SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act Of 1934 (Fee Required)
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act Of 1934 (No Fee Required)
Commission File Number 0-9101
JEFFERSON BANKSHARES, INC.
Incorporated in the IRS No. 54-1104491
State of Virginia
123 East Main Street
Charlottesville, Virginia 22902
Telephone (804) 972-1100
No securities are registered pursuant to Section 12(b) of the Act.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of January 31, 1997, the aggregate market value, based upon the last
sale price for that day, of the voting stock held by nonaffiliates of Jefferson
Bankshares, Inc. was $377,685,378.
As of January 31, 1997, Jefferson Bankshares, Inc. had issued and
outstanding 13,957,588 shares of the 32,000,000 authorized shares of its $2.50
par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The portions of the Annual Report to Shareholders for the year ended
December 31, 1996 referred to in Parts I, II and IV of this Form 10-K are
incorporated by reference therein. The portions of the Proxy Statement for the
Corporation's Annual Meeting of Shareholders to be held on April 22, 1997
referred to in Part III of this Form 10-K are incorporated by reference therein.
Part I
Item 1. Business
Jefferson Bankshares, Inc. (the "Corporation") is a bank holding company
registered under the provisions of the Bank Holding Company Act of 1956, as
amended. The Corporation was incorporated under the laws of Virginia on March
22, 1979, and became an active bank holding company on December 31, 1979,
through the consolidation of NB Corporation and Southern Bankshares.
The Corporation owns or controls one subsidiary bank, Jefferson National
Bank, Charlottesville, Virginia, and four nonbank subsidiaries.
Within the last five years the Corporation acquired Peoples Bank of Front
Royal with two offices and approximately $60 million in total assets, the
People's Bank of Virginia Beach with one office and approximately $14 million in
assets, and the Bank of Loudoun with one office and approximately $53 million in
total assets. Jefferson National Bank purchased approximately $35 million in
deposits and selected assets associated with the Waynesboro Office of First
Union National Bank and the downtown Richmond office of Virginia First Savings
Bank. Jefferson National Bank also purchased deposit liabilities and selected
other assets in the approximate amount of $24 million for the Warrenton office
of Liberty Federal Savings Bank from the Resolution Trust Corporation.
The Corporation regularly seeks reasonable opportunities to expand its
asset base and trade area and related business endeavors.
In November, 1996, the Corporation completed the repurchase of 1.24 million
shares of its common stock at a price of $28 per share. The repurchase was
handled as a modified dutch auction tender offer. The tender offer was conducted
to utilize the Corporation's strong capital base more effectively and to
increase shareholder value. Based on proforma financial models, the tender offer
should have the effect of increasing net income per share and improving the
return on average shareholders' equity.
The Corporation provides advisory and technical assistance to its
subsidiaries in the areas of services, operations, audit, planning and
budgeting, and corporate activities and administration. Funds are provided to
the Corporation by dividends and management fees from its subsidiaries and
short-term and long-term borrowings from nonaffiliates.
The Corporation is regulated by the Board of Governors of the Federal
Reserve System and is subject to the requirements of the Bank Holding Company
Act of 1956, as amended, and Virginia laws regarding financial institution
holding companies administered by the Bureau of Financial Institutions of the
State Corporation Commission of Virginia. Jefferson National Bank is subject to
supervision by the Office of the Comptroller of the Currency and is affected by
various federal and Virginia laws and regulations of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, and the Federal
Deposit Insurance Corporation. The various laws and regulations administered by
the regulatory agencies affect corporate practices, expansion of business, and
provisions of services. Also, monetary and fiscal policies of the United States
directly affect bank loans and deposits and thus may affect the Corporation's
earnings. The future impact of these policies and of the continuing regulatory
changes in the financial services industry cannot be predicted.
On December 31, 1996, the Corporation and its affiliates had 905 full-time
and 123 part-time employees. Management believes that employee relations are
good.
As of June 30, 1996, the Corporation had approximately two percent of total
deposits in Virginia. Six other bank holding companies had bank subsidiaries in
Virginia with more deposits than the Corporation.
Jefferson National Bank provides retail and commercial banking and trust
services and, as of December 31, 1996, had 95 locations in Virginia from the
City of Virginia Beach in the east to Augusta County in the west and Frederick
County in the north. Jefferson National Bank pays competitive rates on deposits
and other interest-bearing liabilities, constantly reviews current and potential
services, and periodically provides staff training and sales programs.
Throughout its trade areas, Jefferson National Bank competes with other
financial institutions, including larger bank holding companies, money market
mutual funds, and other companies which extend credit.
Jefferson Properties, Inc., which owns properties used or held for future
use, primarily by Jefferson National Bank, derived 94 percent of its income from
Jefferson Bankshares and its subsidiaries in 1996. Charter Insurance Managers,
Inc. and Grace Insurance Agency, Incorporated, a subsidiary of Jefferson
National Bank, are currently inactive. Jefferson Financial, Inc. offers limited
financial and investment advisory services.
Also incorporated herein by reference is the information on pages 12 and 13
of the 1996 Annual Report to Shareholders (the "1996 Annual Report") as to
the distribution of the Corporation's assets, liabilities and shareholders'
equity and interest rates and interest differential; pages 14 and 15 of the
1996 Annual Report as to the Corporation's non-interest income and non-interest
expense; pages 19 and 20 of the 1996 Annual Report as to the Corporation's
investment portfolio; pages 15 through 18 of the 1996 Annual Report as to the
Corporation's loan portfolio (including the Corporation's loan loss
experience); page 20 of the 1996 Annual Report as to the Corporation's deposits;
page 11 of the 1996 Annual Report as to the Corporation's return on
equity and assets; and page 21 of the 1996 Annual Report as to the Corporation's
short-term borrowings.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
Statements included or incorporated by reference into the Corporation's
Securities and Exchange Commission filings and shareholder communications may
contain forward-looking statements that are subject to risks and uncertainties,
including, but not limited to the impact of competitive products, product demand
and market acceptance risks, fluctuations in operation results, delays in
development of highly complex products, and other risks detailed from time to
time in the Corporation's filings with the Securities and Exchange Commission.
These risks could cause the Corporation's actual results for 1997 and beyond to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Corporation.
Item 2. Properties
Incorporated herein by reference is the discussion of premises and
equipment included in Part I, Item 1 hereof and in Note 7 (entitled "Premises
and Equipment") to the consolidated financial statements in the 1996 Annual
Report.
Jefferson National Bank is in the process of constructing a new operations
center in Charlottesville, Virginia. The new facility will contain approximately
113,000 square feet of space and, excluding furniture, fixtures and equipment,
will cost approximately $13 million. The new facility is expected to be ready
for occupancy during the third quarter of 1997 and will enable Jefferson
National Bank to consolidate various back-office functions into a single
location.
As a result of the new operations center, Jefferson National Bank has
entered into a contract to sell its existing warehouse containing approximately
73,000 square feet of space in Charlottesville at a price of approximately $1.2
million. The transaction is expected to close during the fourth quarter of 1997.
Also as a result of the new operations center, Jefferson National Bank will
vacate its existing operations facility which contains approximately 41,000
square feet of space. Jefferson National Bank presently expects to renovate this
facility and use it for future office space.
Item 3. Legal Proceedings
There are no legal proceedings against the Corporation that would have a
material adverse effect on the Corporation or its consolidated financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of Jefferson Bankshares
The executive officers of the Corporation are set forth below. All
officers are elected annually to serve at the discretion of the Board of
Directors. Except as otherwise noted below, each of the executive officers has
worked with the Corporation or its affiliates for at least five years.
O. Kenton McCartney, 53, is President and Chief Executive Officer.
Robert H. Campbell, Jr., 62, is Senior Vice President.
Allen T. Nelson, Jr., 47, is Senior Vice President, Treasurer and Chief
Financial Officer. Mr. Nelson joined the Corporation on December 6, 1993. From
February, 1992 until joining the Corporation, Mr. Nelson was Senior Vice
President and Controller of Dominion Bankshares, Inc. Prior to February, 1992 he
served as Finance Executive Officer with C&S/Sovran Corporation.
Walter A. Pace, Jr., 64, is Senior Vice President.
Donald W. Fulton, Jr., 50, is Vice President-Investor Relations.
William M. Watson, Jr., 42, is General Counsel and Secretary.
Part II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
Incorporated herein by reference is the information on page 21 of the 1996
Annual Report under the heading "Capital Resources" and in the table captioned
"Common Stock Performance and Dividends" on page 22 of the 1996 Annual Report.
Item 6. Selected Financial Data
Incorporated herein by reference is the information in the table captioned
"Selected Financial Data" on page 10 of the 1996 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Incorporated herein by reference is the information appearing under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 10 through 23 of the 1996 Annual Report, except for the
information in the tables captioned "Selected Financial Data," "Summary of
Financial Results by Quarter," and "Common Stock Performance and Dividends" on
pages 10, 11 and 22, respectively, of the 1996 Annual Report.
Item 8. Financial Statements and Supplementary Data
Incorporated herein by reference is the information appearing under the
heading "Consolidated Balance Sheets," "Consolidated Statements of Income,"
"Consolidated Statements of Changes in Shareholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial Statements" and
"Independent Auditors' Report" on pages 24 through 38 of the 1996 Annual Report.
Incorporated by reference is the information in the table captioned
"Summary of Financial Results by Quarter" on page 11 of the 1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of Registrant
The information concerning the Corporation's directors is incorporated by
reference to the section entitled "Nominations for Directors" on pages 3 through
6 of the Corporation's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders.
The information concerning the Corporation's executive officers is
incorporated by reference to Part I hereof entitled "Executive Officers of
Jefferson Bankshares."
The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 by the Corporation's directors, executive officers and 10
percent shareholders is incorporated by reference to the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" on page 3 of the
Corporation's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
sections entitled "Compensation of Executive Officers and Directors" on pages 6
through 10 of the Corporation's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
sections entitled "Principal Beneficial Owners" and "Shares Beneficially Owned
by Directors and Executive Officers" on pages 2 and 3 of the Corporation's
definitive Proxy Statement for the 1997 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
section entitled "Loans to Officers and Directors" on page 14 of the
Corporation's definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders.
Part IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements. The following Consolidated Financial
Statements of Jefferson Bankshares, Inc. and subsidiaries and the
Independent Auditors' Report are incorporated by reference to
pages 24 through 38 of the 1996 Annual Report:
Consolidated Balance Sheets at December 31, 1996 and December 31,
1995.
Consolidated Statements of Income for the years ended December 31,
1996, December 31, 1995 and December 31, 1994.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996, December 31, 1995, and December 31,
1994.
Consolidated Statements of Cash Flows for the years ended December
31, 1996, December 31, 1995 and December 31, 1994.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Exhibits. The exhibits listed on the accompanying Index to
Exhibits immediately following the signature page are filed as
part of, or incorporated by reference into, this report.
(b) Reports on Form 8-K
None
Except for the information referred to in Items 1, 2, 5, 6, 7, 8 and
14(a)(1) hereof, the 1996 Annual Report will not be deemed to be filed pursuant
to the Securities Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATE: March 24, 1997 JEFFERSON BANKSHARES, INC.
By: O. Kenton McCartney
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATE SIGNATURE CAPACITY
March 24, 1997 O. Kenton McCartney President, Chief Executive
Officer and Director
March 24, 1997 Allen T. Nelson, Jr. Senior Vice President,
Treasurer and
Chief Financial Officer
March 24, 1997 Hovey S. Dabney Chairman of the Board
March 24, 1997 John T. Casteen, III* Director
March 24, 1997 Lawrence S. Eagleburger* Director
March 24, 1997 Hunter Faulconer* Director
March 24, 1997 Fred L. Glaize, III* Director
March 24, 1997 Henry H. Harrell* Director
March 24, 1997 Alex J. Kay, Jr.* Director
March 24, 1997 J. A. Kessler, Jr.* Director
March 24, 1997 W. A. Rinehart, III* Director
March 24, 1997 Gilbert M Rosenthal* Director
March 24, 1997 Alson H. Smith, Jr.* Director
March 24, 1997 H. A. Williamson, Jr.* Director
*By: William M. Watson, Jr.
Attorney-in-Fact
EXHIBIT INDEX
Exhibit No. Page
3. Articles of Incorporation and Bylaws:
(a) Articles of Incorporation incorporated by
reference to Jefferson Bankshares' Annual Report
on Form 10-K for 1984.
(b) Articles of Amendment to Articles of
Incorporation dated May 7, 1987, incorporated by
reference to Jefferson Bankshares' report on Form
10-Q for the quarter ended June 30, 1987.
(c) Articles of Amendment to Articles of
Incorporation dated March 23, 1993, incorporated
by reference to Jefferson Bankshares' report on
Form 10-Q for the quarter ended June 30, 1993.
(d) Amended and Restated Bylaws dated January 24,
1995, incorporated by reference to Jefferson
Bankshares' Annual Report on Form 10-K for 1994.
(e) Amendment dated September 25, 1996 to the Amended
and Restated Bylaws, incorporated by reference to
Jefferson Bankshares' report on Form 10-Q for the
quarter ended September 30, 1996.
4. Instruments defining the rights of security holders
including indentures:
(a) Articles of Incorporation, incorporated by
reference to Jefferson Bankshares' Annual Report
on Form 10-K for 1984.
(b) Articles of Amendment to Articles of
Incorporation dated May 7, 1987, incorporated by
reference to Jefferson Bankshares' report on Form
10-Q for the quarter ended June 30, 1987.
(c) Articles of Amendment to Articles of
Incorporation dated March 23, 1993, incorporated
by reference to Jefferson Bankshares' report on
Form 10-Q for the quarter ended June 30, 1993.
10. Material Contracts:
(a) Senior Officers Supplemental Pension Plan,
incorporated by reference to Jefferson
Bankshares' Annual Report on Form 10-K for 1982.
(b) Split Dollar Life Insurance Plan, incorporated
by reference to Jefferson Bankshares' Annual
Report on Form 10-K for 1984.
(c) 1995 Long Term Incentive Stock Plan, incorporated
by reference to Exhibit 99(a) to Form S-8 of
Jefferson Bankshares, File No. 33-60799.
(d) Amendment dated June 27, 1995 to Long Term
Incentive Stock Plan, incorporated by reference
to Jefferson Bankshares' report on Form 10-Q for
the quarter ended June 30, 1995.
(e) Deferred Compensation and Stock Purchase Plan for
Non-Employee Directors, incorporated by reference
to Exhibit 99(a) to Form S-8 of Jefferson Bankshares,
File No. 33-57461.
(f) First Amendment dated January 28, 1997 to Deferred
Compensation and Stock Purchase Plan for Non-Employee 13
Directors is filed herewith.
* (g) Executive Severance Agreement dated October 25,
1993 between Jefferson Bankshares and O. Kenton
McCartney, incorporated by reference to Jefferson
Bankshares' Annual Report on Form 10-K for 1993.
* (h) Executive Severance Agreement dated October 25,
1993 between Jefferson Bankshares and Robert H.
Campbell, Jr., incorporated by reference to
Jefferson Bankshares' Annual Report on Form 10-K
for 1993.
* (i) Executive Severance Agreement dated December 6, 1993
between Jefferson Bankshares, Inc. and Allen T.
Nelson, Jr., incorporated by reference to Jefferson
Bankshares' Annual Report on Form 10-K for 1994.
* (j) Executive Severance Agreement dated October 25, 1993
between Jefferson Bankshares and William M. Watson, Jr.,
incorporated by reference to Jefferson Bankshares' Annual
Report on Form 10-K for 1995.
* (k) Amended and Restated Split Dollar Life Insurance
Agreement dated October 29, 1993 between Jefferson
Bankshares and Robert H. Campbell, Jr., incorporated by
reference to Jefferson Bankshares' Annual Report on
Form 10-K for 1993.
* (l) Amendment dated February 15, 1995, to the Amended
and Restated Split Dollar Life Insurance
Agreement dated October 29, 1993 between
Jefferson Bankshares and Robert H. Campbell, Jr.,
incorporated by reference to Jefferson
Bankshares' report on Form 10-Q for the quarter
ended March 31, 1995.
* (m) Amended and Restated Split Dollar Life Insurance
Agreement dated October 29, 1993 between
Jefferson Bankshares and O. Kenton McCartney,
incorporated by reference to Jefferson
Bankshares' Annual Report on Form 10-K for 1993.
* (n) Amendment dated as of May 19, 1994, to the
Amended and Restated Split Dollar Life Insurance
Agreement dated October 29, 1993 between
Jefferson Bankshares and O. Kenton McCartney,
incorporated by reference to Exhibit 10(p) to
Form S-4 of Jefferson Bankshares, File No.
33-53727.
* (o) Split Dollar Life Insurance Agreement dated
January 6, 1995 between Jefferson Bankshares, Inc. and
Allen T. Nelson, Jr., incorporated by reference to
Jefferson Bankshares' Annual Report on Form 10-K for 1994.
* (p) Amended and Restated Split Dollar Life Insurance
Agreement dated October 29, 1993 between Jefferson
Bankshares and William M. Watson, Jr., incorporated by
reference to Jefferson Bankshares' Annual Report on
Form 10-K for 1995.
13. Annual Report to Security Holders, Form 10-Q or
Quarterly Report to Security Holders 15
21. Subsidiaries of the Registrant 55
23. Consents of Experts and Counsel 56
Consent of KPMG Peat Marwick LLP to incorporation by
reference of auditors' reports into Jefferson
Bankshares' Registration Statements on Form S-3 and
Form S-8 is filed herewith.
24. Power of Attorney 57
27. Financial Data Schedule 58
99. Second Amendment dated January 28, 1997 to Employee Stock
Purchase Plan is filed herewith. 60
*Management contract or compensatory plan or arrangement of the Corporation
required to be filed as an exhibit.
EXHIBIT 10(f)
FIRST AMENDMENT
TO THE
JEFFERSON BANKSHARES, INC.
DEFERRED COMPENSATION AND STOCK PURCHASE PLAN
FOR NON-EMPLOYEE DIRECTORS
The Jefferson Bankshares, Inc. Deferred Compensation and Stock Purchase
Plan for Non-Employee Directors (the "Plan"), as amended and restated as of
December 13, 1994, is hereby further amended as follows:
1. The first sentence of Section 7 of the Plan is deleted and replaced
with the following new sentences:
If a Director has elected pursuant to Section 5 to defer Fees otherwise
payable through the crediting of Shares, the Company shall either (a)
cause such Shares to be credited to an account maintained in the name
of the Trustee by the Agent to be held for the benefit of the electing
Director, or (b) issue such Shares directly to itself as custodian and
credit the Shares to an account for the electing Director to whom the
Fees would be otherwise payable. Such account shall be referred to as
the Director's "Share Fees Account."
2. Section 16 of the Plan is amended in its entirety to read as
follows:
16. Share Certificates and Voting.
(a) The Trustee or the Company shall hold for
deferred payment to the Director all Shares purchased with cash
dividends and other distributions paid or made with respect to the
Shares. When Shares become distributable under the terms of the Plan to
a Director, the Company shall not issue fractions of Shares. Whenever
under the terms of the Plan a fractional Share would otherwise be
required to be issued, the Director shall be paid in cash for such
fractional Share based upon the Fair Market Value on, or as of a recent
date prior to, the date of distribution.
(b) The Trustee, or a co-fiduciary of the Company
(within the meaning of applicable state law), shall exercise all
voting, tender and similar rights with respect to Shares that are
credited to a Director's Share Fees Account. Each Director shall be
entitled to exercise all voting, tender and similar rights with respect
to all other Shares purchased under the Plan.
This Amendment is adopted as of January 28, 1997.
JEFFERSON BANKSHARES, INC.
/s/ O. Kenton McCartney
President and CEO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis are intended to aid the reader
in understanding and evaluating the consolidated results of operations and the
financial condition of Jefferson Bankshares, Inc. and subsidiaries (the
"Corporation"). The analysis attempts to identify trends and material changes
that occurred during the reporting periods. The discussion should be read in
conjunction with the Consolidated Financial Statements, their related notes, and
the statistical information associated with the discussion.
In November 1996, the Corporation completed a Modified Dutch Auction
Tender Offer in which it repurchased 1.236 million shares of its common stock.
The acquisition cost of $35 million decreased shareholders' equity and book
value per share. According to proforma financial models, the reduction in shares
outstanding and the lower equity should have the positive effects of increasing
net income per share and the return on average shareholders' equity.
Results of Operations
Net income in 1996 rose to a record $27.8 million, which was 12
percent above the previous record of $24.9 million established in 1995. Net
income per share also reached a new record at $1.86 in 1996, or a 13 percent
increase over $1.64 in 1995. The higher increase in net income per share was
attributable, in part, to the decrease in average shares outstanding as the
result of the purchase of shares in the tender offer. Table 1 provides a summary
of the results of operations for the last five years and certain information
regarding the Corporation's consolidated financial condition at the end of each
of those periods.
1. SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
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Years Ended December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
RESULTS OF OPERATIONS
Interest income $ 153,628 $ 146,373 $ 129,496 $ 128,922 $ 129,072
Interest expense 59,046 58,644 45,393 47,820 56,505
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 94,582 87,729 84,103 81,102 72,567
Provision for loan losses 3,480 3,020 1,600 1,911 4,195
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 91,102 84,709 82,503 79,191 68,372
Non-interest income 18,977 19,019 17,910 17,245 16,655
Non-interest expense 67,655 66,580 66,423 61,668 54,965
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 42,424 37,148 33,990 34,768 30,062
Provision for income tax expense 14,623 12,285 11,390 11,183 9,018
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 27,801 $ 24,863 $ 22,600 $ 23,585 $ 21,044
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net income $ 1.86 $ 1.64 $ 1.49 $ 1.57 $ 1.50
Dividends declared .88 .76 .68 .62 .53
Book value 14.66 14.92 13.62 13.03 12.04
Average number of shares outstanding 14,982,442 15,181,152 15,148,400 15,060,873 14,075,372
Number of shares outstanding at year-end 13,937,491 15,182,235 15,170,250 15,080,553 14,953,304
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS
Return on average assets 1.34% 1.25% 1.18% 1.27% 1.23%
Return on average shareholders' equity 12.20 11.43 11.05 12.34 12.96
Shareholders' equity to total assets 9.45 11.04 10.72 10.12 9.77
Dividend payout ratio 46.99 45.02 44.40 36.07 33.42
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION AT YEAR-END
Assets $ 2,161,825 $ 2,051,188 $ 1,925,950 $ 1,941,961 $ 1,842,447
Earning assets 1,974,908 1,878,599 1,740,048 1,749,740 1,675,448
Deposits 1,891,109 1,793,199 1,688,872 1,677,354 1,636,346
Long-term debt - 15 19 1,213 2,131
Shareholders' equity 204,314 226,540 206,553 196,434 180,023
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2. SUMMARY OF FINANCIAL RESULTS BY QUARTER
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Three Months Ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------------------------
Interest income $ 39,818 $ 38,634 $ 37,840 $ 37,336 $ 37,709 $ 37,336 $ 36,808 $ 34,520
Interest expense 15,476 14,655 14,380 14,535 15,195 15,462 15,066 12,921
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 24,342 23,979 23,460 22,801 22,514 21,874 21,742 21,599
Provision for loan losses 960 900 840 780 1,580 480 480 480
Non-interest income 4,502 4,875 4,939 4,661 6,450 4,337 4,248 3,984
Non-interest expense 17,169 16,864 16,883 16,739 16,747 16,462 16,630 16,741
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 10,715 11,090 10,676 9,943 10,637 9,269 8,880 8,362
Income tax expense 3,669 3,848 3,698 3,408 3,372 3,122 2,979 2,812
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,046 $ 7,242 $ 6,978 $ 6,535 $ 7,265 $ 6,147 $ 5,901 $ 5,550
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ .49 $ .48 $ .46 $ .43 $ .48 $ .40 $ .39 $ .37
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Higher net income in 1996 raised profitability ratios over 1995
levels. The return on average assets increased to 1.34 percent in 1996 from 1.25
percent in 1995. In 1994, this ratio was 1.18 percent. Another measure of
profitability, the return on average shareholders' equity, improved in 1996 to
12.20 percent from 11.43 percent in 1995. In 1994, this ratio was 11.05 percent.
The 1996 ratio, in addition to being influenced by higher net income, also was
affected positively by the reduction of equity from the tender offer. As the
tender offer occurred in the fourth quarter of 1996, its effect on average
shareholders' equity and, consequently, on the return on average shareholders'
equity for the year ended December 31, 1996 was not significant.
Table 2 presents a quarterly summary of earnings components for the
last two years. In 1996, quarterly net income rose through the first three
quarters, principally on the strength of increasing net interest income. In the
fourth quarter of 1996, net income of $7.0 million was less than the $7.2
million recorded in the third quarter of 1996, but net income per share
increased to $.49 in the fourth quarter compared with $.48 in the third quarter.
Lower fourth quarter net income was attributable to a decrease in non-interest
income and an increase in non-interest expense. In addition, funds used to
purchase shares in the tender offer reduced earning assets and consequently
lowered interest income. Net income per share increased, however, as the average
number of shares outstanding decreased in the fourth quarter of 1996.
In 1995, net income and net income per share increased in each
quarter and reached record quarterly levels in the final quarter of the year.
Rising net interest income contributed to the positive quarterly earnings trend.
Third and fourth quarter net income in 1995 benefited from an F.D.I.C. premium
reduction and a premium rebate in the third quarter of 1995. In addition, in the
fourth quarter of 1995, the Corporation recognized a gain of $1.9 million
resulting from the annuitization of certain pension liabilities. Partially
offsetting the effects of the reduction in F.D.I.C. assessments and the gain
from the pension liability was an increase of $1.2 million in the provision for
loan losses.
Net Interest Income
Net interest income is the difference between interest income and
interest expense and represents the Corporation's gross profit margin. For
comparative purposes, the income from tax-exempt securities and loans is
adjusted to a tax-equivalent basis. This adjustment, based on the statutory
federal corporate tax rate of 35 percent, causes tax-exempt income and resulting
yields to be presented on a basis comparable with income and yields from fully
taxable earning assets.
The net interest margin represents tax-equivalent net interest
income divided by average earning assets. It reflects the average effective rate
earned by the Corporation on its average earning assets. Net interest income and
the net interest margin are influenced by fluctuations in market rates and
changes in both the volume and mix of average earning assets and the liabilities
that fund those assets.
Table 3 presents average balances, related interest income and
expense, and average yield/cost data for each of the last three years. Table 4
reflects changes in interest income and interest expense resulting from changes
in average volume and changes due to rates.
Tax-equivalent net interest income increased 7 percent in 1996 to
$95.6 million from $89.0 million in 1995. Loan growth was an important factor in
the increases in net interest income and in the net interest margin, which
widened in 1996 to 5.00 percent from 4.88 percent in 1995.
Average earning assets increased 5 percent in 1996, however average
loans increased 10 percent. Thus, average loans increased to 67 percent of
average earning assets in 1996 from 64 percent in 1995. This change in the mix
of average earning assets helped stabilize the yield on average earning assets
as interest rates in 1996 were generally somewhat below those in 1995. The yield
on average earning assets was 8.08 percent in 1996 compared with 8.09 percent in
1995. In contrast, the average cost of interest-bearing liabilities declined to
3.82 percent in 1996 from 3.91 percent in 1995. These changes in volume, mix,
and rates provided a 5 percent increase in tax-equivalent interest income and an
increase of less than one percent in interest expense.
3. CONSOLIDATED AVERAGE BALANCES/NET INTEREST INCOME/RATES*
Tax-equivalent basis (Dollars in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Loans - net of unearned income $1,286.4 $ 115.2 8.95% $1,164.3 $105.4 9.05% $1,047.2 $ 85.0 8.12%
Investment securities:
Available for sale:
U.S. Treasury 188.6 11.8 6.23 176.2 11.2 6.36 176.7 11.5 6.51
U.S. Government agencies 2.6 0.1 4.64 3.6 0.2 4.73 1.8 0.1 4.10
Mortgage-backed securities - - - 1.0 0.1 4.97 0.3 - -
Held to maturity:
U.S. Treasury 0.1 - 5.01 1.1 - - 1.4 - -
U.S. Government agencies 220.0 13.7 6.21 243.6 15.8 6.49 265.2 17.8 6.72
States and political subdivisions 14.6 1.1 7.88 20.1 1.6 8.07 26.7 2.1 7.82
Corporate debt securities 177.7 11.3 6.37 194.3 12.0 6.20 203.1 12.5 6.17
Other securities 10.9 0.8 7.03 8.4 0.6 7.28 7.8 0.6 7.68
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 614.5 38.8 6.31 648.3 41.5 6.42 683.0 44.6 6.54
Money market investments 13.4 0.7 5.30 11.5 0.7 5.95 25.3 1.2 4.54
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,914.3 154.7 8.08 1,824.1 147.6 8.09 1,755.5 130.8 7.45
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses (14.1) (13.9) (13.7)
Cash and due from banks 72.4 85.7 85.5
Premises and equipment 52.5 51.7 50.4
Other assets 45.5 44.3 43.3
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,070.6 $1,991.9 $1,921.0
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Time and savings deposits:
Interest-checking accounts $ 300.6 $ 6.1 2.01% $ 292.5 $ 6.6 2.25% $ 299.8 $ 6.8 2.27%
Regular savings 177.1 4.4 2.50 183.4 4.9 2.65 200.2 5.4 2.68
Money market deposit accounts 330.6 11.9 3.60 320.8 11.8 3.68 345.9 9.7 2.81
Certificates of deposit $100,000
and over 99.0 5.0 5.03 86.9 4.6 5.25 71.2 2.8 3.99
Other time deposits 610.0 30.4 4.98 591.0 29.5 5.01 522.6 20.2 3.87
- -----------------------------------------------------------------------------------------------------------------------------------
Total time and savings deposits 1,517.3 57.8 3.81 1,474.6 57.4 3.89 1,439.7 44.9 3.12
Short-term borrowings 27.6 1.3 4.70 24.9 1.2 4.90 14.9 0.4 2.96
Long-term debt - - - - - - 0.5 0.1 5.65
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES 1,544.9 59.1 3.82 1,499.5 58.6 3.91 1,455.1 45.4 3.12
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 282.4 260.3 248.9
Other liabilities 15.5 14.7 12.4
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,842.8 1,774.5 1,716.4
Shareholders' equity before
unrealized gains (losses) 226.5 217.4 204.8
Unrealized gains (losses) on securities
available for sale, net 1.3 - (0.2)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 227.8 217.4 204.6
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,070.6 $1,991.9 $1,921.0
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 95.6 $ 89.0 $ 85.4
AVERAGE INTEREST RATE SPREAD 4.26% 4.18% 4.33%
INTEREST EXPENSE AS A PERCENT
OF AVERAGE EARNING ASSETS 3.08% 3.21% 2.59%
NET INTEREST MARGIN 5.00% 4.88% 4.87%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Fully taxable equivalent income is calculated by dividing actual tax-exempt
income by a factor which increases interest income to an amount that would need
to be received if such income were taxable at the federal tax rate of 35%. Loan
interest income includes fees of $3,417,000 in 1996; $2,921,000 in 1995; and
$2,831,000 in 1994. Loans include non-accrual loan balances and interest
accrued, if any.
Comparing 1995 with 1994, tax-equivalent net interest income
increased 4 percent in 1995 to $89.0 million from $85.4 million in 1994. The net
interest margin was stable in 1995 at 4.88 percent compared with 4.87 percent in
1994. Both the yields on earning assets and the costs of interest-bearing
liabilities rose in 1995 compared with 1994 as market rates of interest were
higher in 1995.
Net interest income and the net interest margin benefited in 1995
from a 4 percent increase in average earning assets and a change in the mix of
those assets. Average loans increased 11 percent in 1995 raising loans to 64
percent of average earning assets from 60 percent in 1994.
Provision for Loan Losses
The provision for loan losses is the amount charged to expense each
year that is intended to maintain an adequate allowance, or reserve, for loan
losses in the future. The adequacy of the allowance and, consequently, the
provision for loan losses are dependent on a variety of factors including size,
growth, and composition of the loan portfolio, historical and expected loan loss
experience, and an analysis of the quality of the loan portfolio and general
economic conditions. In 1996, the Corporation raised its provision for loan
losses to $3.5 million from $3.0 million in 1995. In 1994, the provision was
$1.6 million. The higher provision in 1996 compared with 1995 reflected 12
percent growth in the loan portfolio and concerns about consumer debt levels and
related delinquencies. The increase in the provision for loan losses in 1995
compared with 1994 reflected the same factors that led to the increase in 1996,
as well as a higher amount of loan losses in 1995 compared with 1994.
Economic factors are expected to be a key influence on the provision
for loan losses in 1997. The provision is likely to be increased commensurate
with loan growth. In addition, it may be increased further if there is a rise in
loan losses, delinquencies, or expectations of such increases. Trends that
develop in 1997 relating to the economy, actual loan losses, and the level of
non-performing assets will strongly influence the amount of the provision.
4. ANALYSIS OF CHANGES IN NET INTEREST INCOME*
<TABLE>
<CAPTION>
Tax-equivalent basis (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Year 1996 over 1995 Year 1995 over 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net Net
Average Increase Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans - net of unearned income $10,974 $(1,172) $9,802 $10,047 $10,289 $20,336
Investment securities:
Available for sale:
U.S. Treasury 782 (231) 551 (34) (273) (307)
U.S. Government agencies (48) (3) (51) 85 13 98
Held to maturity:
U.S. Treasury (50) (10) (60) - 66 66
U.S. Government agencies (1,551) (664) (2,215) (1,348) (596) (1,944)
States and political subdivisions (432) (37) (469) (554) 66 (488)
Other (874) 301 (573) (495) 30 (465)
Money market investments 105 (79) 26 (755) 286 (469)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 8,906 (1,895) 7,011 6,946 9,881 16,827
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Time and savings deposits:
Interest-checking accounts 179 (723) (544) (151) (54) (205)
Regular savings (164) (268) (432) (445) (59) (504)
Money market deposit accounts 358 (257) 101 (741) 2,851 2,110
Certificates of deposit $100,000 and over 612 (198) 414 709 1,015 1,724
Other time deposits 934 (144) 790 2,847 6,528 9,375
Short-term borrowings 126 (52) 74 392 386 778
Long-term debt - (1) (1) (28) 1 (27)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 2,045 (1,643) 402 2,583 10,668 13,251
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN NET INTEREST
INCOME $ 6,861 $ (252) $6,609 $ 4,363 $ (787) $ 3,576
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The change in interest that cannot be separated between rate and volume has
been allocated to each variance proportionately.
5. NON-INTEREST INCOME
<TABLE>
<CAPTION>
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Trust income $ 4,380 $ 4,500 $ 3,944 $ 4,037 $ 3,765
Service charges on deposit accounts 9,970 9,155 8,702 8,475 8,326
Credit insurance income 79 107 165 208 255
Investment securities gains (losses), net 4 (103) 1,166 88 298
Mortgage loan sales income 614 275 681 1,932 1,528
Other income 3,930 5,085 3,252 2,505 2,483
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME $18,977 $19,019 $17,910 $17,245 $16,655
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-Interest Income
Non-interest income includes service charges and other related
income from services rendered by the Corporation. In addition, non-interest
income includes gains and losses realized from the sale of fixed assets, sales
and calls of investment securities, sales of mortgage loans, and other income
items.
Non-interest income totaled $19.0 million in both 1996 and 1995. The
1995 total included $1.9 million in income related to the annuitization of
certain pension liabilities. Excluding this non-recurring income from the
comparison, non-interest income was 11 percent higher in 1996 compared with
1995. Deposit account fees, which increased 9 percent, or $815 thousand, were
the largest factor in the increase. This increase resulted primarily from higher
return check fees. Revenues from the sales of investment products and services,
which is included in other income, also added $549 thousand in 1996. In
addition, income generated from the sale of mortgage loans in the secondary
market more than doubled in 1996 to $614 thousand. The increase in this income
was attributable to a greater volume of fixed rate mortgage loans originated in
1996. Also contributing to the increase in non-interest income were fees from
credit card activities, which rose 38 percent in 1996 to $795 thousand. Fee
income from credit cards rose as the card base increased and fee waivers expired
on cards issued in 1995.
Non-interest income increased 6 percent in 1995 to $19.0 million
from $17.9 million in 1994. The comparison was influenced by a $1.9 million
increase in income from the annuitization of certain pension liabilities in 1995
and by $1.2 million in income in 1994 from the sale of investment securities
available for sale. Excluding these items of non-recurring income, non-interest
income increased 2 percent in 1995 over 1994. Contributing to this increase were
a 14 percent increase in trust income and a 5 percent increase in deposit
account fees. Offsetting these increases was a 60 percent reduction in income
from the sale of mortgage loans. This decrease resulted from a reduced volume of
fixed rate mortgage loan originations.
Non-Interest Expense
Non-interest expense represents the overhead expenses of the
Corporation. The Corporation monitors all categories of non-interest expense in
an attempt to improve productivity and earnings performance.
Non-interest expense in 1996 was 2 percent above the amount recorded
in 1995. Salaries and employee benefits increased 5 percent in 1996 to $41.1
million. Salaries increased only 3 percent, but, consistent with the
Corporation's plan to reward performance, employee benefits, commissions,
incentives, and bonuses represented a larger portion of compensation in 1996.
Occupancy expense increased 11 percent in 1996. A charge of $438 thousand
recorded in accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
Be Disposed Of, was responsible for a substantial portion of this increase.
Equipment expense increased 5 percent, telecommunications expense 2 percent, and
other expense 4 percent in 1996 over 1995.
Partially offsetting the above expense increases was a significant
reduction in F.D.I.C. insurance assessments in 1996, which resulted in a $2.0
million reduction in expense. The F.D.I.C. lowered its assessments for the Bank
Insurance Fund to a flat administrative fee of $2 thousand in 1996. The
additional expense recorded in 1996 was related to Savings Association Insurance
Fund deposits. In 1996, Congress passed legislation requiring banks to pay a
portion of the interest on Financing Corporation (FICO) bonds that were issued
to provide funds to resolve the savings and loan crisis. Consequently, beginning
in 1997, the Corporation will be obligated to pay an assessment for the FICO
obligation, which is estimated to total approximately $250 thousand in 1997. In
addition to the reduction in F.D.I.C. assessments in 1996, the Corporation
reduced its office supplies expense 1 percent and its postage expense 6 percent.
Non-interest expense in 1995 was nearly level with the 1994 amount.
A significant factor in this comparison was a reduction in F.D.I.C. insurance
assessments of $1.7 million. The largest expense increase was salaries and
employee benefits, which rose 5 percent in 1995. Occupancy expense was unchanged
from 1994 to 1995. Other expenses that increased included equipment expense,
office supplies expense, postage expense, and telecommunications expense.
Partially offsetting these increases, other expense decreased 5 percent in 1995
compared with 1994.
6. NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C>
Salaries and employee benefits $41,090 $39,222 $37,261 $34,651 $31,439
Occupancy expense, net 5,644 5,063 5,063 4,740 4,653
Equipment expense 6,370 6,086 5,965 5,722 5,125
F.D.I.C. assessments 44 2,081 3,790 3,645 3,327
Office supplies 1,182 1,189 1,108 1,115 1,051
Postage 1,229 1,313 1,160 1,187 1,143
Telecommunications expense 1,855 1,817 1,775 1,425 1,292
Other expense 10,241 9,809 10,301 9,183 6,935
- -------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE $67,655 $66,580 $66,423 $61,668 $54,965
- -------------------------------------------------------------------------------------------
OPERATING EFFICIENCY RATIO* 59.0% 61.6% 64.3% 61.7% 60.4%
- -------------------------------------------------------------------------------------------
</TABLE>
*Total non-interest expense as a percent of net interest income
(tax-equivalent basis) and total non-interest income.
INCOME TAXES
The provision for income taxes was $14.6 million in 1996 and $12.3
million in 1995. Higher operating earnings were principally responsible for the
increase in income taxes. In 1994, income taxes were $11.4 million.
FINANCIAL CONDITION
The Corporation's financial condition is measured in terms of its
asset and liability composition, asset quality, capital resources, and
liquidity. The growth and composition of assets and liabilities in 1996
reflected generally favorable economic conditions and the continuation of trends
from the previous year. While asset growth overall was moderate, loans continued
to grow at a strong pace. On the liability side of the balance sheet, deposit
growth continued to be influenced by record amounts of funds being invested in
the securities markets. The Corporation's asset quality, which traditionally is
strong relative to peer and industry standards, improved further in 1996.
Similarly, liquidity measures remained fully adequate in 1996. With respect to
its capital resources, in spite of the reduction of capital from the repurchase
of shares of common stock in the tender offer, the Corporation remains well
capitalized, which is the highest classification under regulatory standards.
The Corporation is not engaged in investment strategies involving
derivative financial instruments. Asset and liability management is conducted
without the use of forward-based contracts, options, swap agreements, or other
synthetic financial instruments derived from the value of an underlying asset,
reference rate, or index. Off-balance sheet risks, such as commitments to extend
credit, and other items are discussed in Note 10 of the Notes to Consolidated
Financial Statements.
ASSETS
On December 31, 1996, total assets were $2.162 billion, or 5 percent
higher than the year earlier total of $2.051 billion. Average total assets
increased 4 percent in 1996 to $2.071 billion from $1.992 billion in 1995.
7. LOAN PORTFOLIO
<TABLE>
<CAPTION>
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
LOAN CLASSIFICATION:
Commercial, financial, and agricultural $ 492,727 $ 467,296 $ 407,152 $ 408,349 $388,314
Real estate - construction 104,192 84,090 107,629 97,832 105,611
Real estate - mortgage 413,526 406,122 366,983 285,384 270,307
Consumer 355,504 262,985 219,872 231,656 216,388
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $1,365,949 $1,220,493 $1,101,636 $1,023,221 $980,620
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Loan Portfolio. In 1996, loans continued on a growth pattern
similar to that in 1995. Loans, net of unearned income increased 12 percent to
$1.366 billion on December 31, 1996 from $1.220 billion one year earlier.
Average loans, net of unearned income increased 10 percent in 1996 to $1.286
billion from $1.164 billion in 1995.
All three major areas of the loan portfolio, consumer, commercial,
and mortgage, contributed to the strong growth in 1996. Consumer lending led the
growth with a 35 percent increase. The indirect instalment portion of the
portfolio increased 79 percent to $188 million at year-end 1996 compared with
$105 million one year earlier. A new relationship with a major insurance company
was responsible for approximately $40 million of this increase. In addition,
credit card balances increased to $16 million at year-end 1996 from $9 million
one year earlier.
Commercial lending, which is the largest segment of the portfolio,
increased 5 percent in 1996 to $493 million. Favorable economic conditions in
the various markets served by the Corporation and continued focus on this
segment of the portfolio were factors in this growth.
8. REMAINING MATURITIES OF
SELECTED LOANS
(in thousands)
- ---------------------------------------------------------
Commercial,
Financial, and Real Estate -
December 31, 1996 Agricultural Construction
- ---------------------------------------------------------
WITHIN 1 YEAR $100,619 $ 49,539
- ---------------------------------------------------------
VARIABLE RATE:
1 to 5 years 87,606 13,565
After 5 years 161,297 19,663
- ---------------------------------------------------------
TOTAL 248,903 33,228
- ---------------------------------------------------------
FIXED RATE:
1 to 5 years 111,956 15,001
After 5 years 31,249 6,424
- ---------------------------------------------------------
TOTAL 143,205 21,425
- ---------------------------------------------------------
TOTAL MATURITIES $492,727 $104,192
- ---------------------------------------------------------
Construction lending also benefitted from a favorable economy. Loans
in this category increased 24 percent in 1996 to $104 million.
Mortgage loans increased 2 percent to $414 million on December 31,
1996. This increase was attributable principally to adjustable rate mortgages.
On December 31, 1996, the Corporation had no concentration of loans
in any one industry in excess of 10 percent of its loan portfolio. Because of
the nature of the Corporation's market, loan collateral is predominantly real
estate related. Thus, periodic weakness in real estate markets may have an
adverse effect on collateral values and could lead to writedowns and loan
losses. The Corporation carefully monitors its exposure to risk from
construction and development loans, commercial real estate loans, and
residential lending. The Corporation does not engage in foreign lending
activities. Consequently, the loan portfolio is not exposed to risk from foreign
credits.
Credit quality is a consistent strength of the Corporation. One
measure of that strength is a low level of loan losses. In 1996, net loan losses
totaled $2.3 million, or only .18 percent of average loans, net of unearned
income. In 1995, net loan losses were $3.3 million, or .29 percent of average
loans, net of unearned income. Loan losses were higher in 1995 principally as
the result of writedowns on two large credits.
Loan loss expectations for 1997 are influenced by positive economic
conditions, moderate interest rates, and lower levels of problem assets
partially offset by some concern about the level of consumer debt. At year-end
1996, management was not aware of any conditions that would cause loan losses to
be materially higher in 1997 than in 1996. However, adverse changes in the
economic cycle and unforeseen changes in borrowers' financial conditions could
impact loan losses in 1997. The Corporation will continue its efforts to
minimize future credit losses.
Risk elements associated with the loan portfolio are presented in
Table 10. Excluding foreclosed properties, identified risk elements on December
31, 1996 totaled $7.6 million, or .56 percent of loans, net of unearned income.
At December 31, 1995, the total was $9.0 million, or .74 percent of loans, net
of unearned income. Foreclosed properties at December 31, 1996 were $2.0
million, or 52 percent less than the year earlier total of $4.1 million.
Foreclosed properties are reported net of writedowns at the lower of cost or
estimated net realizable value. At December 31, 1996, total risk elements
represented .70 percent of loans, net of unearned income plus foreclosed
properties and .44 percent of total assets. These ratios at the end of 1995 were
1.1 percent and .64 percent, respectively. At year-end 1996, the Corporation
identified an additional $5.4 million in loans that pose some uncertainty over
the borrowers' ability to comply with loan repayment terms.
With respect to the non-accrual loans identified in Table 10, the
amounts classified in this category represent loan balances on which the accrual
of interest has been discontinued. The largest exposure to a single borrower in
this group of loans at year-end 1996 was $878 thousand. Only 4 other non-accrual
loans had balances greater than $200 thousand at year-end 1996. Loans are placed
in a non-accrual status when collection of principal or interest is legally
barred or when management determines that collection of interest cannot be
assured in light of the financial condition of the borrower and the
circumstances surrounding the loan. The Corporation's subsidiary bank is in
substantial compliance with regulatory policy that requires accrual of interest
to be discontinued when principal or interest is past due for 90 days or more
unless the loan is well secured and in the process of collection. Because of the
historical experience of net loan losses, the ratio of risk elements to loans
outstanding, and the overall quality of the loan portfolio, management has been
able to evaluate each individual loan situation of any appreciable magnitude and
its potential for collection prior to classifying any loan as non-accrual.
9. SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
ALLOWANCE AT BEGINNING OF YEAR $ 13,432 $ 13,754 $ 13,864 $ 13,057 $ 10,894
LOAN LOSSES:
Commercial, financial, and agricultural 426 1,641 994 789 920
Real estate - construction 138 1,090 150 - 90
Real estate - mortgage 362 110 187 140 343
Consumer 2,015 1,274 1,054 696 1,607
- --------------------------------------------------------------------------------------------------------------------
TOTAL LOAN LOSSES 2,941 4,115 2,385 1,625 2,960
- --------------------------------------------------------------------------------------------------------------------
RECOVERIES:
Commercial, financial, and agricultural 83 169 67 59 58
Real estate - construction - 2 4 6 47
Real estate - mortgage 34 38 75 72 9
Consumer 568 564 529 261 263
- --------------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 685 773 675 398 377
- --------------------------------------------------------------------------------------------------------------------
NET LOAN LOSSES 2,256 3,342 1,710 1,227 2,583
INCREASE FROM ACQUISITIONS - - - 123 551
PROVISION CHARGED TO EXPENSE 3,480 3,020 1,600 1,911 4,195
- --------------------------------------------------------------------------------------------------------------------
ALLOWANCE AT END OF YEAR $ 14,656 $ 13,432 $ 13,754 $ 13,864 $ 13,057
- --------------------------------------------------------------------------------------------------------------------
LOANS - NET OF UNEARNED INCOME:
Outstanding at year-end $1,365,854 $1,220,421 $1,101,500 $1,022,911 $979,365
Average 1,286,417 1,164,324 1,047,206 1,006,262 908,397
RATIOS:
NET LOAN LOSSES TO AVERAGE LOANS 0.18% 0.29% 0.16% 0.12% 0.28%
Allowance to year-end loans 1.07% 1.10% 1.25% 1.36% 1.33%
Allowance to net loan losses 6.50X 4.02X 8.04X 11.30X 5.05X
Provision to net loan losses 1.54X 0.90X 0.94X 1.56X 1.62X
Provision to average loans 0.27% 0.26% 0.15% 0.19% 0.46%
Recoveries to loan losses 23.29% 18.78% 28.30% 24.49% 12.74%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the $2.0 million total of foreclosed properties at
December 31, 1996 were 10 parcels of real estate. The highest carrying value of
a single property was $538 thousand. Only 3 other parcels included in foreclosed
properties at year-end 1996 had carrying values above $200 thousand.
The Corporation maintains a general allowance for loan losses and
does not allocate its allowance for loan losses to individual categories for
management purposes. Table 11 shows an allocation among loan categories based
upon an analysis of the portfolio's composition, historical loan loss
experience, and other relevant factors. In determining the adequacy of the
allowance for loan losses, management considers the size and composition of the
loan portfolio, historical loss experience, economic conditions, the value and
adequacy of collateral and guarantors, and the current level of the allowance.
In addition, consideration is given to potential losses associated with
non-accrual loans and loans that are deemed potential problems.
At December 31, 1996, the allowance for loan losses was $14.7
million, or 1.07 percent of loans, net of unearned income. A year earlier, the
allowance was $13.4 million, or 1.10 percent of loans, net of unearned income.
At its year-end 1996 level, the allowance for loan losses exceeded the sum of
net loan losses over the previous five years. At that level, management believes
that the allowance is adequate, subject to unforeseen economic changes or
unexpected regulatory developments.
10. RISK ELEMENTS
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
Book Value December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C>
LOANS:
Non-accrual $4,608 $ 6,009 $ 6,996 $ 9,174 $10,448
Troubled debt restructurings 245 250 - - -
Past due principal and/or
interest for 90 days or more 2,790 2,753 2,713 5,453 3,545
- --------------------------------------------------------------------------------------------------------------
TOTAL $7,643 $ 9,012 $ 9,709 $14,627 $13,993
- --------------------------------------------------------------------------------------------------------------
AS A PERCENT OF:
Loans - net of unearned income .56% .74% .88% 1.43% 1.43%
Total assets .35% .44% .50% .75% .76%
Allowance for loan losses 52.15% 67.09% 70.59% 105.50% 107.17%
FORECLOSED PROPERTIES $1,957 $ 4,093 $ 5,919 $ 8,831 $11,770
- --------------------------------------------------------------------------------------------------------------
TOTAL RISK ELEMENTS $9,600 $13,105 $15,628 $23,458 $25,763
- --------------------------------------------------------------------------------------------------------------
AS A PERCENT OF:
Loans - net of unearned income
plus foreclosed properties .70% 1.07% 1.41% 2.27% 2.60%
Total assets .44% .64% .81% 1.21% 1.40%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, gross interest income in
the amount of $615,000, $632,000, and $462,000, respectively, would have been
recorded on loans reported as non-accrual if the loans had been current in
accordance with their original terms and conditions. The amount of interest
income on those loans that was included in net interest income amounted to
$79,000, $49,000 and $66,000 in 1996, 1995, and 1994, respectively. At December
31, 1996, the Corporation identified additional loans totaling $5,402,000 that
pose some uncertainty over the borrowers' ability to comply with the loan
repayment terms. Investment securities also may pose credit risks. At December
31, 1996, all investment securities were performing according to terms.
11. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Commercial, financial, and
agricultural $ 7,307 36.1% $ 7,871 38.3% $ 8,447 36.9% $ 6,499 39.9% $ 6,958 39.6%
Real estate - construction 510 7.6 137 6.9 156 9.8 687 9.6 753 10.8
Real estate - mortgage 830 30.3 732 33.3 514 33.3 385 27.9 437 27.5
Consumer 3,297 26.0 2,202 21.5 2,227 20.0 3,598 22.6 2,558 22.1
Unallocated 2,712 - 2,490 - 2,410 - 2,695 - 2,351 -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCE FOR
LOAN LOSSES $14,656 100.0% $13,432 100.0% $13,754 100.0% $13,864 100.0% $13,057 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12. INVESTMENT SECURITIES
Based on stated maturities (Dollars in thousands)
- ------------------------------------------------------------------------------
Amortized Fair Tax-Equivalent
December 31, 1996 Cost Value Yield
- ------------------------------------------------------------------------------
AVAILABLE FOR SALE:
U.S. Treasury Securities:
Within one year $ 33,694 $ 33,717 5.60%
One to five years 140,410 142,359 6.46
- ------------------------------------------------------------------------------
TOTAL U.S. TREASURY SECURITIES 174,104 176,076 6.29
- ----------------------------------------------------------------------------
U.S. Government Agencies:
Within one year 2,000 1,997 4.18
- ------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 2,000 1,997 4.18
- ----------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -
AVAILABLE FOR SALE 176,104 178,073 6.27
- ------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Government Agencies:
Within one year 45,955 46,106 6.02
One to five years 166,853 167,306 6.08
- -----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 212,808 213,412 6.07
- ----------------------------------------------------------------------------
State and Political Subdivision
Securities:
Within one year 1,914 1,905 5.97
One to five years 9,030 9,208 5.56
Five to ten years 1,641 1,719 8.19
After ten years 2,046 2,070 6.42
- ----------------------------------------------------------------------------
TOTAL STATE AND POLITICAL
SUBDIVISION SECURITIES 14,631 14,902 6.03
- ----------------------------------------------------------------------------
Corporate Debt Securities:
Within one year 83,167 83,612 6.55
One to five years 112,164 112,536 6.46
- ----------------------------------------------------------------------------
TOTAL CORPORATE DEBT SECURITIES 195,331 196,148 6.50
- ----------------------------------------------------------------------------
OTHER SECURITIES:
After ten years 8,211 8,211 6.94
- ----------------------------------------------------------------------------
TOTAL OTHER SECURITIES 8,211 8,211 6.94
- ----------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES
- HELD TO MATURITY $430,981 $432,673 6.28%
- ----------------------------------------------------------------------------
Investment Securities. Investment securities represent the second
largest component of earning assets. In accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, securities held in the investment portfolio are classified as
Held to Maturity or Available for Sale. The Corporation has no Trading
securities. Held to Maturity securities are reported at amortized cost in the
Corporation's consolidated financial statements. Available for Sale securities
are reported at fair value. Unrealized gains or losses on these securities are
reported as a separate component of shareholders' equity, net of tax effects,
and are excluded from earnings until realized.
At December 31, 1996, the combined reported value of investment
securities was $609 million compared with the year earlier total of $643
million. Available for Sale securities decreased to $178 million at year-end
1996 from $189 million one year earlier. Held to Maturity securities decreased
to $431 million on December 31, 1996 from the year earlier total of $455
million.
13. CORPORATE DEBT BY QUALITY RATING
(Dollars in thousands)
- -------------------------------------------------------------
Book
December 31, 1996 Value Percent
- -------------------------------------------------------------
MOODY'S RATING
Aaa $ 16,642 8.5%
Aa1 2,000 1.0
Aa2 14,612 7.5
Aa3 26,560 13.6
A1 58,387 29.9
A2 74,523 38.2
A3 2,506 1.3
Other/Not Rated 101 -
- -------------------------------------------------------------
TOTAL $195,331 100.0%
- -------------------------------------------------------------
At year-end 1996, the fair value adjustment of the amortized cost of
securities Available for Sale was an unrealized gain of $2.0 million. At
year-end 1995, this adjustment reflected an unrealized gain of $4.5 million. The
unrealized gains in both 1996 and 1995 reflected higher yields on securities
Available for Sale than on comparable investments at those period-ends. In the
event the Corporation needs to sell securities classified as Available for Sale,
gains or losses on such sales would be reflected in the Corporation's
consolidated statement of income in the period in which the sale occurs.
At December 31, 1996, the weighted average yield of the Held to
Maturity portfolio was 6.28 percent. The weighted average yield of Available for
Sale securities was 6.27 percent. The market value of securities Held to
Maturity was 100.4 percent of its book value at year-end 1996 compared with
101.1 percent on December 31, 1995. Additional information regarding investment
securities can be found in Table 12 and Note 3 of the Notes to Consolidated
Financial Statements. Quality ratings of the Corporation's corporate debt
securities appear in Table 13. With the exception of securities issued by the
U.S. Government, the Corporation held no concentration of 10 percent or greater
of its shareholders' equity in securities of any single issuer at December 31,
1996.
Money Market Investments. At year-end 1996, the Corporation did not
own any short-term money market investments. One year earlier, the Corporation
had $15 million in these investments. Short-term money market investments
averaged $13 million in 1996 compared with $11 million in 1995.
LIABILITIES
The Corporation relies almost exclusively on core deposits to fund
its earning assets.
Deposits. Total deposits on December 31, 1996 were $1.891 billion or
5 percent above the year earlier total of $1.793 billion. Average total deposits
of $1.800 billion in 1996 were 4 percent above the 1995 average of $1.735
billion. Deposit growth in 1996 continued to be influenced by record inflows of
funds into the securities markets.
Deposit growth in 1996 was stronger in non-interest bearing demand
deposits than in interest-bearing deposits. At December 31, 1996, demand
deposits totaled $312 million, or 8 percent higher than the year earlier total
of $287 million. The strongest growth within demand deposits in 1996 occurred in
commercial accounts, which increased 13 percent. The growth in these accounts
was related to the Corporation's growth in commercial lending.
Interest-bearing deposits increased 5 percent to $1.579 billion at
year-end 1996 from the year earlier total of $1.506 billion. Consistent with the
1995 growth pattern, other time deposits, which are principally consumer
certificates of deposit less than $100 thousand, registered the greatest growth
in 1996. Total balances in these accounts increased $39 million, or 6 percent,
to $644 million at year-end 1996. Contributing to this increase was a special
deposit promotion late in 1996. Also contributing to the increase in
interest-bearing deposits were money market deposit accounts, which increased 5
percent at year-end 1996 compared with the year earlier total. Within this
category, commercial money market accounts increased 14 percent in 1996 over the
year-end 1995 total. Interest checking account balances increased 2 percent at
year-end 1996, while savings account balances declined 2 percent from the year
earlier balances. Balances in certificates of deposit $100 thousand and over
increased to $110 million at year-end 1996 from the year earlier total of $94
million. Table 14 summarizes the remaining maturities of certificates of deposit
$100 thousand and over.
14. CERTIFICATES OF DEPOSIT
$100,000 AND OVER
(in thousands)
- ------------------------------------------------
December 31, 1996 Amount
- ------------------------------------------------
REMAINING MATURITIES:
Within 3 months $ 56,720
3 to 6 months 21,770
6 TO 12 MONTHS 18,892
After 12 months 12,878
- ------------------------------------------------
TOTAL $110,260
- ------------------------------------------------
Debt. Short-term borrowings totaled $50 million on December 31, 1996
compared with $16 million at year-end 1995. These borrowings include federal
funds purchased, securities sold under agreements to repurchase, and other
borrowings. Total short-term borrowings averaged $28 million in 1996 and $25
million in 1995. Table 15 summarizes the Corporation's position with respect to
federal funds purchased and securities sold under agreements to repurchase. At
year-end 1996, the Corporation did not have any long-term debt.
15. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Balance Rate Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE
Outstanding at year-end $50,066 6.08% $16,118 3.13% $16,479 3.69%
Average outstanding for the year 23,781 4.55 18,568 4.57 14,845 3.21
Maximum outstanding at any month-end 56,060 - 46,878 - 42,501 -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
In the fourth quarter of 1996, the Corporation completed a Modified
Dutch Auction Tender Offer in which it repurchased a total of 1.236 million
shares of its common stock. The repurchase had the effect of reducing
shareholders' equity approximately $35 million. The tender offer was conducted
to utilize the Corporation's strong capital base more effectively and to
increase shareholder value. Based upon proforma financial models, the tender
offer should have the effect of increasing net income per share and improving
the return on average shareholders' equity.
Because the repurchase amount exceeded the amount of earnings
retained after dividend payments in 1996, shareholders' equity decreased to $204
million on December 31, 1996 from the year earlier total of $227 million.
Shareholders' equity averaged 5 percent higher in 1996 at $228 million compared
with $217 million in 1995. Average shareholders' equity as a percent of average
assets was 11.0 percent in 1996 and 10.9 percent in 1995. Average shareholders'
equity in 1996 was affected less than period-end shareholders' equity because
the tender offer was completed near the middle of the fourth quarter.
Federal banking law sets forth certain regulatory capital
requirements that apply to the Corporation and its banking subsidiary. Within
the framework established by the law, the Corporation and its banking subsidiary
qualify for the classification "well capitalized", which is the highest
regulatory classification. Additional information concerning regulatory capital
requirements is contained in Note 11 of the Notes to the Consolidated Financial
Statements.
From time to time, the Corporation purchases shares of its own
common stock from shareholders and from brokers and dealers. In 1996, the
Corporation purchased 67,500 shares (in addition to shares purchased in the
tender offer) at a cost of $1.5 million. In 1995, the Corporation purchased
67,048 shares at a cost of $1.4 million. The volume of share repurchases is
determined in consideration of shares issued for various purposes and by the
financial advantage to the Corporation. Purchases are made in accordance with
applicable securities laws, regulations, and internal policy considerations.
16. RISK-BASED CAPITAL
(Dollars in thousands)
- ---------------------------------------------------------------------------
December 31 1996 1995 1994
- ---------------------------------------------------------------------------
TIER 1 CAPITAL:
Shareholders' equity* $ 203,034 $ 223,637 $ 210,244
Less intangible assets 7,965 9,046 7,471
- ---------------------------------------------------------------------------
TOTAL TIER 1
CAPITAL 195,069 214,591 202,773
- ---------------------------------------------------------------------------
TIER 2 CAPITAL:
Allowable allowance for
loan losses 14,656 13,432 13,754
- ---------------------------------------------------------------------------
TOTAL CAPITAL $ 209,725 $ 228,023 $ 216,527
- ---------------------------------------------------------------------------
Risk-weighted assets $1,558,530 $1,402,735 $1,340,091
Tangible quarterly
average assets 2,129,384 2,026,619 1,914,722
RISK-BASED
CAPITAL RATIOS:
Tier 1 capital 12.52% 15.30% 15.13%
Total capital 13.46% 16.26% 16.16%
Tier 1 leverage 9.16% 10.59% 10.59%
- ---------------------------------------------------------------------------
* Exclusive of net unrealized gains and losses on securities available for sale,
as prescribed by regulatory guidelines.
The Corporation's common stock is traded in the NASDAQ Stock
Market's National Market System under the trading symbol JBNK. Table 17 presents
the market prices and dividends of the Corporation's common stock for each
quarter in 1996 and 1995. On December 31, 1996, the book value of a share of
common stock was $14.66 compared with the year earlier book value of $14.92. The
book value comparison between year-end 1996 and 1995 was affected by the
repurchase of shares in the tender offer.
17. COMMON STOCK PERFORMANCE AND DIVIDENDS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Common Stock Price
- ---------------------------------------------------------------------------------------------------------------
1996 1995 Dividends Declared
- ---------------------------------------------------------------------------------------------------------------
High Low High Low 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
First Quarter .......... $ 22.63 $ 20.00 $ 20.75 $ 19.13 $ .22 $ .19
Second Quarter ......... 22.50 20.63 22.13 19.13 .22 .19
Third Quarter .......... 27.75 21.50 23.50 21.00 .22 .19
Fourth Quarter ......... 29.50 26.75 23.50 20.13 .22 .19
- ---------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 $ 29.50 $ 20.00 $ 23.50 $ 19.13 $ .88 $.76
</TABLE>
Jefferson Bankshares' common stock is traded in the National Market System of
the Nasdaq Stock Market in which Jefferson Bankshares' symbol is JBNK. Dividend
restrictions and other matters are discussed in Notes 8 and 13 of the Notes to
Consolidated Financial Statements. On January 15, 1997, there were
approximately 8,116 shareholders of record.
LIQUIDITY
Liquidity in a banking company measures the ability to provide funds
for customers' demands for loans and deposit withdrawals without impairing
profitability. To meet these needs, the Corporation maintains cash reserves and
readily marketable investments in addition to funds provided from loan
repayments and maturing securities. Funds also can be obtained through
increasing deposits or short-term borrowings and through the bank's borrowing
privileges at the Federal Reserve and through the Federal Home Loan Bank. In
addition, the Corporation has a $15 million line of credit available.
A related concern of liquidity management is interest rate
sensitivity. Changes in interest rates may affect both funding requirements as
well as the relative liquidity of certain assets. Prudent balance sheet
management requires continual protection against any unanticipated or
significant changes in the level of market interest rates. Stable levels of net
interest income should be maintained in a changing environment by ensuring that
interest rate risk is kept at an acceptable level. Accordingly, the Corporation
has developed guidelines that stipulate that annual net interest income should
not be reduced by more than 10 percent as the result of a sudden 200 basis point
upward or downward movement in interest rates.
Management uses a variety of interest sensitivity, or "gap", reports
to summarize the Corporation's ability to reprice its interest-sensitive assets
and liabilities over various time intervals. An asset-sensitive, or positive,
gap implies that assets will reprice faster than liabilities. In an increasing
interest rate environment, net interest income would be positively affected.
Conversely, a liability-sensitive, or negative, gap implies that liabilities
will reprice faster than assets and, thus, net interest income would be
positively affected by decreasing interest rates. As shown in Table 18, at
December 31, 1996, the Corporation had a negative gap of $65.0 million over the
next twelve months. This amount was well within the approved exposure limits of
interest sensitive assets to interest sensitive liabilities of 1.25 to 1 and .75
to 1.
In addition to gap analysis, management also uses simulation
modeling to forecast future balance sheet movements using various interest rate
scenarios. By studying the effects on net interest income of rising, falling,
and most-likely interest rate scenarios, the Corporation can position itself to
take advantage of anticipated interest rate movements. It also can protect
itself better against any unexpected interest rate movements by fully
understanding the dynamic nature of its balance sheet components.
The Corporation uses traditional, on-balance sheet means for limiting
interest rate risk. Through aggressive pricing and/or marketing strategies, the
Corporation is able to emphasize fixed or variable rate assets and liabilities
to position the balance sheet in accordance with management's strategies and
tolerance for interest rate risk.
18. INTEREST SENSITIVITY ANALYSIS*
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Over Over Over
3 Months 6 Months Total 1 Year
3 Months Through Through Within and Not
December 31, 1996 or Less 6 Months 12 Months 1 Year Classified Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
EARNING ASSETS:
Loans - net of unearned income $ 539,024 $ 35,317 $ 177,212 $ 751,553 $ 614,301 $1,365,854
Investment securities:
Available for Sale 7,314 - 28,400 35,714 142,359 178,073
Held to Maturity 27,509 33,626 69,901 131,036 299,945 430,981
Money market investments - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 573,847 68,943 275,513 918,303 1,056,605 1,974,908
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Money market deposit accounts 339,770 - - 339,770 - 339,770
Certificates of deposit $100,000 and over 56,720 21,770 18,892 97,382 12,878 110,260
All other time deposits 250,976 123,879 121,266 496,121 633,141 1,129,262
Short-term borrowings 50,066 - - 50,066 - 50,066
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 697,532 145,649 140,158 983,339 646,019 1,629,358
- ---------------------------------------------------------------------------------------------------------------------------------
NET NON-INTEREST-BEARING LIABILITIES - - - - 345,550 345,550
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY GAP
ASSET SENSITIVE (LIABILITY SENSITIVE) $(123,685) $ (76,706) $ 135,355 $(65,036) $ 65,036 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE GAP $(123,685) $(200,391) $(65,036) $(65,036) $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Remaining maturity if fixed rate; earliest possible repricing interval if
floating rate.
ACCOUNTING RULE CHANGES
On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosure. The Statements require impaired loans to
be measured at the present value of expected future cash flows discounted at the
loan's effective interest rate, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. In reviewing
the effects of implementing these Statements, management deemed the allowance
for loan losses to be adequate, and no additional provision resulted from the
implementation of the Statements.
Effective January 1, 1996, the Corporation adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. SFAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Upon adoption of this
Statement, the Corporation recognized a loss of $438 thousand for the impairment
of one of its properties.
For years beginning after December 15, 1995, SFAS No. 122,
Accounting for Mortgage Servicing Rights, requires capitalization of the cost of
mortgage servicing rights. The Corporation does not service loans that are
applicable under this Statement and, accordingly, this Statement had no impact
on the Corporation's consolidated financial statements.
SFAS No. 123, Accounting for Stock-Based Compensation, establishes a
new fair value method of accounting for stock-based compensation arrangements
with employees that is effective for fiscal years beginning after December 15,
1995. Entities may either adopt the fair value method or elect to continue
following the accounting treatment outlined in APB Opinion No. 25, Accounting
for Stock Issued to Employees. Entities electing to continue following Opinion
No. 25 are required to make proforma disclosures of net income and net income
per share, as if the fair value based method had been adopted. The Corporation
has elected to continue following Opinion No. 25 and, consequently, adoption of
this Statement did not have an impact on the Corporation's results of
operations. Required disclosures under SFAS No. 123 are contained in Note 9 of
the Notes to Consolidated Financial Statements.
SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which was issued in June 1996,
provides accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets, secured borrowing and
collateral transactions, and the extinguishments of liabilities. The Statement
is to be applied to transactions occurring after December 31, 1996. SFAS No. 125
is based on a financial-components approach that focuses on control. Under this
approach, following a transfer of financial assets, an entity recognizes the
assets it controls and liabilities it has incurred, and derecognizes financial
assets for which control has been surrendered and financial liabilities that
have been extinguished. In December 1996, SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125, was issued. SFAS
No. 127 postpones implementation of certain provisions of SFAS No. 125 until
after December 31, 1997. The effect on the Corporation's consolidated financial
statements of adopting these Statements is not expected to be material.
[LOGO]
Jefferson Bankshares, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash and due from banks (Note 10) $ 100,228 $ 88,028
Federal funds sold and other money market investments - 15,000
Investment securities (Note 3):
Available for sale (cost of $176,104 in 1996 and $184,203 in 1995) 178,073 188,669
Held to maturity (fair value of $432,673 in 1996 and $459,360 in 1995) 430,981 454,509
Loans (Note 4) 1,365,949 1,220,493
Less: Unearned income (95) (72)
Allowance for loan losses (Note 5) (14,656) (13,432)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 1,351,198 1,206,989
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 7) 55,774 52,310
Other assets 45,571 45,683
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,161,825 $2,051,188
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits (Notes 2 and 3):
Demand $ 311,817 $ 287,489
Interest checking 312,097 306,753
Regular savings 172,804 177,217
Money market deposit accounts 339,770 322,889
Certificates of deposit $100,000 and over 110,260 93,720
Other time deposits 644,361 605,131
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 1,891,109 1,793,199
Federal funds purchased and securities sold under agreements to repurchase 50,066 16,118
Other liabilities 16,336 15,316
Long-term debt - 15
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,957,511 1,824,648
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock of $10.00 par value. Authorized 1,000,000 shares; issued none - -
Common stock of $2.50 par value. Authorized 32,000,000 shares; issued and
outstanding 13,937,491 shares in 1996 and 15,182,235 shares in 1995 34,844 37,956
Capital surplus 48,720 47,623
Retained earnings 119,470 138,058
Unrealized gains on securities available for sale, net (Note 3) 1,280 2,903
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (Notes 2, 8, 9, 11, and 13) 204,314 226,540
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 7 and 10)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,161,825 $2,051,188
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
INTEREST INCOME
Interest and fees on loans $114,534 $104,607 $ 84,427
Income on investment securities:
Available for sale 11,874 11,374 11,582
Held to maturity 26,511 29,709 32,335
Other interest income 709 683 1,152
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 153,628 146,373 129,496
- ---------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-checking 6,050 6,594 6,799
Regular savings 4,432 4,864 5,368
Money market deposit accounts 11,917 11,816 9,706
Certificates of deposit $100,000 and over 4,980 4,566 2,842
Other time deposits 30,373 29,583 20,208
Short-term borrowings 1,294 1,220 441
Long-term debt - 1 29
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 59,046 58,644 45,393
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 94,582 87,729 84,103
PROVISION FOR LOAN LOSSES (Note 5) 3,480 3,020 1,600
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 91,102 84,709 82,503
- ---------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust income 4,380 4,500 3,944
Service charges on deposit accounts 9,970 9,155 8,702
Investment securities gains (losses), net (Note 3) 4 (103) 1,166
Mortgage loan sales income 614 275 681
Other income (Note 9) 4,009 5,192 3,417
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 18,977 19,019 17,910
- ---------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits (Note 9) 41,090 39,222 37,261
Occupancy expense, net 5,644 5,063 5,063
Equipment expense 6,370 6,086 5,965
Other expense 14,551 16,209 18,134
- ---------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 67,655 66,580 66,423
- ---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 42,424 37,148 33,990
PROVISION FOR INCOME TAX EXPENSE (Note 6) 14,623 12,285 11,390
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 27,801 $ 24,863 $ 22,600
- ---------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (Notes 8 and 9) $ 1.86 $ 1.64 $ 1.49
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
[LOGO]
Jefferson Bankshares, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized Gains
Common Stock Capital Retained (Losses) on Securities
Shares Amount Surplus Earnings Available for Sale, Net Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
BALANCE DECEMBER 31, 1993 15,080,553 $37,701 $43,977 $114,756 $ - $196,434
Adjustment to beginning balance for change
in accounting principle, net (Note 3) 5,072 5,072
Net income 22,600 22,600
Cash dividends declared ($.68 per share) (10,135) (10,135)
Acquisition of common stock (72,500) (181) (1,235) (1,416)
Issuance of common stock for:
Dividend reinvestment plan 124,912 313 2,075 2,388
Stock options (Note 9) 37,285 93 280 373
Change in unrealized gains (losses)
on securities available for sale, net
(Note 3) (8,763) (8,763)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 15,170,250 37,926 46,332 125,986 (3,691) 206,553
Net income 24,863 24,863
Cash dividends declared ($.76 per share) (11,536) (11,536)
Acquisition of common stock (67,048) (168) (1,255) (1,423)
Issuance of common stock for:
Dividend reinvestment plan 7,256 18 131 149
Incentive stock plan (Note 9) 27,820 70 315 385
Deferred Compensation and Stock
Purchase Plan for Non-Employee
Directors (Note 8) 43,957 110 845 955
Change in unrealized gains (losses)
on securities available for sale, net
(Note 3) 6,594 6,594
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 15,182,235 37,956 47,623 138,058 2,903 226,540
Net income 27,801 27,801
Cash dividends declared ($.88 per share) (13,065) (13,065)
Acquisition of common stock:
Tender offer (1,235,690) (3,089) (32,013) (35,102)
Other (67,500) (169) (1,311) (1,480)
Issuance of common stock for:
Dividend reinvestment plan 22,807 57 573 630
Incentive stock plan (Note 9) 23,729 59 272 331
Deferred Compensation and Stock
Purchase Plan for Non-Employee
Directors (Note 8) 9,538 24 192 216
Employee Stock Purchase Plan (Note 8) 2,372 6 60 66
Change in unrealized gains (losses)
on securities available for sale, net
(Note 3) (1,623) (1,623)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 13,937,491 $34,844 $48,720 $119,470 $1,280 $204,314
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 27,801 $ 24,863 $ 22,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,881 6,490 5,975
Amortization and accretion 3,694 4,145 5,187
Provision for loan losses 3,480 3,020 1,600
Increase in deferred tax asset (920) (166) (3,069)
Investment securities (gains) losses, net (Note 3) (4) 103 (1,166)
Gains on sales of premises and equipment, net (67) (247) (173)
(Increase) decrease in interest receivable 1,043 (537) (376)
Increase (decrease) in taxes payable 87 (306) 106
Increase in interest payable 462 1,418 91
(Increase) decrease in loans held for resale, net 1,493 (1,921) 6,149
Other, net (1,419) (146) 2,656
- ---------------------------------------------------------------------------------------------------------------
Total adjustments 14,730 11,853 16,980
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 42,531 36,716 39,580
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held
to maturity 123,912 123,904 153,889
Proceeds from calls of investment securities
held to maturity (Note 3) 485 148 4,838
Purchases of investment securities held to maturity (103,765) (114,127) (118,746)
Proceeds from maturities of securities available for sale 30,950 37,700 19,450
Proceeds from sales of securities available for sale
(Note 3) 979 11,347 44,346
Purchases of securities available for sale (24,624) (57,707) (35,407)
Net increase in loans (149,760) (121,504) (87,751)
Business combinations, net of cash (Note 2) - 31,369 21,130
Proceeds from sales of premises and equipment 796 1,003 208
Proceeds from sales of foreclosed properties 2,296 2,694 2,732
Purchases of premises and equipment (10,281) (7,647) (8,772)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (129,012) (92,820) (4,083)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 97,910 69,815 (12,076)
Net increase (decrease) in short-term borrowings 33,948 (361) (37,618)
Repayment of long-term debt (15) (4) (1,194)
Proceeds from issuance of common stock 1,243 1,489 2,761
Payments to acquire common stock (36,582) (1,423) (1,416)
Dividends paid (12,823) (11,193) (10,034)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 83,681 58,323 (59,577)
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,800) 2,219 (24,080)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 103,028 100,809 124,889
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 100,228 $ 103,028 $ 100,809
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
Jefferson Bankshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995, and 1994
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jefferson Bankshares, Inc. ("the Corporation") is the bank holding
company for its subsidiary, Jefferson National Bank, and is headquartered in
Charlottesville, Virginia. Through its subsidiary bank, the Corporation delivers
financial services with a network of 95 offices covering many of the principal
markets of Virginia. The accounting and reporting policies of the Corporation
conform to generally accepted accounting principles and to general practice
within the banking industry.
A. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Corporation and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain previously reported amounts have been
reclassified to conform to current presentations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. INVESTMENT SECURITIES: In accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities, investment securities are reported in one of three categories:
Trading, Available for Sale, or Held to Maturity. Available for Sale securities
are reported in the Corporation's consolidated financial statements at fair
value. Unrealized gains and losses, net of the related tax effect, are excluded
from earnings and reported as a separate component of shareholders' equity until
realized. Held to Maturity securities are recorded at amortized cost. The
Corporation has no Trading securities.
Amortization of premiums and accretion of discounts are computed by the
level yield method. Realized gains and losses are computed using the specific
identification method.
C. LOANS: On January 1, 1995, the Corporation adopted SFAS No. 114, Accounting
by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosure. The
Statements require impaired loans to be measured at the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral.
Interest on some instalment loans and certain second mortgage loans is accrued
by a method that approximates the level yield method. Interest on all other
loans is accrued based upon the principal amounts outstanding. The accrual of
interest on loans is discontinued when the collection of principal or interest
is legally barred or considered highly unlikely. After a loan is classified
non-accrual, interest income is recognized only to the extent payments are
received.
The Corporation's subsidiary bank is in compliance with regulatory
policy that requires accrual of interest to be discontinued when principal or
interest is due and has remained unpaid for 90 days or more unless the loan is
both well secured and in the process of collection.
D. ALLOWANCE FOR LOAN LOSSES: The Corporation follows the allowance method in
providing for loan losses. Accordingly, all loan losses are charged to the
allowance for loan losses and all recoveries are credited to it.
Estimates of possible future losses involve the exercise
of management's judgment and assumptions with respect to future conditions.
Management utilizes these estimates and assumptions in conformity with generally
accepted accounting principles, and actual results could differ from these
estimates. The principal factors considered by management in determining the
adequacy of the allowance are size and composition of the loan portfolio,
historical loss experience, economic conditions, the value and adequacy of
collateral, guarantors, and the current level of the allowance.
E. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization charges
are computed principally by the straight-line method based upon the estimated
useful lives of the assets, except for leasehold improvements which are
amortized over the lives of the respective leases or the estimated useful lives
of the improvements, whichever is shorter. The costs of major renovations and
betterments are capitalized, while the costs of ordinary maintenance and repairs
are expensed as incurred.
F. FORECLOSED PROPERTIES: Foreclosed properties, classified in "Other assets" in
the accompanying consolidated balance sheets, consist primarily of real estate
held for resale which was acquired through foreclosure on loans secured by real
estate. Foreclosed properties are carried at the lower of cost or appraised
market value less estimated disposal costs. Writedowns to market value at the
date of foreclosure are charged to the allowance for loan losses. Subsequent
declines in market value are charged to expense. Management utilizes estimates
and assumptions in conformity with generally accepted accounting principles.
G. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill is amortized using the
straight-line method over fifteen years. Other acquired intangible assets, such
as the value of purchased core deposits, are amortized using the straight-line
method over the periods benefited, not exceeding fifteen years.
H. INCOME TAXES: The Corporation accounts for income taxes using the asset and
liability method as prescribed by SFAS No. 109, Accounting for Income Taxes.
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The Corporation and its subsidiaries file consolidated tax returns.
Each subsidiary provides for income taxes based upon its contribution to income
taxes (benefit) of the consolidated group.
I. COMMON STOCK: Shares of its own common stock reacquired by the Corporation
are cancelled as a matter of state law and are accounted for as authorized but
unissued shares.
J. EARNINGS PER COMMON SHARE: Earnings per common share amounts are calculated
by dividing net income by the daily average number of outstanding common shares.
Common share equivalents resulting from the incentive stock plan and stock
option plan are not used in the calculations because their effect is not
material.
K. PENSION PLAN: The Corporation has a non-contributory, trusteed defined
benefit pension plan covering salaried employees and some hourly employees
meeting certain age and service requirements. The net periodic pension cost
consists of the following components: service cost (benefits earned during the
year), interest costs on the projected benefit obligation, actual return on plan
assets, and the net amount resulting from the amortization and deferral of
certain items over 15 years. Due to its fully funded status, no contributions
were made to the plan in 1996, 1995, or 1994.
L. TRUST DIVISION: Securities and other property held by the Trust Division in a
fiduciary or agency capacity are not assets of the Corporation and, therefore,
are not included in the accompanying consolidated financial statements.
M. STATEMENTS OF CASH FLOWS: Cash and cash equivalents include cash and due from
banks and federal funds sold and other money market investments. During the
years ended December 31, 1996, 1995, and 1994, cash paid for interest was
$58,584,000, $57,226,000, and $45,302,000, and cash paid for income taxes was
$15,635,000, $12,591,000, and $11,748,000, respectively. During 1996, 1995, and
1994, other assets increased as a result of loan foreclosures in the amount of
$555,000, $1,269,000, and $1,534,000, respectively, representing non-cash
investing activities for purposes of the Consolidated Statements of Cash Flows.
NOTE 2: BUSINESS COMBINATIONS
In June 1995, Jefferson National Bank acquired the deposits associated
with the Waynesboro office of First Union National Bank and a Richmond office of
Virginia First Savings Bank. Approximately $35 million in deposit accounts were
transferred to Jefferson in these two transactions. The transactions resulted in
goodwill of $2.4 million.
On August 18, 1994, Bank of Loudoun (Loudoun) merged into Jefferson
National Bank. The Corporation issued 538,881 shares of its common stock in
exchange for all of the outstanding shares of common stock of Loudoun. The
merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements were restated to include the accounts and
transactions of Loudoun for all applicable periods.
On March 25, 1994, Jefferson National Bank purchased the deposit
liabilities of Liberty Federal Savings Bank (Liberty) from the Resolution Trust
Corporation. Liberty had two banking offices in Warrenton, Virginia and total
deposits of approximately $24 million. The transaction resulted in goodwill of
$2.0 million.
The transactions with First Union, Virginia First, and Liberty were
accounted for as purchases, and, accordingly, the accounts and transactions for
each entity are included in the Corporation's consolidated financial statements
subsequent to the respective merger dates.
NOTE 3: INVESTMENT SECURITIES
The Corporation adopted SFAS No. 115 on January 1, 1994. The effect of
adopting SFAS No. 115 was an increase in consolidated shareholders' equity of
$5,072,000 to reflect the net unrealized gains of securities classified as
Available for Sale.
The amortized cost, approximate fair values, and gross unrealized gains
and losses of investment securities are as follows:
(in thousands)
- -------------------------------------------------------------------------------
December 31 1996
- -------------------------------------------------------------------------------
SECURITIES - AVAILABLE FOR SALE
- -------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------
U.S. Treasury $174,104 $2,368 $ 396 $176,076
U.S. Government agencies 2,000 - 3 1,997
- -------------------------------------------------------------------------------
TOTAL $176,104 $2,368 $ 399 $178,073
- -------------------------------------------------------------------------------
SECURITIES - HELD TO MATURITY
- -------------------------------------------------------------------------------
U.S. Government agencies $212,808 $1,451 $ 847 $213,412
States and political
subdivisions 14,631 346 75 14,902
Corporate debt securities 195,331 1,185 368 196,148
Other securities 8,211 - - 8,211
- -------------------------------------------------------------------------------
TOTAL $430,981 $2,982 $1,290 $432,673
- -------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------
December 31 1995
- --------------------------------------------------------------------------
SECURITIES - AVAILABLE FOR SALE
- -------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------
U.S. Treasury $180,478 $4,794 $ 291 $184,981
U.S. Government agencies 2,747 - 37 2,710
Mortgage-backed securities 978 7 7 978
- -------------------------------------------------------------------------
TOTAL $184,203 $4,801 $ 335 $188,669
- -------------------------------------------------------------------------
SECURITIES - HELD TO MATURITY
- -------------------------------------------------------------------------
U.S. Treasury $ 972 $ 23 $ - $ 995
U.S. Government agencies 244,377 3,574 958 246,993
States and political
subdivisions 23,802 632 9 24,425
Corporate debt securities 180,320 1,864 275 181,909
Other securities 5,038 - - 5,038
- -------------------------------------------------------------------------
TOTAL $454,509 $6,093 $1,242 $459,360
- -------------------------------------------------------------------------
Proceeds from sales of securities Available for Sale were $979,000 in
1996, $11,347,000 in 1995, and $44,346,000 in 1994. Gross gains of $8,000 and
$1,166,000 were recorded in 1996 and 1994, respectively. Gross losses of $7,000
and $103,000 were recorded in 1996 and 1995, respectively.
There were no sales of Held to Maturity securities in 1996, 1995, or
1994. Proceeds from calls of Held to Maturity securities were $485,000 in 1996,
$148,000 in 1995, and $4,838,000 in 1994. Gross gains of $3,000 from calls of
securities Held to Maturity were recorded in 1996.
Investment securities having carrying values of $138,630,000 at
December 31, 1996 and $109,729,000 at December 31, 1995 were pledged to secure
deposits and for other purposes required by law.
The amortized cost and approximate fair values of investment securities
by contractual maturities at December 31, 1996 are shown in Table 12, Investment
Securities, in Management's Discussion and Analysis (MD&A).
NOTE 4: LOANS
The composition of the loan portfolio by loan classification
at December 31, 1996 and 1995 appears in Table 7, Loan Portfolio, in MD&A.
Balances of non-accrual loans and loans meeting the criteria of troubled debt
restructurings at December 31, 1996 and 1995 and the related income statement
effects for the years ended December 31, 1996, 1995, and 1994 appear in Table
10, Risk Elements, in MD&A.
Loans to directors and executive officers of the Corporation and its
significant subsidiaries, loans to companies in which they have a significant
interest, and loans to members of their immediate families are made on
substantially the same terms as those prevailing at the time for other loan
customers. Excluding loans aggregating less than $60,000 to any such person, his
or her interests, and immediate family members, the balances of such loans
outstanding were $23,426,000 and $20,842,000 at December 31, 1996 and 1995,
respectively. The changes in the balances from year-end 1995 to 1996 resulted
from additions during 1996 of $36,323,000 and collections amounting to
$33,739,000.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses for the
years ended December 31, 1996, 1995, and 1994 appears in Table 9, Summary of
Loan Loss Experience, in MD&A.
NOTE 6: INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31, 1996, 1995, and 1994 are as follows:
(in thousands)
- ----------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------
Current: Federal $15,474 $12,085 $11,619
State 69 28 6
- ----------------------------------------------------------------
15,543 12,113 11,625
Deferred (920) 172 (235)
- ----------------------------------------------------------------
Income tax expense $14,623 $12,285 $11,390
- ----------------------------------------------------------------
The provision for income tax expense is different from
the amount computed by applying the statutory corporate federal income tax rate
of 35 percent for the following reasons:
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
Provision for income tax
expense at statutory rate 35.0% 35.0% 35.0%
Increase (reduction) in income
taxes resulting from:
Tax-exempt interest (1.6) (2.3) (2.4)
Other, net 1.1 .4 .9
- -----------------------------------------------------------------
Income tax expense 34.5% 33.1% 33.5%
- -----------------------------------------------------------------
The effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows:
(in thousands)
- ----------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $5,130 $4,701
Deferred compensation 577 672
Other real estate owned 871 837
Other 2,279 2,626
- ----------------------------------------------------------------
Total gross deferred tax assets 8,857 8,836
- ----------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment 1,514 1,872
Unrealized gains on investment
securities available for sale 689 1,563
Prepaid pension costs 614 669
Other 582 1,068
- ----------------------------------------------------------------
Total gross deferred tax
liabilities 3,399 5,172
- ----------------------------------------------------------------
Net deferred tax asset
(included in other assets) $5,458 $3,664
- ----------------------------------------------------------------
At December 31, 1996, the Corporation has net operating loss
carryforwards obtained from previous business combinations for federal income
tax purposes of approximately $1.3 million which are available to offset future
federal taxable income, if any, through 2007. The Corporation has not recognized
a valuation allowance for the gross deferred tax asset recorded in the
accompanying 1996 and 1995 consolidated balance sheets since it is not dependent
on future earnings for recoverability.
NOTE 7: PREMISES AND EQUIPMENT
The Corporation's principal executive offices are located at 123 East
Main Street, Charlottesville, Virginia.
Premises and equipment at December 31, 1996 and 1995 are summarized as
follows:
(in thousands)
- -----------------------------------------------------------------
Estimated
Useful Lives
(Years) 1996 1995
- -----------------------------------------------------------------
Land - $ 11,283 $ 10,209
Buildings 30-50 49,418 47,764
Leasehold improvements 5-40 4,805 4,629
Furniture and equipment 3-12 53,245 47,953
- -----------------------------------------------------------------
118,751 110,555
Less accumulated depreciation
and amortization 62,977 58,245
- -----------------------------------------------------------------
Premises and equipment, net $ 55,774 $ 52,310
- -----------------------------------------------------------------
Depreciation and amortization of premises and equipment aggregated
$5,712,000 in 1996, $5,766,000 in 1995, and $5,723,000 in 1994.
At December 31, 1996, the Corporation leased 25 of its 95 banking
offices under operating lease agreements on terms ranging from 1 to 25 years
generally with renewal options up to 10 years. Supplementary office space and
equipment are leased on a short-term basis.
Rent expense charged to operations under operating lease agreements
totaled $1,207,000, $1,133,000, and $1,081,000 in 1996, 1995, and 1994,
respectively. The following is a schedule of future minimum rental payments, net
of subleases, required under non-cancelable operating leases that have initial
or remaining terms in excess of one year as of December 31, 1996:
(in thousands)
- -------------------------------------------------------------
Future
Minimum
Payments
- -------------------------------------------------------------
1997 $ 931
1998 803
1999 738
2000 496
2001 354
Later years 1,538
- -------------------------------------------------------------
$4,860
- -------------------------------------------------------------
Management expects that in the normal course of business most leases
will be renewed or replaced by other leases. Therefore, it is anticipated that
future annual rental expense will not be less than the amount shown for the year
ended December 31, 1996. Most of the leases provide that the Corporation pay
taxes, maintenance, insurance, and certain other operating expenses of the
leased assets. Leased property recorded under capital leases and the related
lease payment commitments are not material.
NOTE 8: COMMON STOCK AND EARNINGS PER SHARE
The daily average common shares outstanding used in computing earnings
per share were 14,982,442 in 1996, 15,181,152 in 1995, and 15,148,400 in 1994.
In November 1996, the Corporation completed a Modified Dutch Auction
Tender Offer in which it repurchased 1,235,690 shares of its common stock at $28
per share. The total purchase price, including associated transaction expenses,
was $35,102,000, which was recorded in the Consolidated Financial Statements as
a reduction in common stock at $2.50 par value and the remainder as a reduction
in retained earnings.
At December 31, 1996, 781,443 shares were reserved for use in the
Corporation's dividend reinvestment plan, and 226,501 shares were reserved for
the Corporation's employee stock purchase plan. At its December 1994 meeting,
the Board of Directors of Jefferson Bankshares, Inc. amended and restated the
Deferred Compensation and Stock Purchase Plan for Non-Employee Directors to
provide participants the option of investing in Jefferson Bankshares, Inc.
common stock. The Corporation has reserved 96,505 shares of common stock as of
December 31, 1996 for this purpose. During 1996, 9,538 shares were issued at
prices of $20.31-$29.31 per share. During 1995, 43,957 shares were issued at
prices of $21.13 - $23.25 per share. The shares are exercisable at the time the
director is no longer a member of the board.
NOTE 9: EMPLOYEE BENEFIT PLANS
The Corporation has a non-contributory, trusteed defined benefit
pension plan covering salaried employees and some hourly employees meeting
certain age and service requirements. Benefits are based upon years of service
and average compensation for the five highest paid years during the last 10
years of service, integrated with the Social Security tax base. Contributions
are made to the plan, up to the amount deductible for Federal income tax
purposes, based upon the amount actuarially determined to be necessary for
meeting plan obligations. Contributions are intended to provide not only for
benefits attributed to service to date, but also for benefits expected to be
earned in the future. Plan assets consist principally of marketable stocks and
corporate and U.S. Government debt obligations.
In the fourth quarter of 1995, the Corporation recognized a gain of
$1.9 million included in other non-interest income related to the annuitization
of certain pension liabilities valued at $8.7 million.
The following table sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheets as of December 31:
(in thousands)
- ------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------
Accumulated benefit obligation (includes
vested benefits of $15,579 for 1996
and $13,121 for 1995) $(16,634) $(14,068)
- ------------------------------------------------------------------
Projected benefit obligation for service
rendered to date $(20,993) $(18,430)
Plan assets at fair value 27,673 24,069
- ------------------------------------------------------------------
Plan assets in excess of projected benefit
obligation (funded status) 6,680 5,639
Unrecognized net gain (4,487) (3,196)
Unrecognized prior service cost 53 79
Unrecognized net asset being amortized
over 15 years (491) (613)
- ------------------------------------------------------------------
Prepaid pension cost (included
in other assets) $ 1,755 $ 1,909
- ------------------------------------------------------------------
Net pension cost (benefit) for 1996, 1995, and 1994 includes the
following components:
(in thousands)
- -----------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------
Service cost-benefits earned
during the year $ 979 $ 1,068 $ 1,061
Interest cost on projected
benefit obligation 1,408 1,902 1,714
Actual return on plan assets (3,965) (5,303) (1,256)
Net amortization and deferral 1,732 2,446 (1,464)
- -----------------------------------------------------------------
Net pension cost
for the year $ 154 $ 113 $ 55
- -----------------------------------------------------------------
The assumed discount rate was 7.75% in both 1996 and 1995, and the
expected rate of return was 9.50% and 9.00% for 1996 and 1995, respectively. The
assumed discount rate and expected rate of return were 7.25% and 9.25%,
respectively, for 1994. The weighted average rate of increase in future
compensation was assumed to be 4.00% in 1996 and 1995 and 5.25% in 1994.
The Corporation has a defined contribution profit-sharing plan covering
salaried employees and some hourly employees. Subject to certain limitations,
the Corporation contributes to the plan 5.25% of its consolidated net income
before taxes, adjusted as provided by the plan.
The Corporation also has an incentive stock plan under which awards of
units consisting of hypothetical shares of the Corporation's common stock were
made to senior officers and key employees. The plan became effective May 1,
1985, and the final awards were granted on May 31, 1994. The Corporation awarded
264,246 units under this plan of which 162,126 units had vested as of December
31, 1996. The remaining units will vest over the next three years. In 1996 and
1995, the Corporation issued 23,729 and 27,820 shares of common stock,
respectively, under this plan. The cost of the plan, based upon the market value
of the Corporation's common stock times the number of units awarded, is accrued
as salaries and employee benefits expense over the various vesting periods.
The costs of these major employee benefit plans included in salaries
and employee benefits expense are summarized as follows:
(in thousands)
- ----------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------
Pension $ 154 $ 113 $ 55
Profit sharing 2,464 2,114 1,890
Incentive stock 245 536 698
- ----------------------------------------------------------------
$2,863 $2,763 $2,643
- ----------------------------------------------------------------
The Corporation applies Accounting Principles Board Opinion 25 and
related interpretations in accounting for stock-based compensation plans.
Accordingly, no compensation cost has been recognized for the Corporation's
stock options. Had compensation cost been determined based on the fair value at
the grant dates consistent with the alternative method of SFAS No. 123, the
Corporation's net income and net income per share would have been reduced to the
proforma amounts indicated below. In accordance with the transition provisions
of SFAS No. 123, the proforma amounts reflect stock options with grant dates
subsequent to January 1, 1995.
(Dollars in thousands except per share data)
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
Net income As reported $27,801 $24,863
Proforma 27,674 24,791
Net income per share As reported 1.86 1.64
Proforma 1.85 1.63
- -----------------------------------------------------------------
Under its 1995 Long-Term Incentive Stock Plan (the 1995 Plan), the
Corporation may grant incentive and non-qualified stock options, stock
appreciation rights, restricted stock, or other stock unit awards to selected
employees. The Corporation may grant a maximum of 750,000 shares of its common
stock under the 1995 Plan with no more than 75,000 shares issued to any one
participant during any calendar year. The exercise price of each stock option
equals the market price of the Corporation's common stock on the date of grant.
An option's maximum term is 10 years. The options become exercisable at the rate
of 20% per year beginning one year from the date of grant.
For the purpose of computing the proforma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: dividend yields of
3.1% and 3.8%; expected volatility of 21% and 25%; a risk free interest rate of
6.4%; and an expected option life of 7 years from the date of grant.
The weighted average fair value of each option granted during 1996 and
1995 was $5.10 and $4.89, respectively. A summary of the status of the
Corporation's stock option plan as of December 31 and changes during the years
then ended is presented below:
- --------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- --------------------------------------------------------------------------
Outstanding, January 1 114,400 $19.938 - $ -
Granted 86,600 20.313 114,400 19.938
Exercised - - - -
Forfeited 4,000 20.313 - -
- --------------------------------------------------------------------------
Outstanding, December 31 197,000 $20.100 114,400 $19.938
Options exercisable
at year-end 22,880 $19.938 - $ -
- --------------------------------------------------------------------------
At December 31, 1996, the Corporation had 197,000 stock options
outstanding with a weighted average contractual life of 8.4 years.
NOTE 10: COMMITMENTS, CONTINGENT LIABILITIES,
OFF-BALANCE SHEET RISKS, AND OTHER MATTERS
The Corporation is a party to financial instruments which properly are
not reflected in the consolidated financial statements. These include
commitments to extend credit and letters of credit. These instruments involve
elements of credit and interest rate risk. Nonperformance or default by the
other party to loan commitments or standby letters of credit could result in a
financial loss to the Corporation equal to the amount of the loan commitments
and standby letters of credit. The same credit and collateral policies are used
by the Corporation in issuing these financial instruments as are used for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer under
a set of specified terms and conditions. Commitments generally have fixed
expiration dates or termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Loan commitments may be secured or unsecured. In the case of secured
commitments, collateral varies but may include commercial or residential
properties; business assets such as inventory, equipment, or accounts
receivable; securities; or other business or personal assets or guarantees. At
December 31, 1996, commitments to extend credit totaled $295,415,000.
Standby letters of credit are conditional commitments issued by the
Corporation or its subsidiaries to guarantee the performance of a customer to a
third party. The terms and risk of loss involved in issuing standby letters of
credit are similar to those involved in issuing loan commitments and extending
credit. At December 31, 1996, commitments outstanding under standby letters of
credit approximated $30,331,000.
The investment securities portfolio includes U.S. Treasury and U.S.
Government agency securities which may, on occasions, be loaned to securities
dealers designated as "Primary Government Dealers" by the Federal Reserve
System. Such loans of securities are secured by U.S. Treasury securities, U.S.
Government agency securities, or cash with a market value exceeding 102% of the
market value of securities lent. Such transactions may involve credit and
interest rate risk. At December 31, 1996, securities loaned totaled $1,000,000.
Various litigation is pending against the Corporation and its
subsidiaries. After reviewing these suits with counsel, management believes that
their ultimate resolution will not materially affect the consolidated financial
statements.
As a member of the Federal Reserve System, the Corporation's subsidiary
bank is required to maintain certain average reserve balances. For the final
weekly reporting period in the years ended December 31, 1996 and 1995, the
aggregate amounts of daily average required balances were approximately
$30,400,000 and $49,969,000, respectively.
The bank originates mortgage loans that are sold in
the secondary market. In connection with such activities, the Corporation
maintains fidelity bond insurance in the amount of $15,000,000 and errors and
omissions insurance of $2,500,000, which are in excess of required amounts.
NOTE 11: REGULATORY CAPITAL REQUIREMENTS
The Corporation and its bank subsidiary are subject to
certain regulatory capital requirements as set forth in Section 38 of the
Federal Deposit Insurance Act. Regulations define five capital categories and
specify certain minimum levels of capital required for each category. The
framework for determining capital adequacy measures tangible capital (equity
less certain intangible assets) relative to risk-weighted assets (assets
classified by risk with duly assigned weights) and to average assets. These
measures are quantified into ratios of Tier 1 and total capital to risk-weighted
assets and Tier 1 capital to average assets (Tier 1 leverage ratio). Tier 1
Capital is defined as shareholders' equity minus certain intangible assets. Tier
2 capital includes a certain amount of the allowance for loan losses and is
added to Tier 1 Capital to form total capital.
Under this framework, an undercapitalized institution is subject to
both mandatory and discretionary supervisory actions. An institution cannot pay
dividends, make capital distributions, or pay management fees to affiliates if
such payments cause the institution to become undercapitalized. In addition,
there are numerous other restrictions, prohibitions, and required or
discretionary regulatory actions that may be imposed if an institution is deemed
undercapitalized.
Management believes, at December 31, 1996, that the Corporation and the
bank meet all capital adequacy requirements to which they are subject. The most
recent notification from the Federal Reserve Bank for the Corporation and from
the Comptroller of the Currency for the bank categorize each as "well
capitalized." Management is not aware of any conditions or events that have
changed either institution's category since that notification.
Set forth below are the regulatory capital amounts and ratios for the
Corporation and the bank.
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------------------------------
Minimum Requirements for:
Actual Adequately Capitalized Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------------
<S> <C>
Tier 1 capital (to risk-
weighted assets)
Corporation $195,069 12.52% $ 62,341 4% $ 93,512 6%
Bank 179,609 11.59 62,013 4 493,019 6
Total capital (to risk-
weighted assets)
Corporation 209,725 13.46 124,682 8 155,853 10
Bank 194,265 12.53 124,026 8 155,032 10
Tier 1 capital
(to average assets)
Corporation 195,069 9.16 85,175 4 106,469 5
Bank 179,609 8.80 81,394 4 101,743 5
- -------------------------------------------------------------------------------------
December 31, 1995
- -------------------------------------------------------------------------------------
Tier 1 capital (to risk-
weighted assets)
Corporation $214,591 15.30% $ 56,109 4% $ 84,164 6%
Bank 199,776 14.33 55,783 4 69,729 6
Total capital (to risk-
weighted assets)
Corporation 228,023 16.26 112,219 8 140,274 10
Bank 213,208 15.29 111,566 8 139,458 10
Tier 1 capital
(to average assets)
Corporation 214,591 10.59 81,065 4 101,331 5
Bank 199,776 9.91 80,972 4 100,789 5
- -------------------------------------------------------------------------------------
</TABLE>
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, the following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
A. Cash and Due From Banks: The carrying amount is a reasonable estimate of fair
value.
B. Money Market Investments: For short-term instruments, the carrying amount is
a reasonable estimate of fair value. For instruments that mature in over 90
days, such as fixed-rate certificates of deposit, the fair value is estimated
based on the discounted cash flow of contractual cash flows using interest rates
currently offered for deposits of similar maturities.
C. Investment Securities: Fair values of investment securities are based on
quoted market prices or dealer quotes. In the absence of quoted market prices or
dealer quotes, fair value is estimated using quoted market prices for similar
securities, adjusted for differences between the quoted securities and the
securities being valued.
D. Loans: Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by loan type (such as
construction, mortgage, commercial, financial and agricultural, and consumer),
interest rate terms (such as fixed or adjustable), and estimated credit risk.
For certain loans, such as some residential mortgage loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of performing loans is estimated by discounting the future cash flows through
the estimated maturities using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The estimate of maturity is based on historical experience, with
repayments for each loan classification modified, as required, by an estimate of
the effect of current economic and lending conditions. Fair value for
significant non-performing loans is based on recent external appraisals. If
appraisals are not available, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower information.
E. Deposits: The fair value of demand deposits, interest-checking accounts,
regular savings accounts, and money market deposit accounts is the amount
payable on demand at the reporting date. The fair value of fixed maturity
certificates of deposit and certain other deposits is estimated based on the
discounted value of the contractual cash flows using the interest rates
currently offered for deposits of similar remaining maturities.
F. Short-Term Borrowings: The carrying values of federal funds purchased and
securities sold under agreements to repurchase and other short-term borrowings
are reasonable estimates of fair value.
G. Off-Balance Sheet Financial Instruments: The fair value of commitments to
extend credit is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and the
present credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates.
The fair value of standby letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
The carrying amount is a reasonable estimate of the fair value of
securities loaned.
At December 31, 1996, the carrying amounts and fair values of loan
commitments, standby letters of credit, and securities loaned are immaterial.
H. Limitations: Fair value estimates are made at a specific point in time based
on relevant market information and information about the financial instruments.
Because no market exists for a significant portion of the Corporation's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Corporation's entire holdings of a particular financial
instrument or groups of such instruments. Because these estimates are subjective
in nature and involve uncertainties and matters of discretionary judgment, they
cannot be determined with precision. Changes in assumptions could affect the
estimates significantly.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
liabilities, premises and equipment, and goodwill. In addition, tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
The carrying amounts and estimated fair values of the Corporation's
financial instruments are as follows:
(in thousands)
- --------------------------------------------------------------------
Carrying Fair
December 31, 1996 Amount Value
- --------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 100,228 $ 100,228
Investment securities:
Available for sale 178,073 178,073
Held to maturity 430,981 432,673
Loans, net 1,351,198 1,353,822
Financial liabilities:
Demand deposits and interest-bearing
transaction accounts 1,136,488 1,136,488
Certificates of deposit 754,621 759,900
Short-term borrowings 50,066 50,066
- --------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 88,028 $ 88,028
Federal funds sold and other money
market investments 15,000 15,000
Investment securities:
Available for sale 188,669 188,669
Held to maturity 454,509 459,360
Loans, net 1,206,989 1,231,503
Financial liabilities:
Demand deposits and interest-bearing
transaction accounts 1,094,348 1,094,348
Certificates of deposit 698,851 701,979
Short-term borrowings 16,118 16,118
Long-term debt 15 15
- --------------------------------------------------------------------
NOTE 13: PARENT COMPANY
The Parent Company, in the ordinary course of business, provides its
subsidiaries with certain centralized management services and staff support. The
cost of these services is allocated to each subsidiary based on analyses of the
services rendered. In addition, certain subsidiaries of Jefferson Bankshares,
Inc. have in the past borrowed funds from the Parent Company at rates
approximating the Parent Company's cost of borrowing. In addition, the Parent
Company guarantees certain leases for its subsidiaries.
The primary source of funds for the dividends paid by the Parent
Company is dividends received from its subsidiaries. The payment of such
dividends by the subsidiary bank and other nonbank subsidiaries and the ability
of the subsidiary bank to loan or advance funds to the Parent Company are
subject to certain statutory limitations. On December 31, 1996, 2 percent of
consolidated shareholders' equity was not so restricted. In addition, in 1996
the subsidiary bank received approval from the Comptroller of the Currency to
exceed the statutory limits on dividend payments to the Parent Company in 1997
and 1998. The request was made in consideration of special dividends paid by the
subsidiary bank to the Parent Company in 1996 to fund the tender offer.
Condensed financial information for the Parent Company follows:
Condensed Balance Sheets
- ----------------------------------------------------------------
Jefferson Bankshares, Inc. (Parent Company)
(in thousands)
- ----------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------
ASSETS
Cash $ 1,246 $ 492
Money market investments at
bank subsidiary 4,993 3,609
Investment securities--Held to maturity
(fair value of $4,075 in 1996 and
$5,092 in 1995) 4,012 4,987
Dividends receivable from subsidiaries 3,100 4,200
Investments in subsidiaries at equity:
Bank 187,900 210,953
Bank-related 4,109 4,011
- ----------------------------------------------------------------
192,009 214,964
Other assets 5,314 4,303
- ----------------------------------------------------------------
TOTAL ASSETS $210,674 $232,555
- ----------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities $ 6,360 $ 6,015
- ----------------------------------------------------------------
Shareholders' equity
Common stock 34,844 37,956
Capital surplus 48,720 47,623
Retained earnings 119,470 138,058
Unrealized gains on
securities available for sale of
Bank subsidiary, net 1,280 2,903
- ----------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 204,314 226,540
- ----------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $210,674 $232,555
- ----------------------------------------------------------------
Condensed Statements of Income
- ---------------------------------------------------------------------
Jefferson Bankshares, Inc. (Parent Company)
(in thousands)
- ---------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------
INCOME
Dividends from subsidiaries $ 48,180 $17,400 $10,560
Interest and fees from subsidiaries 3,178 2,897 2,717
Income on investment securities
held to maturity 201 192 -
Other income 205 100 100
- ---------------------------------------------------------------------
TOTAL INCOME 51,764 20,589 13,377
- ---------------------------------------------------------------------
EXPENSE
Interest expense 23 - 17
Salaries and employee benefits 1,972 1,849 1,892
Merger and acquisition expense 45 88 150
Other expense 800 732 852
- ---------------------------------------------------------------------
TOTAL EXPENSE 2,840 2,669 2,911
- ---------------------------------------------------------------------
Income before income tax expense
and equity in undistributed net
income of subsidiaries 48,924 17,920 10,466
Income tax expense 305 100 19
- ---------------------------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 48,619 17,820 10,447
Equity in undistributed net income
of subsidiaries (1) (20,818) 7,043 12,153
- ---------------------------------------------------------------------
NET INCOME $ 27,801 $24,863 $22,600
- ---------------------------------------------------------------------
(1) Amount in parentheses represents the excess of dividends declared over net
income of subsidiaries.
Condensed Statements of Cash Flows
- ----------------------------------------------------------------------
Jefferson Bankshares, Inc. (Parent Company)
(in thousands)
- ----------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 27,801 $ 24,863 $ 22,600
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 40 36 36
(Increase) decrease in dividends
receivable 1,100 (1,640) 160
Increase (decrease) in taxes
payable 103 407 (13)
Increase in deferred
tax asset (77) (103) (113)
Equity in undistributed net
income of subsidiaries 20,818 (7,043) (12,153)
Other, net (457) (416) (752)
- ----------------------------------------------------------------------
Total adjustments 21,527 (8,759) (12,835)
- ----------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 49,328 16,104 9,765
- ----------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of investment securities
held to maturity - (6,944) -
Proceeds from maturities of
investment securities held
to maturity 972 1,954 -
- ----------------------------------------------------------------------
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES 972 (4,990) -
- ----------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Net decrease in
short-term borrowings - - (265)
Repayment of long-term debt - - (900)
Proceeds from issuance of
common stock 1,243 1,489 2,761
Payments to acquire
common stock (36,582) (1,423) (1,416)
Dividends paid (12,823) (11,193) (10,034)
- ----------------------------------------------------------------------
NET CASH USED IN
FINANCING ACTIVITIES (48,162) (11,127) (9,854)
- ----------------------------------------------------------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,138 (13) (89)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,101 4,114 4,203
- ----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 6,239 $ 4,101 $ 4,114
- ----------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
Certified Public Accountants
1021 East Cary Street
Suite 1900
Richmond, Virginia 23219
The Board of Directors
Jefferson Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of
Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated 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
Bankshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
January 21, 1997
EXHIBIT 21
SUBSIDIARIES OF
JEFFERSON BANKSHARES, INC.
December 31, 1996
Jurisdiction in
Names Which Organized
----- ---------------
Direct
Indirect
Jefferson National Bank U.S.
Grace Insurance Agency, Incorporated Virginia
Charter Insurance Mangers, Inc. Virginia
Jefferson Financial, Inc. Virginia
Jefferson Properties, Inc. Virginia
EXHIBIT 23
KPMG Peat Marwick LLP
Suite 1900
1021 East Cary Street
Richmond, Virginia 23219
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Jefferson Bankshares, Inc.:
We consent to incorporation by reference in Registration Statement No. 33-56025
on Form S-3, Registration Statement No. 33-56121 on Form S-8, Registration
Statement No. 33-60799 on Form S-8, and Registration Statement No. 33-57461 on
Form S-8 of Jefferson Bankshares, Inc. of our report dated January 21, 1997
relating to the consolidated balance sheets of Jefferson Bankshares, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996, which report is
incorporated by reference in the December 31, 1996 annual report on Form 10-K of
Jefferson Bankshares, Inc.
KPMG Peat Marwick LLP
Richmond, Virginia
March 24, 1997
EXHIBIT 24
POWER OF ATTORNEY
FORM 10-K
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned Directors of
Jefferson Bankshares, Inc., a Virginia corporation, hereby constitute and
appoint O. Kenton McCartney, Allen T. Nelson, Jr. and William M. Watson, Jr., or
any of them, with full power to each of them to act alone, my true and lawful
attorneys-in-fact and agents, for me on my behalf and in my name, place and
stead, to execute and file the Annual Report on Form 10-K for Jefferson
Bankshares, Inc. for its fiscal year ended December 31, 1996, and any amendment
which such attorney- or attorneys-in-fact may deem appropriate or necessary.
Dated: January 28, 1997
John T. Casteen, III (Seal) J. A. Kessler, Jr. (Seal)
Lawrence S. Eagleburger (Seal) W. A. Rinehart, III (Seal)
Hunter Faulconer (Seal) Gilbert M. Rosenthal (Seal)
Fred L. Glaize, III (Seal) Alson H. Smith, Jr. (Seal)
Henry H. Harrell (Seal) H. A. Williamson, Jr. (Seal)
Alex J. Kay, Jr. (Seal)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 100,228
<INT-BEARING-DEPOSITS> 1,579,292
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 178,073
<INVESTMENTS-CARRYING> 430,981
<INVESTMENTS-MARKET> 432,673
<LOANS> 1,365,854
<ALLOWANCE> 14,656
<TOTAL-ASSETS> 2,161,825
<DEPOSITS> 1,891,109
<SHORT-TERM> 50,066
<LIABILITIES-OTHER> 16,336
<LONG-TERM> 0
0
0
<COMMON> 34,844
<OTHER-SE> 169,470
<TOTAL-LIABILITIES-AND-EQUITY> 2,161,825
<INTEREST-LOAN> 114,534
<INTEREST-INVEST> 38,385
<INTEREST-OTHER> 709
<INTEREST-TOTAL> 153,628
<INTEREST-DEPOSIT> 57,752
<INTEREST-EXPENSE> 59,046
<INTEREST-INCOME-NET> 94,582
<LOAN-LOSSES> 3,480
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 67,655
<INCOME-PRETAX> 42,424
<INCOME-PRE-EXTRAORDINARY> 27,801
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,801
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.86
<YIELD-ACTUAL> 5.00
<LOANS-NON> 4,608
<LOANS-PAST> 2,790
<LOANS-TROUBLED> 245
<LOANS-PROBLEM> 5,402
<ALLOWANCE-OPEN> 13,432
<CHARGE-OFFS> 2,941
<RECOVERIES> 685
<ALLOWANCE-CLOSE> 14,656
<ALLOWANCE-DOMESTIC> 11,944
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,712
</TABLE>
EXHIBIT 99
SECOND AMENDMENT
TO THE
JEFFERSON BANKSHARES, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Jefferson Bankshares, Inc. Employee Stock Purchase Plan (the
"Plan"), as amended as of September 26, 1995, is hereby further amended as
follows:
1. Section 3 of the Plan is amended by adding the following new
sentence at the end thereof:
The Plan shall be administered in a manner such that all Participating
Employees have the same rights and privileges (as determined in
accordance with Section 423(b)(5) of the Internal Revenue Code of 1986,
as amended).
2. Section 4 of the Plan is amended by adding the following new
sentence immediately after the first sentence thereof:
Notwithstanding the foregoing, an employee who owns Common Stock or
other stock of the Company, or stock of the Company's Parent or any
Subsidiary, that possesses five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company,
its Parent, or any Subsidiary, shall not be eligible to participate in
the Plan. The preceding sentence shall be applied in a manner
consistent with the provisions of Sections 423(b)(3) and 424 of the
Internal Revenue Code of 1986, as amended.
This Amendment is adopted as of January 28, 1997.
JEFFERSON BANKSHARES, INC.
/s/ O. Kenton McCartney
President and CEO
