<PAGE>
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]
For the transition period from ______________ to _______________
Commission File No. 0-21466
JEFFERSON SAVINGS BANCORP, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1625841
--------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
14915 MANCHESTER ROAD, BALLWIN, MISSOURI 63011
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 227-3000
Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of class)
PREFERRED SHARE PURCHASE RIGHTS
-------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 19, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was approximately $99.2 million based on the
closing sales price of $28.50 per share of the registrant's Common Stock on such
date as quoted on the Nasdaq National Market. For purposes of this calculation
only, it is assumed that directors, officers and beneficial owners of more than
5% of the registrant's outstanding voting stock are deemed affiliates.
Number of shares of Common Stock outstanding as of March 19, 1997: 4,969,382
DOCUMENTS INCORPORATED BY REFERENCE
The following is a list of the documents incorporated by reference and the Parts
of the Form 10-K into which such documents are incorporated:
1. Portions of Proxy Statement for 1997 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
- -----------------
JEFFERSON SAVINGS BANCORP, INC.
Jefferson Savings Bancorp, Inc. (the "Company") is the holding company for
Jefferson Savings and Loan Association, F.A. (the "Association") and First
Federal Savings Bank of North Texas (the "Bank"). The Company was originally
incorporated at the direction of the Board of Directors of the Association for
the purpose of becoming a holding company for the Association upon its
conversion from mutual to stock form which was consummated on April 8, 1993.
In 1995, the Company acquired all of the outstanding stock of North Texas
Savings and Loan Association, Denton, Texas ("North Texas"), First Federal
Savings Bank of Longview, Longview, Texas ("Longview") and Shelby-Panola Savings
Association, Carthage, Texas ("Shelby-Panola") in cash transactions accounted
for as purchases. At the time of these acquisitions, North Texas had five
branches and approximately $190.7 million in total assets, Longview had five
branches and approximately $134.5 million in total assets and Shelby-Panola had
one branch and total assets of approximately $55.6 million. Upon completion of
the acquisitions, North Texas, Longview and Shelby-Panola were consolidated
under a single federal charter and now operate as First Federal Savings Bank of
North Texas. The excess cost over fair value of net assets acquired in the
three 1995 acquisitions was approximately $15 million.
On December 30, 1996, the Company acquired Texas Heritage Savings
Association/Banc in Rowlett, Texas ("Texas Heritage") in exchange for $5.1
million in cash and 223,151 shares of the Company's common stock, par value $.01
per share (the "Common Stock"). At the date of acquisition, Texas Heritage's
total assets were $71.8 million, consisting primarily of loans receivable of
$56.0 million and mortgage-backed and investment securities of $7.3 million;
Texas Heritage's total deposits were $64.7 million. As a result of the Texas
Heritage acquisition, the Company added four branches in the suburban Dallas
counties of Dallas, Rockwall and Tarrant. The acquisition, which was funded by
Common Stock, available cash and borrowings, was accounted for using the
purchase method. The excess cost over fair value of net assets acquired was
approximately $6.3 million. Upon completion of the acquisition, Texas Heritage
was merged into the Bank. Under the purchase method of accounting, the results
of operations of Texas Heritage are included in the Company's results of
operations only since the date of its acquisition. Accordingly, the purchase of
Texas Heritage had no material impact on the Company's results of operations
during 1996.
On February 28, 1997, the Company acquired L&B Financial, Inc., the holding
company for Loan & Building State Savings Bank Sulphur Springs, Texas ("L&B
Financial") for a combination of approximately $15 million in cash and 549,000
shares of Common Stock. L&B Financial's total assets were approximately $141
million, consisting primarily of loans receivable of $70 million and mortgage-
backed and investment securities of $58 million; L&B Financial's total deposits
were $104 million. As a result of the L&B Financial acquisition, the Company
added six branches in the northeast Texas counties of Bowie, Camp, Franklin,
Hopkins, Morris and Titus. The acquisition was accounted for using the purchase
method. Upon completion of the acquisition, the operations of L&B Financial
were merged into the Bank.
The Company is currently classified as a multiple savings and loan holding
company subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury. Prior to its acquisition of the Association, the
Company had no assets and no liabilities and engaged in no business activities.
The Company currently does not engage in any significant activity other than
holding the stock of the Association and the Bank (collectively, the "Savings
Association Subsidiaries") and operating the business of a savings association
through the Savings Association Subsidiaries. Accordingly, the information set
forth in this report, including financial statements and related data, relates
primarily to the consolidated operations of the Association and the Bank and
their respective subsidiaries.
2
<PAGE>
The executive offices of the Company are located at 14915 Manchester Road,
Ballwin, Missouri 63011 and its main telephone number is (314) 227-3000.
THE SAVINGS ASSOCIATION SUBSIDIARIES
GENERAL. The principal business of the Savings Association Subsidiaries
consists of attracting deposits from the general public through a variety of
deposit programs and investing these funds in loans secured by first mortgages
on real estate located in their market areas. The Savings Association
Subsidiaries emphasize the origination of loans for the purchase or construction
of owner-occupied, single-family (one- to four-unit) residential properties.
The Savings Association Subsidiaries also promote the origination of home equity
loans as market conditions and local law permit. In addition, the Savings
Association Subsidiaries offer loans for the purchase or construction of
commercial real estate and loans for the acquisition and development of land for
residential purposes. To a limited extent, primarily as an accommodation to its
customers, the Association and the Bank originate consumer loans, including
automobile loans, education loans and loans secured by savings deposits.
The Savings Association Subsidiaries derive their income principally from
interest earned on loans and, to a lesser extent, loan servicing and other fees,
interest earned on investments, and, during recent fiscal years, gains on the
sale of loans. The Savings Association Subsidiaries' principal expenses are
interest expense on deposits and borrowings and noninterest expense such as
compensation and employee benefits, office occupancy expenses and other
miscellaneous expenses. Funds for these activities are provided principally by
deposits, borrowings, repayments of outstanding loans, sales of loans and
operating revenues.
The Savings Association Subsidiaries' deposits are insured by the Savings
Association Insurance Fund ("SAIF"), which is administered by the Federal
Deposit Insurance Corporation ("FDIC"), up to applicable limits for each
depositor. The Association is a member of the Federal Home Loan Bank ("FHLB")
of Des Moines and the Bank is a member of the FHLB of Dallas, which are two of
the 12 district banks comprising the FHLB System. The Savings Association
Subsidiaries are subject to comprehensive regulation and examination by the OTS
which is also the chartering authority for the Savings Association Subsidiaries.
The Savings Association Subsidiaries are also subject to comprehensive
examination, supervision and regulation by the FDIC. Such regulation is
intended primarily for the protection of depositors.
THE ASSOCIATION. The Association conducts its business through ten offices
located in the City of St. Louis, St. Louis County and St. Charles County. The
Association was originally founded in 1927 as a Missouri mutual savings
association. The Association converted to stock form in 1993 and converted to a
federal charter in 1995. With $685.2 million in assets at December 31, 1996,
the Association is the second largest savings association headquartered in the
State of Missouri. The Association's market area consists of the City of St.
Louis and St. Louis and St. Charles Counties, and, to a lesser extent, portions
of Jefferson County, all in the State of Missouri. At December 31, 1996, over
74.9% of the Association's total loan portfolio was secured by properties
located in the Association's market area and over 92.5% of the Association's
deposits were from residents of the Association's market area.
The St. Louis metropolitan area has a population of approximately 2.5
million, representing an increase of approximately 3% since 1980. The
unemployment rate for the St. Louis metropolitan statistical area was 4.1% for
the month of December 1996 which was significantly below the national average.
According to 1990 census figures, per capita income in the St. Louis
metropolitan statistical area was $15,681.
The region has a diversified economic base with an emphasis on service and
retail industries. The labor force, which numbered approximately 1.3 million in
1990, is largely concentrated in non-manufacturing industries, which represent
approximately 75% of the total labor force. Within the non-manufacturing
sector, service industries (excluding domestic service), retail trade and
federal, state and local government represent approximately 25%, 17% and 11%,
respectively, of the total labor force. Within the manufacturing sector, the
aircraft and food products industries represent approximately 3% and 2%,
respectively, of the total labor force, and the chemical, machinery,
3
<PAGE>
motor vehicle, printing and publishing and metals industries are approximately
equally represented, each employing less than 2% of the total labor force.
The St. Louis area ranks third in the United States based on the number of
Fortune 100 industrial corporations headquartered in the region, and ranks sixth
in the nation in terms of headquarters of companies listed among the Fortune 500
largest industrial and service corporations.
The Association's executive offices are located at 14915 Manchester Road,
Ballwin, Missouri 63011 and its main telephone number is (314) 227-3000.
THE BANK. The Bank was formed by the Company in 1995 through the merger of
Longview, North Texas and Shelby-Panola following their acquisition by the
Company. Subsequently, Texas Heritage and L&B Financial were merged into the
Bank following their acquisitions. The Bank's operations currently include:
(i) six offices in the suburban Dallas counties of Denton, Collin, Tarrant and
Wise, a market which North Texas had served since 1957; (ii) five offices in the
northeastern Texas counties of Gregg and Harrison, a market which Longview had
served since 1934; (iii) six offices in the northeastern Texas counties of
Bowie, Camp, Franklin, Hopkins, Morris and Titus, which L&B Financial had served
since 1890; (iv) four offices in the suburban Dallas counties of Dallas and
Rockwall, a market which Texas Heritage had served since 1984; and (v) one
office in Panola County which Shelby-Panola had served since 1956. Both the
suburban Dallas and the Northeast Texas areas have diversified economies and
have experienced population growth in recent years. With $462.6 million in
assets at December 31, 1996, the Bank is the tenth largest savings association
in the State of Texas.
The Bank's executive offices are located at 321 West Oak Street, Denton,
Texas and its main telephone number is (817) 382-9670.
RECENT LEGISLATIVE DEVELOPMENTS
During the quarter ended September 30, 1996, the Company incurred an after-
tax charge of $3.5 million as the result of the imposition of a special
assessment by the FDIC to recapitalize the SAIF. The FDIC operates two deposit
insurance funds: the Bank Insurance fund ("BIF") which generally insures the
deposits of commercial banks and the SAIF which generally insures the deposits
of savings associations. Because the reserves of the SAIF have been below
statutorily required minimums, institutions with SAIF-assessable deposits, like
the Association and the Bank, have been required to pay substantially higher
deposit insurance premiums than institutions with deposits insured by the BIF
for the past several semi-annual periods. In order to recapitalize the SAIF and
address the premium disparity, the recently-enacted Deposit Insurance Funds Act
of 1996 authorized the FDIC to impose a one-time special assessment on
institutions with SAIF-assessable deposits based on the amount determined by the
FDIC to be necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of 65.7 basis points based on the amount of their SAIF-
assessable deposits as of March 31, 1995.
The FDIC has proposed a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
best supervisory ratings would be reduced to zero and institutions in the worst
risk assessment classification will be assessed at the rate of 0.27% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions will be
required to pay assessments to the FDIC at the rate of 6.5 basis points to help
fund interest payments on certain bonds issued by the Financing Corporation
("FICO"), an agency of the federal government established to finance takeovers
of insolvent thrifts. During this period, BIF members will be assessed for FICO
obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF
and SAIF members will be assessed at the same rate for FICO payments.
The Deposit Insurance Funds Act of 1996 provides that the BIF and the SAIF
will be merged into a single Deposit Insurance Fund effective December 31, 1999
but only if there are no insured savings associations on that date. The
legislation directs the Department of Treasury to make recommendations to
Congress by March 31, 1997
4
<PAGE>
for the establishment of a single charter for banks and thrifts. The Company
cannot predict what the effect of any such legislation will be on the
Association and the Bank.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Company's loan portfolio totaled $885.4
million at December 31, 1996, representing 77.1% of total assets at that date.
At December 31, 1996, the loan portfolio of the Association totaled $515.6
million, or 75.2% of its assets, and the loan portfolio of the Bank totaled
$369.8 million, or 79.9% of its assets. It is the Company's policy to
concentrate its lending within the market areas of the Association and the Bank.
The Company estimates that approximately 89.2% of the Association's loans are
secured by properties in the State of Missouri and 90.2% of the Bank's loans are
secured by properties in the State of Texas.
Although the Company has in recent years increased its lending on
commercial real estate and its construction lending, the Company's loan
portfolio continues to consist primarily of loans secured by residential real
estate. At December 31, 1996, $623.8 million, or 63.5% of the total loan
portfolio, consisted of single-family, conventional residential mortgage loans,
which are loans that are neither insured by the Federal Housing Administration
("FHA") nor partially guaranteed by the Veterans Administration ("VA"). The
Company also makes conventional mortgage loans for the purpose of constructing
single-family residences. At December 31, 1996, loans for the construction and
development of single-family residential real estate totaled $164.3 million, or
16.7% of the Company's total loan portfolio. At December 31, 1996, the
remainder of the Company's portfolio of residential mortgage loans consisted
primarily of home equity lines of credit secured by mortgages on residential
real estate. Such loans totaled $44.9 million, or 4.6% of the total loan
portfolio, at December 31, 1996.
At December 31, 1996, loans secured by commercial real estate totaled
$134.5 million, or 13.7% of the total loan portfolio. Included in this amount
was approximately $53.0 million in loans for the acquisition and development of
real estate for construction of single-family dwellings primarily in Texas.
To a limited extent, the Savings Association Subsidiaries originate
consumer loans. Such loans, which primarily consist of automobile loans,
education loans and loans secured by savings deposits, totaled $8.7 million, or
0.9% of the Company's total loan portfolio at December 31, 1996.
5
<PAGE>
Set forth below is selected data relating to the composition of the
Company's loan portfolio by type of loan on the dates indicated. As of December
31, 1996, the Company had no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ---------------- ----------------- ----------------- ----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ------- -------- ------- --------- ------- --------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family (1).................. $623,754 63.51% $629,327 75.74% $501,307 84.98% $234,101 72.63% $204,224 70.00%
Home equity........................ 44,924 4.57 26,826 3.23 22,685 3.84 21,431 6.65 24,075 8.25
FHA insured/VA guaranteed.......... 968 0.10 1,065 0.13 931 0.16 1,203 0.37 1,554 0.53
Commercial......................... 134,532 13.70 72,194 8.69 56,192 9.52 58,382 18.11 55,702 19.09
Construction....................... 164,278 16.73 94,630 11.39 5,945 1.67 5,385 1.67 5,388 1.85
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans........ 968,456 98.61 824,042 99.18 587,060 99.51 320,502 99.43 290,943 99.72
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial........................... 5,000 0.51 2,000 0.24 2,000 0.34 1,000 0.31 -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Automobile......................... 1,649 0.17 875 0.10 148 0.02 188 0.06 221 0.08
Loans secured by savings deposits.. 3,658 0.37 3,410 0.41 297 0.05 240 0.07 267 0.09
Education.......................... 178 0.02 229 0.03 224 0.04 254 0.08 277 0.08
Other.............................. 3,195 0.32 341 0.04 213 0.04 151 0.05 48 0.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans........... 8,680 0.88 4,855 0.58 882 0.15 833 0.26 813 0.28
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable....... 982,136 100.00% 830,897 100.00% 589,942 100.00% 322,353 100.00% 291,756 100.00%
====== ====== ====== ====== ======
Add (deduct):
Loans in process................... (89,573) (38,458) (3,755) (5,380) (2,914)
Unearned (discounts) premiums, net. (1,786) (621) 111 115 (38)
Deferred loan costs (fees), net.... 1,157 1,363 2,163 (362) (726)
Allowance for losses............... (6,529) (5,096) (3,471) (3,190) (2,974)
-------- -------- -------- -------- --------
Loans receivable, net.......... $885,405 $788,085 $584,990 $313,518 $285,104
======== ======== ======== ======== ========
</TABLE>
- -------------------
(1) Includes loans held for sale of $2,821,000, $1,787,000, $752,000 and
$610,000 at December 31, 1996, 1995, 1993 and 1992, respectively.
6
<PAGE>
LOAN PORTFOLIO SENSITIVITY. The following table sets forth certain
information as of December 31, 1996 regarding the dollar amount of loans
maturing in the Company's portfolio, including scheduled repayments of
principal, based on contractual terms to maturity. Demand loans, loans having
no schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. The table below does not include any estimate of
prepayments, which significantly shorten the average life of all mortgage loans
and may cause the Company's actual repayment experience to differ from that
shown below.
<TABLE>
<CAPTION>
DUE AFTER
DUE WITHIN ONE THROUGH DUE AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential real estate.. $ 26,174 $ 91,871 $551,601 $669,646
Commercial real estate... 73,126 32,730 28,676 134,532
Construction............. 161,449 2,829 -- 164,278
Commercial............... 5,000 -- -- 5,000
Consumer................. 5,190 2,768 722 8,680
-------- -------- -------- --------
Total................... $270,939 $130,198 $580,999 $982,136
======== ======== ======== ========
</TABLE>
The following table sets forth as of December 31, 1996 the dollar
amount of the loans maturing subsequent to the year ending December 31, 1997
broken down between those with predetermined interest rates and those with
adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATES ADJUSTABLE RATES TOTAL
------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Residential real estate.. $130,025 $513,447 $643,472
Commercial real estate... 15,430 45,976 61,406
Construction............. 2,164 665 2,829
Commercial............... -- -- --
======== ======== ========
Consumer................. 2,836 654 3,490
-------- -------- --------
Total................... $150,455 $560,742 $711,197
======== ======== ========
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Company the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decreases when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. Residential mortgage loan
originations are attributable to referrals from commissioned loan
representatives, depositors, walk-in customers, advertising and referrals from
real estate brokers and developers. The Company also uses commissioned loan
representatives for the origination of residential construction loans.
Commercial real estate loan originations are attributable largely to the
Company's reputation and its long-standing ties to builders in its market areas.
All loan applications are evaluated by the loan division to ensure compliance
with the Company's underwriting standards. See " -- Loan Underwriting Policies."
7
<PAGE>
In order to increase loan originations, the Company in 1993 commenced a loan
origination program utilizing commissioned representatives to identify single-
family mortgage loan origination opportunities in the Association's market area.
Loan representatives are paid commissions on all loans originated by the
Association pursuant to their referrals. No loans may be originated by the
Association pursuant to this program unless the borrower meets the same
underwriting criteria as applied to the Association's other single-family
mortgage loans. The Company has instituted a similar program at the Bank and
recently extended the use of commissioned loan representatives to the
identification of residential construction lending opportunities.
To further supplement originations, the Company has in the past undertaken
residential mortgage loan purchases both on a bulk and an individual loan basis.
All such loans were underwritten using the same underwriting guidelines as are
applied to direct originations and were generally secured by properties in the
Company's market area. Because of the increased level of originations generated
by the commissioned loan representatives in recent years, however, the Company
has de-emphasized loan purchases.
As a result of its acquisitions of Longview, North Texas and Shelby-Panola
during fiscal year 1995, the Company increased its loan portfolio by $208.3
million after purchase accounting adjustments. The Company added $56.0 million
in loans to the portfolio through its purchase of Texas Heritage in 1996. The
resulting premiums and discounts are being amortized or accreted to income
consistent with the accounting policies of the Company.
The Savings Association Subsidiaries sell whole loans to institutional
investors, principally to the Federal Home Loan Mortgage Corporation ("FHLMC").
The bulk of such loan sales have consisted of long-term, fixed-rate mortgage
loans which have been sold in furtherance of the Company's goal of better
matching the maturities and interest rate sensitivity of its assets and
liabilities. Depending on market trends, the Savings Association Subsidiaries
may obtain a purchase commitment from the institutional investor prior to
committing to an interest rate to the borrower. In connection with the
origination of the loan, the Savings Association Subsidiaries have traditionally
charged an origination fee of between one and two points, which the Association
retained upon the sale of the related loans.
8
<PAGE>
The following table sets forth certain information with respect to the loan
origination, purchase and sale activity of the Company during the periods
indicated, including loans acquired in business combinations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction.................................. $188,304 $ 72,104 $ 8,948
Single-family................................. 66,754 65,847 101,303
Home equity................................... 37,130 13,497 11,855
FHA insured/VA guaranteed..................... 793 1,352 --
Commercial real estate........................ 57,905 8,027 6,054
Commercial...................................... 3,418 -- 1,822
Consumer........................................ 3,842 1,311 469
-------- -------- --------
Total loans originated...................... 358,146 162,138 130,451
-------- -------- --------
Loans purchased:
Real estate loans:
Single-family................................. 8,644 25,431 225,609
Commercial.................................... 473 1,000 --
Construction.................................. -- 971 --
-------- -------- --------
Total loans purchased....................... 9,117 27,402 225,609
-------- -------- --------
Loans acquired in business combinations:
Real estate loans:
Construction.................................. 23,311 33,006 --
Single-family................................. 28,141 152,703 --
Home improvement.............................. -- 1,065 --
FHA insured/VA guaranteed..................... 286 450 --
Commercial real estate........................ 13,453 19,961 --
Consumer........................................ 2,181 4,297 --
Less allowance for loss, unearned discount and
deferred fees................................. (11,333) (3,152) --
-------- -------- --------
Total loans acquired in acquisitions.......... 56,039 208,330 --
-------- -------- --------
Loans sold:
Residential real estate......................... 32,893 27,190 13,826
Commercial real estate.......................... -- 1,157 --
-------- -------- --------
Total loans sold.............................. 32,893 28,347 13,826
-------- -------- --------
Principal repayments.............................. 290,969 165,052 71,144
Decrease (increase) in other items, net........... (2,120) (1,376) 382
-------- -------- --------
Net increase...................................... $ 97,320 $203,095 $271,472
======== ======== ========
</TABLE>
9
<PAGE>
LOAN UNDERWRITING POLICIES. The Savings Association Subsidiaries' lending
activities are subject to written, non-discriminatory underwriting standards and
loan origination procedures prescribed by the Savings Association Subsidiaries'
respective Boards of Directors and management. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements and confirmations. Property valuations are performed by
independent outside appraisers approved by the Savings Association Subsidiaries'
Boards of Directors. All loans must be approved by at least two members of the
Management Loan Committee, which consists of the Senior Vice President/Senior
Lending Officer and two Loan Officers. Loans of up to $200,000 may be approved
by the two Loan Officers. Approval of the full Management Loan Committee is
required for any loan between $200,000 and $500,000. Any loan in excess of
$500,000 must be approved by the respective Board of Directors.
The Savings Association Subsidiaries' policies are to record a lien on the
real estate securing the loan and to obtain a title insurance policy which
insures that the property is free of prior encumbrances. Borrowers must also
obtain hazard insurance policies prior to closing and, when the property is in
an area designated as a flood plain by the Department of Housing and Urban
Development, paid flood insurance policies. Most borrowers are also required to
advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Savings Association
Subsidiaries make disbursements for items such as real estate taxes.
Applications for fixed-rate, single-family real estate loans are underwritten
and closed in accordance with FHLMC and Federal National Mortgage Association
("FNMA") standards, and other loan applications are underwritten and closed
based on the Savings Association Subsidiaries' own loan guidelines, which
generally conform to FHLMC and FNMA standards. Fixed-rate, single-family real
estate loans having contractual maturities of greater than 15 years currently
are sold to institutional investors. Residential and commercial mortgage loans
are required to have title searches, title insurance, and fire and extended
coverage insurance.
Upon receipt of a loan application from a prospective borrower, a credit
report and verifications are ordered to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate intended to secure the proposed loan is undertaken by a fee
appraiser approved by the Savings Association Subsidiaries.
The Savings Association Subsidiaries are permitted to lend up to 100% of the
appraised value of the real property securing a mortgage loan. However, if the
amount of a residential loan originated or refinanced exceeds 90% of the
appraised value, the Savings Association Subsidiaries are required by federal
regulations to obtain private mortgage insurance on that portion of the
principal amount of the loan that exceeds 80% of the appraised value of the
property. The Savings Association Subsidiaries will make a single-family
residential mortgage loan with up to a 95% loan-to-value ratio if the required
private mortgage insurance is obtained. The Savings Association Subsidiaries
generally limit the loan-to-value ratio on commercial real estate mortgage loans
to 80%. The federal banking agencies, including the OTS, have adopted
regulations establishing new loan-to-value ratio requirements for specific
categories of real estate loans.
Under federal law, the Association and the Bank may not make loans to a
single borrower aggregating in excess of 15% of their respective unimpaired
capital and unimpaired surplus.
Interest rates charged on loans are affected principally by competitive
factors, the demand for such loans and the supply of funds available for lending
purposes and, in the case of fixed-rate, single-family residential loans, rates
established by FHLMC. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including those of the
Federal Reserve Board, legislative and tax policies and government budgetary
matters.
RESIDENTIAL REAL ESTATE LENDING. The Savings Association Subsidiaries
historically have been and continue to be originators of single-family,
residential real estate loans in their respective market areas. The Savings
Association Subsidiaries currently originate fixed-rate, residential mortgage
loans in accordance with underwriting guidelines promulgated by FHLMC and FNMA
and adjustable-rate mortgage loans for terms of up to 30 years. At December 31,
1996, single-family, residential mortgage loans, including FHA/VA loans but
excluding home equity
10
<PAGE>
loans, totaled $624.7 million, or 63.6% of the Company's total loan portfolio,
of which approximately $489.4 million, or 78.3%, bore adjustable rates of
interest.
The Savings Association Subsidiaries offer adjustable-rate residential
mortgage loans with interest rates which adjust annually based upon changes in
an index based on the weekly average yield on U.S. Treasury securities adjusted
to a constant comparable maturity of one year, as made available by the Federal
Reserve Board (the "Treasury Index"), plus a margin of 2.75%. The amount of any
increase or decrease in the interest rate presently is limited to two percentage
points per year, with a maximum adjustment of 6.00% over the initial loan rate.
These limitations may vary with market conditions. The Company estimates that
the maximum rate to which the adjustable-rate mortgage loans currently held in
portfolio could adjust would not exceed 12.875% per annum as a result of current
contractual limits on aggregate rate increases. The adjustable-rate mortgage
loans offered by the Savings Association Subsidiaries, as well as many other
savings institutions, provide for initial rates of interest below the rates
which would prevail when the index used for repricing is applied. However,
loans are underwritten on the basis of the borrower's ability to pay at the rate
which would be in effect without the discount.
The Company's loan portfolio also includes residential mortgage loans with
interest rate adjustments indexed to published cost-of-funds indices for thrift
institutions in various FHLB districts. Due to delays in the publishing of
these indices, the interest rates on loans so indexed do not adjust as quickly
as loans indexed to the Treasury Index and, for that reason, the Savings
Association Subsidiaries no longer originate or purchase such loans. At
December 31, 1996, the Savings Association Subsidiaries held approximately $45.4
million in adjustable-rate loans and mortgage-backed securities indexed to
various cost-of-funds indices.
The retention of adjustable-rate mortgage loans in the Company's loan
portfolio helps reduce the Company's exposure to changes in interest rates.
However, there are unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates,
the risk of default on adjustable-rate mortgage loans may increase due to the
upward adjustment of interest costs to the borrower. Further, the adjustable-
rate mortgages originated by the Company generally provide for initial rates of
interest below the rates which would apply were the index used for pricing
applied initially. These loans are subject to increased risk of delinquency or
default as the higher, fully-indexed rate of interest subsequently comes into
effect, replacing the lower initial rate. Although adjustable-rate mortgage
loans allow the Company to increase the sensitivity of its asset base to changes
in interest rates, the extent of this interest rate sensitivity is limited by
the periodic and lifetime interest rate adjustment limitations. Accordingly,
there can be no assurance that yields on the Company's adjustable-rate mortgages
will adjust sufficiently to compensate for increases in the Company's cost of
funds. Because borrowers may generally prepay adjustable-rate residential
mortgage loans without penalty, such mortgages expose the Company to prepayment
risk in a declining interest rate environment.
The Savings Association Subsidiaries also originate conventional fixed-rate
mortgage loans secured by single-family residential properties. All fixed-rate
loans are underwritten according to FHLMC and FNMA guidelines, utilizing their
approved documents, so that the loans qualify for sale in the secondary mortgage
market.
HOME EQUITY LENDING. Home equity loans are generally made on the security of
residences and normally do not exceed 80% of the appraised value of the
residence, less the outstanding principal of the first mortgage, and have terms
of up to ten years. The Company's home equity loans require the payment of
interest only until maturity when unpaid principal is due. Because Texas law
currently restricts the creation of any lien on a primary residence other than a
first lien, the Company does not offer home equity loans in Texas. At December
31, 1996, total outstanding home equity loans totaled $44.9 million, or 4.6% of
the Company's total loan portfolio.
COMMERCIAL REAL ESTATE LENDING. The Company currently originates commercial
real estate loans which are generally secured by apartments, retail stores,
hotels, office buildings, warehouses and other income-producing commercial
property. The Company's commercial loan portfolio also includes loans for the
acquisition and development of land for the construction of single-family
residences.
11
<PAGE>
At December 31, 1996, the principal concentrations in the Company's
commercial real estate loan portfolio were as follows:
<TABLE>
<CAPTION>
AMOUNT
TYPE OF LOAN (IN THOUSANDS)
- ------------ --------------
<S> <C>
Acquisition, development and construction.. $ 61,315
Office buildings........................... 34,783
Multi-family............................... 16,212
Hotels and restaurants..................... 4,113
Other...................................... 18,109
--------
$134,532
=========
</TABLE>
The Company's three largest commercial real estate loans at December 31, 1996
were a $5.4 million acquisition and development loan secured by a single-family
subdivision development located in Tarrant County, Texas, a $4.3 million loan
secured by a retail shopping center located in St. Louis County, and a $4.4
million loan secured by a single-family subdivision development located in
Collin County, Texas. At December 31, 1996, the Company's ten largest commercial
real estate loans amounted to $36.8 million, or 27.3% of the Company's portfolio
of commercial real estate loans. All ten of these loans were current at December
31, 1996.
At December 31, 1996, commercial real estate loans totaled $134.5 million, or
13.7% of the Company's total loan portfolio, as compared to $72.2 million, or
8.7%, at December 31, 1995. The Company originated $6.1 million, $8.0 million
and $57.9 million of commercial real estate loans during the years ended
December 31, 1994, 1995 and 1996, respectively.
The Company's commercial real estate loans have a maximum term and
amortization of 30 years, but typically have balloon terms ranging from five to
ten years. Commercial real estate loans generally are made with interest rates
that adjust annually or more frequently based upon changes in the Treasury Index
or other index utilized, including prime rate and cost of funds indices, plus a
negotiated margin.
Commercial real estate lending entails significant additional risks as
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly impacted by supply and demand conditions in the market for office
and retail space, and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. To minimize these risks, the Company
generally limits itself to its market area and to borrowers with which it has
substantial experience or who are otherwise well known to the Company. It is the
Company's current policy to obtain personal guarantees and annual financial
statements from all principals obtaining commercial real estate loans. The
Company inspects the properties securing commercial real estate loans at least
annually and also reviews all commercial real estate loans in excess of $500,000
on an annual basis to ensure that the loan meets current underwriting standards.
Under federal law, the aggregate amount of loans which a savings association
may make on the security of liens on non-residential real property may not
exceed 400% of the institution's capital. Under this standard, at December 31,
1996, the Association was permitted to invest in nonresidential real property
loans in an aggregate amount equal to $176.2 million and the Bank was permitted
to invest an aggregate amount equal to $100.0 million.
CONSTRUCTION LENDING. Through the Savings Association Subsidiaries, the
Company engages in construction lending to qualified borrowers for construction
of single-family residential properties. These properties are primarily located
in the Company's market areas. At December 31, 1996, the Company's loan
portfolio included $164.3 million in construction loans all of which were for
the construction or development of single-family homes. Generally, loans for the
construction of owner-occupied, single-family residential properties are made on
an adjustable-rate basis and for terms of from six to 12 months, during which
time the borrower is required to make monthly payments of accrued interest on
the outstanding loan balance. All construction loans are secured by a first
12
<PAGE>
lien on the property under construction. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. Construction
loans generally have a maximum loan-to-value ratio of 80%. At December 31,
1996, there were no construction loans with a loan-to-value ratio in excess of
80%. Borrowers must satisfy all credit requirements which would apply to the
Savings Association Subsidiaries' permanent mortgage loan financing for the
subject property.
The Company makes construction loans both to individuals building their
primary or secondary residences and to selected local developers for the
construction of single-family dwellings. The Company generally limits its
exposure to any single developer to $4.0 million unless the Company has had
significant past experience with the developer.
Prior to making a commitment to fund a construction loan, the Company
requires both an appraisal of the property by appraisers approved by the Board
of Directors of the Association or the Bank, as the case may be, and a study of
the feasibility of the proposed project. The Company uses appraisers meeting
federal and state certification standards on all of its commercial construction
loans. The Company also reviews and inspects each project at the commencement of
construction and during the term of the construction loan.
Construction financing generally is considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Company may be required to advance funds beyond the amount originally committed
to permit completion of the development. If the estimate of value proves to be
inaccurate, the Company may be confronted, at or prior to the maturity of the
loan, with a project having a value which is insufficient to assure full
repayment. The ability of a developer to sell developed lots or completed
dwelling units will depend on, among other things, demand, pricing, availability
of comparable properties and economic conditions.
CONSUMER LENDING. The Company does not emphasize consumer loans, but
originates such loans as an accommodation to its customers. The consumer loans
originated by the Company include automobile loans, education loans and loans
secured by savings deposits. In the Texas market, the Bank originates home
improvement loans as consumer loans because Texas law currently restricts the
Bank from taking a mortgage on the borrower's home in connection with such
transactions. At December 31, 1996, consumer loans totaled $8.7 million, or 0.9%
of the Company's total loan portfolio.
Automobile loans are secured by both new and late-model used cars and are
generally limited to 80% of the "sticker price" or purchase price, whichever is
lower, or the loan value as published by the National Automobile Dealers
Association. Automobile loans are only made to the borrower-owner on a direct
basis. New cars are financed for a period of up to 60 months, while used cars
are financed for 48 months or less. Collision insurance is required for all
automobile loans.
The Company makes savings deposit loans for up to 100% of the depositor's
savings deposit balance. The interest rate is normally two percentage points
above the rate paid on the savings account, and the account must be pledged as
collateral to secure the loan. Savings deposit loans are payable on demand.
Interest is billed on a monthly or quarterly basis. At December 31, 1996, total
loans on savings deposits were $3.7 million, or 0.4% of the total loan
portfolio.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
13
<PAGE>
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Company, and a borrower may be able to assert
against such assignee claims and defenses which it has against the seller of the
underlying collateral. The risks associated with consumer loans is minimized
due to the relatively small amount of consumer loans originated by the Company.
In underwriting consumer loans, the Company places primary emphasis on the
borrower's credit history and an analysis of the borrower's income and expenses,
perceived ability to repay the loan and the value of the collateral, if any. At
December 31, 1996, $232,000 of the Company's consumer loans were 90 days or more
delinquent. The Company's policy is generally to fully provide for losses in
consumer loans not secured by real property at such time as the loan becomes
greater than 90 days delinquent.
COMMERCIAL LENDING. The Association and the Bank are also authorized to
invest up to 20% of their respective assets in loans for commercial, corporate,
business or agricultural purposes but have traditionally not engaged in this
form of lending. The Association has extended warehouse lines of credit totaling
$5.0 million at December 31, 1996 to two local mortgage brokers. Under these
arrangements, the Association provides temporary funding for residential first
mortgage loans originated by the mortgage brokers until the brokers can deliver
the loans for resale in the secondary market. The lines of credit are secured by
assignments of the notes underlying the mortgage loans.
LOAN FEES AND SERVICING. In addition to interest earned on loans, the Company
receives fees in connection with loan commitments and originations, loan
modifications, late payments and changes of property ownership and for
miscellaneous services related to its loans. Loan origination fees are
calculated as a percentage of the loan principal. Depending on market
conditions, the Company may receive fees of up to two points (one point being
equivalent to 1% of the principal amount of the loan) in connection with the
origination of fixed-rate and adjustable-rate residential mortgage loans. All
loan origination fees and the related incremental direct costs of originating
loans are deferred and amortized over the contractual life of the loan using the
interest method. If a loan is prepaid, refinanced or sold, all remaining net
deferred fees with respect to such loan are taken into income at such time. See
Note 1 of Notes to Consolidated Financial Statements.
In addition to the foregoing fees, the Company receives fees for servicing
loans which have been sold to other financial institutions or to FHLMC or FNMA.
Servicing activities include the collection and processing of mortgage payments,
accounting for loan funds and paying real estate taxes, hazard insurance and
other loan-related expenses out of escrowed funds. As compensation for these
services, the Company is generally permitted to retain a portion of the monthly
payment. Loan servicing fees have not been a significant source of income for
the Company. At December 31, 1996, the Company was servicing approximately $58.0
million in loans sold to others, all of which were residential mortgage loans.
Income from these activities varies from period to period with the volume and
type of loans originated, sold and purchased, which in turn is dependent on
prevailing mortgage interest rates and their effect on the demand for loans in
the Company's market areas.
NONPERFORMING LOANS AND OTHER PROBLEM ASSETS. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Company takes immediate steps to have the delinquency cured and the loan
restored to current status. Loans which are delinquent 15 days incur a late fee
of 5% of principal and interest due. As a matter of policy, the Company will
contact the borrower after the loan has been delinquent 15 days. If payment is
not promptly received, the borrower is contacted again, and efforts are made to
formulate an affirmative plan to cure the delinquency. The Company will send a
Company officer to the property before a loan payment becomes 45 days past due.
If a delinquency exceeds 60 days in the case of a residential mortgage loan, 30
days in the case of a construction loan or 30-60 days for a loan on commercial
real estate, the Company will institute additional measures to enforce its
remedies resulting from the loan's default, including commencing foreclosure
action. After any loan is delinquent 60 days or more, formal legal proceedings
are commenced to collect amounts owed.
14
<PAGE>
After residential mortgage loans become past due more than 90 days, the
Company generally establishes an allowance in the amount of uncollected
interest. Commercial real estate loans generally are placed on nonaccrual status
if the loan becomes past due more than 90 days, or management concludes that
payment in full is not likely. Consumer loans are generally charged off, or any
expected loss is reserved for, after they become more than 90 days past due.
Loans are charged off when management concludes that they are uncollectible.
Real estate acquired by the Company as a result of foreclosure is classified
as real estate acquired through foreclosure until such time as it is sold. When
such property is acquired, it is recorded at its fair market value. Any required
write-down of the loan to its fair market value upon foreclosure is charged
against the allowance for loan losses. See Notes 1 and 7 of Notes to
Consolidated Financial Statements included under Item 8 hereof.
The following table sets forth information with respect to the Company's
nonperforming assets. At the dates indicated, there were no accruing loans 90
days or more past due.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Restructured loans (1).................. $ 179 $ 546 $ -- $ -- $ 3,230
------ ------ ------ ------ -------
Nonaccruing loans:
Residential real estate............... $1,169 $1,687 $ 249 $ 192 $ 570
Commercial real estate................ -- 26 -- -- --
Construction.......................... 11 707 -- -- --
Commercial............................ 74 15 -- -- --
Consumer.............................. 232 42 -- -- 22
------ ------ ------ ------ -------
Total nonaccruing loans............. 1,486 2,477 249 192 592
Applicable allowance for losses..... (43) -- -- -- --
------ ------ ------ ------ -------
Nonaccruing loans, net.......... 1,443 2,477 249 192 592
------ ------ ------ ------ -------
Total restructured and
nonaccruing loans, net...... 1,622 3,023 249 192 3,822
------ ------ ------ ------ -------
Nonperforming loans, net as a
percentage of net loans....... 0.18% 0.38% 0.04% 0.06% 1.34%
====== ====== ====== ====== =======
Foreclosed assets:
Residential........................... $1,584 $ 436 $ 70 $ 605 $ 604
Commercial............................ 1,195 3,163 3,002 7,464 7,881
Construction.......................... 2,115 343 -- -- --
Commercial............................ -- -- -- -- --
------ ------ ------ ------ -------
Total foreclosed assets............. 4,894 3,942 3,072 8,069 8,485
Applicable allowance for losses..... (434) (272) (455) (457) (730)
------ ------ ------ ------ -------
Foreclosed assets, net.......... 4,460 3,670 2,617 7,612 7,755
------ ------ ------ ------ -------
Nonperforming assets, net....... $6,082 $6,693 $2,866 $7,804 $11,577
====== ====== ====== ====== =======
Nonperforming assets, net as a
percentage of total assets.... 0.53% 0.59% 0.33% 1.38% 2.77%
====== ====== ====== ====== =======
- --------------------
</TABLE>
(1) Not included in restructured loans since December 31, 1992 is a loan
secured by commercial real estate. Management determined that this loan
should no longer be considered a nonperforming asset since the borrower has
been current in meeting restructured terms since the date of restructuring,
the restructured loan provides for principal amortization, and the loan has
an interest rate and other features that are at least equivalent to market
terms. The unpaid balance of this loan was approximately $3,084,000,
$3,113,000, $3,148,000 and $3,187,000 at December 31, 1996, 1995, 1994 and
1993, respectively.
15
<PAGE>
Total nonperforming assets decreased from $6.7 million at December 31, 1995
to $6.1 million at December 31, 1996, and decreased from 0.59% of assets to
0.53% of assets. Nonperforming assets increased to $6.7 million, or 0.59% of
assets at December 31, 1995 from $2.9 million or 0.33% of assets at December 31,
1994, primarily as a result of the acquisition of the Bank. Between December
31, 1993 and 1994, nonperforming assets declined from $7.8 million to $2.9
million. The majority of the decline in such assets was the result of a $5.0
million decline in foreclosed assets due to the sale of a large portion of a
shopping center in St. Louis County that was acquired through foreclosure during
1992. At December 31, 1996, the Company's foreclosed assets consisted primarily
of two commercial properties carried on the Company's books at $1.2 million, 12
single-family residences carried on the Company's books at $1.6 million and $2.1
million in residential construction loans. See "Real Estate Operations -- Real
Estate Acquired Through Foreclosure." The Company's restructured loans consist
of three loans totaling approximately $179,000 secured by single-family
residences located in Denton, Panola and Burnett counties in Texas. Not
included in restructured loans is a $3.1 million loan secured by a country club
and leasehold on a golf course in St. Charles County, Missouri which was
restructured during 1991 because of the borrower's inability to meet debt
service. Because the loan has been performing since the date of restructuring,
provides for principal amortization and bears a market interest rate, management
does not consider this a non-performing loan and has excluded it from the table
above.
During the year ended December 31, 1996, gross interest income of
approximately $134,000 and $14,000, would have been recorded on nonaccruing
loans and on restructured loans, respectively, if such loans had been current
throughout the period according to their original terms. Only cash received of
$61,000 was included in income during the year ended December 31, 1996 on
nonaccruing loans. Approximately $12,000 in interest on restructured loans was
included in income during the year ended December 31, 1996.
At December 31, 1996, there were $1.7 million of loans which were not
classified as nonaccrual, past due 90 days or more or restructured, but where
known information about possible credit problems of borrowers caused management
to have serious doubts as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as non-accrual, 90 days past
due or restructured. These loans are classified as impaired and were identified
through normal internal credit review procedures.
ASSET CLASSIFICATION. Federal regulations require savings associations to
review their assets on a regular basis and to classify them as "substandard,"
"doubtful" or "loss," if warranted. Assets classified as substandard or
doubtful require the institution to establish general loss allowances. If an
asset or portion thereof is classified loss, the institution must either
establish specific loss allowances in the amount of 100% of the portion of the
asset classified loss, or charge off such amount. An asset which does not
currently warrant classification but which possesses weaknesses or deficiencies
deserving close attention is required to be designated as "special mention."
OTS examiners may disagree with the institution's classifications and amounts
reserved. If an institution does not agree with an examiner's classification of
an asset, it may appeal this determination to the OTS.
The Company has determined that on a consolidated basis at December 31,
1996 it had $7.5 million, net of reserves, in assets classified as substandard,
no assets classified as doubtful and $156,000 in assets classified as loss.
Substandard assets included $1.7 million in residential loans, $195,000 in
consumer loans, $945,000 in construction loans, $206,000 in commercial real
estate loans and $4.5 million, net of reserves, in real estate acquired through
foreclosure. Assets classified as loss, which are fully reserved, consisted of
$76,000 in real estate acquired through foreclosure and $80,000 in mortgage
loans.
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Company recognizes
that credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan. It is management's
policy to maintain an adequate allowance for loan losses based on, among other
things, the Company's and the industry's historical loan loss experience,
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality. The Company increases its allowance for loan losses by
charging provisions for possible loan losses against the Company's income.
16
<PAGE>
The Company's methodology for establishing the allowance for loan losses
takes into consideration probable losses that have been identified in connection
with specific loans as well as losses in the loan portfolio that have not been
identified but can be expected to occur. Management conducts monthly reviews of
the loan portfolio and evaluates the need to establish specific allowances on
the basis of this review. As part of its review, management grades loans for
which collection in full may not be reasonably assured using a classification
system similar to that employed by OTS examiners. Loans subject to grading
include delinquent loans and any loans that have been placed on a watch list.
Specific allowances are provided for individual loans when it is probable the
Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The amount of any specific allowance necessary is
determined based on the present value of expected future cash flows discounted
at the loan's effective interest rate or the fair value of the collateral for
collateral-dependent loans. At the date of foreclosure, the Company transfers
the property to real estate acquired through foreclosure at fair value. Any
amount of cost in excess of fair value is charged-off against the allowance for
loan losses. The Company does not record partial charge-offs on individual
loans. If, upon ultimate disposition of the property, net sales proceeds differ
from the net carrying value of the property, a gain or loss on sale of real
estate is recorded.
General allowances are established by the Board of Directors on at least a
quarterly basis based on an assessment of risk in the Company's loan portfolio
as a whole taking into consideration the composition and quality of the
portfolio, delinquency trends, current charge-off and loss experience, the state
of the real estate market and economic conditions generally. Additional
provisions for losses on loans are made in order to bring the allowance to a
level deemed adequate.
Management continues to actively monitor the Company's asset quality and to
charge off loans against the allowance for loan losses when appropriate or to
provide specific loss reserves when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.
Although the Company has experienced increased loan charge-off activity in
the last two fiscal years, net charge-offs have continued to represent a small
percentage of average loans outstanding. The ratio of the allowance to
nonaccruing loans at December 31, 1996 was 439%. The Company has increased its
provision for loan losses during the two most recent fiscal years in order to
maintain the allowance for loan losses at a prudent level and to allow for
future growth in the portfolio primarily as a result of the Texas acquisitions.
17
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $5,096 $3,471 $3,190 $2,974 $2,225
Reserves acquired in business combinations.. 851 1,378 -- -- --
Loans charged-off:
Residential real estate.................... (24) -- (19) (24) (22)
Commercial real estate..................... -- (91) -- -- (14)
Construction............................... (42) (31) -- -- --
Commercial................................. -- -- -- -- --
Consumer................................... (12) -- -- -- --
------ ------ ------ ------ ------
Total charge-offs......................... (78) (122) (19) (24) (36)
------ ------ ------ ------ ------
Recoveries:
Residential real estate.................... -- -- -- -- --
Commercial real estate..................... -- -- -- -- --
Construction............................... -- -- -- -- --
Commercial................................. -- -- -- -- --
Consumer................................... -- 2 -- -- --
------ ------ ------ ------ ------
Total recoveries.......................... -- 2 -- -- --
------ ------ ------ ------ ------
Net loans charged-off....................... (78) (120) (19) (24) (36)
------ ------ ------ ------ ------
Provision charged to expense................ 660 367 300 240 785
------ ------ ------ ------ ------
Balance at end of period.................... $6,529 $5,096 $3,471 $3,190 $2,974
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period........ 0.01% 0.02% 0.01% 0.01% 0.01%
====== ====== ====== ====== ======
Ratio of allowance to net loans............. 0.74% 0.65% 0.59% 1.02% 1.04%
====== ====== ====== ====== ======
</TABLE>
18
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The Company has allocated portions of the
allowance to individual loan categories based on its analysis of the risk
elements in those portfolios. In addition, the Company maintains an unallocated
portion of the allowance in order to maintain the allowance at a level deemed
prudent by management. The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------ -------- ------------ -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate... $ 1,360 68.18% $ 1,050 79.10% $ 529 88.98%
Commercial real estate.... 1,116 13.70 535 8.69 875 9.52
Construction.............. 1,497 16.73 139 11.39 -- 1.01
Commercial................ 40 0.51 -- 0.24 -- 0.34
Consumer.................. 155 0.88 71 0.58 7 --
Unallocated............... 2,361 -- 3,301 -- 2,060 --
------- ------ ------- ------ ------- -------
$6,529 100.00% $5,096 100.00% $3,471 100.00%
======= ====== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1993 1992
--------------------- ----------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------- ----------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential real estate... $ 259 79.65% $ 244 78.78%
Commercial real estate.... 883 18.11 1,701 19.09
Construction.............. -- 1.67 -- 1.85
Commercial................ -- 0.31 -- --
Consumer.................. 9 0.26 5 0.28
Unallocated............... 2,039 -- 1,024 --
------- ------ ------- ------
$ 3,190 100.00% $2,974 100.00%
======= ====== ======= ======
</TABLE>
Included in the above amounts are specific reserves totaling $80,000 and
$26,000 at December 31, 1996 and 1995, respectively, related to loans classified
as loss. No specific reserves were included in the amounts shown above at
December 31, 1994, 1993 or 1992. There were no loans classified as loss at any
of the other dates disclosed above.
REAL ESTATE OPERATIONS
REAL ESTATE ACQUIRED FOR DEVELOPMENT AND SALE. The Company's real estate
operations include sales of real estate acquired through foreclosure as well as
of real estate acquired for development and sale. Until the enactment of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),
a significant business focus of the Association was the construction and sale of
residential housing as then permitted by Missouri savings and loan law. On the
effective date of FIRREA, the Association owned seven parcels of real estate
held for development with a gross carrying value of approximately $25.0 million.
In connection with the enactment of
19
<PAGE>
FIRREA, the Association determined to wind down its development activities and
subsequently implemented a plan for divestiture of all remaining real estate.
During fiscal year 1996, the Company sold the only remaining parcel of real
estate.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE. Real estate acquired through
foreclosure is initially recorded at fair value. Fair value is defined as the
amount in cash or cash-equivalent value of other consideration that a real
estate parcel would yield in a current sale between a willing buyer and a
willing seller. Fair value is measured by market transactions. If a market does
not exist, fair value of the item is estimated based on selling prices of
similar items in active markets or, if there are no active markets for similar
items, by discounting a forecast of expected cash flows at a rate commensurate
with the risk involved. Fair value is generally determined through independent
appraisal at the time of foreclosure. At December 31, 1996, the Company held no
foreclosed assets for which market prices were unavailable. If considered
necessary, the Company records a valuation allowance for estimated selling costs
of the property immediately after foreclosure. Subsequent to foreclosure, real
estate acquired through foreclosure is periodically evaluated by management and
an allowance for loss is established if the estimated fair value of the
property, less estimated costs to sell, declines. At December 31, 1996, the
Company's largest foreclosed asset was an office building in St. Louis County,
Missouri which was acquired in November 1995 resulting in a carrying value of
$1.2 million.
ALLOWANCE FOR LOSS ON REAL ESTATE. The Company has established an allowance
for loss on real estate to which losses on the devaluation of such properties
could be charged in future periods. Losses on real estate may be recognized
either as a result of a sale at less than the carrying value or as a result of a
reappraisal or other subsequent re-evaluation reflecting a lower value than the
amount previously recorded. Gains are recognized in the event properties are
sold for more than the book carrying value. The allowance for loss on real
estate formerly included an allowance for loss on real estate acquired for
development and sale. As sales of such properties have been closed, the
Association has made charge-offs against the allowance and this allowance has
been reduced to zero at December 31, 1996.
The following table summarizes the activity in the Company's allowance for
loss on real estate acquired through foreclosure for the periods stated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $ 272 $ 455 $ 457 $ 730 $ 894
Reserves acquired in business combinations.. 21 52 -- -- --
Provision charged to expense................ 200 -- -- -- --
Recoveries.................................. -- -- -- -- --
Charge-offs................................. (59) (235) (2) (273) (848)
----- ----- ----- ----- -----
Balance at end of period.................... $ 434 $ 272 $ 455 $ 457 $ 730
===== ===== ===== ===== =====
</TABLE>
20
<PAGE>
The following table summarizes activity in the Company's allowance for loss
on real estate acquired for development and sale for the periods stated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $ 1,100 $1,100 $1,300 $1,580 $10,296
Reserves acquired in business combinations.. -- 33 -- -- --
Provision charged to expense................ -- -- -- -- --
Charge-offs................................. (1,100) (33) (200) (280) (8,716)
------- ------ ------ ------ -------
Balance at end of period.................... $ -- $1,100 $1,100 $1,300 $ 1,580
======= ====== ====== ====== =======
</TABLE>
MORTGAGE-BACKED SECURITIES
The Company maintains a significant portfolio of mortgage-backed securities
in the form of Government National Mortgage Association ("GNMA"), FNMA and FHLMC
participation certificates and securities issued by other nonagency
organizations. GNMA certificates are guaranteed as to principal and interest by
the full faith and credit of the United States, while FNMA and FHLMC
certificates are each guaranteed by their respective agencies. Mortgage-backed
securities generally entitle the Company to receive a pro rata portion of the
cash flows from an identified pool of mortgages. The Company has also invested
in collateralized mortgage obligations ("CMOs") which are securities issued by
special purpose entities generally collateralized by pools of mortgage-backed
securities. The cash flows from such pools are segmented and paid in accordance
with a predetermined priority to various classes of securities issued by the
entity. The Company's CMOs are tranches collateralized by federal agency
securities with weighted average lives aggregating approximately 12.2 years at
December 31, 1996. Although mortgage-backed securities yield from 30 to 100
basis points less than the loans which are exchanged for such securities, they
present substantially lower credit risk and are more liquid than individual
mortgage loans and may be used to collateralize obligations of the Company. See
Note 5 of Notes to Consolidated Financial Statements included under Item 8
hereof. Because the Company receives regular payments of principal and interest
from its mortgage-backed securities, these investments provide more consistent
cash-flows than investments in other debt securities which generally only pay
principal at maturity. Mortgage-backed securities also help the Association and
Bank meet certain definitional tests for favorable treatment under federal
banking and tax laws. See "Regulation of the Savings Association Subsidiaries --
Qualified Thrift Lender Test" and "Taxation."
Mortgage-backed securities, however, expose the Company to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose the Company to the risk that it will be
unable to obtain comparable yields upon reinvestment of the proceeds. In the
event the mortgage-backed security has been funded with an interest-bearing
liability with a maturity comparable to the original estimated life of the
mortgage-backed security, the Company's interest rate spread could be adversely
affected. Conversely, in a rising interest rate environment, the Company may
experience a lower than estimated rate of repayment on the underlying mortgages,
effectively extending the estimated life of the mortgage-backed security and
exposing the Company to the risk that it may be required to fund the asset with
a liability bearing a higher rate of interest. The Company seeks to minimize the
effect of extension risk by focusing on investments in adjustable-rate and/or
relatively short-term (seven year or shorter maturity) mortgage-backed
securities.
21
<PAGE>
The following table sets forth the composition of the Company's mortgage-
backed securities portfolio at the dates indicated. As permitted by the Guide to
the Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities, the Company reclassified $94.2 million in mortgage-
backed securities from held-to-maturity to available-for-sale during the fiscal
year ended December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
- -----------------
FNMA................................. $ -- --% $ -- --% $106,292 100.0%
------- ----- -------- ----- -------- -----
Total mortgage-backed
securities held to maturity...... $ -- --% $ -- --% $106,292 100.0%
======= ===== ======== ===== ======== =====
Available for Sale:
- -------------------
GNMA................................. $31,762 33.4% $ 4,002 1.7% $ -- -- %
FHLMC................................ 19,550 20.5 24,475 10.5 11,837 11.4
FNMA................................. 14,991 15.7 109,461 47.0 840 0.8
CMOs................................. 28,900 30.4 94,945 40.8 90,808 87.8
------- ----- -------- ----- -------- -----
Total mortgage-backed securities
available for sale............... $95,203 100.0% $232,883 100.0% $103,485 100.0%
======= ===== ======== ===== ======== =====
</TABLE>
The following table sets forth the scheduled maturities, amortized cost,
market values and weighted average yields for the Company's mortgage-backed
securities at December 31, 1996. Expected maturities will differ from
contractual maturities due to scheduled repayments and because borrowers may
have the right to prepay obligations with or without prepayment penalties. The
following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------------------------
ONE TO FIVE GREATER THAN FIVE
YEARS YEARS TOTAL
-------------------- -------------------- ---------------------------------
WEIGHTED WEIGHTED APPROXIMATE WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST YIELD COST VALUE YIELD
--------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
- -------------------
GNMA............................. $ 24 7.24% $31,379 6.59% $31,403 $31,762 6.59%
FHLMC............................ 13,126 5.85 6,427 6.82 19,553 19,550 6.17
FNMA............................. 1,006 5.62 13,908 6.59 14,914 14,991 6.52
CMOs............................. -- -- 30,112 5.92 30,112 28,900 5.92
------- ------- ------- -------
Total mortgage-backed
securities available for sale.. $14,156 5.84% $81,826 6.36% $95,982 $95,203 6.28%
======= ==== ======= ==== ======= ======= ====
</TABLE>
INVESTMENT ACTIVITIES
The Savings Association Subsidiaries each maintain substantial portfolios
of investment securities in order to provide liquidity for their operations as
well as for income. The Association and the Bank are permitted under federal and
state law to make certain investments, including investments in securities
issued by various federal
22
<PAGE>
agencies and state and municipal governments, deposits at the FHLB, certificates
of deposit in federally insured institutions, certain bankers' acceptances and
federal funds. They may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds.
The Savings Association Subsidiaries purchase investment securities
pursuant to guidelines established by and under the supervision of their
respective Investment Committees. The stated goal of the investment guidelines
is to obtain the highest yield consistent with maintaining safety of principal.
To this end, the guidelines give priority to the preservation of assets while
maintaining flexibility through diversification of investments. The liquidity
portfolios of the Association and the Bank may consist of certain investments
with maturity limits ranging up to five years, including investments in U.S.
government and federal agency obligations, municipal obligations, commercial
paper and corporate debt, mutual funds, federal funds, certificates of deposit
and repurchase agreements. The Company's investment policy limits investments in
corporate debt to securities rated AAA or AA with a maturity of less than three
years. Commercial paper must be rated A-1 or P-1.
The Association and the Bank are each required to maintain average daily
balances of liquid assets (cash, deposits maintained pursuant to Federal Reserve
Board requirements, time and savings deposits in certain institutions,
obligations of state and political subdivisions thereof, shares in mutual funds
with certain restricted investment policies, highly rated corporate debt, and
mortgage loans and mortgage-backed securities with less than one year to
maturity or subject to repurchase within one year) equal to a monthly average of
not less than a specified percentage (currently 5%) of its net withdrawable
savings deposits plus short-term borrowings. Savings associations are also
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of their net withdrawable
savings accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet liquidity requirements. The average liquidity
and short-term liquidity ratios of the Association for the month of December
1996 were 5.79% and 2.29%, respectively, and for the Bank were 6.02% and 4.48%,
respectively.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated. At December 31, 1996, 1995 and
1994, all investment securities were classified as available for sale.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities (at fair value):
U.S. government and federal agency
obligations........................... $ 85,339 $47,797 $29,467
Tax-free municipal bonds................ 363 793 --
-------- ------- -------
Total investment securities......... 85,702 48,590 29,467
-------- ------- -------
Other investments (at cost):
Interest-bearing deposits:
FHLBs................................. 11,531 18,745 $ 7,097
Other federally insured institutions.. -- -- 276
-------- ------- -------
Total interest-bearing deposits..... 11,531 18,745 7,373
-------- ------- -------
Federal funds sold...................... 4,815 -- --
FHLB stock.............................. 15,769 16,520 12,650
-------- ------- -------
Total investments................... $117,817 $83,855 $49,490
======== ======= =======
</TABLE>
23
<PAGE>
The following table sets forth the scheduled maturities, amortized costs,
market values and average yields for the Company's investment securities
portfolio at December 31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------------------------
ONE TO FIVE GREATER THAN FIVE
YEARS YEARS TOTAL
-------------------- -------------------- ---------------------------------
WEIGHTED WEIGHTED APPROXIMATE WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST YIELD COST VALUE YIELD
--------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and federal
agency obligations......... $30,478 6.19% $54,000 7.87% $84,478 $85,339 7.26%
Tax-free municipal bonds..... 195 4.68 166 4.87 361 363 4.77
--------- --------- --------- -----------
Total investment securities...... $30,673 6.18% $54,166 7.86% $84,839 $85,702 7.25%
========= ======== ========= ======== ========= =========== ========
</TABLE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Savings Association
Subsidiaries funds for the lending, investment activities of the Savings
Association subsidiaries and for general operational purposes. In addition to
deposits, the Savings Association Subsidiaries derives funds from borrowed
money, loan principal and interest repayments, maturities of investment
securities and interest payments thereon. Although loan repayments are a
relatively stable source of funds, deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds, or on a longer term basis for general operational
purposes.
DEPOSITS. The Savings Association Subsidiaries attract deposits principally
from within their primary market areas by offering a variety of deposit
instruments, including checking accounts, money market accounts, regular savings
accounts, retirement savings plans, and certificates of deposit which range in
maturity from three months to eight years. Deposit terms vary according to the
minimum balance required, the length of time the funds must remain on deposit
and the interest rate. Maturities, terms, service fees and withdrawal penalties
for their deposit accounts are established by the Association and the Bank on a
periodic basis. The Savings Association Subsidiaries generally review their
deposit mixes and pricing on a weekly basis. In determining the characteristics
of their deposit accounts, the Savings Association Subsidiaries consider the
rates offered by competing institutions, funds acquisition and liquidity
requirements, growth goals, and federal regulations. The Company does not
currently have any brokered deposits.
The Savings Association Subsidiaries compete for deposits with other
institutions in their market areas by offering deposit instruments that are
competitively priced and by providing customer service through convenient and
attractive offices, knowledgeable and efficient staff and hours of service that
meet customers' needs. Substantially all of the Association's depositors are
Missouri residents and substantially all of the Bank's depositors are Texas
residents.
24
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Savings Association Subsidiaries
between the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
--------------------------------- -------------------------------- ---------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
% OF FROM PRIOR % OF FROM PRIOR % OF
BALANCE DEPOSITS YEAR BALANCE DEPOSITS YEAR BALANCE DEPOSITS
--------- --------- ----------- -------- --------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and statement savings..... $ 48,360 5.11% $ (1,841) $ 50,201 5.77% $ 11,808 $ 38,393 7.50%
NOW................................ 51,038 5.39 3,958 47,080 5.41 26,964 20,116 3.93
Money market....................... 108,956 11.50 15,415 93,541 10.75 11,945 81,596 15.94
-------- ------ -------- -------- ------ -------- -------- ------
Total............................ 208,354 22.00 17,532 190,822 21.93 50,717 140,105 27.37
-------- ------ -------- -------- ------ -------- -------- ------
Certificates of deposit:
Fixed-rate, fixed-term........... 8,707 0.92 (5,616) 14,323 1.65 10,043 4,280 0.83
7-31 days........................ 49 0.01 49 -- -- -- -- --
Three-month senior citizens...... 193 0.02 (35) 228 0.03 (734) 962 0.19
3-month.......................... 4,008 0.42 (831) 4,839 0.55 4,839 -- --
6-month.......................... 55,684 5.88 (17,159) 72,843 8.37 53,909 18,934 3.70
9-month.......................... 20,198 2.13 (31,813) 52,011 5.98 48,374 3,637 0.71
11-month......................... -- -- (8,346) 8,346 0.96 8,346 -- --
1-year........................... 215,910 22.80 (21,655) 237,565 27.30 59,670 177,895 34.75
13-month......................... 199 0.02 199 -- -- -- -- --
14-month......................... 99 0.01 99 -- -- -- -- --
15-month......................... 13,548 1.43 13,548 -- -- -- -- --
18-month......................... 149,076 15.74 90,251 58,825 6.76 36,200 22,625 4.42
2-year........................... 67,688 7.15 (2,013) 69,701 8.01 15,491 54,210 10.59
30-month......................... 33,208 3.51 (12,835) 46,043 5.29 25,339 20,704 4.04
3-year and over.................. 110,282 11.64 662 109,620 12.60 42,105 67,515 13.19
Jumbo certificates............... 56,452 5.96 53,252 3,200 0.36 2,997 203 0.04
Other............................ 3,414 0.36 1,602 1,812 0.21 946 866 0.17
-------- ------ -------- -------- ------ -------- -------- ------
Total certificates of deposit.. 738,715 78.00 59,359 679,356 78.07 307,525 371,831 72.63
-------- ------ -------- -------- ------ -------- -------- ------
Total.......................... $947,067 100.00% $ 76,891 $870,178 100.00% $358,242 $511,936 100.00%
======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
25
<PAGE>
The following table sets forth the average balances and interest rates
based on month-end balances for certificates of deposit and noncertificate
accounts as of the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings............... $ 49,246 2.48% $ 44,771 2.85% $ 39,762 2.49%
NOW..................... 55,350 1.76 31,064 2.39 19,211 1.97
Money market............ 88,034 4.39 90,040 3.89 100,175 2.85
Certificates of
deposit............... 682,640 5.61 544,912 5.77 261,138 4.81
-------- -------- --------
Total deposits...... $875,270 5.07% $710,787 5.20% $420,286 4.00%
======== ==== ======== ==== ======== ====
</TABLE>
The following table sets forth the Company's time deposits
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
2 - 3.99%................... $ 385 $ 3,488 $ 27,447
4 - 5.99%................... 622,173 405,829 279,360
6 - 7.99%................... 115,905 268,467 57,534
8 - 9.99%................... 252 1,572 7,490
-------- -------- --------
$738,715 $679,356 $371,831
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of the Company's
time deposits in specified interest rate categories at December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
---------------------------------------------------
MORE THAN MORE THAN
ONE YEAR 1 YEAR TO 2 YEARS AFTER
RATE OR LESS 2 YEARS TO 3 YEARS 3 YEARS TOTAL
- ----- -------- --------- ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2 - 2.99%...................... $ 305 $ -- $ -- $ -- $ 305
3 - 3.99%...................... 80 -- -- -- 80
4 - 4.99%...................... 38,747 1,749 596 -- 41,092
5 - 5.99%...................... 417,137 135,259 15,702 12,983 581,081
6 - 6.99%...................... 59,927 8,121 20,429 11,843 100,320
7 - 7.99%...................... 126 1,942 5,415 8,102 15,585
8 - 8.99%...................... 116 136 -- -- 252
-------- -------- ------- -------- --------
$516,438 $147,207 $42,142 $ 32,928 $738,715
======== ======== ======= ======== ========
</TABLE>
26
<PAGE>
Depending upon interest rates existing at the time certificates mature, the
Company's cost of funds may be significantly affected by the rollover of these
funds. An increase in such cost of funds, if any, may have a material impact on
the Company's operations. To the extent such deposits do not rollover, the
Company may, if necessary, use other sources of funds, including borrowings from
the FHLBs, to replace such deposits. See " -- Borrowings."
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1996.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSITS
- --------------- --------------
(IN THOUSANDS)
<S> <C>
Three months or less......................... $22,063
Over three through six months................ 19,249
Over six through 12 months................... 21,614
Over 12 months............................... 22,442
-------
Total....................................... $85,638
=======
</TABLE>
The following table sets forth the Company's deposit activities
for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits.............................................. $794,822 $626,842 $499,183
Withdrawals........................................... 815,763 608,890 341,528
-------- -------- --------
Net deposits (withdrawals)........................... (20,941) 17,952 157,655
Deposits acquired in acquisitions, net of
purchase accounting adjustments...................... 64,740 312,409 --
Amortization of purchase accounting market valuation.. 129 118 --
Interest credited on deposits......................... 32,963 27,763 12,895
-------- -------- --------
Net increase (decrease) in deposits.................. $ 76,891 $358,242 $170,550
======== ======== ========
</TABLE>
BORROWINGS. Savings deposits historically have been the primary source of
funds for the Savings Association Subsidiaries' lending, investments and general
operating activities. The Association and the Bank are authorized, however, to
use advances from the FHLBs to supplement their supply of lendable funds and to
meet deposit withdrawal requirements. The FHLBs function as central reserve
banks providing credit for savings institutions and certain other member
financial institutions. As members of the FHLB System, the Association and the
Bank are required to own stock in the FHLBs in which they are members and are
authorized to apply for advances. Advances are made pursuant to several
different programs, each of which has its own interest rate and range of
maturities. Advances from the FHLBs are secured by the Association's or Bank's
stock in the FHLBs and a portion of the their mortgage-backed securities and
mortgage loan portfolios.
Over the past several years, the Company has sought to reduce its level of
borrowings as it has reduced the size of its mortgage-backed securities
portfolio which was largely purchased with funds borrowed from the FHLB of Des
Moines following the Association's conversion to stock form in 1993. At December
31, 1996, the Company had $94.3 million in FHLB advances and lines of credit
outstanding. Additional borrowings of $3.4 million were outstanding on a note
from a commercial bank to the Company. The proceeds from this latter borrowing
were used to fund the acquisition of additional shares by the Employee Stock
Ownership Plan.
27
<PAGE>
The following table sets forth certain information regarding the
Company's short-term borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts outstanding at period end:
FHLB advances.............................................. $ 66,761 $150,500 $190,000
Securities sold under agreements to repurchase............. -- -- 22,160
Other short-term borrowings................................ 27,490 20,683 49,800
Long-term debt............................................. 3,430 3,779 --
Weighted average rate paid at period end:
FHLB advances.............................................. 5.98% 5.78% 6.16%
Securities sold under agreements to repurchase............. -- -- 6.16
Other short-term borrowings................................ 6.11 5.92 6.16
Long-term debt............................................. 9.15 8.15 --
Maximum amount of borrowings outstanding at any month end:
FHLB advances.............................................. $150,500 $212,900 $205,000
Securities sold under agreements to repurchase............. -- 24,492 34,593
Other short-term borrowings................................ 29,200 55,175 62,800
Long-term debt............................................. 3,779 3,779 --
Approximate average amounts outstanding during period:
FHLB advances.............................................. $116,846 $183,106 $174,846
Securities sold under agreements to repurchase............. -- 19,984 27,341
Other short-term borrowings................................ 17,408 30,807 28,385
Long-term debt............................................. 3,575 1,750 --
Approximate weighted average rate paid during period (1):
FHLB advances.............................................. 5.89% 5.99% 4.69%
Securities sold under agreements to repurchase............. -- 6.56 4.29
Other short-term borrowings................................ 4.68 5.72 4.58
Long-term debt............................................. 7.63 7.54 --
</TABLE>
- --------------------
(1) The approximate weighted average rate paid during the period was computed
by dividing the average amounts outstanding into the related interest
expense for the period.
SUBSIDIARY ACTIVITIES
The Savings Association Subsidiaries conduct certain of their activities
through "service corporation" subsidiaries. Federal associations like the
Savings Association Subsidiaries generally may invest up to 2% of their assets
in service corporations plus an additional 1% for community purposes. Federal
associations are also authorized to make investments without limit in "operating
subsidiaries" that engage solely in activities that federal associations may
conduct directly. As of December 31, 1996, the net book value of the
Association's investment in and loans to its service corporations was $1,000 and
the net book value of the Bank's service corporations investment was $99,000.
Operations of the subsidiaries accounted for $244,000, or 8.7% of consolidated
total income for the year ended December 31, 1996.
28
<PAGE>
The Association currently has four subsidiaries which are described below.
J.S. Services, Inc. is a subsidiary originally established to develop,
build and service real estate projects in the St. Louis area and to serve as
trustee for loans originated by the Association. Current activities are limited
to serving as trustee for loan originations and the sale of tax deferred annuity
and investment products. J.S. Services, Inc. is also a licensed insurance
agency.
JS&L Realty, Inc. is a licensed real estate agency which was established to
assist in the sale of the Association's real estate developments but is now
inactive.
J.S. Services of Florida, Inc. had developed and sold real estate in past
years, but is now inactive.
Jefferson Financial Corporation is an investment subsidiary formed under
the Texas Business Corporation Act on October 12, 1995 to own and manage the
Association's investment portfolio and to engage in such general mortgage
banking activities as might be permitted from time to time by applicable laws
and regulations. As of December 31, 1996, it had no assets and was inactive.
The Bank has two service corporation subsidiaries described below.
First Service Corporation, Inc. was originally established to develop,
build and service real estate projects in the Longview area. The service
corporation owns the remaining 20 lots in the Briarwood Subdivision (originally
80-90 lots) with a $0 carrying value. All lots are held for sale. The service
corporation previously sold credit life insurance and receives an immaterial
amount of income from commissions on these policies.
North Texas Financial Services, Inc. is a financial services subsidiary
incorporated on October 31, 1995 to sell tax-deferred annuities and investment
products.
The Association and the Bank are required to give the FDIC and OTS 30 days'
prior notice before establishing or acquiring a new subsidiary, or commencing
any new activity through an existing subsidiary. Both the FDIC and OTS have
authority to order termination of subsidiary activities determined to pose a
risk to the safety or soundness of the institution. In addition, OTS capital
regulations require savings institutions to deduct from capital for regulatory
reporting purposes the amount of their investments in and extensions of credit
to subsidiaries engaged in activities not permissible to national banks in
determining regulatory capital compliance. The activities of the subsidiaries
of the Savings Association Subsidiaries are currently permissible for national
banks. See "Regulation of the Savings Association Subsidiaries -- Regulatory
Capital Requirements."
COMPETITION
The Company faces strong competition both in originating real estate and
other loans and in attracting deposits. The Company competes for real estate
and other loans principally on the basis of interest rates and the loan fees it
charges, the types of loans it originates and the quality of services it
provides to borrowers. Its primary competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers making loans secured by real estate located in the Company's market
areas. Commercial banks, credit unions, and finance companies provide vigorous
competition in consumer lending.
The Company attracts all its deposits through its branch offices primarily
from the communities in which those branch offices are located. Consequently,
competition for deposits is principally from other savings institutions,
commercial banks, credit unions and brokers in these communities. The Company
competes for deposits and loans by offering a variety of deposit accounts at
competitive rates, a wide array of loan products, convenient business hours and
branch locations, a commitment to outstanding customer service and a well-
trained staff. In addition, the Company believes it has developed strong
relationships with local businesses, realtors, and the public in general.
29
<PAGE>
Management believes its primary markets currently to be the City of St.
Louis, Missouri and St. Louis and St. Charles Counties, Missouri and Dallas,
Denton, Collin, Rockwall, Tarrant, Wise, Gregg, Harrison, Shelby and Panola
Counties, Texas. With the acquisition of L&B Financial, the Company has
expanded into the northeastern Texas counties of Bowie, Camp, Franklin, Hopkins,
Morris and Titus.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had 231 full-time
and 50 part-time employees, none of whom was represented by a collective
bargaining agreement.
REGULATION OF THE COMPANY
GENERAL. The Company is registered as a savings and loan holding company
with the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements. As subsidiaries of a savings and loan holding company,
the Association and the Bank are subject to certain restrictions in its dealings
with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. Upon its acquisition of the Bank, the Company
became a multiple savings and loan holding company subject to certain
restrictions on its activities. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings association
may commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof, any business activity
other than (i) furnishing or performing management services for a subsidiary
savings association, (ii) conducting an insurance agency or escrow business,
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings institution, (iv) holding or managing properties used or
occupied by a subsidiary savings institution, (v) acting as trustee under deeds
of trust, (vi) those activities previously directly authorized by regulation as
of March 5, 1987 to be engaged in by multiple holding companies, or (vii) those
activities authorized by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") as permissible for bank holding companies, unless
the Director of OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of OTS prior to being engaged in by a
multiple holding company. The activities authorized by OTS regulation for
multiple savings and loan holding companies as of March 5, 1987 include a
variety of activities including, among other things, the origination,
purchasing, sale and servicing of various loans, the provision of clerical
services primarily for affiliates, the provision of certain other management
services to affiliates and other multiple holding companies, and underwriting or
reinsuring credit life insurance in connection with extensions of credit by a
savings association subsidiary or another savings and loan holding company or
subsidiary thereof. The OTS has also approved various real estate-related
activities for multiple holding companies, including the acquisition of
unimproved lots or the acquisition of unimproved real estate for prompt
development and subdivision, the development, subdivision and construction of
improvement of acquired real estate for sale or rental, the acquisition of
improved real estate and mobile homes to be held for rental or sale, the
acquisition of improved real estate for remodeling, rehabilitation,
modernization, renovation, or demolition or rebuilding for sale or rental, and
the maintenance and management of improved real estate. In the event any
savings association subsidiary of a multiple savings and loan holding company
fails to satisfy the Qualified Thrift Lender ("QTL") Test and does not requalify
within one year, however, the holding company will be required to register as a
bank holding company and become subject to the more stringent activity
limitations applicable to bank holding companies.
If the Company were to control only a single savings association, it would
be deemed a unitary holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company. However, if the
Director of OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity constitutes a
serious risk to the financial safety, soundness, or stability of its subsidiary
savings association, the Director of OTS may limit (i) payment of dividends by
the savings association, (ii) transactions between the savings association and
its affiliates, and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be
30
<PAGE>
imposed on the savings association. Notwithstanding the above rules as to
permissible business activities of unitary savings and loan holding companies,
if the savings association subsidiary of such a holding company fails to meet
the QTL Test, then the unitary holding company also becomes subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a QTL within one year thereafter, register
as, and become subject to, the restrictions applicable to a bank holding
company. See "Regulation of the Savings Association Subsidiaries -- Qualified
Thrift Lender Test."
RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof, or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Except with the prior approval of the Director of OTS, no director or officer of
a savings and loan holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock, may also acquire control of any
savings association, other than a subsidiary savings association, or of any
other savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under Missouri law, no foreign association or foreign holding company shall
acquire any proprietary interest in, or control of, or merge, or enter into any
merger agreement, with any association except in accordance with such rules and
regulations as the Missouri Director shall promulgate providing for the
licensing, admission, qualifications and operating requirements of foreign
associations. The term foreign association is defined as any association with
its principal office located outside Missouri. A foreign holding company is any
company or corporation authorized or existing under the laws of any jurisdiction
or authority which directly or indirectly controls a foreign association. The
laws of Missouri provide that foreign associations which conduct their principal
operations in a state adjoining Missouri, and which are not controlled by a
foreign holding company incorporated in or which conducts its principal
operations in a state not adjoining Missouri may merge with or acquire control
of associations conducting their principal operations in Missouri if the
adjoining state permits associations which conduct their principal operations in
Missouri to acquire control of savings and loan associations in such adjoining
state under conditions which are substantially the same as those imposed by that
state on savings and loan associations conducting their principal operations in
that state. Texas law does not restrict acquisitions of Texas-chartered savings
associations by associations chartered by other states or by holding companies
located in another state.
REGULATION OF THE SAVINGS ASSOCIATION SUBSIDIARIES
GENERAL. The Association and the Bank are subject to extensive examination
and regulation by the OTS which acts as both their chartering authority and
their primary federal banking regulator. The lending activities and other
investments of the Association and the Bank must comply with various federal
regulatory requirements. The FDIC also has the authority to conduct special
examinations of the Association and the Bank because their deposits are insured
by the SAIF. The Association and the Bank must file reports with these agencies
describing its activities and financial condition. The Association and the Bank
are also subject to certain reserve requirements promulgated by the Federal
Reserve Board. This supervision and regulation is intended primarily for the
protection of depositors. Certain of these regulatory requirements are referred
to below or appear elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a
31
<PAGE>
combination of core and "supplementary" capital equal to 8.0% of "risk-weighted"
assets. In addition, the OTS has adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). See "-- Prompt Corrective Regulatory Action." For
purposes of this regulation, Tier 1 capital has the same definition as core
capital which is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the deduction of intangible assets are provided for purchased mortgage
servicing rights, purchased credit card relationships and qualifying supervisory
goodwill. Tangible capital is given the same definition as core capital but
does not include an exception for qualifying supervisory goodwill and is reduced
by the amount of all the savings association's intangible assets with only a
limited exception for mortgage servicing rights. Both core and tangible capital
are further reduced by an amount equal to the savings association's debt and
equity investments in "nonincludable" subsidiaries engaged in activities not
permissible to national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies.
Adjusted total assets are a savings association's total assets as
determined under generally accepted accounting principles increased by certain
goodwill amounts and by a pro rated portion of the assets of unconsolidated
includable subsidiaries in which the savings association holds a minority
interest. Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the savings association's minority investments in
unconsolidated includable subsidiaries and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and by the amount of the savings association's high
loan-to-value ratio land loans and non-residential construction loans and equity
investments other than those deducted from core and tangible capital. At
December 31, 1996, the Savings Association Subsidiaries had no high ratio land
or nonresidential construction loans and had only $99,000 in equity investments
for which OTS regulations require deduction from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%. Consumer and residential construction loans are assigned a risk weight of
100%. Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight.
The OTS risk-based capital regulations have been amended to require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is
measured in terms of the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as the present value
of expected cash inflows from existing assets and off-balance sheet contracts
less the present value of expected cash outflows from existing liabilities. A
savings institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent
32
<PAGE>
of the current estimated economic value of its assets. A savings institution
with a greater than normal interest rate risk would be required to deduct from
total capital, for purposes of calculating its risk-based capital requirement,
an amount (the "interest rate risk component") equal to one-half the difference
between the institution's measured interest rate risk and the normal level of
interest rate risk, multiplied by the economic value of its total assets.
Implementation of the interest rate risk component has been delayed and the
Company has not been required to determine whether it will be required to deduct
an interest rate risk component from capital.
The table below presents the Association's and the Bank's respective
capital positions relative to the minimum requirements under the OTS regulatory
capital regulations at December 31, 1996.
<TABLE>
<CAPTION>
ASSOCIATION BANK
-------------------- ---------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS (1) AMOUNT ASSETS (1)
------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tangible capital...................................... $44,044 6.43% $25,011 5.65%
Tangible capital requirement.......................... 10,279 1.50 6,639 1.50
------- ----- ------- ----
Excess.............................................. $33,765 4.93% $18,372 4.15%
======= ===== ======= ====
Core capital.......................................... $44,044 6.43% $25,011 5.65%
Core capital requirement.............................. 20,559 3.00 13,278 3.00
------- ----- ------- ----
Excess.............................................. $23,485 3.43% $11,733 2.65%
======= ===== ======= ====
Total capital (i.e., core and supplementary capital).. $48,158 11.59% $27,248 9.30%
Risk-based capital requirement........................ 33,229 8.00 23,436 8.00
------- ----- ------- ----
Excess.............................................. $14,929 3.59% $ 3,812 1.30%
======= ===== ======= ====
</TABLE>
- -------------------
(1) Based upon adjusted total assets for purposes of the tangible and core
capital requirements, and risk-weighted assets for purposes of the risk-
based capital requirement.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association. Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from non-traditional activities. The Director of OTS may treat the
failure of any savings association to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
association which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date
33
<PAGE>
it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Under regulations jointly adopted by the federal banking regulators, a
depository institution's capital adequacy for purposes of the FDICIA prompt
corrective action rules is determined on the basis of the institution's total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-
weighted assets) and leverage ratio (the ratio of its Tier 1 or core capital to
adjusted total assets). A savings association that is not subject to an order
or written directive to meet or maintain a specific capital level will be deemed
"well capitalized" if it has: (i) a total risk-based capital ratio of 10% or
greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a
leverage ratio of 5.0% or greater. An "adequately capitalized" savings
association is a savings association that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings association has a
composite 1 CAMEL rating). An "undercapitalized institution" is a savings
association that has: (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the association has a composite 1 CAMEL
rating). A "significantly undercapitalized" institution is defined as a savings
association that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings association
is defined as a savings association that has a ratio of "tangible equity" to
total assets of less than 2.0%. Tangible equity is defined as core capital plus
cumulative perpetual preferred stock (and related surplus) less all intangibles
other than qualifying supervisory goodwill and certain purchased mortgage
servicing rights. The OTS may reclassify a well capitalized savings association
as adequately capitalized and may require an adequately capitalized or
undercapitalized association to comply with the supervisory actions applicable
to associations in the next lower capital category (but may not reclassify a
significantly undercapitalized institution as critically under-capitalized) if
the OTS determines, after notice and an opportunity for a hearing, that the
savings association is in an unsafe or unsound condition or that the association
has received and not corrected a less-than-satisfactory rating for any CAMEL
rating category. For information regarding the position of the Association and
the Bank with respect to the FDICIA prompt corrective action rules, see Note 3
of Notes to Consolidated Financial Statements included under Item 8 hereof.
QUALIFIED THRIFT LENDER TEST. A savings association that does not meet the
QTL Test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution are restricted to those of a national bank; (iii) the
institution will not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution will be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three years
from the date the institution ceases to be a Qualified Thrift Lender, it must
cease any activity, and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
34
<PAGE>
In order to satisfy, the QTL Test, a savings association must either
satisfy the definition of domestic building and loan association under the
Internal Revenue Code or its Qualified Thrift Investments must represent at
least 65% of portfolio assets. Qualified Thrift Investments include investments
in residential mortgages, home equity loans, loans made for educational
purposes, small business loans, credit card loans and mortgage-backed
securities. Portfolio assets are defined as total assets less intangibles,
property used by a savings association in its business and liquidity investments
in an amount not exceeding 20% of assets. A savings association shall be deemed
a Qualified Thrift Lender as long as its percentage of Qualified Thrift
Investments continues to equal or exceed 65% in at least nine out of each 12
months. A savings association that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL Test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired. At December 31, 1996, both the Association and the Bank
were in compliance with the QTL Test.
TRANSACTIONS WITH AFFILIATES. A savings association or its subsidiaries
may not engage in "covered transactions" with any one affiliate in an amount
greater than 10% of such institution's capital stock and surplus, and for all
such transactions with all affiliates the savings association is limited to an
amount equal to 20% of such capital stock and surplus. All such transactions
must also be on terms substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. An affiliate of a
savings association is any company or entity which controls, is controlled by or
is under common control with the savings association. In a holding company
context, the parent holding company of a savings association (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the savings association. In addition to the foregoing
restrictions, no savings association may (i) loan or otherwise extend credit to
an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings association. As long as
the Company owns more than 80% of the voting stock of both the Association and
the Bank, the Association and the Bank will not be subject to the restrictions
on transactions with affiliates in their dealings with each other. The Savings
Association Subsidiaries are also subject to the anti-tying provisions of
Section 106(b) of the Bank Holding Company Act ("BHCA") which prohibit a
depository institution from extending credit to or offering any other services,
or fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the
institution or certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain exceptions.
LOANS TO EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. Loans to
directors, executive officers and principal stockholders, and their related
interests, must be made on terms substantially the same as offered in comparable
transactions to other persons unless the loan is made pursuant to a benefit or
compensation program that is widely available to employees and does not give
preference to insiders. Loans to any executive officer, director or greater
than 10% stockholder of a savings association, and their related interests, may
not exceed, together with all other outstanding loans to such person and
affiliated entities, the association's loan to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus) and all loans
to all executive officers, directors and greater than 10% stockholders, and all
their related interests, may not, in the aggregate, exceed the association's
capital and surplus. Loans to directors, executive officers and greater than
10% stockholders of a savings association, and their respective related
interests, in excess of the greater of $25,000 or 5% of capital and surplus (up
to $500,000) must be approved in advance by a majority of the board of directors
of the association with any "interested" director not participating in the
voting. Loans to executive officers of depository institutions must be made on
terms not more favorable than those afforded to other borrowers, approved by the
board of directors of the institution, and are subject to reporting requirements
for and additional restrictions on the type, amount and terms of credits to such
officers. The Savings Association Subsidiaries are also subject to certain
provisions of Section 106(b) of the BHCA which prohibit extensions of credit to
executive officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
35
<PAGE>
DIVIDEND LIMITATIONS. Under OTS regulations, the Association and the Bank
are not permitted to pay dividends on their capital stock if their regulatory
capital would thereby be reduced below the amount then required for the
liquidation account established for the benefit of certain depositors of the
Association at the time of its conversion to stock form or, in the case of the
Bank, for the benefit of certain depositors in Shelby-Panola, Longview and North
Texas at the time of their conversions to stock form and assumed by the Bank.
The liquidation accounts assumed by the Bank, however, are not expected to
materially affect the ability of the Bank to pay dividends. In addition,
savings association subsidiaries of savings and loan holding companies are
required by statute to give the OTS 30 days' prior notice of any proposed
declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
the Association and the Bank. Under these regulations, a savings association
that, immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Association") is generally permitted without OTS
approval, after notice, to make capital distributions during a calendar year in
the amount equal to the greater of (i) 75% of net income for the previous four
quarters or (ii) up to 100% of its net income to date during the calendar year
plus an amount that would reduce by one-half the amount by which its capital-to-
assets ratio exceeded its fully phased-in capital requirement to assets ratio at
the beginning of the calendar year. A savings association with total capital
in excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted, after notice, to
make capital distributions without OTS approval of up to 75% of its net income
for the previous four quarters, less dividends already paid for such period. A
savings association that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. Unless the OTS determines that either
the Association or the Bank is an institution requiring more than normal
supervision, the Association and the Bank are authorized to pay dividends in
accordance with the provisions of the OTS regulations discussed above as a Tier
1 Association.
Tier 1 Associations may not make capital distributions in excess of the
safe harbor amounts unless the association has given the OTS notice and
opportunity to object. In determining whether to object to such a notice, the
OTS will consider whether the distribution would be inconsistent with the safe
and sound operation of the Tier 1 Association. The Association applied to the
OTS for permission to make a capital distribution in excess of the amounts
permitted to a Tier 1 Association in order to provide the Company with
additional funds for its acquisitions of Longview, North Texas and Shelby-
Panola. The Company intends to maintain the Association's status as a "well
capitalized" institution following any such distribution. See " -- Prompt
Corrective Regulatory Action."
The Association and the Bank are also prohibited from making any capital
distributions if after making the distribution, they would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. The OTS,
after consultation with the FDIC, however, may permit an otherwise prohibited
stock repurchase if made in connection with the issuance of additional shares in
an equivalent amount and the repurchase will reduce the institution's financial
obligations or otherwise improve the institution's financial condition.
At December 31, 1996, the Savings Association Subsidiaries had an aggregate
total of approximately $7.5 million that was available for distribution to the
Company as dividends or other capital distributions under the foregoing
regulations.
In addition to the foregoing, earnings of the Association and the Bank
appropriated to bad debt reserves and deducted for Federal income tax purposes
are not available for payment of cash dividends or other distributions to
stockholders without payment of taxes at the then-current tax rate by the
Association or the Bank on the amount of earnings removed from the reserves for
such distributions. See "Taxation."
DEPOSIT INSURANCE. The Savings Association Subsidiaries required to pay
assessments based on a percent of their insured deposits to the FDIC for
insurance of their deposits by the SAIF. Under the FDIA, the FDIC is required
to set semi-annual assessments for SAIF-insured institutions at a rate
determined by the FDIC to be
36
<PAGE>
necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of insured deposits that
the FDIC determines to be justified for that year by circumstances raising a
significant risk of substantial future losses to the SAIF.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "--Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.
For the past several semi-annual periods, institutions with SAIF-assessable
deposits, like the Savings Association Subsidiaries, have been required to pay
higher deposit insurance premiums than institutions with deposits insured by the
BIF. In order to recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the designated reserve ratio of 1.25% of
insured deposits. Institutions were assessed at the rate of 65.7 basis points
based on the amount of their SAIF-assessable deposits as of March 31, 1995. As
a result of the special assessment the Company incurred an after-tax expense of
$3.5 million during the quarter ended September 30, 1996.
The FDIC has adopted a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
worst risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, all SAIF-insured
institutions, will be required to pay assessments to the FDIC at the rate of 6.5
basis points to help fund interest payments on certain bonds issued by the
Financing Corporation ("FICO") an agency of the federal government established
to finance takeovers of insolvent thrifts. During this period, BIF members will
be assessed for these obligations at the rate of 1.3 basis points. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments.
LIQUIDITY REQUIREMENTS. Savings associations are required to maintain
average daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. Savings associations are also required to maintain average
daily balances of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable savings accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. The average daily and short-term liquidity ratios of
the Association for the month of December 1996, were 5.79% and 2.29%,
respectively, and for the Bank, were 6.02% and 4.48%, respectively.
FEDERAL HOME LOAN BANK SYSTEM. The Association and the Bank were members
of the FHLB System, which consists of 12 Federal Home Loan Banks subject to
supervision and regulation by the Federal Housing Finance Board ("FHFB"). The
Federal Home Loan Banks provide a central credit facility primarily for member
institutions. Savings association members of a FHLB are required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate unpaid principal of their home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20th of
their advances from the FHLB, whichever is greater. The Association was in
compliance with this requirement with an investment in FHLB of Des Moines stock
at December 31, 1996, of $13.1 million and the Bank was in compliance with this
requirement with an investment in FHLB of Dallas stock of $2.6 million. The
FHLBs of Des Moines and Dallas are funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. Each makes advances to
37
<PAGE>
members in accordance with policies and procedures established by the FHFB and
their Board of Directors. As of December 31, 1996, the Association had $60.0
million in advances and other borrowings from the FHLB of Des Moines and the
Bank had $6.8 million in advances from the FHLB of Dallas. See " -- Deposit
Activity and Other Sources of Funds -- Borrowings."
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
the first $49.3 million of transaction accounts, plus 10% on the remainder.
This percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of December 31, 1996, the Association and the Bank each met their
reserve requirements.
TAXATION
GENERAL. The Company currently files a consolidated federal income tax
return on a December 31 fiscal year basis. Consolidated returns have the effect
of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
FEDERAL INCOME TAXATION. Savings institutions are subject to the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in the
same general manner as other corporations. For tax years prior to 1996,
however, savings institutions which met certain definitional tests and other
conditions prescribed by the Code were eligible for certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. With respect to "qualifying real property loans," which generally
are loans secured by interests in certain real property, qualifying savings
institutions could base the amount of the bad debt reserve deduction upon either
actual loss experience (the "experience method") or a percentage of taxable
income determined without regard to such deduction (the "percentage of taxable
income method"). Under the experience method, the bad debt deduction for an
addition to the reserve for qualifying real property loans is an amount
determined under a formula based generally on the bad debts actually sustained
by a savings institution over a period of years. Under the percentage of
taxable income method, the bad debt reserve deduction for qualifying real
property loans was computed as a percentage, which Congress had reduced from as
much as 60% in prior years to 8%, of taxable income, with certain adjustments,
effective for taxable years beginning after 1986. For such taxable years, there
was no deduction in the event that less than 60% of the total dollar amount of
the assets of an institution fell within certain designated categories.
Recently enacted legislation, however, has repealed the percentage of
taxable income method for calculating additions to tax bad debt reserves.
Beginning with the first tax year beginning after December 31, 1995, thrift
institutions will be treated the same as commercial banks under the Code.
Banking organizations with $500 million or more in assets, like the Company,
will only be able to take a tax bad debt deduction when a loan is actually
charged off.
Savings institutions which have previously used the percentage of taxable
income method for calculating additions to bad debt reserves will be required to
recapture post-1987 excess reserves into taxable income over a six-year period
beginning with the first taxable year after December 31, 1995. Large thrift
institutions, like the Association, will be required to recapture all post-1987
additions to their bad debt reserves. The start of recapture may be delayed
until the third taxable year beginning after December 31, 1995 if the dollar
amount of the institution's residential loan originations in each year is not
less than the average dollar amount of residential loans originated in each of
the six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans. Dividends
paid by a thrift institution in excess of current and accumulated earnings and
profits and any distribution by a thrift institution in redemption of its stock
or in partial or complete liquidation of the institution, however, will be
deemed to have been made from pre-1988 tax bad debt reserves and the institution
will be required to recapture the amount of such reserves into taxable income.
Otherwise, institutions will not be required to recapture pre-1988 bad debt
reserves into income unless they cease to meet the Code definition of a bank.
38
<PAGE>
STATE INCOME TAXATION. Missouri-based thrift institutions, such as the
Association, are subject to a special financial institutions tax, based on net
income without regard to net operating loss carryforwards, at the rate of 7% of
net income. This tax is in lieu of certain other state taxes on thrift
institutions, on their property, capital or income, except taxes on tangible
personal property owned by the Association and held for lease or rental to
others and on real estate, contributions paid pursuant to the Unemployment
Compensation Law of Missouri, social security taxes, sales taxes and use taxes.
In addition, the Association is entitled to credit against this tax all taxes
paid to the State of Missouri or any political subdivision except taxes on
tangible personal property owned by the Association and held for lease or rental
to others and on real estate, contributions paid pursuant to the Unemployment
Compensation Law of Missouri, social security taxes, sales and use taxes, and
taxes imposed by the Missouri Financial Institutions Tax Law. Missouri thrift
institutions are not subject to the regular state corporate income tax.
The Bank is subject to an annual Texas franchise tax equal to the greater
of $2.50 per $1,000 of taxable capital apportioned to Texas or $4.50 per $100 of
net taxable earned surplus apportioned to Texas. Taxable earned surplus is the
Bank's federal taxable income with certain modifications.
For additional information regarding taxation, see Note 14 of Notes to
Consolidated Financial Statements included under Item 8 hereof.
ITEM 2. PROPERTIES
- -------------------
The Association's offices consist of the main office at 14915 Manchester
Road, Ballwin, Missouri, 63011 and nine offices in the St. Louis area. The main
office, built in 1972, has approximately 1,802 square feet, a total investment
of $2.7 million and net book value of $968,000 at December 31, 1996. The nine
offices comprise approximately 42,041 square feet, a total investment of $6.4
million and a net book value of $3.6 million at December 31, 1996.
The Bank's offices consist of the main office at 321 W. Oak, Denton, Texas,
76201 and 15 offices in Texas. The main office, built in 1957, has
approximately 9,848 square feet, a total investment of $1.1 million and a net
book value of $1.0 million at December 31, 1996. The 15 offices comprise
approximately 64,071 square feet, a total investment of $4.4 million and a net
book value of $4.1 million at December 31, 1996.
The net book value of the Company's investment in premises and equipment
totaled approximately $9.7 million at December 31, 1996. For a discussion of
premises and equipment, see Note 8 of Notes to Consolidated Financial Statements
included under Item 8 hereof.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to their businesses. There are no legal proceedings
to which any of the Company or its subsidiaries is currently a party or to which
any of their property is subject which are currently expected to result in a
material loss.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS.
- ----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
39
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
--------
The Company's common stock, par value $.01 per share (the "Common Stock"),
is traded on the Nasdaq National Market under the symbol "JSBA." As of March
19, 1997, there were 4,969,382 shares of Common Stock outstanding (including
shares held by the Company's Employee Stock Ownership Plan) and approximately
1,300 holders of record. The Company began paying quarterly dividends during
the first quarter of fiscal year 1996. The Company's ability to pay dividends
is dependent on dividends received from the Savings Association Subsidiaries.
For a discussion of various regulatory restrictions on the payment of dividends
by the Savings Association Subsidiaries, see Item 1. Business -- Regulation of
-----------------
the Savings Association Subsidiaries -- Dividend Limitations.
The following table sets forth the high, low and closing sales prices for
the Common Stock as reported on the Nasdaq National Market and the cash
dividends declared on the Common Stock for each full quarterly period during the
last two fiscal years:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- -------------------------------------
DIVIDENDS DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED HIGH LOW CLOSE DECLARED
- ------------- ---------- ---------- -------- --------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $ 31 $ 27 $ 29 5/8 $ 0.08 $ 16 3/4 $16 3/4 $16 3/4 $ --
June 30 28 1/2 25 1/4 25 1/2 0.08 18 7/8 16 1/4 18 --
September 30 24 3/4 22 1/4 22 1/2 0.08 24 1/4 18 23 5/8 --
December 31 27 22 3/4 26 0.08 28 1/2 23 27 3/4 --
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Cash and investments....................... $ 125,176 $ 85,801 $ 50,207 $ 26,966 $ 80,726
Mortgage-backed securities................. 95,203 232,883 209,777 210,226 36,748
Loans receivable, net...................... 885,405 788,085 584,990 313,518 285,104
Excess cost over fair value of
net assets acquired....................... 19,746 14,496 -- -- --
Accrued income and other assets............ 22,549 21,664 15,607 15,975 15,639
---------- ---------- -------- -------- --------
Total assets............................. $1,148,079 $1,142,929 $860,581 $566,685 $418,217
========== ========== ======== ======== ========
Savings deposits........................... $ 947,069 $ 870,179 $511,936 $341,386 $379,190
Borrowed money............................. 97,682 174,962 261,960 145,694 --
Accrued expenses and other liabilities..... 13,409 17,537 13,946 7,897 6,379
---------- ---------- -------- -------- --------
Total liabilities........................ 1,058,160 1,062,678 787,842 494,977 385,569
Stockholders' equity....................... 89,919 80,251 72,739 71,708 32,648
---------- ---------- -------- -------- --------
Total liabilities and stockholders'
equity.................................. $1,148,079 $1,142,929 $860,581 $566,685 $418,217
========== ========== ======== ======== ========
Book value per common share (1)............ $22.34 $21.49 $18.70 $ 18.17 N/A
========== ========== ======== ======== ========
</TABLE>
- -------------
(1) Book value per share computation excludes shares in the ESOP that have not
been allocated or committed to be released.
40
<PAGE>
OPERATING DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest and dividend income............... $81,690 $73,044 $44,991 $28,748 $32,869
Interest expense........................... 52,158 50,298 27,470 14,732 19,176
------- ------- ------- ------- -------
Net interest income...................... 29,532 22,746 17,521 14,016 13,693
Provision for losses on loans.............. 660 367 300 240 785
------- ------- ------- ------- -------
Net interest income after provision
for losses on loans..................... 28,872 22,379 17,221 13,776 12,908
------- ------- ------- ------- -------
Noninterest income:
Gain on sales of investment
securities, net.......................... -- -- -- 195 16
Gain (loss) on sales of mortgage-backed
securities, net.......................... (1,296) -- 158 369 --
Gain on sales of loans, net............... 374 227 265 150 200
Gain on real estate operations, net....... 453 765 98 488 723
Other..................................... 1,587 1,490 904 685 547
------- ------- ------- ------- -------
Total noninterest income................. 1,118 2,482 1,425 1,887 1,486
------- ------- ------- ------- -------
Noninterest expense:
General and administrative expense........ 18,570 14,451 10,012 8,264 7,028
SAIF special assessment................... 5,599 -- -- -- --
Amortization of excess cost over
fair value of net assets acquired........ 1,023 504 -- -- --
------- ------- ------- ------- -------
Total noninterest expense................ 25,192 14,955 10,012 8,264 7,028
------- ------- ------- ------- -------
Income before income taxes............... 4,798 9,906 8,634 7,399 7,366
Income tax expense......................... 1,982 3,536 3,272 2,639 2,961
------- ------- ------- ------- -------
Net income............................... $ 2,816 $ 6,370 $ 5,362 $ 4,760 $ 4,405
======= ======= ======= ======= =======
Earnings per share......................... $ 0.71 $ 1.60 $ 1.32 $ 0.77 N/A
======= ======= ======= ======= =======
</TABLE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average assets................... 0.25% 0.61% 0.73% 1.02% 1.01%
Return on average equity................... 3.43 8.28 7.41 7.92 14.37
Average equity to average assets........... 7.37 7.37 9.84 12.85 7.06
Stockholders' equity to total assets
(end of period)........................... 7.83 7.02 8.45 12.65 7.81
Dividend payout ratio...................... -- -- -- --
Net interest margin........................ 2.75 2.24 2.43 3.11 3.27
Interest rate spread....................... 2.45 1.89 2.01 2.70 3.03
Average interest-earning assets to
average interest-bearing liabilities...... 106.14 107.31 110.92 112.57 105.29
Noninterest expense to average assets...... 2.26 1.43 1.36 1.77 1.62
Allowance for loan losses to
net loans (end of period)................. 0.74 0.65 0.59 1.02 1.04
Nonperforming assets, net to total
assets (end of period).................... 0.53 0.59 0.33 1.38 2.77
</TABLE>
41
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
The principal business of the Company consists of soliciting deposits from
the general public through its branches and investing these funds primarily in
loans secured by single-family residential properties located in the Company's
market areas. The Company also originates residential construction loans and
loans secured by commercial real estate as well as a limited amount of consumer
loans. The Company additionally maintains substantial portfolios of investment
and mortgage-backed securities.
The Company's net income is dependent on its net interest income, which is
the difference between the interest income earned on its loan, mortgage-backed
securities and investment securities portfolios, and the interest paid on
interest-bearing liabilities. The Company's net income is also affected by the
generation of noninterest income, such as deposit account service charges, fees,
and gains on the sale of loans. Also, net income is affected by the level of
loan loss provisions and operating expenses.
The operations of the Company, and the thrift industry, are significantly
impacted by competition, prevailing economic conditions, and current monetary
and financial policies. Lending activities are influenced by the supply and
demand for housing, availability of funds, interest rate levels, and
competition. Deposit flows and cost of funds are influenced by prevailing
interest rates, competitive investments, certificate of deposit maturities and
personal income and savings levels in the market area.
INTEREST-RATE RISK SENSITIVITY
The primary component of the Company's net income is derived from the
spread between interest-earning asset yields and the cost of interest-bearing
liabilities. In a changing interest rate environment this spread can widen or
narrow depending on the relative repricing and maturities of interest-earning
assets and interest-bearing liabilities. A principal strategy of the Company has
been to achieve acceptable net interest margins while decreasing the sensitivity
of its earnings to interest rate fluctuations by matching more closely the cash
flows and effective maturities or repricings of its interest-sensitive assets
and liabilities. In implementing this strategy, the Company has sought to
increase the sensitivity of its assets to changing interest rates by emphasizing
the origination and/or purchase of adjustable-rate mortgage loans and mortgage-
backed securities with shorter terms and/or adjustable rates. The Company also
originates fixed-rate mortgage loans which are generally sold in the secondary
market. The Company actively manages the maturity and repricing characteristics
of its liabilities and has sought to limit the interest sensitivity of its
liabilities by emphasizing certificates of deposit with maturities of one year
or longer. The Company has utilized short-term borrowings from Federal Home Loan
Banks to fund loans and mortgage-backed securities with adjustable interest
rates or balloon features.
Interest rate risk at a given point in time can be represented by an
interest rate sensitivity position ("gap"). The following table sets forth the
amounts of interest-earning assets and interest-bearing liabilities outstanding
at December 31, 1996, which mature or reprice in each of the time periods shown.
The table projects principal prepayments for loans receivable using the
historical prepayment rates for pools of similar loans and for mortgage-backed
securities using the historical prepayment rate for each individual security.
All other information is based on contractual terms to maturity or repricing.
This table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the repricing of certain
categories of assets and liabilities is subject to competitive and other
pressures beyond the Company's control. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a stated period
may, in fact, mature or reprice at different times and at different volumes.
42
<PAGE>
<TABLE>
<CAPTION>
MORE THAN MORE THAN
THREE MONTHS ONE YEAR
THREE MONTHS THROUGH THROUGH MORE THAN
OR LESS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......................... $237,568 $380,073 $186,341 $81,423 $ 885,405
Mortgage-backed securities............... 28,160 54,786 10,813 1,444 95,203
Investment securities and other
interest-earning assets................ 37,088 3,976 76,585 168 117,817
-------- -------- -------- ------- ----------
Total interest-earning assets....... 302,816 438,835 273,739 83,035 1,098,425
-------- -------- -------- ------- ----------
Interest-bearing liabilities:
Savings deposits.......................... 228,498 418,262 258,015 42,294 947,069
Borrowed money............................ 37,792 33,939 25,951 -- 97,682
-------- -------- -------- ------- ----------
Total interest-bearing liabilities.. 266,290 452,201 283,966 42,294 1,044,751
-------- -------- -------- ------- ----------
Interest sensitivity gap............ $ 36,526 $(13,366) $(10,227) $40,741 $ 53,674
======== ======== ======== ======= ==========
Cumulative interest
sensitivity gap................... $ 36,526 $ 23,160 $ 12,933 $53,674
======== ======== ======== =======
Ratio of cumulative gap to
total assets...................... 3.18% 2.02% 1.13% 4.68%
======== ======== ======== =======
</TABLE>
A static gap report consists of an inventory of the dollar amounts of
assets and liabilities that have the potential to mature or reprice within a
particular period. It does not consider the probability that potential
maturities or repricings of interest-sensitive accounts will occur, or to what
extent. Because the static gap analysis does not capture many of the factors
that determine true interest rate risk, the Company places more emphasis on the
use of income simulation analysis in measuring and managing exposure to interest
rate risk.
Income simulation analysis captures the potential and probability of the
maturity and repricing of assets and liabilities. Moreover, income simulation
analysis measures the relative sensitivities of these balance sheet items and
projects their behavior over an extended period of time. Also, income simulation
analysis permits management to assess the probable effects on balance sheet
items of interest rate changes and management strategies that address such
changes. For these reasons, the Company relies primarily upon income simulation
analysis in measuring and managing exposure to interest rate risk.
43
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND COSTS
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities
including the average yield on such assets and the average cost of such
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average month-end balances of assets or
liabilities, respectively, for the periods indicated. During the periods
indicated, nonaccrual loans are included in loans receivable.
The table also presents information for the periods indicated with respect
to the Company's "net interest margin" which has traditionally been used by
financial institutions as an indicator of the profitability of their core
operations. Net interest margin is calculated by dividing net interest income by
the average balance of interest-earning assets and is a function of the
Company's interest rate spread (the difference between the weighted average
yield on its interest-earning assets and the weighted average rate paid on its
interest-bearing liabilities) and the ratio of its average interest-earning
assets to average interest-bearing liabilities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- -------------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- -------- ----- ------------ -------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable..................$ 805,575 $64,911 8.06% $ 707,448 $53,500 7.56% $467,260 $30,988 6.63%
Mortgage-backed securities........ 176,145 10,858 6.16 233,425 14,994 6.42 215,082 11,764 5.47
Investment securities............. 63,631 4,280 6.73 44,160 2,770 6.27 22,468 1,287 5.73
Other interest-earning assets..... 30,091 1,641 5.45 28,714 1,780 6.20 17,138 952 5.55
---------- ------- ---------- ------- -------- -------
Total interest-earning
assets................ 1,075,442 81,690 7.60 1,013,747 73,044 7.21 721,948 44,991 6.23
------- ------- -------
Noninterest-earning assets........... 38,437 30,377 13,483
---------- ---------- --------
Total assets.............$1,113,879 $1,044,124 $735,431
========== ========== ========
Interest-bearing liabilities:
Savings deposits:
Passbook and statement savings,
NOW, and money market
accounts...................$ 192,630 $ 6,063 3.15 $ 165,875 $ 5,522 3.33 $159,148 $ 4,228 2.66
Certificates of deposit........ 682,640 38,303 5.61 544,912 31,474 5.77 261,138 12,573 4.81
---------- ------- ---------- ------- -------- -------
Total savings deposits... 875,270 44,366 5.07 710,787 36,996 5.20 420,286 16,801 4.00
Borrowed money.................... 137,986 7,792 5.65 233,897 13,302 5.69 230,572 10,669 4.63
---------- ------- ---------- ------- -------- -------
Total interest-bearing
liabilities........... 1,013,256 52,158 5.15 944,684 50,298 5.32 650,858 27,470 4.22
------- ------- -------
Noninterest-bearing liabilities...... 18,507 22,468 12,227
---------- ---------- --------
Total liabilities........ 1,031,763 967,152 663,085
Stockholders' equity................. 82,116 76,972 72,346
---------- ---------- --------
Total liabilities and
stockholders' equity..$1,113,879 $1,044,124 $735,431
========== ========== ========
Net interest income.................. $29,532 $22,746 $17,521
======= ======= =======
Interest rate spread................. 2.45% 1.89% 2.01%
==== ==== =======
Net interest margin.................. 2.75% 2.24% 2.43%
==== ==== =======
Ratio of average interest-earning
assets to average interest-
bearing liabilities............... 106.14% 107.31% 110.92%
========== ========== ========
</TABLE>
44
<PAGE>
RATE/VOLUME ANALYSIS
The following table allocates the period-to-period changes in the Company's
various categories of interest income and expense between changes due to changes
in volume (calculated by multiplying the change in average volumes of the
related interest-earning asset or interest-bearing liability category by the
prior year's rate) and changes due to changes in rate (change in rate multiplied
by the prior year's volume). Changes due to changes in rate/volume (changes in
rate multiplied by changes in volume) have been allocated proportionately
between changes in volume and changes in rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
--------------------------- ---------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- ------- ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable .................. $ 7,727 $ 3,684 $11,411 $17,685 $4,827 $22,512
Mortgage-backed securities......... (3,550) (586) (4,136) 1,064 2,166 3,230
Investment securities.............. 1,295 215 1,510 1,351 132 1,483
Other interest-earning assets ..... 82 (221) (139) 706 122 828
------- ------- ------- ------- ------ -------
Total interest and
dividend income.......... 5,554 3,092 8,646 20,806 7,247 28,053
------- ------- ------- ------- ------ -------
Interest expense:
Savings deposits:
Passbook and statement savings,
NOW, and money market
accounts ................... 851 (310) 541 185 1,109 1,294
Certificates of deposit ........ 7,726 (897) 6,829 15,967 2,934 18,901
------- ------- ------- ------- ------ -------
Total savings deposits ... 8,577 (1,207) 7,370 16,152 4,043 20,195
Borrowed money .................... (5,417) (93) (5,510) 156 2,477 2,633
------- ------- ------- ------- ------ -------
Total interest expense.... 3,160 (1,300) 1,860 16,308 6,520 22,828
------- ------- ------- ------- ------ -------
Change in net interest
income................... $ 2,394 $ 4,392 $ 6,786 $ 4,498 $ 727 $ 5,225
======= ======= ======= ======= ====== =======
</TABLE>
BUSINESS COMBINATIONS
In May 1995, the Company acquired all the outstanding stock of North Texas
Savings and Loan Association, Denton, Texas ("North Texas") and First Federal
Savings Bank of Longview, Longview, Texas ("Longview"). In July 1995 the Company
acquired all the outstanding stock of Shelby-Panola Savings Association,
Carthage, Texas ("Shelby-Panola"). The acquisitions, which were funded by
available cash and borrowings, were accounted for using the purchase method. At
the time of these acquisitions, North Texas had five branches and approximately
$190.7 million in total assets, Longview had five branches and approximately
$134.5 million in total assets and Shelby-Panola had one branch and total assets
of approximately $55.6 million. Upon completion of the acquisitions, North
Texas, Longview, and Shelby-Panola were consolidated under a single federal
charter and now operate under the common name of First Federal Savings Bank of
North Texas. The excess of cost over fair value of net assets acquired in the
three 1995 acquisitions was approximately $15 million. Under the purchase method
of accounting, the results of operations of the three acquired companies are
included in the Company's results of operations only since the dates of their
acquisitions.
On December 30, 1996, the Company completed its acquisition of Texas
Heritage Savings Association/Banc in Rowlett, Texas ("Texas Heritage") in
exchange for $5.1 million in cash and 223,151 shares of the Company's common
stock. Texas Heritage's total assets were $71.8 million, consisting primarily of
loans receivable of
45
<PAGE>
$56.0 million and mortgage-backed and investment securities of $7.3 million;
Texas Heritage's total deposits were $64.7 million. As a result of the Texas
Heritage acquisition, the Company added four branches in the suburban Dallas
counties of Dallas, Rockwall and Tarrant. The acquisition, which was funded by
common stock, available cash and borrowings, was accounted for using the
purchase method. The excess of cost over fair value of net assets acquired was
approximately $6.3 million. Upon completion of the acquisition, Texas Heritage
was merged into First Federal. Under the purchase method of accounting, the
results of operations of Texas Heritage are included in the Company's results of
operations only since the date of its acquisition. Accordingly, the purchase of
Texas Heritage had no material impact on the Company's results of operations
during 1996.
The Company's acquisition of L&B Financial, Inc. in Sulphur Springs, Texas
("L&B Financial") was completed on February 28, 1997. The Company acquired L&B
Financial for a combination of approximately $15 million in cash and 549,000
shares of the Company's common stock. L&B Financial's total assets were
approximately $141 million, consisting primarily of loans receivable of $70
million and mortgage-backed and investment securities of $58 million; L&B
Financial's total deposits were $104 million. As a result of the L&B Financial
acquisition, the Company added six branches in the northeast Texas counties of
Bowie, Camp, Franklin, Hopkins, Morris and Titus. The acquisition was accounted
for using the purchase method. Upon completion of the acquisition. The
operations of L&B Financial were merged into First Federal.
FINANCIAL CONDITION
Jefferson Savings' conversion to stock form in 1993 brought in a tremendous
amount of new capital that had to be put to work immediately to enable the
Company to generate an adequate return for the stockholders. Immediately
following the conversion, the Company executed a short- to intermediate-term
strategy whereby it leveraged the new capital with Federal Home Loan Bank
("FHLB") advances and bought mortgage-backed securities to increase net interest
income. It has always been the Company's belief, however, that the only way to
create long-term stockholder value is by building the core banking business.
Beginning in late 1993, the Company adopted a sales culture which has allowed it
to substantially increase its deposit and loan market share in the St. Louis
area. In 1995, the Company entered a dynamic new market through its acquisition
of three Texas savings and loan associations. The Company also established its
sales culture in its Texas subsidiary during 1996. With the successful
implementation of its sales culture in the St. Louis and northeast Texas
markets, management's focus turned to enhancing the Company's loan origination
abilities while reducing its reliance on interest income from investment and
mortgage-backed securities.
Net loans receivable increased $97.3 million, or 12.3%, from $788.1 million
at December 31, 1995 to $885.4 million at December 31, 1996. The acquisition of
Texas Heritage contributed $56.0 million to net loans receivable while loans
were up a combined $41.3 million at Jefferson Savings and First Federal prior to
the acquisition. Loan origination volume more than doubled during 1996. Loan
originations totaled $358.1 million in 1996 compared to $162.1 million in 1995.
In addition, loan purchases totaled $9.1 million and principal repayments
totaled $291.0 million during the year ended December 31, 1996 compared to loan
purchases of $27.4 million and principal repayments of $165.1 million during the
year ended December 31, 1995.
Mortgage-backed securities decreased $137.7 million, or 59.1%, from $232.9
million at December 31, 1995 to $95.2 million at December 31, 1996 as the
Company continued to reposition the balance sheet to emphasize income from
lending activities. During 1996, the Company sold a total of $147.5 million in
mortgage-backed securities. Proceeds from these sales were used to pay down FHLB
borrowings and fund loan originations or were invested in more liquid securities
or securities with more favorable repricing characteristics.
Investment securities, interest-bearing deposits and federal funds sold
increased $34.7 million, or 51.6%, from $67.3 million at December 31, 1995 to
$102.0 million at December 31, 1996. The acquisition of Texas Heritage added
$7.9 million in investment securities, interest-bearing deposits and federal
funds sold. The remaining amount of increase was due to the reinvestment of a
portion of the proceeds from sales and principal payments of mortgage-backed
securities.
46
<PAGE>
Deposits increased $76.9 million, or 8.8%, from $870.2 million at December
31, 1995 to $947.1 million at December 31, 1996. The acquisition of Texas
Heritage brought in $64.7 million in new deposits. During fiscal year 1996,
approximately $33.0 million of interest was credited to accounts while deposits
exceeded withdrawals by $12.0 million. Borrowed money decreased $77.3 million,
or 55.8%, from $175.0 million at December 31, 1995 to $97.7 million at December
31, 1996.
Stockholders' equity increased by $9.7 million, or 12.1%, to $89.9 million.
Stockholders' equity as a percentage of assets increased to 7.83% at December
31, 1996 compared to 7.02% at December 31, 1995. Contributing to the growth in
stockholders' equity were net income of $2.8 million, the issuance of 223,151
shares of common stock valued at $5.2 million in connection with the purchase of
Texas Heritage, and the amortization of stock awards under the Management
Recognition Plans (MRPs) and the Employee Stock Ownership Plan (ESOP).
Stockholders' equity also benefited from unrealized gains in the Company's
portfolios of investment and mortgage-backed securities available for sale.
Investment securities and mortgage-backed securities with carrying values of
$85.7 million and $95.2 million, respectively, were classified as available-for-
sale at December 31, 1996. The Company recorded an unrealized gain, net of
income taxes, as a credit to stockholders' equity in the amount of $50,000 at
December 31, 1996. Since such securities are carried at fair market value, they
can be liquidated to fund loan originations and other corporate purposes with no
additional impact on capital. The increases in stockholders' equity were
partially offset by the payment of $1.2 million in dividends on the Company's
common stock
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995.
NET INCOME. As the result of two large charges in the third quarter of
1996, net income decreased $3.6 million, or 55.8%, from $6.4 million for the
year ended December 31, 1995 to $2.8 million for the year ended December 31,
1996. These third quarter charges, which totaled $4.7 million, net of tax, or
$1.19 per share, consisted of a one-time special assessment to recapitalize the
SAIF and a loss on the sale of mortgage-backed securities incurred as the result
of a repositioning of the balance sheet. Reflecting continued improvement in the
Company's underlying business, net income for 1996, excluding these third
quarter charges, was $7.6 million, or $1.90 per share, which represents an
increase of $1.2 million, or 19%, over 1995. This increase in net income before
these third quarter charges was the result of strong growth in net interest
income and noninterest income, both of which were attributable to the Texas
thrifts whose results of operations are included from the dates of their
acquisitions in accordance with the purchase method used in accounting for the
acquisitions. The additional income contributed by the Texas thrifts more than
offset the increase in general and administrative expenses which resulted from
the Texas acquisitions. Return on average stockholders' equity and return on
average assets were 3.43% and .25%, respectively, for the year ended December
31, 1996 compared to 8.28% and .61%, respectively, for the year ended December
31, 1995. Return on average stockholders' equity and return on average assets
for 1996 excluding the third quarter charges were 9.08% and .68%, respectively.
Earnings per share for the year ended December 31, 1996 were $.71 per share
compared to $1.60 per share for 1995. Earnings per share for 1996 excluding the
third quarter charges were $1.90 per share. Average shares outstanding for the
years ended December 31, 1996 and 1995 were 3,974,457 and 3,983,317,
respectively.
NET INTEREST INCOME. Net interest income increased $6.8 million, or 29.8%,
from $22.7 million for the year ended December 31, 1995 to $29.5 million for the
year ended December 31, 1996, as a result of growth in the Company's interest-
earning assets and significant improvement in the Company's interest rate
spread. The average balance of interest-earning assets increased $61.7 million,
or 6.1%, from $1.014 billion for the year ended December 31, 1995 to $1.075
billion for the year ended December 31, 1996. The Company's interest rate spread
increased from 1.89% during 1995 to 2.45% during 1996. The improvements in the
average balance of interest-earning assets and the interest rate spread were
primarily the result of the increased loan origination activity in Texas and the
inclusion of the operating results of First Federal for the entire year.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
from $73.0 million for the year ended December 31, 1995 to $81.7 million for the
year ended December 31, 1996 primarily due to the increase
47
<PAGE>
in the average volume of interest-earning assets resulting from the inclusion of
a full year of First Federal's results of operations and strong loan origination
activity in Texas. These factors, combined with the shift in interest-earning
assets from mortgage-backed securities to higher yielding loans, led to an
increase in the average yield on interest-earning assets from 7.21% for the year
ended December 31, 1995 to 7.60% for the year ended December 31, 1996. Interest
income on loans receivable increased $11.4 million, or 21.3%. The increase in
interest income from loans receivable is attributable to an increase in the
average yield on the loan portfolio from 7.56% during the year ended December
31, 1995 to 8.06% during the year ended December 31, 1996 and a $98.1 million
increase in the average balance of loans receivable during the year ended
December 31, 1996. The increase in the average yield on the loan portfolio is
due to the upward adjustment on the Company's adjustable-rate loan portfolio and
increased construction lending, primarily in the Company's Texas market, which
is at higher yields than the existing loan portfolio.
Interest income on mortgage-backed securities decreased $4.1 million, or
27.6%. Nearly all of the decrease was attributable to the $57.3 million decrease
in the average balance of mortgage-backed securities as management decided to
reduce the size of the Company's mortgage-backed securities portfolio to fund
loan originations, purchase investment securities, and reduce borrowed money.
Interest income on investment securities increased $1.5 million, or 54.5%.
Nearly all of the increase was due to a $19.5 million increase in the average
balance outstanding. A portion of the proceeds from the sales of mortgage-backed
securities was reinvested in shorter-term investment securities. Interest income
from other interest-earning assets (including interest earned on interest-
bearing deposits in the FHLB and dividends received on the FHLB stock which
Jefferson Savings and First Federal are required to hold as members of the FHLB)
decreased $139,000. The decrease was primarily due to a decrease in the average
yield on other interest-earning assets from 6.20% for the year ended December
31, 1995 to 5.45% for the year ended December 31, 1996.
INTEREST EXPENSE. Total interest expense increased $1.9 million, or 3.7%,
from $50.3 million for the year ended December 31, 1995 to $52.2 million for the
year ended December 31, 1996 due to an increase in interest expense on savings
deposits which was mostly offset by a decrease in interest expense on borrowed
money. Interest expense on savings deposits increased $7.4 million from $37.0
million for the twelve-month period ended December 31, 1995 to $44.4 million for
the twelve-month period ended December 31, 1996 primarily as the result of a
$164.5 million increase in the average balance of savings deposits due to the
inclusion of the deposits from the 1995 Texas acquisitions in the average
balance for the full year during 1996 versus a partial year since their dates of
acquisition in 1995. The average cost of deposits decreased from 5.20% during
1995 to 5.07% during 1996 due to the decrease in market interest rates between
the respective periods. Interest expense on borrowed money decreased $5.5
million from $13.3 million for the twelve-month period ended December 31, 1995
to $7.8 million for the twelve-month period ended December 31, 1996 primarily
due to a $95.9 million decrease in the average balance. Proceeds from the sales
and repayment of investment and mortgage-backed securities were used to repay
borrowed money.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans for the
year ended December 31, 1996 totaled $660,000 compared to $367,000 for the year
ended December 31, 1995 reflecting the growth in the loan portfolio. Loan
charge-offs for the year ended December 31, 1996 decreased to $78,000 compared
to $122,000 in charge-offs during the year ended December 31, 1995. The
allowance for losses on loans was $6.5 million, or .74% of net loans, at
December 31, 1996 compared to $5.1 million, or .65%, at December 31, 1995.
Nonaccruing loans were $1.5 million, or .17% of net loans at December 31, 1996
compared to $2.5 million, or .31 % of net loans at December 31, 1995. The ratio
of nonperforming assets to total assets decreased from .59% at December 31, 1995
to .53% at December 31, 1996. Management considers many factors in determining
the necessary levels of loan loss reserves, including a detailed analysis of
specific loans in the portfolio, known and inherent risk in the portfolio,
estimated value of the underlying collateral, assessment of general trends in
the real estate market, and current and prospective economic and regulatory
conditions.
48
<PAGE>
NONINTEREST INCOME. Total noninterest income decreased $1.4 million, or
54.9%, from $2.5 million for the year ended December 31, 1995 to $1.1 million
for the year ended December 31, 1996 primarily as a result of a $1.3 million net
loss on sales of mortgage-backed securities. During the third quarter of 1996,
management decided to sell $63.0 million in mortgage-backed securities, all of
which were classified as available for sale, to remove marginally profitable
assets from the balance sheet and to free up cash to fund future loan
originations. The transaction resulted in a pretax loss of $1.9 million. The
proceeds were used to temporarily repay borrowed money. In addition, the Company
sold $84.5 million in mortgage-backed securities during the first and second
quarters resulting in net gains of $634,000. The proceeds from these sales were
reinvested in shorter-term investment and mortgage-backed securities. During
1995 the Company sold $59.3 million in mortgage-backed and investment securities
that were acquired in connection with the purchase of the Texas thrifts. No gain
or loss was realized on these sales since these securities were recorded at
market value when acquired and were sold shortly after their acquisition.
Noninterest income was also reduced by a lower gain on real estate operations
which decreased $312,000 from $765,000 for the year ended December 31, 1995 to
$453,000 for the year ended December 31, 1996. The 1996 amount includes $878,000
of gains from the sales of real estate, including two large commercial
properties, partially offset by $225,000 in expenses associated with the holding
of those properties and a provision for loss of $200,000. The 1995 amount
includes $126,000 in net rental income from two commercial properties acquired
through foreclosure, $323,000 from a deficiency judgment on properties acquired
through foreclosure in a prior period and a $183,000 gain on the sale of real
estate held for development. These reductions offset improvements in every other
category of noninterest income. Fees for other services to customers increased
$112,000, from $393,000 for the year ended December 31, 1995 to $505,000 for the
year ended December 31, 1996, as the result of additional fees generated by the
Texas thrifts. Gain on sales of loans increased $147,000 from $227,000 for the
year ended December 31, 1995 to $374,000 for the year ended December 31, 1996
due to an increase in loan sales from $28.3 million in 1995 to $32.9 million in
1996. The gains on sales of loans represent origination and other fees retained
by the Company in connection with the sales of fixed-rate loans to institutional
investors generally on an individual loan basis. The increased sales activity
reflects one full year of activity from First Federal. Other noninterest income
decreased $67,000 from $511,000 for the year ended December 31, 1995 to $444,000
for the year ended December 31, 1996.
NONINTEREST EXPENSE. Noninterest expense increased $10.2 million, or 68.5%,
from $15.0 million for the year ended December 31, 1995 to $ 25.2 million for
the year ended December 31, 1996. Over half of this increase was due to the
payment of a special assessment to recapitalize the SAIF. During the third
quarter of 1996, legislation was passed which provided for a one-time assessment
to all financial institutions holding SAIF-insured deposits. The Company's share
of the assessment was $5.6 million which represents an after-tax charge to
earnings of $3.5 million, or $.87 per share. Compensation and employee benefits
increased $2.1 million, or 28.6%, from $7.5 million for the year ended December
31, 1995 to $9.6 million for the year ended December 31, 1996 as the result of
normal salary increases and the inclusion of the Texas thrifts for the entire
year. Federal insurance premiums increased $522,000, or 32.1%, from $1.6 million
for the year ended December 31, 1995 to $2.1 million for the year ended December
31, 1996 as a result of deposit growth and the acquisition of the Texas thrifts.
Although the Company expects continued deposit growth during 1997, overall
deposit insurance expense should decline as a result of the 60% reduction in the
Company's SAIF assessment rate following the recapitalization of the SAIF.
Legal, examination, and other professional fees increased $340,000, or 39.0%,
from $872,000 for the year ended December 31, 1995 to $1.2 million for the year
ended December 31, 1996 primarily as the result of expenses associated with the
Company's acquisition activities, implementation of the Company's dividend
reinvestment plan and increased audit and examination charges associated with
the Texas thrifts. Occupancy expense increased $291,000 from $1.8 million for
the year ended December 31, 1995 to $2.1 million for the year ended December 31,
1996 due primarily to the acquisition of the Texas thrifts. Advertising expense
increased $125,000, or 36.6%, from $341,000 for the year ended December 31, 1995
to $466,000 for the year ended December 31, 1996 in support of increased sales
activity and the addition of the Texas thrifts. Other noninterest expense
increased $703,000, or 30.5%, from $2.3 million for the year ended December 31,
1995 to $3.0 million for the year ended December 31, 1996 primarily as the
result of the inclusion of a full year of operating expenses in 1996 related to
the Texas thrifts versus a partial year in 1995. Amortization of excess cost
over fair value of net assets acquired ("goodwill") increased
49
<PAGE>
$519,000, from $504,000 for the year ended December 31, 1995 to $1,023,000 for
the year ended December 31, 1996. Goodwill is being amortized on a straight-
line basis over 15 years. The increase in amortization expense reflects a full
year of amortization in 1996 versus a partial year in 1995. Goodwill and the
related amortization expense will increase further during 1997 due to the
acquisitions of Texas Heritage and L&B Financial. The Company's efficiency
ratio, which is the relationship of noninterest expense to net interest income
and noninterest income, excluding the two third quarter charges previously
discussed, was 60% in 1996, which compares favorably to the Company's peer
average of 58%.
INCOME TAX EXPENSE. The Company provides for state and federal income tax
expense based upon income before income taxes. The effective tax rate for 1996
was 41.3% compared to 35.7% for 1995. The increase in the effective tax rate
during 1996 was primarily the result of the increase in amortization of
goodwill, which is not tax deductible. The Company accounts for income taxes
under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," which requires the asset and liability
method. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NET INCOME. Net income increased $1.0 million, or 18.8%, from $5.4 million
for the year ended December 31, 1994 to $6.4 million for the year ended December
31, 1995 as the result of strong growth in net interest income and a substantial
increase in noninterest income. The increases in net interest income and
noninterest income were both attributable to the acquisitions of the Texas
thrifts whose results of operations are included from the dates of their
acquisitions in accordance with the purchase method used in accounting for the
acquisitions. The ratios of return on average stockholders' equity and return on
average assets were 8.28% and .61 %, respectively, for the year ended December
31, 1995 compared to 7.41 % and .73%, respectively, for the year ended December
31, 1994. The increase in the ratio of return on average stockholders' equity
was attributable to the additional income generated from the Texas acquisitions
during 1995. The decline in return on average assets during 1995 was the result
of a decrease in the ratio of average interest-earning assets to average
interest-bearing liabilities combined with a decline in the net interest margin.
Earnings per share for the year ended December 31, 1995 were $1.60 per share
compared to $1.32 per share for 1994. Average shares outstanding for the years
ended December 31, 1995 and 1994 were 3,983,317 and 4,065,119, respectively.
NET INTEREST INCOME. Net interest income increased $5.2 million, or 29.8%,
from $17.5 million for the year ended December 31, 1994 to $22.7 million for the
year ended December 31, 1995, primarily as a result of significant growth in
interest-earning assets as a result of the Texas acquisitions. The average
balance of interest-earning assets increased $291.8 million, or 40.4%, from
$721.9 million for the year ended December 31, 1994 to $1.0 billion for the year
ended December 31, 1995. The impact of this increase was partially offset by a
decline in the interest rate spread from 2.01 % to 1.89% during the same period.
The increase in the average balance of interest-earning assets was primarily the
result of $369.6 million in interest-earning assets purchased in the acquisition
of the Texas thrifts. The interest rate spread decreased as the cost of deposits
and short-term borrowings used to fund new loans increased.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
from $45.0 million for the year ended December 31, 1994 to $73.0 million for the
year ended December 31, 1995 primarily due to growth in the loan and mortgage-
backed securities portfolios and an increase in the average yield on interest-
earning assets from 6.23% for the year ended December 31, 1994 to 7.21% for the
year ended December 31, 1995. Interest income on loans receivable increased
$22.5 million, or 72.6%. The increase in interest income from loans receivable
is attributable to a $240.2 million increase in the average balance of loans
receivable during the year ended December 31, 1995, and an increase in the
average yield on the loan portfolio from 6.63% during the year ended December
31, 1994 to 7.56% during the year ended December 31, 1995 reflecting the higher
rate environment.
50
<PAGE>
Interest income on mortgage-backed securities increased $3.2 million, or
27.4%. Approximately $1.0 million of the increase was attributable to the $18.3
million increase in the average balance of mortgage-backed securities with the
remainder attributable to an increase in the average yield on the portfolio from
5.47% for the year ended December 31, 1994 to 6.42% for the year ended December
31, 1995. The increase in the average balance resulted from the $94.3 million in
mortgage-backed securities purchased in the Texas acquisitions, partially offset
by the sale of $55.4 million in mortgage-backed securities during the year ended
December 31, 1995. The increase in the average yields is the result of the
adjustable-rate nature of a large part of the portfolio combined with the
increase in market interest rates between the respective periods. At December
31, 1995, $119.6 million, or 51.4%, of mortgage-backed securities had interest
rates which adjust monthly or annually.
Interest income on investment securities increased $1.5 million, or 115.3%
due to a $21.7 million increase in the average balance outstanding and a 54
basis point rise in the average yields. Interest income from other interest-
earning assets (including interest earned on interest-bearing deposits in the
FHLB and dividends received on FHLB stock) increased $828,000. The increase was
due to an increase in the average balance in other interest-earning assets from
$17.1 million for the year ended December 31, 1994 to $28.7 million for the year
ended December 31, 1995.
INTEREST EXPENSE. Total interest expense increased $22.8 million, or 83.1%,
from $27.5 million for the year ended December 31, 1994 to $50.3 million for the
year ended December 31, 1995 principally due to an increase in interest expense
on deposits. Interest expense on savings deposits increased $20.2 million from
$16.8 million for the twelve-month period ended December 31, 1994 to $37.0
million for the twelve-month period ended December 31, 1995 primarily as the
result of a $290.5 million increase in the average balance of savings deposits
during the same period. The average cost of deposits also increased from 4.00%
during 1994 to 5.20% during 1995. Interest expense on borrowed money increased
$2.6 million from $10.7 million for the twelve-month period ended December 31,
1994 to $13.3 million for the twelve-month period ended December 31, 1995. The
increase was caused by the increase in the average cost from 4.63% during 1994
to 5.69% during 1995, which was due to the increase in market interest rates
between the respective periods.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans for the
year ended December 31, 1995 totaled $367,000 compared to $300,000 for the year
ended December 31, 1994. Loan charge-offs for the year ended December 31, 1995
increased to $122,000 compared to $19,000 in charge-offs during the year ended
December 31, 1994. The allowance for losses on loans was $5.1 million, or .65%
of total loans, at December 31, 1995 compared to $3.5 million, or .59% of total
loans, at December 31, 1994. Nonaccruing loans were $2.5 million, or .31 % of
total loans at December 31, 1995 compared to $249,000, or .04% of total loans at
December 31, 1994. The ratio of nonperforming assets to total assets increased
from .33% at December 31, 1994 to .59% at December 31, 1995. Management
considers many factors in determining the necessary levels of loan loss
reserves, including a detailed analysis of specific loans in the portfolio,
known and inherent risk in the portfolio, estimated value of the underlying
collateral, assessment of general trends in the real estate market, and current
and prospective economic and regulatory conditions.
NONINTEREST INCOME. Total noninterest income increased $1.1 million, or
74.0%, from $1.4 million for the year ended December 31, 1994 to $2.5 million
for the year ended December 31, 1995 primarily as a result of increased gain on
real estate operations, servicing and other loan fees, and fees for other
customer services, partially offset by a reduction in gains on sales of
mortgage-backed securities. Gain on real estate operations increased $667,000
from $98,000 for the year ended December 31, 1994 to $765,000 for the year ended
December 31, 1995. The increase is due primarily to $126,000 in net rental
income from two commercial properties acquired through foreclosure, $323,000
from a deficiency judgment on prior period properties acquired through
foreclosure and a $183,000 gain on the sale of' real estate held for
development. Servicing and other loan fees increased $366,000, from $220,000 for
the year ended December 31, 1994 to $586,000 for the year ended December 31,
1995. The increase is primarily a result of $279,000 in servicing and other loan
fees generated by the Texas thrifts and an increase in income from late charges
on loans. Fees for other services to customers increased $167,000, from
51
<PAGE>
$226,000 for the year ended December 31, 1994 to $393,000 for the year ended
December 31, 1995. The increase is primarily a result of $181,000 in fees for
services to customers generated by the Texas thrifts. Gain on the sale of
mortgage-backed securities for the year ended December 31, 1994 was $158,000
resulting from the sale of $6.5 million of FHLMC mortgage-backed securities,
which were classified as available for sale. During 1995 the Company recorded
no such gain or loss on sales.
NONINTEREST EXPENSE. Noninterest expense increased $4.9 million, or 49.4%,
from $10.0 million for the year ended December 31, 1994 to $15.0 million for the
year ended December 31, 1995 primarily due to increases in compensation and
employee benefits expenses and other expense. In addition, the Company incurred
$504,000 in expense from the amortization of excess of cost over fair value of
net assets acquired in the Texas acquisitions. The ratio of' noninterest expense
to average assets increased from 1.36% for the year ended December 31, 1994 to
1.43% for the year ended December 31, 1995. Compensation and employee benefits
increased $1.9 million, from $5.6 million for the year ended December 31, 1994
to $7.5 million for the year ended December 31, 1995 as the result of salary
increases, the hiring of additional employees to strengthen and support the
Company's sales culture and the acquisition of the Texas thrifts. Occupancy
expense increased $402,000, or 28.1%, from $1.4 million for the year ended
December 31, 1994 to $1.8 million for the year ended December 31, 1995 due
primarily to the acquisition of the Texas thrifts. Federal insurance premiums
increased $795,000, or 95.8%, from $830,000 for the year ended December 31, 1994
to $1.6 million for the year ended December 31, 1995 as a result of deposit
growth and the acquisition of the Texas thrifts. Legal, examination, and other
professional fees increased $326,000, or 59.8%, from $546,000 for the year ended
December 31, 1994 to $872,000 for the year ended December 31, 1995 primarily as
the result of increased audit and examination charges associated with the Texas
thrifts and legal expenses incurred in converting Jefferson Savings from a state
charter to a federal charter. Other noninterest expense increased $1.0 million,
or 82.3%, from $1.3 million for the year ended December 31, 1994 to $2.3 million
for the year ended December 31, 1995 primarily as the result of expenses
attributable to the acquisition of the Texas thrifts.
INCOME TAX EXPENSE. The Company provides for state and federal income tax
expense based upon income before income taxes. The effective tax rate for 1995
was 35.7% is compared to 37.9% for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of the Association
and the Bank. The Company's assets consist almost entirely of its investments in
and advances to its subsidiaries. Its primary funding needs are for interest
payments on certain bank debt, cash for future acquisitions and funds for the
payment of dividends to stockholders. To fund these activities, the Company is
dependent on future earnings, dividends from the Association and the Bank, or
borrowings. The Association and the Bank are subject to certain regulatory
limitations with respect to the payment of dividends to the Company. At December
31, 1996, the Association and the Bank had a total of approximately $7.5 million
available for the payment of additional dividends to the Company under these
regulations. The Association and the Bank meet all existing regulatory capital
requirements at December 31, 1996.
The Association and the Bank are required by federal regulations to
maintain specified levels of liquid assets, consisting of cash and eligible
investments, which include, among other investments, certain United States
Treasury obligations, securities of various federal agencies, certificates of
deposit at insured banks, federal funds sold, and bankers' acceptances. The
current level of liquidity required by the OTS is 5% of the sum of net
withdrawable deposits and borrowings due within one year. The Association and
the Bank have consistently maintained liquidity in excess of required amounts.
The Association's liquidity ratios were 5.57% and 5.78% at December 31, 1996 and
1995, respectively. The Bank's liquidity ratios were 6.40% and 16.61% at
December 31, 1996 and 1995, respectively.
On a consolidated basis, the Company's primary sources of funds are
deposits, borrowings, proceeds from principal and interest payments on loans and
mortgage-backed securities, and cash flows from operations. Borrowings consist
primarily of advances and lines of credit from the Federal Home Loan Banks.
While maturities
52
<PAGE>
and scheduled amortization of loans and mortgage-backed securities are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company chooses among these different sources of funds based on comparative
costs, availability, and the Company's asset/liability objectives.
The Company's most liquid assets are cash and cash equivalents, which are
short-term, highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash and include
interest-bearing deposits and federal funds sold. At December 31, 1996, 1995,
and 1994, cash and cash equivalents totaled $23.7 million, $20.7 million, and
$8.1 million, respectively. The levels of these assets are dependent on the
Company's operating, financing, and investing activities during any given
period. These activities for the years ended December 31, 1996, 1995, and 1994
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income.......................................... $ 2,816 $ 6,370 $ 5,362
Adjustments to reconcile net income to net cash
provided by operating activities................... (1,574) (610) 6,893
-------- -------- ---------
Net cash provided by operating activities......... 1,242 5,760 12,255
Net cash provided by (used in) investing activities.. 69,979 78,133 (296,075)
Net cash provided by (used in) financing activities.. (68,206) (71,293) 285,629
-------- -------- ---------
Net increase in cash and cash equivalents......... 3,015 12,600 1,809
Cash and cash equivalents at beginning of year....... 20,690 8,090 6,281
-------- -------- ---------
Cash and cash equivalents at end of year.......... $ 23,705 $ 20,690 $ 8,090
======== ======== =========
</TABLE>
The primary source of cash from operating activities during the years ended
December 31, 1996, 1995 and 1994 was income from operations.
The primary investing activity of the Company is the origination and/or
purchase of mortgage loans and mortgage-backed securities. During the years
ended December 31, 1996, 1995, and 1994, the Company originated loans in the
amounts of $358.1 million, $162.1 million, and $130.5 million, respectively.
Purchases of mortgage loans and mortgage-backed securities totaled $39.0
million, $27.4 million, and $263.6 million, respectively, in those same periods.
Other investing activities include investing in FHLB stock and U.S. Government
and federal agency obligations. During the years ended December 31, 1996, 1995,
and 1994, these activities were funded in part by principal payments on loans
and mortgage-backed securities and maturities of investment securities totaling
$343.7 million, $213.3 million, and $112.0 million, respectively. For the past
two fiscal years, the Company has funded a substantial portion of its operations
with cash flows from its investing activities, principally in the form of
proceeds from sales and principal repayments on mortgage-backed securities.
These cash flows have been used to pay down borrowings as well as for loan
originations and other investments.
The primary financing activity of the Company is the attraction of savings
deposits supplemented by borrowings from the Federal Home Loan Bank. During the
years ended December 31, 1996, 1995 and 1994, savings deposits increased $76.9
million, $358.2 million and $170.5 million, respectively. The increases in 1996
and 1995 include deposits assumed in the acquisitions of the Texas thrifts of
approximately $65 million and $313 million, respectively. Borrowed money
decreased $77.3 million and $87.0 million during the years ended December 31,
1996 and 1995, respectively and increased $116.3 million during the year ended
December 31, 1994.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1996 the Company had commitments
to originate loans of $28.4 million, and to purchase residential
53
<PAGE>
adjustable rate mortgages of $1.9 million. Certificates of deposit which are
scheduled to mature in one year or less at December 31, 1996 totaled $516.4
million. Management believes that a significant portion of such deposits will
remain with the Company.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. During June 1996, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinquishments of Liabilities". SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinquishments of liabilities based on consistent
application of a financial components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial components approach, after a
transfer of financial assets an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial components approach focuses on the assets and liabilities that exist
after the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not meet
the criteria for a sale, the transfer is accounted for as a secured borrowing
with pledge of collateral.
SFAS No. 125 extends the "available for sale" or "trading" approach in SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities", to
nonsecurity financial assets that can contractually be prepaid or otherwise
settled in such a way that the holder of the asset would not recover
substantially all of its recorded investment. Thus, nonsecurity financial assets
(no matter how acquired) such as loans, other receivables, interest-only strips
or residual interests in securitization trusts that are subject to prepayment
risk that could prevent recovery of substantially all of the recorded amount are
to be reported at fair value with the change in fair value accounted for
depending on the asset's classification as "available-for-sale" or "trading".
SFAS No. 125 also amends SFAS No. 115 to prevent a security from being
classified as held-to-maturity if the security can be prepaid or otherwise
settled in such a way that the holder of the security would not recover
substantially all of its recorded investment.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not permitted.
Also, the extension of the SFAS No. 115 approach to certain nonsecurity
financial assets and the amendment to SFAS No. 115 is effective for financial
assets held on or acquired after January 1, 1997. Reclassifications that are
necessary because of the amendment do call into question an entity's intent to
hold other debt securities to maturity in the future. The adoption of SFAS No.
125 is not expected to have a material impact on the Company's financial
statements.
54
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS Page
- --------------------------------- ----
<S> <C>
Independent Auditors' Report......................................... 56
Consolidated Balance Sheets as of December 31, 1996 and 1995......... 57
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994................................... 58
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994................................... 59
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994................................... 60
Notes to Consolidated Financial Statements........................... 61
SUPPLEMENTARY DATA
- ------------------
Quarterly Financial Data............................................. 86
</TABLE>
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Jefferson Savings Bancorp, Inc.
Ballwin, Missouri:
We have audited the accompanying consolidated balance sheets of Jefferson
Savings Bancorp, Inc. and subsidiaries (the Company) as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' 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
Company'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 Savings
Bancorp, 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
St. Louis, Missouri
January 29, 1997
56
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash.............................................................. $ 7,359,389 $ 1,945,276
Interest-bearing deposits......................................... 11,531,105 18,745,488
Federal funds sold................................................ 4,815,000 --
Investment securities available for sale, at fair value
(amortized cost of $84,838,744 and $48,443,789 at
December 31, 1996 and 1995, respectively)...................... 85,701,772 48,590,166
Mortgage-backed securities available for sale, at fair value
(amortized cost of $95,982,081 and $234,160,389 at
December 31, 1996 and 1995, respectively)....................... 95,203,312 232,882,760
Loans receivable, net............................................. 885,405,062 788,085,287
Investment in real estate, net.................................... 4,460,202 4,681,972
Stock in Federal Home Loan Banks.................................. 15,768,700 16,520,100
Office properties and equipment, net.............................. 9,667,851 7,984,488
Excess of cost over fair value of net assets acquired............. 19,746,106 14,495,743
Accrued income and other assets................................... 8,420,576 8,997,504
-------------- --------------
$1,148,079,075 $1,142,928,784
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits.................................................. $ 947,068,672 $ 870,178,701
Borrowed money.................................................... 97,682,127 174,961,956
Deferred tax liability............................................ 1,324,000 1,161,000
Advance payments by borrowers for taxes and insurance............. 2,884,424 2,875,576
Accrued expenses and other liabilities............................ 9,200,939 13,500,813
-------------- --------------
Total liabilities............................................. 1,058,160,162 1,062,678,046
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value): Authorized 5,000,000 shares;
none issued.................................................... -- --
Common stock ($.01 par value): Authorized 20,000,000 shares;
issued 4,470,049 shares at December 31, 1996 and 1995.......... 44,700 44,700
Additional paid-in capital....................................... 45,771,841 43,197,276
Retained earnings, subject to certain restrictions............... 50,759,048 49,140,260
Unrealized gain (loss) on assets available for sale, net......... 50,259 (666,313)
Unamortized restricted stock awards.............................. (359,477) (616,055)
Unearned ESOP shares............................................. (5,345,412) (6,115,907)
Treasury stock, at cost: 62,703 shares and 296,486 shares at
December 31, 1996 and 1995, respectively....................... (1,002,046) (4,733,223)
-------------- --------------
Total stockholders' equity................................... 89,918,913 80,250,738
-------------- --------------
$1,148,079,075 $1,142,928,784
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Interest and dividend income:
Loans receivable................................................. $64,911,063 $53,500,602 $30,987,615
Mortgage-backed securities ...................................... 10,858,270 14,993,783 11,764,502
Investment securities............................................ 4,280,168 2,769,581 1,286,528
Interest-bearing deposits and federal funds sold................. 583,224 730,042 56,883
Stock in Federal Home Loan Banks................................. 1,057,478 1,049,947 895,367
----------- ----------- -----------
Total interest and dividend income............................ 81,690,203 73,043,955 44,990,895
----------- ----------- -----------
Interest expense:
Savings deposits................................................ 44,365,648 36,995,127 16,801,236
Borrowed money.................................................. 7,792,206 13,302,429 10,668,685
----------- ----------- -----------
Total interest expense ...................................... 52,157,854 50,297,556 27,469,921
----------- ----------- -----------
Net interest income.......................................... 29,532,349 22,746,399 17,520,974
Provision for losses on loans.................................... 660,000 367,153 300,000
----------- ----------- -----------
Net interest income after provision for losses on loans...... 28,872,349 22,379,246 17,220,974
----------- ----------- -----------
Noninterest income:
Servicing and other loan fees................................... 638,200 585,503 220,356
Fees for other services to customers............................ 505,107 392,572 225,575
Gain (loss) on sales of mortgage-backed securities, net......... (1,296,134) -- 157,906
Gain on sales of loans, net..................................... 373,739 226,518 264,700
Gain on real estate operations, net............................. 453,101 765,251 98,341
Other........................................................... 443,950 511,122 458,836
----------- ----------- -----------
Total noninterest income..................................... 1,117,963 2,480,966 1,425,714
----------- ----------- -----------
Noninterest expense:
General and administrative:
Compensation and employee benefits............................. 9,613,987 7,475,867 5,613,727
Occupancy...................................................... 2,122,183 1,831,345 1,429,056
Advertising.................................................... 465,767 340,973 329,277
Federal insurance premiums..................................... 2,147,752 1,625,650 830,455
Legal, examination, and other professional fees................ 1,212,294 871,867 545,501
Other.......................................................... 3,008,409 2,305,321 1,264,263
----------- ----------- -----------
Total general and administrative............................. 18,570,392 14,451,023 10,012,279
SAIF special assessment......................................... 5,598,880 -- --
Amortization of excess cost over fair value of
net assets acquired........................................... 1,022,642 503,682 --
----------- ----------- -----------
Total noninterest expense.................................... 25,191,914 14,954,705 10,012,279
----------- ----------- -----------
Income before income taxes................................... 4,798,398 9,905,507 8,634,409
Income tax expense............................................... 1,982,200 3,536,000 3,272,000
----------- ----------- -----------
Net income................................................... $ 2,816,198 $ 6,369,507 $ 5,362,409
=========== =========== ===========
Earnings per share............................................... $.71 $1.60 $1.32
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
--------------------------------------------------------------------------
UNREALIZED
GAIN (LOSS) UNAMORTIZED
COMMON STOCK ADDITIONAL ON ASSETS RESTRICTED
------------------- PAID-IN RETAINED AVAILABLE STOCK
SHARES DOLLARS CAPITAL EARNINGS FOR SALE, NET AWARDS
--------- ------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993...................... 4,255,999 $44,700 $42,435,790 $37,408,344 $ 30,897 $(1,418,371)
Net income................. -- -- -- 5,362,409 -- --
Amortization of restricted
stock awards.............. -- -- -- -- -- 401,158
Tax benefit of restricted
stock awards vested....... -- -- 100,000 -- -- --
Amortization of ESOP shares -- -- 235,709 -- -- --
Change in unrealized gain
(loss) on assets available
for sale, net............. -- -- -- -- (4,241,905) --
Stock options exercised.... 1,426 -- (8,499) -- -- --
Purchase of treasury stock. (91,862) -- -- -- -- --
--------- ------- ----------- ----------- -------------- -----------
Balance at December 31,
1994...................... 4,165,563 44,700 42,763,000 42,770,753 (4,211,008) (1,017,213)
Net income................. -- -- -- 6,369,507 -- --
Amortization of restricted
stock awards.............. -- -- -- -- -- 401,158
Tax benefit of restricted
stock awards vested....... -- -- 86,000 -- -- --
Purchase of ESOP shares.... -- -- -- -- -- --
Amortization of ESOP shares -- -- 371,956 -- -- --
Change in unrealized gain
(loss) on assets available
for sale, net............ -- -- -- -- 3,544,695 --
Stock options exercised.... 8,000 -- (47,680) -- -- --
Tax benefit of
non-incentive stock
options exercised......... -- -- 24,000 -- -- --
--------- ------- ----------- ----------- -------------- -----------
Balance at December 31,
1995...................... 4,173,563 44,700 43,197,276 49,140,260 (666,313) (616,055)
Net income................. -- -- -- 2,816,198 -- --
Dividends paid ($.32 per
share).................... -- -- -- (1,197,410) -- --
Release of ESOP shares in
lieu of cash
dividends on allocated
ESOP shares.............. -- -- 9,353 -- -- --
Stock issued in dividend
reinvestment
and stock purchase plan... 2,169 -- 14,272 -- -- --
Amortization of restricted
stock awards.............. -- -- -- -- -- 256,578
Tax benefit of restricted
stock awards vested....... -- -- 265,000 -- -- --
Amortization of ESOP shares -- -- 691,082 -- -- --
Change in unrealized gain
(loss) on assets available
for sale, net............ -- -- -- -- 716,572 --
Stock issued to acquire
Texas Heritage............ 223,151 -- 1,593,297 -- -- --
Stock options exercised.... 8,463 -- (50,439) -- -- --
Tax benefit of
non-incentive stock
options exercised......... -- -- 52,000 -- -- --
--------- ------- ----------- ----------- -------------- -----------
Balance at December 31,
1996...................... 4,407,346 $44,700 $45,771,841 $50,759,048 $ 50,259 $ (359,477)
========= ======= =========== =========== ============== ===========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-------------------------------------------------------
TOTAL
UNEARNED STOCK-
ESOP TREASURY HOLDERS'
SHARES STOCK EQUITY
----------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31,
1993...................... $(3,438,500) $(3,354,619) $71,708,241
Net income................. -- -- 5,362,409
Amortization of restricted
stock awards.............. -- -- 401,158
Tax benefit of restricted
stock awards vested....... -- -- 100,000
Amortization of ESOP shares 687,700 -- 923,409
Change in unrealized gain
(loss) on assets available
for sale, net............. -- -- (4,241,905)
Stock options exercised.... -- 22,759 14,260
Purchase of treasury stock. -- (1,529,043) (1,529,043)
----------- ----------- -----------
Balance at December 31,
1994...................... (2,750,800) (4,860,903) 72,738,529
Net income................. -- -- 6,369,507
Amortization of restricted
stock awards.............. -- -- 401,158
Tax benefit of restricted
stock awards vested....... -- -- 86,000
Purchase of ESOP shares.... (3,779,081) -- (3,779,081)
Amortization of ESOP shares 413,974 -- 785,930
Change in unrealized gain
(loss) on assets available
for sale, net............. -- -- 3,544,695
Stock options exercised.... -- 127,680 80,000
Tax benefit of
non-incentive stock
options exercised......... -- -- 24,000
----------- ----------- -----------
Balance at December 31,
1995...................... (6,115,907) (4,733,223) 80,250,738
Net income................. -- -- 2,816,198
Dividends paid ($.32 per
share).................... -- -- (1,197,410)
Release of ESOP shares in
lieu of cash
dividends on allocated
ESOP shares.............. 24,505 -- 33,858
Stock issued in dividend
reinvestment
and stock purchase plan... -- 34,617 48,889
Amortization of restricted
stock awards.............. -- -- 256,578
Tax benefit of restricted
stock awards vested...... -- -- 265,000
Amortization of ESOP shares 745,990 -- 1,437,072
Change in unrealized gain
(loss) on assets available
for sale, net............. -- -- 716,572
Stock issued to acquire
Texas Heritage............ -- 3,561,491 5,154,788
Stock options exercised.... -- 135,069 84,630
Tax benefit of
non-incentive stock
options exercised......... -- -- 52,000
----------- ----------- -----------
Balance at December 31,
1996...................... $(5,345,412) $(1,002,046) $89,918,913
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 2,816,198 $ 6,369,507 $ 5,362,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................... 2,503,912 2,295,597 2,115,867
Provision for losses on loans............................... 660,000 367,153 300,000
Provision for losses on real estate......................... 200,000 -- --
Net gain on sales of assets................................. (4,090) (856,492) (635,502)
Loans originated for sale................................... (27,764,507) (24,559,773) (2,628,606)
Sale of loans held for sale................................. 27,019,117 22,957,970 3,407,868
Deferred income taxes....................................... (250,000) (130,000) 868,100
Stock dividend from Federal Home Loan Banks................. (151,800) (339,800) --
Other, net.................................................. (3,787,048) (343,959) 3,465,234
------------- ------------- -------------
Net cash provided by operating activities............ 1,241,782 5,760,203 12,255,370
------------- ------------- -------------
Cash flows from investing activities:
Principal payments on:
Loans receivable.............................................. 290,969,097 165,052,315 71,143,875
Mortgage-backed securities.................................... 22,378,652 19,464,726 25,905,565
Proceeds from maturity of investment securities................. 30,335,000 28,775,000 15,000,000
Proceeds from sale of:
Loans receivable.............................................. 5,873,494 5,388,938 10,418,399
Mortgage-backed securities available for sale................. 147,471,014 55,412,739 6,528,275
Investment securities available for sale...................... -- 3,880,781 --
Redemption of Federal Home Loan Bank stock...................... 1,572,400 -- --
Cash invested in:
Loans receivable originated................................... (330,381,304) (137,577,488) (127,822,404)
Loans receivable purchased.................................... (9,117,125) (27,402,471) (225,608,551)
Mortgage-backed securities.................................... (29,836,277) -- (38,039,237)
Investment securities......................................... (62,997,500) (7,994,413) (30,810,859)
Federal Home Loan Bank stock.................................. -- (245,400) (7,085,000)
Proceeds from sale of real estate............................... 4,947,530 2,050,673 5,144,425
Cash paid for acquisitions...................................... (5,147,225) (51,980,749) --
Cash and cash equivalents from acquisitions..................... 5,584,393 24,138,494 --
Other, net...................................................... (1,673,269) (830,428) (849,397)
------------- ------------- -------------
Net cash provided by (used in) investing activities.. 69,978,880 78,132,717 (296,074,909)
------------- ------------- -------------
Cash flows from financing activities:
Increase in savings deposits, net............................... 12,021,140 45,715,780 170,549,804
Increase (decrease) in borrowed money, net...................... (79,041,170) (110,398,044) 116,265,547
Fees paid for interest rate cap agreements...................... -- -- (1,000,300)
Increase (decrease) in advance payments by borrowers
for taxes and insurance....................................... (122,011) (2,911,422) 1,328,604
Dividends paid.................................................. (1,197,410) -- --
Purchase of treasury stock...................................... -- -- (1,529,043)
Purchase of ESOP shares......................................... -- (3,779,081) --
Other, net...................................................... 133,519 80,000 14,260
------------- ------------- -------------
Net cash provided by (used in) financing activities.. (68,205,932) (71,292,767) 285,628,872
------------- ------------- -------------
Increase in cash and cash equivalents................ 3,014,730 12,600,153 1,809,333
Cash and cash equivalents at beginning of year.................... 20,690,764 8,090,611 6,281,278
------------- ------------- -------------
Cash and cash equivalents at end of year.......................... $ 23,705,494 $ 20,690,764 $ 8,090,611
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid................................................... $ 52,419,826 $ 50,803,549 $ 27,298,454
Income taxes paid............................................... 2,492,384 3,965,252 2,589,000
Noncash investing activities:
Stock issued for acquisitions................................. 5,154,788 -- --
Transfer of mortgage-backed securities from
held to maturity to available for sale...................... -- 94,245,376 --
Additions to real estate acquired in settlement
of loans or through foreclosure............................. 3,867,980 1,826,177 212,059
Loans originated to finance the sale of real estate........... 133,726 204,975 275,700
Noncash financing activity - interest credited.................. 32,963,462 27,762,659 12,895,000
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Following are the significant accounting policies which Jefferson Savings
Bancorp, Inc. and subsidiaries (the Company) follow in preparing and presenting
their consolidated financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Jefferson
Savings Bancorp, Inc. and its wholly owned subsidiaries, Jefferson Savings and
Loan Association F.A. ("Jefferson Savings" or the "Association") and First
Federal Savings Bank of North Texas ("First Federal" or the "Bank"). Jefferson
Savings' wholly owned subsidiaries are J.S. Services, Inc., J.S. Services of
Florida, Inc., JS&L Realty, Inc., and Jefferson Financial Corporation. First
Federal's wholly-owned subsidiaries are First Service Corporation, Inc. and
North Texas Financial Services, Inc. All significant intercompany items have
been eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In the normal course of business, the
Company encounters two significant types of risk: economic and regulatory.
Economic risk is comprised of interest rate risk, credit risk, and market risk.
The Company is subject to interest rate risk to the degree that its interest-
bearing liabilities reprice on a different basis than its interest-earning
assets. Credit risk is the risk of default on the Company's loan portfolio that
results from the borrowers' inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of collateral
underlying loans receivable and the value of the Company's investment in real
estate.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates. The determination of the allowance
for loan losses and the valuation of real estate are based on estimates that are
particularly susceptible to changes in the economic environment and market
conditions. These balances may be adjusted in the future based on such changes,
or based on requirements of regulatory examiners of the Company's subsidiaries.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common
shares and common stock equivalents, if dilutive, outstanding during the period.
The only common stock equivalents are stock options. The weighted average number
of common stock equivalents is calculated using the treasury stock method. The
average number of common shares and common equivalent shares outstanding for the
years 1996, 1995, and 1994 was 3,974,457, 3,983,317, and 4,065,119,
respectively. Only employee stock ownership plan ("ESOP") shares that have been
allocated or committed to be released are considered outstanding for earnings
per share calculations.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
considers all interest-bearing deposits and federal funds sold to be cash
equivalents.
61
<PAGE>
INVESTMENTS IN MORTGAGE-BACKED AND INVESTMENT SECURITIES
Investment and mortgage-backed securities for which the Company has the
positive intent and ability to hold to maturity are reported at cost, adjusted
for premiums and discounts.
Available-for-sale securities, which consist of investment and mortgage-
backed securities, and certain equity securities not classified as trading
securities nor as held-to-maturity securities, are carried at fair value.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity until realized. Realized gains and losses, based on the amortized cost of
specifically identified securities, are included in income when management makes
the decision to sell.
Any declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary are
included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity, adjusted for anticipated prepayments.
LOANS RECEIVABLE AND RELATED FEES
Loans receivable are carried at cost, as the Company has both the intent
and the ability to hold them to maturity. Interest is credited to income as
earned; however, interest receivable is accrued only if deemed collectible.
Generally, the Company's policy is to exclude from income interest on loans
delinquent over 90 days. Such interest ultimately collected is credited to
income in the period received.
Loan origination fees and the related incremental direct costs of
originating loans are deferred and amortized over the contractual lives of the
related loans using the interest method.
The Company obtains commitments to sell certain conforming loans. All such
sales are made without recourse to the Company. Loans held for sale are carried
at the lower of aggregate cost or market value. The gains on sales of loans are
recognized at the time of sale and are determined by specific identification. At
December 31, 1996 and 1995, such loans totaled $2.8 million and $1.8 million,
respectively.
Unearned discount on non-real estate loans and premiums and discounts on
other purchased loans are amortized using the interest method.
The allowance for loan losses is maintained at an amount considered
adequate to provide for potential losses. The provision for loan losses is based
on a periodic analysis of the loan portfolio by management. In this regard,
management considers numerous factors, including, but not necessarily limited
to, general economic conditions, loan portfolio composition, prior loss
experience, and independent appraisals. In addition to the allowance for losses
on impaired loans, an overall unallocated allowance is established to provide
for unidentified credit losses. In estimating such losses, management considers
various risk factors, including geographic location, loan collateral, and
payment history.
62
<PAGE>
INVESTMENT IN REAL ESTATE
Investment in real estate includes real estate acquired for development and
sale and real estate acquired through foreclosure.
The property held for development and sale is carried at the lower of cost
(adjusted for acquisition, direct holding, and development costs) or net
realizable value.
Real estate acquired through foreclosure is initially recorded at fair
value. Fair value is defined as the amount in cash or cash equivalent value of
other consideration that a real estate parcel would yield in a current sale
between a willing buyer and a willing seller. If considered necessary, the
Company records a valuation allowance for estimated selling costs of the
property immediately after foreclosure. Subsequent to foreclosure, real estate
acquired through foreclosure is periodically evaluated by management and an
allowance for loss is established if the estimated fair value of the property,
less estimated costs to sell, declines.
Profit on sales of real estate is recognized when title has passed, minimum
down-payment requirements have been met, the terms of any notes received by the
Company are such to satisfy continuing payment requirements, and the Company is
relieved of any requirement for continued involvement in the real estate.
Otherwise, recognition of profit is deferred until such criteria are met.
STOCK IN FEDERAL HOME LOAN BANKS
The Company's subsidiaries, as members of the Federal Home Loan Bank System
administered by the Federal Housing Finance Board, are required to maintain an
investment in capital stock of the Federal Home Loan Banks ("FHLB") in an amount
equal to a specified percentage of mortgage loans, total assets or advances from
the FHLBs to the subsidiaries. The stock is recorded at cost which represents
redemption value.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally on the straight-line method over the estimated useful life of the
related asset. Leasehold improvements are amortized over the shorter of their
estimated useful life or the term of the related lease. Estimated useful lives
range from 10 to 35 years for office buildings and related components and 3 to 8
years for furniture and equipment.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired ("goodwill") in
business combinations accounted for as purchases is amortized using the
straight-line method over 15 years, the estimated period to be benefited.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase
("reverse repurchase agreements"). Reverse repurchase agreements are treated as
financings and the obligation to repurchase securities sold is reflected as a
liability in the consolidated balance sheets.
63
<PAGE>
INTEREST RATE CAP AGREEMENTS
Premiums paid for interest rate cap agreements are amortized to interest
expense over the terms of the agreements. Unamortized premiums are classified as
other assets in the consolidated balance sheets. Amounts receivable under cap
agreements are accrued as a reduction of interest expense.
INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries. Deferred income taxes are provided on income and expense items
that are recognized for financial reporting purposes in periods different from
the period in which items are recognized for income tax purposes ("temporary
differences").
Under the asset and liability method of accounting for income taxes, the
Company establishes deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-based Compensation" provides an optional accounting method for stock-
based compensation plans based on the fair value of equity instruments awarded.
The Company has elected to continue measuring compensation cost for these plans
using the intrinsic value based method of accounting and to comply with the
expanded footnote disclosures as prescribed by SFAS No. 123. Stock-based
compensation plans of the Company to which SFAS No. 123 applies are the
management recognition plans and the Stock Option and Incentive Plan which are
set forth in notes 15 and 16 to the consolidated financial statements,
respectively.
RECLASSIFICATION
Certain reclassifications of 1995 and 1994 information have been made to
conform with the 1996 presentation.
(2) BUSINESS COMBINATIONS
On May 31, 1995, the Company completed its acquisitions of North Texas
Savings and Loan Association, Denton, Texas ("North Texas") and First Federal
Savings Bank of Longview, Longview, Texas ("Longview") in exchange for cash of
$28.3 million and $12.8 million, respectively. North Texas' total assets were
$190.7 million, consisting primarily of loans receivable of $126.9 million and
mortgage-backed securities of $49.5 million; North Texas' total deposits were
$148.2 million. Longview's total assets were $134.5 million, consisting
primarily of loans receivable of $66.0 million and mortgage-backed securities of
$34.0 million; Longview's total deposits were $120.0 million. On July 13, 1995,
the Company completed its acquisition of Shelby-Panola Savings Association,
Carthage, Texas ("Shelby-Panola") in exchange for cash of $10.9 million.
Shelby-Panola's total assets were $55.6 million, consisting primarily of
investment securities of $22.9 million, loans receivable of $14.3 million, and
mortgage-backed securities of $12.2 million; Shelby-Panola's total deposits were
$44.8 million. The acquisitions, which were funded by available cash and
borrowings, were accounted for using the purchase method and, accordingly, the
results of operations have been included in the Company's results of operations
from the respective transaction dates. The excess of cost over fair value of
net assets acquired was approximately $15 million. Upon completion of the
acquisitions, North Texas, Longview, and Shelby-Panola were consolidated under a
single federal charter and operate under the common name of First Federal
Savings Bank of North Texas.
64
<PAGE>
On December 30, 1996, the Company completed its acquisition of Texas
Heritage Savings Association/Banc, Rowlett, Texas ("Texas Heritage") in exchange
for cash of $5.1 million and 223,151 shares of the Company's common stock. Texas
Heritage's total assets were $71.8 million, consisting primarily of loans
receivable of $56.0 million and investment and mortgage-backed securities of
$7.3 million. Texas Heritage's total deposits were $64.7 million. The
acquisition, which was funded by available cash and borrowings, and the
Company's common stock, was accounted for using the purchase method. The excess
of cost over fair value of net assets acquired was approximately $6.3 million.
Upon completion of the acquisition, Texas Heritage was merged into First Federal
Savings Bank of North Texas.
During 1996 the Company announced it's plan to acquire L&B Financial, Inc.
in Sulphur Springs, Texas ("L&B Financial") for approximately $15 million in
cash and 549,000 shares of the Company's common stock. L&B Financial's total
assets are approximately $141 million, consisting primarily of loans receivable
of $70 million and mortgage-backed and investment securities of $58 million. L&B
Financial's total deposits are $104 million. The acquisition is expected to
close in the first quarter of 1997 and will be accounted for using the purchase
method. Upon completion of the acquisition, the operations of L&B Financial will
be merged into First Federal Savings Bank of North Texas.
The following unaudited information presents pro forma results of
operations of the Company for the years ended December 31, 1996 and 1995,
assuming the acquisitions had taken place on January 1, 1995:
<TABLE>
<CAPTION>
EXCLUDING L&B FINANCIAL INCLUDING L&B FINANCIAL
----------------------- -----------------------
1996 1995 1996 1995
----------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net interest income.............................. $32,723 $28,418 $36,398 $32,650
Net income....................................... 2,944 6,787 2,335 7,325
======= ======= ======= =======
Earnings per share............................... $ .70 $ 1.61 $ .49 $ 1.54
======= ======= ======= =======
</TABLE>
(3) REGULATORY CAPITAL
The capital regulations of the Office of Thrift Supervision (OTS), as a
result of the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (FIRREA), require thrift institutions to maintain tangible capital equal to
1.5% of total adjusted assets, a minimum 3% leverage (core capital) ratio, and
an 8% risk-based capital. The risk-based capital requirement is calculated
based on the credit risk presented by both on-balance-sheet assets and off-
balance-sheet commitments and obligations. Assets are assigned a credit-risk
weighting based upon their relative risk ranging from 0% for assets backed by
the full faith and credit of the United States or that pose no credit risk to
the institution to 100% for assets such as delinquent or repossessed assets. As
of December 31, 1996, both Jefferson Savings and First Federal met all OTS
capital requirements.
The OTS requires every savings association with more than normal interest
rate risk to deduct from its total capital, for purposes of determining
compliance with their risk-based capital requirement, an amount equal to one-
half of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities, and off-
balance-sheet contracts. The OTS recently announced that it will delay the
effective date of the regulation until it evaluates the process by which an
association may appeal an interest-rate risk capital deduction determination.
65
<PAGE>
Jefferson Savings and First Federal are also subject to the regulatory
framework for prompt corrective action. To be categorized as well capitalized
or adequately capitalized, an institution must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios as set forth in the table
below.
Following are the actual and required capital amounts and ratios as of
December 31, 1996:
<TABLE>
<CAPTION>
REQUIREMENTS UNDER
PROMPT CORRECTIVE ACTION PROVISIONS
--------------------------------------------
ACTUAL REQUIREMENTS WELL CAPITALIZED ADEQUATELY CAPITALIZED
------------------- ------------------- ------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ------ ----------- ------ ----------- ------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:/(1)/
Jefferson Savings....... $44,044,359 6.43% $10,279,409 1.50% NA NA
First Federal........... 25,011,055 5.65% 6,639,071 1.50% NA NA
Core capital:/(1)/
Jefferson Savings....... 44,044,359 6.43% 20,558,818 3.00% $34,264,697 5.00% $27,411,758 4.00%
First Federal........... 25,011,055 5.65% 13,278,141 3.00% 22,130,235 5.00% 17,704,188 4.00%
Risk-based capital:/(2)/
Jefferson Savings....... 48,157,739 11.59% 33,229,271 8.00% 41,536,589 10.00% 33,229,271 8.00%
First Federal........... 27,248,349 9.30% 23,436,003 8.00% 29,295,004 10.00% 23,436,003 8.00%
Tier I capital:/(2)/
Jefferson Savings....... 44,044,359 10.60% NA 24,921,954 6.00% 16,614,636 4.00%
First Federal........... 25,011,055 8.54% NA 17,577,002 6.00% 11,718,002 4.00%
</TABLE>
____________
(1) To adjusted total assets
(2) To risk-weighted assets
66
<PAGE>
(4) INVESTMENT SECURITIES
The amortized cost and fair value of debt securities classified as
available for sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
UNREAL- UNREAL-
AMORTIZED IZED IZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
United States government and
agency obligations........... $84,477,683 $1,067,688 $(206,607) $85,338,764
Tax exempt municipal bond..... 361,061 1,947 -- 363,008
----------- ---------- --------- -----------
$84,838,744 $1,069,635 $(206,607) $85,701,772
=========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
GROSS GROSS
UNREAL- UNREAL-
AMORTIZED IZED IZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
United States government and
agency obligations........... $47,654,065 $ 196,585 $ (53,008) $47,797,642
Tax exempt municipal bond..... 789,724 2,800 -- 792,524
----------- ---------- --------- -----------
$48,443,789 $ 199,385 $ (53,008) $48,590,166
=========== ========== ========= ===========
</TABLE>
The Company sold no investment securities during the years ended December
31, 1996 and 1994. During the year ended December 31, 1995, the Company received
proceeds of $3,880,781 on the sale of investment securities which were acquired
in connection with the purchase of North Texas, Longview and Shelby-Panola.
These securities were sold shortly after acquisition and no gains or losses were
recorded on their sale.
The amortized cost and fair value of investment securities, by contractual
maturity, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Within one year...................... $ 5,500,710 $ 5,512,225
One to five years.................... 25,171,900 24,993,093
Five to 10 years..................... 54,166,134 55,196,454
----------- -----------
$84,838,744 $85,701,772
=========== ===========
</TABLE>
67
<PAGE>
(5) MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities, classified
as available for sale, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
UNREAL- UNREAL-
AMORTIZED IZED IZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
GNMA..................... $ 1,403,313 $ 363,023 $ (4,190) $ 31,762,146
FHLMC.................... 19,552,821 58,920 (61,265) 19,550,476
FNMA..................... 14,913,952 132,677 (55,888) 14,990,741
Collateralized mortgage
obligations............. 30,111,995 - (1,212,046) 28,899,949
------------ ---------- ----------- ------------
$ 95,982,081 $ 554,620 $(1,333,389) $ 95,203,312
============ ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
UNREAL- UNREAL-
AMORTIZED IZED IZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
GNMA..................... $ 3,965,323 $ 39,794 $ (3,179) $ 4,001,938
FHLMC.................... 24,494,551 84,780 (103,993) 24,475,338
FNMA..................... 110,785,042 121,765 (1,446,454) 109,460,358
Collateralized mortgage
obligations............. 94,915,473 1,017,370 (987,712) 94,945,131
------------ ---------- ----------- ------------
$234,160,389 $1,263,709 $(2,541,338) $232,882,760
============ ========== =========== ============
</TABLE>
Gross realized gains, gross realized losses, and gross proceeds on sales of
mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- ----------
<S> <C> <C> <C>
Gross realized gains........... $ 1,318,142 $ -- $ 157,906
Gross realized losses.......... (2,614,276) -- --
------------ ----------- ----------
Net realized gain (loss).. $ (1,296,134) $ -- $ 157,906
============ =========== ==========
Gross proceeds................. $147,471,014 $55,412,739 $6,528,275
============ =========== ==========
</TABLE>
68
<PAGE>
The amortized cost and fair value of mortgage-backed securities by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities due to scheduled repayments and because borrowers may
have the right to prepay obligations with or without prepayment penalties. The
following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
AMORTIZED FAIR
COST VALUE
------------- -------------
<S> <C> <C>
Within one year............................ $ 7,580,791 $ 7,573,014
One to five years.......................... 6,575,487 6,555,087
Five to ten years.......................... 1,074,669 1,080,639
After ten years............................ 80,751,134 79,994,572
------------ ------------
$ 95,982,081 $ 95,203,312
============ ============
Weighted average interest rate 6.28%
====
</TABLE>
(6) LOANS RECEIVABLE, NET
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional.................................. $620,934,461 $627,539,727
Home equity................................... 44,923,700 26,825,674
FHA insured/VA guaranteed..................... 967,822 1,065,237
Held for sale................................. 2,820,623 1,787,202
Commercial..................................... 134,531,803 72,194,456
Residential construction....................... 164,277,756 94,629,714
------------ ------------
Total loans secured by real estate.......... 968,456,165 824,042,010
Other loans:
Commercial secured by first mortgage loans..... 5,000,000 2,000,000
Automobile loans............................... 1,648,668 874,465
Loans secured by savings deposits.............. 3,658,476 3,409,508
Education loans................................ 177,749 229,151
Other.......................................... 3,195,261 341,485
------------ ------------
982,136,319 830,896,619
Add (deduct):
Loans in process............................... (89,573,006) (38,457,597)
Unearned discounts, net........................ (1,786,152) (621,248)
Deferred loan costs, net....................... 1,156,502 1,363,369
Allowance for loan losses...................... (6,528,601) 5,095,856)
------------ ------------
$885,405,062 $788,085,287
============ ============
Weighted average interest rate at end of year... 8.17% 7.78%
============ ============
Adjustable rate mortgages at end of year........ $603,676,000 $571,249,000
============ ============
</TABLE>
69
<PAGE>
Loans serviced for others at December 31, 1996, 1995, and 1994 totaled
approximately $58.0 million, $54.6 million, and $26.8 million, respectively.
Restructured loans were held by the Company at December 31, 1996 and 1995
with carrying values of approximately $179,000 and $546,000, respectively.
Interest income of approximately $12,000 and $24,000 was recognized on these
loans for the years ended December 31, 1996 and 1995, respectively. Gross
interest income would have been approximately $14,000 and $27,000 for the years
ended December 31, 1996 and 1995, respectively, if the interest payments had
been received in accordance with the original terms.
A summary of impaired loans, which include nonaccrual loans and loans
internally classified, follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Nonaccrual loans.............................. $1,486,193 $2,476,768
Impaired loans continuing to accrue interest.. 1,748,924 199,654
---------- ----------
Total impaired loans.......................... $3,235,117 $2,676,422
========== ==========
Impaired loans with related allowance
for loan losses............................. $ 387,970 $ 35,536
Allowance for losses on impaired loans...... 80,465 26,449
Impaired loans with no related allowance
for loan losses............................. 2,847,147 2,640,886
Average balance of impaired loans
during the year............................. 3,256,772 3,773,619
========== ==========
</TABLE>
Interest on impaired loans which would have been recorded under the
original terms of the loans and cash receipts of interest were $137,000 and
$61,000, respectively, for the year ended December 31, 1996. Interest on
impaired loans which would have been recorded under the original terms of the
loans and cash receipts of interest were $135,000 and $43,000, respectively, for
the year ended December 31, 1995.
Loans to executive officers and directors are made on substantially the
same terms as those prevailing at the time for comparable transactions with
unaffiliated persons and, in the opinion of management, do not involve more than
the normal risk of collectibility. These loans totaled $1,841,569 and $2,210,414
at December 31, 1996 and 1995, respectively.
Activity in loans to executive officers and directors is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995.......... $ 2,210,414
New loans or advances................. 695,096
Acquisition of Texas Heritage......... 98,242
Loans outstanding to former officers.. (79,712)
Repayments............................ (1,082,471)
-----------
Balance at December 31, 1996.......... $ 1,841,569
===========
</TABLE>
70
<PAGE>
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Balance at beginning of year.................................. $ 5,095,856 $3,470,908 $ 3,190,355
Allowance from purchase acquisitions.......................... 850,893 1,378,050 --
Provision charged to expense.................................. 660,000 367,153 300,000
Recoveries.................................................... -- 1,575 --
Charge-offs................................................... (78,148) (121,830) (19,447)
----------- ---------- -----------
Balance at end of year........................................ $ 6,528,601 $5,095,856 $ 3,470,908
=========== ========== ===========
</TABLE>
(7) INVESTMENT IN REAL ESTATE, NET
Investment in real estate is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Real estate acquired for development and sale................. $ -- $2,112,389
Real estate acquired through foreclosure...................... 4,894,051 3,942,093
----------- ----------
4,894,051 6,054,482
Less allowance for losses..................................... 433,849 1,372,510
----------- ----------
$4,460,202 $4,681,972
========== ==========
</TABLE>
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
REAL REAL
ESTATE ESTATE
ACQUIRED ACQUIRED
FOR DE- THROUGH
VELOPMENT FORE-
AND SALE CLOSURE TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
Balance at December 31, 1993................................. $ 1,300,196 $ 456,715 $ 1,756,911
Charge-offs.................................................. (200,000) (1,925) (201,925)
----------- ---------- -----------
Balance at December 31, 1994................................. 1,100,196 454,790 1,554,986
Acquisition of First Federal................................. 33,148 52,366 85,514
Charge-offs.................................................. (33,148) (234,842) (267,990)
----------- ---------- -----------
Balance at December 31, 1995................................. 1,100,196 272,314 1,372,510
Provision.................................................... - 200,000 200,000
Charge-offs.................................................. (1,100,196) (59,904) (1,160,100)
Acquisition of Texas Heritage................................ -- 21,439 21,439
----------- ---------- -----------
Balance at December 31, 1996................................. $ -- $ 433,849 $ 433,849
=========== ========== ===========
</TABLE>
71
<PAGE>
The results of real estate operations are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Gain from sales of real estate, net........................ $ 878,315 $ 629,974 $ 212,896
Provision for losses on real estate........................ (200,000) -- --
Operating income (expense), net............................ (225,214) 135,277 (114,555)
----------- ----------- ----------
$ 453,101 $ 765,251 $ 98,341
=========== =========== ===========
</TABLE>
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land....................................................... $ 2,066,270 $ 2,066,270
Office buildings........................................... 5,998,551 5,286,837
Leasehold improvements..................................... 1,033,208 531,579
Furniture and equipment.................................... 5,544,356 4,355,519
----------- -----------
14,642,385 12,240,205
Less accumulated depreciation and amortization............. 4,974,534 4,255,717
----------- -----------
$ 9,667,851 $ 7,984,488
=========== ===========
</TABLE>
Depreciation and amortization expense totaled $866,889, $707,323, and
$590,138 for the years ended December 31, 1996, 1995, and 1994, respectively.
The Company leases certain of its facilities and equipment under
noncancelable operating leases. These leases expire at various dates and contain
options for renewal. The future minimum rental obligations under the terms of
the leases are summarized as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997.................................... $356,068
1998.................................... 357,069
1999.................................... 199,893
2000.................................... 161,878
2001.................................... 76,104
Thereafter............................... 138,477
----------
$1,289,489
==========
</TABLE>
Net rent expense for all operating leases totaled $270,299, $209,391, and
$284,821 for the years ended December 31, 1996, 1995, and 1994, respectively.
72
<PAGE>
(9) ACCRUED INCOME AND OTHER ASSETS
Accrued income and other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
Accrued interest:
Loans receivable.......................... $ 6,349,988 $ 5,478,683
Mortgage-backed securities................ 565,724 1,163,394
Investment securities..................... 720,930 981,039
Interest rate cap agreements.............. 44,696 257,673
------------ ------------
7,681,338 7,880,789
Accounts receivable......................... 321,878 121,170
Interest rate cap premiums.................. 10,639 195,240
Other....................................... 406,721 800,305
------------ ------------
$ 8,420,576 $ 8,997,504
============ ============
</TABLE>
(10) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995
-------------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
NOW........................................ $ 51,038,104 1.85% $ 47,079,937 2.11%
Money market............................... 108,955,371 4.12 93,541,180 3.97
Passbook and statement savings............. 48,360,266 2.43 50,201,267 2.58
------------ ------------
208,353,741 3.17 190,822,384 3.14
Certificates of deposit.................... 738,714,931 5.67 679,356,317 5.87
------------ ------------
Total savings deposits................... $947,068,672 5.12% $870,178,701 5.27%
============ ===== ============ =====
</TABLE>
Deposits of $100,000 or more totaled approximately $106,670,000 and
$86,065,000 at December 31, 1996 and 1995, respectively.
73
<PAGE>
Certificates of deposit, by rate, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
2.00-2.99%......................................$ 305,115 $ 417,088
3.00-3.99%...................................... 80,114 3,070,685
4.00-4.99%...................................... 41,092,223 63,330,589
5.00-5.99%...................................... 581,080,551 342,498,721
6.00-6.99%...................................... 100,319,367 245,158,333
7.00-7.99%...................................... 15,585,135 23,309,120
8.00-8.99%...................................... 252,426 1,428,666
9.00-9.99%...................................... -- 143,115
------------ ------------
$738,714,931 $679,356,317
============ ============
</TABLE>
The scheduled maturities of the certificates of deposit are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
PERCENT
AMOUNT OF TOTAL
------------ ----------
<S> <C> <C>
Within one year................................ $516,438,403 69.9%
Second year.................................... 147,207,224 19.9%
Third year..................................... 42,142,180 5.7%
Fourth year.................................... 21,375,529 2.9%
Fifth year..................................... 8,847,179 1.2%
Thereafter..................................... 2,704,416 .4%
------------ --------
$738,714,931 100.0%
============ ========
</TABLE>
Interest expense on savings deposits by type is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NOW........................................................ $ 974,885 $ 741,819 $ 378,383
Money market............................................... 3,877,708 3,501,849 2,858,339
Passbook and statement savings............................. 1,209,597 1,277,893 991,354
Certificates of deposit.................................... 38,303,458 31,473,566 12,573,160
----------- ----------- -----------
$44,365,648 $36,995,127 $16,801,236
=========== =========== ===========
</TABLE>
74
<PAGE>
(11) BORROWED MONEY
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995
--------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
------------ ------------- ------------- ---------
<S> <C> <C> <C> <C>
Lines of credit with Federal Home
Loan Banks........................ $27,490,486 6.11% $ 20,682,875 5.92%
----------- ------------
Advances from Federal Home Loan
Banks due:
1996............................. -- 130,500,000 5.77
1997............................. 30,000,000 5.81 20,000,000 5.85
1998............................. 20,770,491 6.16 -- --
1999............................. 15,646,366 6.05 -- --
2015............................. 344,484 6.92 -- --
----------- ------------
66,761,341 5.98 150,500,000 5.78
Commercial bank debt due in 1998... 3,430,300 9.15 3,779,081 8.15
----------- ------------
$97,682,127 6.13% $174,961,956 5.84%
=========== =========== ============ =====
</TABLE>
At December 31, 1996, the total unused lines of credit with the Federal
Home Loan Banks totaled $38.5 million. The terms of the agreements call for
interest rates that vary daily. These borrowings averaged $17.4 million, $30.8
million, and $28.4 million during the years ended December 31, 1996, 1995, and
1994, respectively. The maximum amount outstanding at any month-end during 1996,
1995, and 1994 was $29.2 million, $55.2 million, and $62.8 million,
respectively.
Advances from Federal Home Loan Banks averaged $116.8 million, $183.1
million, and $174.8 million during 1996, 1995, and 1994, respectively. The
maximum amount outstanding at any month-end was $150.5 million, $212.9 million,
and $205.0 million for the years ended December 31, 1996, 1995, and 1994,
respectively.
Certain advances totaling $56.8 million and a line of credit for $15.5
million were collateralized by blanket liens on first mortgage loans. The
remaining advance from the Federal Home Loan Banks for $10.0 million, and a line
of credit totaling $12.0 million, were collateralized by mortgage-backed
securities having an amortized cost (including accrued interest) of
approximately $79.6 million and a fair value of approximately $81.5 million at
December 31, 1996.
At December 31, 1995 and during 1996, there were no securities sold under
agreements to repurchase. Securities sold under agreements to repurchase
averaged $20.0 million and $27.3 million during 1995 and 1994, respectively. The
maximum amount outstanding at any month-end during 1995 and 1994 was $24.5
million and $34.6 million, respectively.
The commercial bank debt is collateralized by Jefferson Savings stock. The
debt matures on May 31, 1998 and requires annual principal payments of $314,923
and quarterly interest payments.
75
<PAGE>
Interest expense on borrowed money, by type, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Lines of credit with the FHLBs....... $ 813,911 $ 1,761,931 $1,300,974
Advances from FHLBs.................. 6,878,467 11,082,926 8,120,616
Securities sold under agreements
to repurchase....................... -- 1,310,598 1,173,029
Interest on federal funds purchased.. 11,083 -- --
Interest rate cap agreements, net.... (183,947) (985,055) 74,066
Interest on commercial bank debt..... 272,692 132,029 --
----------- ----------- ----------
$ 7,792,206 $13,302,429 $10,668,685
=========== =========== ===========
</TABLE>
(12) INTEREST RATE CAP AGREEMENTS
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on short-term borrowings. Such agreements involve a
certain amount of credit risk in that a counterparty to an agreement may
default. The amounts potentially subject to credit risk are the future cash
flows under the agreements and not the notional principal amounts. These
agreements, entered into during 1994, provide for payments to the Company on a
quarterly basis to the extent the 90-day LIBOR rises above 4.25% on a notional
principal amount of $20 million. The Company's interest rate cap agreements at
December 31, 1996 are scheduled to mature during 1997.
(13) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Accrued interest payable:
Savings deposits................................. $ 428,358 $ 407,438
Borrowed money................................... 56,110 228,854
----------- -----------
484,468 636,292
Accounts payable for check fundings, net.......... 3,930,808 8,784,961
Income taxes payable.............................. 645,241 425,841
Accrued compensation expense...................... 1,151,648 956,325
Accounts payable.................................. 783,453 871,252
Unremitted payments on loans serviced for others.. 689,186 533,918
Unearned profit on real estate sales.............. 147,925 270,957
Other............................................. 1,368,210 1,021,267
----------- -----------
$ 9,200,939 $13,500,813
=========== ===========
</TABLE>
(14) INCOME TAXES
Prior to 1996, if certain conditions were met, savings and loan
associations and savings banks were allowed special bad debt deductions in
determining taxable income based on either specified experience formulas or on a
percentage of taxable income before such deduction. Bad debt deductions in
excess of actual losses were tax-preference items, and were subject to a minimum
tax. The Company used the percentage of taxable income method for 1994 and 1995
in determining the bad debt deduction for tax purposes.
76
<PAGE>
The special bad debt deduction accorded thrift institutions is covered
under Section 593 of the Internal Revenue Code ("IRC"). On August 20, 1996, the
Small Business Job Protection Act of 1996 (the "Act") was signed into law. This
Act included the repeal of Section 593 effective for tax years beginning after
December 31, 1995. As a result, thrift institutions are no longer allowed a
percentage method bad debt deduction. The repeal on the thrift reserve method
generally requires thrift institutions to recapture into income the portion of
tax bad debt reserves accumulated since 1987 ('base year reserve"). The
recapture will generally be taken into income ratably over six tax years.
However, if the Company meets a residential loan requirement for tax years
beginning in 1996 and 1997, recapture of the reserve can be deferred until the
tax year beginning in 1998. At December 31, 1996, the Company had bad debts
deducted for tax purposes in excess of the base year reserve of approximately
$3.6 million. The Company has recognized a deferred income tax liability for
this amount.
Certain events covered by IRC Section 593(e), which was not repealed, will
trigger a recapture of the base year reserve. The base year reserve of thrift
institutions would be recaptured if a thrift ceases to qualify as a bank for
federal income tax purposes. The base year reserves of thrift institutions also
remain subject to income tax penalty provisions which, in general, require
recapture upon certain stock redemptions of, and excess distributions to,
stockholders. At December 31, 1996, retained earnings included approximately
$19.5 million of base year reserves, for which no deferred federal income tax
liability has been recognized.
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Current expense:
Federal...................... $2,070,355 $3,580,000 $2,068,900
State........................ 161,845 86,000 335,000
Deferred - federal and state.. (250,000) (130,000) 868,100
---------- ---------- ----------
$1,982,200 $3,536,000 $3,272,000
========== ========== ==========
</TABLE>
The reasons for the difference between expected income tax expense,
computed at the statutory federal income tax rate, and actual income tax expense
is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
income tax expense...... $1,631,455 34.0% $3,367,872 34.0% $2,935,699 34.0%
Items affecting federal
income tax rate:
Goodwill amortization.. 347,698 7.2 171,252 1.7 -- --
State tax, net of
federal benefit....... 97,078 2.0 40,129 .4 292,129 3.4
Municipal interest..... (53,214) (1.1) (56,211) (.5) (52,531) (.6)
Other, net............... (40,817) (.8) 12,958 .1 96,703 1.1
---------- ------ ---------- ----- ---------- ----
$1,982,200 41.3% $3,536,000 35.7% $3,272,000 37.9%
========== ====== ========== ===== ========== ====
</TABLE>
77
<PAGE>
The significant components of deferred income tax expense attributable to
income from operations are only the tax effects of changes in the Company's
temporary differences as there have been no changes in the tax laws or rates.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Loss reserves on real estate acquired for development
and sale, not deductible for tax reporting................. $ -- $ 408,000
Book provision for loan loss in excess of tax.............. 2,323,000 1,838,000
Deferred profit on real estate sold........................ 47,000 60,000
Deferred compensation and stock bonus awards............... 332,000 334,000
Unrealized loss on securities available for sale........... -- 465,000
Other...................................................... 87,000 28,000
----------- -----------
Total gross deferred tax assets.......................... 2,789,000 3,133,000
----------- -----------
Deferred tax liabilities:
Deferred loan costs, net................................... (593,000) (700,000)
Office properties and equipment, principally due to
differences in depreciation................................ (337,000) (337,000)
FHLB stock dividends, principally due to deferral of
income for tax reporting................................... (772,000) (708,000)
Installment sales of real estate acquired for development
and sale................................................... (780,000) (847,000)
Purchase accounting adjustments............................ (179,000) (202,000)
Tax bad debt deductions in excess of base year amount...... (1,332,000) (1,290,000)
Unrealized gain on securities available for sale........... (34,000) --
Other...................................................... (86,000) (210,000)
----------- -----------
Total gross deferred tax liabilities (4,113,000) (4,294,000)
----------- -----------
Net deferred tax liability............................... $(1,324,000) $(1,161,000)
=========== ===========
</TABLE>
(15) BENEFIT PLANS
The Company sponsors a thrift savings plan qualifying under Section 401(k)
of the Internal Revenue Code. The plan covers substantially all employees with
one year of service. Participants may designate up to 10% of their annual
compensation as their contribution to the plan. Under the plan, contributions by
employees of up to 3% of their annual compensation are partially matched by the
Company. Matching contributions by the Company totaled approximately $129,000,
$65,000, and $56,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
The Company has a tax-qualified employee stock ownership plan which covers
substantially all employees who have attained the age of 21 and completed one
year of service. All shares were purchased by the ESOP using funds loaned by
the Company and are held in a suspense account for allocation among the
participants as the loans are repaid with level principal payments over 10 and
12 years. Shares released from the suspense account are allocated among the
participants based upon their pro rata annual compensation. Dividends received
by the ESOP on allocated shares are used to release additional shares.
The cost of shares held by the ESOP are recorded in the consolidated
financial statements through a charge to a contra equity account for the
unearned shares. The contra equity account is reduced as shares are committed to
be released to the participants. For ESOP shares committed to be released to
compensate employees, the Company recognizes compensation expense equal to the
fair value of shares committed to be released. Compensation expense was
$1,437,072, $785,930, and $579,559 for the years ended December 31, 1996, 1995,
and 1994, respectively.
78
<PAGE>
The ESOP shares as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
Allocated shares......................... 164,212
Unearned shares.......................... 382,538
----------
Total ESOP shares............. 546,750
==========
Fair value of unearned shares
at December 31, 1996................... $9,945,988
==========
</TABLE>
The Company has management recognition plans ("MRPs") to reward and retain
personnel of experience and ability in key positions of responsibility. The MRPs
hold 171,924 shares of the Company's common stock which were contributed by the
Company. 164,500 of such shares have been granted in the form of restricted
stock to eligible employees and are paid to such employees under vesting
schedules ranging from three to five years. The unearned shares held by the
MRPs are recorded in the consolidated financial statements as a charge to a
contra equity account. The contra equity account is amortized to expense over
the period of vesting. The related pretax expense was $256,578, $401,158, and
$401,158 for the years ended December 31, 1996, 1995, and 1994, respectively.
No MRP shares were awarded during the years ended December 31, 1996, 1995, or
1994. As such, the SFAS No. 123 disclosure requirements of the proforma effects
of the fair value based method of accounting for shares granted is not
applicable.
The Company has a retirement plan for its non-employee directors who
retired from the Company's Board of Directors at or after age 70 in accordance
with its Bylaws. Such a director will receive, on each of the three anniversary
dates of his retirement, an amount equal to 50% of the directors' fees which he
received from the Company during the calendar year preceding his retirement.
Benefits to be paid under the plan are accrued over the remaining period to
retirement of the covered directors. The related pretax expense was
approximately $39,400 per year for the years ended December 31, 1996, 1995, and
1994.
During 1993, the Company entered into a supplemental retirement agreement
("SRA") with the Company's Chief Executive Officer. Benefits to be paid under
the plan are accrued over the remaining period to retirement of the covered
executive. The related pretax expense was approximately $150,900 per year for
the years ended December 31, 1996, 1995, and 1994.
79
<PAGE>
(16) STOCK OPTION PLAN
The Jefferson Savings Bancorp, Inc. 1993 Stock Option and Incentive Plan
(the "Option Plan") provides for the granting, to directors and key employees of
the Company and its subsidiaries, of options to purchase up to 429,812 shares of
common stock of the Company over a period of 10 years at a price not less than
the market value of the shares at the date the options were granted. The Plan
provides for the granting of options which either qualify or do not qualify as
Incentive Stock Options as defined by Section 422 of the Internal Revenue Code
of 1986, as amended. As of December 31, 1996, there were 77,428 options
available for grant. A summary of stock options outstanding at December 31, 1996
follows:
<TABLE>
<CAPTION>
YEAR OPTIONS OPTIONS REMAINING EXERCISE
GRANTED OUTSTANDING EXERCISABLE CONTRACTUAL LIFE PRICE
- ------- ----------- ----------- ---------------- ---------
<S> <C> <C> <C> <C>
1993 333,337 288,743 6.27 years $10.00
1995 386 77 8.13 years 16.37
1996 772 -- 9.12 years 25.75
------- -------
Total 334,495 288,820
======= =======
Weighted average 6.28 years 10.04
</TABLE>
Changes in options outstanding were as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES PRICE
---------- ------------
<S> <C> <C>
Balance at December 31, 1993.................. 358,092 $10.00
Granted....................................... --
Exercised..................................... (1,426) 10.00
Forfeited..................................... (5,708) 10.00
-------
Balance at December 31, 1994.................. 350,958 10.00
Granted....................................... 386 16.37
Exercised..................................... (8,000) 10.00
Forfeited..................................... (1,158) 10.00
-------
Balance at December 31, 1995.................. 342,186 10.01
Granted....................................... 772 25.75
Exercised..................................... (8,463) 10.00
Forfeited..................................... --
-------
Balance at December 31, 1996.................. 334,495 10.04
======= ======
</TABLE>
No amounts have been charged to expense in connection with this plan.
Disclosure of the fair value based method of accounting for stock options
granted during the years ended December 31, 1996 and 1995 as required by SFAS
No. 123 is not presented due to the immaterial effects of stock options granted.
80
<PAGE>
(17) DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
During 1996 the Company adopted a Dividend Reinvestment and Stock Purchase
Plan which allows stockholders to reinvest dividends and/or purchase additional
shares of the Company's common stock without payment of any brokerage commission
or service charge. If the shares are purchased in the market or in private
transactions, the price of shares purchased will be the actual purchase price,
exclusive of brokerage commissions and expenses. If the shares are purchased
directly from the Company, the purchase price will equal the average of the high
and low trade prices for shares of the Company's common stock as reported on the
Nasdaq Stock Market, reduced by a discount of 2%.
(18) STOCKHOLDER PROTECTION RIGHTS
On August 17, 1994, the Company adopted a stockholder protection rights
plan (the "Plan") designed to protect stockholders from coercive or unfair
takeover tactics by a hostile acquirer seeking to gain control of the Company
without offering a fair price to all its stockholders.
Under the Plan, each stockholder of record on September 7, 1994 received a
dividend distribution of one Right for each outstanding share of common stock.
Each Right entitles the holder to buy one unit of a new series of Junior
Participating Preferred Stock, Series E at an exercise price of $60 per unit. In
the event that a person or group acquires 19.9% or more of the Company's
outstanding common stock, each Right will entitle the holder to purchase the
number of shares of common stock of the Company having a value of twice the
Right's exercise price.
The Rights will expire on August 17, 2004 and will thereafter have no
value. The Rights are redeemable by the Board of Directors at a redemption price
of $0.01 per Right at any time prior to expiration.
(19) COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Company had outstanding commitments to
originate adjustable and fixed rate mortgage loans and home equity loans
totaling approximately $12.3 million, $15.1 million, and $1.0 million,
respectively; to purchase adjustable rate mortgage loans totaling approximately
$1.9 million; and to sell fixed rate mortgage loans totaling approximately $5.2
million. In addition, the Company had unused equity lines of credit totaling
$43.7 million. Commitments to originate loans are extended for periods up to 60
days. Commitments outstanding at December 31, 1996, to originate fixed rate
mortgage loans were issued from 7.375% to 11.25%. Commitments to extend credit
may involve, to varying degrees, elements of credit risk and interest rate risk
in excess of the amount recognized in the consolidated balance sheet. The amount
of credit risk in the event of nonperformance by the other party to the
commitment is represented by the contractual amount of the loan when originated.
Interest rate risk on commitments to extend credit results from the possibility
that interest rates may have moved unfavorably from the position of the Company
since the time the commitment was made.
The Company is involved in various litigation in the ordinary course of
business. In the opinion of management and the Company's counsel, at the present
time, disposition of the suits and claims will not have a material effect on the
Company's financial position.
(20) LIQUIDATION ACCOUNT
On April 8, 1993, the Association converted from a mutual savings
association to a capital stock savings association. At the time of conversion,
the Association established a liquidation account in an amount equal to the
regulatory capital of the Association as of September 30, 1992 (the date of the
most recent balance sheet included in the offering circular related to the
Conversion). The liquidation account is maintained for the benefit of any person
with a deposit account of $50 or more in the Association on March 31, 1992
("Eligible Depositor") who continues to maintain their deposits in the
Association after that date. In the event of a complete liquidation of the
81
<PAGE>
Association, each Eligible Depositor will be entitled to an interest in the
liquidation account in the proportionate amount of the then current adjusted
balance of deposits held before any liquidation distribution may be made with
respect to the stockholders. The balance attributable to the liquidation
account is decreased by a proportionate amount as each account holder closes an
account or reduces the balance in such account as of any subsequent fiscal year-
end. The liquidation account at December 31, 1996 was approximately $13.9
million. The creation and maintenance of the liquidation account will not
restrict the use or application of any of the capital accounts of the Company,
except that the Company may not declare or pay a cash dividend on, or repurchase
any of, its capital stock, if the effect of such dividend or repurchase would be
to cause the Association's retained earnings to be reduced below the aggregate
amount then required for the liquidation account.
(21) FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.............. $ 18,890 $ 18,890 $ 20,691 $ 20,691
Investment securities.................. 85,702 85,702 48,590 48,590
Mortgage-backed securities............. 95,203 95,203 232,883 232,883
Loans receivable....................... 885,405 898,707 788,085 794,996
Stock in Federal Home Loan Banks....... 15,769 15,769 16,520 16,520
Interest rate cap agreements........... 11 20 195 2,559
Accrued interest receivable............ 7,681 7,681 7,881 7,881
---------- ---------- ---------- ----------
$1,108,661 $1,121,972 $1,114,845 $1,124,120
========== ========== ========== ==========
Financial liabilities:
Savings deposits:
Passbook and statement savings, NOW,
and money market accounts............ $ 208,354 $ 208,354 $ 190,822 $ 190,822
Certificates of deposit............... 738,715 742,171 679,356 683,645
Borrowed money......................... 97,682 97,543 174,962 175,022
Accrued interest payable............... 484 484 636 636
---------- ---------- ---------- ----------
$1,045,235 $1,045,548 $1,045,776 $1,050,125
========== ========== ========== ==========
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument listed above:
82
<PAGE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, interest-bearing deposits, and
federal funds sold. The carrying value is considered a reasonable estimate of
fair value of these financial instruments due to their short-term nature.
INVESTMENT SECURITIES
Fair values are based on quoted market prices or dealer quotes.
MORTGAGE-BACKED SECURITIES
Fair values are based on quoted market prices or dealer quotes.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential real estate,
commercial real estate, construction, and other non-real estate. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturities is based on the Company's 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 nonperforming 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.
STOCK IN FEDERAL HOME LOAN BANKS
Stock in Federal Home Loan Banks is valued at cost, which represents
redemption value and approximates fair value.
INTEREST RATE CAP AGREEMENTS
Fair values are based on quoted market prices or dealer quotes.
SAVINGS DEPOSITS
The fair value of savings deposits with no stated maturity, such as
passbook, NOW, and money market accounts, is equal to the amount payable on
demand.
The fair value of certificates of deposit, all of which have stated
maturities, is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
BORROWED MONEY
The fair value of borrowed money is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently available for similar borrowings.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
The carrying value is considered a reasonable estimate of fair value of
these financial instruments due to their short-term nature.
83
<PAGE>
(22) PARENT COMPANY FINANCIAL INFORMATION
The following are condensed balance sheets as of December 31, 1996 and 1995
and condensed statements of income and cash flows for the years ended December
31, 1996, 1995, and 1994 for Jefferson Savings Bancorp, Inc. (parent company
only):
<TABLE>
<CAPTION>
(IN THOUSANDS)
CONDENSED BALANCE SHEETS 1996 1995
------------------------- -------- -------
<S> <C> <C>
Assets:
Investment in subsidiaries...................... $ 88,951 $77,914
Advances to subsidiaries........................ 4,393 5,050
Investment in real estate, net.................. -- 918
Other assets.................................... 274 1,183
-------- -------
$ 93,618 $85,065
======== =======
Liabilities and stockholders' equity:
Commercial bank debt............................ 3,430 3,779
Other liabilities............................... 269 1,035
Stockholders' equity............................ 89,919 80,251
-------- -------
$ 93,618 $85,065
======== =======
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
CONDENSED STATEMENTS OF INCOME 1996 1995 1994
------------------------------ ------- -------- -------
<S> <C> <C> <C>
Interest income................................... $ 812 $ 894 $ 1,274
Interest expense.................................. 273 132 --
Dividends from subsidiaries....................... 5,147 39,064 918
Gain on real estate operations.................... 319 150 110
------- -------- -------
6,005 39,976 2,302
Operating expenses................................ 761 459 343
------- -------- -------
Income before income taxes and equity
in undistributed earnings of subsidiaries...... 5,244 39,517 1,959
Income tax expense................................ 129 160 386
------- -------- -------
Income before undistributed earnings
of subsidiaries................................ 5,115 39,357 1,573
Equity in undistributed earnings of subsidiaries.. (2,299) (32,987) 3,789
------- -------- -------
Net income..................................... $ 2,816 $ 6,370 $ 5,362
======= ======== =======
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
CONDENSED STATEMENTS OF CASH FLOWS 1996 1995 1994
---------------------------------- -------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income....................................... $ 2,816 $ 6,370 $ 5,362
Net income of subsidiaries....................... (2,848) (6,077) (4,707)
Dividends from subsidiaries...................... 5,147 39,064 918
Other, net....................................... 1,551 1,857 (719)
------- -------- -------
Net cash provided by operating activities.. 6,666 41,214 854
------- -------- -------
Investing activities:
Advances to subsidiaries......................... (1,343) 10,504 661
Proceeds from sale of real estate................ 1,237 183 --
Cash paid for acquisitions....................... (5,147) (51,981) --
------- -------- -------
Net cash provided by (used in) investing
activities............................. (5,253) (41,294) 661
------- -------- -------
Financing activities:
Dividends paid................................... (1,197) -- --
Change in borrowed money......................... (349) 3,779 --
Purchase of ESOP shares.......................... -- (3,779) --
Proceeds from stock options exercised............ 84 80 14
Proceeds from dividend reinvestment and
stock purchase plan............................ 49 -- --
Purchase of treasury stock....................... -- -- (1,529)
------- -------- -------
Net cash provided by (used in)
financing activities................... (1,413) 80 (1,515)
------- -------- -------
Net change in cash and cash equivalents.... -- -- --
Cash and cash equivalents at beginning of year...... -- -- --
------- -------- -------
Cash and cash equivalents at end of year............ $ -- $ -- $ --
======= ======== =======
Supplemental disclosures of cash flow information:
Stock issued for acquisitions.................... $ 5,155 $ -- $ --
======= ======== =======
</TABLE>
85
<PAGE>
QUARTERLY OPERATING DATA
<TABLE>
<CAPTION>
1996 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income............................... $20,510 $20,156 $20,770 $20,254
Interest expense........................................... 13,477 13,063 13,100 12,518
------- ------- ------- -------
Net interest income.................................... 7,033 7,093 7,670 7,736
Provision for losses on loans.............................. 165 165 165 165
------- ------- ------- -------
Net interest income after
provision for losses on loans........................ 6,868 6,928 7,505 7,571
------- ------- ------- -------
Noninterest income:
Gain (loss) on sales of mortgage-backed securities, net.. 508 127 (1,931) --
Gain on sales of loans, net.............................. 149 72 79 74
Gain on real estate operations, net...................... 368 48 3 34
Other.................................................... 582 433 399 173
------- ------- ------- -------
Total noninterest income.............................. 1,607 680 (1,450) 281
------- ------- ------- -------
Noninterest expense:
General and administrative............................... 4,980 4,708 4,370 4,512
SAIF special assessment.................................. -- -- 5,599 --
Amortization of excess cost over
fair value of net assets acquired....................... 250 250 261 262
------- ------- ------- -------
Total noninterest expense............................. 5,230 4,958 10,230 4,774
------- ------- ------- -------
Income (loss) before income taxes..................... 3,245 2,650 (4,175) 3,078
Income tax expense (benefit)............................... 1,255 1,033 (1,338) 1,032
------- ------- ------- -------
Net income (loss)..................................... $ 1,990 $ 1,617 $(2,837) $ 2,046
======= ======= ======= =======
Earnings (loss) per share.................................. $.50 $.41 $(.72) $.51
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income............................... $14,282 $16,732 $21,192 $20,838
Interest expense........................................... 9,979 11,733 14,605 13,981
------- ------- ------- -------
Net interest income................................... 4,303 4,999 6,587 6,857
Provision for losses on loans.............................. 90 94 83 100
------- ------- ------- -------
Net interest income after
provision for losses on loans........................ 4,213 4,905 6,504 6,757
------- ------- ------- -------
Noninterest income:
Gain on sales of mortgage-backed securities, net......... -- -- -- --
Gain on sales of loans receivable, net................... 8 53 70 96
Gain (loss) on real estate operations, net............... 203 (25) 353 234
Other.................................................... 187 345 482 476
------- ------- ------- -------
Total noninterest income.............................. 398 373 905 806
------- ------- ------- -------
Noninterest expense:
General and administrative............................... 2,543 3,116 4,202 4,590
Amortization of excess cost over
fair value of net assets acquired....................... -- -- 252 252
------- ------- ------- -------
Total noninterest expense............................. 2,543 3,116 4,454 4,842
------- ------- ------- -------
Income before income taxes............................ 2,068 2,162 2,955 2,721
Income tax expense........................................ 766 756 1,121 893
------- ------- ------- -------
Net income............................................ $ 1,302 $ 1,406 $ 1,834 $ 1,828
======= ======= ======= =======
Earnings per share........................................ $.32 $.34 $.47 $.46
======= ======= ======= =======
</TABLE>
86
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
For information concerning the Board of Directors and executive officers of
the Company, the information contained under the section captioned "Proposal I
- -- Election of Directors" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement") which will
be filed within 120 days of the Company's fiscal year end and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the sections captioned "Director
Compensation" and "Executive Compensation and Other Benefits" in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(B) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference
to the sections captioned "Securities Ownership of Management" in the
Proxy Statement.
(C) CHANGES IN CONTROL
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
----------------------------------------------
(1) Financial Statements. The following consolidated financial statements
are filed under Item 8 hereof:
Independent Auditors' Report
87
<PAGE>
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-K and is also the Exhibit Index.
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIALLY
NO. DESCRIPTION NUMBERED COPY
- --- ----------- -------------
<S> <C> <C>
3.1 Certificate of Incorporation *
3.2 Bylaws **
4.1 Specimen Stock Certificate ***
4.2 Rights Agreement, dated August 17, 1994, between Jefferson Savings
Bancorp, Inc. and Boatmen's Trust Company ****
10.1+ Jefferson Savings Bancorp, Inc. 1993 Stock Option and Incentive Plan *
10.2+ Jefferson Savings Bancorp, Inc. Management Recognition Plan "A" *
10.3+ Jefferson Savings Bancorp, Inc. Management Recognition Plan "B" *
10.4+ Jefferson Savings Bancorp, Inc. Management Recognition Plan "C" *
10.5+ Jefferson Savings Bancorp, Inc. Management Recognition Plan "D" *
10.6+ Jefferson Savings Bancorp, Inc. Directors' Retirement Plan *****
10.7+ Employment Agreement between Jefferson Savings Bancorp,
Inc., Jefferson Savings and Loan Association and David V. McCay *
10.8+ Supplemental Retirement Agreement between Jefferson
Savings and Loan Association and David V. McCay *
10.9+ Form of Director's Deferred Compensation Agreement *
10.10+ Jefferson Savings and Loan Association Bonus Plan *
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule (EDGAR only)
</TABLE>
- -------------------
(+) Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
* Incorporated by reference from Registration Statement on Form S-1 filed
December 23, 1992 (File No. 33-56324)
** Incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 1995
*** Incorporated by reference from Registration Statement on Form 8-A filed
March 30, 1993 (File No. 0-21466)
**** Incorporated by reference from Registration Statement on Form 8-A filed
August 19, 1994.
***** Incorporated by reference from Pre-Effective Amendment No. 2 to
Registration Statement on Form S-1 filed February 10, 1993 (File No. 33-
56324)
88
<PAGE>
(B) REPORTS ON FORM 8-K. On October 25, 1996, the Registrant filed a
-------------------
current report on Form 8-K to report its third quarter earnings under Item 5.
No financial statements were filed under Item 7 of this report.
(C) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
--------
either filed as part of this Annual Report on Form 10-K or incorporated by
reference herein.
(D) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT.
--------------------------------------------------------------
There are no other financial statements and financial statement schedules which
were excluded from the Annual Report to Stockholders pursuant to Rule 14a-
3(b)(1) which are required to be included herein.
89
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
JEFFERSON SAVINGS BANCORP, INC.
March 28, 1997 By: /s/ David V. McCay
--------------------------------------
David V. McCay
Chairman of the Board, 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.
By: /s/ David V. McCay March 28, 1997
-----------------------------------
David V. McCay
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Gary G. Honerkamp March 28, 1997
-----------------------------------
Gary G. Honerkamp
Senior Vice President and Secretary
By: /s/ Paul J. Milano March 28, 1997
------------------------------------
Paul J. Milano
Senior Vice President, Treasurer, Chief
Financial Officer and Senior Accounting Officer
(Principal Financial and Accounting Officer)
By: /s/ Frank C. Bick March 28, 1997
-------------------------------------
Frank C. Bick
Director
By: /s/ William W. Canfield March 28, 1997
-------------------------------------
William W. Canfield
Director
By: /s/ Lloyd D. Doerflinger, Jr. March 28, 1997
-------------------------------------
Lloyd D. Doerflinger, Jr.
Director
By:
-------------------------------------
Forrest W. Miller, Jr.
Director
By:
-------------------------------------
Edward G. Throop
Director
90
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT
- ------
Jefferson Savings Bancorp, Inc.
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF PERCENTAGE
SUBSIDIARIES (1) INCORPORATION OWNERSHIP
- ---------------- --------------- -----------
<S> <C> <C>
Jefferson Savings and Loan Association, F.A. United States 100%
First Federal Savings Bank of North Texas United States 100%
Jefferson Acquisition Co. Missouri 100%
SUBSIDIARIES OF JEFFERSON SAVINGS
AND LOAN ASSOCIATION, F.A.
- ---------------------------------
J.S. Services, Inc. Missouri 100%
JS&L Realty, Inc. Missouri 100%
J.S. Services of Florida, Inc. Florida 100%
Jefferson Financial Corporation Texas 100%
SUBSIDIARIES OF FIRST FEDERAL
SAVINGS BANK OF NORTH TEXAS
- ------------------------------
First Service Corporation, Inc. Texas 100%
North Texas Financial Services, Inc. Texas 100%
</TABLE>
- --------------------
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the Annual Report on
Form 10-K.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Jefferson Savings Bancorp, Inc.
We consent to incorporation by reference in the registration statement (Number
333-09063) on Form S-3 and (Number 33-56324) on Form S-8 of Jefferson Savings
Bancorp, Inc. of our report dated January 29, 1997, relating to the consolidated
balance sheets of Jefferson Savings Bancorp, Inc. and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the December 31, 1996
annual report on Form 10-K of Jefferson Savings Bancorp, Inc.
KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO OF JEFFERSON SAVINGS BANCORP, INC. AT AND
FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,359
<INT-BEARING-DEPOSITS> 11,531
<FED-FUNDS-SOLD> 4,815
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 180,905
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 891,934
<ALLOWANCE> (6,529)
<TOTAL-ASSETS> 1,148,079
<DEPOSITS> 947,069
<SHORT-TERM> 97,682
<LIABILITIES-OTHER> 13,409
<LONG-TERM> 0
0
0
<COMMON> 45
<OTHER-SE> 89,874
<TOTAL-LIABILITIES-AND-EQUITY> 1,148,079
<INTEREST-LOAN> 64,911
<INTEREST-INVEST> 15,138
<INTEREST-OTHER> 1,641
<INTEREST-TOTAL> 81,690
<INTEREST-DEPOSIT> 44,366
<INTEREST-EXPENSE> 52,158
<INTEREST-INCOME-NET> 29,532
<LOAN-LOSSES> 660
<SECURITIES-GAINS> (1,296)
<EXPENSE-OTHER> 25,192
<INCOME-PRETAX> 4,798
<INCOME-PRE-EXTRAORDINARY> 2,816
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,816
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 2.75
<LOANS-NON> 1,443
<LOANS-PAST> 0
<LOANS-TROUBLED> 179
<LOANS-PROBLEM> 1,749
<ALLOWANCE-OPEN> 5,096
<CHARGE-OFFS> 78
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 6,529
<ALLOWANCE-DOMESTIC> 4,168
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,361
</TABLE>
