginia 22186
Attention: Thomas W. Winfree, President
Copy to:
Gerard L. Hawkins
Elias, Matz, Tiernan & Herrick, L.L.P.
12th Floor, The Walker Building
734 15th Street, N.W.
Washington, D.C. 20005
9.5. Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart hereof shall be deemed
to be an original instrument, but all such counterparts together shall
constitute but one agreement.
9.6. Governing Law. Except as may otherwise be required by
the laws of the United States, this Agreement shall be governed by and
construed in accordance with the laws of Virginia.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf and its corporate seal to be
hereunto affixed and attested by its officers thereunto duly authorized,
all as of the day and year first above written.
CRESTAR FINANCIAL CORPORATION
By
Name:
Title:
CRESTAR BANK
By
Name:
Title:
JEFFERSON SAVINGS AND LOAN
ASSOCIATION, F.A.
By
Name: Thomas W. Winfree
Title: President
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________________
All of the Directors of Jefferson affix their signatures hereto for the
purpose of agreeing to vote all their shares of Jefferson Common Stock
beneficially owned by them and with respect to which they have power to
vote in favor of the Merger and, subject to their fiduciary duties, to
cause the Merger to be recommended by the Board of Directors of
Jefferson to the shareholders of Jefferson in the proxy statement sent
to shareholders in connection with such shareholders' meeting.
EXHIBIT A
<PAGE>
PLAN OF MERGER
OF
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
INTO
CRESTAR BANK
Section 1. Jefferson Savings and Loan Association, F.A.
("Jefferson ") shall, upon the time that Articles of Merger are made
effective by the State Corporation Commission of Virginia (the
"Effective Time of the Merger"), be merged (the "Merger") into Crestar
Bank, which shall be the "Surviving Bank".
Section 2. Conversion of Stock. At the Effective Time of the
Merger:
(i) Each share of Crestar Bank Common Stock outstanding
immediately prior to the Effective Time of the Merger shall
continue unchanged as an outstanding share of Common stock of the
Surviving Bank.
(ii) Subject to Section 4, each share of Jefferson Common
Stock which is issued and outstanding immediately prior to the
Effective Time of the Merger (other than shares held by Crestar
Financial Corporation ("Crestar") of record and shares to be
exchanged for cash) and which, under the terms of Section 3 is to
be converted into Crestar Common Stock, shall be converted into the
number of shares of Crestar Common Stock determined by dividing
$17.00 per share of Jefferson Common Stock (the "Price Per Share")
by the average closing price of Crestar Common Stock as reported on
the New York Stock Exchange for each of the 10 trading days ending
on the 10th day prior to the day of the Effective Time of the
Merger (the "Average Closing Price"). The result of the quotient
determined by dividing the Price Per Share by the Average Closing
Price and rounded to the nearest thousandths decimal point is
hereinafter called the "Exchange Ratio".
(iii) Subject to Section 4, each share of Jefferson Common
Stock outstanding immediately prior to the Effective Time of the
Merger which, under the terms of Section 3, is to be converted into
the right to receive cash, shall be converted into the right to
receive the Price Per Share in cash (subject to all applicable
withholding taxes).
(iv) At the Effective Time of the Merger, Jefferson's
transfer books shall be closed and no further transfer of Jefferson
Common Stock shall be permitted.
(v) Each holder of outstanding options to acquire shares of
Jefferson Common Stock ("Jefferson Options") shall elect, by giving
notice to Jefferson prior to the Closing Date, either to (a) allow
the Jefferson Options to terminate at the Effective Time of the
Merger and promptly following the Effective Time of the Merger
receive a cash payment (subject to all applicable withholding
taxes) equal to the excess of (i) the aggregate Price Per Share of
the Jefferson Common Stock represented by his Jefferson Options
less (ii) the aggregate exercise price of such Jefferson Options,
(b) exercise the Jefferson Options for Jefferson Common Stock prior
to the Closing Date and convert such Common Stock into Crestar
Common Stock or elect to receive cash as provided in Section 2.(ii)
hereof, or (c) have the Jefferson Options assumed by Crestar.
Section 3. Manner of Conversion. The manner in which each
outstanding share of Jefferson Common Stock shall be converted into
Crestar Common Stock or cash, as specified in Section 2 hereof, after
the Effective Time of the Merger, shall be as follows:
(i) All shares for which cash elections shall have been
made and for which certificates representing such shares shall have
been delivered to Jefferson subject to the terms of the Agreement
(as hereinafter defined) at or prior to the meeting of Jefferson
shareholders at which the Merger is considered, shall be converted
into the right to receive the Price Per Share in cash. If the
Merger is approved by Jefferson's shareholders, a shareholder's
election to receive the Price Per Share in cash shall be
irrevocable. Pursuant to the terms of the Agreement, Jefferson
shall retain certificates for shares submitted for cash purchase
until either (i) termination of the Agreement (as hereinafter
defined), upon which Crestar Bank shall return such certificates,
or (ii) the Effective Time of the Merger, when Crestar Bank (which
shall act as exchange agent) shall exchange such certificates for
cash, at the Price Per Share, subject to Section 4. Certificates
for shares of Jefferson Common Stock shall be submitted in exchange
for cash accompanied by a Letter of Transmittal (to be promptly
furnished by Crestar Bank, as exchange agent, to Jefferson
shareholders of record as of the Effective Time of the Merger).
(ii) Each share of Jefferson Common Stock, other than shares
held of record by Crestar and shares for which a cash election has
been made (and are not exchanged for cash because of Section 4),
shall be exchanged for shares of Crestar Common Stock as determined
by the Exchange Ratio.
(iii) No fractional shares of Crestar Common Stock shall be
issued, but instead the value of fractional shares shall be paid in
cash (subject to all applicable withholding taxes), for which
purpose the Average Closing Price shall be employed.
(iv) Certificates for shares of Jefferson Common Stock shall
be submitted in exchange for Crestar Common Stock and/or cash
accompanied by a Letter of Transmittal (to be promptly furnished by
Crestar Bank to Jefferson 's shareholders of record as of the
Effective Time of the Merger). Until so surrendered, each
outstanding certificate which, prior to the Effective Time of the
Merger, represented Jefferson Common Stock, shall be deemed to
evidence only the right to receive (a) shares of Crestar Common
Stock as determined by the Exchange Ratio, or (b) in the case of
shares for which cash elections shall have been made, the Price Per
Share in cash (subject to all applicable withholding taxes)
multiplied by the number of shares evidenced by the certificates,
without interest. Until such outstanding shares formerly
representing Jefferson Common Stock are so surrendered, no dividend
payable to holders of record of Crestar Common Stock as of any date
subsequent to the Effective Time of the Merger shall be paid to the
holder of such outstanding certificates in respect thereof. Upon
such surrender, dividends accrued or declared on Crestar Common
Stock shall be paid in accordance with Section 2.2 of the Agreement
and Plan of Reorganization dated as of September 1, 1994 (the
"Agreement") among Crestar, Crestar Bank and Jefferson .
Section 4. Proration of Shares Purchased with Cash. The number of
shares of Jefferson Common Stock to be exchanged for cash cannot exceed
40% of the outstanding shares of Jefferson Common Stock immediately
prior to the Effective Time of the Merger. If shareholders of Jefferson
elect to exchange for cash more than this percentage of Jefferson Common
Stock, Crestar shall purchase all shares submitted by holders of 100 or
fewer shares (if such holder has submitted all his shares for cash
exchange) and then purchase shares submitted by other holders pro rata
so as to require Crestar to pay cash for no more than 40% of the shares
of Jefferson Common Stock. A shareholder submitting shares for cash
purchase all of whose shares are not exchanged for cash because of the
proration provisions of this Section 4 shall receive shares of Crestar
Common Stock at the Exchange Ratio for all shares of Jefferson Common
Stock not exchanged for cash.
Section 5. Articles of Incorporation, Bylaws and Directors of the
Surviving Bank. At the Effective Time of the Merger, there shall be no
change caused by the Merger in the Articles of Incorporation (except any
change caused by the filing of Articles of Merger relating to the
Merger), By-laws, or Board of Directors of the Surviving Bank.
Section 6. Conditions to Merger. Consummation of the Merger is
subject to the following conditions:
(i) The approving vote of the holders of more than two-
thirds of the outstanding shares of Jefferson Common Stock entitled
to vote.
(ii) The approval of the Merger by the Board of Governors of
the Federal Reserve System, the Office of Thrift Supervision and
the State Corporation Commission of Virginia.
(iii) The satisfaction of the conditions or the waiver of
such conditions by the party for whose benefit they were imposed,
as contained in the Agreement.
Section 7. Effect of the Merger. The Merger, shall have the
effect provided by Section 6.1-44 and Section 13.1-721 of the Code of
Virginia.
Section 8. Amendment. Pursuant to Section 13.1-718(I) of the
Virginia Stock Corporation Act, the Board of Directors of Crestar Bank
(with Jefferson's consent) reserves the right to amend this Plan of
Merger at any time prior to issuance of the certificate of merger by the
State Corporation Commission of Virginia, provided, however, that any
such amendment made subsequent to the submission of this Plan of Merger
to the shareholders of Jefferson, may not: (i) alter or change the
amount or kind of shares, securities, cash, property or rights to be
received in exchange for or in conversion of all or any of the shares of
Jefferson Common Stock; (ii) alter or change any of the terms and
conditions of this Plan of Merger if such alteration or change would
adversely affect the shares of Jefferson Common Stock; or (iii) alter or
change any term of the certificate of incorporation of Jefferson (except
as provided herein).
<PAGE>
Annex II
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of September 1, 1994 (the
"Agreement"), by and between Jefferson Savings and Loan Association,
F.A., a federal savings association ("Issuer"), and Crestar Financial
Corporation, a Virginia corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan
of Reorganization dated as of September 1, 1994 (the "Plan"), providing
for, among other things, the merger of Issuer with and into Crestar
Bank, a wholly-owned subsidiary of Grantee and Virginia banking
corporation, with Crestar Bank as the surviving corporation; and
WHEREAS, as a condition and inducement to Grantee's execution of
the Plan, Grantee has required that Issuer agree, and Issuer has agreed,
to grant Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set
forth herein and in the Plan, and intending to be legally bound hereby,
Issuer and Grantee agree as follows:
1. Defined Terms. Capitalized terms which are used but not
defined herein shall have the meanings ascribed to such terms in the
Plan.
2. Grant of Option. Subject to the terms and conditions set
forth herein, Issuer hereby grants to Grantee an irrevocable option (the
"Option") to purchase up to 260,864 shares (as adjusted as set forth
herein) (the "Option Shares", which shall include the Option Shares
before and after any transfer of such Option Shares) of Common Stock,
$3.00 par value ("Issuer Common Stock"), of Issuer at a purchase price
of $15.00 per Option Share (the "Purchase Price").
3. Exercise of Option.
(a) Provided that Grantee shall not be in material breach
of the agreements or covenants contained in this Agreement or in the
Plan, and no preliminary or permanent injunction or other order against
delivery of shares covered by the Option issued by any court of
competent jurisdiction in the United States shall be in effect, Grantee
may exercise the Option, in whole or in part, at any time and from time
to time following the occurrence of a Purchase Event; provided, that the
Option shall terminate and be of no further force and effect upon the
earliest to occur of (A) the Effective Time of the Merger (as defined in
Section 6.3 of the Plan) of Issuer into Crestar Bank, (B) termination of
the Plan in accordance with the terms thereof prior to the occurrence of
a Purchase Event or a Preliminary Purchase Event (other than a
termination of the Plan by Grantee due to a breach by Issuer of a
covenant or agreement contained in the Plan, as the case may be pursuant
to Section 7.1(c)(1) of the Plan (a "Default Termination")), (C) 12
months after the termination of the Plan by Grantee pursuant to a
Default Termination (provided, however, that if within 12 months after
such a termination of the Plan, a Purchase Event or Preliminary Purchase
Event shall occur, then notwithstanding anything to the contrary
contained herein this option shall terminate 12 months after the first
occurrence of such an event), and (D) 12 months after termination of the
Plan (other than pursuant to a Default Termination) following the
occurrence of a Purchase Event or a Preliminary Purchase Event; and
provided, further, that any purchase of shares upon exercise of the
Option shall be subject to compliance with applicable law, including,
without limitation, the Bank Holding Company Act of 1956, as amended
(the "BHC Act").
(b) As used herein, a "Purchase Event" means any of the
following events:
(i) Without Grantee's prior written consent, Issuer
shall have authorized, recommended or publicly-proposed, or
publicly announced an intention to authorize, recommend or propose,
or entered into an agreement with any person (other than Grantee or
any subsidiary of Grantee) to effect an, Acquisition Transaction
(as defined below). As used herein, the term Acquisition
Transaction shall mean (A) a merger, consolidation or similar
transaction involving Issuer or any of its subsidiaries (other than
transactions solely between Issuer's subsidiaries), (B) the
disposition, by sale, lease, exchange or otherwise, of assets of
Issuer or any of its subsidiaries representing in either case 25%
or more of the consolidated assets of Issuer and its subsidiaries,
or (C) the issuance, sale or other disposition of (including by way
of merger, consolidation, share exchange or any similar
transaction) securities representing 25% or more of the voting
power of Issuer or any of its subsidiaries (any of the foregoing an
"Acquisition Transaction"); or
(ii) any person (other than Grantee or any
subsidiary of Grantee) shall have acquired beneficial ownership (as
such term is defined in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "1934 Act")) of or the right
to acquire beneficial ownership of, or any "group" (as such term is
defined under the 1934 Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership
of, 25% or more of the then outstanding shares of Issuer Common
Stock.
(c) As used herein, a "Preliminary Purchase Event" means
any of the following events:
(i) any person (other than Grantee or any
subsidiary of Grantee) shall have commenced (as such term is
defined in Rule 14d-2 under the 1934 Act) or shall have filed a
registration statement under the Securities Act of 1933, as amended
(the "1933 Act"), with respect to, a tender offer or exchange offer
to purchase any shares of Issuer Common Stock such that, upon
consummation of such offer, such person would own or control 10% or
more of the then outstanding shares of Issuer Common Stock (such an
offer being referred to herein as a "Tender Offer" or an "Exchange
Offer", respectively); or
(ii) the holders of Issuer Common Stock shall not
have approved the Plan at the meeting of such stockholders held for
the purpose of voting on the Plan, such meeting shall not have been
held or shall have been canceled prior to termination of the Plan
or Issuer's Board of Directors shall have withdrawn or modified in
a manner adverse to Grantee the recommendation of Issuer's Board of
Directors with respect to the Plan, in each case after it shall
have been publicly announced that any person (other than Grantee or
any subsidiary of Grantee) shall have (A) made, or disclosed an
intention to make, a proposal to engage in an Acquisition
Transaction, (B) commenced a Tender Offer or filed a registration
statement under the 1933 Act with respect to an Exchange Offer, or
(C) filed an application (or given a notice), whether in draft or
final form, under the BHC Act, the Bank Merger Act or the Change in
Bank Control Act of 1978, for approval to engage in an Acquisition
Transaction.
As used in this Agreement, "person" shall have the meaning
specified in Sections 3(a)(9) and 13(d)(3) of the 1934 Act.
(d) In the event Grantee 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) the total number of
Option Shares it intends to purchase pursuant to such exercise, and (ii)
a place and date not earlier than three business days nor later than 15
business days from the Notice Date for the closing (the "Closing") of
such purchase (the "Closing Date"). If prior notification to or
approval of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), the Office of Thrift Supervision (the "OTS")
or any other regulatory authority is required in connection with such
purchase, Issuer shall cooperate with Grantee in the filing of the
required notice of application for approval and the obtaining of such
approval and the Closing shall occur immediately following such
regulatory approvals (and any mandatory waiting periods).
4. Payment and Delivery of Certificates.
(a) On each Closing Date, Grantee shall (i) pay to Issuer,
in immediately available funds by wire transfer to a bank account
designated by Issuer, an amount equal to the Purchase Price multiplied
by the number of Option Shares to be purchased on such Closing Date, and
(ii) present and surrender this Agreement to Issuer at the address of
Issuer specified in Section 11(f) hereof.
(b) At each Closing, simultaneously with the delivery of
immediately available funds and surrender of this Agreement as provided
in Section 4(a), (i) Issuer shall deliver to Grantee (A) a certificate
or certificates representing the Option Shares to be purchased at such
Closing, which Option Shares shall be free and clear of all liens,
claims, charges and encumbrances of any kind whatsoever and subject to
no preemptive rights, and (B) if the Option is exercised in part only,
an executed new agreement with the same terms as this Agreement
evidencing the right to purchase the balance of the shares of Issuer
Common Stock purchasable hereunder, and (ii) Grantee shall deliver to
Issuer a letter agreeing that Grantee shall not offer to sell or
otherwise dispose of such Option Shares in violation of applicable
federal and state law or of the provisions of this Agreement.
(c) In addition to any other legend that is required by
applicable law, certificates for the Option Shares delivered at each
Closing shall be endorsed with a restrictive legend which shall read
substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF SEPTEMBER
1, 1994. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF
WITHOUT CHARGE UPON RECEIPT BY ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the above legend shall be removed
by delivery of substitute certificate(s) without such legend 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 reasonably satisfactory to Issuer and its counsel,
to the effect that such legend is not required for purposes of the 1933
Act.
5. Representations and Warranties of Issuer. Issuer hereby
represents and warrants to Grantee as follows:
(a) Due Authorization. Issuer has all requisite corporate
power and authority to enter into this Agreement and, subject to any
approvals referred to herein, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Issuer.
This Agreement has been duly executed and delivered by Issuer. The
execution and delivery of this Agreement, the consummation of the
transactions contemplated hereby and compliance by Issuer with any of
the provisions hereof will not (i) conflict with or result in a breach
of any provision of its Charter or By-laws or a default (or give rise to
any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, bond, debenture, mortgage,
indenture, license, material agreement or other material instrument or
obligation to which Issuer is a party, by which it or any of its
properties or assets may be bound, or (ii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Issuer or
any of its properties or assets. No consent or approval by any
governmental authority, other than compliance with applicable federal
and state securities and banking laws, and regulations of the Federal
Reserve Board and the OTS, is required of Issuer in connection with the
execution and delivery by Issuer of this Agreement or the consummation
by Issuer of the transactions contemplated hereby.
(b) Authorized Stock. Issuer has taken all necessary
corporate and other action to authorize and reserve and to permit it to
issue, and, at all times from the date hereof until the obligation to
deliver Issuer Common Stock upon the exercise of the Option terminates,
will have reserved for issuance, upon exercise of the Option, the number
of shares of Issuer Common Stock necessary for Grantee to exercise the
Option, and Issuer will take all necessary corporate action to authorize
and reserve for issuance all additional shares of Issuer Common Stock or
other securities which may be issued pursuant to Section 7 upon exercise
of the Option. The shares of Issuer Common Stock to be issued upon due
exercise of the Option, including all additional shares of Issuer Common
Stock or other securities which may be issuable pursuant to Section 7,
upon issuance pursuant hereto, shall be duly and validly issued, fully
paid and nonassessable, and shall be delivered free and clear of all
liens, claims, charges and encumbrances of any kind or nature
whatsoever, including any preemptive rights of any stockholder of
Issuer.
6. Representations and Warrants of Grantee. Grantee hereby
represents and warrants to Issuer that:
(a) Due Authorization. Grantee has all requisite corporate
power and authority to enter into this Agreement and, subject to any
approvals or consents referred to herein, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
(b) Purchase Not for Distribution. This Option is not
being, and any Option Shares or other securities acquired by Grantee
upon exercise of the Option will not be, acquired with a view to the
public distribution thereof and will not be transferred or otherwise
disposed of except in a transaction registered or exempt from
registration under the 1933 Act.
7. Adjustment upon Changes in Capitalization, etc.
(a) In the event of any change in Issuer Common Stock by
reason of a stock dividend, stock split, split-up, recapitalization,
combination, exchange of shares or similar transaction, the type and
number of shares or securities subject to the Option, and the Purchase
Price therefor, shall be adjusted appropriately, and proper provision
shall be made in the agreements governing such transaction so that
Grantee shall receive, upon exercise of the Option, the number and class
of shares or other securities or property that Grantee would have
received in respect of Issuer Common Stock if the Option had been
exercised immediately prior to such event, or the record date therefor,
as applicable. If any additional shares of Issuer Common Stock are
issued after the date of this Agreement (other than pursuant to an event
described in the first sentence of this Section 7(a)), the number of
shares of Issuer Common Stock subject to the Option shall he adjusted so
that, after such issuance, it, together with any shares of Issuer Common
Stock previously issued pursuant hereto, equals 19.9% of the number of
shares of Issuer Common Stock then issued and outstanding, without
giving effect to any shares subject to or issued pursuant to the Option.
(b) In the event that Issuer shall enter in an agreement:
(i) to consolidate with or merge into any person, other than Grantee or
one of its subsidiaries, and shall not be the continuing or surviving
corporation of such consolidation or merger, (ii) to permit any person,
other than Grantee or one of its subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Issuer
Common Stock shall be changed into or exchanged for stock or other
securities of Issuer or any other person or cash or any other property
or the outstanding shares of Issuer Common Stock immediately prior to
such merger shall after such merger represent less than 50% of the
outstanding shares and share equivalents 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 one of its subsidiaries, then, and in
each such case, the agreement governing such transaction shall make
proper provisions so that upon the consummation of any such transaction
and upon the terms and conditions set forth herein, Grantee shall
receive for each Option Share with respect to which the Option has not
been exercised an amount of consideration in the form of and equal to
the per share amount of consideration that would be received by the
holder of one share of Issuer Common Stock less the Purchase Price (and,
in the event of an election or similar arrangement with respect to the
type of consideration to be received by the holders of Issuer Common
Stock, subject to the foregoing, proper provision shall be made so that
the holder of the Option would have the same election or similar rights
as would the holder of the number of shares of Issuer Common Stock for
which the Option is then exercisable).
8. Registration Rights.
(a) Demand Registration Rights. Issuer shall, subject to
the conditions of subparagraph (c) below, if requested by Grantee, as
expeditiously as possible prepare and file a registration statement
under the 1933 Act if such registration is necessary in order to permit
the sale or other disposition of any or all shares of Issuer Common
Stock or other securities that have been acquired by or are issuable to
Grantee upon exercise of the Option in accordance with the intended
method of sale or other disposition stated by Grantee in such request,
including without limitation a "shelf" registration statement under Rule
415 under the 1933 Act or any successor provision, and Issuer shall use
its best efforts to qualify such shares or other securities for sale
under any applicable state securities laws.
(b) Additional Registration Rights. If Issuer at any time
after the exercise of the Option proposes to register any shares of
Issuer Common Stock under the 1933 Act in connection with an
underwritten public offering of such Issuer Common Stock, Issuer will
promptly give written notice to Grantee (and any permitted transferee)
of its intention to do so and, upon the written request of Grantee (or
any such permitted transferee of Grantee) given within 30 days after
receipt of any such notice (which request shall specify the number of
shares of Issuer Common Stock intended to be included in such
underwritten public offering by Grantee (or such permitted transferee)),
Issuer will cause all such shares, the holders of which shall have
requested participation in such registration, to be so registered and
included in such underwritten public offering; provided, however, that
Issuer may elect to not cause any such shares to be so registered (i) if
the underwriters in good faith object for valid business reasons, or
(ii) in the case of a registration solely to implement an employee
benefit plan or a registration filed on Form S-4; provided, further,
however, that such election pursuant to (i) may only be made one time.
If some but not all the shares of Issuer Common Stock, with respect to
which Issuer shall have received requests for registration pursuant to
this subparagraph (b), shall be excluded from such registration, Issuer
shall make appropriate allocation of shares to be registered among
Grantee and any other person (other than the Issuer) who or which is
permitted to register their shares of Issuer Common Stock in connection
with such registration pro rata in the proportion that the number of
shares requested to be registered by each such holder bears to the total
number of shares requested to be registered by all such holders then
desiring to have Issuer Common Stock registered for sale.
(c) Conditions to Required Registration. Issuer shall use
all reasonable efforts to cause each registration statement referred to
in subparagraph (a) above to become effective and to obtain all consents
or waivers of other parties which are required therefor and to keep such
registration statement effective; provided, however, that Issuer may
delay any registration of Option Shares required pursuant to
subparagraph (a) above for a period not exceeding 90 days provided
Issuer shall in good faith determine that any such registration would
adversely affect an offering or contemplated offering of other
securities by Issuer, and Issuer shall not be required to register
Option Shares under the 1933 Act pursuant to subparagraph (a) above:
(i) prior to the earliest of (A) termination of the
Plan, and (B) a Purchase Event or a Preliminary Purchase Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
(iv) within 90 days after the effective date of a
registration referred to in subparagraph (b) above pursuant to
which the holder or holders of the Option Shares concerned were
afforded the opportunity to register such shares under the 1933 Act
and such shares were registered as requested; and
(v) unless a request therefor is made to Issuer by
the holder or holders of at least 25% or more of the aggregate
number of Option Shares then outstanding.
In addition to the foregoing, Issuer shall not be required to
maintain the effectiveness of any registration statement after the
expiration of 120 days from the effective date of such registration
statement. Issuer shall use all reasonable efforts to make any filings,
and take all steps, under all applicable state securities laws to the
extent necessary to permit the sale or other disposition of the Option
Shares so registered in accordance with the intended method of
distribution for such shares, provided, however, that Issuer shall not
be required to consent to general jurisdiction or qualify to do business
in any state where it is not otherwise required to so consent to such
jurisdiction or to so qualify to do business.
(d) 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, accounting expenses and printing expenses incurred by it) in
connection with each registration pursuant to subparagraph (a) or (b)
above and all other qualifications, notifications or exemptions pursuant
to subparagraph (a) or (b) above. Underwriting discounts and
commissions relating to Option Shares, fees and disbursements of counsel
to the holders of Option Shares being registered and any other expenses
incurred by such holders in connection with any such registration shall
be borne by such holders.
(e) Indemnification. In connection with any registration
under subparagraph (a) or (b) above, Issuer hereby indemnifies the
holder of the Option Shares, and each underwriter thereof, including
each person, if any, who controls such holder or underwriter within the
meaning of Section 15 of the 1933 Act, against all expenses, losses,
claims, damages and liabilities caused by any untrue, or alleged untrue,
statement of a material fact 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 holder of the Option Shares, 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
subparagraph (e) 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 subparagraph
(e), such indemnified party shall notify the indemnifying party in
writing of the commencement of such action, but, except to the extent of
any actual prejudice to the indemnifying party, 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 subparagraph (e).
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 agrees
to pay the same, (ii) the indemnifying party fails to assume the defense
of such action with counsel reasonably 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 interest of the indemnified party, in which
case the indemnifying party shall be entitled to assume the defense of
such action notwithstanding its obligation to bear fees and expenses of
such counsel. No indemnifying party shall be liable for any settlement
entered into without its consent, which consent may not be unreasonably
withheld.
If the indemnification provided for in this subparagraph (e) 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 benefits received by Issuer, the
selling shareholders and the underwriters from the offering of the
securities and also the relative fault of Issuer, the selling
shareholders 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 the holders of
the Option Shares 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 1933 Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Any obligation by any holder to
indemnify shall be several and not joint with other holders.
In connection with any registration pursuant to subparagraph (a) or
(b) above, Issuer and each holder of any Option Shares (other than
Grantee) shall enter into an agreement containing the indemnification
provisions of this subparagraph (e).
(f) 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 holder thereof in accordance with and to the extent
permitted by any rule or regulation permitting non-registered sales of
securities promulgated by the SEC from time to time, including, without
limitation, Rule 144A under the 1933 Act. Issuer shall at its expense
provide the holder of any Option Shares with any information necessary
in connection with the completion and filing of any reports or forms
required to be filed by them under the 1933 Act or the 1934 Act, or
required pursuant to any state securities laws or the rules of any stock
exchange.
(g) Issue Taxes. Issuer will pay all stamp taxes in
connection with the issuance and the sale of the Option Shares and in
connection with the exercise of the Option, and will save Grantee
harmless, without limitation as to time, against any and all
liabilities, with respect to all such taxes.
9. Quotation; Listing. If Issuer Common Stock or any other
securities to be acquired upon exercise of the Option are then
authorized for quotation or trading or listing on The Nasdaq National
Market or any securities exchange, Issuer, upon the request of Grantee,
will promptly file an application, if required, to authorize for
quotation or trading or listing the shares of Issuer Common Stock or
other securities to be acquired upon exercise of the Option on The
Nasdaq National Market or such other securities exchange and will use
its best efforts to obtain approval, if required, of such quotation or
listing as soon as practicable.
10. Division of Option. Upon the occurrence of a Purchase Event
or a Preliminary Purchase Event, 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 in the aggregate
the same number of shares of Issuer Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any other
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.
11. Miscellaneous.
(a) Expenses. Except as otherwise provided in Section 8,
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.
(b) Waiver and Amendment. Any provision of this Agreement
may be waived at any time by the party that is entitled to the benefits
of such provision. This Agreement may not be modified, amended, altered
or supplemented except upon the execution and delivery of a written
agreement executed by the parties hereto.
(c) Entire Agreement: No Third-Party Beneficiary;
Severability. This Agreement, together with the Plan and the other
documents and instruments referred to herein and therein, between
Grantee and Issuer (i) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, between
the parties with respect to the subject matter hereof, and (ii) is not
intended to confer upon any person other than the parties hereto (other
than any transferees of the Option Shares or any permitted transferee of
this Agreement pursuant to Section 11(h)) any rights or remedies
hereunder. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or a federal or
state regulatory agency to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of 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 the Option does not permit Grantee to
acquire, or does not require Issuer to repurchase, the full number of
shares of Issuer Common Stock as provided in Section 3 (as adjusted
pursuant to Section 7), 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.
(d) Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the Commonwealth of Virginia
without regard to any applicable conflicts of law rules.
(e) Descriptive Heading. The descriptive headings
contained herein are for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
(f) Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, telecopied (with confirmation) or mailed by registered or
certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be
specified by like notice):
If to Issuer to: Jefferson Savings and Loan Association, F.A.
550 Broad Vie Avenue
Warrenton, Virginia 22186
Attention: Thomas W. Winfree
President
with a copy to: Elias, Matz, Ternan & Herrick
12th Floor, The Walker Building
734 15th Street, N.W.
Washington, D.C. 20005
Attention: Gerard L. Hawkins
If to Grantee to: Crestar Financial Corporation
919 East Main Street
Richmond, VA 23219
Attention: John C. Clark, III
Senior Vice President,
General Counsel and
Corporate Secretary
with a copy to: Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
Attention: Lathan M. Ewers, Jr.
(g) Counterparts. This Agreement and any amendments hereto
may be executed in two counterparts, each of which shall be considered
one and the same agreement and shall become effective when both
counterparts have been signed, it being understood that both parties
need not sign the same counterpart.
(h) Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder or under the Option shall be
assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other party, except
that Grantee may assign this Agreement to a wholly owned subsidiary of
Grantee and Grantee may assign its rights hereunder in whole or in part
after the occurrence of a Purchase Event. Subject to the preceding
sentence, this Agreement shall be binding upon, inure to the benefit and
be enforceable by the parties and their respective successors and
assigns.
(i) Further Assurances. In the event of any exercise of the
Option by Grantee, Issuer and 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.
(j) Specific Performance. The parties hereto agree that this
Agreement may be enforced by either party through specific performance,
injunctive relief and 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.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock
Option Agreement to be signed by their respective officers thereunto
duly authorized, all as of the day and year first written above.
JEFFERSON SAVINGS AND LOAN
ASSOCIATION, F.A.
By:
Name: Thomas W. Winfree
Title: President
CRESTAR FINANCIAL CORPORATION
By:
Name:
Title:
<PAGE>
Annex III
SCOTT & STRINGFELLOW, INC.
909 East Main Street
Richmond, VA 23219
TEL: (804) 643-1911
FAX: (804) 343-7184
October 4, 1994
Board of Directors
Jefferson Savings & Loan Association, F.A.
550 Broadview Avenue
Warrenton, VA 22186
Gentlemen:
You have asked us to render our opinion relating to the fairness, from a
financial point of view, to the shareholders of Jefferson Savings & Loan
Association, F.A. ("Jefferson") of the terms of an Agreement and Plan of
Reorganization among Crestar Financial Corporation ("Crestar"), Crestar Bank,
and Jefferson dated September 1, 1994 and a related Plan of Merger
(collectively, the "Merger Agreement"). The Merger Agreement provides for the
merger of Jefferson with and into Crestar (the "Merger") and further provides
that each share of Common Stock of Jefferson which is issued and outstanding
immediately prior to the Effective Time of the Merger (as defined in Article VI
of the Merger Agreement) shall be exchanged for cash of $17.00 per share or be
converted in a tax-free exchange into the number of shares of Crestar Common
Stock determined by dividing $17.00 per share ("Price Per Share") of Jefferson
Common Stock by the average closing price of Crestar Common Stock as reported on
the New York Stock Exchange for each of the 10 trading days ending on the 10th
day prior to the day of the Effective Time of the Merger. The number of shares
that may be exchanged for cash shall not exceed 40% of the outstanding shares of
Jefferson Common Stock immediately prior to the Effective Time of the Merger.
Additionally, each holder of outstanding Jefferson options shall elect either
to: a) allow the Jefferson options to terminate at the Effective Time of the
Merger and promptly receive a cash payment equal to the excess of the Price Per
Share over the exercise price per share of the Jefferson Options; b) exercise
the Jefferson Options for Jefferson Common Stock prior to the closing date and
convert such Common Stock into Crestar Common Stock or elect to receive cash;
or, c) have the Jefferson Options assumed by Crestar.
In developing our opinion, we have, among other things, reviewed and analyzed:
(i) the Merger Agreement; (ii) the Registration Statement and Proxy
Statement/Prospectus dated October 4, 1994; (iii) Jefferson's audited financial
statements for the four years ended September 30, 1993; (iv) Jefferson's
unaudited financial statements for the quarter and nine months ended June 30,
1993 and 1994, and other internal information relating to Jefferson prepared by
Jefferson's management; (v) information regarding the trading market for the
common stocks of Jefferson and Crestar and the price ranges within which the
respective stocks have traded; (vi) the relationship of prices paid to relevant
financial data such as net worth, assets, deposits, and earnings in certain
thrift and thrift holding company mergers and acquisitions in Virginia in recent
years; (vii) Crestar's annual reports to shareholders and its audited financial
statements for the four years ended December 31, 1993; and (viii) Crestar's
unaudited financial statements for the quarter and six months ended June 30,
1993 and 1994, and other internal information relating to Crestar prepared by
Crestar's management. We have discussed with members of management of Jefferson
and Crestar the background to the Merger, reasons and basis for the Merger and
the business and future prospects of Jefferson and Crestar individually and as a
combined entity. Finally, we have conducted such other studies, analyses and
investigations, particularly of the banking and thrift industry, and considered
such other information as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the information furnished to us by or
on behalf of Jefferson and Crestar. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of Jefferson or Crestar. We have taken into account our assessment of
general economic, financial market and industry conditions as they exist and can
be evaluated at the date hereof, as well as our experience in business valuation
in general.
In relying on our opinion, I believe you will find our experience in this area
to be highly regarded. The U.S. Banker recently named S&S as one of the top
merger and acquisition advisors to community banks and thrifts; the leading
advisor in our region. Additionally, S&S is the only regional investment
banking and brokerage firm which has a Financial Institutions Group one hundred
percent dedicated to serving the community banks and thrifts in our region.
Furthermore, S&S is a public company with over $24 million of equity capital.
Accordingly, we believe S&S is uniquely and highly qualified to render this
opinion to the Board of Jefferson.
On the basis of our analyses and review and in reliance on the accuracy and
completeness of the information furnished to us and subject to the conditions
noted above, it is our opinion that, as of the date hereof the terms of the
Merger Agreement are fair from a financial point of view to the shareholders of
Jefferson Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: /s/ G. Jacob Savage, III
G. Jacob Savage, III
Vice President
Corporate Finance Department
<PAGE>
Annex IV
Department of the Treasury
Office of Thrift Supervision
Washington, D.C.
FORM 10-KSB
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
OR
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
For the fiscal year ended: Office of Thrift Supervision
September 30, 1993 Docket Number: 6498
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
(Exact name of registrant as specified in its charter)
United States 54-0680877
(State or other jurisdiction (I.R.S. Employer or
of incorporation or organization) Identification Number)
550 Broadview Avenue
Warrenton, Virginia 22186
(Address of principal executive office) (Zip Code)
(703) 347-3531
(Registrant's telephone number, including area code)
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 $3.00 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
Transitional Small Business Disclosure Format (check one): YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B 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-KSB or any amendment to this Form 10-KSB. X
Issuer's revenues for its most recent fiscal year. $24,258,000
As of December 13, 1993, the aggregate value of the 885,074 shares of
Common Stock of the Registrant issued and outstanding on such date,
excluding shares held by all directors and officers of the Registrant as a
group, was approximately $7.1 million. This figure is based on the sales
price of $8.00 per share of the Registrant's Common Stock on December 13,
1993.
The number of shares of Common Stock outstanding as of December 13,
1993 was 1,310,876.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-KSB into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year
ended September 30, 1993 are incorporated into Part II, Items 5-7 of
this Form 10-KSB.
(2) Portions of the definitive proxy statement for the 1993
AnnualMeeting of Stockholders are incorporated into Part III, Items 9-12
of this Form 10-KSB.
PART I
Item 1. Business
General. Jefferson Savings and Loan Association, F.A. ("Jefferson" or
the "Association") is a federally-chartered stock savings and loan
association headquartered in Warrenton, Virginia with six branch offices in
Warrenton, Luray, Leesburg, Culpeper and Charlottesville, Virginia. The
deposit accounts of Jefferson are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit
Insurance Corporation ("FDIC"). Jefferson was incorporated in Virginia in
October, 1959, and opened for business in October, 1960 as Fauquier Savings
and Loan Association. The Association acquired and merged several other
financial institutions into it over the years including Jefferson Savings
and Loan Association of Culpeper in 1972, Home Savings and Loan Association
of Roanoke in 1975, and Charlottesville Savings and Loan Association in
1982. The Association converted to a federal stock charter in 1990 which
was approved by stockholders at the 1991 Annual Meeting. Currently,
Jefferson is the largest financial institution headquartered in Fauquier
County, Virginia. At September 30, 1993, Jefferson had total assets of
$284.3 million, deposits of $241.5 million, and stockholders' equity of
$12.7 million or 4.46% of total assets at such date. The Association's
executive offices are located at 550 Broadview Avenue, Warrenton, Virginia
and its telephone number is (703) 347-3531.
Jefferson's principal business currently consists of attracting
deposits from the general public and using such funds, together with
borrowings, to originate primarily residential real estate loans secured by
first liens on residential real estate located in its market area and to
invest in mortgage-backed securities. Jefferson also originates consumer
loans, residential construction loans and non-residential loans (commercial
real estate loans). In addition to the origination of loans and the
investment in mortgage-backed securities, Jefferson invests its funds in
the securities of the U.S. Government and its agencies and other
investments permitted by law. Jefferson also operates four wholly-owned
subsidiaries. Two of such subsidiaries, Jefferson Insurance Services, Inc.
and Jefferson Investment Service Corp. are involved to a limited extent in
insurance brokerage or acting as trustee for deeds of trust securing loans
originated by the Association. The other two subsidiaries, Jefferson
Funding Corporation ("JFC") and Jefferson Funding Corporation II ("JFC II")
are finance subsidiaries which issued notes payable and mortgage collateral
bonds, respectively, as sources of funds in 1985 and 1988, respectively.
See "Sources of Funds - Borrowings."
Jefferson's primary sources of income are derived from interest earned
on its loan and investment securities portfolios and, to a lesser extent,
fees charged for lending activities and for financial services. Its major
expense categories are interest paid on deposits and borrowings and
operating expenses.
Deposits with Jefferson are insured to the maximum extent provided by
law through the SAIF. The Association is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and
the FDIC. Jefferson is a member of the Federal Home Loan Bank of Atlanta
("FHLB of Atlanta" or "FHLB"), which is one of the 12 regional banks
comprising the Federal Home Loan Bank System ("FHLB System"). Jefferson is
further subject to regulations of the Board of Governors of the Federal
Reserve System governing reserves required to be maintained against
deposits and certain other matters.
Market Area
The Association considers its primary market area to be the northern
and central Virginia communities extending from Charlottesville west to
Staunton and north to Washington, D.C. and the Maryland state line. The
Association maintains its headquarters and one branch in Warrenton with
additional branch offices in Leesburg, Culpeper, Luray and Charlottesville.
Its branches are located in communities that can be characterized as either
suburban and/or rural.
Management believes that the Association's franchise lies within some
of the best economic and geographic areas in the Commonwealth of Virginia.
Per capita incomes and real estate values have historically been
significantly above average compared with the rest of the state and the
nation. The proximity to the Washington, D.C. area affords a strong
potential for continued economic benefit from the major positive influence
of the U.S. Government and the ancillary businesses and services which
support our national government.
However, excess commercial office and housing inventory, coupled with
a regional economic decline, have adversely affected the Mid-Atlantic real
estate market. The real estate market in this and other parts of the
country has been weak since 1991 and it may take substantial time for the
market to absorb the existing real estate inventory. Recovery of the Mid-
Atlantic real estate market also may be adversely affected in the future by
the disposition of a substantial amount of real estate by financially
troubled financial institutions, as well as by the Resolution Trust
Corporation ("RTC").
Certain Ratios
The following table sets forth certain financial ratios of the
Association for the periods indicated. Averages are based on year-end
balances.
Year Ended September 30,
1991 1992 1991
Return on assets (net income
(loss) divided by average total
assets) .29% (.31)% .19%
Return on equity (net income
(loss) divided by average
equity) 6.93% (10.65)% 10.33%
Equity to assets ratio (average
equity divided by average total
assets) 4.17% 2.92% 1.81%
Dividend payout ratio (dividends
declared per share divided by
net income per share) N/A N/A N/A
Mortgage-Backed Securities
Jefferson purchases mortgage-backed securities ("mortgage-backed
securities" or "MBSs") and/or exchanges residential real estate mortgage
loans for such securities from time to time. At September 30, 1993,
Jefferson's investment of $51.2 million MBSs consisted of $36.1 million of
Federal Home Loan Mortgage Corporation ("FHLMC") participation certificates
("PCs"), $12.2 million in Federal National Mortgage Association ("FNMA")
REMIC MBSs, and $2.9 million in FNMA certificates. Fixed-rate MBSs totaled
$28.7 million and variable-rate MBSs totaled $22.5 million at September 30,
1993. At September 30, 1993, MBSs available-for-sale totalled $8.9
million, and MBSs held-to-maturity totalled $42.3 million.
The following table sets forth the carrying value and market
value of the Association's MBS's at the dates indicated.
At September 30,
1993 1992 1991
(Dollars in Thousands)
Carrying value $51,173 $50,589 $79,491
Gross unrealized gains
(held-to-maturity) 1,355 2,694 1,324
Gross unrealized loss
(held-to-maturity) (115) -- (294)
Market value $52,413 $5,283 $80,521
Of the MBS's with a carrying value of $51.2 million at September 30,
1993, $4.8 million are pledged to secure deposits by government agencies
and $25.4 million are pledged as collateral for other borrowings.
For further information on MBSs, see Note 3 in the Notes to
Consolidated Financial Statements in the Association's 1993 Annual Report
to Stockholders ("Annual Report").
Lending Activities
General. Although federal laws and regulations permit federally
chartered savings institutions, such as Jefferson, to originate and
purchase loans secured by real estate located throughout the United States,
substantially all of the Association's current lending is done within the
Commonwealth of Virginia, and in particular within the proximity of its
branch locations. Subject to the Association's loans-to-one borrower
limitation, the Association is permitted to invest without limitation in
residential mortgage loans and up to 400% of its capital in loans secured
by non-residential or commercial real estate. Jefferson may also invest in
secured and unsecured consumer loans in an amount not exceeding 35% of the
Association's total assets; however, such limit may be exceeded for certain
types of consumer loans, such as home equity loans secured by residential
real property. In addition, the Association may invest up to 10% of its
total assets in secured and unsecured loans for commercial, corporate,
business or agricultural purposes. The Association's lending activities
have been focused on residential real estate lending, both permanent and
construction, and, to a lesser extent, consumer lending, including home
equity loans. However, during fiscal 1994, the Association intends to
emphasize the origination of non-residential real estate loans. Although
the amount of such originations will depend on market conditions and other
factors although, the Association does not presently anticipate such
originations to exceed $15.0 million in fiscal 1994. Generally, individual
3
loans would be limited to $800,000 and would be secured by real property
located primarily in the Association's market area.
Loan Portfolio Composition. At September 30, 1993, Jefferson's net
loan portfolio, which is total loans (including MBS's amounting to $51.2
million) less loans in process, allowance for loan losses, unearned
discount and deferred fees, totaled $221.1 million ("net loan portfolio"),
representing approximately 77.8% of its total assets of $284.3 million at
that date. At September 30, 1993, Jefferson's total loan portfolio
(including MBS's) amounted to $226.0 million. The Association's total loan
portfolio at September 30, 1993 consisted primarily of one-to-four family
residential mortgage loans (including $51.2 million of MBSs), non-
residential and commercial loans and home equity loans. At September 30,
1993, $160.4 million or 72.5% and $32.4 million or 14.7% of the
Association's net loan portfolio consisted of one-to-four family
residential real estate loans (including $8.1 million of construction
loans) and non-residential and commercial loans, respectively. At such
date, the Association had $24.7 million or 11.1% of its net loan portfolio
invested in consumer loans, which included, among other things, loans
secured by real estate (including home equity loans), loans secured by
deposit accounts, vehicle loans and unsecured loans (including lines of
credit).
The following table sets forth the composition of the Association's
loan portfolio by type of security and type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1993 1992 1991 1990 1989
Amount % Amount % Amount % Amount % Amount %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans by Type of Security:
Mortgage loans:
One-to four-family $160,389 72.5% $167,481 70.7% $213,938 74.2% $242,764 77.2% $268,663 81.5%
Multi-family 8,457 3.8 8,165 3.4 9,129 3.2 5,988 1.9 6,050 1.8
Non-residential and
commercial 32,442 14.7 37,176 15.7 39,676 13.8 45,787 14.6 47,150 14.3
Total mortgage loans 201,288 91.0 212,822 89.8 262,743 91.2 294,539 93.7 321,863 97.6
Consumer loans:
Deposit 1,014 0.4 1,099 0.5 1,150 0.4 931 0.3 875 0.3
Home equity 21,102 9.5 23,616 10.0 23,563 8.2 17,385 5.5 7,476 2.3
Other 2,599 1.2 3,878 1.6 5,869 2.0 8,052 2.6 6,894 2.1
4
TOTAL LOANS 226,003 102.1 241,415 101.9 293,325 101.8 320,907 102.1 337,108 102.3
Less: Loans in process (3,118) (1.4) (3,193) -1.4 (3,665) -1.3 (4,848) -1.5 (5,357) -1.6
Deferred fees (124) -- (57) -- (114) -.- (358) -0.1 (1,054) -0.3
Unearned discount (21) -- (103) -- (279) -0.1 (580) -0.2 (783) -0.2
Allowance for losses (1,602) (0.7) (1,288) -0.5 (1,135) -0.4 (873) -0.3 (798) -0.2
NET LOANS $221,138 100.0% $236,774 100.0% $288,132 100.0% $314,248 100.0% $329,116 100.0%
Loans by Type of Loan:
Mortgage loans:
Fixed-rate $ 34,579 15.6% $ 46,747 19.7% $ 41,865 14.5% $ 46,549 14.8% $ 88,050 26.8%
Adjustable-rate 107,416 48.6 105,523 44.6 127,221 44.2 151,684 48.2 136,528 41.3
Construction loans 8,120 3.7 9,963 4.2 14,166 4.9 16,906 5.4 13,691 4.2
Mortgage-backed securities:
Fixed-rate 28,722 13.0 38,907 16.4 64,032 22.2 67,419 21.5 83,594 25.4
Adjustable-rate 22,451 10.1 11,682 4.9 15,459 5.4 11,981 3.8 - -
Consumer loans:
Home equity 21,102 9.5 23,616 10.0 23,563 8.2 17,385 5.5 7,476 2.3
Deposit and other 3,613 1.6 4,977 2.1 7,019 2.4 8,983 2.9 7,769 2.3
TOTAL LOANS 226,003 102.1 241,415 101.9 293,325 101.8 320,907 102.1 337,108 102.3
Less: Loans in process (3,118) (1.4) (3,193) -1.4 (3,665) -1.3 (4,848) -1.5 (5,357) -1.6
Deferred fees (124) -- (57) -- (114) -.- (358) -0.1 (1,054) -0.3
Unearned discount (21) -- (103) -- (279) -0.1 (580) -0.2 (783) -0.2
Allowance for losses (1,602) (0.7) (1,288) -0.5 (1,135) -0.4 (873) -0.3 (798) -0.2
NET LOANS $221,138 100.0% $236,774 100.0% $288,132 100.0% $314,248 100.0% $329,116 100.0%
</TABLE>
5
Contractual Repayments. The following table sets forth the
contractual principal repayments of the total loan portfolio of the
Association as of September 30, 1993 by categories of loans. Adjustable
and floating-rate loans are included in the period in which such loans are
contractually due.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
Principal In Year(s) Ending September30,
Balance 1997- 1999- 2004 and
September 30, 1994 1995 1996 1998 2003 Thereafter
1993 (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate $141,995 $ 2,920 $1,608 $2,495 $20,964 $18,776 $95,232
mortgage loans
Real estate 8,120 8,120 -- -- -- -- --
construction
loans
Mortgage-backed 51,173 -- -- -- -- -- 51,173
securities
Consumer 24,715 22,975 530 482 728 -- --
loans(1)
Total(2) 226,003 $34,015 $2,138 $2,977 $21,692 $18,776 $146,405
</TABLE>
___________________
(1) Loans secured by deposit accounts and home equity loans aggregating
$22.1 million at September 30, 1993 are assumed to contractually mature in
1994.
(2) Of the $192.0 million of principal repayments contractually due on or
after September 30, 1994, $63.9 million have fixed-rates of interest and
$128.1 million have adjustable or floating-rates of interest.
Contractual principal loan repayments do not necessarily reflect the
actual term of the Association's loan portfolio. The average life of loans
is substantially less than their contractual terms because of loan payoffs
and prepayments and because of enforcement of the due-on-sale clause, which
gives the Association the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage. The average life of mortgage loans tends
to increase, however, when market mortgage loan rates substantially exceed
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans substantially exceed market mortgage loan rates.
Originations, Purchases, Repayments and Sales of Loans. The
Association has general authority to originate and purchase loans secured
by real estate located throughout the United States. However, consistent
with its emphasis on being a community-oriented financial institution, the
Association generally concentrates its lending activities in its primary
market area. The Association generally has not originated loans secured by
real estate located outside the Commonwealth of Virginia although it has,
6
to a limited extent, purchased whole loans or participations therein
secured by property located outside the Commonwealth of Virginia.
Residential real estate loans typically are originated through
salaried loan officers, or are attributable to depositors, walk-in
customers, advertising and referrals from real estate brokers and
developers. Consumer loan originations are attributable largely to
depositors, walk-in customers and advertising. Construction and non-
residential loan originations are typically attributable to referrals from
builders and developers. All loan applications are evaluated by the
Association's staff to ensure compliance with the Association's
underwriting standards. See "- Loan Underwriting Policies."
The Association did not purchase any whole loans or participations
therein in fiscal 1993, 1992 or 1991.
In recent years, the Association has sold participation interests in
loans to institutional investors, primarily the FNMA. As a result of
competitive pressures, the interest rate environment and customer
preference in the Association's primary market area for fixed-rate mortgage
loans, the Association has continued to originate long-term, fixed-rate
residential mortgage loans. Substantially all of such loans are originated
under terms and conditions which will permit their sale in the secondary
mortgage market in order to (i) reduce the proportion of the Association's
loan portfolio comprised of fixed-rate assets, (ii) replenish funds for
continued residential lending activity and (iii) generate noninterest
income. The Association is a qualified servicer for the FHLMC and the
FNMA. Jefferson has participated in various programs of FHLMC and FNMA
and, at September 30, 1993, serviced $70.9 million of mortgage loans for
FHLMC and FNMA, and $7.1 million of mortgage loans for other investors.
The Association periodically packages portions of its adjustable-rate
and fixed-rate residential mortgage loan portfolio, exchanging it for FHLMC
PCs. Jefferson retains the servicing of the mortgage loans and pays a
negotiated management and guarantee fee to FHLMC. Jefferson exchanged $4.1
million of residential mortgage loans for FHLMC PCs during fiscal 1993.
The Association may conduct such exchanges in future periods with FHLMC or
FNMA in order to meet its goal of facilitating liquidity, creating
collateral for governmental deposits, and reducing its risk-based capital
requirement. Although assets such as FHLMC PCs and other MBS's can improve
the Association's liquidity by being saleable in the secondary market, such
assets have an interest rate risk similar to that of the underlying
mortgages collateralizing the MBSs. At September 30, 1993, the Association
owned $51.2 million of MBSs. Jefferson has primarily used the MBSs in its
reverse repurchase agreement transactions and as collateral for
governmental deposits and other borrowings. See "Sources of Funds -
Borrowings."
7
The following table sets forth the changes in the composition of
Jefferson's loan and MBS's portfolios (including loans held for sale)
during the periods indicated.
Year Ended September 30,
1993 1992 1991
(Dollars in Thousands)
Loans Receivable
Additions:
Loan originations:(1)
Residential (one-to four-family) $ 88,055 $ 83,771 $ 37,194
Residential (five or more) 613 -- --
Non-residential and commercial 476 -- 2,164
Land 1,973 1,343 499
Consumer 11,902 12,147 8,758
Total originations 103,019 97,261 48,615
Transfer from real estate owned 1,256 -- --
Changes in loans in process 75 472 1,183
Total additions 104,350 97,733 49,798
Reductions:
Loans sold 63,859 57,227 26,512
Principal repayments on loans 50,651 58,871 32,303
Transfer to mortgage-backed 4,055 -- 13,161
securities
Transfer to real estate owned 1,412 2,724 2,893
Amortization of deferred fees and 15 233 544
unearned discount
Changes in loan loss allowance 314 153 262
Other changes 264 981 330
Total reductions 120,570 120,189 76,005
Net decrease in loans receivable $(16,220) $(22,456) $(26,207)
Mortgage-backed securities
Additions:
Mortgage-backed securities purchased $ 22,661 $ -- $ 32,277
Transfer from loans receivable 4,055 -- 13,161
Net unrealized gain 161 -- --
Amortization of premiums and
discounts, net 71 82 49
Total additions 26,948 82 45,487
Reductions:
Mortgage-backed securities sold, net 8,267 15,869 37,298
Principal repayments on mortgage- 18,097 13,115 8,098
backed securities
Total reductions 26,364 28,984 45,396
Net increase (decrease) in mortgage- $ 584 $(28,902) $ 91
backed securities
_______________________
(1) The Association did not purchase any loans in fiscal 1993, 1992 or 1991.
8
Loan Underwriting Policies. The Association's lending activities are
subject to the Association's written, non-discriminatory underwriting
standards and to loan origination procedures prescribed by the
Association's Board of Directors and its management. Detailed loan
applications are obtained to determine the borrower's ability to repay, and
the more significant items on these applications are verified through the
use of credit reports, financial statements and confirmations. Property
valuations are performed by independent outside appraisers approved by the
Association's Board of Directors.
The Loan Committee consists of the President, Senior Vice Presidents
of Lending and Retail Banking, a Vice President for Loan Origination, and
one rotating member of the Board of Directors. The Loan Committee is
authorized to approve real estate loans up to $500,000, construction loans
up to $250,000, and other secured and unsecured loans up to $100,000. Any
loan in excess of these amounts must be approved by the Board of Directors.
It is the Association's policy to obtain a mortgage creating a valid
lien on real estate and to obtain a title insurance policy that insures the
property is free of prior encumbrances. When a title insurance policy is
not obtained, an attorney's certificate of title is received. Borrowers
must also obtain hazard insurance policies prior to closing and, when the
property is in a flood plain as designated by the Department of Housing and
Urban Development, flood insurance policies. Most borrowers are also
required to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which the
Association makes disbursements for items such as real estate taxes,
private mortgage insurance and hazard insurance. Other escrow account
disbursements may include life insurance or flood insurance.
The Association is permitted to lend up to 100% of the appraised value
of the real property securing a mortgage loan. However, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised
value, the Association is required by federal regulations to obtain private
mortgage insurance of that portion on the principal amount of the loan that
exceeds 90% of the appraised value of the property. The Association
generally limits the loan-to-value ratio on a single-family residential
mortgage loan to 80% although the Association will make a single-family
(also referred to as one-to four-family) residential mortgage loan with up
to a 95% loan-to-value ratio if the required private insurance is obtained.
The Association has generally limited the loan-to-value ratio on commercial
real estate mortgages to 75%.
Under federal regulations prior to the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") on
9
August 9, 1989, the aggregate amount of loans that the Association could
make to any one borrower, including related entities, generally was limited
to the lesser of 10% of the Association's withdrawable deposits or 100% of
its capital for regulatory purposes. However, as a result of FIRREA, the
aggregate amount of loans that the Association may make to one borrower is
limited to 15% of the Association's unimpaired capital and surplus. For a
discussion of FIRREA and its impact on the Association, see "Regulation."
Loans in an additional amount equal to 10% of the Association's unimpaired
capital and surplus also may be made to a borrower if the loans are fully
secured by readily marketable securities. Under the provisions of FIRREA,
loans which exceeded the permitted limit on the effective date of the new
rules were deemed not to be in violation of the new rules, but the
aggregate principal balance of such loans cannot be increased beyond the
amount legally committed to prior to FIRREA. However, the institution must
use its best efforts to reduce its interest therein in order to bring such
loans into compliance with the new standard. The maximum amount of loans
which the Association could have made to one borrower as of September 30,
1993 was approximately $1.9 million based on 15% of its unimpaired capital
and surplus. As of September 30, 1993, the largest aggregate amount of any
such loan by the Association to any one borrower was $2.7 million which
consists of one commercial real estate loan secured by a 156 room full-
service hotel in Asheville, North Carolina. At September 30, 1993, the
loan was 60 days delinquent. On December 31, 1993, the loan was current.
The loan was originated prior to FIRREA and was within the Association's
loans-to-one borrower limit at such time. The Association will continue to
use its best efforts to bring this nonconforming loan into compliance with
the new loans-to-one borrower limitations.
Interest rates charged by the Association on loans are affected
principally by competitive factors, the demand for such loans and the
supply of funds available for lending purposes. These factors are, in
turn, affected by general economic conditions, monetary policies of the
federal government, including the Federal Reserve Board, tax policies,
budgetary matters and deficit spending.
Residential Real Estate Lending. The Association historically has
been and continues to be primarily an originator of single-family
residential real estate loans in its primary market area. The Association
currently originates fixed-rate residential mortgage loans and ARMS for
terms of up to 30 years, although a substantial portion of such loans are
amortized over 15 years. At September 30, 1993, $160.4 million or 72.5% of
the Association's total loan portfolio consisted of single-family,
residential loans (including mortgage-backed securities and residential
construction loans). The Association originated $88.1 million of single-
family residential mortgage loans and loans for the construction of single-
family residential properties in fiscal 1993 compared to $83.8 million and
$37.2 million of such loans in fiscal 1992 and 1991, respectively. The
increased originations in fiscal 1993 and 1992 reflected a heavy volume of
refinancings caused by low interest rates. The Association intends to
continue to emphasize the origination of permanent loans secured by first
mortgage liens on single-family residential properties in the future.
10
The residential ARMs currently offered by the Association have
interest rates which adjust annually based upon changes in an index based
on the weekly average yield on United States Treasury securities adjusted
to a constant comparable maturity of one year, as made available by the
Federal Reserve Board, plus a margin. The amount of any increase or
decrease in the interest rate is, in most cases, presently limited to 2%
per year, with a limit of 5% or 6% over the life of the loan. The ARMs
offered by the Association, as well as many other savings institutions,
provide for initial rates of interest below the rates which would prevail
when the index used for repricing is applied. However, the Association
underwrites the loan on the basis of the borrower's ability to pay at the
initial rate which would be in effect without the discount.
The Association has emphasized and will continue to emphasize the
origination of ARMs as well as other types of loans with adjustable rates
or call provisions in order to reduce the impact of rapid increases in
market rates of interest on its results of operations. ARM originations
totalled $34.1 million, $13.6 million and $8.4 million during fiscal 1993,
1992 and 1991, respectively, and constituted 62%, 84% and 77%,
respectively, of the Association's total originations of single-family
residential mortgage loans and construction loans for single-family
residential properties during such periods. At September 30, 1993, $138.0
million or 69% of the Association's total mortgage loan portfolio
(excluding consumer loans), had adjustable interest rates. However, the
interest rates of the Association's ARMs may not adjust as rapidly as
changes in its cost of funds. Furthermore, although the Association
believes that the 5% or 6% lifetime limit on the increase in the interest
rate on the loan is sufficient to protect the Association from substantial
long-term increases in interest rates, it is possible that such caps may
restrict the interest-rate sensitivity of the loans in the event of rapid
and substantial increases in market rates of interest.
Although the Association has continued to emphasize the origination of
ARMs, competitive market pressures and historically low interest rates have
resulted in the Association's continued origination of fixed-rate mortgage
loans with 15- and 30-year terms. Virtually all fixed-rate residential
mortgage loans are originated under terms and conditions which permit their
sale in the secondary market and include due-on-sale clauses as a means of
increasing the rate of interest on existing lower rate loans by negotiating
new interest rates and terms at the time of sale. Since September 30,
1991, the Association has originated $149.6 million of mortgage loans held
for sale, which consist primarily of fixed-rate mortgage loans, of which
$147.6 million have been sold in the secondary market, with servicing
retained, and none have been sold in the secondary market with servicing
released. At September 30, 1993, $63.3 million or 28.6% of the
Association's total mortgage loan portfolio consisted of long-term, fixed-
rate residential mortgage loans.
Consumer Lending. Under applicable law, the Association may make
secured and unsecured consumer loans in an aggregate amount up to 35% of
the institution's total assets. The 35% limitation does not include home
equity loans (loans secured by the equity in the borrower's residence but
11
not necessarily for the purpose of improvement), home improvement loans or
loans secured by deposits. The Association offers consumer loans in order
to provide a range of financial services to its customers and because the
shorter term and normally higher interest rates on such loans help the
Association earn a higher interest rate spread between its average loan
yield and its cost of funds. On all consumer loans originated, the
Association's underwriting standards include a determination of the
applicant's payment history on other debts and an assessment of the
borrower's ability to meet existing obligations and payments on the
proposed loan. Jefferson has emphasized a wide variety of consumer loans
in recent years in order to provide a full range of financial services to
its customers. Consumer loan products offered include home equity lines of
credit, installment loans, second trusts, personal loans, automobile loans,
credit card loans, and loans secured by deposit accounts. Jefferson has
expanded its consumer lending operations primarily by emphasizing home
equity lines of credit.
Certain individual income tax changes in recent years have resulted in
increased demand for home equity lines of credit, as Jefferson's customers
sought to take advantage of the interest deductibility on such loans.
Also, competition from non-financial entities in terms of rates and
maturity terms have affected Jefferson's ability to attract other types of
consumer loans, such as automobile loans and unsecured loans. Therefore,
Jefferson has focused its consumer lending on home equity lines of credit.
As of September 30, 1993, Jefferson's consumer loan portfolio totaled
$24.7 million or 11.1% of the total loan portfolio. At September 30, 1993,
the composition of the portfolio consisted of $21.1 million of home equity
lines of credit, $800,000 of automobile loans, $1.6 million of
miscellaneous consumer loans, $215,000 of credit card loans and $1.0
million of loans secured by deposit accounts.
Construction Lending. In order to provide diversification and
sensitivity to interest rate changes, Jefferson provides acquisition and
construction financing for unimproved and improved properties to be used
for residential purposes. These loans have interest rates which adjust to
changing market rates and are limited to the Association's local market
area. The terms of the Association's construction loans range from three
to twelve months and generally do not include an interest reserve to cover
the cost of borrowing. The maximum loan-to-value ratio for the
Association's construction loans is presently 80% of the appraised value of
the property on an as completed basis.
Jefferson's construction loans are subject to underwriting criteria
which include reviews of previous projects and past performance of the
borrower, the amount of borrower's equity in the project, independent
appraisals and review and valuation of the cost estimates, pre-construction
sale and leasing data, and cash flow projections expected from the project.
Also, Jefferson requires personal guarantees by the borrowers. As of
September 30, 1993, the Association's construction loan portfolio totaled
$8.1 million, or 3.7% of the total loan portfolio. Of such amount,
approximately $424,000 represents residential construction loans for pre-
12
sold single-family residential homes and $5.1 million represents
construction/permanent loans to the borrower who will be the owner
resident.
The remaining $2.6 million represents primarily developed lots, land loans
and model homes.
Prior to making a commitment to fund the loan, the Association
requires an appraisal of the property by appraisers approved by the
Commonwealth of Virginia and the Board of Directors. The Association also
reviews and inspects each project at the commencement of construction and
prior to every disbursement of funds during the term of the construction
loan. Advances are made on a basis of cost to complete.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could
result in delays and cost overruns. If the estimate of construction costs
proves to be inaccurate, the Association may be required to advance funds
beyond the amount originally committed to permit completion of the
development. If the estimate of value proves to be inaccurate, the
Association may be confronted, at or prior to the maturity of the loan,
with a property having a value which is insufficient to assure full
repayment.
Generally, Jefferson attempts to limit these risks by, among other
things, adopting conservative underwriting standards and originating such
loans primarily in its market area and requiring affirmative lien coverage
by an approved title insurance company. In addition, as stated above, a
majority of Jefferson's construction loans are originated on a pre-sold
basis in which the Association makes the permanent mortgage loan as well.
Non-Residential Real Estate and Commercial Lending. Non-residential
real estate loans originated by the Association are primarily secured by
small office buildings, hotels, light industrial properties and warehouses.
These loans are generally for a term of up to 20 years with an interest
rate that adjusts annually based upon changes in an index based on the
weekly average yield on United States Treasury securities adjusted to a
constant maturity of one year plus a margin. Originations of such loans
are presently limited to the local market area and are done on an
individual exception only basis. Jefferson originates commercial loans on
a very limited basis. As of September 30, 1993, commercial and non-
residential mortgage loans totaled $32.5 million or 14.7% of the net loan
portfolio. Jefferson originated $476,000, $0 and $2.2 million of
commercial and non-residential real estate loans in fiscal 1993, 1992 and
1991, respectively. However, during fiscal 1994, the Association intends
to emphasize the origination of non-residential real estate loans.
Although the amount of such originations will depend on market conditions
and other factors. However, the Association does not presently anticipate
such originations to exceed $15.0 million in fiscal 1994. Generally,
individual loans would be limited to $800,000 and would be secured by
property located in its market area.
Commercial real estate lending entails significant additional risks as
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. These
risks can be significantly impacted by supply and demand conditions in the
market for office and retail space, and as such may be subject to a greater
extent to adverse conditions in the economy generally. To minimize these
risks, Jefferson generally limits itself to a real estate market and/or to
borrowers with which it has substantial experience. The Association is
permitted under FIRREA to make loans to any borrower in an amount up to 15%
of its unimpaired capital and surplus (approximately $1.9 million at
September 30, 1993). The Association has not originated loans to any one
borrower or project in excess of its applicable limit since the enactment
of FIRREA. At September 30, 1993, nonperforming non-residential real
estate loans amounted to $1.3 million or approximately 48.7% of total
nonperforming loans of $2.7 million at such time. See "- Nonperforming
Loans and Real Estate Owned."
Jefferson evaluates all aspects of non-residential real estate loan
transactions in order to mitigate risk. The Association seeks to ensure
that the property securing the loan will generate sufficient cash flow to
adequately cover operating expenses and debt service payments. To this
end, permanent commercial real estate loans are generally originated with a
loan-to-value ratio of 75% or less. In addition, the Association also
seeks to obtain the personal guarantee of the borrower. In underwriting
non-residential real estate loans, consideration is given to the property's
operating history, future operating projections, current and projected
occupancy, position in the local and regional market, location and physical
condition. The underwriting analysis also includes credit checks and a
review of the financial condition of the borrower. A narrative appraisal
report, prepared by an outside appraiser who must be certified by the
Commonwealth of Virginia with a general appraisers designation selected
from a list of appraisers approved by the Association's Board of Directors,
is commissioned by the Association to substantiate property values for
commercial real estate loan transactions, which appraisal, in final form,
the Association obtains prior to closing the loan.
Land Development and Acquisition Loans. To a limited extent, the
Association originates loans to builders and developers for the acquisition
and/or development of vacant land. The proceeds of the loan are used to
acquire the land and/or to make site improvements necessary to develop the
land into saleable lots and to comply with bonding requirements of local
governments. The term of such loans ranges from three years to 15 years
with some requiring interest only payments during the term of the loan and
the principal balance due at the end of the term. Originations of land
development and acquisition loans have been limited to $2.0 million, $1.4
million and $499,000 in fiscal 1993, 1992 and 1991, respectively.
14
Land development and acquisition loans involve significant additional
risks when compared with loans on existing residential properties. These
loans typically involve large loan balances to single borrowers, and the
payment experience is dependent on the successful development of the land
and the sale of the lots. These risks can be significantly impacted by
supply and demand conditions. To minimize these risks, Jefferson generally
limits the loans to builders and developers with whom it has substantial
experience or who are otherwise well-known to the Association. The
Association also requires feasibility studies and market analyses to be
performed with respect to the project and requires affirmative lien
coverage from a title insurance company. The amount of the loan is limited
to 75% or less of the value of developed land or 65% or less on the value
of raw land. All of the Association's land acquisition and development
loans are secured by property located within the Association's market area.
Such loans amounted to $5.9 million or 2.7% of the total loan portfolio at
September 30, 1993. Such amount is included in the Association's non-
residential and commercial loan portfolio at September 30, 1993.
Fee Income. In addition to interest earned on loans, Jefferson
receives income from fees in connection with loan service fees, loan
modifications and extensions, late payments, credit report fees, changes of
property ownership and for miscellaneous services related to its loans.
Income from these activities varies from period to period consistent with
the volume and type of loans made and purchased.
Jefferson charges loan origination fees which are calculated as a
percentage of the amount borrowed and such fees are accounted for in
accordance with generally accepted accounting principles. Loan origination
fees generally range from one to three percent of the amount borrowed in
the case of a mortgage loan. Such fees are usually not obtained in
connection with consumer loans.
At September 30, 1993, Jefferson was servicing $78.0 million of loans
owned by others compared to $109 million and $62 million at September 30,
1992 and 1991, respectively. As the portfolio of ARMs grows and seasons,
and FHLMC and FNMA develop new programs for securitizing ARMs, Jefferson
may exchange ARM loans for MBSs, thus increasing loans serviced for others.
Loan servicing fee income amounted to $355,000 and $268,000 during fiscal
1993 and fiscal 1992, respectively.
In September, 1993, the Association sold $63 million of mortgage loan
servicing rights for mortgage loans previously sold to FNMA. This
transaction resulted in a gain of $770,000. The servicing was internally
originated, and there was no intangible asset associated with the servicing
rights sold. The loans had an average servicing fee of 25 basis points.
There were no such sales in fiscal 1992.
Nonperforming Loans and Real Estate Owned
When a borrower fails to make a required loan payment, the Association
attempts to cause the default to be cured by contacting the borrower. In
general, contacts are made after a payment is more than 15 days past due at
15
which time a late charge is assessed. Defaults are cured promptly in most
cases. If the delinquency on a mortgage loan exceeds 90 days and is not
cured through the Association's normal collection procedures, or an
acceptable arrangement is not worked out with the borrower, the Association
will institute measures to remedy the default, including commencing a
foreclosure action or, in special circumstances, accepting from the
borrower a voluntary deed of the secured property in lieu of foreclosure
with respect to mortgage loans or titles and possession of collateral in
the case of consumer loans.
If foreclosure is effected, the property is sold at a public auction
in which the Association may participate as a bidder. If the Association
is the successful bidder, the acquired real estate property is then
included in the Association's real estate owned account until it is sold.
The Association is permitted under federal regulations to finance sales of
real estate owned by "loans to facilitate," which may involve more
favorable interest rates and terms than generally would be granted under
the Association's underwriting guidelines. At September 30, 1993, the
Association had loans to facilitate amounting to approximately $2.3
million, which, if necessary, have been appropriately adjusted to reflect
market interest rates for accounting purposes.
Loans are placed on nonaccrual status after being delinquent 90 days.
When a loan is placed on a nonaccrual status, interest accrued but not
received is reversed against interest income. A nonaccrual loan may be
restored to an accrual basis when principal and interest payments are
current and full payment of principal and interest is expected.
Jefferson's loss and delinquency experience on its residential real
estate loan portfolio has been limited by a number of factors, including
Jefferson's underwriting standards. Whether Jefferson's loss and
delinquency experience increases significantly depends upon the value of
the real estate securing its loans, economic factors such as an increase in
unemployment, and the ability of borrowers with ARM loans to make increased
payments if interest rates increase. In addition, the value of real estate
fluctuates and could decline significantly. Significant reductions in real
estate values could also substantially increase the risk associated with
home equity loans. As a result of economic conditions and other factors
beyond Jefferson's control, Jefferson's future loss and delinquency
experience cannot be accurately predicted.
Real estate acquired by the Association as a result of foreclosure or
by deed-in-lieu of foreclosure is classified as real estate owned until it
is sold. When property is acquired, it is recorded at the lower of
carrying or market value at the date of acquisition and any resulting
write-down is charged to the allowance for loan losses. To the extent
there is further decline in value, that amount is charged to operating
expense. All costs incurred in maintaining the Association's interest in
the property are capitalized between the date the loan becomes delinquent
and the date of acquisition in an amount which may not exceed the estimated
fair value. After the date of acquisition, all costs incurred in
maintaining the property are expensed and costs incurred for the
16
improvement or development of such property are capitalized in an amount
which may not exceed the estimated fair value less the estimated
disposition costs.
The accounting profession has issued Statement of Position SOP 92-3
("SOP 92-3") which provides guidance on measuring foreclosed assets and in-
substance foreclosed assets after foreclosure. The Statement applies to
all assets obtained through foreclosure or repossession, except for
inventories, marketable equity securities and real estate previously owned
by the lender under certain conditions. Under SOP 92-3 there is a
rebuttable presumption that foreclosed assets are held for sale. SOP 92-3
recommends that foreclosed assets held for sale be carried at the lower of
(a) fair value minus estimated costs to sell, or (b) cost. Foreclosed
assets held for the production of income are treated the same way they
would be had the assets been acquired in a manner other than through
foreclosure. The Association's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement addresses the
accounting by creditors for impairment of all loans, uncollateralized as
well as collateralized, loans that are measured at fair value or at the
lower of cost or fair value, leases, loans restructured in a troubled debt
restructuring, and debt securities. It requires that impaired loans be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The creditor should also
evaluate the collectibility of both contractual interest and contractual
principal when assessing loss accruals. The Statement is effective for
fiscal years beginning after December 15, 1994. Management of the
Association does not believe that implementation of the Statement, when
adopted, will have a materially adverse effect on the Association's
financial condition or results of operations.
The following table sets forth information regarding non-accrual loans
and real estate owned held by the Association at the dates indicated. At
September 30, 1993, the Association did not have any troubled debt
restructurings.
September 30,
1993 1992 1991
(Dollars in Thousands)
Nonaccural loans
Residential $ 1,205 $ 626 $ 1,338
Non-residential 1,298 1,204 4,305
17
Construction 154 112 263
Consumer 9 24 523
Subtotal 2,666 1,966 6,429
Real estate owned
Residential 770 2,775 1,948
Non-residential 6,938 6,308 7,764
In-substance 611 1,365 --
foreclosure
Subtotal 8,319 10,448 9,712
Total nonperforming $10,985 $ 12,414 $16,141
assets
Total nonperforming
assets 3.86% 4.12% 4.98%
to total assets
Loans are treated as in-substance foreclosure if the borrower has
little or no equity in the collateral, the cash flow to repay the loan can
only be expected to come from the operation or sale of the collateral, and
the borrower has abandoned control of the collateral or it is doubtful that
the borrower will be able to repay the loan in the foreseeable future. The
one loan of $611,000 classified as an in-substance foreclosure at September
30, 1993 is a single-family residence located in Warrenton, Virginia. The
Association obtained title to the property in October, 1993.
If the nonaccrual loans and loans deemed to be in-substance
foreclosures at September 30, 1993 had been current in accordance with
their terms for the year ended September 30, 1993 (or from the date of
origination if originated during such period), the total interest income on
such loans for fiscal 1993 would have increased $670,300. The Association
did not accrue any interest income on such loans in fiscal 1993.
Nonaccrual loans. The $1.2 million of nonperforming residential real
estate loans at September 30, 1993 consists of twelve loans secured by
single-family property located primarily in the Association's market area.
As of September 30, 1993, the Association had established approximately
$170,000 of interest reserves based on these loans, but had not established
any specific loan loss reserves. No loan exceeded $198,000.
The $1.3 million of nonperforming non-residential real estate loans at
September 30, 1993 primarily consists of one loan secured by a bowling
alley. At September 30, 1993, the Association had established
approximately $458,000 in interest reserves and had not established any
specific loan loss reserves on this loan. This loan, with an outstanding
principal balance of $1.1 million at September 30, 1993, is collateralized
by a bowling alley in Grafton, Virginia (near Newport News). Such amount
represents the Association's 60% participation interest in the loan. The
loan is serviced by the FDIC and was 38 months delinquent at September 30,
18
1993. The borrower filed for bankruptcy on September 17, 1992 in advance
of a scheduled foreclosure date of September 18, 1992. The bowling alley
is presently operational and an appraisal in December, 1991 indicated a
value in excess of the loan carrying value. The bankruptcy court has
approved the borrower's plan of reorganization which requires the borrower
to pay the loan in full prior to June, 1994, and the borrower began making
monthly interest payments in October, 1993. The remaining three non-
residential real estate loans had outstanding principal balances less than
$100,000, with the borrowers in bankruptcy.
The two construction loans amounted to $112,000 and $42,000, and no
nonaccrual consumer loan exceeded $3,000. However, the Association does
have five loans outstanding to one borrower totalling approximately
$420,000, all of which are in the process of foreclosure.
Restructured loans amounted to $3.8 million at September 30, 1993.
These are loans for which concessions, including deferral of interest or
principal payments, have been granted due to the borrower's financial
condition. The $3.8 million consisted of two commercial real estate loans.
One loan of $2.7 million had a modified interest rate of 8.0%, while the
second loan of $1.1 million had a modified interest rate of 6.5% at
September 30, 1993. There were no outstanding commitments to lend
additional funds to borrowers with restructured loans. During fiscal 1992,
the Association established a specific valuation allowance of $380,000
relating to the loan of $1.1 million. The gross interest income that would
have been recorded if the loans had been current per their original terms
was $330,000 for the year ended September 30, 1993. Interest income
recorded for these loans amounted to $288,000 for the year ended September
30, 1993.
Real estate owned. The $8.2 million of REO, net of a $100,000 general
valuation allowance, consisted of three single-family residences with an
aggregate carrying value $336,000, 22 condominiums in Dallas, Texas with an
aggregate carrying value of $434,000, a Knight's Inn Motel in Monroe,
Michigan with a carrying value of $1.7 million, the Ocean One Hotel in
Virginia Beach, Virginia with a carrying value of $3.8 million, office and
residential property in Leesburg, Virginia with a carrying value of
$276,000, warehouse and land in Chantilly, Virginia with a carrying value
of $414,000, seven lots near Fredricksburg, Virginia with a carrying value
of $305,000, partially developed land in Charlottesville, Virginia with an
aggregate carrying value of $453,000, and a single-family residence in
Warrenton, Virginia with a carrying value of $611,000.
In November, 1993 the Association sold the Knight's Inn Motel in
Monroe, Michigan for $1.8 million. The Association accepted a cash payment
of $150,000 and extended a loan for $1,650,000. In October, 1993, the
Association purchased the land and the land lease for the Knight's Inn for
$340,000. The Association expects to receive a minimum of $30,000 in
annual rental payments from this land lease.
The office and residential property in Leesburg, Virginia is vacant
and has been evaluated by experts for soil contamination. The carrying
19
value of $276,000 is net of a specific reserve of $80,000 relating to the
resolution of this problem.
The Ocean One Hotel, a 102-unit beachfront hotel, was acquired by
foreclosure in June, 1991, and reopened for business in July, 1992 after
being closed for twenty months. The outstanding loan at the time of
foreclosure amounted to $2.7 million. In fiscal 1992, the Association
expensed $2.2 million in renovation expenditures, with $1.1 million charged
to expense, and the remainder of $1.1 million capitalized as part of the
REO balance, resulting in a new carrying value of $3.8 million at September
30, 1992. During fiscal 1993, the Association spent approximately $1.1
million in further renovation expenditures for an indoor swimming pool,
meeting rooms, a restaurant and restaurant equipment, a lounge and bar,
exterior painting, and replacement of certain hotel furnishings. The hotel
was operational during fiscal 1993, and despite major construction
activity, the hotel operated at 35% occupancy at an average room rate of
approximately $69 for an operational profit of $128,000. The Association
does not plan significant further renovation expenditures, and has listed
the property for sale. The Association is unable to project the future
expenditures, if any, that may be necessary to franchise or sell the
property. The property is being managed by a professional hotel operator.
The Association will evaluate the benefits of affiliating the hotel with a
national franchise in fiscal 1994.
At September 30, 1993, the Association has under contract or was
negotiating the sale of approximately $2.5 million of REO, including the
Knights Inn Motel. Based on carrying values at September 30, 1993 and the
contract price of properties under contract, the Association does not
presently anticipate that it will incur any significant losses on the sale
of such properties.
Allowance for loan losses. The total allowance for loan losses
amounted to $1.6 million at September 30, 1993, as compared to $1.3 million
and $1.1 million at September 30, 1992 and 1991, respectively. The
allowance for loan losses as a percent of loans outstanding was .92% at
September 30, 1993 as compared to .67% at September 30, 1992 and .53% at
September 30, 1991. The increase during the past two fiscal years reflects
management's decision to increase the ratio of the allowance for loan
losses to total loans because of the Association's exposure through its
real estate mortgage loan portfolio and the recent downturn in the real
estate market. The $533,000 and $1.1 million provisions during fiscal 1993
and 1992, respectively, were also due to the significant charge-offs during
such periods. Net charge-offs, which reduce the allowance for loan losses,
amounted to $219,000, $962,000 and $236,000 in fiscal 1993, 1992 and 1991,
respectively. Recoveries of loans receivable previously charged-off were
not material in the years ended September 30, 1993, 1992 and 1991. The
allowance for loan losses is maintained at a level believed adequate by
management to absorb losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the portfolio, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant
20
factors. The allowance is increased by provisions for loan losses which
are charged against income.
The Association does not allocate the allowance for loan losses by
category of loan. An overall assessment of the allowance for loan losses
includes the development of risk factors by type of loan to evaluate the
adequacy of the general valuation allowance. The Association also reviews
historical ratios of delinquency and nonperforming assets to further
evaluate loan loss reserves. Further, the Association utilizes regulatory
measures to determine the adequacy of loan loss reserves.
The Association believes that the allowance for loan losses as of
September 30, 1993 was adequate and further believes that the net carrying
values of real estate owned are stated at their fair values. However,
future additions to the allowance for loan losses or reductions in net
carrying values may be necessary based on the performance of the
Association's loan portfolio and changes in economic conditions. In
addition, in connection with periodic examinations of the Association, the
staff of the OTS and the FDIC consider the adequacy of the allowance for
loan losses and the net carrying value of investment in real estate. Such
agencies may require the Association to recognize additions to the
allowance or reductions in the net carrying value of investment in real
estate based on their judgements at the time of such examinations.
On September 1, 1992, the OTS proposed a revision to its guidance to
savings associations and OTS examination staff regarding the appropriate
level of general valuation allowances an association should maintain. The
current policy of the OTS is to require that a savings association classify
its assets on a regular basis and establish prudent general valuation
allowances that are adequate to absorb probable losses that have not been
identified but that are inherent in the loan portfolio. The proposed OTS
policy requires associations to maintain general valuation allowances that
are adequate to absorb probable losses on their portfolios that are not
clearly attributable to specific loans. For classified assets and assets
subject to special mention, the OTS has proposed general valuation
allowances within the following ranges: (i) 0% to 5% of assets subject to
special mention; (ii) 5% to 25% of assets classified substandard; and (iii)
40% to 60% of assets classified doubtful. For unclassified and unreviewed
assets, the OTS proposes general valuation allowances equal to expected net
charge-offs during the next year, which should be based on the level of
annual net charge-offs experienced by the association over the previous
three to five years or similar assets adjusted for current economic
conditions and trends and certain qualitative factors.
Effective December 21, 1993, the OTS, in conjunction with the Office
of the Comptroller of the Currency, the FDIC and the Federal Reserve Board,
issued an Interagency Policy Statement on the Allowance for Loan and Lease
Losses ("Policy Statement"). The Policy Statement, which effectively
supersedes the proposed guidance issued on September 1, 1992, includes
guidance (i) on the responsibilities of management for the assessment and
establishment of an adequate allowance and (ii) for the agencies' examiners
to use in evaluating the adequacy of such allowance and the policies
21
utilized to determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets classified
substandard and doubtful and with respect to the remaining portion of an
institution's loan portfolio. Specifically, the Policy Statement sets
forth the following quantitative measures which examiners may use to
determine the reasonableness of an allowance: (i) 50% of the portfolio that
is classified doubtful; (ii) 15% of the portfolio that is classified
substandard and (iii) for the portions of the portfolio that have not been
classified (including loans designated special mention), estimated credit
losses over the upcoming twelve months based on facts and circumstances
available on the evaluation date. While the Policy Statement sets forth
this quantitative measure, such guidance is not intended as a "floor" or
"ceiling".
A summary of litigation regarding certain real estate owned at
September 30, 1993 is contained herein under Item 3. Legal Proceedings.
For further information on the Association's allowance for losses on loans
and a summary of the net cost of operations for real estate owned, see
Notes (4) and (6), respectively, in the Notes to Consolidated Financial
Statements in the Annual Report).
The following table summarizes activity in the Association's allowance for
loan losses during the periods indicated.
Year Ended September 30,
1993 1992 1991
(Dollars in Thousands)
Allowance at beginning $ 1,288 $ 1,135 $ 873
of year
Provision for loan
losses charged to
operating expenses 533 1,115 498
Sub-total 1,821 2,250 1,371
Charge-offs:
Residential real -- (538) (72)
estate loans
Non-residential real
estate (100) -- (40)
loans
Construction loans (70) -- --
Consumer loans (49) (424) (124)
Total loans charged- (219) (962) (236)
off(1)
Allowance at end of $ 1,602 $ 1,288 $ 1,135
year
22
Average outstanding
balance $180,039 $204,964 $226,042
of loans receivable
Ratio of net charge-
offs to
average outstanding .12% .47% .10%
balance
of loans receivable
Period-end loans $174,830 $190,826 $213,834
receivable
Ratio of allowance to
period- .92% .67% .53%
end loans receivable
_______________________
(1) Recoveries of loans receivable previously charged-off were not
material.
Investment Activities
Interest income and dividends from investment securities provides the
second largest source of income after interest on loans. The Association
is required to maintain certain liquidity ratios and does so by investing
in securities that qualify as liquid assets under OTS regulations. Such
securities include obligations issued by or are fully guaranteed by the
United States government, certain federal agency obligations, certain time
deposits and negotiable certificates of deposit issued by commercial banks
and other specified investments, including commercial paper and corporate
debt securities. See "Regulation - Liquidity Requirements." The balance
of investment securities maintained by Jefferson in excess of regulatory
requirements reflects management's objective of maintaining adequate
liquidity to afford future flexibility to meet withdrawal requests and loan
commitments or to make other investments. Such liquid funds are managed in
an effort to produce the highest yield consistent with maintaining safety
of principal and adherence to applicable regulations. The income from
investments depends on the yield on investments purchased and the size of
the investment portfolio.
The Association adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" as of September 30,
1993. Investments in debt securities are classified as held-to-maturity
when the Association has the positive intent and ability to hold those
securities to maturity. Held-to-maturity investments are measured at
amortized cost with gains and losses recognized at the time of sale.
Investment in stock of the Federal Home Loan Bank of Atlanta is stated at
cost. Investments identified as available-for-sale are measured at market
value with unrealized holding gains and losses reported as a net amount in
23
a separate component of stockholders' equity until realized. Trading
securities are bought and held principally for the purpose of selling in
the near term. Unrealized gains and losses on trading securities are
included in earnings. Dividend and interest income for all three
categories, including amortization of the premium and discount arising at
acquisition, are reported in earnings. The effect of adoption of FASB
Statement No. 115 was to record a net unrealized gain of $154,000 in
investment securities and mortgage-backed securities, a deferred income tax
liability of $53,000 and an increase of $101,000 in stockholders' equity.
The Association had no trading securities as of September 30, 1993.
The following table sets forth the carrying value of Jefferson's
investment portfolio at the dates indicated. See also Note 2 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information with respect to the Association's investment securities
classification as available-for-sale or held-to-maturity. In addition,
information on carrying value, gross unrealized gains, gross unrealized
losses, market value, gross proceeds from sales, and gross realized gains
and losses are also disclosed.
September 30,
1993 1992 1991
(Dollars In Thousands)
FHLB overnight funds $ 14,958 $2,494 $ 143
Certificates of deposit 24 43 15
Trust accounts - CMO & 2,401 1,241 1,509
REMIC
Commercial paper and
subordinated -- 1,113 1,339
debentures
Adjustable-rate mortgage
mutual 10,676 -- --
funds
United States government
and agency obligations 14,011 30,009 --
FHLB Stock 3,600 3,396 3,168
Other (1) -- -- 16
Total $45,670 $38,296 $6,190
_______________
(1) Consists of stock of an unconsolidated subsidiary.
24
Sources of Funds
General. Historically, deposits have been the principal source
of Jefferson's funds for use in lending and for other general business
purposes. In addition to deposits, the Association derives funds from loan
repayments and prepayments, sales of whole loans, loan participations,
investment securities and mortgage-backed securities, advances from the
FHLB and other borrowings, including reverse repurchase agreements. The
availability of funds from sales of loans and debt instruments is
influenced by general interest rates and other market conditions.
Loan principal and interest payments are a relatively stable
source of funds, while savings inflows and outflows and loan prepayments
are significantly influenced by general interest rates and money market
conditions and may fluctuate widely. Borrowings may be used on a short-
term basis to match short-term lending such as non-residential and
construction loans, to compensate for reductions in normal sources of funds
such as savings inflows and to meet liquidity requirements. On a long-term
basis, borrowings may be used to support expanded lending activities.
Deposits. Various regulatory changes have authorized thrift
institutions to offer innovative deposit accounts with shorter terms and
market sensitive interest rates in order to reduce the outflow of such
funds into alternative investment instruments, such as money market funds
and mutual funds, in higher interest rate environments. These new types of
deposits have proven to be more costly than historical types of deposits,
thus subjecting the Association to greater fluctuations in short-term
deposit flows.
In recent years, the Association has experienced deposit outflows
primarily from transaction accounts, as such funds were invested by
depositors in alternative financial instruments. The reductions in short-
term rates resulting from the Federal Reserve Board's action to encourage
economic growth enabled money market funds, bond funds and equity funds,
which, unlike financial institutions, are not required to maintain reserve
requirements or pay premiums to regulatory agencies for depository
insurance, to offer higher interest rates and potentially higher returns on
such investments.
Jefferson offers a variety of rates and deposit programs, short-
term and long-term, designed to attract customers in its market area.
Rates on deposits offered by Jefferson are evaluated on a weekly basis and
are priced based on investment opportunities, competitive rates available
at other depository institutions and the cost of alternative sources of
funds.
Jefferson relies upon its branch network and advertising in its
primary market area to generate its deposit flows. Jefferson's objective
is to obtain stable deposits from local sources, although some deposits are
gathered from non-local sources. Jefferson has not sought deposits from
institutional brokerage programs in the last three fiscal years and had no
brokered funds at September 30, 1993. Deposits with balances in excess of
25
$100,000 totaled $17.3 million or 7.2% of total deposits at September 30,
1993.
In October, 1993, Jefferson acquired $9.3 million of deposits
from another savings institution in Leesburg, Virginia at a premium of
1.25%. These accounts were transferred to the Association's existing
branch office in Leesburg, Virginia.
The following table shows the deposit activity for Jefferson for
the periods indicated.
Year Ended September 30,
1993 1992 1991
(Dollars in Thousands)
Net withdrawals $(17,360) $(7,119) $(6,833)
Interest credited 9,661 12,241 14,192
Net increase
(decrease) $ (7,699) $ 5,122 $ 7,359
in deposits
Jefferson offers a variety of deposit accounts, including
passbook accounts, Negotiable Order of Withdrawal ("NOW") accounts, Money
Market Deposit Accounts ("MMDAs") and a variety of fixed-term certificate
accounts with different rates and maturities. Jefferson also provides
Individual Retirement Accounts (IRAs), Simplified Employee Pension Plans
(SEPPs) and Keogh Plan Accounts.
During fiscal 1990, the Association introduced a new passbook
account which featured a guaranteed one-year interest rate floor and
certain free services such as free checking. Such floor was established on
October 1st of each year and as a result of the decline of market interest
rates below this floor during fiscal 1992, the balance of these deposits
amounted to $77.4 million as of September 30, 1992. The interest rate
floor for fiscal 1992 was 5.75%. However, in fiscal 1993, the interest
rate was adjusted quarterly on the passbook account and was 3.25% for the
quarter ended December 31, 1993 and will be 3.15% for the quarter ended
March 31, 1994. The balance of these deposits amounted to $70.7 million as
of September 30, 1993.
NOW accounts, MMDAs and passbook and statement accounts are
subject to various fees depending upon the type of account, transaction
activity and minimum balance maintained. All fixed-term certificates are
subject to a forfeiture of interest in the event of a withdrawal of
principal prior to the maturity date. These interest penalties amount to
the loss of interest for periods of one to six months depending upon the
term of the certificates.
26
At September 30, 1993, approximately 46% of Jefferson's total
deposits consisted of time deposits and demand deposits represented the
remaining 54% of the deposit base. The weighted average nominal interest
rate for all accounts at September 30, 1993, was 3.84%.
In fiscal 1993, the excess of withdrawals over deposits was $17.4
million and interest credited amounted $9.7 million, resulting in a net
decline in deposits of $7.7 million. The fiscal 1993 decrease included a
withdrawal of $4.0 million of funds from national institution sources, as
the Association intentionally posted less aggressive deposit rates. The
remaining decline in deposits was primarily attributable to a decline in
demand accounts as depositors were withdrawing funds for cash needs and
other opportunities for a higher yield. At September 30, 1993, the
Association had $15.5 million of time deposits in "Bump Rate" certificates
of deposit, which allows a depositor to adjust his rate to market once
during the deposit term, and $10.8 million in "Prime Rate" certificates of
deposit, which are tied to changes in prime rate less 150-175 basis points.
The following table sets forth at September 30, 1993, deposit
account balances (excluding accrued interest payable) by account type,
scheduled maturity and weighted average interest rate.
Weighted
Percent of Average
Total Interest
Type of Account Total Deposits Rate
(Dollars in Thousands)
Demand deposits:
Passbook Accounts $83,780 35% 3.21%
NOW Accounts 15,888 7 2.59
MMDAs 29,806 12 2.82
Total demand deposits 129,474 54 3.05
Time deposits:
Certificates maturing in:
Year ending September 67,021 28 4.53
30, 1994
Year ending September 29,974 12 5.05
30, 1995
Year ending September 10,660 4 5.05
30, 1996
Thereafter 4,338 2 5.58
Total time deposits 111,993 46 4.76
Total deposits $241,467 100% 3.84%
27
The following table sets forth the amount of scheduled maturities
of time deposits at September 30, 1993.
Balance as of Twelve Months Ended
September 30, September 30,
Interest Rate 1992 1993 1994 1995 1996 There
after
(Dollars in Thousands)
Less than 4% $ 9,988 $ 24,410 $24,277 $ 133 $ -- $ --
4.00 - 6.00% 57,931 72,056 32,097 26,240 10,025 3,694
6.01 - 8.00% 32,766 12,426 8,615 2,772 458 581
8.01 - 10.00% 12,306 3,092 2,032 820 177 63
Greater than 10% 34 9 -- 9 -- --
Total maturities $113,025 $111,993 $67,021 $29,974 $10,660 $4,338
Borrowings. The FHLB System functions in a reserve credit
capacity for savings institutions and other member financial institutions.
As a member, Jefferson is required to own capital stock in the FHLB of
Atlanta, and is authorized to apply for advances from the FHLB on the
security of such stock and certain of its home mortgages and other assets.
Such borrowings may be made pursuant to numerous credit programs offered by
the FHLB. Each credit program has its own interest rate and range of
maturities, and the FHLB prescribes the acceptable uses to which the
advances pursuant to each program may be put as well as limitations on the
size of the advances. Depending upon the credit program used, FHLB
advances bear interest at fixed rates or at rates that vary with market
conditions. A prepayment penalty may be imposed for early repayment of
advances. The FHLB offers a full range of maturities up to ten years at
generally competitive rates. At September 30, 1993 and 1992, the
Association did not have any outstanding FHLB advances. See Note (9) to the
Notes to Consolidated Financial Statements in the Annual Report for a
summary of FHLB advances.
28
Securities sold under agreements to repurchase ("reverse
repurchase agreements") involve the transfer of securities to a lender in
exchange for cash under an agreement to repay the cash plus interest in
exchange for the return of the same or substantially the same securities on
the maturity date. Jefferson deals only with financially strong securities
dealers and commercial banks when entering into these transactions.
Generally, the securities used in these transactions have been government
agency MBSs. Funds from this source have been used to provide additional
liquidity and to engage in arbitrage transactions which match the
maturities of assets and liabilities at positive interest rate spreads.
Reverse repurchase transactions are treated as borrowings with
the repurchase obligations reflected as a liability on the Consolidated
Balance Sheets, and the related "interest" expense included in interest on
borrowings. At September 30, 1993 and 1992, the Association did not have
any securities sold under agreements to repurchase. See Note (10) to the
Notes to Consolidated Financial Statements in the Annual Report for a
summary of the Association's reverse repurchase agreements.
The Association's other borrowings primarily represent notes
payable ("Notes") of JFC and mortgage collateral bonds ("Bonds") issued by
JFC II.
On June 6, 1985, JFC, in effect, borrowed $20.3 million from
Thrift Financing Corporation ("TFC"), an investment program established by
Craigie, Inc., which indebtedness was evidenced by the Notes.
Consequently, TFC issued CMOs secured by the Notes which, in turn, are
collateralized by FHLMC PCs. The maturity of the Notes correspond to the
principal repayment of the FHLMC PCs. At September 30, 1993, the
outstanding indebtedness on the Notes was $5.3 million, with an unamortized
discount of $76,000. The Notes are collateralized by a trust cash account
and $5.5 million of FHLMC PCs which had a weighted average rate of 9.07% at
September 30, 1993. The Notes had an effective interest cost to Jefferson
of 11.27% in fiscal 1993.
On May 9, 1988, JFC II issued the Bonds with a gross balance of
$47.1 million which were secured by FHLMC PCs with below market rates. As
a result, the Bonds were initially issued at a discount of $5.0 million, or
10.625% of the outstanding amount payable on the Bonds. The discount
represented the difference between the weighted average interest rate of
the FHLMC PCs and the cost of borrowing. The maturity of the Bonds
corresponds to the maturity of the FHLMC PCs. The unamortized discount on
the Bonds is reduced in proportion to the reduction of the outstanding
balance of the Bonds which increases interest expense. At September 30,
1993, the outstanding indebtedness on the Bonds was $21.2 million, with an
unamortized discount of $2.3 million and had an effective interest cost to
Jefferson of 12.87% in fiscal 1993. The Bonds are collateralized by a
trust cash account and $19.9 million of FHLMC PCs which had a weighted
average rate of 8.33% at September 30, 1993.
A material and prolonged decrease in interest rates could have an
adverse effect on the Association's interest expense primarily as a result
29
of the Bonds issued by JFC II. Due to the paydown of the Bonds of $25.9
million in the 65 months since issuance, the unamortized discount amounted
to $2.3 million at September 30, 1993. The maturity of the Bonds, as well
as the amortization of the discount, correspond to the principal repayments
of the mortgage-backed securities. Average annual repayments on the Bonds
since issuance has amounted to $4.8 million and, correspondingly, average
annual accretion of the discount has amounted to approximately $510,000.
To the extent that interest rates spur significant repayments of the
mortgage-backed securities collateralizing the Bonds, the amortization of
the discount would correspondingly accelerate. The weighted average
interest rate of the mortgage-backed securities collateral was 8.33% at
September 30, 1993. Since the amortization of the discount is accounted
for as interest expense, an acceleration of the amortization of the
discount would have an adverse affect on interest expense and,
correspondingly, net interest income in the short-term.
The following table sets forth the effect on net interest income
of decreases and increases of repayment on the Bonds based on the
historical average annual repayment of $4.8 million.
Percent of Amortization
Historical of Discount at Net Interest
Average Annual Amount of 10.625% of Income
Repayment of Repayment of Repayment of Increase
Bonds Payable Bonds Bonds (Decrease)
75% $ 3,600,000 $ 382,500 $ 127,500
100% $ 4,800,000 $ 510,000 $ --
125% $ 6,000,000 $ 637,500 $(127,500)
150% $ 7,200,000 $ 765,000 $(255,000)
175% $ 8,400,000 $ 892,500 $(382,500)
200% $ 8,400,000 $1,020,000 $(510,000)
225% $10,800,000 $1,147,500 $(637,500)
250% $12,000,000 $1,275,000 $(765,000)
30
The annual repayment rate in fiscal 1993 was approximately 200%
of the historical annual repayment rate.
The following table summarizes the consolidated borrowings of
Jefferson at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1993 1992 1991 1990 1989
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
FHLB Advances $ -- $ -- $13,750 $ 51,050 $ 46,000
Securities sold under agreements to repurchase -- -- 14,001 17,077 17,038
Jefferson Funding Corporation notes payable,
(Collateralized mortgage obligation) 5,212 6,761 8,614 9,505 10,797
Jefferson Funding Corporation II
(Real Estate Mortgage Investment
Certificate) 18,867 27,360 31,853 34,721 37,654
Wrap around mortgages -- 37 38 84 123
Total $24,079 $34,158 $68,256 $112,437 $111,612
</TABLE>
Competition
Jefferson experiences substantial competition in attracting and
retaining savings deposits and in making real estate, consumer and non-
residential loans. The primary factors in competing for savings deposits
are interest rates and convenience of office locations. Direct competition
for savings comes from other savings institutions, commercial banks, credit
unions and more recently other financial-service concerns. Additional
significant competition for savings deposits comes from corporate and
government securities and mutual funds which may yield higher interest
rates than instruments offered by savings institutions. The primary
factors in competing for loans are interest rates, rate adjustment
provisions, loan maturity, loan fees, convenience and the quality of
service to borrowers. Competition for origination of real estate loans
normally comes from other savings institutions, commercial banks, mortgage
banking companies, insurance companies and real estate investment trusts.
Subsidiaries
31
OTS regulations permit a savings institution to invest up to 2%
of its assets in the capital stock, paid-in surplus and unsecured
obligations of subsidiary corporations or service corporations and an
additional 1% of its assets when the additional funds are utilized for
community or inner-city development or investment. In addition, a
federally chartered, SAIF-insured savings institution meeting its minimum
regulatory capital requirements also may make conforming loans to service
corporations in which the lender owns or holds more than 10% of the capital
stock, in an aggregate amount of up to 50% of regulatory capital. The
Association is also authorized to invest up to 30% of its assets in finance
subsidiaries whose sole purpose is to issue debt or equity securities that
the Association is authorized to issue directly, subject to certain
limitations. At September 30, 1993, the Association was authorized to have
a maximum investment of $5.7 million (2% of assets) in the capital stock
and other securities of service corporation subsidiaries and no conforming
loans. In addition, the Association is permitted to invest up to $85.3
million (30% of assets) in finance subsidiaries such as JFC and JFC II. As
of that date, Jefferson's investment in service corporation subsidiaries
was $4.6 million, of which $1.0 million and $2.8 million were invested in
JFC and the JFC II, respectively. The $1.0 million and $2.8 million
represent the amounts by which JFC and the JFC II have over-collateralized
their respective borrowings.
Jefferson currently has four wholly-owned service corporations as
follows:
Subsidiary Primary Business Activity
Jefferson Insurance Services, Inc. Sales of multiple lines of insurance
to the public
Jefferson Investment Service Corp. Trustee on savings institution
mortgages
Jefferson Funding Corporation Finance subsidiary (CMO)
Jefferson Funding Corporation II Finance subsidiary (REMIC)
At September 30, 1993, Jefferson Insurance Services, Inc. and
Jefferson Investment Service Corp. had combined total assets of $695,340,
of which $692,439 is cash and investment securities. Total equity of the
two above nonfinance service corporations at such time was $695,340.
During fiscal 1993, such subsidiaries generated aggregate net income of
approximately $37,000. The nonfinance service corporations are not engaged
in any nonpermissible regulatory activities.
Employees
At September 30, 1993, Jefferson employed 102 full-time and 13 part-
time employees. Management considers its relations with its employees to
be good.
32
Jefferson currently maintains a comprehensive employee benefit program
providing, among other items, health, disability, life insurance, and
educational assistance. In fiscal 1991, a 401(k) plan was made effective
for qualified employees. Jefferson's employee benefits are considered by
management to be generally comparable with employee benefits provided by
other major employers in Jefferson's market area. Jefferson's employees
are not represented by any collective bargaining group. The Association
does not provide post-retirement benefits.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of Jefferson. The description of these laws
and regulations, as well as descriptions of laws and regulations contained
elsewhere herein does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
General
The Association is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and
credit of the United States Government. Accordingly, the Association is
subject to broad federal regulation and oversight by the OTS and the FDIC
extending to all aspects of its operations. The Association is a member of
the FHLB of Atlanta and is subject to certain limited regulation by the
Federal Reserve Board.
The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required
to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC. The investment and lending authority
of the Association is prescribed by federal laws and regulations, and it is
prohibited from engaging in any activities not permitted by such laws and
regulations. These laws and regulations generally are applicable to all
federally chartered savings associations and many also apply to state-
chartered savings associations. Such regulation and supervision is
primarily intended for the protection of depositors.
Certain of the investment and lending authorities for federal
associations were amended significantly by FIRREA. FIRREA provides that no
savings association may invest in corporate debt securities not rated in
one of the four highest rating categories by a nationally-recognized rating
organization. In addition, FIRREA reduced the permissible level of
investment in loans secured by non-residential real property by federal
associations from 40% of assets to 400% of regulatory capital, with
authority in the OTS to increase that investment level on a case-by-case
basis. FIRREA also revised the authority of savings associations to engage
in transactions with affiliates or to make loans to certain insiders by
making such transactions subject to certain provisions of the Federal
Reserve Act. Among other things, those provisions require that these
transactions with affiliates be on terms and conditions comparable to those
for similar transactions with non-affiliates, as discussed below.
33
FIRREA imposed limitations on the aggregate amount of loans that a
savings association could make to any one borrower, including related
entities. Under FIRREA, the permissible amount of loans-to-one borrower
now follows the national bank standard for all loans made by savings
associations, as compared to the pre-FIRREA rule that applied that standard
only to commercial loans made by federally chartered savings associations.
The national bank standard generally does not permit loans-to-one borrower
to exceed 15% of unimpaired capital and surplus. Loans in an amount equal
to an additional 10% of unimpaired capital and surplus also may be made to
a borrower if the loans are fully secured by readily marketable securities.
For information about the Association's largest loan or group of loans, see
"Business - Lending Activities - Loan Underwriting Policies."
The OTS' enforcement authority over all savings associations and their
holding companies was substantially enhanced by FIRREA. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated
for violations of laws and regulations and unsafe or unsound practices.
Other actions or inactions may provide the basis for enforcement action,
including misleading or untimely reports filed with the OTS. FIRREA
significantly increased the amount of and grounds for civil money
penalties. FIRREA requires, except under certain circumstances, public
disclosure of final enforcement actions by the OTS.
Recent Legislation. On December 19, 1991, the Federal Deposit
Insurance Corporation Act of 1991 ("FDICIA") was enacted into law. The
FDICIA provides for, among other things, the recapitalization of the Bank
Insurance Fund ("BIF"); the authorization of the FDIC to make emergency
special assessments under certain circumstances against BIF members and
members of the SAIF; the establishment of risk-based deposit insurance
premiums; and improved examinations and reporting requirements. The FDICIA
also provides for enhanced federal supervision of depository institutions
based on, among other things, an institution's capital level.
Under the FDICIA, new safety and soundness standards are to be adopted
by the federal banking regulators, including the imposition by December 1,
1993 of a maximum ratio of classified assets to total capital, minimum
earnings sufficient to absorb losses without impairing capital, and to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of an institution or holding company, and such other
standards relating to asset quality, earnings and valuation as the
regulators find appropriate. The FDICIA also liberalized the qualified
thrift lender ("QTL") test; imposed greater restrictions on transactions
with insiders; revised the limitations on the includability of purchased
mortgage servicing rights as regulatory capital; mandated consumer
protection disclosures with respect to deposit accounts; and permitted
federal savings institutions to acquire or be acquired by any insured
depository institution. In many of these areas, implementing regulations
must be adopted by the relevant banking regulator.
34
On June 19, 1993, a joint notice of proposed rulemaking was issued by
the OTS, the FDIC, the Office of the Comptroller of the Currency and the
Federal Reserve Board (collectively, the "agencies") concerning standards
for safety and soundness required to be prescribed by regulation pursuant
to Section 39 of the Federal Deposit Insurance Act ("FDIA"). In general,
the standards relate to (1) operational and managerial matters; (2) asset
quality and earnings; and (3) compensation. The operational and managerial
standards cover (a) internal controls and information systems, (b) internal
audit system, (c) loan documentation, (d) credit underwriting, (e) interest
rate exposure, (f) asset growth, and (g) compensation, fees and benefits.
Under the proposed asset quality and earnings standards, Jefferson would be
required to maintain (1) a maximum ratio of classified assets (assets
classified substandard, doubtful and to the extent that related losses
have not been recognized, assets classified loss) to total capital of .75,
and (2) minimum earnings sufficient to absorb losses without impairing
capital. The last ratio concerning market value to book value was
determined by the agencies not to be feasible. Finally, the proposed
compensation standard states that compensation will be considered excessive
if it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. If an insured depository
institution or its holding company fail to meet any of the standards
promulgated by regulation, then such institution or company will be
required to submit a plan within 30 days to the FDIC specifying the steps
it will take to correct the deficiency. In the event that an institution
or company fails to submit or fails in any material respect to implement a
compliance plan within the time allowed by the agency, Section 39 of the
FDIA provides that the FDIC must order the institution or company to
correct the deficiency and may (1) restrict asset growth; (2) require the
institution or company to increase its ratio of tangible equity to assets;
(3) restrict the rates of interest that the institution or company may pay;
or (4) take any other action that would better carry out the purpose of
prompt corrective action.
On November 18, 1993, the agencies issued proposed regulations which
are substantially similar to the advance notice of proposed rulemaking in
June 1993, set forth above. However, pursuant to the proposed regulations
issued in November, the Association would be allowed a maximum ratio of
classified assets to total capital of 1.0 rather than .75 proposed in June
1993. The Association is unable to predict at this time what effect, if
any, these standards will have on its business, results of operations or
management. However, the Association's classified assets to total capital
currently exceed the proposed ratio of 1.0. Management is presently
evaluating the alternatives available to the Association in order to comply
with the proposed requirement, including reducing classified assets, and
increasing capital though earnings and issuance of additional shares of
common stock or other capital instruments. The Association has included a
proposal in the proxy statement for the 1994 Annual Meeting requesting
stockholder approval for a proposed private placement offering. While the
Association does not have any immediate specific plans to issue shares of
capital stock, the Association believes that approval of this proposal will
provide the Association with corporate flexibility to respond on a timely
basis to potentially valuable business opportunities which may include the
35
purchase of deposits, branch office properties and other assets of the
Resolution Trust Corporation. Any such private placement offering, if
initiated, is not expected to exceed $5.0 million.
Insurance of Accounts
The deposits of the Association are insured up to $100,000 per insured
member (as defined by law and regulation) by the SAIF and are backed by the
full faith and credit of the United States Government. As insurer, the
FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation
or order to pose a serious threat to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings associations,
after giving the OTS an opportunity to take such action.
The annual assessment for SAIF members for deposit insurance for the
period from January 1, 1991 through December 31, 1992 was equal to .23% of
insured deposits, which was payable on a semi-annual basis. FDICIA
eliminated limitations on increases in federal deposit insurance premiums
and authorized the FDIC to increase the assessment rates to the extent
necessary to protect the SAIF (as well as the comparable fund administered
by the FDIC which insures the deposits of commercial banks). The FDIC has
issued a final regulation which was effective for the first semi-annual
period of 1993 and thereafter, and which is intended to be a preliminary
step toward the risk-based assessment system required to be implemented by
January 1, 1994. Under the regulation, institutions are assigned to one of
three capital groups which are based solely on the level of an
institution's capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the
FDIA. These three groups are then divided into three subgroups which
reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from .23% for well capitalized, healthy
institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. The insurance premium for the Association for the
first semi-annual period beginning January 1, 1993 was .30% of insured
deposits and is .30% for the second semi-annual period ending December 31,
1993.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or
has violated any applicable law, regulation, order or any condition imposed
by an agreement with the FDIC. It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of
insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, shall continue to be insured for
36
a period of six months to two years, as determined by the FDIC. Management
is aware of no existing circumstances which could result in termination of
the Association's deposit insurance.
Federal Home Loan Bank System
The Association is a member of the FHLB System which consists of 12
regional FHLBs, with each subject to supervision and regulation by the
newly created Federal Housing Finance Board. The FHLBs provide a central
credit facility primarily for member savings institutions. The
Association, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in that FHLB in an amount equal to at least 1%
of the aggregate principal amount of its unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances (borrowings) from the FHLB of Atlanta,
whichever is greater. At September 30, 1993, Jefferson had a $3.6 million
investment in the stock of the FHLB of Atlanta and was in compliance with
this requirement.
Advances from the FHLB of Atlanta are secured by certain types of
mortgages and other assets. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of Atlanta and the
purpose of the borrowing. At September 30, 1993, the Association had no
borrowings from the FHLB of Atlanta outstanding.
Liquidity Requirements
The Association is required to maintain a daily average balance of
liquid assets (cash, certain time deposits, corporate debt securities and
commercial paper, securities of certain mutual funds, banker's acceptances,
and specified United States government, state or federal agency
obligations), equal to at least 5% of the average daily balance of its net
withdrawable savings deposits plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10% and is currently 5%. Short-term liquid
assets currently must consist of 1% of the liquidity base. Monetary
penalties may be imposed for failure to meet liquidity requirements. The
Association's average month-end liquidity ratio for the year ended
September 30, 1993 was 7.7% and its short-term liquidity ratio at September
30, 1993 exceeded the regulatory requirement of 1%. The Association has
consistently maintained liquidity levels in excess of the minimum
requirements.
37
Regulatory Capital Requirements
Federally insured savings associations are required to maintain
minimum levels of regulatory capital. Pursuant to FIRREA, the OTS has
established three capital standards applicable to all savings associations.
These standards generally must be as stringent as the comparable capital
requirements imposed on national banks. The OTS also is authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
Current OTS capital standards require savings associations to satisfy
three different capital requirements. Under these standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted
total assets, "core" capital equal to 3% of adjusted total assets and
"total" capital (a combination of core and "supplementary" capital) equal
to 8% of "risk-weighted" assets. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of fully consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits and
"qualifying supervisory goodwill." Tangible capital is given the same
definition as core capital but does not include qualifying supervisory
goodwill and is reduced by the amount of all the savings association's
intangible assets, with only a limited exception for purchased mortgage
servicing rights. Both core and tangible capital are further reduced by an
amount equal to a savings association's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other
than subsidiaries engaged in activities undertaken as agent for customers
or in mortgage banking activities and subsidiary depository institutions or
their holding companies). Supplementary capital generally consists of
hybrid capital instruments; perpetual preferred stock which is not eligible
to be included as core capital; subordinated debt and intermediate-term
preferred stock; and, subject to limitations, general allowances for loan
losses. Assets are adjusted under the risk-based guidelines to take into
account different risk characteristics, with the categories ranging from 0%
(requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and
which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighing system, as are certain privately-
issued mortgage-backed securities representing indirect ownership of such
loans. High quality MBSs and FHLB stock are assigned a 20% risk-weighting.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under
the rule, an institution with a greater than "normal" level of interest
rate risk will be subject to a deduction of its interest rate risk
component from total capital for purposes of calculating risk-based capital
requirement. As a result, such an institution will be required to maintain
additional capital in order to comply with the risk-based capital
38
requirement. An institution with a greater than "normal" interest rate
risk is defined as an institution that would suffer a loss of net portfolio
value exceeding 2.0% of the estimated market value of its assets in the
event of a 200 basis point increase or decrease (with certain minor
exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the
market value of its assets. The rule also authorizes the director of the
OTS, or his designee, to waive or defer an institution's interest rate risk
component on a case-by-case basis. The final rule is effective as of
January 1, 1994, subject however to a two quarter "lag" time between the
reporting date of the data used to calculate an institution's interest rate
risk and the effective date of each quarter's interest rate risk component.
Thus, an institution with greater than "normal" risk will not be subject to
any deduction from total capital until July 1, 1994 (based on the
calculation of the interest rate risk component using data as of December
31, 1993). Finally, the OTS indicated in the final rule that it intended
to lower the leverage ratio requirement (in its prompt corrective action
regulation) to 3.0% from the current level of 4.0%, on July 1, 1994.
Management of the Association does not believe it will be adversely
impacted by this new regulation upon the effectiveness of the regulation in
July, 1994. However, any actual requirement for July, 1994 will depend on
the composition of assets and level of interest rates in December, 1993,
and in the future, portfolio composition, and OTS filing requirements.
39
The following table sets forth the Association's compliance with each
of the above-described capital requirements as of September 30, 1993.
Tangible Core Risk-Based
Capital Capital(1) Capital(2)
(Dollars in Thousands)
Capital under GAAP $12,682 $12,682 $12,682
Additional capital items:
General valuation allowances(3) -- -- 1,602
Regulatory capital 12,682 12,682 14,284
Minimum required regulatory
capital(4) 4,264 8,528 11,68
Excess regulatory capital $ 8,418 $ 4,154 $ 2,597
Regulatory capital as a
percentage 4.46% 4.46% 9.77%
Minimum capital required
as a percentage (4) 1.5 3.0 8.0
Regulatory capital as
a percentage in excess of
requirements 2.96% 1.46% 1.77%
_______________
(1) Does not reflect amendments which were proposed by the OTS in April
1991, which may increase this requirement to between 4% and 5%, as
discussed below.
(2) Does not reflect amendments to the risk-based capital requirement
which were adopted by the OTS in August 1993, as discussed above.
(3) Limited to 1.25% of risk-weighted assets ($1.8 million at September
30, 1993).
(4) Tangible and core capital are computed as a percentage of adjusted
total assets of $284.3 million at September 30, 1993. Risk-based capital
is computed as a percentage of adjusted risk-weighted assets of $146.1
million at September 30, 1993.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such
actions could include a capital directive, a cease and desist order, civil
money penalties, the establishment of restrictions on an association's
operations, termination of federal deposit insurance and the appointment of
a conservator or receiver. The OTS' capital regulation provides that such
actions, through enforcement proceedings or otherwise, could require one or
more of a variety of corrective actions.
Proposed Federal Regulatory Capital Requirements. In April 1991, the
OTS proposed to modify the 3% of adjusted total assets core capital
requirement in the same manner as was done by the Comptroller of the
Currency for national banks. Under the OTS proposal, only savings
associations rated composite 1 under the OTS MACRO rating system will be
permitted to operate at the regulatory minimum core capital ratio of 3%.
For all other savings associations, the minimum core capital ratio will be
3% plus at least an additional 100 to 200 basis points, which will increase
the core capital ratio requirement from 3% to 4% to 5% of adjusted total
assets or more. In determining the amount of additional capital, the OTS
will assess both the quality of risk management systems and the level of
overall risk in each individual savings association through the supervisory
process on a case-by-case basis.
Prompt Corrective Action
40
Under Section 38 of the FDIA, as added by the FDICIA each federal
banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. In early September 1992, the
federal banking agencies, including the OTS, adopted substantially similar
regulations which are intended to implement the system of prompt corrective
action established by Section 38 of the FDIA. These regulations are
effective December 19, 1992. Under the regulations, an institution shall
be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more,
has a Tier I leverage capital ratio of 5.0% or more and is not subject to
any order or final capital directive to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it
has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition
of "well capitalized," (iii) "undercapitalized" if it has a total risk-
based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
Tier I leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that
is equal to or less than 2.0%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if it
were in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
The Association is currently categorized as an adequately capitalized
institution.
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking
agency within 45 days of the date that the institution receives notice or
is deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. A federal banking agency
must provide the institution with written notice of approval or disapproval
within 60 days after receiving a capital restoration plan, subject to
extensions by the agency. An institution which fails to submit a written
capital restoration plan within the requisite period, or fails in any
material respect to implement a capital restoration plan, shall be subject
to the restrictions in Section 38 of the FDIA which are applicable to
significantly undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution shall
become subject to the provisions of Section 38 of the FDIA (i) restricting
payment of capital distributions and management fees, (ii) requiring that
the appropriate federal banking agency monitor the condition of the
institution and its efforts to restore its capital, (iii) requiring
submission of a capital restoration plan, (iv) restricting the growth of
41
the institution's assets and (v) requiring prior approval of certain
expansion proposals. The appropriate federal banking agency for an
undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include:
requiring the institution to raise additional capital; restricting
transactions with affiliates; restricting interest rates paid by the
institution on deposits; requiring replacement of senior executive officers
and directors; restricting the activities of the institution and its
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that
the agency deems appropriate. These and additional mandatory and
permissive supervisory actions may be taken with respect to significantly
undercapitalized and critically undercapitalized institutions.
Accounting Requirements
FIRREA requires the OTS to establish accounting standards to be
applicable to all savings associations for purposes of complying with
regulations, except to the extent otherwise specified in the capital
standards. Such standards must incorporate GAAP to the same degree as is
prescribed by the Federal banking agencies for banks or may be more
stringent than such requirements. Such standards must be fully implemented
by January 1, 1994 and must be phased in as provided in federal regulations
in effect on May 1, 1989.
On September 2, 1992, the OTS amended a number of its accounting
regulations and reporting requirements (effective October 2, 1992). The
amendments reflected the adoption by the OTS of the following standards:
(i) regulatory reports will incorporate generally accepted accounting
principles ("GAAP") when GAAP is used by federal banking agencies; (ii)
savings association transactions, financial condition and regulatory
capital must be reported and disclosed in accordance with OTS regulatory
reporting requirements that will be at least as stringent as for national
banks; and (iii) the director of the OTS may prescribe regulatory reporting
requirements more stringent than GAAP whenever the director determines that
such requirements are necessary to ensure the safe and sound reporting and
operation of savings associations.
Effective February 10, 1992, the OTS adopted a statement of policy
("Statement") set forth in Thrift Bulletin 52 concerning (i) procedures to
be used in the selection of a securities dealer, (ii) the need to document
and implement prudent policies and strategies for securities, whether held
for investment, trading or for sale, and to establish systems and internal
controls to ensure that securities activities are consistent with the
financial institution's policies and strategies, (iii) securities trading
and sales practices that may be unsuitable in connection with securities
held in an investment portfolio, (iv) high-risk mortgage securities that
are not suitable for investment portfolio holdings for financial
institutions, and (v) disproportionately large holdings of long-term, zero-
42
coupon bonds that may constitute an imprudent investment practice. The
Statement applies to investment securities, high-yield, corporate debt
securities, loans, mortgage-backed securities and derivative securities,
and provides guidance concerning the proper classification of an accounting
for securities held for investment, sale, and trading. Securities held for
investment, sale or trading may be differentiated based upon an
institution's desire to earn an interest yield (held for investment), to
realize a holding gain from assets held for indefinite periods of time
(held for sale), or to earn a dealer's spread between the bid and asked
prices (held for trading). Depository institution investment portfolios
are maintained to provide earnings consistent with the safety factors of
quality, maturity, marketability and risk diversification. Securities that
are purchased to accomplish these objectives may be reported at their
amortized cost only when the depository institution has both the intent and
ability to hold the assets for long-term investment purposes. Securities
held for investment purposes may be accounted for at amortized cost,
securities held for sale are to be accounted for at the lower of cost or
market, and securities held for trading are to be accounted for at market.
The Association believes that its investment activities have been and will
continue to be conducted in accordance with the requirements of OTS
policies and generally accepted accounting principles. See "Business -
Investment Activities."
The accounting principles for depository institutions are currently
undergoing review to determine whether the historical cost model or market-
based measures of valuation is the appropriate measure for reporting the
assets of such institutions in their financial statements. Such a proposal
is controversial because any change in applicable accounting principles
which requires depository institutions to carry mortgage-backed securities
and mortgage loans at fair market value could result in substantial losses
to such institutions and increased volatility in their liquidity and
operations. Currently, it cannot be predicted whether there will be any
changes in the accounting principles for depository institutions in this
regard or when any such changes might become effective. The Association
adopted FASB Statement 115 effective September 30, 1993.
In September 1991, the FASB issued for comment an exposure draft
entitled "Accounting for Investments with Prepayment Risk." The proposed
Statement addresses the post-acquisition measurement of investments in
loans, receivables or other debt securities with cash flows that may vary
due to prepayments. The proposed Statement would establish standards for
the measurement of the carrying amount and income associated with such
investments. Comments on the proposed Statement were accepted by the FASB
until December 31, 1991. A substantial portion of the assets of the
Association are investments in loans and other investments with prepayment
risk. Management of the Association does not believe that implementation
of the Statement, if adopted as proposed, will have a material adverse
effect on the Association's financial condition or results of operations.
On June 30, 1993, the FASB issued a proposed Statement of Financial
Accounting Standards, "Accounting for Stock-based Compensation." The
proposal would establish financial accounting and reporting standards for
43
stock-based compensation paid to employees. It would require recognition
of compensation cost for the fair value of stock-based compensation paid to
employees for their services. This fair value would be recognized at the
date the award is granted. Amounts attributable to future service would be
recognized as an asset, prepaid compensation, and would be amortized
ratably over the period that the related employee services are rendered.
If the award is for past services, the related compensation cost would be
recognized in the period in which the award is granted. Stock price
changes after the measurement date would have no effect on measuring the
stock option or the related compensation cost. The disclosure provisions
would be effective for years beginning after December 31, 1993, and
recognition provisions after December 31, 1996.
Recently, a committee of the U.S. Senate heard testimony on this issue
and certain members thereof indicated that, in the absence of action by the
FASB, they may introduce legislation in the U.S. Congress which requires
companies to recognize compensation expense from employee stock option
plans, which currently generally do not result in expense for financial
reporting purposes either at the time of grant or exercise of options
thereunder.
In fiscal 1993, the Association adopted the 1993 Stock Incentive Plan
subject to approval by the shareholders at the 1994 Annual Meeting.
Management believes that the proposed FASB accounting for stock options, if
adopted in its proposed form, would adversely affect financial statements
issued after the three year disclosure period ending after December 31,
1996.
In May, 1993, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a
Loan." This statement addresses the accounting by creditors for impairment
of all loans, uncollateralized as well as collateralized, loans that are
measured at fair value or at the lower of cost of fair value, leases, loans
restructured in a troubled debt restructuring, and debt securities. It
requires that impaired loans be measured based on the present value of
expected cash flows discounted at the loan's effective interest rate, or as
a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The creditor
should also evaluate the collectibility of both contractual interest and
contractual principal when assessing loss accruals. The statement is
effective for fiscal years beginning after December 15, 1994. Management
of the Association does not believe that implementation of the Statement,
when adopted, may have a material adverse effect on the Association's
financial condition or results of operations.
Federal Qualified Thrift Lender Test
A savings association that does not meet the Qualified Thrift Lender
("QTL") Test set forth in the HOLA and implementing regulations must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make
any new investment, directly or indirectly, unless such activity or
investment is permissible for a national bank; (ii) the branching powers of
the association shall be restricted to those of a national bank; (iii) the
association shall not be eligible to obtain any advances from its FHLB; and
44
(iv) payment of dividends by the association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of
three years from the date the association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety
and soundness considerations).
Effective December 19, 1991, the definition of Qualified Thrift
Investments was amended in its entirety and the QTL Test was amended to
require that Qualified Thrift Investments ("QTIs") represent 65% of
portfolio assets, rather than 60% and 70% of tangible assets as previously
required before and after July 1, 1991, respectively. Portfolio assets are
defined as total assets less intangibles, property used by a savings
association in its business and liquidity investments in an amount not
exceeding 20% of assets. Generally, QTIs are residential housing related
assets. At September 30, 1993, approximately 80.6% of the Association's
assets were invested in QTIs, which was in excess of the percentage
required toqualify the Association under theQTL Test in effectat that time.
Classification of Assets
Under current federal regulations, an institution's problem assets are
subject to classification according to one of three categories:
"substandard," "doubtful" and "loss." For assets classified "substandard"
and "doubtful," the institution is required to establish prudent general
loan loss reserves in accordance with generally accepted accounting
principles. Assets classified "loss" must be either completely written off
or supported by a 100% specific reserve. A classification category
designated "special mention" also must be established and maintained for
assets not currently requiring classification but having potential
weaknesses or risk characteristics that could result in future problems.
An institution is required to develop an in-house program to classify its
assets, including investments in subsidiaries, on a regular basis and set
aside appropriate loss reserves on the basis of such classification.
Management believes it is in compliance with these requirements.
Transactions with Affiliates
Transactions between savings associations and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a savings association is any company or entity which controls, is
controlled by or is under common control with the savings association. In
a holding company context, the parent holding company of a savings
association (such as the Corporation) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which
the savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
association's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same or at least as favorable, to the association
or subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of
a guarantee and similar other types of transactions. In addition to the
45
restrictions imposed by Sections 23A and 23B, no savings association may
(i) loan or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for
affiliates which are subsidiaries of the savings association.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive
officer and to a greater than 10% stockholder of a savings association, and
certain affiliated interests of either, may not exceed, together with all
other outstanding loans to such person and affiliated interests, the
association's loans-to-one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be
made on terms substantially the same as offered in comparable transactions
to other persons and also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
association to all insiders cannot exceed the association's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. At September 30, 1993, the
Association was in compliance with the above restrictions.
Restrictions on Capital Distributions
Effective August 1, 1990, the OTS promulgated a regulation governing
capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account of a savings association. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
associations meeting at least their minimum capital requirements, so long
as such associations notify the OTS and receive no objection to the
distribution from the OTS. Associations and distributions that do not
qualify for the safe harbor are required to obtain prior OTS approval
before making any capital distributions.
Generally, Tier 1 associations, which are savings associations that
before and after the proposed distribution meet or exceed their fully
phased-in capital requirements, may make capital distributions during any
calendar year equal to the higher of (i) 100% of net income for the
calendar year-to-date plus 50% of its "surplus capital ratio" at the
beginning of the calendar year or (ii) 75% of net income over the most
recent four-quarter period. The "surplus capital ratio" is defined to mean
the percentage by which the association's ratio of total capital to assets
exceeds the ratio of its fully phased-in capital requirement to assets, and
"fully phased-in capital requirement" is defined to mean an association's
capital requirement under the statutory and regulatory standards to be
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association.
Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their minimum capital requirements,
may make capital distributions over the most recent four quarter period up
46
to a specified percentage of their net income during that four quarter
period, depending on how close the association is to meeting its fully
phased-in capital requirements. Tier 2 associations that meet the capital
requirements to be in effect on January 1, 1993 (including the 8% risk-
based requirement and then-applicable exclusions of nonpermissible
subsidiary investments and goodwill) are permitted to make distributions
totaling up to 75% of net income over the four quarter period. Tier 2
associations that meet the January 1, 1991 capital requirements (including
the 7.2% risk-based requirement and the then-applicable exclusions of
nonpermissible subsidiary investments and goodwill) are permitted to make
distributions totaling up to 50% of net income over the four quarter
period. Tier 2 associations that meet current minimum requirements, but
not the January 1, 1991 standard, may make distributions totaling up to 25%
of net income over the four quarter period.
Tier 3 associations, which are associations that do not meet current
minimum capital requirements or that have capital in excess of either their
fully phased-in capital requirement or minimum capital requirement but
which have been notified by the OTS that it will be treated as a Tier 3
association because they are in need of more than normal supervision,
cannot make any capital distribution without obtaining OTS approval prior
to making such distributions.
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 associations must submit 30 days written notice to the OTS prior to
making the distribution. The OTS may object to the distribution during
that 30-day period based on safety and soundness concerns. In addition, a
Tier 1 association deemed to be in need of more than normal supervision by
the OTS may be downgraded to a Tier 2 or Tier 3 association as a result of
such a determination.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW and
Super NOW checking accounts) and non-personal time deposits. At September
30, 1993, the Association was in compliance with the applicable
requirements.
The balances maintained to meet the reserve requirements imposed by
the Federal Reserve Board may be used to satisfy applicable liquidity
requirements. Because required reserves must be maintained in the form of
vault cash or a noninterest-bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce the Association's earning
assets.
Interstate Acquisitions
OTS regulations recently have been amended to provide federally
chartered savings associations with essentially unlimited, subject to
federal law, ability to open branch offices in any state. Generally,
federal law prohibits federal thrifts from establishing, retaining or
operating a branch outside the state in which the federal association has
its home office unless the association meets the Internal Revenue's
domestic building and loan test (generally, at least 60% of a thrift's
47
assets must be housing-related) ("IRS Test"). The IRS Test requirement
does not apply if: (i) the branch(es) result(s) from an emergency
acquisition of a troubled thrift (however, if the troubled association is
acquired by a bank holding company, does not have its home office in the
state of the bank holding company's bank subsidiary and does not qualify
under the IRS Test, its branching is limited to the branching laws for
state-chartered banks in the state where the thrift is located); (ii) the
law of the state where the branch would be located would permit the branch
to be established if the federal association were chartered by the state in
which its home office is located; or (iii) the branch was operated lawfully
as a branch under state law prior to the association's conversion to a
federal charter. Furthermore, the OTS will evaluate a branching
applicant's record of compliance with the Community Reinvestment Act
("CRA"). A poor CRA record may be the basis for denial of a branching
application.
TAXATION
Federal Taxation
General. The Association is subject to federal income taxation under
the Internal Revenue Code of 1986, as amended (the "Code"), in the same
general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following
discussion of federal taxation is intended only to summarize certain
federal income tax matters and is not a comprehensive description of the
tax rules applicable to the Association.
Accrual Method of Accounting. For federal income tax purposes, the
Association currently reports its income and expenses on the accrual basis
method of accounting and uses a tax year ending September 30 for filing its
federal income tax returns. Jefferson files consolidated federal income
tax returns with its wholly-owned subsidiaries, except for JFC II, which is
a real estate mortgage investment conduit.
Bad Debt Reserves. Savings institutions such as the Association which
meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a reserve for bad
debts and to make annual additions to the reserve. These additions may,
within specified formula limits, be deducted in arriving at the
Association's taxable income. For purposes of computing the deductible
addition to its bad debt reserve, the Association's loans are separated
into "qualifying real property loans" (i.e., generally those loans secured
by interests in real property) and all other loans ("nonqualifying loans").
The deduction with respect to nonqualifying loans must be computed under
the experience method, which essentially allows a deduction for the
Association's actual charge-offs, while a deduction with respect to
qualifying loans may be computed using a percentage based on actual loss
experience or a percentage of taxable income. Reasonable additions to the
reserve for losses on nonqualifying loans must be based upon actual loss
experience and would reduce the current year's addition to the reserve for
losses on qualifying real property loans, unless that addition is also
determined under the experience method. The sum of the additions to each
reserve for each year is the Association's annual bad debt deduction.
48
Under the experience method, the deductible annual addition to the
Association's bad debt reserves is the amount necessary to increase the
balance of the reserve at the close of the taxable year to the greater of
(a) the amount which bears the same ratio to loans outstanding at the close
of the taxable year as the total net bad debts sustained during the current
and five preceding taxable years bear to the sum of the loans outstanding
at the close of those six years or (b) the lower of (i) the balance in the
reserve account at the close of the last taxable year prior to the most
recent adoption of the experience method (the "base year"), except that for
taxable years beginning after 1987, the base year is the last taxable year
before 1988, or (ii) if the amount of loans outstanding at the close of the
taxable year is less than the amount of loans outstanding at the close of
the base year, the amount which bears the same ratio to loans outstanding
at the close of the taxable year as the balance of the reserve at the close
of the base year bears to the amount of loans outstanding at the close of
the base year.
Under the percentage of taxable income method, the bad debt deduction
equals 8% of taxable income determined without regard to that deduction and
with certain adjustments. The availability of the percentage of taxable
income method has historically permitted a qualifying savings institution
to be taxed at a lower maximum effective marginal federal income tax rate
than that applicable to corporations in general. The maximum effective
marginal federal income tax rate payable by a qualifying savings
institution fully able to use the maximum deduction permitted under the
percentage of taxable income method, in the absence of other factors
affecting taxable income, is 31.3% (as compared with 34% for corporations
generally). Any savings institution at least 60% of whose assets are
qualifying assets, as described in Section 7701(a)(19)(c) of the Code, will
generally be eligible for the full 8% of taxable income deduction. As of
September 30, 1993, at least 60% of the Association's assets were
"qualifying assets" described in Section 7701(a)(19)(C) of the Code, and
the Association anticipates that at least 60% of its assets will continue
to be qualifying assets in the immediate future. If this ceases to be the
case, the Association may be required to restore some portion of its bad
debt reserve to taxable income in the future.
Under the percentage of taxable income method, the bad debt deduction
for an addition to the reserve for qualifying real property loans cannot
exceed the amount necessary to increase the balance in this reserve to an
amount equal to 6% of such loans outstanding at the end of the taxable
year. The bad debt deduction is also limited to the amount which when
added to the addition to the reserve for losses on nonqualifying loans,
equals the amount by which 12% of deposits at the close of the year exceeds
the sum of surplus, undivided profits and reserves at the beginning of the
year. Based on experience, it is not expected that these restrictions will
be a limiting factor for the Association in the foreseeable future. In
addition, the deduction for qualifying real property loans is reduced by an
amount equal to the deduction for nonqualifying loans.
In fiscal 1992 and 1991, the Association used the experience method
with respect to qualifying real property loans. In fiscal 1993, the
Association intends to utilize the percentage of taxable income method.
49
Distributions. If the Association distributes cash or property to
stockholders, and the distribution is treated as being from its accumulated
bad debt reserves, the distribution will cause the Association to have
additional taxable income. As of September 30, 1993, retained earnings
included approximately $3.2 million of accumulated bad debt reserves. A
distribution to stockholders is deemed to have been made from accumulated
bad debt reserves to the extent that (a) the reserves exceed the amount
that would have been accumulated on the basis of actual loss experience,
and (b) the distribution is a "non-dividend distribution." A distribution
in respect of stock is a non-dividend distribution to the extent that, for
federal income tax purposes, (i) it is in redemption of shares, (ii) it is
pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution, together with all other such distributions during the
taxable year, exceeds the Association's current and accumulated earnings
and profits. The amount of additional taxable income created by a
nondividend distribution is an amount that when reduced by the tax
attributable to it is equal to the amount of the distribution.
Alternate Minimum Tax. The Code imposes an alternative minimum tax
("AMT") at a rate of 20% on a base of regular taxable income plus certain
tax preferences ("alternative minimum taxable income" or "AMTI") and will
be payable to the extent such AMTI is in excess of an exemption amount.
The Code provides that an item of tax preference is the excess of the bad
debt deduction allowable for a taxable year pursuant to the percentage of
taxable income method over the amount allowable under the experience
method. The other items of tax preference that constitute AMTI include (a)
tax-exempt interest on newly issued (generally, issued on or after August
8, 1986) private activity bonds other than certain qualified bonds and (b)
for taxable years after 1989, 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses).
Net operating losses can offset no more than 90% of AMTI. Certain payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1992, corporations, including thrift institutions, are also subject
to an environmental tax equal to 0.12% of the excess of AMTI for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million. The Association
incurred a minimum tax expense of $40,000 in fiscal 1991 which will be
utilized as a credit carryover against regular tax in fiscal 1993.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses ("NOLs") to the preceding three taxable years and
forward to the succeeding 15 taxable years. This provision applies to
losses incurred in taxable years beginning after 1986. Losses incurred by
savings institutions in years beginning after 1981 and before 1986 may be
carried back 10 years and forward eight years. As of September 30, 1993,
the Association had $1.3 million of net operating loss carryforwards for
federal income tax purposes. For income tax purposes, the availability of
the Association's tax credit carryforwards to offset current taxable income
has been recorded as restricted by Internal Revenue Code Section 382. In
general, Section 382 provides that following an "ownership change" in a
"loss corporation" the tax credit carryforwards of that corporation will be
available to offset taxable income in each taxable year following the
"ownership change" only up to the amount of the Section 382 limitation
50
(generally, the product of the corporation's market value at the time of
the "ownership change" and the long-term tax-exempt bond rate at such time)
for such year. The $1.3 million carryforward for income tax purposes would
therefore be limited to a maximum of $430,000 in any one year.
Capital Gains and Corporate Dividends-Received Deduction. The capital
gains income tax which was previously imposed at a tax rate of 28% on a
corporation's net long-term capital gains was repealed effective December
31, 1986. Consequently, corporate net capital gains will be taxed at a
maximum rate of 34%. The corporate dividends-received deduction is 80% in
the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return and corporations which
own less than 20% of the stock of a corporation distributing a dividend may
deduct only 70% of dividends received or accrued on their behalf. However,
a corporation may eliminate from income 100% of dividends from a member of
the same affiliated group of corporations.
Tax Returns. The federal income tax returns of the Association, for
its tax years beginning after September 30, 1987 and subsequent periods are
open under the statute of limitations and are subject to review by the
Internal Revenue Service.
Recent Tax Developments. In August, 1993, the Revenue Reconciliation
Act of 1993 became law, and effects tax changes for individuals and
businesses. Key provisions affecting financial institutions include the
following: (1) an increase in the tax rate on corporate taxable income from
34% to 35% for taxable income over $10.0 million; (2) provides a 15-year
straight line amortization period for intangible assets acquired in a
taxable purchase; (3) requires security dealers (to include financial
institutions) to value securities not held as inventory to be marked to
market; (4) requires thrifts to file information returns with the Internal
Revenue Service reporting any discharge of indebtedness of $600 or more;
(5) repeals the "stock for debt" exception to the recognition of
cancellation of debt income; (6) relaxes seller-financing restriction on
sales of foreclosed real property to pensions and exempt organizations; (7)
increases the required estimated tax payments by corporations to 100%; (8)
limits deductibility of business meals and entertainment to 50%; (9)
repeals the deduction for club dues; (10) denies the deduction for spousal
travel expenses; (11) repeals the deduction for lobbying expenses; (12)
increases the cost-recovery period of non-residential real property to 39
years from its present 31.5 years; (13) extends the employer provided
educational assistance programs; (14) adds entirely new capital gains
provisions for the sale and exchange of certain small business stock; (15)
limits deductions for executive compensation to $1.0 million per executive;
(16) eliminates the ceiling on the Medicare portion (2.9%) of the FICA tax;
and (17) lowers the maximum amount of annual compensation to $150,000 when
determining the size and allocation of retirement plan contributions.
The enactment of this legislation will result in increased tax expense
to the Association.
51
State Taxation
Virginia imposes a corporate income tax on a base which is similar to
federal income tax, as adjusted by adding back the federal bad debt
deduction but taking into account a state bad debt deduction of 40%. The
state corporate tax rate is 6% of Virginia taxable income.
Item 2. Properties.
Offices and Other Material Properties
At September 30, 1993, the Association conducted its business from its
main office in Warrenton, Virginia and six branch offices. The following
table sets forth certain information with respect to the offices of the
Association as of September 30, 1993.
Net Book Value of
Owned Lease Property or Leasehold
or Expiration Improvements as of
Office Location Leased Date September 30, 1993
(Dollars in Thousands)
Main Office:
550 Broadview Avenue Owned -- $ 898
Warrenton, Virginia 22186
Branch Offices:
Warrenton Center Leased 11/30/97 $ 38
Warrenton, Virginia 22186
701 South Main Street Owned -- $ 323
Culpeper, Virginia 22701
1705 Seminole Trail Owned -- $ 642
Rio Road & 29 North
Charlottesville, Virginia 22906
300 Preston Avenue Leased 7/31/96 $ 13
Commonwealth Center
Charlottesville, Virginia 22901
9-J Catoctin Circle, S.W. Leased 10/31/94 $ 51
Village Square Shopping Center
Leesburg, Virginia 22075
20 East Luray Shopping Center Leased 9/30/97 $ 6
Luray, Virginia 22835
52
Future Loan Production Location
8500 Sudley Road Owned -- $ 392
Manassas, Virginia 22110
Item 3. Legal Proceedings
Jefferson is a party to the following legal proceedings which
management believes will not have a material adverse impact on the
consolidated financial statements.
a. Max Greenhalgh, et al. v. Virginia Beach Savings and Loan Bank, et al.
This suit is filed in the Third Judicial District of Summit County,
Utah. This is a suit instituted by plaintiffs calling themselves "Founding
Members" of the Jeremy Ranch Golf Club. The Founding Members seek to
protect what they allege to be their golfing and club privileges incident
to their Membership in the Jeremy Ranch Golf Club. Though a named
defendant, Jefferson has never been served. The only participant to be
served was the lead lender, Virginia Beach Federal Savings Bank.
Jefferson was one of the four participants in a loan transaction that
was initially entered into in November, 1982 by and between Jeremy Ltd., a
Utah limited partnership, Richards Woodbury Mortgage Corporation, a Utah
corporation, the loan originator and servicing agent, and Virginia Beach
Federal Savings Bank, the lead lender. The loan was secured by real estate
known as Jeremy Ranch, including the Jeremy Ranch Golf Course. Jefferson
held a 23.59% interest in this loan.
Because the loan was in default, the lenders foreclosed on the
property on November 28, 1988. The Founding Members' suit was filed prior
to the foreclosure sale, and the plaintiffs sought a temporary restraining
order to prevent the foreclosure sale. The court refused to issue such an
order. The action continued on the Founding Members' multiple legal
theories that the lenders, including Jefferson, lost their security
interest in the property and are precluded from enforcing such security
interest so as to adversely affect the Founding Members' privileges. In
the alternative, the Founding Members sought compensatory damages against
the lenders in excess of $2,000,000.
By memorandum decision dated July 11, 1991, the court entered Summary
Judgment in favor of the Plaintiffs and found that the "Founding Members"
of the Jeremy Ranch Club hold easements in gross on the golf course. No
damages were awarded.
In November, 1991, Jefferson entered into an agreement with Virginia
Beach Federal Savings Bank whereby Virginia Beach Federal Savings Bank
purchased Jefferson's interest in all of the Jeremy Ranch property and
agreed to indemnify and hold Jefferson harmless in this litigation.
The matter was tried in February and March of 1993. The court found
that approximately one-third of the Plaintiffs were not entitled to an
easement, but confirmed that the other Plaintiffs did have easements and
53
who were also awarded damages. Both sides appealed. In November of 1993,
Virginia Beach Federal Savings Bank settled the case with 179 of the 180
Plaintiffs in part by selling them the golf course. The matter is still on
appeal as to the one remaining Plaintiff.
b. William T. Blair, Jr. v. Virginia Beach Federal Savings Bank et al.,
Civil No. 900901684.
This action was filed in the Third Judicial District Court of Salt
Lake County, Utah. Plaintiff's claim arises from an employment agreement
he entered into in April of 1985 with the Jeremy Service Corporation. The
Jeremy Service Corporation was the general partner of Jeremy Ltd., which at
the time owned the Jeremy Ranch. Plaintiff alleges that the Jeremy Service
Corporation was the alter ego of the participating lenders, including
Jefferson, in the Jeremy Ranch loan.
Plaintiff asserts various legal theories against the lenders and seeks
damages in the following amounts:
1. Breach of contract: $155,126
2. Breach of covenant of good faith and fair dealings: $228,581
3. Fraud: $228,581
4. Compensatory: $862,013 punitive
5. Negligent misrepresentation: $1,090,594
6. Promissory estoppel: $182,000
7. Indemnification: $11,119
In November, 1991, Jefferson entered into an agreement with Virginia
Beach Federal Savings Bank whereby Virginia Beach Federal purchased
Jefferson's interest in all of the Jeremy Ranch property and agreed to
indemnify and hold Jefferson harmless in this litigation.
Other
The Association has resolved to indemnify and hold harmless those
officers of the Association serving on boards of directors of other
corporations where such service is at the request of, and in the best
interests of, the Association. Two officers of the Association are or were
directors of Jeremy Service Corporation which is involved in one or more of
the law suits referred to above.
Item 4. Submission of Matters to Vote of Security Holders.
Not applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information required herein is incorporated by reference from the
inside back cover of the Association's Annual Report.
54
Item 6. Management's Discussion and Analysis.
The information required herein is incorporated by reference from
pages 3 to 17 of the Annual Report.
Item 7. Financial Statements.
The information required herein is incorporated by reference from
pages 18 to 43 of the Annual Report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required herein is incorporated by reference from
pages 3 to 8 of the definitive proxy statement of the Association filed on
January 11, 1994 ("Definitive Proxy Statement").
Item 10. Executive Compensation.
The information required herein is incorporated by reference from
pages 9 to 12 of the Definitive Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from
pages 1 to 3 of the Definitive Proxy Statement.
Item 12. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from
pages 12 and 13 of the Definitive Proxy Statement.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-B.
(1) The following financial statements are incorporated by reference
from Item 7 hereof (see Exhibit 13):
Consolidated Balance Sheets at September 30, 1993 and 1992
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended September 30, 1993
55
Consolidated Statements of Stockholders' Equity
for Each of the Three Years in the Period Ended
September 30, 1993
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended September 30, 1993
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
(2) The following exhibits are filed as part of this Form 10-KSB and
this list includes the Exhibit Index.
No. Exhibits Page
3.1 Federal Stock Charter *
3.2 Federal Stock Bylaws E-1
4 Specimen Stock Certificate **
10.1 Employment agreement with Thomas W. Winfree E-11
10.2 Form of severance agreement with Craig A. Mason E-19
10.3 Form of severance agreement with Walter E. Monroe E-23
10.4 Form of severance agreement with Benny N. Werner E-27
10.5 Form of severance agreement with James A. Yergin E-31
10.6 Form of severance agreement with John E. Meyer E-35
10.7 Form of severance agreement with Carol J. Smith E-39
10.8 Form of severance agreement with Melanie K. Smith E-43
10.9 Form of severance agreement with Shirley B. Stalnaker E-47
10.10 Form of severance agreement with JoDale Favara E-51
10.11 Form of severance agreement with Douglas R. Lawrence E-55
13 Annual Report to Stockholders E-59
22 Subsidiaries of the Registrant - Reference
is made to "Item 1. Subsidiaries" for
the required information.
* Incorporated by reference to the Association's Form 10-K for the
year ended September 30, 1992.
** Incorporated by reference to the Association's Form 10-K for the
year ended September 30, 1991.
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Jefferson has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
By: /s/ Thomas W. Winfree
Thomas W. Winfree, President and
Chief Executive Officer
56
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on behalf of the Registrant by the
following persons in the capacities on the dates indicated.
Name Title Date
/s/ Robin C. Gulick Director and Chairman December 31, 1993
Robin C. Gulick of the Board
/s/ Thomas W. Winfree Director, President December 31, 1993
Thomas W. Winfree and Chief Executive
Officer
/s/ Calvin P. Burton Director December 31, 1993
Calvin P. Burton
/s/ Charles H. Jones, Jr. Director December 31, 1993
Charles H. Jones, Jr.
/s/ Robert F. Kube Director December 31, 1993
Robert F. Kube
/s/ William M. Rider Director December 31, 1993
William M. Rider
/s/ Saul J. Robinson Director December 31, 1993
Saul J. Robinson
Director December 31, 1993
John Sheldon Clark
Director December 31, 1993
Arthur J. Shadek
/s/ Craig A. Mason Senior Vice President, December 31, 1993
Craig A. Mason Chief Financial
Officer and Principal
Accounting Officer
<PAGE>
<PAGE>
Annex V
(JEFFERSON SAVINGS & LOAN LOGO)
January 4, 1994
To Our Stockholders:
We are pleased to report that fiscal 1993 was profitable for Jefferson
Savings and Loan Association. In addition, it appears that the economic forces
which have been restraining financial institution earnings in the last few
years began receding during 1993. The benefits of Jefferson's market position,
conservative operations, and business momentum from the successful stock
offering completed in October, 1992 became increasingly evident. While work
remains in continuing to improve operations and enhance shareholder value, we
remain committed to making Jefferson a more important factor in our
communities' financial decisions.
Jefferson's 1993 net income of $846,000 was a dramatic increase from the
1992 loss of $973,000. This significant improvement was the result of higher
net interest income, reduced losses on loans, a gain on the sale of mortgage
loan servicing, and a decrease in real estate owned expense. Total assets were
$284 million at September 30, 1993. Stockholders' equity increased to $12.7
million at September 30, 1993, resulting in a book value of $9.67 per share.
In April 1993, the Association effected a one-for-three reverse stock split,
reducing outstanding shares to 1,310,876.
In October, 1993 Jefferson successfully acquired $9.3 million of
deposits from another savings institution in Leesburg, Virginia. We welcome
these new customers to the Jefferson family. We also acquired a vacant branch
facility in Manassas, Virginia from the Resolution Trust Corporation, and plan
to open a loan production facility there in 1994. During 1994, we will be
evaluating other opportunities available for expansion in our contiguous
market areas. However, we will only pursue opportunities that make economic
and regulatory sense. Our retail system has been Jefferson's strength and we
intend to continue doing what we do best, making mortgage and consumer loans,
and servicing our deposit customers. This expansion will need to be supported
by capital growth as well. Our plans include an offering of stock if it
becomes likely that asset and liability growth will take place.
During this past year, we have begun to transform Jefferson into an
institution which embraces a strong sales culture with recognition of the
importance of efficiently serving our customers. Our goal is to have the
people in our communities use Jefferson whenever a financial need arises.
Since 1960, Jefferson has served the people of Warrenton, Culpeper,
Luray, Leesburg and Charlottesville. As a result of the challenging regulatory
and competitive environments, it has become clear that only the best managed
and strongest financial institutions will survive. Jefferson intends to remain
in that elite group.
We would like to express our thanks to all Jefferson employees for their
hard work that was a major factor in our success in 1993. We also salute the
Board of Directors for their policy guidance and devotion to Jefferson's
future. Finally, we would like to thank our stockholders for your continuing
support. Management and the Board of Directors has placed enhancement of
shareholder value as a top priority in planning Jefferson's future.
Sincerely,
(SIG) (SIG)
Robin C. Gulick Thomas W. Winfree
Chairman of the President and
Board Chief Executive
Officer
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
September 30,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Assets:
Cash and investments . . . . . $48,596 $48,192 $13,498 $32,240 $36,025
Loans receivable, net . . . . . 169,965 186,185 208,641 234,848 245,522
Mortgage-backed securities . . 51,173 50,589 79,491 79,400 83,594
Other assets . . . . . . . . . 14,516 16,654 22,560 16,631 18,943
$284,250 $301,620 $324,190 $363,119 $384,084
Liabilities and Stockholders'
Equity:
Deposits . . . . . . . . . . . $241,467 $249,166 $244,139 $236,780 $257,983
FHLB advances . . . . . . . . . 13,750 51,050 46,000
Other borrowings . . . . . . . 24,079 34,158 54,506 61,387 65,612
Other liabilities . . . . . . . 6,022 6,558 5,260 8,009 8,436
Stockholders' equity . . . . . 12,682 11,738 6,535 5,893 6,053
$284,250 $301,620 $324,190 $363,119 $384,084
</TABLE>
<TABLE>
Year Ended September 30,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Summary of Income and Expense:
Interest income . . . . . . . . $21,168 $26,712 $32,820 $34,717 $36,191
Interest expense . . . . . . . 13,725 20,007 26,983 30,038 32,133
Net interest income . . . . . . 7,443 6,705 5,837 4,679 4,058
Provision for losses on loans . 533 1,115 498 667 603
Noninterest income . . . . . . 3,090 2,257 2,549 1,577 1,761
Operating expenses . . . . . . 8,239 8,820 7,206 6,253 8,771
Income (loss) before income tax
expense (benefit) and
extraordinary item . . . . . 1,761 (973) 682 (664) (3,555)
Income tax expense (benefit) . 915 500 (504) (1,430)
Income (loss) before
extraordinary item . . . . . 846 (973) 182 (160) (2,125)
Extraordinary item . . . . . . 460
Net income (loss) . . . . . . . $846 $(973) $642 $(160) $(2,125)
</TABLE>
<TABLE>
At or for the Year Ended September 30,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Book value per common share (1) $9.67 $8.95 $36.64 $33.04 $33.93
Outstanding shares (1) . . . . 1,310,876 1,310,876(2) 178,377 178,377 178,377
Earnings (loss) per share
before extraordinary item (1) $.65 $(5.45) $1.02 $(.90) $(11.91)
Extraordinary item per share
(1) . . . . . . . . . . . . . 2.58
Net earnings (loss) per share
(1) . . . . . . . . . . . . . $.65 $(5.45) $3.60 $(.90) $(11.91)
Return on average assets (net
income divided by average
total assets) . . . . . . . . .29% (.31)% .19% (.04)% (.53)%
Return on equity (net income
divided by average equity) . 6.93% (10.65)% 10.33% (2.68)% (29.86)%
Equity-to-average assets
(average equity divided by
average total assets) . . . . 4.17% 2.92% 1.81% 1.60% 1.78%
Number of offices . . . . . . . 6 6 7 7 7
Regulatory Capital:
Tangible . . . . . . . . . . . $12,682 $11,738 $6,535 $5,893 N/A
Core . . . . . . . . . . . . . 12,682 11,738 6,535 5,893 N/A
Risk-based . . . . . . . . . . 14,284 13,026 7,670 6,691 N/A
</TABLE>
___________
(1) All periods presented have been adjusted to give effect to the
one-for-three reverse stock split in April, 1993.
(2) At September 30, 1992, outstanding shares totaled 1,310,876, while the
weighted average shares outstanding for the year ended September 30, 1992
totaled 178,377.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Jefferson Savings and Loan Association, F.A. ("Jefferson" or the
"Association") is a federally chartered savings and loan association
headquartered in Warrenton, Virginia with branch offices in Warrenton, Luray,
Leesburg, Culpeper and Charlottesville. The Association's principal business
consists of attracting deposits and using such funds, together with
borrowings, to originate primarily residential real estate loans secured by
property located mainly in Virginia. However, during fiscal 1994, the
Association intends to emphasize the origination of nonresidential real estate
loans secured by property in its market area. Currently, Jefferson is the
largest financial institution headquartered in Fauquier County, Virginia.
In recent years, management has pursued various strategies in connection
with an overall plan to meet more stringent regulatory capital requirements.
As part of this plan, the Association successfully completed a common stock
offering resulting in net proceeds of $6.2 million, reduced high cost
borrowings, increased net interest income, increased net interest spread,
reduced its reliance on national deposits, increased local core deposits, sold
newly originated fixed interest-rate mortgage loans, with servicing retained,
reduced real estate owned, and increased noninterest income. In the future,
management intends to concentrate its efforts on reducing expenses related to
real estate owned, upgrading the mortgage origination capability of the
Association, and moderately increasing branch and deposit growth in Virginia
markets contiguous to those markets presently served by the Association.
During fiscal 1993, the Association recorded net income of $846,000
versus a net loss of $973,000 in fiscal 1992. The major contributing factors
for this improvement were an increase in net interest income of $738,000, a
decrease in provision for losses on loans of $582,000, a gain on the sale of
mortgage loan servicing of $770,000, an increase on gains on sale of mortgage
loans of $381,000 and a decrease of $1.0 million in real estate owned expense.
Such benefits were partially offset by a decrease of $467,000 in gains on sale
of investment securities and mortgage- backed securities, an increase in
operating expenses other than real estate owned expense of $427,000, and an
increase in income tax expense of $915,000.
Financial Condition at September 30, 1993 and 1992
The Association's total assets decreased $17.4 million, or 5.8%, to
$284.3 million at September 30,1993 from $301.6 million at September 30, 1992
due primarily to a $16.2 million decrease in loans receivable, a $7.0 million
decrease in cash held in escrow, and a $2.2 million decrease in real estate
owned, which decreases were partially offset by an increase of $7.4 million in
investment securities.
On September 30, 1992, the Association successfully completed a
subscription rights and community stock offering which resulted in the sale of
approximately 3.4 million shares of common stock. At September 30, 1992, the
funds from the stock offering, amounting to approximately $6.8 million were
held in an interest-earning escrow account. These funds were released to the
Association on October 5, 1992, and re-invested in other interest-earning
assets after payment of offering expenses.
The portfolio of $45.7 million in investment securities at September 30,
1993 consisted primarily of $14.0 million in U.S. Government and agency
obligations, $15.0 million in Federal Home Loan Bank of Atlanta ("FHLB")
overnite funds, $3.6 million in FHLB stock, $10.7 million in adjustable-rate
mortgage mutual funds, and $2.4 million in finance subsidiary trust cash
accounts. At September 30, 1993, the Association adopted Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", which
requires investments to be classified as held-to-maturity, trading, or
available-for-sale. Investments held- to-maturity are reported at amortized
cost; investments classified as trading are reported at fair value, with
unrealized gains and losses included in earnings; and investments classified
as available-for-sale are reported at fair value with unrealized gains and
losses excluded from earnings and reported in a separate component of
stockholders' equity, net of income tax effect. At September 30, 1993,
investments available-for-sale totalled $24.7 million, with an unrealized loss
of $7,000, and investments held- to-maturity totalled $21.0 million, with no
unrealized gain or loss. There were no investments classified as trading. The
Association has continued its past policy of investing in short- term overnite
funds, high quality government and government agency obligations on a direct
basis or through mutual funds. At September 30, 1992 the investment portfolio
of $38.3 million consisted of $30.0 million of U.S. Treasury bills,
$2.5 million in FHLB overnite funds, $3.4 million in FHLB stock, $1.1 million
in a corporate note, and $1.3 million in finance subsidiary trust cash
accounts and other investments. For further information concerning the
Association's investment securities, see Note 2 in the Notes to Consolidated
Financial Statements contained herein.
The mortgage-backed securities ("MBSs" or "mortgage-backed securities")
portfolio of $51.2 million consists entirely of Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
instruments. At September 30, 1993, MBSs classified as available-for-sale
totalled $8.7 million with an unrealized gain of $161,000, and MBSs classified
as held-to-maturity totalled $42.3 million with a net unrealized gain of
$1,240,000. At September 30, 1993, there were no MBSs classified as trading.
Approximately $25.3 million of the MBSs classified as held-to-maturity are
placed with trustees as part of collateralized mortgage obligation ("CMO") and
real estate mortgage investment conduit ("REMIC") transactions through
Jefferson's wholly-owned finance subsidiaries. The finance subsidiaries' MBSs
decreased $12.3 million in fiscal 1993 as a result of prepayments due to the
low interest rate environment which prevailed in fiscal 1993. However, the
balance of MBSs at September 30, 1993 compared to September 30, 1992 remained
virtually unchanged due to purchases of MBSs of $22.7 million, and the
securitization of portfolio mortgage loans of $4.1 million into MBSs, which
were offset by repayments of $18.1 million (including the $12.3 million of
prepayments referred to above) and sales of $8.3 million. The sales of MBSs in
fiscal 1993 were effected in late December, 1992 to increase the Association's
risk-based capital ratios to meet increased regulatory capital standards and
offset loss provisions on mortgage loans and real estate owned. The sales of
$15.4 million in fiscal 1992 were effected to reduce assets and increase
risk-based capital ratios in accordance with a capital plan filed with the
Office of Thrift Supervision ("OTS").
Loans receivable decreased $16.2 million or 8.7% in fiscal 1993 to
$170.0 million at September 30, 1993. This decline was attributable to a
continuing decline in mortgage interest rates, which has spurred record
refinancing activity, and a high level of loan repayments. Loan originations
increased to $103.0 million in fiscal 1993 compared to $97.3 million in fiscal
1992. Sales of loans increased to $64.8 million in fiscal 1993 compared to
$57.8 million in fiscal 1992 and loan repayments totalled $50.7 million in
fiscal 1993 compared to $58.9 million in fiscal 1992. The Association has
continued to sell newly originated fixed-rate mortgage loans in the secondary
market while retaining servicing. However, in September, 1993, the Association
sold servicing rights to $63 million of loans previously sold. In 1993, the
Association continued to focus its lending activities on single-family
residential loans, construction loans, and consumer loans, and originated only
$476,000 of nonresidential loans during fiscal 1993 and 1992. Nonresidential
loans decreased to $32.4 million or 18.6% of outstanding loans at
September 30, 1993 from $37.1 million or 19.5% of outstanding loans at
September 30, 1992. However, during fiscal 1994, the Association intends to
emphasize the origination of nonresidential real estate loans. The amount of
such originations will depend on market conditions and other factors. However,
the Association does not presently anticipate such originations to exceed
$15.0 million in fiscal 1994. Generally, individual loans would be limited to
$800,000 and would be secured by property located in its market area. For
information regarding loan loss provisions and nonperforming assets, see
"Nonperforming Assets" contained within this report.
In August, 1993, the Association implemented a systems conversion for
mortgage loan origination software and hardware. A computer network will be
completed in fiscal 1994 to facilitate the goal of higher loan originations in
future periods. In addition, teller platform hardware and software will be
operational in January, 1994. The cost of these office equipment additions in
fiscal 1993 and fiscal 1994 will be approximately $800,000. The Association
expects to increase staff and develop correspondent sources to achieve
increased loan production targets.
Real estate owned ("REO") decreased $2.2 million or 21.3% during fiscal
1993 to $8.2 million. During fiscal 1993, sales of REO totalled $3.5 million,
while additions totalled $1.6 million. During fiscal 1993, the Association
established a general valuation allowance ("GVA") equal to $100,000, which is
netted against the aggregate REO fair value of $8.3 million. However, the
individual properties are carried at fair value without consideration of the
GVA. During fiscal 1993, the Association directly expensed approximately
$1.0 million in renovation expenditures for an REO property, the Ocean One
Hotel in Virginia Beach, Virginia (See "Results of Operations-Operating
Expenses."). Direct write-offs of properties other than the Ocean One totalled
$372,000 in fiscal 1993.
Office properties and equipment increased $473,000 reflecting the
purchase of computer hardware and software for mortgage originations and the
purchase of land and a building in Manassas, Virginia for use as a loan
production office.
During fiscal 1993, total liabilities decreased $18.3 million or 6.3% to
$271.6 million at September 30, 1993 due primarily to a decrease of
$7.7 million in deposits and a decrease of $10.1 million in other borrowings
(CMO and REMIC).
Deposits decreased $7.7 million or 3.1% during fiscal 1993 to
$241.5 million at September 30, 1993. Jumbo time deposits (accounts in excess
of $100,000) decreased $5.4 million in fiscal 1993, with national funds
representing $4.0 million of the jumbo time deposit decline. However, other
time deposits increased $4.4 million in fiscal 1993. Demand accounts
represented 54% of total deposits, while time deposits totalled 46%. At
September 30, 1993, the Association had $15.5 million of time deposits in
"Bump Rate" certificates of deposit, which allows a depositor to adjust his or
her rate to a current rate once during the deposit term, and $10.8 million in
"Prime Rate" certificates of deposit, which are tied to changes in prime rate
less 150-175 basis points. The weighted average cost of deposits at
September 30, 1993 was 3.84%, a decline of 110 basis points from the weighted
average cost of 4.94% at September 30, 1992. The Association has continued
pricing its deposits within a mid-range of rates offered by its competitors
except for selective promotions.
In October, 1993, the Association purchased approximately $9.3 million
of deposits from another savings institution in Leesburg, Virginia at a
premium of 1.25%. These accounts were transferred to the Association's
existing branch in Leesburg, Virginia.
There were no outstanding advances from the FHLB or securities sold
under agreements to repurchase at September 30, 1993 or 1992. Due to the high
liquidity from loan sales and repayments, the Association utilized only
$2 million in FHLB advances in fiscal 1993.
Other borrowings declined $10.1 million or 29.5% in fiscal 1993 to
$24.1 million at September 30, 1993. This repayment of the CMO and REMIC
borrowings of Jefferson's wholly owned subsidiaries was accelerated by the
heavy refinancing of real estate mortgage loans due to the decline in market
interest rates. The unamortized discount related to these borrowings declined
approximately $1.0 million to $2.3 million at September 30, 1993. As a result,
the costs of other borrowings rose to approximately 12.55% in fiscal 1993.
Heavy refinancing activity in fiscal 1994 is expected to continue, which will
result in continuing higher amortization of the unamortized discount, and a
high cost of other borrowings.
In April, 1993, the Association completed a one-for-three reverse stock
split approved by the stockholders at the 1993 Annual Meeting, reducing
outstanding shares to 1,310,876. Book value per share at September 30, 1993
was $9.67. In June, 1993, the National Association of Securities Dealers, Inc.
accepted the Association's application to list the Association's common stock
in its small cap issues (NASDAQ:JEFF). Present market makers are Branch
Cabell & Co., Scott & Stringfellow Investment Corporation, Anderson and
Strudwick, and Wheat First Securities, all of Richmond, Virginia, Ryan Beck
and Co. Inc. of West Orange, New Jersey and Herzog, Heine, Geduld, Inc. of New
York, New York.
Jefferson does not invest in high-yield financing (junk bonds), real
estate joint ventures, interest rate swaps or futures contracts, and had no
goodwill or purchased mortgage servicing rights at September 30, 1993.
Nonperforming assets
Nonperforming assets consist of nonaccrual loans, real estate acquired
by foreclosure or deed-in-lieu of foreclosure, in- substance foreclosures and
repossessed assets. The Association does not accrue interest on loans which
are 90 days or more delinquent.
Excess commercial office inventory, coupled with a regional economic
decline, adversely affected the real estate market in the Washington, D.C.
metropolitan area and contributed to the level of the Association's
nonperforming assets in fiscal 1991, 1992 and 1993. The real estate in the
metropolitan Washington, D.C. area may take substantial time to absorb the
existing real estate inventory and may also be adversely affected in the
future by the disposition of a significant amount of real estate by
financially troubled institutions, as well as by the Federal Deposit Insurance
Corporation ("FDIC") and the Resolution Trust Corporation ("RTC"). The real
estate market in the Association's market area and the overall economy are
expected to be significant determinants of the quality of the Association's
assets in future periods and, thus, its results of operations.
The following table sets forth information regarding the Association's
nonaccrual loans and real estate owned at the dates indicated.
<TABLE>
September 30,
1993 1992 1991
(Dollars in Thousands)
<S> <C> <C> <C>
Nonaccrual loans
Residential . . . . . . . . . . . . . . . . . . . . . . $1,205 $626 $1,338
Nonresidential . . . . . . . . . . . . . . . . . . . . 1,298 1,204 4,305
Construction . . . . . . . . . . . . . . . . . . . . . 154 112 263
Consumer . . . . . . . . . . . . . . . . . . . . . . . 9 24 523
Subtotal . . . . . . . . . . . . . . . . . . . . . . 2,666 1,966 6,429
Real estate owned
Residential . . . . . . . . . . . . . . . . . . . . . . 770 2,775 1,948
Nonresidential . . . . . . . . . . . . . . . . . . . . 6,938 6,308 7,764
In-substance foreclosure . . . . . . . . . . . . . . . 611 1,365
Subtotal . . . . . . . . . . . . . . . . . . . . . . 8,319 10,448 9,712
Total nonperforming assets . . . . . . . . . . . . . . . $10,985 $12,414 $16,141
Total nonperforming assets to total assets . . . . . . . 3.86% 4.12% 4.98%
</TABLE>
If the nonaccrual loans and loans deemed in-substance foreclosure assets
at September 30, 1993 had been current in accordance with their terms for the
year ended September 30, 1993 (or from the date of origination if originated
during such period), the total interest income on such loans for fiscal 1993
would have been $670,300. The Association did not accrue any interest income
on such loans in fiscal 1993.
The $2.7 million of nonaccrual loans at September 30, 1993 consisted of
twelve residential loans, four nonresidential loans, two construction loans,
and five consumer loans.
The largest of these nonaccrual loans, with an outstanding principal
balance of $1.1 million at September 30, 1993, is collateralized by a bowling
alley in Grafton, Virginia (near Newport News). Such amount represents the
Association's 60% participation interest in the loan. The loan is serviced by
the FDIC and was 38 months delinquent at September 30, 1993. The borrower
filed bankruptcy in September, 1992. The bankruptcy court has approved the
borrower's plan of reorganization which requires the
borrower to refinance the loan prior to June, 1994, and the borrower began
making monthly interest payments in October, 1993. The bowling alley is
operational, with a December, 1991 appraisal value in excess of loan carrying
value.
At September 30, 1993, all twelve residential loans had outstanding
principal balances less than $198,000, the remaining three nonresidential
loans had outstanding principal balances less than $100,000, the two
construction loans amounted to $112,000 and $42,000, and no nonaccrual
consumer loans exceeded $3,000. However, the Association does have five loans
outstanding to one borrower totalling approximately $420,000. These loans are
in the process of foreclosure. Other than the bowling alley loan, all loans
are secured by property located in the Association's market areas.
The $8.2 million of REO at September 30, 1993, net of a $100,000 general
valuation allowance, consisted of three single-family residences with an
aggregate carrying value of $336,000, 22 condominiums in Dallas, Texas with an
aggregate carrying value of $434,000, a Knight's Inn motel in Monroe, Michigan
with a carrying value of $1.7 million, the Ocean One hotel in Virginia Beach,
Virginia with a carrying value of $3.8 million, office and residential
property in Leesburg, Virginia with a carrying value of $276,000, warehouse
and land in Chantilly, Virginia with a carrying value of $414,000, seven lots
near Warrenton, Virginia with a carrying value of $305,000, partially
developed land in Charlottesville, Virginia with an aggregate carrying value
of $453,000, and a single-family residence in Warrenton, Virginia with a
carrying value of $611,000.
In November, 1993, the Association sold the Knight's Inn motel in
Monroe, Michigan for $1.8 million. The Association accepted a cash payment of
$150,000 and extended a loan of $1,650,000 for the remainder of the purchase
price. In October, 1993, the Association purchased the land and the land lease
for the Knight's Inn motel for $340,000. As a result, the Association expects
to receive a minimum of $30,000 in annual rental payments from this land
lease.
The office and residential property in Leesburg, Virginia is vacant and
has been evaluated by experts for soil contamination. The carrying value of
$276,000 is net of a specific reserve of $80,000 relating to the resolution of
this problem.
The Ocean One Hotel is a 102-room beachfront hotel which was acquired by
foreclosure in June, 1991 and reopened for business in July, 1992 after being
closed for twenty months. The outstanding loan at the time of the foreclosure
amounted to $2.7 million. In fiscal 1992, the Association spent $2.2 million
in renovation expenditures, with $1.1 million charged to expense, and the
remainder of $1.1 million capitalized as part of the REO balance, resulting in
a new carrying value of $3.8 million at September 30, 1992. During fiscal
1993, the Association expensed $1.1 million in further renovation expenditures
for an indoor swimming pool, meeting rooms, a restaurant and restaurant
equipment, a lounge and bar, exterior painting, and replacement of certain
hotel furnishings. The Association does not plan further significant
renovation expenditures, and has listed the property for sale. However, the
Association is unable to project, if any, additional expenditures which may be
necessary to sell the property. The property is being managed by a
professional hotel operator. The Association is evaluating the benefits of
affiliating the hotel with a national franchise in fiscal 1994.
Results of Operations
General The operating results of the Association depend primarily on its net
interest income, which is the difference between interest and dividend income
on interest-earning assets, consisting primarily of loans, investment
securities and mortgage- backed securities, and interest expense on
interest-bearing liabilities, consisting primarily of deposits, FHLB advances,
and other borrowings. The Association's results of operations also are
affected by the provision for loan losses, resulting from the Association's
assessment of the adequacy of the allowance for loan losses; the level of its
noninterest income, including gains on the sale of loans, investments, and
mortgage-backed securities, and mortgage loan servicing, deposit and other
fees and service charges; the level of its operating expenses, including
compensation, occupancy and equipment, Federal deposit insurance, REO expense,
advertising, and miscellaneous expenses; and income tax expenses. Each of
these principal components of the Association's operating results is discussed
below.
Jefferson experienced net income of $846,000 or $0.65 per share for the
year ended September 30, 1993, as compared with a net loss of $973,000 or
$5.45 per share for the year ended September 30, 1992, and net income of
$642,000 or $3.60 per share in the year ended September 30, 1991. Earnings per
share have been adjusted for all periods to reflect a one-for-three reverse
stock split effected in April, 1993. Net income in fiscal 1993 resulted from
higher net interest income, lower provision for loan losses, gains from sale
of mortgage loan servicing, and lower REO expenses, which were partially
offset by higher income tax expense. The net loss in fiscal 1992 resulted from
higher provision for loan losses, increased REO expenses and the absence of
gain on the sale of mortgage loan servicing rights.
Net Interest Income Net interest income before provision for loan losses
improved to $7.4 million in fiscal 1993, from $6.7 million in fiscal 1992 and
from $5.8 million in fiscal 1991. The increases in fiscal 1993 and fiscal 1992
compared to the prior periods, were due primarily to a decrease in the average
balance of interest-bearing liabilities at a greater rate than the decrease in
interest-earning assets and, to a lesser extent, to a more rapid decrease in
the cost of interest-bearing liabilities than the decline in yield on
interest- earning assets. The yield on interest-earning assets declined
114 basis points in fiscal 1993 compared to fiscal 1992, versus a decline of
151 basis points of the cost of interest-bearing liabilities, causing an
increase in net interest spread of 37 basis points to 2.64% in fiscal 1993.
The yield on interest-earning assets declined 80 basis points in fiscal 1992
compared to fiscal 1991 versus a decline of 128 basis points in the cost of
interest- bearing liabilities, causing an increase in the net interest spread
of 48 basis points to 2.27% in fiscal 1992 compared to 1.79% in fiscal 1991.
The following table sets forth for the periods indicated information
regarding average balances of and weighted average yields on loans,
mortgage-backed securities and investment securities and balances of and
weighted average interest rates paid on deposits and borrowings as well as the
dollar difference between such average balances, and the net interest rate
spread between the weighted average yields earned and rates paid. Average
balances are calculated on an average daily balance. Nonperforming loans have
been included in the table as loans carrying a zero yield.
<TABLE>
Year Ended September 30,
1993 1992 1991
Average Average Average Average Average Average
Balance Yield/Rate Balance Yield/Rate Balance Yield/Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable . . $180,039 8.58% $204,964 9.54% $226,042 10.24%
Mortgage-backed
securities . . . . 45,980 7.46 68,657 8.33 90,599 8.63
Investment securities 50,062 4.61 29,310 4.90 24,985 7.45
Total
interest-earning
assets . . . . . 276,081 7.67 302,931 8.81 341,626 9.61
Interest-bearing
liabilities:
Deposits . . . . . . 243,442 4.12 250,316 5.78 238,243 7.35
Borrowings . . . . . 29,420 12.54 55,720 9.96 107,052 8.86
Total
interest-bearing
liabilities . . . 272,862 5.03 306,036 6.54 345,295 7.82
Average dollar
difference between
interest-earning
assets and
interest-bearing
liabilities . . . . . $3,219 $(3,105) $(3,669)
Interest rate spread . 2.64% 2.27% 1.79%
</TABLE>
<TABLE>
1993 Compared to 1992 Increase 1992 Compared to 1991 Increase
(Decrease) Due to (Decrease) Due to
Volume Rate Total Volume Rate Total
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable . . . . . . . $(2,137) $(1,984) $(4,121) $(2,012) $(1,582) $(3,594)
Mortgage-backed securities . . (1,692) (601) (2,293) (1,831) (272) (2,103)
Investment securities . . . . . 957 (87) 870 251 (662) (411)
Total interest income . . . . (2,872) (2,672) (5,544) (3,592) (2,516) (6,108)
Interest expense:
Deposits . . . . . . . . . . . (283) (4,138) (4,421) 700 (3,740) (3,040)
Borrowings . . . . . . . . . . (3,298) 1,437 (1,861) (5,113) 1,177 (3,936)
Total interest expense . . . (3,581) (2,701) (6,282) (4,413) (2,563) (6,976)
Net interest income . . . . . . . $709 $29 738 $821 $47 $868
</TABLE>
Interest Income Interest income decreased $5.5 million or 20.8% to
$21.2 million in fiscal 1993 compared to fiscal 1992. Interest income
decreased $6.1 million or 18.6% to $26.7 million in fiscal 1992 compared to
$32.8 million in fiscal 1991. Such decreases were due to both declines in the
average balance of the Association's interest-earning assets and the average
yield earned thereon. The average balance of loans receivable decreased
$24.9 million or 12.2% to $180.0 million in fiscal 1993, and decreased
$21.1 million or 9.3% to $205.0 million in fiscal 1992 compared to the prior
respective years. Such decreases in the average balance of loans receivable
were primarily due to increased loan repayment and refinancing activity, an
increase in loan sales reflecting management's decision to sell
newly-originated fixed-rate mortgage loans, and the reluctance of borrowers to
select adjustable-rate mortgages. The average balance of mortgage-backed
securities decreased $22.7 million or 33.0% to $46.0 million in fiscal 1993,
and decreased $21.9 million or 24.2% to $68.7 million in fiscal 1992 compared
to the prior respective years. Such decreases in the average balance of
mortgage-backed securities were primarily due to increased principal
repayments caused by refinancing activity of the underlying collateral,
especially those collateralizing the CMO and REMIC borrowings. During fiscal
1993, the Association purchased approximately $22.7 million in mortgage-backed
securities, mostly variable-rate, to reinvest funds received as a result of
heavy prepayments of loans and mortgage-backed securities. The average balance
of investment securities increased $20.8 million or 70.8% to $50.1 million in
fiscal 1993, and increased $4.3 million or 17.3% to $29.3 million in fiscal
1992 compared to the respective prior periods. Such increases reflected
management's decision to place excess funds received from the heavy
prepayments of loans and mortgage-backed securities in short-term and
variable-rate investments as part of its asset/liability management and
reduction of interest rate risk.
The yields on all interest-earning assets declined in fiscal 1993 and
fiscal 1992 reflecting the general decline in market interest rates, decreases
from annual adjustments of adjustable- rate mortgages, origination of new
loans at an interest rate lower than existing portfolio yield, and refinancing
of higher yielding loans to lower yields.
Interest Expense Interest expense decreased $6.3 million or 31.4% to
$13.7 million in fiscal 1993 and decreased by $7.0 million or 25.9% to
$20.0 million in fiscal 1992 compared to the respective prior periods. Such
decreases were due to both a decrease in the average balance of the
Association's interest-bearing liabilities and the rate paid thereon. During
fiscal 1993, the average balance of deposits decreased $6.9 million or 2.7% to
$243.4 million, and during fiscal 1993 the average balance of borrowings
decreased $26.3 million or 47.2% to $29.4 million. The decline in deposits was
primarily attributable to a decrease in jumbo time deposits and Presidential
passbook deposits. The cost of deposits decreased 166 basis points reflecting
the decline of market interest rates and a less aggressive deposit pricing
policy by Jefferson. The decrease in borrowings reflected the accelerated
paydown of the CMO and REMIC indebtedness due to the heavy prepayment activity
of the underlying FHLMC PC collateral. The prepayment of CMO and REMIC
borrowings also accelerated the amortization of the related discount,
significantly increasing the cost of borrowings. The excess liquidity created
from high loan and MBS repayments and the decrease in loans receivable
eliminated the need for material outside borrowings.
During fiscal 1992, compared to fiscal 1991, the increase in the average
balance of deposits of $12.1 million or 5.1% to $250.3 million was more than
offset by a decrease of $51.3 million, or 48.0%, in the average balance of
borrowings during such period to $55.7 million. Deposits increased due to an
increase in demand accounts, such as the Presidential passbook account, which
were aggressively priced. The decrease in the average balance of borrowings
was due to the repayment of high cost FHLB advances and CMO and REMIC
borrowings. In addition, reverse repurchase agreements were repaid. Deposit
costs declined reflecting the decrease in market interest rates, while CMO and
REMIC prepayments caused borrowing costs to increase due to accelerated
amortization of the related discount. Due to excess liquidity, the need to
increase regulatory capital ratios, and the lack of portfolio loan demand, the
Association utilized excess funds in fiscal 1992 to reduce liabilities and
improve net interest income.
Due to the significant drop in interest rates in fiscal 1993 and fiscal
1992, the Association does not expect further significant decreases in deposit
costs in future periods. However, the current level of mortgage rates
continues to provide an impetus for refinancing activity and will probably
result in continued high costs of borrowings on the CMO and REMIC. As a
result, the Association may experience a decrease in its interest rate spread
in fiscal 1994. Approximately $944,000 of the unamortized discount was
amortized to expense in fiscal 1993, with a remaining outstanding balance to
be expensed of $2.3 million at September 30, 1993.
Provision for Loan Losses The provision for loan losses in fiscal 1993
totalled $533,000 compared to $1.1 million and $498,000 during fiscal 1992 and
1991, respectively. The increase in fiscal 1992 was primarily attributable to
the charge-off of $380,000 for a Dallas, Texas office building and $424,000
with respect to certain consumer loans. In fiscal 1993, the Association
charged-off $70,000 on a construction loan, $100,000 on a nonresidential loan,
$49,000 with respect to certain consumer loans, and increased the general
valuation allowance by $314,000. At September 30, 1993, the Association's
allowance for loan losses amounted to $1.6 million or 60.1% of nonperforming
loans and 0.92% of total loans. Management's determination of the adequacy of
the allowance for loan losses is based on an evaluation of the loan portfolio,
past loan loss experience, current economic conditions, volume, growth and
composition of the loan portfolio, and other relevant factors. The allowance
is increased by provisions for loan losses which are charged against income.
The Association believes that the allowance for loan losses as of
September 30, 1993 was adequate and further believes that the carrying value
of REO is stated at fair value. However, future additions to the allowance for
loan losses or reductions in net carrying values may be necessary based on the
performance of the Association's loan portfolio and changes in economic
conditions. In addition, in connection with periodic examinations of the
Association, the staff of the OTS and the FDIC consider the adequacy of the
allowance for loan losses and the carrying value of REO. Such agencies may
require the Association to recognize additions to the allowance or reductions
in the net carrying value of REO based on their judgments at the time of such
examinations. The last completed OTS and FDIC examinations were
December, 1992.
Noninterest Income Noninterest income increased $833,000 to $3.1 million in
fiscal 1993 compared to $2.3 million in fiscal 1992, and decreased $261,000 in
fiscal 1992 from $2.5 million in fiscal 1991.
The increase in noninterest income in fiscal 1993 of $833,000 was due
primarily to a $770,000 gain on the sale of mortgage loan servicing rights
with respect to $63 million of mortgage loans previously sold to FNMA. There
were no such sales in fiscal 1992. Fees and service charges increased $98,000
in fiscal 1993 primarily due to an increase of $87,000 in mortgage loan
service fees due to a higher average balance of loans serviced in fiscal 1993
compared to fiscal 1992. The gain on sale of loans in fiscal 1993 and fiscal
1992 resulted entirely from loans held for sale, and increased $381,000 in
fiscal 1993 versus fiscal 1992 due to more favorable market conditions and
timing of sale considerations. The gain on sale of MBSs decreased $158,000 in
fiscal 1993 compared to fiscal 1992. See "Financial Condition at September 30,
1993 and 1992" contained within this report and Note 2 in the Notes to
Consolidated Financial Statements contained herein. The gain on sale of
investment securities decreased $309,000 in fiscal 1993 compared to fiscal
1992. These gains arose from investments in mutual funds, with fiscal 1992
gains resulting from timely, opportunistic decisions on market rate changes.
The decrease in noninterest income in fiscal 1992 was due primarily to a
$618,000 decrease in gain on the sale of mortgage loan servicing rights, a
decrease of $173,000 in miscellaneous other income and a $127,000 decrease in
gain on sale of loans, which decreases were partially offset by a $667,000
increase in gain on sale of MBSs and investment securities. The decrease in
gain on the sale of mortgage loan servicing rights in fiscal 1992 was due to
the lack of such sales of servicing rights in fiscal 1992. The decrease in
miscellaneous other income was due primarily to the inclusion of interest
income of $121,000 from prior year's income tax refunds in fiscal 1991. The
decrease in gain on sale of loans was due primarily to changing market
interest rate movements and timing of sale considerations. In fiscal 1992, the
Association recorded an aggregate increase of $667,000 in gains on sale of
MBSs and investment securities. See "Financial Condition at September 30, 1993
and 1992" contained in this report and Notes 2 and 3 in the Notes to
Consolidated Financial Statements contained herein. Future gains, if any, on
the sale of investment securities, MBSs, loans receivable or mortgage loan
servicing rights will depend on the amount and classificaton of such assets,
market conditions and timing of sale considerations.
Operating Expenses
Operating expenses decreased $581,000 or 6.6% to $8.2 million in fiscal
1993 compared to $8.8 million in fiscal 1992, and increased $1.6 million or
22.9% from $7.2 million in fiscal 1991. The primary cause of these changes was
the decrease of $1.0 million in net cost of REO in fiscal 1993 compared to
fiscal 1992, and the increase of $1.6 million in net cost of REO in fiscal
1992 compared to fiscal 1991. Operating expenses as a percentage of average
assets were 2.81%, 2.82%, and 2.10% in fiscal 1993, 1992, and 1991,
respectively. Excluding the net cost of REO, the ratios were 2.37%, 2.08% and
1.88% in fiscal 1993, 1992, and 1991, respectively.
Compensation and employee benefits increased $198,000 in fiscal 1993
compared to fiscal 1992, and increased $101,000 in fiscal 1992 compared to
fiscal 1991. The increase in fiscal 1993 resulted from pay increases for
existing staff after a pay freeze in fiscal 1992, increased staffing in
certain administrative positions, and increased staffing in loan origination
positions. Group insurance costs declined $80,000 in fiscal 1993 compared to
fiscal 1992. Group insurance costs increased $118,000 in fiscal 1992 compared
to fiscal 1991 reflecting an adverse experience in health costs.
Occupancy and equipment expense increased $105,000 to $1.2 million in
fiscal 1993 compared to fiscal 1992, and was stable in fiscal 1992 compared to
fiscal 1991. The fiscal 1993 increase resulted from an increase in the
Warrenton branch rental expense, and an increase in repairs and maintenance on
buildings and equipment.
Federal deposit insurance premiums increased $126,000 in fiscal 1993
compared to fiscal 1992 and was stable in fiscal 1992 compared to fiscal 1991.
This increase reflects the higher rate assigned to the Association due to a
risk-based rate schedule adopted by the FDIC effective January, 1993.
Net cost of REO decreased $1.0 million to $1.3 million in fiscal 1993
compared to fiscal 1992, and increased $1.6 million to $2.3 million in fiscal
1992 compared to fiscal 1991. The high level of REO expense in fiscal 1993 and
fiscal 1992 primarily related to the renovation of the Ocean One hotel in
Virginia Beach, Virginia. In fiscal 1992, the Association expensed
$1.1 million in renovation expenses, and in fiscal 1993 further renovation
expenditures totalled approximately $1.1 million (See "Nonperforming Assets"
herein). The hotel was operational during fiscal 1993, and despite major
construction activity, operated at 35% occupancy at an average room rate of
approximately $69 for an operational profit of $128,000. The Association does
not plan further significant renovation expenditures, and has listed the
property for sale. The business of the hotel is seasonal, with losses in the
winter months, and profits in the peak summer months. The Association believes
that occupancy should improve in future periods with the absence of
construction activity, higher advance reservations, and possible affiliation
with a national franchise.
The fiscal 1992 net costs also included $261,000 for a motel in Monroe,
Michigan, $241,000 for an apartment complex in Dallas, Texas, $233,000 for
land in Dallas, Texas, and $160,000 for two land developments in Warrenton,
Virginia. As of November 20, 1993, the assets referred to in this paragraph
were sold by the Association at no material loss.
The fiscal 1993 costs also included expenses of $103,000 for an office
and residential property in Leesburg, Virginia, $101,000 for a warehouse and
land in Chantilly, Virginia, and $75,000 for a single-family residence in
Warrenton, Virginia. The Monroe, Michigan motel operated at a net profit to
the Association in fiscal 1993 of $83,000.
Advertising expense amounted to $233,000, $228,000 and $234,000 in
fiscal 1993, 1992 and 1991, respectively. In fiscal 1994, the Association will
utilize an in-house marketing officer to improve its marketing efforts.
Other operating expense amounted to $1.6 million in fiscal 1993 and
1992, and $1.7 million in fiscal 1991. The largest expense in this category
was legal expense which totalled $311,000, $239,000 and $264,000 in fiscal
1993, 1992 and 1991, respectively.
Income Tax Expense and Extraordinary Item
The Association adopted FASB Statement No. 109,"Accounting for Income
Taxes" in the year ended September 30, 1993. See Notes 1 and 12 in the Notes
to Consolidated Financial Statements contained herein. The Association
recorded tax expense of $915,000 in fiscal 1993, none in fiscal 1992, and
$500,000 in fiscal 1991. Due to a net operating loss carryforward ("NOL"), an
extraordinary item benefit was realized in the amount of $460,000 in fiscal
1991. The Association utilized all remaining book NOLs in fiscal 1991, and had
a remaining tax NOL of $1.3 million at September 30, 1993. However, this tax
NOL is restricted to an annual usage of approximately $430,000 due to an
ownership change provision of the Internal Revenue Code, further explained in
Note 12. Also, Note 12 discloses the components of the Association's effective
tax rate, and the tax effects of deferred tax assets and liabilities.
Asset and Liability Management
Financial institutions are subject to interest rate risk to the degree
that their interest-bearing liabilities, consisting primarily of deposits,
FHLB advances and other borrowings, mature or reprice more rapidly, or on a
different basis, than their interest-earning assets, which consist
predominantly of intermediate or long-term real estate loans. While having
liabilities that mature or reprice more frequently on average than assets may
be beneficial in times of declining interest rates, such an asset/liability
structure may result in declining net earnings during periods of rising
interest rates, unless offset by increases in loan originations and purchases
or in noninterest income. The long-term objectives of Jefferson include the
reduction of sensitivity of earnings to interest rate fluctuations by
diversifying its sources of funds, improving its interest rate spread,
improving the ratio of interest-earning assets to interest- bearing
liabilities, and achieving a better matching of the maturities and interest
rate sensitivities of its assets and liabilities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring the institution's interest rate sensitivity gap. An asset or
liability is said to be interest rate sensitive within a specified time
period, if it will mature or reprice within that time period. The interest
rate sensitivity gap ("gap") is defined as the difference between
interest-sensitive assets and interest-sensitive liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds interest rate sensitive
liabilities. A gap is considered when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to result in an decrease in net
interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap would tend to decrease net interest income. Jefferson's one-year maturity
gap was a positive $68.6 million or 24.1% of total assets at September 30,
1993 compared to a positive $64.9 million or 21.5% of total assets at
September 30, 1992. The Association has pursued a strategy of retaining
adjustable-rate real estate loans, home equity loans, consumer loans, and
adjustable-rate MBSs in its asset portfolio, and seeking long-term deposits
and borrowings.
Jefferson was not involved with interest-rate futures or interest-rate
swaps at September 30, 1993.
The following table summarizes the contractual maturities or repricing
characteristics of the Association's interest-earning assets and
interest-bearing liabilities adjusted for the effects of hedging at
September 30, 1993. The principal balance of adjustable- rate assets are
included in the period in which they are first scheduled to adjust rather than
in the period in which they mature. Other material assumptions are set forth
in the footnote to the table.
<TABLE>
September 30, 1993
Within 1 1 to 3 3 to 5 5 to 10 10 to 20 More than
Year Years Years Years Years 20 Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive
Assets:
Investment securities $45,670 $ $ $ $ $ $45,670
Mortgage-backed
securities . . . . 20,416 15,226 10,267 5,264 51,173
Loans receivable . . 119,806 31,257 10,522 8,380 169,965
Total . . . . . . . . 185,892 46,483 20,789 13,644 266,808
Non-interest-sensitiv
e assets . . . . . 17,442
Total assets . $284,250
Interest-sensitive
liabilities:
Deposits . . . . . . 110,664 70,927 21,368 21,131 13,664 3,713 $241,467
Borrowings . . . . . 6,615 9,382 6,036 2,046 24,079
Total . . . . . . . . 117,279 80,309 27,404 23,177 13,664 3,713 265,546
Non-interest-sensitive
liabilities . . 6,022
Total
liabilities . 271,568
Stockholders' equity 12,682
Total
liabilities
and
stockholders'
equity . . . $284,250
Hedged gap . . . . . $68,613 $(33,826) $(6,615) $(9,533) $(13,664) $(3,713)
Cumulative hedged gap $68,613 $34,787 $28,172 $18,639 $4,975 $1,262
Cumulative hedged gap
to total assets . 24.14% 12.24% 9.91% 6.56% 1.75% 0 .44%
</TABLE>
___________
(1) Estimated maturity/repricing amounts are based on contractual maturity
and amortization, as well as estimated loan prepayment rates and estimated
deposit erosion rates.
Liquidity and Capital Resources
As required by OTS regulations, Jefferson maintains cash and eligible
liquid investments in an amount equal to 5% of net withdrawable savings and
borrowings payable in one year or less to assure its ability to meet demand
for withdrawals and repayment of short-term borrowings. The Association has
consistently exceeded this regulatory liquidity requirement, and the
Association's average month-end liquidity ratio during the year ended
September 30, 1993 was 7.77%.
The Association's principal sources of funds are deposits, loan
repayments and prepayments, proceeds from the sale of loans, MBSs, investment
securities, mortgage servicing rights and REO, FHLB advances, reverse
repurchase agreements, other borrowings and net income. The availability of
funds from the sale of loans, investment securities, MBSs, mortgage servicing
rights and REO is influenced by general interest rates, market conditions, and
accounting and regulatory considerations. Borrowing may be used for hedging
purposes with respect to changes in prevailing interest rates.
At September 30, 1993, the Association had $3.1 million of undisbursed
loan funds and $8.3 million of approved loan commitments with $3.8 million at
variable-rate and $4.5 million at fixed-rate. The amount of time deposits
which are scheduled to mature in fiscal 1994 is $67.0 million. In addition,
the Association was contingently liable under unfunded lines of credit for
$14.1 million and standby letters of credit aggregating $341,000 at
September 30, 1993.
The Association is subject to regulations of the OTS that impose certain
minimum regulatory capital requirements. These standards are: (a) tangible
capital of 1.5% of adjusted total assets; (b) core capital of 3% of adjusted
total assets; and (c) a risk-based capital requirement of 8% of risk-weighted
assets. As indicated in the following table, the Association exceeded all
regulatory capital requirements which were in effect as of September 30, 1993.
<TABLE>
Tangible Capital Core Capital Risk-Based Capital
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual . . . . . . . . . . . . . . $12,682 4.46% $12,682 4.46% $14,284 9.77%
Required . . . . . . . . . . . . . 4,264 1.50 8,528 3.00 11,687 8.00
Excess . . . . . . . . . . . . . . $8,418 2.96% $4,154 1.46% $2,597 1.77%
</TABLE>
In April, 1993 the Association effected a one-for-three reverse stock
split reducing outstanding common shares to 1,310,876 from 3,934,291 and
increasing par value from $1 to $3 per share. In June, 1993 the common stock
of Jefferson began trading on the National Association of Securities Dealers
Automated Quotation System under the symbol "JEFF". It is currently listed
under the small issues grouping.
In June, 1993 the Board of Directors adopted the 1993 stock incentive
plan to be submitted to a vote of shareholders at the Annual Meeting in
January, 1994. The plan reserves 131,088 shares of authorized but unissued
common stock (10% of outstanding common shares) for future issuance to
employees. The plan would remain in effect for ten years, and allow grant of
incentive stock options, stock options and stock appreciation rights. On
August 3, 1993, incentive stock options of 64,500 shares at $6 per share were
awarded subject to approval of the 1993 stock incentive plan by shareholders.
The August 3, 1993 option agreements provide for a vesting schedule of 20% for
each year of employment after August 3, 1993. If the 1993 stock incentive plan
is approved, the 1988 stock option plan will be frozen with outstanding
options of 3,833 at $6 per share. Under a separate agreement, one director
retains a stock option of 6,917 shares at $6 per share as part of his efforts
in the successful 1992 stock offering.
The Association has not paid any cash or stock dividends since 1984. The
payment of cash dividends is subject to regulation by the OTS. See Note 15 in
the Notes to Consolidated Financial Statements contained herein.
In August, 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. See
Note 15 in the Notes to Consolidated Financial Statements contained herein.
Management does not presently believe that the implementation of the
interest-rate risk component on July 1, 1994 will have a material adverse
effect on its financial condition or its results of operations.
Proposed Federal Regulatory Capital Requirements On April 22, 1991, the OTS
published a notice of proposed rule making, which would establish a 3.0%
leverage ratio (core capital ratio) only for savings institutions in the
strongest financial and managerial condition as determined by the OTS. All
other savings institutions would be required to maintain leverage ratios of at
least 4.0% to 5.0%. While the amount of any addition to the core capital ratio
that might be required of the Association cannot be determined at this time,
if the OTS adopts the rule as proposed, it is anticipated the Association's
core capital requirement will increase to at least 4.0% and perhaps more. As
set forth above, the Association's core capital ratio at September 30, 1993
was 4.46%.
Marketplace Trends and Economic Conditions
Real estate market values in the domestic and global economies continued
to experience further erosion in fiscal 1993 resulting from deflationary
trends. Among the primary factors currently affecting real estate values are
excessive supply of commercial properties available for leasing purposes,
changes in the 1986 Tax Reform Act, increased scrutiny by the banking
industry's regulatory authorities resulting in continued high levels of
provisions for loan losses, decreased credit availability to small businesses
and, more recently, increased unemployment in defense-related businesses.
The aforementioned economic problems have continued to negatively impact
real estate values in the Association's marketplace resulting in additional
loan loss provisions in fiscal 1993. Given the inherent weaknesses in the
domestic and global economies, the Association's marketplace may continue to
experience real estate valuation problems until stabilization in the
unemployment rates and overall asset values occurs.
Interest rates in fiscal 1993 continued to decline as the Federal
Reserve Board continued to maintain policies designed to keep short-term
interest rates low. These policies are in direct response to economic weakness
in the U.S. economy. In response to such policies undertaken by the Federal
Reserve Board, the Association has experienced a more rapid drop in the cost
of deposits than in the yield on loans, MBSs, and investment securities, thus,
increasing interest rate spread or the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities.
However, the Association does not expect further significant reductions in
deposit costs in future periods and , as a result, the Association may
experience a decrease in its interest rate spread in the future.
Accounting Issues and Recent Developments
In May, 1993, the FASB issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan." This
statement addresses the accounting by creditors for impairment of all loans,
uncollateralized as well as collateralized, loans that are measured at fair
value or at the lower of cost or fair value, leases, loans restructured in a
troubled debt restructuring, and debt securities. It requires that impaired
loans be measured based on the present value of expected cash flows discounted
at the loan's effective interest rate, or as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. The creditor should also evaluate the collectibility
of both contractual interest and contractual principal when assessing loss
accruals. The statement is effective for fiscal years beginning after
December 15, 1994. Management of the Association does not believe that
implementation of the Statement, when adopted, will have a materially adverse
effect on the Association's financial condition or results of operations.
Recent Legislation
On December 19, 1991, the Federal Deposit Insurance Corporation Act of
1991 ("FDICIA") was enacted into law. The FDICIA provides for, among other
things, the recapitalization of the Bank Insurance Fund; the authorization of
the FDIC to make emergency special assessments under certain circumstances
against federally insured depository institutions, the establishment of
risk-based deposit premiums; the issuance of certain examination and reporting
requirements; and enhanced federal supervision of depository institutions
based on capital levels.
The Association is exempt from many of the new audit, accounting and
regulatory reports and requirements since the Association has less than
$500 million in total assets. However, the Association would be subject to a
proposed safety and soundness requirement concerning asset quality which
requires that classified assets (assets classified substandard, doubtful and
to the extent that related losses have not been recognized, assets classified
loss) do not exceed 100% of capital. If an insured depository institution
fails to meet this standard, such institution would be required to submit a
plan within 30 days to the FDIC specifying the steps it will take to correct
the deficiency. In the event that an institution fails to submit or fails in
any material respect to implement a compliance plan within the time allowed by
the FDIC, the FDIC must order the institution to correct the deficiency and
may (1) restrict asset growth; (2) require the institution to increase its
ratio of tangible equity to assets; (3) restrict the rates of interest that
the institution may pay; or (4) take any other action that would better carry
out the purpose of prompt corrective action.
The Association's classified assets currently exceed the 100% threshold.
Management is presently evaluating the alternatives available to the
Association in order to comply with the proposed requirement, including
reducing classified assets, and increasing capital through earnings and
issuance of additional shares of common stock or other capital instruments.
The Association has included a proposal in the proxy statement for the 1994
Annual Meeting requesting stockholder approval for a proposed private
placement offering. While the Association does not have any immediate specific
plans to issue shares of capital stock, the Association believes that approval
of this proposal will provide the Association with corporate flexibility to
respond on a timely basis to potentially valuable business opportunities which
may include the purchase of deposits, branch office properties and other
assets of the Resolution Trust Corporation. Any such private placement
offering, if initiated, is not expected to exceed $5.0 million.
Impact of Inflation, Deflation and Changing Prices
The consolidated financial statements and related notes presented
elsewhere have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Association are monetary in nature. As
a result, interest rates have a more significant impact on the Association's
performance than the effects of general levels of inflation. Interest rates
may not necessarily move in the same direction or in the same magnitude as the
prices of goods and services. However, noninterest expenses do reflect general
levels of inflation.
Deflation, which is having a detrimental effect on the domestic and
global economy, resulted from excessive debt leverage incurred in the 1980s.
The impact of deflation negatively affects the underlying values of real
estate-related assets utilized as collateral or security on loans to borrowers
and, therefore, may devalue the overall market value of the Association's loan
portfolio and other assets.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1993 AND 1992
<TABLE>
1993 1992
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,926 $2,916
Cash held in escrow (Note 15) . . . . . . . . . . . . . . . . . . . 6,980
Investment securities, market values of $45,670 in 1993 and $38,288
in 1992 (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . 45,670 38,296
Mortgage-backed securities, market values of $52,413 in 1993 and
$53,283 in 1992 (Notes 3, 10 and 11) . . . . . . . . . . . . . . 51,173 50,589
Loans receivable, net (Notes 4 and 9) . . . . . . . . . . . . . . . 169,965 186,185
Accrued interest receivable (Note 5) . . . . . . . . . . . . . . . 1,759 2,128
Real estate owned (Note 6) . . . . . . . . . . . . . . . . . . . . 8,219 10,448
Office properties and equipment, net (Note 7) . . . . . . . . . . . 3,474 3,001
Prepaid expenses and other assets (Note 13) . . . . . . . . . . . . 1,064 1,077
$284,250 $301,620
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . $241,467 $249,166
Other borrowings (Note 11) . . . . . . . . . . . . . . . . . . . . 24,079 34,158
Advance payments from borrowers for taxes and insurance . . . . . . 1,630 1,704
Accrued expenses and other liabilities . . . . . . . . . . . . . . 4,392 4,854
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 271,568 289,882
Commitments and contingent liabilities (Notes 13 and 14)
Stockholders' Equity (Note 15):
Common stock, par value $3 per share, authorized 5,000,000 shares at
September 30, 1993 and September 30, 1992, issued and outstanding
1,310,876 shares at September 30, 1993 and 3,934,291 shares at
September 30, 1992 . . . . . . . . . . . . . . . . . . . . . . . 3,933 3,934
Preferred stock, par value $1 per share, authorized 2,500,000 shares
at September 30, 1993 and September 30, 1992, issued and
outstanding -0- shares at September 30, 1993 and 1992 . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 3,380 3,382
Retained earnings, substantially restricted . . . . . . . . . . . . 5,268 4,422
Net unrealized gain on assets available-for-sale . . . . . . . . . 101
Total stockholders' equity . . . . . . . . . . . . . . . . . 12,682 11,738
$284,250 $301,620
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE>
1993 1992 1991
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Interest income
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,440 $19,561 $23,155
Mortgage-backed securities . . . . . . . . . . . . . . . . . 3,422 5,715 7,818
Investment securities . . . . . . . . . . . . . . . . . . . . 2,027 952 1,398
Other investments . . . . . . . . . . . . . . . . . . . . . . 279 484 449
Total interest income . . . . . . . . . . . . . . . . . . 21,168 26,712 32,820
Interest expense
Deposits (Note 8) . . . . . . . . . . . . . . . . . . . . . . 10,035 14,456 17,496
Borrowed money (Note 9) . . . . . . . . . . . . . . . . . . . 3,690 5,551 9,487
Total interest expense . . . . . . . . . . . . . . . . . 13,725 20,007 26,983
Net interest income . . . . . . . . . . . . . . . . . . . 7,443 6,705 5,837
Provision for losses on loans (Note 4) . . . . . . . . . . . . 533 1,115 498
Net interest income after provision for losses on loans . . . . 6,910 5,590 5,339
Noninterest income
Fees and service charges . . . . . . . . . . . . . . . . . . 846 748 758
Gain on sale of:
Investment securities (Note 2) . . . . . . . . . . . . . . 12 321 57
Mortgage-backed securities (Note 3) . . . . . . . . . . . . 313 471 68
Loans receivable . . . . . . . . . . . . . . . . . . . . . 954 573 700
Mortgage servicing rights . . . . . . . . . . . . . . . . . 770 618
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 195 144 317
3,090 2,257 2,518
Operating expenses
Compensation and employee benefits (Note 13) . . . . . . . . 3,230 3,032 2,931
Occupancy and equipment (Note 14) . . . . . . . . . . . . . . 1,184 1,079 1,074
Federal deposit insurance . . . . . . . . . . . . . . . . . . 697 571 535
Net cost of real estate owned (Note 6) . . . . . . . . . . . 1,309 2,317 740
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . 233 228 234
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,586 1,593 1,661
8,239 8,820 7,175
Income (loss) before income tax expense and extraordinary item 1,761 (973) 682
Income tax expense (Note 12) . . . . . . . . . . . . . . . . . 915 500
Income (loss) before extraordinary item . . . . . . . . . . . . 846 (973) 182
Extraordinary item reduction of income taxes arising from
carryforward of operating losses (Note 12) . . . . . . . . . 460
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $846 $(973) $642
Earnings (loss) per share before extraordinary item . . . . . . $0.65 $(5.45) $1.02
Earnings per share extraordinary item . . . . . . . . . . . . . 2.58
Net earnings (loss) per share . . . . . . . . . . . . . . . . . $0.65 $(5.45) $3.60
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE>
Additional Net Unrealized Total
Common paid-in Retained gain on assets stockholders'
stock capital earnings available-for-sale equity
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at September 30,
1990 . . . . . . . . . . $535 $605 $4,753 $ $5,893
Net income . . . . . . . . 642 642
Balance at September 30,
1991 . . . . . . . . . . 535 605 5,395 6,535
Net loss . . . . . . . . . (973) (973)
Issuance of 3,399,160 shares
of common stock . . . . . 3,399 2,777 6,176
Balance at September 30,
1992 . . . . . . . . . . 3,934 3,382 4,422 11,738
Increase in net unrealized
gain on assets
available-for-sale . . . 101 101
Net income . . . . . . . . 846 846
Redemption of 554 fractional
shares in one-for-three
reverse stock split . . . (1) (2) (3)
Balance at September 30,
1993 . . . . . . . . . . $3,933 $3,380 $5,268 $101 $12,682
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE>
1993 1992 1991
(Dollars in Thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . $846 $(973) $642
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Provision for losses on loans . . . . . . . . . . . 533 1,115 498
Provision for losses on real estate owned . . . . . 472 1,849 464
Depreciation and amortization . . . . . . . . . . . 384 372 306
Amortization of investment security premiums and
discounts, net . . . . . . . . . . . . . . . . . 5 (8)
Amortization of mortgage-backed-securities premiums
and discounts, net . . . . . . . . . . . . . . . (71) (82) (49)
Deferred loan fees . . . . . . . . . . . . . . . . (15) (234) (244)
Net (gain) loss on sales of:
Loan participation interests . . . . . . . . . . (954) (573) (700)
Mortgage-backed securities . . . . . . . . . . . (313) (471) (68)
Investment securities . . . . . . . . . . . . . . (12) (321) (57)
Real estate owned . . . . . . . . . . . . . . . . (150) (40)
Branch offices and equipment . . . . . . . . . . (2)
Receipt of stock dividends from FHLB of Atlanta . . (204) (228) (241)
Decrease in accrued interest receivable . . . . . . 369 742 359
Decrease in other assets . . . . . . . . . . . . . 13 130 2,039
Increase (decrease) in other liabilities . . . . . (515) 1,537 (1,217)
Disbursements for originations of loans held for
sale . . . . . . . . . . . . . . . . . . . . . . (62,890) (60,632) (26,087)
Proceeds from sales of loans held for sale . . . . 64,813 57,800 27,212
Net cash provided (used) by operating activities 2,304 (4) 2,849
Investing activities
Proceeds from sales of:
Investment securities . . . . . . . . . . . . . . . 10,073 331 38,417
Mutual funds . . . . . . . . . . . . . . . . . . . 105,166 57,326
Maturities of investment securities . . . . . . . . . 30,009 240 240
Purchases of:
Investment securities . . . . . . . . . . . . . . . (22,997) (30,049) (16,020)
Mutual funds . . . . . . . . . . . . . . . . . . . (115,792) (57,326)
(Increase) decrease in CMO & REMIC trust funds . . . (1,160) 268 (125)
Increase in FHLB overnite funds . . . . . . . . . . . (12,464) (2,351) (59)
Purchases of mortgage-backed securities . . . . . . . (22,661) (32,277)
Principal payments on mortgage-backed securities . . 18,097 13,115 8,098
Proceeds from sales of mortgage-backed securities . . 8,580 21,872 31,833
Loan originations . . . . . . . . . . . . . . . . . . (40,129) (36,629) (22,528)
Principal payments on loans . . . . . . . . . . . . . 50,651 58,871 32,303
Purchases of property and equipment . . . . . . . . . (860) (153) (882)
Proceeds from sale of branch offices and fixed assets 5 18 2
Proceeds from sales of real estate owned . . . . . . 2,276 2,299 206
Additions to real estate owned . . . . . . . . . . . (213) (2,120)
Other . . . . . . . . . . . . . . . . . . . . . . . . (300)
Net cash provided by investing activities . . . 8,581 25,712 38,908
Financing activities
Net increase (decrease) in deposits . . . . . . . . . $(7,699) $5,026 $7,359
Decrease in securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . . . . . (14,001) (3,076)
Proceeds from advances from FHLB of Atlanta . . . . . 2,000 47,000 93,000
Repayments of advances from FHLB of Atlanta . . . . . (2,000) (60,750) (130,300)
Decrease in advance payments from borrowers for taxes
and insurance . . . . . . . . . . . . . . . . . . . (74) (224) (1,532)
Decrease in other borrowings . . . . . . . . . . . . (10,079) (6,347) (3,805)
Proceeds from sale (repurchase) of common stock . . . (3) 6,176
Net cash used by financing activities . . . . . (17,855) (23,120) (38,354)
Increase (decrease) in cash and cash equivalents (6,970) 2,588 3,403
Cash and cash equivalents at beginning of year . . . . 9,896 7,308 3,905
Cash and cash equivalents at end of year . . . . . . . $2,926 $9,896 $7,308
Supplemental disclosures:
Cash paid (received) during year for:
Interest on deposits and all borrowings . . . . . . $13,869 $20,293 $27,366
Income taxes . . . . . . . . . . . . . . . . . . . (34) 68 (923)
Non-cash investing activities:
Transfers from loans receivable to real estate
owned . . . . . . . . . . . . . . . . . . . . . . $1,412 $2,724 $2,893
Additions to mortgage-backed securities from
securitization of loans receivable . . . . . . . 4,055 13,161
Transfers from real estate owned to loans
receivable . . . . . . . . . . . . . . . . . . . 1,256
Unrealized net gain on investment securities and
mortgage-backed securities . . . . . . . . . . . 101
Sale of mortgage-backed securities recorded on an
accrual basis in fiscal 1991 with proceeds of
sale received in 1992 . . . . . . . . . . . . . . (5,532)
(continued on following page)
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation The consolidated financial statements include
the accounts of Jefferson Savings and Loan Association, F.A. ("Jefferson" or
the "Association") and its wholly owned subsidiaries: Jefferson Insurance
Services, Inc., Jefferson Investment Service Corporation, Jefferson Funding
Corporation, and Jefferson Funding Corporation II. All significant
intercompany balances and transactions have been eliminated in consolidation.
During the year ended September 30, 1991, the Association converted from a
Virginia state charter to a federal charter.
Basis of Financial Statement Presentation The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles. In the normal course of business, the Association encounters two
significant types of risk: economic and regulatory. Economic risk is comprised
of interest rate risk, credit risk, and market risk. The Association is
subject to interest rate risk to the degree that its interest-bearing
liabilities reprice on a different basis than its interest-earning assets.
Credit risk is the risk of default on the Association's loan portfolio that
results from the borrowers' inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of collateral
underlying loans receivable and the valuation of the Association's real estate
owned.
The determination of the allowance for loan losses and the valuation of
real estate owned are based on estimates that are particularly susceptible to
significant changes in the economic environment and market conditions.
Management believes that, as of September 30, 1993, the allowance for loan
losses and the valuation of real estate owned are adequate based on the
information currently available. A worsening or protracted economic decline
could increase the likelihood of losses due to credit and market risks and
could create the need for substantial increases to the allowance for loan
losses.
The Association is subject to the regulations of various regulatory
agencies which can change significantly from year to year. In addition, these
regulatory agencies, as an integral part of their examination process,
periodically review the Association's allowances for losses. Such agencies may
require the Association to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
Investment securities and mortgage-backed securities The Association adopted
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" as of September 30, 1993. Investments in debt securities
are classified as held-to-maturity when the Association has the positive
intent and ability to hold those securities to maturity. Held-to-maturity
investments are measured at amortized cost with gains and losses recognized at
the time of sale. Investment in stock of the Federal Home Loan Bank of Atlanta
is stated at cost. Investments identified as available-for-sale are measured
at market value with unrealized holding gains and losses reported as a net
amount in a separate component of shareholders' equity until realized. Trading
securities are bought and held principally for the purpose of selling in the
near term. Unrealized gains and losses on trading securities are included in
earnings. Dividend and interest income for all three categories, including
amortization of the premium and discount arising at acquisition, are reported
in earnings. The effect of adoption of FASB Statement No. 115 was to record a
net unrealized gain of $154,000 in investment securities and mortgage-backed
securities, a deferred income tax liability of $53,000 and an increase of
$101,000 in stockholders' equity.
Loans receivable and allowance for loan losses Loans receivable are carried
at cost, as the Association has both the intent and the ability to hold them
to maturity. Interest is recorded as income when earned; however, interest
receivable is accrued only if deemed collectible. Generally, the Association's
policy is to exclude from interest income the interest on loans delinquent
over 90 days. Such interest, if ultimately collected, is recorded as income in
the period received.
Loan origination fees and the related incremental direct costs of
originating loans are deferred and amortized over the contractual lives of the
related loans using the interest method.
The allowance for loan losses is maintained at an amount considered
adequate to provide for potential losses. The provision for loan losses is
based on a periodic analysis of the loan portfolio by management. In this
regard, management considers numerous factors, including, but not necessarily
limited to, general economic conditions, loan portfolio composition, prior
loss experience, and independent appraisals. In addition to specific
allowances for estimated losses on identified problem loans, an overall
unallocated allowance is established to provide for unidentified credit
losses. In estimating such losses, management considers various risk factors
including geographical location, loan collateral, and payment history.
Loan sales The Association periodically generates funds for lending by
selling whole and/or participating interests in real estate loans. Loans held
for sale are carried at the lower of cost or market. Gains or losses on such
sales are recognized at the time of sale and are determined by the difference
between the net sales proceeds and the unpaid principal balance of the loans
sold adjusted for yield differential, such as servicing fees. Loans held for
sale are designated during origination or shortly after funding.
Real estate owned Real estate acquired in settlement of loans and in-
substance foreclosure are recorded at the lower of cost or fair value less
estimated costs to sell, at the time of acquisition or in-substance
foreclosure. Specific valuation allowances on real estate owned are recorded
through a charge to earnings if there is a further deterioration in fair
value. Costs relating to development and improvement of real estate are
capitalized, whereas those related to holding the real estate are expensed as
incurred. Recognition of gains on sale of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of property sold
and the terms of sale. Under certain circumstances, the gain, or a portion
thereof, is deferred until the necessary criteria are met.
Loans are treated as in-substance foreclosure if the borrower has little
or no equity in the collateral, the cash flow to repay the loan can only be
expected to come from the operation or sale of the collateral, and the
borrower has abandoned control of the collateral or it is doubtful that the
borrower will be able to repay the loan in the foreseeable future.
Office properties and equipment Office properties and equipment are stated at
cost less accumulated depreciation and amortization. Land is carried at cost.
Depreciation of office properties and equipment has been charged to income on
both the straight-line and accelerated methods at rates calculated to recover
the cost of the properties over their estimated useful lives. Leasehold
improvements are capitalized and are amortized over the shorter of their
estimated useful lives or the terms of the leases. Estimated useful lives are
fifteen to forty years for buildings and improvements and three to ten years
for furniture, fixtures, equipment and automobiles.
Income taxes In 1992 the FASB issued Statement of Financial Accounting
Standards No. 109, "Accounting for income Taxes." This statement requires a
change from the deferred method of accounting for income taxes of the
Accounting Principles Board Opinion 11, to the asset and liability method of
accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The recognition of net deferred assets is reduced,
if necessary, by a valuation allowance for the amount of any tax benefits
that, based on available evidence, are not expected to be realized (See
Note 12). Additionally, under Statement 109, deferred tax liabilities will be
provided for bad debt reserves for income tax reporting purposes that arose in
tax years beginning before December 15, 1987 (base year). Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date. The Association adopted Statement 109 in the year
ended September 30, 1993. There was no cumulative effect of adopting
Statement 109 in the year ended September 30, 1993.
The Association files a consolidated Federal and Virginia income tax
return, except for Jefferson Funding Corporation II, a real estate mortgage
investment conduit.
Statement of Cash Flows For the purposes of reporting cash flows, the
Association has defined cash and cash equivalents as cash on hand, cash due
from banks and federal funds sold.
Earnings Per Share Earnings per share of common stock are presented based on
the weighted average number of shares outstanding during the periods
presented, a total of 1,310,876, 178,377 and 178,377 shares for fiscal years
ended September 30, 1993, 1992 and 1991, respectively. These outstanding
shares have been restated to reflect a one-for-three reverse stock split
effected in April, 1993. The assumed exercise of stock options would not have
a material effect on the per share amounts.
Accounting Issues In May, 1993, the FASB issued Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan." This statement addresses the accounting by creditors for impairment of
all loans, uncollateralized as well as collateralized, loans that are measured
at fair value or at the lower of cost or fair value, leases, loans
restructured in a troubled debt restructuring, and debt securities. It
requires that impaired loans be measured based on the present value of
expected cash flows discounted at the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. The creditor should
also evaluate the collectibility of both contractual interest and contractual
principal when assessing loss accruals. The statement is effective for fiscal
years beginning after December 15, 1994. Management of the Association does
not believe that implementation of the Statement, when adopted, will have a
material adverse effect on the Association's financial condition or results of
operations.
Reclassifications Certain reclassifications of prior years' information have
been made to conform with the 1993 presentation. The reclassifications have no
effect upon previously reported results of operations.
NOTE 2 INVESTMENT SECURITIES
Investment securities consist of the following:
<TABLE>
September 30,
1993 1992
Gross Gross Gross Gross
Carrying Unrealized Unrealized Market Carrying Unrealized Unrealized Market
Value Gains Losses Value Value Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
U.S. Government and agency
obligations due:
one to five years $5,018 $ $18 $5,000
five to ten years 9,000 11 9,011
Adjustable-rate mortgage
mutual fund . 10,676 10,676
Subtotal 24,694 11 18 24,687
Held-to-maturity
U.S. Government and agency
obligations due:
one to five years $30,009 $ $ $30,009
Trust accounts CMO & REMIC . 2,401 2,401 1,241 1,241
Commercial paper &
subordinated debentures . 1,113 8 1,105
Federal Home Loan Bank
overnight funds . 14,958 14,958 2,494 2,494
Federal Home Loan Bank
stock, at cost . . . 3,600 3,600 3,396 3,396
Other . . 24 24 43 43
Subtotal 20,983 20,983 38,296 8 38,288
45,677 $11 $18 $45,670 $38,296 $ $8 $38,288
Available-for-sale net
unrealized loss . . . . (7)
$45,670
</TABLE>
Results from the sale and maturities of investment securities are as
follows:
<TABLE>
Year Ended September 30,
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Gross proceeds from sales of:
Mutual funds . . . . . . . . . . . . . . . . . . . $105,166 $57,326 $
Other investment securities . . . . . . . . . . . . 10,073 331 38,417
115,439 57,657 38,417
Maturities of investment securities . . . . . . . . . 30,009 240 240
$145,448 $57,897 $38,657
Gross realized gains . . . . . . . . . . . . . . . . $146 $380 $94
Gross realized losses . . . . . . . . . . . . . . . . (134) (59) (37)
Net realized gains . . . . . . . . . . . . . . . . . $12 $321 $57
</TABLE>
The weighted average interest rate on investment securities was 4.04%
and 5.16% at September 30, 1993 and 1992, respectively. The investment
securities described above were neither pledged nor otherwise encumbered as of
September 30, 1993.
NOTE 3 MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consist of the following:
<TABLE>
September 30, 1993
Gross Gross
Principal Unamortized Unearned Carrying Unrealized Unrealized Market
Balance Premium Discount Value Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale
FHLMC participation
certificates . . $3,223 $ $ $3,223 $161 $ $3,384
FNMA REMIC . . . . . 5,517 5,517 5,517
Subtotal . . . . 8,740 8,740 161 8,901
Held-to-maturity
FHLMC participation
certificates . . 32,604 187 102 32,689 1,355 (71) 33,973
FNMA REMIC . . . . . 6,772 8 75 6,705 (9) 6,696
FNMA certificates . 2,791 87 2,878 (35) 2,843
Subtotal . . . . 42,167 282 177 42,272 1,355 (115) 43,512
Total . . . . . . $50,907 $282 $177 51,012 $1,516 $(115) $52,413
Available-for-sale net
unrealized gain . . . . 161
$51,173
</TABLE>
<TABLE>
September 30, 1992
Gross Gross
Principal Unamortized Unearned Carrying Unrealized Unrealized Market
Balance Premium Discount Value Gains Losses Value
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
FHLMC participation
certificates . . . . $50,804 $30 $245 $50,589 $2,694 $ $53,283
</TABLE>
The weighted average interest rate on mortgage backed securities was
7.99% and 8.30% for the year ended September 30, 1993 and 1992, respectively.
Results from the sales of mortgage-backed securities are as follows:
<TABLE>
Year Ended September 30,
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Gross proceeds from sales . . . . . . . . . . . . . . . $8,580 $15,828 $31,833
Gross realized gains . . . . . . . . . . . . . . . . . $313 $471 $68
Gross realized losses . . . . . . . . . . . . . . . . .
Net realized gains . . . . . . . . . . . . . . . . . . $313 $471 $68
</TABLE>
The Association has pledged certain mortgage-backed securities with a
carrying value of $4.8 million and $4.5 million on September 30, 1993 and
1992, respectively, to secure deposits by government entities. The Association
has also pledged mortgage- backed securities with carrying values of
$5.5 million and $7.5 million at September 30, 1993 and 1992, respectively, to
secure notes payable held by Jefferson Funding Corporation. In addition,
$19.9 million and $30.2 million of mortgage-backed securities at September 30,
1993 and 1992, respectively, are pledged to secure bonds payable held by
Jefferson Funding Corporation II.
NOTE 4 LOANS RECEIVABLE
Loans receivable consists of the following:
<TABLE>
September 30,
1993 1992
(Dollars in thousands)
<S> <C> <C>
First mortgage loans:
One-to-four family . . . . . . . . . . . . . . . . . . . . $101,096 $106,929
Multi-family . . . . . . . . . . . . . . . . . . . . . . . 8,457 8,165
Non-residential and commercial . . . . . . . . . . . . . . 32,442 37,176
141,995 152,270
Construction loans . . . . . . . . . . . . . . . . . . . . . 8,120 9,963
Loans secured by deposit accounts . . . . . . . . . . . . . . 1,014 1,099
Home equity loans . . . . . . . . . . . . . . . . . . . . . . 21,102 23,616
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . 2,599 3,878
174,830 190,826
Less:
Due borrowers on loans in process . . . . . . . . . . . . . (3,118) (3,193)
Deferred loan fees . . . . . . . . . . . . . . . . . . . . (124) (57)
Unearned discounts . . . . . . . . . . . . . . . . . . . . (21) (103)
Allowance for losses . . . . . . . . . . . . . . . . . . . (1,602) (1,288)
(4,865) (4,641)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $169,965 $186,185
Loans held for sale . . . . . . . . . . . . . . . . . . . . . $6,248 $7,217
Loans receivable, net . . . . . . . . . . . . . . . . . . . . 163,717 178,968
$169,965 $186,185
</TABLE>
Loans held for sale are all single-family fixed-rate mortgage loans
which are carried at the lower of cost or market. There was no related
unrealized loss at September 30, 1993 or 1992.
Activity in the allowance for losses on loans is summarized as follows:
<TABLE>
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of period . . . . . . . . . . . . . . $1,288 $1,135 $873
Provision . . . . . . . . . . . . . . . . . . . . . . . 533 1,115 498
Charge-offs, net . . . . . . . . . . . . . . . . . . . (219) (962) (236)
Balance, end of period . . . . . . . . . . . . . . . . . $1,602 $1,288 $1,135
</TABLE>
Recoveries of loans receivable previously charged-off were not material
in the years ended September 30, 1993, 1992 and 1991.
The allowance for uncollected interest established for mortgage loans
which are delinquent for a period in excess of 90 days amounted to $670,300,
$605,800, and $603,500 as of September 30, 1993, 1992 and 1991, respectively.
Principal balances of non- performing loans and loans classified as
in-substance foreclosure related to reserves for uncollected interest totalled
$3.3 million, $3.5 million and $6.4 million as of September 30, 1993, 1992 and
1991, respectively.
The amount of loans serviced for others totalled $78 million,
$109 million, and $62 million as of September 30, 1993, 1992 and 1991,
respectively.
Restructured loans amounted to $3.8 million at September 30, 1993 and
consisted of two commercial loans which were delinquent less than 90 days at
September 30, 1993. There were no outstanding commitments to lend additional
funds to borrowers with restructured loans. One loan of $2.7 million had a
modified interest rate of 8.0%, while the second loan of $1.1 million had a
modified interest rate of 6.5% at September 30, 1993. During fiscal 1992, the
Association established a specific valuation allowance of $380,000 relating to
the loan of $1.1 million.
The gross interest income on these loans that would have been recorded
if the interest rates on the loans had not been reduced was $330,000,
$442,000, and $420,000 for the years ended September 30, 1993, 1992 and 1991,
respectively. Interest income recorded for these loans amounted to $288,000,
$314,100, and $257,000 for the years ended September 30, 1993, 1992 and 1991,
respectively.
NOTE 5 ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
September 30,
1993 1992
(Dollars in thousands)
<S> <C> <C>
Investment securities . . . . . . . . . . . . . . . . . . . . . . $151 $63
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . 471 693
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . 1,137 1,372
$1,759 $2,128
</TABLE>
NOTE 6 REAL ESTATE OWNED
All assets in real estate owned are held for sale and are summarized as
follows:
<TABLE>
September 30,
1993 1992
(Dollars in thousands)
<S> <C> <C>
Real estate acquired through settlements of loans . . . . . . . $7,255 $8,839
Real estate held for development . . . . . . . . . . . . . . . 453 244
In-substance foreclosure . . . . . . . . . . . . . . . . . . . 611 1,365
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . 8,319 10,448
Less: General valuation allowance . . . . . . . . . . . . . . . (100)
$8,219 $10,448
</TABLE>
The cost of operations for real estate owned in the consolidated
statements of operations consists of the following:
<TABLE>
September 30,
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Income:
Rental income . . . . . . . . . . . . . . . . . . . . . $626 $450 $428
Gain on sale . . . . . . . . . . . . . . . . . . . . . 169 40
795 490 428
Expense:
Provision for loss . . . . . . . . . . . . . . . . . . 472 1,849 464
Operating expenses . . . . . . . . . . . . . . . . . . 1,614 958
Loss on sale . . . . . . . . . . . . . . . . . . . . . 18 704
2,104 2,807 1,168
Net cost . . . . . . . . . . . . . . . . . . . . . . $1,309 $2,317 $740
</TABLE>
NOTE 7 OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
September 30,
1993 1992
(Dollars in thousands)
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $771 $510
Office building . . . . . . . . . . . . . . . . . . . . . . . . . 2,319 2,183
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . 223 187
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . 3,474 3,098
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 56
6,849 6,034
Less accumulated depreciation and amortization . . . . . . . . . 3,375 3,033
$3,474 $3,001
</TABLE>
NOTE 8 DEPOSITS
A summary of deposits follows:
<TABLE>
September 30,
1993 1992
Weighted Weighted
Amount Average Average
Rate % Amount Rate %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Passbook & statement
accounts . . . . . . . $83,780 3.21% 35% $86,991 5.05% 35%
NOW accounts . . . . . . 15,888 2.59 7 17,334 2.58 7
Money market deposit
accounts . . . . . . . 29,806 2.82 12 31,816 3.32 13
Total demand deposits . . . 129,474 3.05 54 136,141 4.32 55
Time deposits . . . . . . . 111,993 4.76 46 113,025 5.68 45
$241,467 3.84% 100% $249,166 4.94% 100%
</TABLE>
Time deposits as of September 30, 1993 mature as follows:
<TABLE>
Year ending
September 30, (Dollars in thousands)
<S> <S>
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . $67,021
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 29,974
Thereafter . . . . . . . . . . . . . . . . . . . . . . . 14,998
$111,993
</TABLE>
Interest expense on deposit accounts is summarized as follows:
<TABLE>
September 30,
1993 1992 1991
(Dollars in thousands)
<S> <C> <C> <C>
Passbook and statement accounts . . . . . . . . . . . . $3,055 $3,331 $1,384
NOW and money market deposit accounts . . . . . . . . . 1,423 2,138 3,338
Time deposits . . . . . . . . . . . . . . . . . . . . . 5,557 8,987 12,774
$10,035 $14,456 $17,496
</TABLE>
Deposits with balances in excess of $100,000 were $17.3 million and
$17.5 million at September 30, 1993 and 1992, respectively. At September 30,
1992, brokered deposits totalled $98,000. There were no brokered deposits at
September 30, 1993.
NOTE 9 ADVANCES FROM FEDERAL HOME LOAN BANK OF ATLANTA
There were no outstanding advances from the Federal Home Loan Bank of
Atlanta (FHLB) at September 30,1993 or September 30, 1992.
The following assets were pledged as collateral under a security
agreement to secure the FHLB advances:
September 30,
1993 1992
(Dollars in
thousands)
First mortgage loans . . . . . . . . $34,738 $47,333
Interest expense on borrowed money is summarized as follows:
September 30,
1993 1992 1991
(Dollars in thousands)
FHLB Advances . . . . . . . . . . . . . . . . . $1 $1,257 $3,180
Securities sold under agreements to repurchase 24 1,912
Jefferson Funding Corporation-CMO . . . . . . . 677 930 1,159
Jefferson Funding Corporation II-REMIC . . . 3,012 3,340 3,236
$3,690 $5,551 $9,487
NOTE 10 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
There were no outstanding securities sold under agreements to repurchase
at September 30, 1993 or September 30, 1992.
The Association occasionally enters into sales of securities under
agreements to repurchase (agreements). Fixed- coupon agreements are treated as
financings, and the obligations to repurchase securities sold are reflected as
a liability in the consolidated balance sheet. The dollar amount of securities
underlying the agreements remains in the asset accounts. These agreements
mature within one year.
The dealer may have sold, loaned, or otherwise disposed of such
securities to other parties in the normal course of their operations, and have
agreed to resell to the Association identical or substantially identical
securities at the maturities of the agreements. Securities sold under
agreements to repurchase averaged $-0- and $744,000 during 1993 and 1992,
respectively. The maximum amounts outstanding at any month-end during 1993 and
1992 were $-0- and $-0-, respectively, and the average interest rates were
- -0-% and 3.24% during 1993 and 1992, respectively. The Association has not
utilized this type of borrowing since October, 1991.
NOTE 11 OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
September 30,
1993 1992
(Dollars in thousands)
<S> <C> <C>
Jefferson Funding Corporation notes payable, net of discount of $76,000
in 1993 and $97,000 in 1992 . . . . . . . . . . . . . . . . . . . . . $5,212 $6,761
Jefferson Funding Corporation II notes payable, net of discount of
$2.3 million in 1993 and $3.3 million in 1992 . . . . . . . . . . . . 18,867 27,360
Wrap-around first mortgage loans . . . . . . . . . . . . . . . . . . . 37
$24,079 $34,158
</TABLE>
On June 6, 1985, Jefferson Funding Corporation, a finance subsidiary of
the Association, issued notes payable with a gross balance of $20.3 million to
Thrift Financing Corporation ("TFC"), an investment program established by
Craigie, Inc. TFC issued collateralized mortgage obligations secured by notes
issued by Jefferson Funding Corporation. The notes are collateralized by
$5.5 million and $7.5 million of mortgage-backed securities at September 30,
1993 and 1992 respectively. The maturity of the notes corresponds to the
principal repayment of the collateral. The notes had an effective interest
cost to the Association of 11.27% and 11.85% in fiscal 1993 and fiscal 1992,
respectively. The weighted average interest rate of the mortgage-backed
securities was 8.68% and 8.87% during fiscal 1993 and fiscal 1992,
respectively.
On May 9, 1988, Jefferson Funding Corporation II, a real estate mortgage
investment conduit, issued mortgage collateral bonds with a gross balance of
$47.1 million. The bonds payable had an effective rate of 12.87% and 11.13%
for the years ended September 30, 1993 and 1992, respectively, and were
collateralized by FHLMC participation certificates of $19.9 million and $30.2
million at September 30, 1993 and 1992, respectively. The maturity of the
notes corresponds to the principal repayment of the collateral. The weighted
average interest rate of the mortgage- backed securities was 8.41% and 8.26%
during fiscal 1993 and fiscal 1992, respectively.
NOTE 12 INCOME TAXES
The following is a summary of the provision for income tax expense:
<TABLE>
September 30,
1993 1992 1991
(Dollars in Thousands)
<S> <C> <C> <C>
Current Federal income tax expense . . . . . . . . . . . . . . . . . . $915 $ - $ 40
Deferred Federal and state income tax benefit . . . . . . . . . . . . . - - 460
$915 $ - $500
</TABLE>
Deferred income taxes result from timing differences in the recognition
of income and expense for tax and financial reporting purposes. The sources of
these timing differences and the tax effects for years prior to the adoption
of Statement 109 are as follows:
<TABLE>
September 30,
1992 1991
(Dollars in Thousands)
<S> <C> <C>
Loss on sale of loans to real estate mortgage investment conduit (REMIC)
recognized as a financing transaction for financial statement purposes,
recognized as a sale for tax purposes . . . . . . . . . . . . . . . . . . . $181 $103
Gain on pension plan curtailment recognized currently for financial statement
purposes, deferred for tax purposes . . . . . . . . . . . . . . . . . . . . - -
Loan origination and commitment fees, deferred for financial statement
purposes, recognized on the cash basis for tax purposes . . . . . . . . . . (25) 103
Loan interest income recognized currently for financial statement purposes,
deferred for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . - 58
Imputed gain (net of imputed losses) on sale of participating interests in
mortgage loans, recognized currently for financial statement purposes,
deferred for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . - 275
Directors' fee expense, recognized currently for financial statement
purposes, deferred for tax purposes . . . . . . . . . . . . . . . . . . . . (4) 1
FHLB stock dividends, deferred for financial statement purposes, recognized
on the cash basis for tax purposes . . . . . . . . . . . . . . . . . . . . (72) (80)
Utilization of net operating loss carryforward . . . . . . . . . . . . . . . - -
Other timing differences . . . . . . . . . . . . . . . . . . . . . . . . . . (80) -
$ - $460
</TABLE>
A reconciliation from the statutory Federal income tax rate to the
effective income tax rate follows:
<TABLE>
September 30,
1993 1992 1991
<S> <C> <C> <C>
Statutory Federal income tax rate . . . . . . . . . . . . . . . . 34.0% (34.0)% 34.0%
Increases (reductions) in taxes resulting from:
State income taxes . . . . . . . . . . . . . . . . . . . . . . - - 3.8
Provision for losses on loans and real estate owned . . . . . . 14.1 29.3 28.1
Gain on sale of real estate owned . . . . . . . . . . . . . . . (2.9) (1.4) -
FHLB stock dividends . . . . . . . . . . . . . . . . . . . . . (3.8) - -
Loss on sale of loans to REMIC . . . . . . . . . . . . . . . . 19.2 - -
Net operating loss carryforward . . . . . . . . . . . . . . . . (8.4) - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.2) 6.1 7.4
Effective income tax rate . . . . . . . . . . . . . . . . . . . . 52.0% -% 73.3%
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30,1993 are
summarized as follows:
<TABLE>
Amount
(Dollars in thousands)
<S> <C>
Deferred tax assets:
Allowance for loan losses . . . . . . . . . . . . . . . $ 613
Deferred loan fees . . . . . . . . . . . . . . . . . . 107
Accrued vacation pay . . . . . . . . . . . . . . . . . 25
Net operating loss carryforward . . . . . . . . . . . . 448
Total gross deferred tax assets . . . . . . . . . . 1,193
Deferred tax liabilities:
Unamortized discount on REMIC bonds . . . . . . . . . . 692
FHLB stock dividends . . . . . . . . . . . . . . . . . 309
Prepaid pension contribution . . . . . . . . . . . . . 92
Total deferred tax liabilities . . . . . . . . . . 1,093
Net deferred tax asset before valuation allowance . 100
Less: Valuation allowance . . . . . . . . . . . . . (100)
Net deferred tax asset . . . . . . . . . . . . . . $ -
</TABLE>
A valuation allowance of $100,000 was established as of September 30,
1993 since it is more likely than not that the entire amount of gross deferred
tax assets will not be realized.
As of September 30, 1990, the Association had net operating loss
carryforwards for financial reporting purposes of approximately $1,400,000
which were utilized in 1991 to offset deferred federal and state income tax
expense resulting in an extraordinary item of $460,000. Carryforwards for
income tax purposes approximate $1.3 million as of September 30, 1993, and
expire in 2007.
For income tax purposes, the availability of the Association's tax
credit carryforwards to offset current taxable income has been recorded as
restricted by Internal Revenue Code Section 382. In general, Section 382
provides that following an "ownership change" in a "loss corporation" the tax
credit carryforwards of that corporation will be available to offset taxable
income in each taxable year following the "ownership change" only up to the
amount of the Section 382 limitation (generally, the product of the
corporation's market value at the time of the "ownership change" and the
long-term tax-exempt bond rate at such time) for such year. The $1.3 million
carryforward for income tax purposes would therefore be limited to a maximum
of $430,000 in any one year.
The Tax Reform Act of 1986 enacted an alternative minimum tax system,
generally effective for taxable years beginning after December 31, 1986. The
Association is subject to the alternative minimum tax for financial reporting
purposes resulting in an alternative minimum tax expense of $40,000 for the
year ended September 30, 1991. This amount will be utilized as a credit
carryover against regular tax in 1993.
The Association has met certain requirements of the Internal Revenue
Code which permit a bad debt deduction (unrelated to the amount of losses
actually anticipated and charged to earnings) based on a percentage (currently
8%) of taxable income before such deduction. In the years ended September 30,
1992 and 1991, the deduction was computed under the experience method as it
resulted in the deduction of an amount in excess of that permitted under the
percentage of taxable income method. In the year ended September 30, 1993, the
deduction was computed under the percentage of taxable income method.
NOTE 13 BENEFIT PLANS
Employee Pension Plan
Prior to February 5, 1990, the Association funded and maintained a
defined benefit plan for all qualified full-time employees hired before the
age of 60. As of February 5, 1990, the accrual of benefits under the pension
plan was frozen. Thus, all compensation after that date is not used to compute
benefits. However, the plan continues to be in existence. Jefferson plans to
continue the retirement plan with the frozen accrual of benefits indefinitely,
but reserves the right to revise or discontinue the plan. Assets of the plan
will not revert to the Association, and cannot be diluted by merger.
The net periodic pension cost includes the following components:
<TABLE>
September 30,
1993 1992 1991
(Dollars in Thousands)
<S> <C> <C> <C>
Service cost of benefits earned during the period . . . . . . . . $ - $ - $ -
Interest cost on projected benefit obligation . . . . . . . . . . 152 141 131
Actual return on plan assets . . . . . . . . . . . . . . . . . . (120) (107) (334)
Net amortization and deferral . . . . . . . . . . . . . . . . . . (11) 204
Recognition of gain on plan curtailment . . . . . . . . . . . . . - - -
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . $32 $23 $1
</TABLE>
Employee Pension Plan
Assumptions used in the accounting for net periodic pension costs for
1993, 1992 and 1991 were as follows:
<TABLE>
1993 1992 1991
<S> <C> <C> <C>
Weighted average discount rate . . . . . . . . . . . . . . . . . . . 7.5% 7.5% 8.5%
Weighted average rate of increase in compensation levels . . . . . . N/A N/A N/A
Weighted average expected long-term rate of return on plan assets . . 6% 6% 8%
</TABLE>
The following table sets forth the Plan's funded status:
<TABLE>
September 30,
1993 1992
(Dollars in Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . . $2,138 $1,990
Non-vested benefit obligation . . . . . . . . . . . . . . . . . . . . . - -
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . 2,138 1,990
Effect of projected future compensation levels . . . . . . . . . . . . .
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . 2,138 1,990
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . 2,140 2,040
Unrecognized net loss and effects of changes in assumptions . . . . . . . 269 304
Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . $271 $354
</TABLE>
The assets of the plan at September 30, 1993 consist of cash (13%),
bonds (58%), stocks (20%), and annuities (9%).
Stock Option Plan
During the fiscal year ended September 30, 1988, the Board of Directors
and stockholders approved a stock option and incentive plan. Under the terms
of the 1987 Plan, the Stock Option Committee may grant options for the
purchase of shares up to 10% of total stock outstanding of the Association.
Incentive stock options may be granted to full-time officers and other key
employees at a price of not less than 100% of market value at the date of
grant, and the aggregate fair market value cannot exceed $100,000 per employee
the first year that the employee is granted an incentive stock option.
Non-incentive stock options may be granted to full-time officers and other key
employees at a price that the Stock Option Committee may determine at its sole
discretion. All stock options granted must be exercised within 10 years. The
Plan terminates ten years from inception.
At September 30, 1993, 1992 and 1991, the following table summarizes
information on the stock option plan:
<TABLE>
Average Price
Per Share Shares
<S> <C> <C>
Outstanding at September 30, 1990 . . . . . . . . . . . . . $14.00 13,375
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . 14.00 (1,000)
Outstanding at September 30, 1991 . . . . . . . . . . . . . 14.00 12,375
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . 14.00 (375)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . 14.00 (1)
Outstanding at September 30, 1992 . . . . . . . . . . . . . 14.00 11,999
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . 14.00 (499)
One-for-three reverse stock split . . . . . . . . . . . . . (7,667)
Outstanding at September 30, 1993 . . . . . . . . . . . . . 6.00 3,833
</TABLE>
On October 6, 1992, the Board of Directors voted to reduce the average
price of all outstanding options under the 1987 Plan from $14.00 per share to
$2.00 per share. In April, 1993, the outstanding shares of the stock option
plan were reduced to reflect a one-for-three reverse stock split.
As part of the successful common stock offering in fiscal 1992, the
Board of Directors awarded stock options to a director for 6,917 shares of
common stock at $6.00 per share. These stock options remain outstanding at
September 30, 1993.
On August 3, 1993 the Board of Directors adopted the Jefferson Savings
and Loan Association, F.A. 1993 Stock Incentive Plan (the "1993 Plan") subject
to approval by the shareholders. The 1993 Plan reserves an aggregate of
131,088 shares of authorized but unissued common stock, which is approximately
equal to 10% of outstanding common stock. The 1993 Plan would remain in effect
for a term of ten years unless sooner terminated. Three kinds of rights are
available for grant: incentive stock options, stock options and stock
appreciation rights. If the 1993 Plan is approved, the 1987 Plan will be
discontinued and no further awards will be made under the 1987 Plan. Awards
already made under the 1987 Plan which are still outstanding will continue to
be governed by the terms of the 1987 Plan. On August 3, 1993, stock options
under the 1993 Plan totalling 64,500 were awarded at a price of $6.00. The
August 3, 1993 option agreements provide for a vesting schedule of 20% for
each year of employment after August 3, 1993.
Employee 401-K Plan
Effective October 1, 1990, the Association implemented a qualified
401(k) plan for all employees. In fiscal years 1993,1992 and 1991, the
Association matched 50% of salary reductions elected by the employee up to 3%
of salary, and 25% of salary reductions elected for 3% to 6% of salary. No
matching was made for salary reduction in excess of 6%. The Association
incurred $30,010, $20,166 and $21,690 in matching and administration expense
for the years ended September 30, 1993, 1992 and 1991, respectively.
Postretirement Benefits
The Association does not provide post-retirement benefits and therefore
does not accrue any liability for these type of benefits.
NOTE 14 COMMITMENTS, CONTINGENCIES AND RELATED PARTIES
Financial instruments with off-balance-sheet risk
The Association is a party to financial instruments with
off-balance-sheet risk in the normal course of business 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, standby letters of credit, financial guarantees, interest rate caps
and floors, and forward contracts. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Association has in
particular classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit and financial guarantees written is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For
interest rate caps and floors, and forward contracts, the contract or notional
amounts do not represent exposure to credit loss. The Association controls the
credit risk of its forward contracts through credit approvals, limits and
monitoring procedures.
At September 30, 1993, the Association had outstanding commitments of
$8.3 million to originate loans with variable interest rates aggregating
approximately $3.8 million and with fixed interest rates aggregating
approximately $4.5 million. Fixed rate commitments are at market rates as of
the commitment dates and generally expire within 60 days.
Concentrations of Credit Risk
The Association's primary business activity is with customers located in
Virginia, Maryland and the District of Columbia. The Association grants
residential, commercial and consumer loans to customers throughout these
areas, most of whom are residents local to the Association's business
locations.
The Association's largest loans are concentrated in the hospitality
industry, however these loans comprise less than 5% of total loans at
September 30, 1993. Management diligently monitors all loans in this industry,
including, when possible, making inspections of the properties, maintaining
current operating statements, and performing net realizable value
calculations, with allowances for losses established as necessary to properly
reflect the value of the properties. Management believes the current loss
allowances are sufficient to cover the credit risk estimated to exist at
September 30, 1993.
In addition, the Association was contingently liable under unfunded
lines of credit for $14.1 million and standby letters of credit aggregating
$341 thousand at September 30, 1993.
Rental Commitments
Minimum rental commitments under noncancelable operating leases for five
branch offices in effect at September 30, 1993 are shown below:
<TABLE>
Year ending
September 30, Amount
(Dollars in
Thousands)
<S> <C>
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,243
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,643
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,518
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,791
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,448
Total minimum commitments . . . . . . . . . . . . . . . . . . . . . . $416,643
</TABLE>
Total rent expense was $171,707 for 1993, $146,104 for 1992 and $143,482
for 1991.
Related Party
The Association, like many financial institutions, has followed a policy
of granting loans to its officers, directors and employees, generally for the
financing of their personal residences and for certain consumer purposes.
These loans are made in the ordinary course of business, and on substantially
the same terms as those of comparable transactions prevailing at the time,
except that employees other than officers and directors may borrow money at an
interest rate which is related to the Association's cost of funds. They do not
involve more than the normal risk of collectibility or present other
unfavorable features.
The following is a summary of loan transactions with directors and
executive officers which equal or exceed $60,000 in the aggregate.
<TABLE>
Year Ended
September 30,
1993 1992 1991
(Dollars in
Thousands)
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . . . . . . . . . . . $750 $743 $763
Originations . . . . . . . . . . . . . . . . . . . . . . . . . 36 68 14
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . (48) (61) (34)
Balance at end of year . . . . . . . . . . . . . . . . . . . . $738 $750 $743
</TABLE>
NOTE 15 STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL
The Director of the Office of Thrift Supervision requires all thrift
institutions to maintain capital in accordance with capital standards which
include maintenance of: (1) tangible capital equal to at least 1.5% of
adjusted total assets, (2) core capital equal to at least 3.0% of adjusted
total assets, and (3) total capital equal to percentages of risk-weighted
assets to at least 8.0%
On September 30, 1992, the Association successfully completed a
subscription rights and community stock offering which resulted in the sale of
approximately 3.4 million shares of common stock. At September 30, 1992, the
funds from the stock offering, amounting to approximately $7 million, were
held in an escrow account. These funds were subsequently released to the
Association on October 5, 1992. As a result of the capital infusion and
current earnings, the Association exceeds all three of its regulatory capital
requirements as of September 30, 1993. The required and actual amounts and
ratios of capital pertaining to the Association as of September 30, 1993 are
set forth as follows:
<TABLE>
Current Capital Actual Association
Requirement Capital Capital Excess
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible . . . . . . . . . . . . . $4,264 1.5% $12,682 4.46% $8,418 2.96%
Core . . . . . . . . . . . . . . . 8,528 3.0 12,682 4.46 4,154 1.46
Risk-based . . . . . . . . . . . . 11,687 8.0 14,284 9.77 2,597 1.77
</TABLE>
The Association's capital for generally accepted accounting principles
of $12,682,000 equals tangible and core capital in reports of regulatory
capital to the OTS. Risk-based capital is the sum of $12,682,000 and the
general valuation allowance of $1,602,000, which totals $14,284,000.
Due to its regulatory capital deficiency prior to September 30, 1992,
Jefferson was required to file a capital restoration plan ("CRP") with the
OTS. The initial CRP was approved in May, 1990, and a revised CRP was approved
in October, 1991. On December 10, 1992, the Association received written
confirmation from the OTS that its CRP was terminated and that it was no
longer under the restrictions of the capital plan. Under current regulations,
if the Association should fail to meet regulatory capital requirements in the
future it would be required to file a capital plan outlining the actions
necessary to increase capital to the required standards.
In April, 1993 the Association effected a one-for-three reverse stock
split reducing outstanding common shares to 1,310,876 from 3,934,291, and
increasing par value from $1 to $3 per share.
Retained earnings at September 30, 1993 included approximately
$3.2 million of actual additions to bad debt reserves for Federal income tax
purposes which may be subject to income taxes at the then current Federal
income tax rate if used for any purpose other than to absorb bad debt losses.
As of September 30, 1993 management did not contemplate that this portion of
retained earnings will be used in a manner that will create any additional
income tax liability.
The payment of cash dividends by the Association is subject to
regulation by the OTS. The OTS has promulgated a regulation that measures an
institution's ability to make capital distributions, which includes the
payment of cash dividends, according to the institution's capital position.
The rule establishes "safe harbor" amounts of capital distributions that
institutions can make after providing notice to the OTS, but without needing
prior approval. Institutions can distribute amounts in excess of the safe
harbor only with the prior approval of the OTS. The Association has not paid
any cash dividends since 1984.
On April 22, 1991, the OTS published a notice of proposed rulemaking,
"Regulatory Capital;Leverage Ratio Requirement." The proposed rule would
establish a 3.0% leverage ratio (core capital ratio) only for savings
institutions in the strongest financial and managerial condition as determined
by the OTS. All other savings institutions would be required to maintain
leverage ratios of at least 4.0% to 5.0%. While the amount of any addition to
the core capital ratio that might be required of the Association cannot be
determined at this time, if the OTS adopts the rule as proposed, it is
anticipated the Association's core capital requirement will increase to at
least 4.0% and perhaps more.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of calculating the risk-based capital requirement. As a
result, such an institution will be required to maintain additional capital in
order to comply with the risk-based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that
would suffer a loss of net portfolio value exceeding 2.0% of the estimated
market value of its assets in the event of a 200 basis point increase or
decrease (with certain minor exceptions) in interest rates. The interest rate
risk component will be calculated, on a quarterly basis, as one-half of the
difference between an institution's measured interest rate risk and 2.0%,
multiplied by the market value of its assets. The rule also authorizes the
Director of the OTS to waive or defer an institution's interest rate risk
component on a case- by-case basis. The final rule is effective as of
January 1, 1994, subject however to a two quarter "lag" time between the
reporting date of the data used to calculate an institution's interest rate
risk and the effective date of each quarter's interest rate risk component.
Thus, an institution with greater than "normal" risk will not be subject to
any deduction from total capital until July 1, 1994 (based on the calculation
of the interest rate risk component using data as of December 31, 1993).
Finally, the OTS indicated in the final rule that it intended to lower the
leverage ratio requirement (in its prompt corrective action regulation) to
3.0% from the current level of 4.0%, on July 1, 1994.
NOTE 16 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregated fair value amounts
presented do not represent the underlying value of the Association.
The carrying value and fair value of financial instrument assets and
liabilities as of September 30, 1993 are as follows:
<TABLE>
September 30, 1993
Carrying Value Fair Value
(Dollar amounts in thousands)
<S> <C> <C>
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . $2,926 $2,926
Investment securities . . . . . . . . . . . . . . . 45,670 45,670
Mortgage-backed securities . . . . . . . . . . . . 51,173 52,413
Loans receivable,net . . . . . . . . . . . . . . . 169,965 172,574
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . 241,467 240,374
Other borrowings . . . . . . . . . . . . . . . . . 24,079 24,420
</TABLE>
The fair value of cash is the book value. The fair value of investment
securities and mortgage-backed securities is determined by reference to quoted
market prices. The fair value of loans receivable is determined by discounting
the future cash flows, using the current rates at which similar loans would be
made to borrowers with similar credit ratings, and for the same remaining
terms to maturity. The fair value of construction, home equity line, and
consumer loans is book value. The fair value of Federal Home Loan Bank Stock
is book value.
The fair value of demand deposits, including passbook and statement
accounts, NOW accounts, and money market deposit accounts, is book value. For
time deposits, including fixed maturity certificates of deposit, fair value is
determined by discounting the future cash flows, using the rates currently
offered for deposits with similar remaining terms to maturities. The fair
value of other borrowings is determined by discounting the future cash flows,
using the current rates offered for similar maturities.
The Association had $22.4 million of off-balance sheet financial
commitments, which are commitments to originate loans and unused consumer
lines of credit. Since these obligations are based on current market rates,
the carrying amount is considered to be a reasonable estimate of fair market
value.
NOTE 17 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended September 30,
1993 and 1992 are shown as follows:
<TABLE>
Three months ended
Dec. 31, Mar. 31, June 30, Sept. 30,
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1993
Total interest income . . . . . . . $5,745 $5,290 $5,221 $4,912
Total interest expense . . . . . . 3,754 3,479 3,256 3,236
Net interest income . . . . . . . 1,991 1,811 1,965 1,676
Provision for losses on loans . . . 55 97 77 304
Net interest income after
provision for losses on loans 1,936 1,714 1,888 1,372
Noninterest income . . . . . . . . 625 504 601 1,360
Operating expenses . . . . . . . . (1,771) (1,885) (2,323) (2,260)
Income before income tax expense 790 333 166 472
Income tax expense . . . . . . . . 285 155 61 414
Net income . . . . . . . . . . . . $505 $178 $105 $58
Earnings per share . . . . . . . . $.38 $.14 $.08 $.05
1992
Total interest income . . . . . . . $7,160 $6,858 $6,470 $6,224
Total interest expense . . . . . . 5,645 5,011 4,874 4,477
Net interest income . . . . . . 1,515 1,847 1,596 1,747
Provision for losses on loans . . . 44 215 169 687
Net interest income after
provision for losses on loans 1,471 1,632 1,427 1,060
Noninterest income . . . . . . . . 411 379 666 801
Operating expenses . . . . . . . . (1,827) (1,762) (1,820) (3,411)
Income before income tax expense 55 249 273 (1,550)
Income tax expense and
extraordinary item, net . . . . . 13 107 136 (256)
Net income . . . . . . . . . . . . $42 $142 $137 $ (1,294)
Earnings per share . . . . . . . . $.23 $.80 $.77 $ (7.25)
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Jefferson Savings and Loan Association, F.A.
Warrenton, Virginia
We have audited the accompanying consolidated balance sheets of
Jefferson Savings and Loan Association, F.A. and subsidiaries as of
September 30, 1993 and 1992, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended
September 30, 1993, 1992 and 1991. These consolidated financial statements are
the responsibility of the Association's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jefferson
Savings and Loan Association and subsidiaries at September 30, 1993 and 1992,
and the results of their operations and their cash flows for the years ended
September 30, 1993, 1992 and 1991, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
fiscal 1993, the Association adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
BDO Seidman
Washington, D.C.
November 24, 1993
DIRECTORS AND OFFICERS
<TABLE>
DIRECTORS OFFICERS
<S> <C> <C>
Calvin P. Burton Thomas W. Winfree Anne F. Brower
Insurance Agent President and Assistant Vice President and
Chief Executive Officer Asst. Manager, Warrenton Branch
John Sheldon Clark
Private Investor Craig A. Mason Patricia M. Coury
Senior Vice President and Assistant Vice President and
Robin C. Gulick, Esq. Chief Financial Officer Manager, Consumer Loans
Chairman of the Board
Attorney Walter E. Monroe Marcia G. Grant
Senior Vice President and Assistant Vice President
Charles H. Jones, Jr. Chief Lending Officer Secondary Marketing
Managing Partner
Edge Partners, L.P. Benny N. Werner Diana M. Lesko
Senior Vice President Assistant Vice President and
Robert F. Kube Retail Banking Manager, Loan Servicing
Treasurer
Builder and Investor James A. Yergin, Esq. William G. Mayo
Senior Vice President and Assistant Vice President
William M. Rider General Counsel REO and Special Projects
Secretary
President, R.L. Rider Jodale Favara Michael W. Morris
Construction, Inc. Vice President and Manager Assistant Vice President and
Loan Operations Manager, Leesburg Branch
Saul J. Robinson
President Dan W. Jeff Imogene K. O'Toole
Skyline Group, Inc. Vice President and Assistant Vice President and
Marketing Director Manager, Culpeper Branch
Arthur J. Shadek
Private Investor Douglas R. Lawrence Linda R. Sorrells
Vice President and Controller Assistant Vice President and
Thomas W. Winfree Manager, Charlottesville
President and John E. Meyer Rio Road Branch
Chief Executive Officer Vice President and
Systems Manager Shirley G. Stewart
DIRECTORS EMERITI Assistant Vice President and
Carol J. Smith Manager, Luray Branch
A.R. Anderson, Jr. DDS Vice President and Director
William D. Doeller of Deposit Accounts Bonnie J. Curtis
John J. Huckle, DVM Assistant Secretary
J.B. Hudson, Jr. Esq. Melanie K. Smith Warrenton Branch
Harold D. Kube Vice President and
L.A. Lacy Director of Human Resources Helen B. Jones
Harvey L. Pearson Assistant Secretary
Walter B. Potter, Sr. Shirley B. Stalnaker Executive Secretary
W.W. Sanders, Jr. Vice President,
Administrative Assistant Patricia L. Texter
Assistant Secretary and
Lucille B. Travers Asst. Manager, Leesburg Branch
Vice President and Manager
Warrenton Branch
</TABLE>
OFFICES AND SERVICES
<TABLE>
OFFICES SERVICES
<S> <C> <C>
Charlottesville Personal Financial
Management Commercial Services
1705 Seminole Trail
Rio Road and 29 North Basic Checking Business Checking
Charlottesville, Virginia 22901 Interest Checking Simplified Employee
(804) 937-1331 Premier Money Fund Pension Plan SEP
Jefferson Reserve VISA/MasterCard and
300 Preston Avenue (Overdraft Protection) POS Merchant Service
Commonwealth Center Holiday Club Savings Construction/Permanent Loans
Charlottesville, Virginia 22906 Presidential Savings Commercial Real Estate Loans
(804) 971-4900 Regular Savings
Bump Rate Certificates Services for Your
Culpeper Jumbo Certificates Convenience
No Penalty Certificates
701 South Main Street Prime Certificates Automated Teller Machines
Culpeper, Virginia 22701 Regular Certificates Automatic Funds Transfer
(703) 825-1001 Retirement Certificates Automatic Loan Payment
Individual Retirement Bank by Mail
Leesburg Accounts IRA and Certified Checks
Spousal IRA Coupon Redemption
9-J Catoctin Circle, SW Direct Deposit
Village Square Consumer Lending Drive-Up Windows
Leesburg, Virginia 22075 Electronic Banking Card with
(703) 777-3777 Home Equity Lines of Credit access to MOST, Plus and
and Installment Loans The Exchange Networks
Luray Automobile Loans Federal Tax Deposit
Personal Loans Night Depository
20 East Luray Shopping Center Savings/CD Loans Notary Public
Luray, Virginia 22835 VISA Classic and Gold Note Collection
(703) 743-4558 Sight Drafts
Mortgage Lending Telephone Transfer
Warrenton Travelers Cheques
Community Homebuyer Loans U.S. Savings Bonds
Warrenton Center First Trust Loans VISA Cash Advance
Warrenton, Virginia 22186 Second Mortgage Loans Wire Transfer
(703) 347-7173 Investment Property Loans FDIC INSURED
Refinancing EQUAL HOUSING LENDER
Construction Loans MEMBER FEDERAL HOME
Jumbo Residential Loans LOAN BANK SYSTEM
</TABLE>
STOCKHOLDER INFORMATION
BUSINESS OF THE ASSOCIATION
Jefferson Savings and Loan Association, F.A., with corporate offices
at 550 Broadview Avenue, Warrenton, Virginia, is a federally-chartered
stock savings and loan association, which began operations in 1960, and
currently operates six branches in Virginia. The Association is primarily
engaged in the business of obtaining funds in the form of deposits and
investing such funds in mortgage loans on residential real estate and,
to a lesser extent, commercial, nonresidential real estate and consumer loans.
The Association is a member and a stockholder of the Federal Home Loan Bank
System, and its deposits are insured by the Federal Deposit Insurance
Corporation up to its applicable limits.
Corporate Counsel
James A. Yergin, Esq.
Jefferson Savings and Loan Association, F.A.
550 Broadview Avenue
Warrenton, VA 22186
Special Counsel
Elias, Matz, Tiernan & Herrick
734 15th Street, N.W.
12th Floor
Washington, D.C. 20005
Independent Auditors
BDO Seidman
1707 L Street, N.W.
8th Floor
Washington, DC 20036-4301
Registrar and Transfer Agent
Mellon Financial Services
Securities Transfer Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
Market Makers
Anderson & Strudwick, Inc.
1108 East Main Street
Richmond, Virginia 23219
(804) 643-2400
Branch Cabell & Co.
919 East Main Street
Richmond, Virginia 23219
(804) 225-1400
Scott & Stringfellow, Inc.
909 East Main Street
Richmond, Virginia 23219
(804) 643-1811
Wheat First Securities, Inc.
901 East Byrd Street
Richmond, Virginia 23219
(804) 649-2311
Ryan Beck & Co. Inc.
80 Main Street
West Orange, New Jersey 07052
(201)325-3000
Herzog, Heine, Geduld, Inc.
26 Broadway
New York, New York 10004
(212) 908-5195
FORM 10-K
A copy of the Form 10-K as filed with the Office of Thrift Supervision
will be furnished without charge to stockholders as of the record date
for voting at the Annual Meeting of Stockholders upon written request to
the Chief Financial Officer, Jefferson Savings and Loan Association, F.A.,
550 Broadview Avenue, Warrenton, Virginia 22186.
The Annual Meeting of Stockholders of Jefferson Savings and Loan
Association, F.A. will be held on January 27, 1994 at 4 p.m., Eastern Time,
at the Fauquier Springs Country Club.
STOCK AND DIVIDEND INFORMATION
The Association may not declare or pay a cash dividend on any of its
stock if the effect thereof would cause the Association's regulatory
capital to be reduced below the regulatory capital requirement imposed
by the Office of Thrift Supervision. See Note 15 of Notes to Consolidated
Financial Statements for further information regarding restrictions on cash
dividends. There have been no cash or stock dividends paid in the seven years
ended September 30, 1993.
In April, 1993, the Association effected a one-for-three reverse stock
split which reduced outstanding shares of common stock to 1,310,876 from
3,934,291.
The Association's common stock trades on the National Association
of Securities Dealers Automated Quotation (NASDAQ) System under the symbol
JEFF. As of December 15, 1993, there were 1355 registered stockholders of
record not including the number of persons or entities whose stock is held in
nominee or "street" name through various brokerage firms or banks. Prior to
July, 1993, the Association's common stock was not listed on any
exchange, and traded privately. The following table sets forth the high and
low closing price of the common stock for the periods indicated. Quotations
were obtained from the NASDAQ.
Year ended
September 30,
1993 High Low
4th Quarter . . . . . . . . . . . . . . . . . . . . 6.75 6.00
<PAGE>
Annex VI
DEPARTMENT OF THE TREASURY
OFFICE OF THRIFT SUPERVISION
Washington, D.C.
FORM 10-QSB
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
or
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Office of Thrift Supervision Docket Number 6498
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
(Exact name of small business issuer as specified in its charter)
United States 54-0680877
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
550 Broadview Avenue, Warrenton, Virginia 22186
(Address of principal executive offices) (Zip Code)
(703) 347-3531
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
The number of shares outstanding of the registrant's common stock, ($3.00 par
value) on June 30, 1994 was 1,310,876.
Transitional Small Business Disclosure Yes No X
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Jefferson Savings and Loan Association, F.A.
Consolidated Balance Sheets
(Dollars in thousands)
June 30, September 30,
Assets 1994 1993
(Unaudited)
Cash $ 4,065 $ 2,926
Investment securities 37,968 45,670
Mortgage-backed securities 39,468 51,173
Loans receivable, net 201,944 169,965
Accrued interest receivable 1,766 1,759
Real estate owned 7,329 8,219
Office properties and equipment, net 4,212 3,474
Prepaid expenses and other assets 1,362 1,064
Total assets $298,114 $284,250
Liabilities and Stockholders' Equity
Liabilities
Deposits $268,920 $241,467
Other borrowings 14,789 24,079
Advance payments from borrowers
for taxes and insurance 1,515 1,630
Accrued expenses and other liabilities 1,176 4,392
Total liabilities 286,400 271,568
Stockholders' Equity
Common stock, par value $3 per share,
authorized 5,000,000 shares, issued
and outstanding, 1,310,876 shares at
June 30, 1994 and September 30, 1993 3,933 3,933
Preferred stock, par value $1 per share,
authorized 2,500,000 shares at June 30,
1994 and September 30, 1993, issued and
outstanding -0- shares at June 30, 1994
and September 30, 1993 - -
Additional paid-in capital 3,380 3,380
Retained earnings 5,063 5,268
Net unrealized gain (loss) on assets
available-for-sale (662) 101
Total stockholders' equity 11,714 12,682
Total liabilities and stockholders' equity $298,114 $284,250
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Jefferson Savings and Loan Association, F.A.
Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
(Dollars in thousands) 1994 1993 1994 1993
Interest income
Loans $ 3,712 $ 3,780 $10,765 $11,846
Mortgage-backed securities 661 869 2,194 2,659
Investment securities 411 485 1,278 1,562
Other investments 68 87 183 189
Total interest income 4,852 5,221 14,420 16,256
Interest expense
Deposits 2,400 2,438 7,072 7,662
Borrowed money 619 818 2,379 2,828
Total interest expense 3,019 3,256 9,451 10,490
Net interest income 1,833 1,965 4,969 5,766
Provision for losses on loans 66 77 70 229
Net interest income after
provision for losses on
loans 1,767 1,888 4,899 5,537
Noninterest income
Fees and service charges 192 222 529 631
Gain (loss) on sale of:
Investment securities - 40 (65) (26)
Mortgage-backed securities - - - 300
Loans receivable 22 314 193 698
Mortgage loan servicing - - (11) -
Office properties and
equipment 70 (3) 72 (3)
Miscellaneous 16 28 111 130
Total noninterest income 300 601 829 1,730
Operating expenses
Compensation and employee
benefits 1,011 778 2,797 2,389
Occupancy and equipment 316 310 920 866
Federal deposit insurance 189 178 556 514
Net cost of real estate owned 75 598 236 913
Advertising 47 49 125 150
Other 423 410 1,164 1,147
Total operating expenses 2,061 2,323 5,798 5,979
Income(loss) before
income taxes 6 166 (70) 1,288
Income tax expense 137 61 135 500
Net income(loss) $ (131) $ 105 $(205) $ 788
Earnings(loss) per share $ (0.10) $ 0.08 $(0.16) $ 0.60
Weighted average shares
of common stock 1,310,876 1,310,876 1,310,876 1,310,876
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Jefferson Savings and Loan Association, F.A.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands) Nine months ended June 30,
1994 1993
Operating activities
Net income(loss) $ (205) $ 788
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for losses on loans 70 229
Provision for losses on real estate owned 45 297
Depreciation and amortization 349 282
Amortization of premiums and discounts, net
of investment securities and mortgage-
backed securities 127 -
Net (gain) loss on sales of:
Investment securities 65 26
Mortgage-backed securities - (300)
Loans receivable (193) (698)
Office properties and equipment (72) 3
(Increase) decrease in accrued
interest receivable (7) 202
(Increase) decrease in other assets (298) 657
Decrease in advance payments from borrowers
for taxes and insurance (115) (529)
Decrease in other liabilities (3,216) (1,235)
Receipt of stock dividends from FHLB of Atlanta (91) (151)
Disbursements for originations of loans
held for sale (4,811) (36,980)
Proceeds from sales of loans held for sale 11,252 44,896
Net cash provided (used) by operating
activities 2,900 7,487
Investing activities
Proceeds from sales of:
Investment securities - 1,100
Mutual funds 15,090 61,816
Maturities of investment securities 14 34,065
Purchases of:
Investment securities (4,000) (20,416)
Mutual Funds (15,562) (85,610)
(Increase) decrease in FHLB overnite funds 9,540 (9,190)
(Increase) decrease in CMO & REMIC trust funds 1,785 (3)
Purchases of mortgage-backed securities (6,039) (10,235)
Proceeds from sale of mortgage-backed securities - 9,086
Principal payments on mortgage-backed securities 17,715 11,651
Loan originations (81,664) (40,906)
Principal payments on loans 44,907 43,985
Purchases of property and equipment (1,087) (158)
Proceeds from sale of property and equipment 72 -
Additions to real estate owned (894) (97)
Proceeds from sales of real estate owned 199 2,900
Net cash provided by investing
activities (19,924) (2,012)
Financing activities
Net increase (decrease) in deposits 27,453 (4,584)
Proceeds from advances from FHLB of Atlanta 15,000 2,000
Repayments of advances from FHLB of Atlanta (15,000) (2,000)
Decrease in other borrowings (9,290) (7,374)
Redemption of common stock - (3)
Net cash used by financing activities 18,163 (11,961)
Increase (decrease) in cash 1,139 (6,486)
Cash at beginning of period 2,926 9,896
Cash at end of period $ 4,065 $ 3,410
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Jefferson Savings and Loan Association, F.A.
Consolidated Statements of Cash Flows
(Unaudited)
Supplemental disclosures of information:
(Dollars in thousands) Nine months ended June 30,
Cash paid for the period: 1994 1993
Interest on deposits and all borrowings $ 9,684 $10,776
Income taxes $ 1,125 12
Non-cash investing activities:
Transfers from loans receivable to
real estate owned $ 470 $ 1,418
Transfers from real estate owned to
loans receivable $ 2,010 -
Additions to mortgage-backed
securities from securitization of
loans receivable - $4,055
Unrealized net gain (loss) on assets
held-for-sale recorded as an increase
(decrease) of stockholders' equity $ (764) $ 12
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
Jefferson Savings and Loan Association, F.A.
Notes to Consolidated Financial Statements
June 30, 1994
(Unaudited)
Note 1. Basis of Presentation
The foregoing financial statements are unaudited. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial statements have been
included. The operating results for the three and nine months ended June 30,
1994 are not necessarily indicative of the results for the full year. These
financial statements should be read in conjunction with the consolidated
financial statements and the notes included in the Association's Annual
Report for the year ended September 30, 1993.
Note 2. Earnings Per Share
Earnings per share has been computed on outstanding shares of common stock of
1,310,876 for the three and nine months ended June 30, 1994 and 1993,
respectively. The outstanding shares have been adjusted to reflect a one-for-
three reverse stock split effected in April, 1993.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
The total assets of Jefferson Savings and Loan Association, F.A.
("Jefferson" or the "Association") increased $13.9 million, or 4.9%, to
$298.1 million at June 30, 1994 from $284.3 million at September 30, 1993,
due primarily to an $32.0 million increase in loans receivable, which was
partially offset by a decrease in investment securities of $7.7 million, a
decrease in mortgage-backed securities of $11.7 million, and a decrease in
real estate owned of $0.9 million. The decrease in investment securities,
primarily overnite funds, was used to increase loans receivable. The decrease
in mortgage-backed securities was primarily caused by a $8.9 million
reduction in assets collateralizing the CMO and REMIC borrowings in wholly
owned finance subsidiaries.
Investment securities decreased $7.7 million to $38.0 million during the
nine months ended June 30, 1994. The primary factor causing this decrease was
a decline of $9.5 million in Federal Home Loan Bank overnite funds. At June
30, 1994, investment securities consisted primarily of $5.4 million in
Federal Home Loan Bank overnite funds, $9.0 million in Federal Home Loan Bank
notes, $3.7 million in Federal Home Loan Bank stock, $11.1 million in mutual
funds primarily invested in government-agency adjustable-rate mortgage-backed
securities, $9.0 million in Federal Home Loan Mortgage Corporation("FHLMC")
and Federal National Mortgage Association("FNMA") adjustable-rate notes, and
$.6 million in overnite cash investments. All investment securities except
the overnite cash funds, and the FHLB stock are classified as available-for-
sale. These $25.0 million of investment securities available-for-sale had an
unrealized net loss of $864,700 at June 30, 1994.
Mortgage-backed securities ("MBSs") decreased $11.7 million to $39.5
million during the nine months ended June 30, 1994. Purchases of MBSs during
the nine months ended June 30, 1994 totalled $6.0 million. Principal
repayments during the nine months ended June 30, 1994 amounted to $17.6
million. There were no sales of MBSs in the nine months ended June 30, 1994.
All purchases consisted of government-agency variable-rate securities
collateralized by one-year adjustable-rate mortgages. MBSs classified as
available-for-sale totalled $6.6 million and had an unrealized net loss of
$205,100 at June 30, 1994. MBSs collateralizing the CMO and REMIC borrowings
in wholly owned finance subsidiaries totalled $16.4 million. MBSs owned by
the Association totalled $23.2 million, of which $16.8 million were variable-
rate and $6.4 were fixed rate.
Loans receivable, net, increased $32.0 million during the nine months
ended June 30, 1994 due primarily to a change in portfolio management. The
Board of Directors directed management to place approximately $20 million of
long-term fixed-rate mortgage loans which were originated between December,
1993 and March 31, 1994 in the portfolio to be held-to-maturity. Lower market
rates of interest spurred increased refinancing and repayment of mortgage
loans held in portfolio in the quarter ended December 31, 1993. However, an
increase in mortgage interest rates during the six months ended June 30, 1994
contributed to a decline in mortgage loan originations, slowed refinancings
and loan repayments, and increased origination of adjustable-rate-mortgages.
There were no loans held-for-sale at June 30, 1994.
Real estate owned declined $0.9 million to $7.3 million during the nine
months ended June 30, 1994 primarily due to the November, 1993 sale of the
Knight's Inn Motel in Monroe, Michigan for $1.8 million. The Association
accepted a cash payment of $150,000 and granted a loan of $1,650,000 for the
remainder of the purchase price. In October, 1993, the Association purchased
the land and land lease for the Knight's Inn Motel for $340,000. As a result,
the Association expects to receive a minimum of $30,000 in annual rental
payments from this land lease, which expires on 9/30/22, with six consecutive
options to extend for five years each (30 years). Land in Charlottesville,
Virginia classified as real estate owned totalling $710,000 is expected to be
sold for cash prior to September 30, 1994 at no loss.
Total liabilities increased in the nine months ended June 30, 1994 by
$14.8 million, or 5.5%, due primarily to an increase in deposits of $27.5
million, which was partially offset by a decline of $9.3 million in other
borrowings, a decrease of $115,000 in advance payments from borrowers for
taxes and insurance, and a decrease of $3.2 million in accrued expenses and
other liabilities .
Deposits increased in the nine months ended June 30, 1994 by $27.5
million to $268.9 million at June 30, 1994, due primarily to the acquisition
in October, 1993 of approximately $9.3 million of deposits from another
savings institution in Leesburg, Virginia at a premium of 1.25%, and the
acquisition of approximately $14.2 million of deposits in Front Royal and
Culpeper, Virginia at a premium of $48,000, or 0.03%. The Leesburg accounts
were transferred to the Association's existing branch in Leesburg, Virginia.
Unamortized goodwill from such purchases totalled $152,000 at June 30, 1994,
and is being amortized over a sixty month period. The remainder of the $4.0
million deposit increase resulted from an improvement of market share at
existing branches utilizing current product offerings. The Association had no
brokered deposits at June 30, 1994.
Other borrowings, consisting of notes payable ("Notes") of Jefferson
Funding Corporation ("JFC") and mortgage collateral bonds ("Bonds") issued by
Jefferson Funding Corporation II ("JFCII") net of unamortized discount,
decreased $9.3 million or 38.6% to $14.8 million at June 30, 1994. JFC and
JFC II are both wholly-owned finance subsidiaries of the Association. The
Notes and Bonds are secured by mortgage-backed securities and outstanding
indebtedness on the Notes and Bonds are reduced as the mortgage-backed
securities are repaid. Lower market interest rates in the Fall of 1993
resulted in increased levels of principal repayments of the mortgage loans
securing mortgage-backed securities. The outstanding bonds payable balance
declined from $26.5 million at September 30, 1993 to $16.2 million at June
30, 1994. The unamortized discount on bonds payable declined from $2.4
million at September 30, 1993 to $1.4 million at June 30, 1994. The
amortization of the discount of $1.0 million is recorded as interest expense.
Accrued expenses and other liabilities decreased $3.2 million due
primarily to a decline of current income tax liability of $0.8 million, and
a reduction in checks outstanding for mortgage loan disbursements of $1.4
million.
At the Association's annual meeting on January 28, 1993, the
stockholders approved a one-for-three reverse stock split. In April, 1993 the
Association's transfer agent issued new certificates to existing
stockholders. As a result, the total number of shares outstanding decreased
to 1,310,876, a decline from the previously outstanding total of 3,934,291.
Total cash of $3,523 was deducted from paid-in capital to settle 554
fractional shares, at a price of $6.36 per share.
Nonperforming Loans and Real Estate Owned
The following table sets forth information regarding nonaccrual loans
and real estate owned held by the Association at the dates indicated.
June 30, September 30,
1994 1993
(Dollars in Thousands)
Nonaccrual Loans
Residential $ 614 $ 1,205
Nonresidential 1,116 1,298
Construction 638 154
Consumer 19 9
Subtotal 2,387 2,666
Real estate owned
Residential 1,010 770
Nonresidential 6,319 6,938
In-substance foreclosure - 611
Subtotal 7,329 8,319
Total nonperforming assets $ 9,716 $10,985
Total nonperforming assets
to total assets 3.26% 3.86%
Real estate owned decreased $0.9 million or 10.8% during the nine months
ended June 30, 1994 due primarily to the sale of the Knights Inn Motel
discussed above. At June 30, 1994, approximately $1.2 million of real estate
owned was under contract to sell at no loss, which primarily consists of a
land development project in Charlottesville, Virginia and a warehouse and
land in Chantilly, Virginia. In the nine months ended June 30, 1994 the
Association wrote off $145,000 of real estate owned, of which $100,000 was
offset by the reduction of the general valuation allowance for real estate
owned in a corresponding amount.
The total of nonaccrual loans declined $279,000, or 10.5%. The decrease
in nonaccrual residential loans of $591,000 was partially offset by an
increase in nonaccrual construction loans of $484,000. The construction loans
consist primarily of two land loans to one builder in Warrenton, Virginia.
The largest loan of $467,000 was secured by land in Warrenton, Virginia. The
Association currently expects a full recovery of the outstanding nonaccrual
loan balances.
Allowance for Loan Losses
The total allowance for loan losses amounted to $1.5 million at June 30,
1994 and $1.6 million at September 30, 1993. The allowance for loan losses
as a percent of loans outstanding was .75% at June 30, 1994, compared to .94%
at September 30, 1993. At June 30, 1994, the allowance for loan losses as a
percentage of nonperforming loans was 63%. The provision for loan losses
amounted to $66,000 and $70,000 during the three and nine months ended June
30, 1994, respectively, compared to $77,000 and $229,000 for the same periods
in 1993.
The Association believes that the allowance for loan losses as of June
30, 1994 was adequate and further believes that the net carrying values of
real estate owned are stated at their fair values. However, future additions
to the allowance for loan losses or reductions in net carrying values may be
necessary based on the performance of the Association's loan portfolio and
changes in economic conditions. In addition, in connection with periodic
examinations of the Association, the staff of the OTS and the Federal Deposit
Insurance Corporation("FDIC") consider the adequacy of the allowance for loan
losses and the net carrying value of real estate owned. Such agencies may
require the Association to recognize additions to the allowance or reductions
in the net carrying value of real estate owned based on their judgements at
the time of such examinations. Based upon an examination completed in
January, 1994, the OTS did not require the Association to increase the
allowance for loan losses, or reduce the net carrying value of real estate
owned.
Results of Operations
Jefferson recorded a net loss of $205,000 for the nine months ended June
30, 1994, compared to net income of $788,000 for the nine months ended June
30, 1993, a decrease of $993,000. Net loss and net earnings per share were
$0.16 and $0.60 for the three months ended June 30, 1994 and 1993,
respectively. Jefferson recorded a net loss of $131,000 for the three months
ended June 30, 1994, compared to net income of $105,000 for the three months
ended June 30, 1993, a decrease of $236,000. Net loss and net earnings per
share were $0.10 and $0.08 for the three months ended June 30, 1994 and 1993,
respectively. Outstanding shares of common stock were 1,310,876 shares for
the three and nine months ended June 30, 1994 and 1993, respectively, as
adjusted for a one-for-three reverse stock split effected in April, 1993.
Net Interest Income
Net interest income declined $797,000 or 13.8% to $5.0 million in the
nine months ended June 30, 1994, compared with $5.8 million in the nine
months ended June 30, 1993. The decrease in net interest income resulted
primarily from a decline in the interest rate spread to 2.37% for the nine
months ended June 30, 1994 compared to 2.77% for the nine months ended June
30, 1993, a decrease of 40 basis points. The yield on interest-earning assets
for the nine months ended June 30, 1994 was 6.93%, a decline of 94 basis
points from 7.87% for the nine months ended June 30, 1993. This decrease was
the result of prepayment and refinancing of high yield mortgage loans,
declining yields on adjustable-rate mortgages, and declining yields on
consumer loans. The cost of interest-bearing liabilities for the nine months
ended June 30, 1994 was 4.56%, a decline of 54 basis points from 5.10% for
the nine months ended June 30, 1993. The cost of deposits for the nine months
ended June 30, 1994 was 3.69%, a decline of 51 basis points from 4.20% for
the nine months ended June 30, 1993. However, the cost of borrowed money was
16.04% for the nine months ended June 30, 1994, an increase of 377 basis
points from 12.27% for the nine months ended June 30, 1993. The increase in
the rate paid on other borrowings was due to the amortization of the CMO and
REMIC borrowings, as discussed in "Financial Condition."
Deposit costs in fiscal 1994 decreased compared to fiscal 1993 primarily
due to the rollover of maturing certificates of deposit to lower rates, and
the reduction of the cost of passbook accounts. However, management expects
that the increase in general interest rates, and in particular, the rising
yield on U.S. Treasury obligations, from January, 1994 to the present will
probably result in an increase in deposit costs in future periods. The costs
of borrowed money increased in the nine months ended June 30, 1994 compared
to the nine months ended June 30, 1993 primarily due to an increase in
amortization of the discount related to the bonds and the notes due to a
higher repayment of the underlying collateral, FHLMC Participation
Certificates("PCs"). The negative impact of the amortization of the discount
of the notes and bonds on net interest income in the nine months ended June
30, 1994 was $(1,112,000), compared to $(707,000) in the nine months ended
June 30, 1993. Management expects that repayments of the FHLMC PCs
collateralizing the bonds will decline in the remaining three months of
fiscal 1994, which will enhance interest rate spread and net interest income.
Interest-earning assets in the nine months ended June 30, 1994 averaged
$277.6 million while interest-bearing liabilities averaged $276.4 million, a
difference of $1.2 million. Interest-earning assets in the nine months ended
June 30, 1993 averaged $275.5 million, while interest-bearing liabilities in
the nine months ended June 30, 1993 averaged $274.3 million, a difference of
$1.2 million.
Net interest income in the three months ended June 30, 1994 decreased
$132,000 to $1.8 million or 6.7% compared to the three months June 30, 1993.
This decline was caused by a lower interest rate spread in the 1994 period as
compared to the 1993 period, as discussed above.
Noninterest Income
Noninterest income decreased $901,000 or 52% in the nine months ended
June 30, 1994 compared to the nine months ended June 30, 1993, and decreased
$301,000 or 50% in the three months ended June 30, 1994 compared to the same
period in 1993. Contributing to the decline in the nine month period ended
June 30, 1994 was a fiscal 1993 gain of $300,000 on the sale of mortgage-
backed securities in December, 1992, while there was no sale of mortgage-
backed securities in fiscal 1994. In addition, gains on the sale of loans
receivable held-for-sale totalled $193,000 in the nine months ended June 30,
1994, compared to $698,000 in the nine months ended June 30, 1993, a decrease
of $505,000. Gains on the sale of loans receivable held-for-sale totalled
$22,000 in the three months ended June 30, 1994, compared to $314,000 in the
three months ended June 30, 1993, a decrease of $292,000. All profits
resulted from the sale of loans classified as held-for-sale, which were newly
originated fixed-rate mortgage loans sold in the secondary market. However,
as noted above, the Association originated $20 million of long-term, fixed-
rate mortgage loans for its portfolio during January, 1994 through April,
1994 and as a result, gains on sales of loans decreased in fiscal 1994. The
net loss on sales of investment securities was $65,000 in the nine months
ended June 30, 1994, compared to a loss of $26,000 in the nine months ended
June 30, 1993, an increase of $39,000. Fees and service charges declined
$102,000 in fiscal 1994 compared to fiscal 1993 primarily due to a decrease
of $92,000 in mortgage loan service fees. The Association sold $63 million of
mortgage loan servicing in September, 1993.
Operating Expenses
Operating expenses decreased $181,000 or 3.0% to $5.80 million in the
nine months ended June 30, 1994 compared to $5.98 million the nine months
ended June 30, 1993. Operating expenses decreased $262,000 or 11.3% to $2.06
million in the three months ended June 30, 1994 compared to $2.32 million in
the three months ended June 30, 1993. These decreases were primarily due to
decreases of real estate owned expenses, which were partially offset by
increases in compensation and employee benefits expense.
Compensation and employee benefits expense increased $408,000, or 17.1%
in the nine months ended June 30, 1994, compared to the nine months ended
June 30, 1993. Compensation and employee benefits expense increased $233,000,
or 29.9% in the three months ended June 30, 1994, compared to the three
months ended June 30, 1993. The primary reason for the higher amounts in the
three and nine months ended June 30, 1994 compared to the same periods in
1993 were the addition of fourteen employees in two newly acquired branches
in Front Royal and Culpeper, Virginia on May 20, 1994, an increase in staff
to initiate a mortgage banking operation, a 4.0% salary increase for fiscal
1994 employees, and the addition of a marketing director. In addition,
pension costs increased $62,000, payroll taxes increased $22,000 and group
insurance costs increased $22,000 in the nine months ended June 30, 1994
compared the same period in 1993.
Occupancy and equipment expense increased $54,000 or 6.2% in the nine
months ended June 30, 1994, compared to the nine months ended June 30, 1993.
The primary reasons for these changes in the nine months ended June 30, 1994
compared to the same period in 1993 were an increase in furniture and fixture
depreciation of $53,000, an increase in personal property taxes of $18,000,
an increase in building depreciation of $8,000, and an increase of office
rent expense of $12,000, which increases were partially offset by a decrease
of $47,000 in repairs and maintenance.
Federal deposit insurance expense increased approximately $42,000 or
8.2% in the nine months ended June 30, 1994 compared to the nine months ended
June 30, 1993, and increased $11,000 or 6.2% in the three months ended June
30, 1994 compared to the same period in 1993. These increases reflect higher
premiums as a result of the implementation of a risk-based formula as
required by federal legislation in January, 1993, and the addition of
deposits acquired by the Association during fiscal 1994.
The net cost of real estate owned decreased $677,000 or 74.2% to
$236,000 in the nine months ended June 30, 1994 compared to the same period
in 1993, and decreased $523,000 or 87.5% to $75,000 in the three months ended
June 30, 1994 compared to the same period in 1993. The decline resulted from
a reduction of costs incurred in a 1993 refurbishing of the Ocean One hotel
in Virginia Beach, Virginia, and approximately $100,000 income in fiscal 1994
from operations of the Knights Inn in Monroe, Michigan which was sold in
November, 1993. The Ocean One hotel affiliated with the Howard Johnson's
franchise in June, 1994, after further renovation costs of approximately
$175,000 which are being written off over a fifteen month period ending
September 30, 1995. In the nine months ended June 30, 1994, the Ocean One
hotel has operated at approximately 33% occupancy at a loss of $112,000.
Management anticipates profit from hotel operations in excess of $275,000 in
the quarter ended September 30, 1994.
Income Tax Expense
The Association recorded income tax expense of $135,000 and $500,000 in
the nine months ended June 30, 1994 and 1993, respectively. The Association
recorded income tax expense of $137,000 and $61,000 in the three months ended
June 30, 1994 and 1993, respectively. The lower tax expense in the nine
months ended June 30, 1994 reflected the net loss before income tax expense
in 1994 as compared with net income before tax expense in 1993. In addition,
temporary differences affect the recognition of income and expense for tax
and financial reporting purposes. The significant temporary differences which
affected tax expense include the amortization of the discount on REMIC bonds,
amortization of prepaid pension amounts, receipt of FHLB stock dividends, the
difference between tax and book bad debt deductions, and the limitation on
the utilization of net operating loss carryforwards. The Association had a
deferred tax asset recorded at June 30, 1994 of $180,000.
Liquidity and Capital Resources
Jefferson is required by OTS regulations to maintain cash and eligible
liquid investments in an amount equal to 5% of net withdrawable savings and
borrowings payable in one year or less to assure its ability to meet demands
for withdrawals and repayment of short-term borrowings. The Association has
consistently exceeded such regulatory liquidity requirements, and for the
nine months ended June 30, 1994 had a weighted average liquidity ratio of
6.43%.
At June 30, 1994, the Association had $14.8 million of approved loan
commitments, and $5.0 million of undisbursed residential construction loans-
in-process. The amount of deposits which are scheduled to mature during the
next twelve month period totals approximately $72.6 million. Management
believes that, by evaluating competitive instruments and pricing in its
market area, it can, in most circumstances, manage and control maturing
deposits so that a substantial amount of such deposits are retained by
Jefferson.
Standby letters of credit outstanding at June 30, 1994 totalled
$311,000. The Association does not engage in transactions involving interest
rate futures or swap transactions.
The Association is subject to regulations of the OTS that impose certain
minimum regulatory capital requirements. The following table presents the
Association's capital requirements and the current excess(deficiency), on
both a dollar and percentage basis, as of June 30, 1994.
Current Actual Capital
Capital Association Excess
Requirement Capital (Deficiency)
Amount Percent Amount Percent Amount Percent
Tangible $ 4,476 1.50% $11,562 3.87% $ 7,086 2.37%
Core $ 8,952 3.00% $11,562 3.87% $ 2,610 0.87%
Risk-based $13,000 8.00% $12,465 7.67% $ (535) (0.33)%
Stockholders' equity of $11.7 million at June 30, 1994 under generally
accepted accounting principles was reduced by $152,000 of goodwill to arrive
at tangible capital for regulatory purposes. Risk-based capital included
stockholders' equity of $11.7 million, increased by the general loan loss
allowance of $1.5 million, and reduced by goodwill of $152,000 and a land
development investment of $612,000. Risk-weight assets totalled $162.5
million at June 30, 1994.
At June 30, 1994, the Association exceeded tangible and core capital
regulatory requirements, but did not exceed the risk-based regulatory capital
requirement. The Association expects to file a capital plan in September,
1994, summarizing the actions it plans on taking to once again comply with
all regulatory capital requirements.
Impact of Inflation, Deflation and Changing Prices
The consolidated financial statements and related notes presented
elsewhere herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position
and operating results in terms of historical dollars without considering
changes in the relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Association are monetary in nature.
As a result, interest rates have a more significant impact on the
Association's performance than the effects of general levels of inflation.
Interest rates may not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, noninterest expenses
do reflect general levels of inflation.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Legal proceedings are more fully described in Form 10-KSB for the year
ended September 30, 1993 filed on January 13, 1994. There have been no
material changes since that date, other than that noted below.
MORRISSEY, ET AL V. JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A., ET AL,
At Law No. 133899, Circuit Court of Fairfax County, Virginia.
This suit was filed on July 29, 1994 by the principals of a Texas partnership
(5930 Prestionview Joint Venture) and the Guarantors of the 1984 loan made to
that partnership. The plaintiffs claim that Jefferson violated Virginia's
Equal Credit Opportunity Act by requiring spousal guarantees of the loan and
requiring reaffirmation of those guarantees when the terms of the loan were
subsequently modified. The plaintiffs seek to have their guarantees declared
unenforceable and to have three deeds of trust on Virginia property securing
$300,000 of the $1,400,000 loan released. Jefferson intends to contest the
suit and management does not anticipate any material impact to the financial
statements as a result of the litigation.
Management does not anticipate any material impact to the financial
statements as a result of litigation.
Item 5. Other Information
On January 11, 1994, the Association signed an agreement to acquire the
Front Royal and Culpeper, Virginia branches of First Union National Bank of
Virginia, which involved the transfer of approximately $14.2 million in
deposits and the acquisition of branch buildings and equipment. The
transaction was approved by the OTS, and was completed on May 20, 1994.
At the April 5, 1994 meeting of the Board of Directors, the bylaws of
the Association were amended to increase the members of the board from nine
to ten. The Board of Directors then elected William H. Savage to fill this
vacancy and to serve until the next annual meeting of stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
(Registrant)
Date: August 15, 1994 Thomas W. Winfree
Thomas W. Winfree, President and
Chief Executive Officer
Date: August 15, 1994 Craig A. Mason
Craig A. Mason, Senior Vice President and
Chief Financial Officer
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
Crestar's Articles of Incorporation implement the provisions of the VSCA, which
provide for the indemnification of Crestar's directors and officers in a variety
of circumstances, which may include indemnification for liabilities under the
Securities Act of 1933. Under sections 13.1-697 and 13.1-702 of the VSCA, a
Virginia corporation generally is authorized to indemnify its directors and
officers in civil or criminal actions if they acted in good faith and believed
their conduct to be in the best interests of the corporation and, in the case of
criminal actions, had no reasonable cause to believe that the conduct was
unlawful. Crestar's Articles of Incorporation require indemnification of
directors and officers with respect to certain liabilities, expenses and other
amounts imposed upon them be reason of having been a director or officer, except
in the case of willful misconduct or a knowing violation of criminal law.
Crestar also carries insurance on behalf of directors, officers, employees or
agents that may cover liabilities under the Securities Act of 1933. In
addition, the VSCA and Crestar's Articles of Incorporation eliminate the
liability of a director or officer of Crestar in a shareholder or derivative
proceeding. This elimination of liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or any federal or
state securities law. Sections 13.1-692.1 and 13.1-696 to -704 of the VSCA are
hereby incorporated herein by reference.
Item 21. Exhibits and Financial Statement Schedules [numbers of the
exhibits yet to be conformed]
(a) Exhibits
2(a) Agreement and Plan of Reorganization dated as of
September 1, 1994, among Crestar, Crestar Bank and
Jefferson (attached to the Proxy Statement/ Prospectus
as Annex I)
2(b) Stock Option Agreement dated as of September 1, 1994,
by and between Jefferson and Crestar (attached to the
Proxy Statement/Prospectus as Annex II)
5 Opinion of Hunton & Williams with respect to legality
8 Opinion of Hunton & Williams with respect to tax
consequences of the Merger
23(a) Consent of KPMG Peat Marwick LLP
23(b) Consent of BDO Seidman
23(c) Consent of Scott & Stringfellow, Inc.
23(d) Consent of Hunton & Williams (included in Exhibit 5 and
Exhibit 8)
25 Power of Attorney (included on page II - 5 of the
Registration Statement)
99(a) Form of Proxy
99(b) Form of Cash Option Election
(b) Financial Statement Schedules -- None
(c) Report, Opinion or Appraisal -- Opinion of Scott &
Stringfellow, Inc. (attached to the Proxy
Statement/Prospectus as Annex III)
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement.
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent post-
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental
change in the information set forth in the
registration statement.
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration
statement is on Form S-3 or Form S-8, and the
information required to be included in a post-
effective amendment by those paragraphs is
contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration
statement.
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment will be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time will be
deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
4. That prior to any public reoffering of the securities
registered hereunder through the use of a prospectus
which is a part of this registration statement, by any
person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain
the information called for by the applicable
registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the
information called for by the other items of the
applicable form.
5. That every prospectus (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act
and is used in connection with an offering of securities
subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be
used until such amendment is effective, and that, for
the purposes of determining any liability under the
Securities Act of 1933, each such post-effective
amendment will be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time will be
deemed to be the initial bona fide offering thereof.
6. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against
public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the
incorporated documents by first-class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by
means of the post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was
not the subject of and included in the registration statement when it
became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richmond,
Commonwealth of Virginia, on October 6, 1994.
CRESTAR FINANCIAL CORPORATION
(Registrant)
By: /s/ John C. Clark, III
John C. Clark, III,
Corporate Senior Vice
President, General Counsel
and Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in
the capacities indicated on October 6, 1994. Each of the directors
and/or officers of Crestar Financial Corporation whose signature appears
below hereby appoints John C. Clark, III, Lathan M. Ewers, Jr. and David
M. Carter, and each of them severally, as his attorney-in-fact to sign
in his name and behalf, in any and all capacities stated below and to
file with the Commission, any and all amendments, including post-
effective amendments to this registration statement, making such changes
in the registration statement as appropriate, and generally to do all
such things in their behalf in their capacities as officers and
directors to enable Crestar Financial Corporation to comply with the
provisions of the Securities Act of 1933, and all requirements of the
Securities and Exchange Commission.
Signature Title
/s/ Richard G. Tilghman Chairman of the Board and Chief
Richard G. Tilghman Executive Officer and Director
(Principal Executive Officer)
/s/ James M. Wells, III President and Director
James M. Wells, III
/s/ Patrick D. Giblin Vice Chairman of the Board and Chief
Patrick D. Giblin Financial Officer and Director
(Principal Financial and Accounting
Officer)
/s/ Richard M. Bagley Director
Richard M. Bagley
/s/ J. Carter Fox Director
J. Carter Fox
/s/ Bonnie Guiton Hill Director
Bonnie Guiton Hill
/s/ Gene A. James Director
Gene A. James
/s/ Charles R. Longsworth Director
Charles R. Longsworth
/s/ Patrick J. Maher Director
Patrick J. Maher
/s/ Frank E. McCarthy Director
Frank E. McCarthy
/s/ G. Gilmer Minor, III Director
G. Gilmer Minor, III
/s/ Gordon F. Rainey, Jr. Director
Gordon F. Rainey, Jr.
/s/ Frank S. Royal Director
Frank S. Royal, M.D.
/s/ L. Dudley Walker Director
L. Dudley Walker
/s/ Karen Hastie Williams Director
Karen Hastie Williams
<PAGE>
EXHIBIT INDEX
Exhibit Description
2(a) Agreement and Plan of
Reorganization
2(b) Stock Option Agreement
5 Opinion of Hunton &
Williams with respect
to legality
8 Opinion of Hunton &
Williams with respect
to tax consequences
23(a) Consent of KPMG Peat
Marwick LLP
23(b) Consent of BDO Seidman
23(c) Consent of Scott &
Stringfellow, Inc.
23(d) Consent of Hunton &
Williams
25 Power of Attorney
99(a) Form of Proxy
99(b) Cash Option Form
Exhibit 5
File No.: 33411.1124
October 5, 1994
Board of Directors
Crestar Financial Corporation
919 East Main Street
Richmond, Virginia 23219
Registration Statement on Form S-4
Ladies and Gentlemen:
We are acting as counsel for Crestar Financial Corporation (the
"Company") in connection with the registration under the Securities Act
of 1933 of 564,000 shares of its common stock (the "Common Stock"). The
transaction in which the Common Stock will be issued is described in the
Company's Registration Statement on Form S-4 of the Company (the
"Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") on October 5, 1994. In connection with
the filing of the Registration Statement you have requested our opinion
concerning certain corporate matters.
We are of the opinion that:
1. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the Commonwealth of
Virginia.
2. The Common Stock has been duly authorized and, when the
shares have been issued as described in the Registration Statement, will
be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to the references to us in the
Proxy Statement/Prospectus included therein. In giving this consent, we
do not admit that we are within the category of persons whose consent is
required by section 7 of the Securities Act of 1933 or the rules and
regulations promulgated thereunder by the Securities and Exchange
Commission.
Very truly yours,
/s/ Hunton & Williams
Exhibit 8
October 4, 1994
Crestar Financial Corporation
Crestar Bank
919 East Main Street
Richmond, Virginia 23219
Jefferson Savings and Loan Association, F.A.
550 Broad View Avenue
Warrenton, Virginia 22186
Merger of Jefferson Savings and Loan Association, F.A.
Into Crestar Bank
Certain Federal Income Tax Matters
Gentlemen:
We have acted as counsel to Crestar Financial Corporation
("Crestar") in connection with the proposed merger of Jefferson Savings
and Loan Association, F.A. ("Jefferson") into Crestar Bank, a wholly-
owned subsidiary of Crestar (the "Merger"). In the Merger, each out-
standing share of Jefferson common stock (other than any shares held by
Crestar) is to be converted into a fraction of a share of Crestar common
stock having a fair market value of $17.00 or, at the election of each
Jefferson shareholder, $17.00 in cash. For that purpose, Crestar common
stock will be valued at the average of the closing price for Crestar
common stock for the 10 trading days ending on the tenth day before the
effective time of the Merger. Any Jefferson shareholder who becomes
entitled to a fractional share interest in Crestar common stock, after
aggregating all the shareholder's shares of Jefferson common stock to be
exchanged for Crestar common stock, will receive cash from Crestar in
lieu of the fractional share interest.
The total number of shares of Jefferson common stock that may be
exchanged for cash pursuant to the cash election is limited to 40 percent of the
shares outstanding immediately before the Merger. If the total number of shares
of Jefferson common stock for which cash elec- tions are made exceeds 40 percent
of the shares of Jefferson common stock outstanding immediately before the
Merger, Crestar first will pay cash to each holder of 100 or fewer shares of
Jefferson stock who has submitted all his shares for cash and then will pay cash
and issue shares of Crestar common stock pro rata for the remaining shares
submitted for cash. Jefferson share- holders are not entitled to exercise
dissenter's rights with respect to the Merger. Jefferson common stock is the
only class of Jefferson stock outstanding.
You have requested our opinion concerning certain federal
income tax consequences of the Merger. In giving this opinion, we have
reviewed the Agreement and Plan of Reorganization (including the Plan of
Merger), dated as of September 1, 1994, among Crestar, Crestar Bank, and
Jefferson; the Form S-4 Registration Statement under the Securities Act
of 1933 relating to the Merger (the "S-4"); and such other documents as
we have considered necessary. In addition, we have assumed the
following:
1. The fair market value of the Crestar common stock
(including any fractional share interest) received by a Jefferson
shareholder in exchange for Jefferson common stock will be approximately
equal to the fair market value of the Jefferson common stock surrendered
in the exchange.
2. None of the compensation received by any shareholder-
employee of Jefferson will be separate consideration for, or allocable
to, any shares of Jefferson common stock; none of the shares of Crestar
common stock received by any shareholder-employee in the Merger will be
separate consideration for, or allocable to, any employment agreement;
and the compensation paid to any shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
3. The payment of cash in lieu of fractional shares of
Crestar common stock is solely for the purpose of avoiding the expense
and inconvenience to Crestar of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to Jefferson shareholders
in lieu of fractional shares of Crestar common stock will not exceed one
percent of the total consideration that will be issued in the Merger to
the Jefferson shareholders in exchange for their Jefferson common stock.
4. No share of Jefferson common stock has been or will be
redeemed in anticipation of the Merger, and Jefferson has not made and
will not make any extraordinary distribution with respect to its stock
in anticipation of the Merger.
5. Crestar has no plan or intention to reacquire any of its
stock issued in the Merger or to make any extraordinary distribution
with respect to such stock.
6. There is no plan or intention by shareholders
of Jefferson to sell, exchange, or otherwise dispose of a number of
shares of Crestar common stock received in the Merger that would reduce
the Jefferson shareholders' ownership of Crestar common stock to a
number of shares having a fair market value, as of the effective date of
the Merger, of less than 50 percent of the fair market value of all the
formerly outstanding Jefferson common stock as of that same date. For
this purpose, shares of Jefferson common stock exchanged for cash in the
Merger or exchanged for cash in lieu of fractional shares of Crestar
common stock are treated as outstanding Jefferson common stock on the
effective date of the Merger. Moreover, shares of Jefferson common
stock and shares of Crestar common stock held by Jefferson shareholders
and otherwise sold, redeemed, or disposed of before or after the Merger
are considered in making the above determination.
7. Crestar Bank will acquire at least 90 percent of the
fair market value of the net assets and at least 70 percent of the fair
market value of the gross assets held by Jefferson immediately before
the Merger. For this purpose, amounts paid by Jefferson for its expens-
es related to the Merger and any redemptions and distributions (except
for regular, normal dividends) made by Jefferson in connection with the
Merger will be included as assets of Jefferson held immediately before
the Merger.
8. Following the Merger, Crestar Bank will continue the
historic business of Jefferson or use a significant portion of Jefferso-
n's historic business assets in a business.
9. The liabilities of Jefferson that will be assumed by
Crestar Bank and the liabilities, if any, to which the transferred
assets of Jefferson are subject were incurred by Jefferson in the
ordinary course of business.
10. There is no intercorporate indebtedness existing between
Jefferson and Crestar, Crestar Bank, or any other subsidiary of Crestar
that was issued or acquired or will be settled at a discount.
11. Neither Crestar nor any subsidiary of Crestar (a) has
transferred or will transfer cash or other property to Jefferson or any
subsidiary of Jefferson for less than fair market value consideration in
anticipation of the Merger or (b) has made or will make any loan to
Jefferson or any subsidiary of Jefferson in anticipation of the Merger.
12. On the effective date of the Merger, the fair market
value of the assets of Jefferson transferred to Crestar Bank will exceed
the sum of Jefferson's liabilities assumed by Crestar Bank plus the
amount of liabilities, if any, to which the transferred assets are
subject.
13. Crestar, Crestar Bank, Jefferson, and the shareholders
of Jefferson will pay their respective expenses, if any, incurred in
connection with the Merger.
14. Crestar Bank has outstanding only one class of stock,
and Crestar owns all the outstanding shares of such class. Following
the Merger, Crestar Bank will not issue additional shares of its stock
that would result in Crestar's owning less than 80 percent of the total
combined voting power of all classes of Crestar Bank's voting stock or
less than 80 percent of each class of Crestar Bank's nonvoting stock.
15. Crestar has no plan or intention to liquidate Crestar
Bank, to merge Crestar Bank into another corporation, to sell or other-
wise dispose of any stock of Crestar Bank, or (except for dispositions
made in the ordinary course of business) to cause Crestar Bank to sell
or otherwise dispose of any of the assets of Jefferson acquired in the
Merger.
16. Crestar Bank has no plan or intention to sell or other-
wise dispose of any of the assets of Jefferson acquired in the Merger,
except for dispositions made in the ordinary course of business.
17. For each of Crestar, Crestar Bank, and Jefferson, not
more than 25 percent of the fair market value of its adjusted total
assets consists of stock and securities of any one issuer, and not more
than 50 percent of the fair market value of its adjusted total assets
consists of stock and securities of five or fewer issuers. For purposes
of the preceding sentence, (a) a corporation's adjusted total assets
exclude cash, cash items (including accounts receivable and cash equiva-
lents), and United States government securities, (b) a corporation's
adjusted total assets exclude stock and securities issued by any subsid-
iary at least 50 percent of the voting power or 50 percent of the total
fair market value of the stock of which is owned by the corporation, but
the corporation is treated as owning directly a ratable share (based on
the percentage of the fair market value of the subsidiary's stock owned
by the corporation) of the assets owned by any such subsidiary, and (c)
all corporations that are members of the same "controlled group" within
the meaning of section 1563(a) of the Internal Revenue Code (the "Code")
are treated as a single issuer.
18. At all times during the five-year period ending on the
effective date of the Merger, the fair market value of all of Jefferso-
n's United States real property interests has been less than 50 percent
of the total fair market value of (a) its United States real property
interests, (b) its interests in real property located outside the United
States, and (c) its other assets used or held for use in a trade or
business. For purposes of the preceding sentence, (x) United States
real property interests include all interests (other than an interest
solely as a creditor) in real property and associated personal property
(such as movable walls and furnishings) located in the United States or
the Virgin Islands and interests in any corporation (other than a
controlled corporation) owning any United States real property interest,
(y) Jefferson is treated as owning its proportionate share (based on the
relative fair market value of its ownership interest to all ownership
interests) of the assets owned by any controlled corporation or any
partnership, trust, or estate in which Jefferson is a partner or benefi-
ciary, and (z) any such entity in turn is treated as owning its propor-
tionate share of the assets owned by any controlled corporation or any
partnership, trust, or estate in which the entity is a partner or bene-
ficiary. As used in this paragraph, "controlled corporation" means any
corporation at least 50 percent of the fair market value of the stock of
which is owned by Jefferson, in the case of a first-tier subsidiary of
Jefferson, or by a controlled corporation, in the case of a lower-tier
subsidiary.
19. Any shares of Crestar common stock received in exchange
for shares of Jefferson common stock that (a) were acquired in connec-
tion with the performance of services, including stock acquired through
the exercise of an option or warrant acquired in connection with the
performance of services, and
(b) are subject to a substantial risk of forfeiture within the meaning
of section 83(c) of the Code will be subject to substantially the same
risk of forfeiture after the Merger.
20. No outstanding Jefferson common stock acquired in con-
nection with the performance of services was or will have been acquired
within six months before the effective date of the Merger by any person
subject to section 16(b) of the Securities Exchange Act of 1934 other
than pursuant to an option granted more than six months before the
effective date of the Merger.
21. Jefferson has not filed, and holds no asset subject to,
a consent pursuant to section 341(f) of the Code and regulations there-
under.
22. Jefferson is not a party to, and holds no asset subject
to, a "safe harbor lease" under former section 168(f)(8) of the Code and
regulations thereunder.
On the basis of the foregoing, and assuming that (i) with
respect to shareholders that are nonresident aliens or foreign entities,
Jefferson will comply with all applicable statement and notification
requirements of Treasury Regulation section 1.897-2(g) & (h), and (ii) the
Merger will be consummated in accordance with the Plan of Merger, we are
of the opinion that (under existing law) for federal income tax purpos-
es:
1. The Merger will be a reorganization within the meaning
of section 368(a)(1)(A) by reason of section 368(a)(2)(D) of the Code,
and Crestar, Crestar Bank, and Jefferson each will be a "party to a
reorganization" within the meaning of section 368(b) of the Code.
2. Jefferson will not recognize gain or loss (a) on the
transfer of its assets to Crestar Bank in exchange for Crestar common
stock, cash, and the assumption of Jefferson's liabilities, or (b) on
the constructive distribution of Crestar common stock and cash to
Jefferson shareholders. (We note, how-ever, that Jefferson or Crestar
Bank may be required to include in income certain amounts as a result of
the termination of any bad-debt reserve maintained by Jefferson for
federal income tax purposes and other possible required changes in
accounting methods.)
3. Neither Crestar nor Crestar Bank will recognize gain or
loss on the acquisition by Crestar Bank of Jefferson's assets in ex-
change for Crestar common stock, cash, and the assumption of Jefferson's
liabilities. (We note, however, that Jefferson or Crestar Bank may be
required to include in income certain amounts as a result of the termi-
nation of any bad-debt reserve maintained by Jefferson for federal
income tax purposes and other possible required changes in accounting
methods.)
4. A Jefferson shareholder will not recognize gain or loss
on the exchange of his shares of Jefferson common stock solely for
shares of Crestar common stock (including any fractional share interest)
in the Merger.
5. The basis of shares of Crestar common stock (including
any fractional share interest) received in the Merger by a Jefferson
shareholder who exchanges his shares of Jefferson common stock solely
for shares of Crestar common stock will be the same as the basis of the
shares of Jefferson common stock exchanged therefor.
6. A Jefferson shareholder who exchanges shares of Jeffer-
son common stock for both shares of Crestar common stock (including any
fractional share interest) and cash (excluding cash received in lieu of
a fractional share) will recognize any gain realized (including any gain
treated as a dividend) up to the amount of such cash received, but will
not recognize any loss.
7. The basis of shares of Crestar common stock (including
any fractional share interest) received in the Merger by a Jefferson
shareholder who exchanges shares of Jefferson common stock for shares of
Crestar common stock and cash (excluding cash received in lieu of a
fractional share) will be the same as the basis of the shares of Jeffer-
son common stock exchanged therefor, decreased by the amount of such
cash received and increased by the amount of gain recognized by the
shareholder (including any gain treated as a dividend).
8. The holding period for shares of Crestar common stock
(including any fractional share interest) received by a Jefferson
shareholder in the Merger will include the holding period for the shares
of Jefferson common stock exchanged therefor, if such shares of Jeffer-
son common stock are held as a capital asset on the effective date of
the Merger.
9. Cash received by a Jefferson shareholder in lieu of a
fractional share of Crestar common stock will be treated as having been
received as full payment in exchange for such fractional share pursuant
to section 302(a) of the Code.
We are also of the opinion that the federal income tax
consequences of the Merger are fairly summarized in the S-4 under the
headings "Summary -- Certain Federal Income Tax Consequences of the
Merger" and "The Merger -- Certain Federal Income Tax Consequences." We
consent to the use of this opinion as an exhibit to the S-4 and to the
reference to this firm under such headings. In giving this consent, we
do not admit that we are within the category of persons whose consent is
required by section 7 of the Securities Act of 1933 or the rules and
regulations promulgated thereunder by the Securities and Exchange
Commission.
Very truly yours,
/s/ HUNTON & WILLIAMS
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Crestar Financial Corporation:
We consent to the use of our report incorporated herein by refer-
ence and to the reference to our firm under the heading "Experts" in the
Proxy Statement/Prospectus. Our report refers to changes in accounting
for postretirement benefits other than pensions and for income taxes.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
October 3, 1994
Exhibit 23(b)
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Jefferson Savings Loan Association, F.A.
We hereby consent to the use in the Prospectus/Proxy Statement
constituting a part of this Registration Statement of our report dated
November 24, 1993, relating to the consolidated financial statements of
Jefferson Savings and Loan Association, F.A., which is contained in the
Prospectus/Proxy Statement.
We also consent to all references to us in the Prospectus/Proxy
Statement.
/s/ BDO Siedman
Washington, D.C.
October 4, 1994
Exhibit 23(c)
CONSENT OF INVESTMENT BANKER
Jefferson Savings & Loan Association, F.A./
Crestar Financial Corporation Merger
We consent to the use, quotation and summarization in the Regis-
tration Statement on Form S-4 of our Opinion of Fairness dated September
1, 1994 and updated Opinion dated October 4, 1994, rendered to the Board
of Directors of Jefferson Savings & Loan Association, F.A. ("Jefferson")
in connection with the merger of Jefferson with and into Crestar Finan-
cial Corporation and to the use of our name, and the statements with
respect to us, appearing in the Registration Statement.
/s/ SCOTT & STRINGFELLOW, INC.
Richmond, Virginia
October 4, 1994
Exhibit 99(a)
REVOCABLE PROXY
JEFFERSON SAVINGS & LOAN ASSOCIATION, F.A.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
JEFFERSON SAVINGS & LOAN ASSOCIATION, F.A. ("JEFFERSON" OR THE "ASSOCIA-
TION") FOR USE ONLY AT THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON
THURSDAY, NOVEMBER 10, 1994, AND AT ANY ADJOURNMENT THEREOF.
The undersigned, being a stockholder of the Association hereby
appoints Messrs. Robin C. Gulick and Thomas W. Winfree, or any one of
them, as proxies, each with power to appoint his substitute, and hereby
authorizes them to represent and vote, as designated below, all the
shares of Common Stock of the Association held of record by the under-
signed on September 27, 1994, at the Special Meeting of Stockholders of
the Association to be held at the Fauquier Springs Country Club, located
at 9236 Tournament Drive, Warrenton, Virginia, 22186 on Thursday,
November 10, 1994, at 4:00 p.m., and at any adjournment of said meeting.
1. PROPOSAL TO approve the Agreement and Plan of Reorganization
and related Plan of Merger (the "Merger Agreement"), dated September 1,
1994, among Crestar Financial Corporation, Crestar Bank and Jefferson
providing for the merger of Jefferson with and into Crestar Bank as more
fully described in the accompanying Proxy Statement/Prospectus.
( ) FOR ( ) AGAINST ( ) ABSTAIN
In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting.
This proxy may be revoked at any time before it is exercised.
This proxy is solicited by the Board of Directors. Shares of
Common Stock of the Association will be voted as specified. If no
specification is made above, shares will be voted FOR approval of the
Merger Agreement in Proposal 1 and otherwise at the discretion of the
proxies.
The undersigned hereby acknowledges receipt of the Notice of
Special Meeting of Stockholders of the Association called for Thursday,
November 10, 1994, and a Proxy Statement/Prospectus for the Special
Meeting prior to the signing of this proxy.
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING
THE ENCLOSED ENVELOPE.
Dated: ________________, 1994
____________________________
Signature
____________________________
Signature
Please sign exactly as your name(s)
appear(s) on this proxy. When signing
in a representative capacity, please
give title.
Exhibit 99(b)
CRESTAR FINANCIAL CORPORATION
JEFFERSON SAVINGS & LOAN ASSOCIATION, F.A.
CASH OPTION ELECTION
AND
LETTER OF TRANSMITTAL
To Jefferson Savings & Loan
Association, F.A.
550 Broad View Avenue
Warrenton, Virginia 22186
Gentlemen:
On November 10, 1994 at the special meeting of shareholders of
Jefferson Bank ("Jefferson"), shareholders will consider an Agreement
and Plan of Reorganization (the "Agreement") dated as of September 1,
1994 among Crestar Financial Corporation ("Crestar"), Crestar Bank and
Jefferson. The Agreement provides for the Merger of Jefferson into
Crestar Bank with the conversion of Jefferson common stock into Crestar
common stock or, at the election of the Jefferson shareholder, cash.
Jefferson common stock is being valued at $17.00 per share in the
Merger.
The Agreement requires Jefferson shareholders who elect to ex-
change any of their shares of Jefferson common stock in the Merger for
cash to make such election prior to the 1994 special meeting. Certifi-
cates for the shares being exchanged for cash must be submitted to
Jefferson at or prior to such meeting. Such certificates are enclosed
with this letter.
I elect to exchange the number of shares of Jefferson common stock
designated below for $17.00 cash per share (subject to all applicable
withholding taxes). I enclose the certificates for such shares.
I understand that the total number of shares of Jefferson common
stock that may be exchanged for cash is subject to proration as de-
scribed in "The Merger -- Cash Option" in the Proxy Statement/Prospect-
us. Jefferson shares not eligible to be exchanged for cash will be
exchanged for Crestar common stock.
I understand that if the Merger is approved by Jefferson share-
holders at the special meeting, this election to receive cash is irrevo-
cable. Jefferson will retain the certificates for shares submitted for
cash purchase in escrow until either termination of the Agreement, upon
which Jefferson promptly will return such certificates, or the Effective
Time of the Merger, when Crestar Bank, as exchange agent, will exchange
such certificates for cash.
Description of Shares of Jefferson Common Stock Submitted for Cash
Name and Address
of Registered Holder(s) Certificate(s) Enclosed
(Kindly note address changes) (Attach list if necessary)
Certificate # Nos. of
Shares
I (We) have, and at the Effective Time of the Merger will have,
full power and authority to sell the shares represented by the certifi-
cate(s) submitted. I (We) certify that the information provided on this
form is true, and I (we) am not subject to backup withholding due to
notified payee underreporting.
Sign Here: Date Here:
Please insert your Social ____________________ ________, 1994
Security or other tax
identifying number below ____________________
(Signature(s) of
Registered Owner(s))
Please sign exactly as
name appears
on stock certificate(s).
See Instruction 2.
Special Instructions
Fill in only if mailing is to be made other than in the name or to the
address specified above.
Special Mailing Instructions
Mail To:
_______________________________
(Type or print)
Name___________________________
Address _______________________
(Number) (Street)
Instructions for Submitting Certificates of Jefferson Savings
& Loan, F.A. Common Stock
1. General. This form must be filled in, dated and signed, and
accompanied by your certificate or certificates for shares of Jefferson
common stock. Delivery should be made at the address shown on the
reverse. Proper delivery is at risk of the owner. If sent by mail,
registered mail is suggested. For your convenience, a return envelope
is enclosed.
2. Signatures. The signature (or signatures in the case of certifi-
cates owned by two or more joint holders) on the Letter of Transmittal
should correspond exactly with the name(s) as written on the face of the
certificates.
If the certificate(s) transmitted hereby is registered in the name of
two or more joint holders, all such holders must sign the Letter of
Transmittal.
If surrendered certificates are registered in different ways on several
certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal as there are different registrations of
such certificates.
If the Letter of Transmittal is signed by a person other than the record
holder of the certificate(s) listed, the certificate(s) must be endorsed
or accompanied by appropriate stock powers, in either case signed by the
record holder(s) in the name(s) that appears on the certificate(s) and
the signature(s) must be guaranteed by a member of a national securities
exchange or of the National Association of Securities Dealers, Inc., or
a United States commercial bank or trust company.
3. Fiduciaries and Representatives. If a Letter of Transmittal, an
endorsement or a certificate or a stock power is signed by a trustee,
executor, administrator, guardian, officer of a corporation, attorney-
in-fact, or other person in any representative or fiduciary capacity,
the person signing, unless such person is the record holder of the
shares, must give such person's full title in such capacity and appro-
priate evidence of authority to act in such capacity must be forwarded
with the Letter of Transmittal.
4. Time in Which to Submit Certificates. Certificate(s) for Jeffer-
son common stock must be submitted prior to Jefferson's special meeting
of shareholders on November 10, 1994 at 4:00 p.m. See "The Merger --
Cash Option" in the Proxy Statement/Prospectus.
All questions concerning the validity of this form will be determined by
Jefferson and/or Crestar Bank and will be final and binding.
Questions and Requests for Assistance may be Directed to Jefferson at
(703) 347-3531.
