UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 23, 1994
CRESTAR FINANCIAL CORPORATION
(Exact name of as specified in charter)
Virginia 1-7083 54-0722175
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
919 East Main Street, P.O.Box 26665, Richmond, Virginia 23261-6665
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 804-782-5000
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
The following exhibits are filed solely to permit incorporation by
reference into a registration statement on Form S-4 covering the issuance of
Registrant's common stock in connection with the assumption of Jefferson Savings
and Loan Association, F.A. ("Jefferson"). These exhibits were prepared by
Jefferson, were not prepared by Registrant, and are not to be considered as
being filed as part of Registrant's disclosure obligations under the Securities
Exchange Act of 1934.
(99)(i) Report on Form 10-KSB for the year ended December 31, 1993
filed by Jefferson with the Office of Thrift Supervision of
the Department of the Treasury.
(99)(ii) Jefferson's Annual Report to Stockholders for the year ended
December 31, 1993.
(99)(iii) Notice of Meeting and Proxy Statement for Jefferson's 1994
annual meeting of stockholders held on January 27, 1994.
(99)(iv) Report on Form 10-QSB for the quarter ended June 30, 1994
filed by Jefferson with the Office of Thrift Supervision of
the Department of the Treasury.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CRESTAR FINANCIAL CORPORATION
(Registrant)
By: /s/ John C. Clark, III
John C. Clark, III
Senior Vice President, General
Counsel and Secretary
Date: September 23, 1994
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
(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
January 10, 1994
To The Stockholders of
Jefferson Savings and Loan Association, F.A.:
You are cordially invited to attend the Annual Meeting of
Stockholders of Jefferson Savings and Loan Association, F.A.
which will be held at the Fauquier Springs Country Club in
Fauquier County, Virginia on Thursday, January 27, 1994 at 4:00
P.M. The formal Notice of the Annual Meeting of Stockholders and
Proxy Statement appear on the following pages and contain details
of the business to be conducted at the meeting. I urge you to
read it carefully.
At this year's Annual Meeting you will be asked to (i) vote
on the election of three directors; (ii) approve a Stock
Incentive Plan; (iii) approve a proposal to conduct a private
placement offering; and (iv) ratify the appointment of BDO
Seidman as the Association's auditors.
The interest and participation of stockholders in the
affairs of Jefferson Savings are very important if we are to do
the best job possible as managers of Jefferson Savings and Loan
Association, F.A. Therefore, whether or not you will be able to
join us on January 27, 1994, please take a moment now to vote on
each of the proposals and to sign, date and mail the enclosed
proxy card in the postage prepaid envelope provided for that
purpose. PLEASE REPLY BY JANUARY 20, 1994.
We look forward to your participation at the meeting, either
in person or by proxy. Thank you for your cooperation.
Sincerely,
Robin C. Gulick
Chairman of the Board of Directors
<PAGE>
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
550 Broadview Avenue
Warrenton, Virginia 22186
(703) 347-3531
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 27, 1994
Notice is hereby given that the Annual Meeting of Stock-
holders of Jefferson Savings and Loan Association, F.A., a
Federal stock savings association, will be held at the Fauquier
Springs Country Club, Fauquier County, Virginia, on January 27,
1994, at 4:00 P.M., Eastern Standard Time, for the following
purposes, all of which are more completely set forth in the
accompanying Proxy Statement:
1. To elect three persons as directors for terms of three
years and until their successors are elected and
qualified;
2. To approve a Stock Incentive Plan;
3. To approve a proposed private placement offering;
4. To ratify the selection of BDO Seidman, Independent
Certified Public Accountants, as auditors for the
Association for the fiscal year ending September 30,
1994; and
5. To transact such other business as properly may come
before the 1994 Annual Meeting or any adjournments
thereof.
Only stockholders of record at the close of business on
December 15, 1993 are entitled to receive notice of and to vote
at the Annual Meeting or any adjournments thereof.
Jefferson Savings and Loan Association, F.A.'s Proxy
Statement is submitted herewith. The Annual Report for the year
ended September 30, 1993 is also enclosed.
By Order of the Board of Directors,
Robin C . Gulick, Chairman
Warrenton, Virginia
January 10, 1994
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU
OWN. EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, DATE,
AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY TO JEFFERSON
SAVINGS AND LOAN ASSOCIATION, F.A. IN THE ENVELOPE PROVIDED. IF YOU ATTEND
THE MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY
PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME
PRIOR TO THE EXERCISE THEREOF.
<PAGE>
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITATION AND REVOCATION OF PROXY
The enclosed proxy, for use only at the Annual Meeting of
Stockholders of Jefferson Savings and Loan Association, F.A.
("Jefferson" or the "Association") to be held on January 27,
1994, and any and all adjournments thereof, is solicited on
behalf of the Board of Directors of Jefferson. Such solicitation
is being made by mail and may also be made in person or by
telephone by officers, directors, and regular employees of
Jefferson. All expenses incurred in such solicitation will be
paid by Jefferson. This Proxy Statement is expected to be mailed
to stockholders on January 10, 1994.
Any stockholder executing a proxy retains the right to
revoke it by notice in writing to the Secretary of Jefferson at
any time prior to its use, by submitting a duly executed proxy
bearing a later date or by attending the meeting and voting in
person. Proxies solicited hereby may be exercised only at the
Annual Meeting and any adjournment thereof and will not be used
for any other meeting.
Each proxy solicited hereby, if properly signed and returned
to the Association and not revoked prior to its use, will be
voted in accordance with the instructions contained therein. If
no contrary instructions are given, each proxy received by the
Board of Directors will be voted for the election as directors of
the nominees listed below, for the approval of the Stock
Incentive Plan, for the approval of the proposal to conduct a
private placement offering, and for the ratification of the
selection of BDO Seidman as the Association's independent
certified public accountants, all of which are discussed herein.
VOTING SECURITIES, PRINCIPAL HOLDERS THEREOF
AND OWNERSHIP BY MANAGEMENT
Only stockholders of record at the close of business on
December 15, 1993 will be entitled to vote at the Annual Meeting.
As of such date, there were 1,310,876 shares of common stock,
$3.00 par value per share ("Common Stock"), of the Association
outstanding, and the Association had no other class of equity
securities outstanding. With respect to the election of
directors, stockholders have cumulative voting rights.
Cumulative voting means the right to vote, in person or by proxy,
the number of shares owned by a stockholder for as many persons
as there are directors to be elected (3) and for whose election
the stockholder has a right to vote, or to cumulate votes by
giving one candidate as many votes as the number of such
directors to be elected multiplied by the number of shares held
by such stockholder or by distributing such votes on the same
principle among any number of candidates. With respect to the
approval of the Stock Incentive Plan, the proposal to conduct a
private placement offering and the ratification of BDO Seidman as
the Association's independent auditors, each share of Common
Stock is entitled to one vote at the Annual Meeting.
<PAGE>
The following persons are known to the Association to be the
beneficial owner of more than 5% of the issued and outstanding
shares of the Association's Common Stock as of December 15, 1993:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percent of
Beneficial Owner of Beneficial Ownership(1)(2) Class
<S> <C> <C>
Charles H. Jones, Jr. 137,600(3) 10.50%
Rock Hedge Farms
Route 1, Box 110
Bluemont, VA 22102
Arthur J. Shadek 135,332 10.32%
Katherine F. Shadek
688 Ocean Road
Vero Beach, FL 32963
Value Partners, Ltd. 131,011 9.99%
2200 Ross Ave., Suite 4600W
Dallas, TX 75201
Josiah T. Austin 128,666 9.81%
Valer C. Austin
El Coronado Ranch Star Route
Pearce, AZ 85625
John Sheldon Clark 118,238(4) 8.97%
4311 W. Lawther Drive
Dallas, TX 75214
</TABLE>
(1) Information is based on Schedule 13D filings made pursuant
to the Securities Exchange Act of 1934, as amended, or other
information available to the Association.
(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 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.
2
<PAGE>
As of December 15, 1993, all directors and executive
officers as a group (13 persons) beneficially owned 425,801
shares or approximately 32% of the issued and outstanding Common
Stock, which includes 1,249 shares subject to currently
exercisable and outstanding stock options granted to officers and
directors under the Association's Stock Option Plan and 6,917
shares of Common Stock subject to currently exercisable and
outstanding stock options held by Director Clark. For
information regarding the beneficial ownership of the Common
Stock by individual directors of the Association, see
"Information with Respect to Nominees for Director and Executive
Officers."
INFORMATION WITH RESPECT TO NOMINEES FOR DIRECTOR
AND EXECUTIVE OFFICERS
The Bylaws of the Association were amended by the Board of
Directors on November 2, 1993 to decrease the number of members
of the Board of Directors from eleven to nine. The Bylaws also
provide that the Board of Directors shall be divided into three
classes as nearly equal in number as possible with one class to
be elected for a term of three years and until their successors
are elected and qualified. The terms of the three classes are
staggered so that one class of directors is elected annually.
Unless otherwise directed, each proxy executed and returned
by a stockholder will be voted for the election of the nominees
listed below. If any person named as a nominee should be unable
or unwilling to stand for election at the time of the Annual
Meeting, the proxies will nominate and vote for a replacement
nominee or nominees recommended by the Board of Directors. There
are no arrangements or understandings between the Association and
any person pursuant to which such person has been elected a
director and no director is related to any other director or
executive officer of the Association by blood, marriage or
adoption. At this time, the Board of Directors knows of no
reason why any of the nominees listed below may not be able to
serve as a director if elected.
Three directors are to be elected at the Annual Meeting to
serve for terms of three years expiring at the Annual Meeting in
1997. The Board of Directors has nominated Messrs. Robert F.
Kube, Thomas W. Winfree and Saul J. Robinson. THE BOARD OF
DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE NOMINEES.
3
<PAGE>
Nominees for Terms Expiring in 1997
<TABLE>
<CAPTION>
Position with the
Association and/or Shares Beneficially
Principal Occupation Director Owned as of
Name During The Past Five Years Age Since December 15, 1993(1)
Amount Percent
<S> <C> <C> <C> <C> <C>
Saul Robinson President, Skyline Group, Inc., 64 1992 2,033 .15%
a tourist attraction business,
Front Royal, VA.
Robert F. Kube Treasurer of the Association; 56 1988 10,943 .83%
Builder and Appraiser.
Thomas W. Winfree President and Chief Executive 49 1986 5,231(2) .40%
Officer of the Association since
January 1990; Executive Vice
President of the Association from
September 1989 to January 1990;
Senior Vice President of the
Association from 1984 to
September 1989.
</TABLE>
Members of the Board of Directors Continuing in Office
Directors Whose Terms Expire in 1995
<TABLE>
<CAPTION>
Position with the
Association and/or Shares Beneficially
Principal Occupation Director Owned as of
Name During The Past Five Years Age Since December 15, 1993(1)
Amount Percent
<S> <C> <C> <C> <C> <C>
William M. Rider Secretary of the Association; 66 1978 2,676(3) .17%
President, R.L. Rider Const.
Co., Warrenton, VA.
Robin C. Gulick Chairman of the Board of the 41 1988 5,828(4) .44%
Association; Partner, law firm
of Gulick, Carson and Pearson,
Warrenton, VA.
Arthur J. Shadek Private Investor, 69 1992 135,332 10.32%
Vero Beach, FL.
</TABLE>
4
Directors Whose Terms Expire in 1996
<TABLE>
<CAPTION>
Position with the
Association and/or Shares Beneficially
Principal Occupation Director Owned as of
Name During The Past Five Years Age Since December 15, 1993(1)
Amount Percent
<S> <C> <C> <C> <C> <C>
Calvin P. Burton Insurance Agent, Carr & Hyde 48 1991 2,206 .17%
Inc. Insurance Agency,
Warrenton, VA.
Charles J. Jones, Jr. Managing Partner, Edge Partners, 60 1992 137,600(5) 10.50%
L.P., an investment partnership,
Shrewsbury, NJ.
John Sheldon Clark Private Investor, Dallas, TX. 47 1992 118,238(6) 8.97%
</TABLE>
(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 500 shares of 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 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 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.
Stockholder Nominations
Article II, Section 14 of the Association's Bylaws provides
that stockholders entitled to vote for the election of directors
may propose nominees for election to the Board of Directors. Any
such nominations must be submitted to the Secretary of the
Association in
5
<PAGE>
writing at least five days prior to the Annual
Meeting. The Association is not required to include nominations
of stockholders in its proxy statement. However, if such a
nomination is properly made, ballots will be provided for use by
stockholders at the Annual Meeting bearing the name of such
nominee or nominees.
Board Meetings and Committees
The Board of Directors has Executive, Personnel and Audit
Committees. Functions of a nominating committee and budget
committee are performed by the Board of Directors as a whole, at
regular meetings, and the Board met once in its capacity as a
nominating committee and once in its capacity as a budget
committee during fiscal 1993.
The Executive Committee consists of Messrs. Gulick, Clark,
Kube, Winfree and Rider, all of whom are non-employee directors
with the exception of Mr. Winfree. The Executive Committee meets
at the direction of the Chairman or President, and has authority
to act on most matters during the intervals between Board
Meetings. The Committee met eight times in fiscal 1993.
The Personnel Committee, which met five times during fiscal
year 1993, consists of Messrs. Kube, Burton, Jones and Shadek,
all of whom are non-employee directors. The committee approves
the compensation of all employees with the exception of the
President and Senior Vice Presidents. Their compensation is
approved by the entire Board of Directors.
The Audit Committee consists of Messrs. Burton, Rider,
Jones and Robinson, all of whom are non-employee directors. The
committee meets with the Association's internal auditor,
management and independent auditors and insures that there are
adequate internal controls. The committee met four times during
fiscal 1993.
The Board of Directors has the responsibility for
establishing broad corporate policies and for the overall
performance of Jefferson. Members of the Board are kept informed
of Jefferson's business by various reports and documents
presented to them each month, as well as by operating and
financial reports made at Board and Committee Meetings by the
Chief Executive Officer and other officers. Regular meetings of
the Board of Directors are held once each month. There were
fourteen meetings of the Board during the year ending September
30, 1993. No director attended fewer than 75% of the Board of
Directors and Committee meetings at which his attendance was
required.
Compensation of Directors
Directors of the Association receive fees of $300 per
month, plus $200 for each Board meeting attended. Directors who
are members of committees receive $100 per committee meeting
attended other than members of the Major Loan Committee, who
receive $200 per committee meeting attended.
6
<PAGE>
On October 5, 1993, the Board of Directors adopted a
resolution providing that in lieu of the compensation described
above, each board member would receive an annual retainer of
$5,000 ($7,500 for the Chairman); $250 for each Board meeting
attended in person; $100 for each loan committee meeting attended
in person; and $1,250 for committee assignment, other than loan
committee, subject to a $2,500 annual limit provided that the
member attends not fewer than 75% of the Board of Directors' and
Committee meetings at which his or her attendance is required.
Salaried officers who serve on the Board will not receive
compensation for service as a director.
Compliance with Section 16(a) of the Securities Exchange Act of
1934
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Association's officers and directors, and
persons who own more than 10% of the Association's Common Stock,
to file reports of ownership and changes in ownership with the
Office of Thrift Supervision. Officers, directors and greater
than 10% stockholders are required by regulations to furnish the
Association with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms
furnished to the Association, the Association believes that
during fiscal 1993, all Section 16(a) filing requirements
applicable to its officers, directors and 10% stockholders were
complied with.
Executive Officers
The following table sets forth certain information concer-
ning the executive officers of Jefferson as of December 15, 1993.
There is no family relationship between any of the directors or
executive officers, and there are no arrangements or
understandings with others under which any person was selected as
an officer. Officers of the Association are appointed annually
by the Board of Directors to serve for one-year terms.
<TABLE>
<CAPTION>
Officer
Name Age Since Title
<S> <C> <C> <C>
Thomas W. Winfree 49 1984 President and
Chief Executive Officer
Craig A. Mason 48 1990 Senior Vice President and
Chief Financial Officer
Walter E. Monroe 57 1988 Senior Vice President and
Chief Lending Officer
Benny N. Werner 44 1978 Senior Vice President of
Retail Banking
James A. Yergin 39 1988 Senior Vice President and
General Counsel
</TABLE>
7
Mr. Winfree has been the President and Chief Executive
Officer of Jefferson since January 1990, was the Executive Vice
President and Chief Executive Officer from September 1989 to
January 1990 and was a Senior Vice President of Jefferson from
1984 to September, 1989. In addition, Mr. Winfree was Vice
President and Director, First Federal Savings Bank of Virginia
from 1983 to 1984, and Executive Vice President, Chief Executive
Officer and Director, Security Savings and Loan from 1979 to
1983.
Mr. Mason was employed as Senior Vice President and Chief
Financial Officer in January, 1990. He was previously employed
by Columbia First Bank from April, 1985 to January, 1990 as Vice
President. Mr. Mason is a certified public accountant.
Mr. Monroe was employed as Senior Vice President and the
Chief Lending Officer of the Association in 1988. He was Vice
President and Director of Commercial Real Estate Lending of
Citicorp Savings of Washington, D.C from July, 1986 to September,
1988, and Executive Vice President of National Permanent Bank,
F.S.B. (predecessor to Citicorp Savings of Washington, D.C.) from
January, 1984 to July, 1986.
Mr. Werner joined Jefferson in 1978 as a loan consultant.
From 1979 to 1985 he served as Branch Manager, Assistant Vice
President at the King Street branch in Leesburg, and as Branch
Coordinator, Vice President from 1985 to 1989. Mr. Werner was
promoted to Senior Vice President/Retail Banking in October,
1989.
Mr. Yergin joined the Association in October, 1988 as the
Association's Staff Counsel and was promoted to Senior Vice
President and General Counsel in January, 1992. Prior thereto,
Mr. Yergin was employed as an associate attorney by the law firm
of Dixon and Smith of Fairfax, Virginia from 1984 to September,
1988.
8
<PAGE>
EXECUTIVE COMPENSATION
Remuneration of Executive Officer
Summary Compensation Table. The Summary Compensation Table
below includes compensation information on the President and
Chief Executive Officer of the Association during the fiscal
years ended September 30, 1993, 1992 and 1991. There were no
other executive officers of the Association whose total
compensation exceeded $100,000 for services rendered in all
capacities during the fiscal years ended September 30, 1993, 1992
and 1991.
<TABLE>
<CAPTION>
Annual
Compensation
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation(1)
<S> <C> <C> <C> <C> <C>
Thomas W. Winfree, 1993 $93,760 $12,690 0 $27,169
President and Chief 1992 82,100 0 0 16,530
Executive Officer 1991 81,337 9,630 0 9,832
</TABLE>
(1) Includes employer matching contributions accrued pursuant
to the Association's defined contribution pension plan.
See "Employee 401(k) Plan." Also includes director's fees
paid to Mr. Winfree for his services as a director of the
Association and, for 1993, a $14,728 payment for accrued
but unused vacation time.
(2) Does not include amounts attributable to miscellaneous
benefits received by the named executive officer, including
the use of automobiles leased or owned by the Association
and payment of club dues. In the opinion of management of
the Association, the costs to the Association of providing
such benefits to Mr. Winfree during the year ended
September 30, 1993 did not exceed the lesser of $50,000 or
10% of the total annual salary and bonus reported for Mr.
Winfree.
Option Grants in Last Fiscal Year. On August 3, 1993, a
Committee of the Board of Directors adopted a resolution
directing the issuance of stock options to Mr. Winfree for 20,000
shares under the proposed 1993 Stock Incentive Plan. The
issuance of such options is subject to approval of the 1993 Stock
Incentive Plan by shareholders at this Annual Meeting. The
options are also subject to a vesting schedule of 20% for each
year of employment after August 3, 1993 with automatic 100%
vesting in the event of a change of control of the Association.
The option price was set at $6.00 per share, the market price for
a share of Common Stock on the date of grant. See "Proposal to
Adopt the Jefferson Savings and Loan Association, F.A., 1993
Stock Incentive Plan."
9
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values. Mr. Winfree did not exercise any options
during the last fiscal year. The following table sets forth for
Mr. Winfree information with respect to the aggregate number of
unexercised options at the end of the fiscal year and the value
with respect thereto.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal Year End Options at Fiscal Year End
Name Exercisable/Unexercisable(1) Exercisable/Unexercisable(2)
<S> <C> <C>
Thomas W. Winfree 500/20,000 $0/$0
</TABLE>
(1) The unexercisable options are contingent upon stockholder
approval of the proposed 1993 Stock Incentive Plan and have
a vesting schedule of 20% for each year of employment after
August 3, 1993.
(2) Based upon the average of the closing bid and asked prices
for the Association's Common Stock as of September 30, 1993
of $6.00.
Pension Plan
Prior to February 5, 1990, the Association funded and
maintained a defined benefit plan ("Plan") for all qualified
full-time employees hired before the age of 60. As of February
5, 1990, the accrual of benefits under the 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 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.
Employee 401(k) Plan
Effective October 1, 1990, the Association implemented a
qualified 401(k) plan for all employees. In fiscal 1992, the
Association matched 50% of salary reduction elected by the
employee up to 3% of salary, and 25% of salary reduction elected
for 4% to 6% of salary. No matching was made for salary
reduction in excess of 6%. The Association incurred $30,010 in
matching and administration expense in the year ended September
30, 1993. Matching contributions become 20% vested after three
(3) years of service, 40% vested after four (4) years of service,
60% vested after five (5) years of service, 80% vested after six
(6) years of service and 100% vested after seven (7) years of
service.
Employee Stock Compensation Program
As a performance incentive and to encourage ownership in
its Common Stock, the Board of Directors adopted in 1988 an
Employee Stock Options and Incentive Plan (the "1988 Plan") for
the benefit of officers and other full-time employees of the
Association who
10
<PAGE>
are deemed to be responsible for the future
growth of the Association. The stockholders of the Association
approved the 1988 Plan at the 1988 Annual Meeting. Three kinds
of rights are contained in the 1988 Plan and are available for
grant: incentive stock options, non-incentive stock options and
stock appreciation rights. As of October 1, 1993, an aggregate
of 22,833 shares of authorized but unissued Common Stock of the
Association were available for issuance under the 1988 Plan
(which amount has been adjusted to reflect the effect of the 1993
one for three reverse stock split) pursuant to the exercise of
stock options and/or the granting of stock appreciation rights,
subject to further modification or adjustment to reflect changes
in the Association's capitalization. As of October 1, 1993,
options covering 3,833 shares were outstanding to certain
officers and employees (which amount reflects an adjustment for
the 1993 one for three reverse stock split).
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 is more fully described below. On December 7,
1993, the Board adopted a resolution discontinuing the 1988 Plan
if the 1993 Plan is approved by the shareholders.
Employment Agreement
Jefferson has a written employment agreement with Thomas W.
Winfree as the Association'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 directors
but in no case more than an amount allowed by the appropriate
federal regulators. 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 permits Mr. Winfree to
be terminated for cause; however, such termination, if any, would
not affect his vested rights in the pension plan or certain other
employee benefits granted under the contract. Mr. Winfree's
contract may also be terminated upon the occurrence of certain
events as specified in federal regulations. If Jefferson does
not amend, renew or extend Mr. Winfree's contract when it
expires, he is entitled to receive additional compensation equal
to six months' salary. Any payments made to Mr. Winfree are
subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder. The
Board of Directors and Mr. Winfree have also agreed that Mr.
Winfree will not receive any additional compensation for his
services on the Board.
Employee Agreements in the Event of an Acquisition
The Board of Directors, concerned that certain key
employees, most of whom are not among Jefferson's most highly
compensated executive officers earning over $60,000 annually,
might consider alternative employment if the Association was to
be acquired by
11
<PAGE>
a third party or group, authorized execution of
letter agreements with ten key employees as of October 1, 1993
for a period of one year. These agreements are with four senior
vice presidents and six other key employees whose continued
employment are considered essential to continuing operations.
All agreements provide for severance pay of six months salary,
beginning with the date of acquisition until 90 days after
acquisition, if employment is terminated by the acquiror. The
agreements will become null and void 90 days after an
acquisition. Acquisition is defined in each of the agreements as
the acquisition, by a third person or group, of beneficial
ownership of 20% or more of the Common Stock of the Association.
All payments made to the employee under the agreement are subject
to and conditional upon their compliance with 12 U.S.C Section
1828(k) and any regulations promulgated thereunder.
These agreements may tend to discourage a non-negotiated
takeover attempt of the Association due to possible increased
expenses arising out of a takeover opposed by management of the
Association.
Transactions With Certain Related Persons
Jefferson offers or has offered loans to its officers,
directors, and employees for the financing of their homes and
consumer loans. These loans are made in the ordinary course of
business and, in the opinion of management, do not involve more
than the normal risk of collectability, or present other
unfavorable features. Such loans are made on the same terms as
those prevailing at the time for comparable transactions with
non-affiliated persons, except that employees of Jefferson, after
one year of service, receive a waiver of 1 point on the
origination fees for an adjustable-rate mortgage loan, one-
quarter point on the origination fees for a fixed-rate mortgage
loan and fixed-rate second trust loan, and a document review fee
for all loans is also waived. On a one year adjustable-rate
mortgage loan, the interest rate charged an employee with at
least one year's service will equal the total of the Federal Home
Loan Bank of Atlanta cost of funds plus one-half of one percent
rounded to the next higher one-eighth of one percent with the
rate adjusted annually thereafter, but in no event is the
interest rate less than Jefferson's cost of funds. On consumer
loans, after six months of employment, employees of Jefferson
receive a discount of two percent on Jefferson Reserve Accounts,
a discount of one percent on home equity lines of credit, a
discount of one-half of one percent on credit cards and a one
percent discount for all other consumer loan products. In no
event is the discount interest rate less than Jefferson's cost of
funds. If an employee leaves the employment of the Association,
the interest rate reverts to the rate that would have been
charged at the loan's inception had such person not been employed
by Jefferson.
As a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), as of
August 9, 1989, the loan policy for employees of Jefferson no
longer applied to directors and executive officers. As of August
9, 1989, directors and executive officers are offered loans only
on the same terms as those offered
12
<PAGE>
to non-affiliated persons.
However, loans made to directors or executive officers with
preferential terms prior to the enactment of FIRREA are
unaffected.
The following executive officers and directors have been
indebted to Jefferson as a result of home mortgage loans and
consumer loans since the beginning of the last fiscal year in an
amount in excess of $60,000:
<TABLE>
<CAPTION>
Balance as of Balance as of
Name and Type Year Original September 30, Principal September 30, Annual
of loan Made Loan Balance 1992 New Advances Repayments 1993 Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas W. Winfree
Mortgage 1986 $120,000 $113,134 $ - $ 2,140 $110,994 5.75%
Consumer 1988 10,000 6,817 15,038 15,000 6,855 10.00
Home Equity 1988 60,000 30,124 13,826 185 43,765 8.00
Robert F. Kube
Mortgage 1978 70,000 46,271 - 3,232 43,039 10.50
Mortgage 1985 475,000 409,354 - 15,058 394,296 10.00
Mortgage 1987 23,500 18,629 - 1,224 17,405 10.00
Consumer 1988 10,000 6,027 7,100 9,015 4,112 10.00
Calvin P. Burton
Mortgage 1986 125,000 119,407 - 1,752 117,655 7.50
</TABLE>
PROPOSAL TO ADOPT THE
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
1993 STOCK INCENTIVE PLAN
General
As a performance incentive and to encourage ownership of
its Common Stock and to replace the existing 1988 Stock Option
Incentive Plan, the Board of Directors has adopted the Jefferson
Savings and Loan Association, F.A. 1993 Stock Incentive Plan (the
"1993 Plan") for the benefit of employees of the Association.
An aggregate of 131,087 shares of authorized but unissued
Common Stock has been reserved for future issuance under the 1993
Plan, which is equal to approximately 10% of the Common Stock
outstanding on August 3, 1993, the date the 1993 Plan was adopted
by the Board. Shares will be issuable under the 1993 Plan
pursuant to the exercise of stock options and/or the granting of
stock appreciation rights, subject to modification or adjustment
to reflect changes in the Association's capitalization as, for
example, in the case of a merger, reorganization, stock split or
stock dividend. The 1993 Plan shall remain in effect for a term
of ten years unless sooner terminated in accordance with its
provisions. Three kinds of rights are contained in the 1993 Plan
and are available for grant: incentive stock options,
compensatory stock options and stock appreciation rights.
The 1988 Plan originally provided for a limit of 80,000
shares subject to awards made under that plan. When the one for
three reverse stock split was approved by the
13
<PAGE>
stockholders in
1993, under the provisions of the 1988 Plan, that limit was
reduced to one third of that amount or 26,666 shares. In order
to allow for greater flexibility and the use of stock options as
incentives, plus a desire to update the 1988 Plan, the Board of
Directors decided to replace the 1988 Plan with the proposed 1993
Plan. If the 1993 Plan is approved, the 1988 Plan will be
discontinued and no further awards will be made under the 1988
Plan. Awards already made under the 1988 Plan which are still
outstanding will continue to be governed by the terms of the 1988
Plan for a period of ten years from the date of the original
grant. Upon the expiration of such ten year period, such options
under the 1988 Plan will be void.
JEFFERSON SAVINGS AND LOAN ASSOCIATION, F.A.
1993 STOCK INCENTIVE PLAN
Administration and Eligibility
The 1993 Plan will be administered by a committee appointed
by the Board of Directors composed of not less than two directors
of the Association, none of whom is a full-time officer or
employee of the Association (the "Committee"), who are given
absolute discretion under the 1993 Plan to select the persons to
whom options, rights and awards will be granted and to determine
the number of shares subject to each option or right. The
Association estimates that there are approximately 100 persons
eligible to receive awards under the 1993 Plan. The initial
Committee consists of Messrs. Kube, Burton, Shadek and Jones.
Description of the 1993 Stock Incentive Plan
The following description of the 1993 Plan is a summary of
its terms and is qualified in its entirety by reference to the
1993 Plan. A copy of the 1993 Plan is available upon request to
the Association by a stockholder of record. Any such request
should be directed to Thomas W. Winfree, President, Jefferson
Savings and Loan Association, F.A., 550 Broadview Avenue,
Warrenton, VA 22186.
Incentive and Compensatory Options. One or more options
may be granted under the 1993 Plan to any eligible person,
provided that the aggregate fair market value (determined at the
time the options are granted) of the stock for which incentive
options (defined below) are first exercisable by any employee
during any calendar year under the terms of the 1993 Plan and all
such plans of the Association shall not exceed $100,000. Options
granted within the foregoing limitation are intended to qualify
as "incentive stock options" as defined in Section 422 of the
Code. Additional nonstatutory stock options may be granted as
nonqualified options. As described below, the tax treatment of
these types of options differs significantly.
An incentive stock option is defined in the Code as an
option granted to an employee in connection with his or her
employment to purchase stock in the Association and which
14
<PAGE>
satisfies certain conditions. The incentive stock option must be
granted pursuant to a plan specifying the aggregate number of
shares to be issued and the employees, or class of employees,
eligible to receive options. The plan must be approved by the
stockholders of the granting corporation within twelve months of
the date of adoption of the plan. The incentive stock option
price must be not less than the fair market value of the stock at
the date of the grant, the incentive stock option must be granted
within ten years from the date of adoption of the plan and, by
its terms, the incentive stock option must not be exercisable
after ten years from the date it was granted. In the case of any
employee who owns more than 10% of the combined voting power of
all classes of stock of the Association or of its subsidiaries,
the option price may not be less than 110% of the fair market
value of the stock at the date of the grant and the employee must
exercise any options within five years from the date of the
grant. The incentive stock option cannot be transferable, except
by will or by the laws of descent and distribution, and must be
exercised only by the aggregate fair market value (determined at
the time of the grant) of stock for which incentive options first
become exercisable by any employee during any calendar year under
the terms of the 1993 Plan and all such plans of the Association
shall not exceed $100,000. The 1993 Plan conforms with the above
requirements.
Nonqualified stock options granted under the 1993 Plan
shall expire no later than ten years from the date on which such
compensatory stock options were granted. The purchase price for
shares acquired pursuant to the exercise of nonqualified stock
options can be no less than the greater of par value or eighty-
five percent (85%) of the fair market value of a share of Common
Stock at the time such nonqualified option is granted. Like
incentive stock options, nonqualified stock options are not
transferable, except by will and the laws of descent and
distribution, and must be exercised only by the optionee during
his or her lifetime.
Under the 1993 Plan, all nonqualified stock options may not
vest and become exercisable until at least six months shall have
elapsed from the date the option was granted.
In the event of a change in control of the Association
(defined as a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Exchange Act, whether or
not the Association in fact is required to comply with Regulation
14A thereunder; provided that, without limitation, such a change
in control shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than the Association, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Association
representing 25% or more of the combined voting power of the
Association's then outstanding securities, or (ii) during any
period of twenty-four consecutive months during the term of an
Option, individuals who at the beginning of such period
constitute the Board of the Association cease for any reason to
constitute at least a majority thereof, unless the election, or
the nomination for election by the Association's stockholders, of
each director who was not a director at the date of grant has
been approved in advance by directors representing at least
15
<PAGE>
two-
thirds of the directors then in office who were directors at the
beginning of the period) or a threatened change of control
(defined as any set of circumstances which in the opinion of the
Board as expressed through a resolution, poses a real,
substantial and immediate possibility of leading to a change in
control of the Association as defined above), all incentive and
nonqualified stock options previously granted will become
immediately exercisable notwithstanding any existing installment
limitation which may be established by the Program
Administrators. If an optionee's employment is terminated for
any reason other than death, disability or retirement, both
incentive and nonqualified stock options must be exercised within
three months after the date of termination, unless the Committee
in its discretion decides at the time of the grant or thereafter
to extend such period of exercise from three (3) months to a
period not exceeding five (5) years.
Payment for shares purchased under the 1993 Plan may be
made either in cash, or at the discretion of the Committee, by
delivering shares of Common Stock (including shares acquired
pursuant to the exercise of an Option) or other property equal in
fair market value to the purchase price of the shares to be
acquired pursuant to the Option, by withholding some of the
shares of Common Stock which are being purchased upon exercise of
an Option, or any combination of the foregoing. To the extent an
optionee already owns shares of Common Stock prior to the
exercise of his or her option, such shares could be used (if
permitted by the Committee) as payment for the exercise price of
the option. If the fair market value of a share of Common Stock
at the time of exercise is greater than the exercise price per
share, this feature would enable the optionee to acquire a number
of shares of Common Stock upon exercise of the option which is
greater than the number of shares delivered as payment for the
exercise price. In addition, an optionee can partially exercise
his or her option and then deliver the shares acquired upon such
exercise (if permitted by the Program Administrators) as payment
for the exercise price of the remaining option. Again, if the
fair market value of a share of Common Stock at the time of
exercise is greater than the exercise price per share, this
feature would enable the optionee to either (1) reduce the amount
of cash required to receive a fixed number of shares upon
exercise of the option or (2) receive a greater number of shares
upon exercise of the option for the same amount of cash that
would have otherwise been used. Because options may be exercised
in part from time to time, the ability to deliver Common Stock as
payment of the exercise price would enable the optionee to turn a
relatively small number of shares into a large number of shares.
The granting of a stock option does not confer upon the
optionee any right to remain in the employ of the Association.
The optionee will have no dividend or voting rights with respect
to the shares until the option price has been paid in full upon
exercise.
Stock Appreciation Rights. Under the 1993 Plan, the
Committee may, in its sole discretion, accept surrender of the
right to exercise any option by an optionee in return for payment
by the Association to the optionee of cash or, subject to certain
conditions, Common Stock of the Association in an amount equal to
the excess of the fair market value of the shares of Common Stock
subject to option at the time over the option price of such
16
<PAGE>
shares, or a combination of cash and Common Stock. An optionee
may exercise such stock appreciation rights only during the
period beginning on the third business day following the release
of certain quarterly or annual financial information and ending
on the twelfth business day following such date.
Upon the exercise of a stock appreciation right, the stock
option to which it relates terminates with respect to the number
of shares as to which the right is so exercised. Conversely,
upon the exercise of a stock option, any related stock
appreciation right shall terminate as to any number of shares
subject to the right that exceeds the total number of shares for
which the stock option remains unexercised. Stock appreciation
rights which relate to incentive stock options must be granted
concurrently with the incentive stock options, while stock
appreciation rights which relate to compensatory stock options
may be granted concurrently with the option or at any time
thereafter which is prior to the exercise or expiration of such
options.
Potential Anti-takeover Effect
As described above, the 1993 Plan contains provisions which
provide for the acceleration of stock options granted under the
1993 Plan in the event of an actual or threatened change in
control, as defined. Pursuant to these provisions, the
Committee, in its discretion, could accelerate or increase the
number of stock options, thereby potentially increasing the
number of shares of Common Stock outstanding. Such an increase
in the number of shares of Common Stock outstanding would
increase the cost of acquiring a controlling interest in the
Association. In addition, the provisions of the 1993 Plan may
have the effect of entrenching management and deterring a non-
negotiated takeover attempt, due to management's ability to
potentially grant options to persons likely to support
management's position.
Awards Under the 1993 Plan
On August 3, 1993, the Committee awarded incentive stock
options effective August 3, 1993, subject to shareholder approval
of the 1993 Plan, to the individuals then occupying the following
positions in the amounts indicated next to their titles:
<TABLE>
<CAPTION>
<S> <C>
President 20,000 shares
Senior Vice Presidents 5,000 shares
Vice Presidents 1,000 shares
Asst. Vice Presidents 500 shares
All Executive Officers as a Group 40,000 shares
All Employees as a Group 64,500 shares(1)
</TABLE>
(1) Of this amount, 13,000 have been awarded to non-officer
employees of the Association.
17
<PAGE>
The Committee further directed that those option agreements
are to provide for a vesting schedule of 20% for each year of
employment after August 3, 1993 with an automatic 100% vesting in
the event of a change in control and that the option price is to
be the fair market value as of August 3, 1993 which was $6.00 per
share as reported on the NASDAQ Small CAP Market Exchange.
Amendments
The Board of Directors may, by resolution, at any time
terminate, amend or revise the 1993 Plan with respect to any
shares of Common Stock as to which Awards have not been granted,
provided, however, that no amendment which (a) changes the
maximum number of shares that may be sold or issued under the
Plan (other than in accordance with the provisions of the 1993
Plan, or (b) changes the class of persons that may be granted
Options, shall become effective until it received the approval of
the stockholders of the Association, and further provided that
the Board of Directors may determine that stockholder approval
for any other amendment to this Plan may be advisable for any
reason, such as for the purpose of obtaining or retaining any
statutory or regulatory benefits under tax, securities or other
laws or satisfying any applicable stock exchange listing
requirements. The Board of Directors may not, without the
consent of the holder of an Award, alter or impair any Award
previously granted or awarded under this Plan as specifically
authorized herein.
Federal Income Tax Consequences
Under current provisions of the Code, the federal income
tax treatment of incentive stock options and nonqualified stock
options is substantially different. As regards incentive stock
options, an optionee who does not dispose of the shares within
two years after the option was granted, or within one year after
the option was exercised, will not recognize income at the time
the option is exercised, and no federal income tax deduction will
be available to the Association at any time as a result of such
grant or exercise. However, the excess of the fair market value
of the stock subject to an incentive stock option on the date
such option is exercised over the exercise price of the option
will be treated as an item of tax preference in the year of
exercise for purposes of the alternative minimum tax. If stock
acquired pursuant to an incentive stock option is disposed of
before the holding periods described above expire, then the
excess of the fair market value (but not in excess of the sales
proceeds) of such stock on the option exercise date over the
option exercise price will be treated as compensation income to
the optionee in the year in which such disposition occurs and, if
it complies with applicable withholding requirements, the
Association will be entitled to a commensurate income tax
deduction. In such event, any difference between the sales
proceeds and the fair market value of the stock on the option
exercise date will be treated as long-term capital gain or loss
if the shares were held more than one year after the option
exercise date.
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<PAGE>
With respect to nonqualified stock options, the difference
between the fair market value of the Common Stock on the date of
exercise and the option exercise price generally will be treated
as compensation income upon exercise, and the Association will be
entitled to a deduction in the amount of income so recognized by
the optionee. Upon a subsequent disposition of the shares, the
difference between the amount received by the optionee and the
fair market value on the option exercise date will be treated as
long or short-term capital gain or loss, depending on whether the
shares were held for more than one year.
When an officer who is subject to Section 16(b) of the
Exchange Act exercises a nonqualified option within six months of
the date the option was granted, no income is recognized for
federal income tax purposes at the time of the exercise of the
compensatory stock option unless the optionee makes an
appropriate election within 30 days after the date of exercise,
in which case the rules described in the preceding paragraph
would apply. If such an election is not made, the optionee will
recognize ordinary income on the date that is six months after
the date of grant (generally, the first date that sale of such
shares would not be subject to potential liability under Section
16(b) of the Exchange Act). The ordinary income recognized will
be the excess, if any, of the fair market value of the shares on
such later date over the option exercise price, and the
Association's tax deduction also will be deferred until such
later date.
No federal income tax consequences are incurred by the
Association or the holder at the time a stock appreciation right
is granted. However, upon the exercise of a stock appreciation
rights, the holder will realize income for federal income tax
purposes equal to the amount received by him, whether in cash,
shares of stock or both, and the Association will be entitled to
a deduction for federal income tax purposes at the same time and
in the same amount.
The above description of tax consequences is necessarily
general in nature and does not purport to be complete. Moreover,
statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual
circumstances. Finally, the consequences under applicable state
and local income tax laws may not be the same as under the
federal income tax laws.
Accounting Treatment
Generally accepted accounting principles require that the
estimated costs of stock appreciation rights be charged to the
Association's earnings based on the change in the market price of
the Common Stock at the beginning (or grant date if granted
during the period) and end of each accounting period, if it is
higher than the exercise price. In the event of a decline in the
market price of the Association's Common Stock subsequent to a
charge against earnings related to the estimated costs of stock
appreciation rights, a reversal of prior charges is made in the
amount of such decline (but not to exceed aggregate prior
increases). The grant of performance share awards similarly may
result in charges against earnings.
19
<PAGE>
Neither the grant nor the exercise of an incentive stock
option or a nonqualified stock option under the 1993 Plan
requires any charge against earnings. The Association may,
however, recognize an expense for compensatory options in the
event that the exercise price of such options is less than the
fair market value of the Common Stock on the date of the grant of
such options.
The Financial Accounting Standards Board ("FASB") has
issued an exposure draft proposing that companies be required to
recognize an expense for all stock-based compensation awards,
including stock options. The expense would be measured as the
fair value of the award at the grant date and would be recognized
over the vesting period of the award. The proposal would provide
for a three-year period of disclosure in footnotes of the expense
measure beginning no earlier than calendar 1994. After that
three-year disclosure period, the expense would have to be
included in the determination of net income.
VOTE REQUIRED
The affirmative vote of a majority of the total votes
eligible to be cast at this Annual Meeting is necessary in order
to adopt the 1993 Stock Incentive Plan. In order for a quorum to
exist, a majority of the outstanding shares of Common Stock
entitled to vote must be represented at the meeting in person or
by proxy. Abstentions and broker non-votes will have the same
effect as a vote against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR ADOPTION OF THE 1993 STOCK INCENTIVE PLAN.
PROPOSAL TO APPROVE A
PROPOSED PRIVATE PLACEMENT OFFERING
The Board of Directors is soliciting stockholder approval
of this proposal at the Annual Meeting to provide the Association
with corporate flexibility to respond to potentially valuable
business opportunities which may include the purchase of
deposits, branch office properties and other assets from third
parties, including properties and other assets of the Resolution
Trust Corporation ("RTC"). While the Association does not have
any immediate, specific plans to issue shares of capital stock,
the corporate flexibility provided for in this proposal will
allow the Association to respond on a timely basis to those
business opportunities and avoid the time and expense of
soliciting stockholder approval at a special meeting.
Although the Association presently does not have specific
plans with respect to a private placement offering, the
Association may conduct a non-public offering in compliance with
the rules and regulations of the OTS which encompass non-public
offerings pursuant to Regulation D promulgated pursuant to the
Securities Act of 1933, as amended ("Regulation D"). Regulation
D sets forth various alternative ways to conduct a non-public
20
<PAGE>
offering and includes varying limitations related to the
aggregate price of the securities offered, the number of
purchasers, the types of purchasers and the manner of sale.
Generally, a private placement offering avoids the time, effort
and expense associated with the preparation of an offering
circular for use in a public offering.
Any such private placement offering, if initiated, is not
expected to exceed $5.0 million. In addition, the Association
would only offer shares of capital stock to accredited investors,
which may include directors and controlling persons of the
Association as well as others. Section 5 of the Association's
Federal Stock Charter requires the approval of the stockholders
of the Association by a majority of the total votes eligible to
be cast at a legal meeting before shares of the Association's
capital stock may be issued to directors, officers, or
controlling persons of the Association. If adopted, this
proposal would provide that required approval.
The Association presently believes that the commencement of
a private offering, if any, would occur in the next 18 months.
As stated above, a private offering, if any, would be initiated
in connection with the purchase of deposits, branch office
properties and other assets from third parties, including
properties and other assets of the RTC. Since the offering of
deposits or assets by such third parties is not within the
control of the Association, the Association is unable at this
time to predict with any certainty the proposed timing of a
private placement offering. However, the Association will not
undertake any private placement offering beyond 18 months from
the date of the 1994 Annual Meeting without additional
stockholder approval.
The offer of capital stock may include authorized but
unissued shares of the Association's Common Stock or Preferred
Stock, $1.00 par value per share ("Preferred Stock"). Shares of
Common Stock would be offered at the then current market price as
determined by the most recent sale price or the average of the
bid and asked prices as quoted on the NASDAQ Small CAP Market
Exchange. The relative rights and preferences, and the price per
share for the shares of Preferred Stock, if any, would be
determined by the Association's Board of Directors.
Based on the closing sale price of the Common Stock on the
NASDAQ Small CAP Market Exchange on December 13, 1993 of $8.00
per share, a $5.0 million offering would result in the issuance
of an additional 625,000 shares of Common Stock. As of the close
of business on December 15, 1993, there were 1,310,876 shares of
Common Stock outstanding.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL OF THIS PROPOSAL. THE APPROVAL OF THIS PROPOSAL
REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE TOTAL VOTES
ELIGIBLE TO BE CAST AT THIS ANNUAL MEETING. ABSTENTIONS AND
BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
PROPOSAL.
21
<PAGE>
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed BDO Seidman,
independent certified public accountants, to be its independent
auditors for the current fiscal year ending September 30, 1994,
subject to ratification by the stockholders. A representative of
BDO Seidman will be present, the representative will have the
opportunity to make a statement if the representative desires to
do so and will be available to respond to appropriate questions
from stockholders.
During the two most recent fiscal years there were no
unresolved issues, scope restrictions or unanswered questions
between Jefferson and BDO Seidman on any matter of accounting
principles, practices, audit procedures or financial statement
disclosures which have not been resolved.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR
RATIFICATION OF THE APPOINTMENT OF BDO SEIDMAN AS INDEPENDENT
AUDITORS FOR THE CURRENT FISCAL YEAR ENDING SEPTEMBER 30, 1994.
THE RATIFICATION OF BDO SEIDMAN AS THE ASSOCIATION'S INDEPENDENT
AUDITORS FOR FISCAL 1994 REQUIRES APPROVAL BY A MAJORITY OF
SHARES REPRESENTED IN PERSON OR BY PROXY.
FORM 10-K ANNUAL REPORT
A copy of Jefferson's Annual Report on Form 10-K (including
financial statements and schedules thereto) as filed with the
Office of Thrift Supervision for the fiscal year ended September
30, 1993, will be furnished to stockholders upon written request
directed to Chief Financial Officer, Jefferson Savings and Loan
Association, F.A. 550 Broadview Avenue, Warrenton, VA 22186.
ADDITIONAL INFORMATION
No person is authorized to give any information or to make
any representations on behalf of Jefferson other than those
contained in this Proxy Statement, and if given or made, such
information may not be relied upon as having been authorized.
The Association's Annual Report to Stockholders has been
mailed, along with this Proxy Statement, to all those who were
stockholders of record as of December 15, 1993. Any stockholder
who has not received a copy of such Annual Report to Stockholders
may obtain a copy by writing the Association. Such Annual Report
to Stockholders is not to be treated as a part of the proxy
solicitation material nor as having been incorporated herein by
reference.
22
<PAGE>
STOCKHOLDER PROPOSALS
Any proposal which a stockholder wishes to have presented
at the next annual meeting of the Association, which is expected
to be held in January 1995, must be received at the main office
of the Association, 550 Broadview Avenue, Warrenton, Virginia
22186 no later than September 13, 1994. If the Board of
Directors of the Association determines that such proposal is in
compliance with all of the requirements of Rule 14a-8 of the
Securities Exchange Act of 1934, as amended it will be included
in the Proxy Statement and set forth on the form of proxy issued
for the next Annual Meeting of Stockholders. It is urged that
any such proposals be sent by certified mail, return receipt
requested.
OTHER MATTERS THAT MAY COME BEFORE THE MEETING
Each proxy solicited hereby also confers discretionary
authority on the Board of Directors of the Association to vote
the proxy with respect to the approval of the minutes of the last
meeting of stockholders, the election of any person as director
if a nominee is unable to serve or for good cause will not serve,
matters incident to the conduct of the Annual Meeting, and upon
such other matters as may properly come before the Annual
Meeting. Management is not aware of any business that may
properly come before the Annual Meeting other than those matters
described in this Proxy Statement. However, if any other matters
should properly come before the Annual Meeting, it is intended
that the proxies solicited hereby will be voted with respect to
those other matters in accordance with the judgment of the
persons voting the proxies.
By Order of the Board of Directors
Robin C. Gulick
Chairman of the Board
Warrenton, Virginia
January 10, 1994
23
<PAGE>
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
