<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
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 0-21466
JEFFERSON SAVINGS BANCORP, INC.
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(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
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(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 _____
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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. [_]
As of March 17, 1998, the aggregate market value of the registrant's voting
stock held by non-affiliates was approximately $205.3 million based on the
closing sales price of $26.875 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 17, 1998: 10,014,892
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 1998 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
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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 446,302 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.
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 1,095,900
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. The excess cost over fair value of net assets acquired was
approximately $5.9 million. 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. 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.
The executive offices of the Company are located at 14915 Manchester Road,
Ballwin, Missouri 63011 and its main telephone number is (314) 227-3000.
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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 $666.1 million in assets at December 31, 1997,
the Association is one of the largest savings associations 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, 1997, over
73.0% of the Association's total loan portfolio was secured by properties
located in the Association's market area and over 92.2% 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 3.5% for
the month of December 1997 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, 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 sixth 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.
3
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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) seven 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) five offices in the northeastern Texas counties of
Bowie, Franklin, Hopkins, Morris and Titus, which L&B Financial had served since
1890; (iv) four offices in the suburban Dallas counties of Dallas, Rockwall and
Tarrant, 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 $573.2 million in assets at
December 31, 1997, the Bank is the eleventh largest savings association in the
State of Texas.
On September 25, 1997, the Bank entered into a Supervisory Agreement
("Agreement") with the OTS in connection with an OTS examination of the Bank for
the period ended December 31, 1996. The Bank agreed to take corrective actions
with respect to certain matters primarily related to the Bank's lending and
asset classification functions, including compliance with the Bank's lending
limits, the review of the loan portfolio in accordance with the Bank's asset
classification policy and the correction of technical exceptions found in the
Bank's credit and collateral files. The Bank also agreed to curtail loans for
acquisition and development purposes without prior OTS approval and to restrict
the amount of residential construction loans it may make to one borrower.
During the course of the examination and in its formal examination response to
the OTS, the Bank advised the OTS that it had already taken, or committed to
take, substantially all of the actions required by the Agreement, including
internally imposed restrictions on the Bank's lending activities that are more
stringent than those called for by the Agreement. The Company believes that
the Bank is in compliance with the terms of the Agreement.
The Bank's executive offices are located at 321 West Oak Street, Denton,
Texas and its main telephone number is (940) 382-9676.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Company's loan portfolio totaled $924.9
million at December 31, 1997, representing 74.7% of total assets at that date.
At December 31, 1997, the loan portfolio of the Association totaled $520.0
million, or 78.1% of its assets, and the loan portfolio of the Bank totaled
$404.9 million, or 70.6% 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 81.7% of the Association's loans are
secured by properties in the State of Missouri and 81.8% of the Bank's loans are
secured by properties in the State of Texas.
The Company's loan portfolio continues to consist primarily of loans
secured by residential real estate. At December 31, 1997, $647.7 million, or
66.7% 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, 1997,
loans for the construction and development of single-family residential real
estate totaled $163.4 million, or 16.8% of the Company's total loan portfolio.
At December 31, 1997, 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 $54.2 million, or 5.6%
of the total loan portfolio, at December 31, 1997.
At December 31, 1997, loans secured by commercial real estate totaled $80.8
million, or 8.3% of the total loan portfolio. To a limited extent, the Savings
Association Subsidiaries originate consumer and commercial loans. Consumer
loans, which primarily consist of automobile loans, education loans and loans
secured by savings deposits, totaled $13.0 million, or 1.3% of the Company's
total loan portfolio at December 31, 1997. Commercial loans totaled $9.8
million, or 1.0%, of the total loan portfolio.
4
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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, 1997, the Company had no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
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1997 1996 1995 1994 1993
------------------------ ----------------- ---------------- ------------------ -----------------
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).......... $647,735 66.72% $623,754 63.51% $629,327 75.74% $501,307 84.98% $234,101 72.63%
Home equity................ 54,156 5.58 44,924 4.57 26,826 3.23 22,685 3.84 21,431 6.65
FHA insured/VA guaranteed.. 2,073 0.21 968 0.10 1,065 0.13 931 0.16 1,203 0.37
Commercial................. 80,758 8.32 56,667 5.77 61,485 7.40 56,192 9.52 58,382 18.11
Construction and
development............... 163,390 16.83 242,143 24.66 105,339 12.68 5,945 1.67 5,385 1.67
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 948,112 97.65 968,456 98.61 824,042 99.18 587,060 99.51 320,502 99.43
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial................... 9,775 1.01 5,000 0.51 2,000 0.24 2,000 0.34 1,000 0.31
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Automobile................. 3,134 0.32 1,649 0.17 875 0.10 148 0.02 188 0.06
Loans secured by savings
deposits.................. 5,532 0.57 3,658 0.37 3,410 0.41 297 0.05 240 0.07
Education.................. 191 0.02 178 0.02 229 0.03 224 0.04 254 0.08
Other...................... 4,179 0.43 3,195 0.32 341 0.04 213 0.04 151 0.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans... 13,036 1.34 8,680 0.88 4,855 0.58 882 0.15 833 0.26
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable.......... 970,923 100.00% 982,136 100.00% 830,897 100.00% 589,942 100.00% 322,353 100.00%
====== ====== ====== ====== ======
Add (deduct):
Loans in process........... (38,126) (89,573) (38,458) (3,755) (5,380)
Unearned (discounts)
premiums, net............. (1,112) (1,786) (621) 111 115
Deferred loan costs
(fees), net............... 1,417 1,157 1,363 2,163 (362)
Allowance for losses....... (8,182) (6,529) (5,096) (3,471) (3,190)
-------- -------- -------- -------- --------
Loans receivable, net.. $924,920 $885,405 $788,085 $584,990 $313,518
======== ======== ======== ======== ========
</TABLE>
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(1) Includes loans held for sale of $2,193,000, $2,821,000, $1,787,000,
$752,000 and $610,000 at December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
5
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LOAN PORTFOLIO SENSITIVITY. The following table sets forth certain
information as of December 31, 1997 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....... $ 25,514 $107,903 $570,547 $703,964
Commercial real estate........ 21,673 26,200 32,885 80,758
Construction and development.. 138,029 24,018 1,343 163,390
Commercial.................... 5,775 4,000 -- 9,775
Consumer...................... 7,906 4,290 840 13,036
-------- -------- -------- --------
Total........................ $198,897 $166,411 $605,615 $970,923
======== ======== ======== ========
</TABLE>
The following table sets forth as of December 31, 1997 the dollar amount of
the loans maturing subsequent to the year ending December 31, 1998 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....... $142,272 $536,178 $678,450
Commercial real estate........ 14,259 44,826 59,085
Construction and development.. 12,815 12,546 25,361
Commercial.................... -- 4,000 4,000
Consumer...................... 4,659 471 5,130
-------- -------- --------
Total...................... $174,005 $598,021 $772,026
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</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."
The Company uses 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
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unless the borrower meets the same underwriting criteria as applied to the
Association's other single-family mortgage loans.
To further supplement originations, the Company has undertaken residential
mortgage loan purchases both on a bulk and an individual loan basis. All such
loans are underwritten using the same underwriting guidelines as are applied to
direct originations and are generally secured by properties in the Company's
market area.
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 and
$70.4 million in loans to the portfolio through its purchase of L&B Financial
in 1997. 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, including the Federal Home Loan Mortgage Corporation ("FHLMC"). The
bulk of such loan sales consist of long-term, fixed-rate mortgage loans which
are sold in furtherance of the Company's goal of better matching the maturities
and interest rate sensitivity of its assets and liabilities. The Savings
Association Subsidiaries generally 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 may charge an origination fee of between one and two points
depending on competition, which the Association retains upon the sale of the
related loans.
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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,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction and development.................. $172,505 $234,192 $ 72,104
Single-family................................. 140,878 66,754 65,847
Home equity................................... 35,106 37,130 13,497
FHA insured/VA guaranteed..................... 1,029 793 1,352
Commercial real estate........................ 10,453 12,017 8,027
Commercial...................................... 8,587 3,418 --
Consumer........................................ 9,310 3,842 1,311
-------- -------- --------
Total loans originated...................... 377,868 358,146 162,138
-------- -------- --------
Loans purchased:
Real estate loans:
Single-family................................. 48,738 8,644 25,431
Commercial.................................... 773 473 1,000
Construction.................................. -- -- 971
-------- -------- --------
Total loans purchased....................... 49,511 9,117 27,402
-------- -------- --------
Loans acquired in business combinations:
Real estate loans:
Construction.................................. 3,111 23,311 33,006
Single-family................................. 44,974 28,141 152,703
Home improvement.............................. 13 -- 1,065
FHA insured/VA guaranteed..................... 116 286 450
Commercial real estate........................ 19,803 13,453 19,961
Consumer........................................ 5,063 2,181 4,297
Less allowance for loss, unearned discount and
deferred fees................................. (2,658) (11,333) (3,152)
-------- -------- --------
Total loans acquired in acquisitions.......... 70,422 56,039 208,330
-------- -------- --------
Loans sold:
Residential real estate......................... 45,232 32,893 27,190
Commercial real estate.......................... -- -- 1,157
-------- -------- --------
Total loans sold.............................. 45,232 32,893 28,347
-------- -------- --------
Principal repayments.............................. 409,383 290,969 165,052
Decrease (increase) in other items, net........... (4,071) (2,120) (1,376)
-------- -------- --------
Net increase...................................... $ 39,515 $ 97,320 $203,095
======== ======== ========
</TABLE>
8
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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 made by the Association 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 Board of
Directors. For the Bank, loans of up to $150,000 may be approved by a loan
officer. Loans of greater than $150,000 up to $500,000 may be approved by the
Management Loan Committee and loans greater than $500,000 must be approved by
the Loan Committee of the Bank's 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 that exceed in the aggregate of 15% of their respective
unimpaired capital and unimpaired surplus. Pursuant to the Agreement, the Bank
has agreed to limit its residential construction lending to a maximum credit
line to any one borrower to 75% of its legal lending limit until it reduces
its classified assets to certain levels.
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
9
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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.
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, 1997, the Savings Association Subsidiaries held approximately $30.5
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 may 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
historically restricted the creation of any lien on a primary residence other
than a first lien, the Company has not offered home equity loans in Texas.
Effective January 1, 1998, the Texas Constitution was amended to permit the
encumbrance of homesteads for non-recourse, closed-end, home equity loans
10
<PAGE>
provided that the aggregate indebtedness secured by the homestead does not
exceed 80% of its fair market value. The Bank anticipates offering such loans on
a limited basis. At December 31, 1997, total outstanding home equity loans
totaled $54.2 million, or 5.6% 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.
At December 31, 1997, 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>
Office buildings........................... $16,631
Multi-family............................... 17,545
Hotels and restaurants..................... 9,418
Other...................................... 37,164
-------
$80,758
=======
</TABLE>
The Company's two largest commercial real estate loans at December 31, 1997
were a $4.3 million loan secured by a retail shopping center located in St.
Louis County and a $4.1 million loan secured by two retail centers in
Springfield, Missouri. At December 31, 1997, the Company's ten largest
commercial real estate loans amounted to $31.0 million, or 38.4% of the
Company's portfolio of commercial real estate loans. None of these loans were
on non-accrual at December 31, 1997.
At December 31, 1997, commercial real estate loans totaled $80.8 million,
or 8.3% of the Company's total loan portfolio, as compared to $56.7 million, or
5.8%, at December 31, 1996. The Company originated $8.0 million, $12.0 million
and $10.5 million of commercial real estate loans during the years ended
December 31, 1995, 1996 and 1997, 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 total capital. Under this standard, at
December
11
<PAGE>
31, 1997, the Association was permitted to invest in nonresidential real
property loans in an aggregate amount equal to $207.7 million and the Bank was
permitted to invest an aggregate amount equal to $152.6 million .
CONSTRUCTION LENDING. Through the Savings Association Subsidiaries, the
Company engages in construction lending to qualified borrowers for construction
of single-family residential properties including loans for the acquisition and
development of land for the construction of single-family residences. These
properties are primarily located in the Company's market areas. At December 31,
1997, the Company's loan portfolio included $163.4 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 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, 1997, 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.
Under its Agreement with OTS, the Bank has agreed to curtail its lending
for purposes of acquisition, development and construction ("ADC") without prior
written OTS approval. In addition, the Bank agreed to, on an ongoing basis,
develop, adopt, and implement underwriting policies and procedures, in keeping
with industry standards, to address construction lending, ADC lending,
commercial real estate, credit analysis, asset classification, allowance for
loan and lease losses, and appraisals. The Bank has also agreed to have a
written review prepared by an independent appraiser for all loans and credit
applications greater than $ 1 million. The Bank's residential construction
lending is limited to a maximum credit line of 75% of the Bank's legal lending
limit until such time as the Bank has reduced its classified assets to 25% or
less of Tier 1 core capital plus its allowance for loan and lease losses. The
Company and the Bank believe that the Bank is in full compliance with the terms
of the Agreement.
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. At December 31, 1997, consumer loans totaled $13.0
million, or 1.3% of the Company's total loan portfolio.
12
<PAGE>
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, 1997, total
loans on savings deposits were $5.5 million, or 0.6% 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 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, 1997, $72,000 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 $9.0 million at December 31, 1997 to three 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
13
<PAGE>
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, 1997,
the Company was servicing approximately $85.8 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.
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.
14
<PAGE>
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,
------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Restructured loans...................... $ 210 $ 179 $ 546 $ -- $ --
------ ------ ------ ------ ------
Nonaccruing loans:
Residential real estate............... $1,826 $1,169 $1,687 $ 249 $ 192
Commercial real estate................ 1,214 -- 26 -- --
Construction.......................... 2,294 11 707 -- --
Commercial............................ -- 74 15 -- --
Consumer.............................. 72 232 42 -- --
------ ------ ------ ------ ------
Total nonaccruing loans............. 5,406 1,486 2,477 249 192
Applicable allowance for losses..... (152) (43) -- -- --
------ ------ ------ ------ ------
Nonaccruing loans, net.......... 5,254 1,443 2,477 249 192
------ ------ ------ ------ ------
Total restructured and
nonaccruing loans, net...... 5,464 1,622 3,023 249 192
------ ------ ------ ------ ------
Nonperforming loans, net as a
percentage of net loans....... 0.59% 0.18% 0.38% 0.04% 0.06%
====== ====== ====== ====== ======
Foreclosed assets:
Residential........................... $ 880 $1,584 $ 436 $ 70 $ 605
Commercial............................ 1,315 1,195 3,163 3,002 7,464
Construction.......................... 2,596 2,115 343 -- --
Commercial............................ -- -- -- -- --
------ ------ ------ ------ ------
Total foreclosed assets............. 4,791 4,894 3,942 3,072 8,069
Applicable allowance for losses..... (535) (434) (272) (455) (457)
------ ------ ------ ------ ------
Foreclosed assets, net.......... 4,256 4,460 3,670 2,617 7,612
------ ------ ------ ------ ------
Nonperforming assets, net....... $9,720 $6,082 $6,693 $2,866 $7,804
====== ====== ====== ====== ======
Nonperforming assets, net as a
percentage of total assets.... 0.79% 0.53% 0.59% 0.33% 1.38%
====== ====== ====== ====== ======
</TABLE>
Total nonperforming assets increased from $6.1 million (or 0.53% of assets)
at December 31, 1996 to $9.7 million (or 0.79% of assets) at December 31, 1997
after declining from $6.7 million (or 0.59% of assets) at December 31, 1995.
The increase in nonperforming assets during the most recent fiscal year is
attributed to an increase in nonaccruing construction loans, which consists of
eleven loans for the construction of single-family residences in the Dallas/Fort
Worth metropolitan area, a $1.2 million increase in nonaccruing commercial real
estate loans, which consists of one loan secured by commercial real estate in
the Dallas/Fort Worth metropolitan area and one loan secured by commercial real
estate in Longview, Texas, and a $657,000 increase in nonaccruing residential
real estate loans. 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, 1997, the Company's foreclosed assets consisted primarily
of three commercial properties carried on the Company's books at $1.3 million,
15 single-family residences carried on the Company's books at $880,000 and $2.6
million in residential construction loans. See " -- Real Estate Acquired
Through Foreclosure." The Company's restructured loans consist of four loans
totaling approximately $210,000 secured by single-family residences
15
<PAGE>
located in Denton, Panola, Burnett and Hopkins 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 nonperforming loan and has excluded it from the table
above. At December 31, 1997, the Company had one single-family construction loan
totaling $623,000 that was more than 90 days past the maturity date with regard
to principal repayment. Interest payments on the loan were less than 90 days
past due and the loan was still accruing interest. Since the interest due on
this loan was less than 90 days past due, the loan is not considered a
nonperforming asset.
During the year ended December 31, 1997, gross interest income of
approximately $523,000 and $17,000, 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
$296,000 was included in income during the year ended December 31, 1997 on
nonaccruing loans. Approximately $15,000 in interest on restructured loans was
included in income during the year ended December 31, 1997.
At December 31, 1997, there were $3.3 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,
1997 it had $14.5 million, net of reserves, in assets classified as substandard,
no assets classified as doubtful and $1.1 million in assets classified as loss.
Substandard assets included $1.8 million in residential loans, $76,000 in
consumer loans, $4.8 million in construction loans, $3.3 million in commercial
real estate loans and $4.3 million, net of reserves, in real estate acquired
through foreclosure. Assets classified as loss, which are fully reserved,
consisted of $363,000 in real estate acquired through foreclosure and $696,000
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.
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
16
<PAGE>
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 higher loan charge-off activity in the
last three fiscal years than in the fiscal years prior to that, 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, 1997 was 151.3%.
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.
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,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................. $6,529 $5,096 $3,471 $3,190 $2,974
Reserves acquired in business combinations..... 1,156 851 1,378 -- --
Loans charged-off:
Residential real estate...................... (91) (24) -- (19) (24)
Commercial real estate....................... -- -- (91) -- --
Construction................................. (546) (42) (31) -- --
Commercial................................... (7) -- -- -- --
Consumer..................................... (137) (12) -- -- --
------ ------ ------ ------ ------
Total charge-offs......................... (781) (78) (122) (19) (24)
------ ------ ------ ------ ------
Recoveries:
Residential real estate...................... 18 -- -- -- --
Commercial real estate....................... -- -- -- -- --
Construction................................. -- -- -- -- --
Commercial................................... -- -- -- -- --
Consumer..................................... -- -- 2 -- --
------ ------ ------ ------ ------
Total recoveries.......................... 18 -- 2 -- --
------ ------ ------ ------ ------
Net loans charged-off.......................... (763) (78) (120) (19) (24)
------ ------ ------ ------ ------
Provision charged to expense................... 1,260 660 367 300 240
------ ------ ------ ------ ------
Balance at end of period....................... $8,182 $6,529 $5,096 $3,471 $3,190
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period.......... 0.08% 0.01% 0.02% 0.01% 0.01%
====== ====== ====== ====== ======
Ratio of allowance to net loans................ 0.88% 0.74% 0.65% 0.59% 1.02%
====== ====== ====== ====== ======
</TABLE>
17
<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,
-----------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------------- ---------------------------
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....... $1,640 72.51% $ 1,354 68.18% $ 1,050 79.10%
Commercial real estate........ 2,896 8.32 1,199 5.77 535 7.40
Construction and development.. 1,557 16.83 3,007 24.66 139 12.68
Commercial.................... 43 1.01 4 0.51 -- 0.24
Consumer...................... 107 1.34 152 0.88 71 0.58
Unallocated................... 1,939 -- 813 -- 3,301 --
------ ----- ------- ------ ------- ------
$8,182 100.00% $ 6,529 100.00% $ 5,096 100.00%
====== ====== ======= ====== ======= ======
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1994 1993
------------------- -------------------------
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....... $ 529 88.98% $ 259 79.65%
Commercial real estate........ 875 9.52 883 18.11
Construction and development.. -- 1.01 -- 1.67
Commercial.................... -- 0.34 -- 0.31
Consumer...................... 7 -- 9 0.26
Unallocated................... 2,060 -- 2,039 --
------ ------- -------- -------
$3,471 100.00% $ 3,190 100.00%
====== ======= ======== =======
</TABLE>
Included in the above amounts are specific reserves totaling $696,000,
$108,000 and $26,000 at December 31, 1997, 1996 and 1995, respectively, related
to loans classified as loss. No specific reserves were included in the amounts
shown above at December 31, 1994 or 1993. There were no loans classified as a
loss at any of the other dates disclosed above.
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, 1997, 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,
18
<PAGE>
less estimated costs to sell, declines. At December 31, 1997, 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 $837,000.
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 1.2 years at
December 31, 1997. 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.
19
<PAGE>
The following table sets forth the composition of the Company's mortgage-
backed securities portfolio at the dates indicated. All such securities were
classified as available-for-sale at such dates.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------- ------ ------- ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale:
- ------------------
GNMA................................. $60,641 70.9% $31,762 33.4% $ 4,002 1.7%
FHLMC................................ 5,550 6.5 19,550 20.5 24,475 10.5
FNMA................................. 11,596 13.6 14,991 15.7 109,461 47.0
CMOs................................. 7,693 9.0 28,900 30.4 94,945 40.8
------- ----- ------- ----- -------- -----
Total mortgage-backed securities
available for sale............... $85,480 100.0% $95,203 100.0% $232,883 100.0%
======= ===== ======= ===== ======== =====
</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, 1997. 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, 1997
--------------------------------------------------------------------------------
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............................. $ 17 8.62% $60,531 5.30% $60,548 $60,641 5.30%
FHLMC............................ 3,196 6.24 2,314 6.85 5,510 5,550 6.49
FNMA............................. 880 6.46 10,590 6.81 11,470 11,596 6.79
CMOs............................. -- -- 7,742 6.19 7,742 7,693 6.19
------ ------- ------- -------
Total mortgage-backed
securities available for sale.. $4,093 6.30% $81,177 5.63% $85,270 $85,480 5.66%
====== ======= ======= =======
</TABLE>
20
<PAGE>
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 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-backed securities equal to a monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable savings deposits
plus short-term borrowings. 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 1997 were approximately 20%
and 3%, respectively, and for the Bank were approximately 23% and 5%,
respectively.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated. At December 31, 1997, 1996 and
1995, all investment securities were classified as available for sale.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities (at fair value):
U.S. government and federal agency obligations.. $129,660 $ 85,339 $47,797
Tax-free municipal bonds........................ 337 363 793
-------- -------- -------
Total investment securities................. 129,997 85,702 48,590
-------- -------- -------
Other investments (at cost):
Interest-bearing deposits....................... 12,673 11,531 18,745
Federal funds sold.............................. 9,870 4,815 --
FHLB stock...................................... 16,741 15,769 16,520
-------- -------- -------
Total investments........................... $169,281 $117,817 $83,855
======== ======== =======
</TABLE>
21
<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, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------------------
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......... $114,237 6.82% $15,000 6.72% $129,237 $129,660 6.81%
Tax-free municipal bonds..... 337 5.04 -- -- 337 337 5.04
--------- --------- --------- -----------
Total investment securities...... $114,574 6.82 $15,000 6.72 $129,574 $129,997 6.81
========= ========= ========= ===========
</TABLE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of funds for the lending and
investment activities of the Savings Association subsidiaries and for general
operational purposes. In addition to deposits, the Savings Association
Subsidiaries derive 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.
22
<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, 1997 AT DECEMBER 31, 1996
--------------------------------- -------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE) AT DECEMBER 31, 1995
--------------------
% 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..... $ 48,750 4.67% $ 390 $ 48,360 5.11% $ (1,841) $ 50,201 5.77%
NOW................................ 57,174 5.47 6,136 51,038 5.39 3,958 47,080 5.41
Money market....................... 128,121 12.26 19,165 108,956 11.50 15,415 93,541 10.75
---------- ------ -------- -------- ------ -------- -------- ------
Total............................ 234,045 22.40 25,691 208,354 22.00 17,532 190,822 21.93
---------- ------ -------- -------- ------ -------- -------- ------
Certificates of deposit:
Fixed-rate, fixed-term........... 5,220 0.50 (3,487) 8,707 0.92 (5,616) 14,323 1.65
7-31 days........................ -- -- (49) 49 0.01 49 -- --
Three-month senior citizens...... 159 0.01 (34) 193 0.02 (35) 228 0.03
3-month.......................... 2,888 0.28 (1,120) 4,008 0.42 (831) 4,839 0.55
6-month.......................... 51,856 4.96 (3,828) 55,684 5.88 (17,159) 72,843 8.37
9-month.......................... 10,311 0.99 (9,887) 20,198 2.13 (31,813) 52,011 5.98
11-month......................... -- -- -- -- -- (8,346) 8,346 0.96
1-year........................... 172,119 16.47 (43,791) 215,910 22.80 (21,655) 237,565 27.30
13-month......................... -- -- (199) 199 0.02 199 -- --
14-month......................... -- -- (99) 99 0.01 99 -- --
15-month......................... -- -- (13,548) 13,548 1.43 13,548 -- --
18-month......................... 222,262 21.27 73,186 149,076 15.74 90,251 58,825 6.76
21 month......................... 15,782 1.51 15,782 -- -- -- -- --
2-year........................... 74,070 7.09 6,382 67,688 7.15 (2,013) 69,701 8.01
30-month......................... 38,098 3.65 4,890 33,208 3.51 (12,835) 46,043 5.29
3-year and over.................. 123,290 11.80 13,008 110,282 11.64 662 109,620 12.60
Jumbo certificates............... 91,817 8.79 35,365 56,452 5.96 53,252 3,200 0.36
Other............................ 2,964 0.28 (450) 3,414 0.36 1,602 1,812 0.21
---------- ------ -------- -------- ------ -------- -------- ------
Total certificates of deposit.. 810,836 77.60 72,121 738,715 78.00 59,359 679,356 78.07
---------- ------ -------- -------- ------ -------- -------- ------
Total.......................... $1,044,881 100.00% $ 97,812 $947,069 100.00% $ 76,891 $870,178 100.00%
========== ====== ======== ======== ====== ======== ======== ======
</TABLE>
23
<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,
------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ -----------------
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................ $ 51,417 2.49% $ 49,246 2.48% $ 44,771 2.85%
NOW...................... 82,175 2.35 55,350 1.76 31,064 2.39
Money market............. 96,157 4.35 88,034 4.39 90,040 3.89
Certificates of deposit.. 817,967 5.63 682,640 5.61 544,912 5.77
---------- -------- --------
Total deposits....... $1,047,716 5.10% $875,270 5.07% $710,787 5.20%
========== ======== ========
</TABLE>
The following table sets forth the Company's time deposits classified by
rates as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
2 - 3.99%.. $ 167 $ 385 $ 3,488
4 - 5.99%.. 697,045 622,173 405,829
6 - 7.99%.. 113,483 115,905 268,467
8 - 9.99%.. 141 252 1,572
-------- -------- --------
$810,836 $738,715 $679,356
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of the Company's
time deposits in specified interest rate categories at December 31, 1997.
<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%................ $ 167 $ -- $ -- $ -- $ 167
3 - 3.99%................ -- -- -- -- --
4 - 4.99%................ 47,225 606 -- 6 47,837
5 - 5.99%................ 499,200 113,392 21,288 15,328 649,208
6 - 6.99%................ 21,983 30,791 31,884 9,749 94,407
7 - 7.99%................ 2,251 3,672 12,129 1,024 19,076
8 - 8.99%................ 12 129 -- -- 141
-------- -------- ------- -------- --------
$570,838 $148,590 $ 65,301 $26,107 $810,836
======== ======== ======== ======= ========
</TABLE>
24
<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,
1997.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSITS
--------------- -----------
(IN THOUSANDS)
<S> <C>
Three months or less........... $16,717
Over three through six months.. 18,414
Over six through 12 months..... 32,121
Over 12 months................. 31,889
-------
Total....................... $99,141
=======
</TABLE>
The following table sets forth the Company's deposit activities for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Deposits.............................................. $1,003,419 $794,822 $626,842
Withdrawals........................................... 1,046,835 815,763 608,890
---------- -------- --------
Net deposits (withdrawals)........................... (43,416) (20,941) 17,952
Sale of branch deposits............................... (3,217) -- --
Deposits purchased in acquisitions, net of
purchase accounting adjustments...................... 104,876 64,740 312,409
Amortization of purchase accounting market valuation.. 129 129 118
Interest credited on deposits......................... 39,440 32,963 27,763
---------- -------- --------
Net increase in deposits............................. $ 97,812 $ 76,891 $358,242
========== ======== ========
</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, 1997, the Company had $62.9 million in FHLB advances and lines of credit
outstanding. Additional borrowings of $3.0 million were outstanding on
25
<PAGE>
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.
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,
------------------------------
1997 1996 1995
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts outstanding at period end:
FHLB advances............................................. $48,079 $ 66,761 $150,500
Securities sold under agreements to repurchase............ -- -- --
Other short-term borrowings............................... 14,791 27,490 20,683
Long-term debt............................................ 3,039 3,430 3,779
Weighted average rate paid at period end:
FHLB advances............................................. 6.01% 5.98% 5.78%
Securities sold under agreements to repurchase............ -- -- --
Other short-term borrowings............................... 6.25 6.11 5.92
Long-term debt............................................ 8.90 9.15 8.15
Maximum amount of borrowings outstanding at any month end:
FHLB advances............................................. $96,650 $150,500 $212,900
Securities sold under agreements to repurchase............ -- -- 24,492
Other short-term borrowings............................... 20,900 29,200 55,175
Long-term debt............................................ 3,430 3,779 3,779
Approximate average amounts outstanding during period:
FHLB advances............................................. $67,749 $116,846 $183,106
Securities sold under agreements to repurchase............ -- -- 19,984
Other short-term borrowings............................... 9,338 17,408 30,807
Long-term debt............................................ 3,210 3,575 1,750
Approximate weighted average rate paid during period (1):
FHLB advances............................................. 6.05% 5.89% 5.99%
Securities sold under agreements to repurchase............ -- -- 6.56
Other short-term borrowings............................... 4.24 4.68 5.72
Long-term debt............................................ 7.77 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, 1997, the net book value of the
Association's investment in and loans to its
26
<PAGE>
service corporations was $122.1 million and the net book value of the Bank's
service corporations investment was $117,000. Operations of the subsidiaries
accounted for $6.6 million, or 64.8% of consolidated total income for the year
ended December 31, 1997.
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. In January 1997, the Company made a capital contribution of
approximately $150 million to Jefferson Financial Corporation in the form of
single-family mortgage loans.
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 15 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.
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<PAGE>
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.
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, 1997, the Company and its subsidiaries had 270 full-time
and 49 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 of the Company, (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 or 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.
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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 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 the
unitary holding company would be required to 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 written 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 ("FDIA"); 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
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<PAGE>
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 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 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, 1997, the Savings Association Subsidiaries had $124,000 in high
ratio land or nonresidential construction loans 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.
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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 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, 1997.
<TABLE>
<CAPTION>
ASSOCIATION BANK
----------------------- ---------------------
PERCENT OF PERCENT OF
AMOUNT ASSETS (1) AMOUNT ASSETS (1)
----------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tangible capital...................................... $51,915 7.80% $38,139 6.95%
Tangible capital requirement.......................... 9,989 1.50 8,231 1.50
------- ----- ------- -----
Excess.............................................. $41,926 6.30% $29,908 5.45%
======= ===== ======= =====
Core capital.......................................... $51,915 7.80% $38,139 6.95%
Core capital requirement.............................. 19,979 3.00 16,461 3.00
------- ----- ------- -----
Excess.............................................. $31,936 4.80% $21,678 3.95%
======= ===== ======= =====
Total capital (i.e., core and supplementary capital).. $53,809 14.43% $42,376 12.21%
Risk-based capital requirement........................ 29,827 8.00 27,754 8.00
------- ----- ------- -----
Excess.............................................. $23,982 6.43% $14,622 4.21%
======= ===== ======= =====
</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
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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 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
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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).
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 goodwill and
other 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, 1997, 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 the
Home Owners' Loan Act which prohibit a savings association 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
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<PAGE>
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
Bank Holding Company Act 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.
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 did not 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 written 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, 1997, the Savings Association Subsidiaries had an aggregate
total of approximately $14.0 million that was available for distribution to the
Company as dividends or other capital distributions under the foregoing
regulations.
34
<PAGE>
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 are 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 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.
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 4%) of its net withdrawable accounts plus short-term
borrowings. 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 1997, were approximately 20% and 3%,
respectively, and for the Bank, were approximately 23% and 5%, 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
35
<PAGE>
Association was in compliance with this requirement with an investment in FHLB
of Des Moines stock at December 31, 1997, of $13.1 million and the Bank was in
compliance with this requirement with an investment in FHLB of Dallas stock of
$3.6 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 members in accordance with policies and procedures
established by the FHFB and their Board of Directors. As of December 31, 1997,
the Association had $30.0 million in advances and other borrowings from the FHLB
of Des Moines and the Bank had $18.1 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 $47.8 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, 1997, 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.
The percentage of taxable income method for calculating additions to tax
bad debt reserves was repealed in 1996. Beginning in 1996, thrift institutions
are treated the same as commercial banks under the Code. Banking organizations
with $500 million or more in assets, like the Company, are only able to take a
tax bad debt deduction when a loan is actually charged off.
Savings institutions which previously used the percentage of taxable income
method for calculating additions to bad debt reserves are required to recapture
post-1987 excess reserves into taxable income over a six-year period beginning
in 1996. Large thrift institutions, like the Association and the Bank, are
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 do 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, are deemed to have been made from pre-1988 tax bad
debt reserves and the institution is required to recapture the amount of such
reserves
36
<PAGE>
into taxable income. Otherwise, institutions are not required to recapture
pre-1988 bad debt reserves into income unless they cease to meet the Code
definition of a bank.
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 11,800 square feet, a total investment
of $3.2 million and net book value of $1.1 million at December 31, 1997. The
nine offices comprise approximately 42,000 square feet, a total investment of
$6.4 million and a net book value of $3.3 million at December 31, 1997.
The Bank's offices consist of the main office at 321 W. Oak, Denton, Texas,
76201 and 21 offices in Texas. The main office, built in 1957, has
approximately 9,848 square feet, a total investment of $1.4 million and a net
book value of $1.2 million at December 31, 1997. The 21 offices comprise
approximately 87,000 square feet, a total investment of $7.7 million and a net
book value of $6.0 million at December 31, 1997.
The net book value of the Company's investment in premises and equipment
totaled approximately $11.5 million at December 31, 1997. 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, 1997.
37
<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
17, 1998, there were 10,014,892 shares of Common Stock outstanding (including
shares held by the Company's Employee Stock Ownership Plan) and approximately
1,400 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. Historical per share data has been restated for a two-
for-one stock split effected through a 100% stock dividend payable December 17,
1997.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ ----------------------------------------------
DIVIDENDS DIVIDENDS
QUARTER ENDED: HIGH LOW CLOSE DECLARED HIGH LOW CLOSE DECLARED
- -------------- ---- --- ----- --------- ---- ------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $ 15 1/4 $ 12 5/8 $ 14 1/4 $ 0.05 $ 15 1/2 $ 13 1/2 $ 14 13/16 $0.04
June 30 15 5/16 13 7/8 15 1/8 0.05 14 1/4 12 5/8 12 3/4 0.04
September 30 20 3/16 14 1/8 20 3/16 0.05 12 3/8 11 1/8 11 1/4 0.04
December 31 22 19 1/4 20 1/2 0.07 13 1/2 11 3/8 13 0.04
</TABLE>
38
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash and investments.......................... $ 178,321 $ 125,176 $ 85,801 $ 50,207 $ 26,966
Mortgage-backed securities.................... 85,480 95,203 232,883 209,777 210,226
Loans receivable, net......................... 924,920 885,405 788,085 584,990 313,518
Excess cost over fair value of
net assets acquired.......................... 23,849 19,746 14,496 -- --
Accrued income and other assets............... 25,485 22,549 21,664 15,607 15,975
---------- ---------- ---------- -------- --------
Total assets................................ $1,238,055 $1,148,079 $1,142,929 $860,581 $566,685
========== ========== ========== ======== ========
Savings deposits.............................. $1,044,881 $ 947,069 $ 870,179 $511,936 $341,386
Borrowed money................................ 65,908 97,682 174,962 261,960 145,694
Accrued expenses and other liabilities........ 11,006 13,409 17,537 13,946 7,897
---------- ---------- ---------- -------- --------
Total liabilities........................... 1,121,795 1,058,160 1,062,678 787,842 494,977
Stockholders' equity.......................... 116,260 89,919 80,251 72,739 71,708
---------- ---------- ---------- -------- --------
Total liabilities and stockholders' equity.. $1,238,055 $1,148,079 $1,142,929 $860,581 $566,685
========== ========== ========== ======== ========
Book value per common share (1)............... $ 12.52 $ 11.17 $ 10.75 $ 9.35 $ 9.08
========== ========== ========== ======== ========
</TABLE>
______________
(1) Book value per share computation excludes shares in the ESOP that have not
been allocated or committed to be released.
OPERATING DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest and dividend income.................. $95,306 $81,690 $73,044 $44,991 $28,748
Interest expense.............................. 58,144 52,158 50,298 27,470 14,732
------- ------- ------- ------- -------
Net interest income......................... 37,162 29,532 22,746 17,521 14,016
Provision for losses on loans................. 1,260 660 367 300 240
------- ------- ------- ------- -------
Net interest income after provision
for losses on loans........................ 35,902 28,872 22,379 17,221 13,776
------- ------- ------- ------- -------
Noninterest income:
Gain on sales of investment securities, net.. 1,144 -- -- -- 195
Gain (loss) on sales of mortgage-backed
securities, net............................. (583) (1,296) -- 158 369
Gain on sales of loans, net.................. 575 374 227 265 150
Results of real estate operations, net....... 71 453 765 98 488
Other........................................ 2,306 1,587 1,490 904 685
------- ------- ------- ------- -------
Total noninterest income.................... 3,513 1,118 2,482 1,425 1,887
------- ------- ------- ------- -------
Noninterest expense:
General and administrative expense........... 21,103 18,570 14,451 10,012 8,264
SAIF special assessment...................... -- 5,599 -- -- --
Amortization of excess cost over
fair value of net assets acquired........... 1,711 1,023 504 -- --
------- ------- ------- ------- -------
Total noninterest expense................... 22,814 25,192 14,955 10,012 8,264
------- ------- ------- ------- -------
Income before income taxes.................. 16,601 4,798 9,906 8,634 7,399
Income tax expense............................ 6,370 1,982 3,536 3,272 2,639
------- ------- ------- ------- -------
Net income.................................. $10,231 $ 2,816 $ 6,370 $ 5,362 $ 4,760
======= ======= ======= ======= =======
Earnings per share, basic..................... $ 1.13 $ 0.37 $ 0.84 $ 0.69 $ 0.40
Earnings per share, diluted................... 1.08 0.35 0.80 0.66 0.38
======= ======= ======= ======= =======
Dividends per share $ 0.22 $ 0.16 $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
39
<PAGE>
KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average assets................ 0.81% 0.25% 0.61% 0.73% 1.02%
Return on average equity................ 9.49 3.43 8.28 7.41 7.92
Average equity to average assets........ 8.58 7.37 7.37 9.84 12.85
Stockholders' equity to total assets
(end of period)....................... 9.39 7.83 7.02 8.45 12.65
Dividend payout ratio................... 19.47 43.24 -- -- --
Net interest margin..................... 3.10 2.75 2.24 2.43 3.11
Interest rate spread.................... 2.80 2.45 1.89 2.01 2.70
Average interest-earning assets to
average interest-bearing liabilities.. 106.17 106.14 107.31 110.92 112.57
Noninterest expense to average assets... 1.82 2.26 1.43 1.36 1.77
Allowance for loan losses to
net loans (end of period)............. 0.88 0.74 0.65 0.59 1.02
Nonperforming assets, net to total
assets (end of period)................ 0.79 0.53 0.59 0.33 1.38
</TABLE>
40
<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.
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Annual Report on Form
10-K, the words or phrases "will likely result,""are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors, including
regional and national economic conditions, unfavorable judicial decisions,
substantial changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory factors
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
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.
41
<PAGE>
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, 1997, 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.
<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
------------- ------------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......................... $281,831 $392,916 $176,029 $74,144 $ 924,920
Mortgage-backed securities............... 28,552 50,789 5,786 353 85,480
Investment securities and other
interest-earning assets................ 92,624 48,006 28,651 -- 159,411
-------- -------- -------- ------- ----------
Total interest-earning assets....... 403,007 491,711 210,466 74,497 1,169,811
-------- -------- -------- ------- ----------
Interest-bearing liabilities:
Savings deposits.......................... 218,746 537,081 254,209 34,845 1,044,881
Borrowed money............................ 26,896 26,467 12,545 -- 65,908
-------- -------- -------- ------- ----------
Total interest-bearing liabilities.. 245,642 563,548 266,754 34,845 1,110,789
-------- -------- -------- ------- ----------
Interest sensitivity gap............ $157,365 $(71,837) $(56,288) $39,652 $ 59,022
======== ======== ======== ======= ==========
Cumulative interest
sensitivity gap................... $157,365 $ 85,528 $ 29,240 $68,892
======== ======== ======== =======
Ratio of cumulative gap to
total assets...................... 12.71% 6.91% 2.36% 5.56%
======== ======== ======== =======
</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.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which internally generates estimates of the change in
the Company's net portfolio value ("NPV") over a range of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The OTS also produces a similar analysis
using its own model based upon data submitted on the quarterly Thrift Financial
Reports filed by the subsidiary thrifts. The results of the OTS model may vary
from the Company's internal model due to differences in assumptions utilized,
including loan prepayment rates, reinvestment rates and deposits decay rates.
The following table sets forth the Company's NPV as of December 31, 1997:
42
<PAGE>
<TABLE>
<CAPTION>
NPV AS % OF
NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS
------------------------------------- ---------------------------
CHANGE IN INTEREST RATES DOLLAR PERCENT NPV CHANGE (IN
IN BASIS POINTS (RATE SHOCK) AMOUNT CHANGE CHANGE RATIO BASIS POINTS)
- --------------------------- ------ ------ ------- ----- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 400... $ 68,834 $(39,304) (36.4)% 5.77% (300)
+ 300... 82,249 (25,889) (23.9) 6.82 (195)
+ 200... 94,289 (13,849) (12.8) 7.74 (103)
+ 100... 102,629 (5,509) (5.1) 8.36 (41)
Static.. 108,138 -- -- 8.77 --
- 100... 108,511 373 0.3 8.80 3
- 200... 108,357 219 0.2 8.78 1
- 300... 111,198 3,060 2.8 8.99 22
- 400... 115,228 7,090 6.6 9.28 51
</TABLE>
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements
provide an indication of the Company's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Company's NPV and will differ from actual results.
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,
------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ------------------------------ --------------------------------
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........ $ 943,041 $78,665 8.34% $ 805,575 $64,911 8.06% $ 707,448 $53,500 7.56%
Mortgage-backed
securities............. 97,602 5,979 6.13 176,145 10,858 6.16 233,425 14,994 6.42
Investment securities... 114,827 8,198 7.14 63,631 4,280 6.73 44,160 2,770 6.27
Other interest-earning
assets................. 42,719 2,464 5.77 30,091 61,641 5.45 28,714 1,780 6.20
---------- ------- ---------- --------- ---------- --------
Total
interest-earning
assets............. 1,198,189 95,306 7.95 1,075,442 81,690 7.60 1,013,747 73,044 7.21
------- ---------- -------
Noninterest-earning assets. 57,961 38,437 30,377
---------- ---------- ----------
Total assets....... $1,256,150 $1,113,879 $1,044,124
========== ========== ==========
Interest-bearing
liabilities:
Savings deposits:
Passbook and
statement savings,
NOW, and money
market
accounts........... $ 229,750 7,396 3.22 $ 192,630 $ 6,063 3.15 $ 165,875 $ 5,522 3.33
Certificates of
deposit............. 818,437 46,058 5.63 682,640 38,303 5.61 544,912 31,474 5.77
---------- ------ ---------- ------- --------- -------
Total savings
deposits........... 1,048,187 53,454 5.10 875,270 44,366 5.07 710,787 36,996 5.20
Borrowed money.......... 80,422 4,690 5.83 137,986 7,792 5.65 233,897 13,302 5.69
---------- ------ ---------- -------- --------- ------
Total
interest-bearing
liabilities........ 1,128,609 58,144 5.15 1,013,256 52,158 5.15 944,684 50,298 5.32
------- ------- -------
Noninterest-bearing
liabilities............... 19,716 18,507 22,468
---------- ---------- ---------
Total liabilities.. 1,148,325 1,031,763 967,152
Stockholders' equity....... 107,825 82,116 76,972
---------- ---------- ---------
Total liabilities
and
stockholders'
equity............. $1,256,150 $1,113,879 $1,044,124
========== ========== ==========
Net interest income........ $37,162 $ 29,532 $ 22,746
======= ======= ==========
Interest rate spread....... 2.80% 2.45% 1.89%
====== ====== =======
Net interest margin........ 3.10% 2.75% 2.24%
====== ====== =======
Ratio of average
interest-earning
assets to average
interest-
bearing
liabilities 106.17% 106.14% 107.31%
====== ====== ======
</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,
--------------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
-------------------------------------------- ----------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------------------------------- ----------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ---- ----- ------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable ....................... $11,427 $2,327 $13,754 $ 7,727 $ 3,684 $11,411
Mortgage-backed securities.............. (4,826) (53) (4,879) (3,550) (586) (4,136)
Investment securities................... 3,642 276 3,918 1,295 215 1,510
Other interest-earning assets .......... 722 101 823 82 (221) (139)
------- ------ ------- ------- ------- -------
Total interest and dividend
income..................... 10,965 2,651 13,616 5,554 3,092 8,646
------- ------ ------- ------- ------- -------
Interest expense:
Savings deposits:
Passbook and statement savings,
NOW, and money market accounts ... 1,195 138 1,333 851 (310) 541
Certificates of deposit ............. 7,618 137 7,755 7,726 (897) 6,829
------- ------ ------- ------- ------- -------
Total savings deposits ........ 8,813 275 9,088 8,577 (1,207) 7,370
Borrowed money ......................... (3,343) 241 (3,102) (5,417) (93) (5,510)
------- ------ ------- ------- ------- -------
Total interest expense......... 5,470 516 5,986 3,160 (1,300) 1,860
------- ------ ------- ------- ------- -------
Change in net interest income.. $ 5,495 $2,135 $ 7,630 $ 2,394 $ 4,392 $ 6,786
======= ====== ======= ======= ======= =======
</TABLE>
BUSINESS COMBINATIONS
During the past several years, the Company has built a franchise in the
State of Texas through acquisitions. 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 446,302 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 mortgage-backed and investment securities
of $7.3 million; Texas Heritage's total deposits were
45
<PAGE>
$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 $15.3 million in cash and 1,095,900 shares of the
Company's common stock. L&B Financial's total assets were $140.8 million,
consisting primarily of loans receivable of $70.4 million and mortgage-backed
and investment securities of $57.3 million; L&B Financial's total deposits were
$104.9 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.
The excess of cost over fair value of net assets acquired was $5.9 million.
Upon completion of the acquisition, L&B Financial was merged into First Federal.
Under the purchase method of accounting, the results of operations of L&B
Financial are included in the Company's results of operations only since the
date of its acquisition.
As of December 31, 1997, First Federal had $573 million in assets and 22
offices in northeast Texas. First Federal has been a significant contributor to
the Company's overall profitability. During 1997, however, the Company decided
to shift its focus from continued expansion through acquisitions towards the
integration of its Texas operations. On September 25, 1997, First Federal
entered into a supervisory agreement with the OTS in connection with the OTS'
most recent examination of the First Federal. First Federal agreed that it
would take corrective actions with respect to certain matters primarily related
to the Bank's lending and asset classification functions. First Federal also
agreed to curtail loans for acquisition and development purposes without prior
OTS approval and to restrict the amount of residential construction loans it may
make to any one borrower. During the course of the examination and in its
formal examination response to the OTS, First Federal advised the OTS that it
had already taken, or committed to take, substantially all of the actions
required by the agreement, including internally imposed restrictions on the
Bank's lending activities that are more stringent than those called for by the
agreement. The Company believes that First Federal is in compliance with the
terms of the Agreement.
FINANCIAL CONDITION
Net loans receivable increased $39.5 million, or 4.5%, from $885.4 million
at December 31, 1996 to $924.9 million at December 31, 1997. The acquisition of
L&B Financial contributed $70.4 million to net loans receivable while loans
declined a combined $30.9 million at Jefferson Savings and First Federal before
consideration of the acquisition. Loan originations totaled $377.9 million in
1997 compared to $358.1 million in 1996. Loan purchases totaled $49.5 million
and principal repayments totaled $409.4 million during the year ended December
31, 1997, compared to loan purchases of $9.1 million and principal repayments of
$291.0 million during the year ended December 31, 1996.
Mortgage-backed securities decreased $9.7 million, or 10.2%, from $95.2
million at December 31, 1996 to $85.5 million at December 31, 1997. Investment
securities, interest-bearing deposits and federal funds sold increased $50.5
million, or 49.5%, from $102.0 million at December 31, 1996 to $152.5 million at
December 31, 1997. During 1997, the Company continued to reposition the balance
sheet to emphasize income from lending activities and to strengthen its interest
rate risk position. The acquisition of L&B Financial added $45.0 million in
mortgage-backed securities and $18.7 million in investment securities, interest-
bearing deposits and federal funds sold. During 1997, the Company sold a total
of $97.7 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.
46
<PAGE>
Deposits increased $97.8 million, or 10.3%, from $947.1 million at December
31, 1996 to $1,044.9 million at December 31, 1997. The acquisition of L&B
Financial brought in $104.9 million in new deposits. During fiscal year 1997,
approximately $39.4 million of interest was credited to accounts while
withdrawals exceeded deposits by $4.0 million. Borrowed money decreased $31.8
million, or 32.5%, from $97.7 million at December 31, 1996 to $65.9 million at
December 31, 1997.
Stockholders' equity increased by $26.3 million, or 29.3%, to $116.3
million. Stockholders' equity as a percentage of assets increased to 9.39% at
December 31, 1997, compared to 7.83% at December 31, 1996. Contributing to the
growth in stockholders' equity were net income of $10.2 million, the issuance of
1,095,900 shares of common stock valued at $15.3 million in connection with the
purchase of L&B Financial, and the amortization of stock awards under the
Employee Stock Ownership Plan (ESOP) and the Management Recognition Plans
(MRPs). Stockholders' equity also benefitted 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 $130.0 million and $85.5 million, respectively, were classified as available-
for-sale at December 31, 1997. The Company recorded an unrealized gain, net of
income taxes, as a credit to stockholders' equity in the amount of $329,000
during December 31, 1997. 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 $2.0 million in dividends on the
Company's common stock
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET INCOME. Net income for the year ended December 31, 1997 was $10.2
million compared to $2.8 million for the year ended December 31, 1996. Net
income showed significant improvement even after factoring out a non-recurring
charge during 1996. During the third quarter of 1996 the Company incurred a
$3.5 million after-tax charge to earnings as the result of a one-time special
assessment to recapitalize the SAIF. Excluding the effect of this charge, net
income for 1996 was $6.3 million. The increase in net income excluding the
effect of the SAIF special assessment was the result of strong growth in net
interest income and noninterest income partially offset by an increase in
noninterest expense.
Return on average stockholders' equity and return on average assets were
9.49% and .81%, respectively, for the year ended December 31, 1997 compared to
3.43% and .25%, respectively, for the year ended December 31, 1996. Return on
average stockholders' equity and return on average assets for 1996 excluding the
third quarter charge were 7.57% and .56%, respectively. Basic and diluted
earnings per share for the year ended December 31, 1997 were $1.13 and $1.08,
respectively, compared to $.37 and $.35, respectively for 1996. Basic and
diluted earnings per share for the year ended December 31, 1996 excluding the
special assessment were $.83 and $.79, respectively.
NET INTEREST INCOME. Net interest income increased $7.6 million, or 25.8%,
from $29.5 million for the year ended December 31, 1996, to $37.2 million for
the year ended December 31, 1997 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 $122.7
million, or 11.4%, from $1.075 billion for the year ended December 31, 1996 to
$1.198 billion for the year ended December 31, 1997. The Company's interest
rate spread increased from 2.45% during 1996 to 2.80% during 1997. The
improvements in the average balance of interest-earning assets and the interest
rate spread were primarily the result of growth in the average balance of loans
receivable caused by the acquisitions of Texas Heritage and L&B Financial and
continued strong loan origination activity.
Also contributing to the improvement in net interest income has been a
continued expansion in the net interest margin which the Company attributes to
several factors including the sale of lower yielding mortgage-backed securities
during the third quarter of 1996, which provided the Company with funding for
additional loan originations in the Texas market, and the upward adjustment of
rates on the Company's existing adjustable-rate loan portfolio. Another
significant contributor to the increase in loan portfolio yields during recent
periods has been the Company's construction and development lending through its
Texas subsidiary. In order to improve the risk profile of the Texas subsidiary,
however, the Company has previously determined to reduce its level of higher
margin development lending in Texas.
47
<PAGE>
First Federal has also agreed with the OTS to curtail loans for acquisition and
development purposes without prior OTS approval and to restrict the amount of
residential construction loans which it may make to one borrower. In addition,
the Company currently does not anticipate making additional acquisitions in the
Texas market. As a result of these developments, the Company's net interest
income may not experience increases in future periods comparable to those
experienced during the past several years.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
from to $81.7 million for the year ended December 31, 1996 to $95.3 million for
the year ended December 31, 1997. The increase resulted from the increase in
the average volume of interest-earning assets caused by the acquisitions of
Texas Heritage and L&B Financial and continued strong loan origination activity.
These factors, combined with the shift in interest-earning assets from mortgage-
backed securities to higher yielding loans and investment securities, led to an
increase in the average yield on interest-earning assets from 7.60% for the year
ended December 31, 1996 to 7.95% for the year ended December 31, 1997.
Interest income on loans receivable increased $13.8 million, or 21.2%. The
increase in interest income from loans receivable is attributable to a $137.5
million increase in the average balance of loans receivable during the year
ended December 31, 1997 and an increase in the average yield on the loan
portfolio from 8.06% during the year ended December 31, 1996 to 8.34% during the
year ended December 31, 1997. The increase in the average balance and the
average yield on the loan portfolio resulted from the acquisitions of Texas
Heritage and L&B Financial and continued strong loan origination activity. In
addition, the average yield was impacted by the upward adjustment of the
Company's adjustable-rate loan portfolio.
Interest income on mortgage-backed securities decreased $4.9 million, or
44.9%. Nearly all of the decrease was attributable to the $78.5 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 during
1996 and 1997 to fund loan originations, purchase investment securities, and
reduce borrowed money.
Interest income on investment securities increased $3.9 million, or 91.5%.
Nearly all of the increase was due to a $51.2 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) increased $823,000. The increase was primarily due to a $12.6 million
increase in the average balance.
INTEREST EXPENSE. Total interest expense increased $6.0 million, or 11.5%,
from $52.2 million for the year ended December 31, 1996 to $58.1 million for the
year ended December 31, 1997 due to an increase in interest expense on savings
deposits which was partially offset by a decrease in interest expense on
borrowed money. Interest expense on savings deposits increased $9.1 million
from $44.4 million for the twelve-month period ended December 31, 1996 to $53.5
million for the twelve-month period ended December 31, 1997. This increase was
primarily the result of a $172.9 million increase in the average balance of
savings deposits. The deposits of Texas Heritage are included in the average
balance for all of 1997 and the deposits of L&B Financial are included in the
average balance since the date of acquisition. The average cost of deposits
remained relatively flat at 5.10% during 1997 compared to 5.07% during 1996.
Interest expense on borrowed money decreased $3.1 million from $7.8 million for
the twelve-month period ended December 31, 1996 to $4.7 million for the twelve-
month period ended December 31, 1997 primarily due to a $57.6 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, 1997 totaled $1,260,000 compared to $660,000 for the
year ended December 31, 1996 reflecting the growth in the loan portfolio. Loan
charge-offs for the year ended December 31, 1997 were $781,000, or .83% of
average loans outstanding, compared to $78,000, or .10% of average loans
outstanding, during the year ended December 31, 1996. The increase was primarily
the result of $519,000 in charge-offs on land development and construction loans
to two borrowers. The
48
<PAGE>
allowance for losses on loans was $8.2 million, or .88% of net loans, at
December 31, 1997 compared to $6.5 million, or .74%, at December 31, 1996.
Nonaccruing loans were $5.4 million, or .58 % of net loans, at December 31, 1997
compared to $1.5 million, or .17% of net loans, at December 31, 1996. The
increase was the result of a $2.3 million increase in nonaccruing construction
loans, which consists of eleven loans for the construction of single-family
residences in the Dallas/Fort Worth metropolitan area, a $1.2 million increase
in nonaccruing commercial real estate loans, which consists of one loan secured
by commercial real estate in the Dallas/Fort Worth metropolitan area and one
loan secured by commercial real estate in Longview, Texas, and a $657,000
increase in nonaccruing residential real estate loans. The ratio of
nonperforming assets to total assets increased, largely as the result of the
increase in nonaccruing loans, from .53% at December 31, 1996 to .79% at
December 31, 1997. 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. Management believes the allowance for loan losses is adequate at
December 31, 1997.
NONINTEREST INCOME. Total noninterest income for the year ended December
31, 1997 increased $2.4 million, or 214.2%, to $3.5 million compared to $1.1
million for the year ended December 31, 1996. During 1997, the Company sold
$76.4 million in available-for-sale investment securities and $97.7 million in
available-for-sale mortgage-backed securities resulting in a net gain on sale of
investment securities of $1.1 million and a net loss on sale of mortgage-backed
securities of $583,000. Following the purchases of Texas Heritage and L&B
Financial, the Company decided to restructure a large portion of its investment
and mortgage-backed securities portfolios to strengthen the interest rate risk
profile of its balance sheet. In addition, a portion of the proceeds from the
sales were used to repay borrowed money. During 1996, the Company sold $147.5
million in available-for-sale mortgage-backed securities resulting in a net loss
on sale of mortgage-backed securities totaling $1.3 million. There were no
sales of investment securities during 1996.
Fees for other services to customers increased $531,000, or 105.1%,from
$505,000 for the year ended December 31, 1996 to $1,036,000 for the year ended
December 31, 1997 and servicing and other loan fees increased $152,000, or
23.7%, from $638,000 for the year ended December 31, 1996 to $790,000 for the
year ended December 31, 1997, as the result of additional fees generated by the
Texas thrifts. Gain on sales of loans increased $201,000 from $374,000 for the
year ended December 31, 1996 to $575,000 for the year ended December 31, 1997
due to an increase in loan sales from $32.9 million in 1996 to $45.2 million in
1997. 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. Noninterest income was
partially reduced by lower results of real estate operations which decreased
$382,000, or 84.3%, from $453,000 for the year ended December 31, 1996 to
$71,000 for the year ended December 31, 1997. 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.
NONINTEREST EXPENSE. Noninterest expense for the year ended December 31,
1997 was $22.8 million compared to $25.2 million for the year ended December 31,
1996. During the third quarter of 1996, the Company incurred a $5.6 million
pretax charge to earnings as the result of legislation passed to recapitalize
the SAIF which provided for a one-time assessment to all financial institutions
holding SAIF-insured deposits. Excluding this one-time charge, total
noninterest expense for the comparable periods increased $3.2 million, or 16.4%.
Compensation and employee benefits increased $2.0 million, or 20.7%, from
$9.6 million for the year ended December 31, 1996 to $11.6 million for the year
ended December 31, 1997 as the result of the addition of Texas Heritage and L&B
Financial and normal salary increases. Federal insurance premiums decreased $1.3
million, or 60.2%, from $2.1 million for the year ended December 31, 1996 to
$856,000 for the year ended December 31, 1997 as a result of the reduction in
the Company's SAIF assessment rate following the recapitalization of the SAIF.
Occupancy expense increased $656,000, or 30.9%, from $2.1 million for the year
ended December 31, 1996 to $2.8 million for the year ended December 31, 1997 due
primarily to the acquisition of the Texas Heritage and L & B Financial. Legal,
examination, and other professional fees increased $216,000, or 17.8%, from $1.2
million for the year
49
<PAGE>
ended December 31, 1996 to $1.4 million for the year ended December 31, 1997 as
the result of assistance relating to integrating the Company's Texas
acquisitions and actions taken in response to supervisory issues. Advertising
expense increased $98,000, or 21.0%, from $466,000 for the year ended December
31, 1996 to $564,000 for the year ended December 31, 1997 in support of
increased sales activity and the addition of the Texas Heritage and L & B
Financial. Other noninterest expense increased $868,000, or 28.8%, from $3.0
million for the year ended December 31, 1996 to $3.9 million for the year ended
December 31, 1997 primarily as the result of the acquisitions of Texas
Heritage and L & B Financial. Amortization of excess cost over fair value of net
assets acquired ("goodwill") increased $688,000, or 67.3%, from $1.0 million for
the year ended December 31, 1996 to $1.7 million for the year ended December 31,
1997. Goodwill is being amortized on a straight-line basis over 15 years. The
purchase of Texas Heritage and L & B Financial added $12.2 million in goodwill
to the Company's balance sheet. The Company's efficiency ratio, which is the
relationship of noninterest expense to net interest income and noninterest
income was 56% in 1997, compared to 82% for 1996. The 1996 efficiency ratio
excluding the one-time SAIF special assessment charge was 64%.
INCOME TAX EXPENSE. The Company provides for state and federal income tax
expense based upon income before income taxes. The effective tax rate for 1997
was 38.4% compared to 41.3% for 1996. 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, 1996 AND 1995
NET INCOME. Net income for the year ended December 31, 1996 was $2.8
million compared to $6.4 million for the year ended December 31, 1995. During
the third quarter of 1996 the Company incurred a $3.5 million after-tax charge
to earnings as the result of a one-time special assessment to recapitalize the
SAIF. Excluding the effect of this charge, net income for 1996 was $6.3
million. Also contributing to the decline in net income during 1996 was a net
after-tax loss on sales of mortgage-backed securities of $855,000 incurred as
the result of a repositioning of the balance sheet.
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
SAIF charge were 7.57% and .56%, respectively. Basic and diluted earnings per
share for the year ended December 31, 1996 were $.37 and $.35, respectively,
compared to $.84 and $.80, respectively for 1995. Basic and diluted earnings
per share for the year ended December 31, 1996 excluding the third quarter
charge were $.83 and $.79, 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 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
50
<PAGE>
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
FIILB) 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.
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.
51
<PAGE>
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 lower results of 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
other categories 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 $.46 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. 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
goodwill increased $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. The
Company's efficiency ratio, which is the relationship of noninterest expense to
net interest income and noninterest income, excluding the SAIF special
assessment, was 64% in 1996.
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.
52
<PAGE>
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 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, 1997, the
Association and the Bank had a total of approximately $14.0 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, 1997.
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 4% of the sum of net
withdrawable deposits and short-term 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 23.42% and 5.57% at
December 31, 1997 and 1996, respectively. The Bank's liquidity ratios were
23.42% and 6.40% at December 31, 1997 and 1996, 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 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, 1997, 1996 and
1995, cash and cash equivalents totaled $31.6 million, $23.7 million and $20.7
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, 1997, 1996 and 1995
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Operating activities:
Net income......................................... $ 10,231 $ 2,816 $ 6,370
Adjustments to reconcile net income to net cash
provided by operating activities............... 1,566 (1,574) (610)
-------- -------- --------
Net cash provided by operating activities.. 11,797 1,242 5,760
Net cash provided by (used in) investing activities.... 42,488 69,979 78,133
Net cash provided by (used in) financing activities.... (46,407) (68,206) (71,293)
-------- -------- --------
Net increase in cash and cash equivalents.. 7,878 3,015 12,600
Cash and cash equivalents at beginning of year......... 23,705 20,690 8,090
-------- -------- --------
Cash and cash equivalents at end of year... $ 31,583 $ 23,705 $ 20,690
======== ======== ========
</TABLE>
The primary source of cash from operating activities during the years ended
December 31, 1997, 1996 and 1995 was income from operations.
53
<PAGE>
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, 1997, 1996 and 1995, the Company originated loans in the
amounts of $377.9 million, $358.1 million and $162.1 million, respectively.
Purchases of mortgage loans and mortgage-backed securities totaled $114.6
million, $39.0 million and $27.4 million, respectively, in those same periods.
Other investing activities include investing in FHLB stock and U.S. Government
and federal agency obligations. Purchases of U.S. Government and federal agency
obligations totaled $128.2 million, $63.0 million and $8.0 million during the
years ended December 31, 1997, 1996, and 1995, respectively. During the years
ended December 31, 1997, 1996 and 1995, these activities were funded in part by
principal payments on loans and mortgage-backed securities and maturities of
investment securities totaling $452.3 million, $343.7 million and $213.3
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, 1997, 1996 and 1995, savings deposits increased $97.8
million, $76.9 million and $358.2 million, respectively. The increase in 1997
includes deposits assumed in the acquisition of L&B Financial in the amount of
$104.9 million. The increase in 1996 includes deposits assumed in the
acquisition of Texas Heritage in the amount of $65 million. Borrowed money
decreased $31.8 million, $77.3 million and $87.0 million during the years ended
December 31, 1997, 1996 and 1995.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1997 the Company had commitments
to originate loans of $26.3 million, and to purchase residential adjustable rate
mortgages of $4.6 million. Certificates of deposit which are scheduled to
mature in one year or less at December 31, 1997 totaled $570.8 million.
Management believes that a significant portion of such deposits will remain with
the Company.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. For many years, software applications routinely
conserved magnetic storage space by using only two digits to record calendar
years; for example, the year 1999 is stored as "99". On January 1, 2000, the
calendars in many software applications will change from "99" to "00". Many of
these software applications, in their current form, will produce erroneous
results or will fail to run at all since their logic cannot deal with this
transaction.
The Company's mainframe computer hardware and systems software are Year
2000 compliant. The Company primarily utilizes third-party vendor application
software for all computer applications. The third-party vendors for the
Company's banking applications are in the process of modifying, upgrading or
replacing their computer applications to ensure Year 2000 compliance. In
addition, the Company has instituted a Year 2000 compliance program whereby the
Company is reviewing the Year 2000 compliance issues that may be faced by its
third-party vendors. Under such program, the Company will examine the need for
modifications or replacement of all non-Year 2000 compliant software. The
Company does not currently expect that the cost of its Year 2000 compliance
program will be material to its financial condition and believes that it will
satisfy such compliance program by the end of 1998 without material disruption
of its operations. In the event that the Company's significant suppliers do not
successfully and timely achieve Year 2000 compliance, the Company's business of
operations could be adversely affected.
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.
54
<PAGE>
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. On January 1, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
which provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. The statement
also requires that a liability can be derecognized if and only if either (a) the
debtor pays the creditor and is relieved of its obligation for the liability or
(b) the debtor is legally released from the liability either judicially or by
the creditor. The Statement provides implementation guidance for assessing
isolation of transferred assets and for accounting for transfers of partial
interests, servicing of financial assets, securitizations, transfers of sales-
type and direct financing lease receivables, securities lending transactions,
repurchase transactions including "dollar rolls", "wash sales", loan
syndications and participations, risk participation in banker's acceptances,
factoring arrangements, transfers of receivables with recourse, and
extinguishments of liabilities. The adoption of SFAS No. 125 did not have a
material effect on the Company's financial statements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. In February 1997, the
FASB issued SFAS 129 which establishes standards for disclosing information
about an entity's capital structure. SFAS 129 is effective for financial
statements for periods ending after December 15, 1997. Since SFAS 129 is a
disclosure requirement only there will be no impact on the Company's financial
statements.
REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS 130
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 is not expected
to have a material impact on the Company's financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June 1997, the FASB issued SFAS 131 which establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to shareholders.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. Since SFAS 131 is a disclosure requirement only there will
be no effect on the Company's financial position or results of operations.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -----------------------------------------------------------------
Reference is made to the discussion captioned "Interest Rate Risk
Sensitivity" in Item 7 of this Annual Report on Form 10-K.
55
<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 57
Consolidated Balance Sheets as of December 31, 1997 and 1996 58
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 59
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 60
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 61
Notes to Consolidated Financial Statements 62
SUPPLEMENTARY FINANCIAL DATA 85
- ----------------------------
</TABLE>
56
<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, 1997 and
1996, 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,
1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
February 6, 1998
57
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
ASSETS 1997 1996
---- ----
<S> <C> <C>
Cash $ 9,039,932 $ 7,359,389
Interest-bearing deposits 12,673,066 11,531,105
Federal funds sold 9,870,000 4,815,000
Investment securities available for sale, at fair value
(amortized cost of $129,574,313 and $84,838,744 at
December 31, 1997 and 1996, respectively) 129,996,500 85,701,772
Mortgage-backed securities available for sale, at fair value
(amortized cost of $85,270,031 and $95,982,081 at
December 31, 1997 and 1996, respectively) 85,480,293 95,203,312
Loans receivable, net 924,919,606 885,405,062
Investment in real estate, net 4,255,921 4,460,202
Stock in Federal Home Loan Banks 16,741,500 15,768,700
Office properties and equipment, net 11,532,147 9,667,851
Excess cost over fair value of net assets acquired 23,848,993 19,746,106
Accrued income and other assets 9,697,539 8,420,576
-------------- --------------
$1,238,055,497 $1,148,079,075
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Savings deposits $1,044,881,130 $ 947,068,672
Borrowed money 65,908,257 97,682,127
Deferred tax liability 471,000 1,324,000
Advance payments by borrowers for taxes and insurance 3,550,798 2,884,424
Accrued expenses and other liabilities 6,984,474 9,200,939
-------------- --------------
Total liabilities 1,121,795,659 1,058,160,162
-------------- --------------
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 10,035,998 and 8,940,098 shares at
December 31, 1997 and 1996, respectively 100,360 89,400
Additional paid-in capital 62,797,493 45,727,141
Retained earnings, subject to certain restrictions 58,978,239 50,759,048
Unrealized gain on assets available for sale, net 379,251 50,259
Unamortized restricted stock awards (120,151) (359,477)
Unearned ESOP shares (5,706,665) (5,345,412)
Treasury stock, at cost: 21,106 shares and 125,406 shares
at December 31, 1997 and 1996, respectively (168,689) (1,002,046)
-------------- --------------
Total stockholders' equity 116,259,838 89,918,913
-------------- --------------
$1,238,055,497 $1,148,079,075
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income:
Loans receivable $78,664,717 $64,911,063 $53,500,602
Mortgage-backed securities 5,978,803 10,858,270 14,993,783
Investment securities 8,198,008 4,280,168 2,769,581
Interest-bearing deposits and federal funds sold 1,345,222 583,224 730,042
Stock in Federal Home Loan Banks 1,118,936 1,057,478 1,049,947
----------- ----------- -----------
Total interest and dividend income 95,305,686 81,690,203 73,043,955
----------- ----------- -----------
Interest expense:
Savings deposits 53,453,991 44,365,648 36,995,127
Borrowed money 4,689,451 7,792,206 13,302,429
----------- ----------- -----------
Total interest expense 58,143,442 52,157,854 50,297,556
----------- ----------- -----------
Net interest income 37,162,244 29,532,349 22,746,399
Provision for losses on loans 1,260,000 660,000 367,153
----------- ----------- -----------
Net interest income after provision
for losses on loans 35,902,244 28,872,349 22,379,246
----------- ----------- -----------
Noninterest income:
Servicing and other loan fees 789,675 638,200 585,503
Fees for other services to customers 1,035,822 505,107 392,572
Gain on sales of investment securities, net 1,144,210 - -
Loss on sales of mortgage-backed securities, net (582,966) (1,296,134) -
Gain on sales of loans, net 574,969 373,739 226,518
Results of real estate operations, net 71,032 453,101 765,251
Other 480,393 443,950 511,122
----------- ----------- -----------
Total noninterest income 3,513,135 1,117,963 2,480,966
----------- ----------- -----------
Noninterest expense:
General and administrative:
Compensation and employee benefits 11,602,322 9,613,987 7,475,867
Occupancy 2,777,801 2,122,183 1,831,345
Advertising 563,718 465,767 340,973
Federal insurance premiums 855,817 2,147,752 1,625,650
Legal, examination, and other professional fees 1,427,827 1,212,294 871,867
Other 3,876,040 3,008,409 2,305,321
----------- ----------- -----------
Total general and administrative 21,103,525 18,570,392 14,451,023
SAIF special assessment - 5,598,880 -
Amortization of excess cost over fair value of
net assets acquired 1,710,843 1,022,642 503,682
----------- ----------- -----------
Total noninterest expense 22,814,368 25,191,914 14,954,705
----------- ----------- -----------
Income before income taxes 16,601,011 4,798,398 9,905,507
Income tax expense 6,370,000 1,982,200 3,536,000
----------- ----------- -----------
Net income $10,231,011 $ 2,816,198 $ 6,369,507
=========== =========== ===========
Earnings per share, basic $ 1.13 $ .37 $ .84
Earnings per share, diluted 1.08 .35 .80
==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996, and 1995
----------------------------------------------------------------
Unrealized
gain (loss)
on assets
Common stock Additional available
------------ paid-in Retained for sale,
Shares Dollars capital earnings net
--------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 8,940,098 $ 89,400 $42,718,300 $42,770,753 $(4,211,008)
Net income - - - 6,369,507 -
Amortization of restricted
stock awards - - - - -
Tax benefit of restricted
stock awards vested - - 86,000 - -
Purchase of ESOP shares - - - - -
Amortization of ESOP shares - - 371,956 - -
Change in unrealized gain
(loss) on assets available
for sale, net - - - - 3,544,695
Stock options exercised - - (47,680) - -
Tax benefit of
non-incentive stock
options exercised - - 24,000 - -
--------- -------- ----------- ----------- -----------
Balance at December 31, 1995 8,940,098 89,400 43,152,576 49,140,260 (666,313)
Net income - - - 2,816,198 -
Dividends paid ($.16 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 - - 14,272 - -
Amortization of restricted
stock awards - - - - -
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 - - 1,593,297 - -
Stock options exercised - - (50,439) - -
Tax benefit of
non-incentive stock
options exercised - - 52,000 - -
--------- -------- ----------- ----------- -----------
Balance at December 31, 1996 8,940,098 89,400 45,727,141 50,759,048 50,259
Net income - - - 10,231,011 -
Dividends paid ($.22 per
share) - - - (2,011,820) -
Release of ESOP shares in
lieu of cash dividends on
allocated ESOP shares - - 34,814 - -
Stock issued in dividend
reinvestment and stock
purchase plan - - 84,031 - -
Amortization of restricted
stock awards - - - - -
Tax benefit of restricted
stock awards vested - - 162,000 - -
Amortization of ESOP shares - - 1,118,196 - -
Change in unrealized gain
(loss) on assets available
for sale, net - - - - 328,992
Stock issued to acquire
L&B Financial 1,095,900 10,960 15,265,887 - -
Shares sold to ESOP - - 412,269 - -
Stock options exercised - - (88,845) - -
Tax benefit of
non-incentive stock
options exercised - - 82,000 - -
---------- -------- ----------- ----------- -----------
Balance at December 31, 1997 10,035,998 $100,360 $62,797,493 $58,978,239 $ 379,251
========== ======== =========== =========== ===========
<CAPTION>
Unamortized Total
restricted Unearned Treasury stock stock-
stock ESOP -------------- holders'
awards shares Shares Dollars equity
----------- ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $(1,017,213) $(2,750,800) (608,972) $(4,860,903) $ 72,738,529
Net income - - - - 6,369,507
Amortization of restricted
stock awards 401,158 - - - 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 - - 16,000 127,680 80,000
Tax benefit of
non-incentive stock
options exercised - - - - 24,000
----------- ----------- -------- ----------- ------------
Balance at December 31, 1995 (616,055) (6,115,907) (592,972) (4,733,223) 80,250,738
Net income - - - - 2,816,198
Dividends paid ($.16 per
share) - - - - (1,197,410)
Release of ESOP shares in
lieu of cash dividends on
allocated ESOP shares - 24,505 - - 33,858
Stock issued in dividend
reinvestment and stock
purchase plan - - 4,338 34,617 48,889
Amortization of restricted
stock awards 256,578 - - - 256,578
Tax benefit of restricted
stock awards vested - - - - 265,000
Amortization of ESOP shares - 745,990 - - 1,437,072
Change in unrealized gain
(loss) on assets available
for sale, net - - - - 716,572
Stock issued to acquire
Texas Heritage - - 446,302 3,561,491 5,154,788
Stock options exercised - - 16,926 135,069 84,630
Tax benefit of
non-incentive stock
options exercised - - - - 52,000
----------- ----------- -------- ----------- ------------
Balance at December 31,
1996 (359,477) (5,345,412) (125,406) (1,002,046) 89,918,913
Net income - - - - 10,231,011
Dividends paid ($.22 per
share) - - - - (2,011,820)
Release of ESOP shares in
lieu of cash dividends on
allocated ESOP shares - 41,533 - - 76,347
Stock issued in dividend
reinvestment and stock
purchase plan - - 10,018 80,044 164,075
Amortization of restricted
stock awards 239,326 - - - 239,326
Tax benefit of restricted
stock awards vested - - - - 162,000
Amortization of ESOP shares - 942,859 - - 2,061,055
Change in unrealized gain
(loss) on assets available
for sale, net - - - - 328,992
Stock issued to acquire
L&B Financial - (672,884) - - 14,603,963
Shares sold to ESOP - (672,761) 64,568 515,898 255,406
Stock options exercised - - 29,714 237,415 148,570
Tax benefit of
non-incentive stock
options exercised - - - - 82,000
----------- ----------- -------- ----------- ------------
Balance at December 31, 1997 $ (120,151) $(5,706,665) (21,106) $ (168,689) $116,259,838
=========== =========== ======== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,231,011 $ 2,816,198 $ 6,369,507
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,963,754 2,503,912 2,295,597
Provision for losses on loans 1,260,000 660,000 367,153
Provision for losses on real estate 264,000 200,000 -
Net gain on sales of assets (1,689,427) (4,090) (856,492)
Loans originated for sale (33,406,835) (27,764,507) (24,559,773)
Sale of loans held for sale 35,356,956 27,019,117 22,957,970
Deferred income taxes 150,000 (250,000) (130,000)
Stock dividend from Federal Home Loan Banks (210,600) (151,800) (339,800)
Other, net (4,121,428) (3,787,048) (343,959)
------------- ------------- -------------
Net cash provided by operating activities 11,797,431 1,241,782 5,760,203
------------- ------------- -------------
Cash flows from investing activities:
Principal payments on:
Loans receivable 409,382,688 290,969,097 165,052,315
Mortgage-backed securities 22,327,204 22,378,652 19,464,726
Proceeds from maturity of investment securities 20,625,000 30,335,000 28,775,000
Proceeds from sale of:
Loans receivable 9,875,541 5,873,494 5,388,938
Mortgage-backed securities available for sale 97,661,265 147,471,014 55,412,739
Investment securities available for sale 76,380,742 - 3,880,781
Redemption of Federal Home Loan Bank stock 11,200 1,572,400 -
Cash invested in:
Loans receivable originated (344,460,751) (330,381,304) (137,577,488)
Loans receivable purchased (49,511,372) (9,117,125) (27,402,471)
Mortgage-backed securities (65,055,352) (29,836,277) -
Investment securities (128,242,847) (62,997,500) (7,994,413)
Federal Home Loan Bank stock - - (245,400)
Proceeds from sale of real estate 4,866,075 4,947,530 2,050,673
Cash paid for acquisitions (15,266,182) (5,147,225) (51,980,749)
Cash and cash equivalents from acquisitions 8,296,533 5,584,393 24,138,494
Sale of branch deposits, net (2,708,045) - -
Other, net (1,693,426) (1,673,269) (830,428)
------------- ------------- -------------
Net cash provided by investing activities 42,488,273 69,978,880 78,132,717
------------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in savings deposits, net (3,975,781) 12,021,140 45,715,780
Decrease in borrowed money, net (41,773,870) (79,041,170) (110,398,044)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 112,458 (122,011) (2,911,422)
Dividends paid (2,011,820) (1,197,410) -
Purchase of ESOP shares - - (3,779,081)
Shares sold to ESOP 928,167 - -
Other, net 312,646 133,519 80,000
------------- ------------- -------------
Net cash used in financing activities (46,408,200) (68,205,932) (71,292,767)
------------- ------------- -------------
Increase in cash and cash equivalents 7,877,504 3,014,730 12,600,153
Cash and cash equivalents at beginning of year 23,705,494 20,690,764 8,090,611
------------- ------------- -------------
Cash and cash equivalents at end of year $ 31,582,998 $ 23,705,494 $ 20,690,764
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 58,690,604 $ 52,419,826 $ 50,803,549
Income taxes paid 7,250,893 2,492,384 3,965,252
Noncash investing activities:
Stock issued for acquisitions 15,276,847 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 5,577,945 3,867,980 1,826,177
Loans originated to finance the sale of real estate 745,950 133,726 204,975
Noncash financing activity -- interest credited 39,439,947 32,963,462 27,762,659
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
61
<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. For a discussion of regulatory risk, see note 3.
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 the results of regulatory examinations of the Company's
subsidiaries.
EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" on December 31, 1997. SFAS No.
128 replaces the previously reported primary earnings per share and fully-
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of stock options. Diluted earnings per share is very similar to fully-
diluted earnings per share.
The Company declared a two-for-one stock split which was effected through a
100% stock dividend payable on December 17, 1997.
All per share data for prior years has been restated to conform with the
requirements of SFAS No. 128 and to give effect to the stock split.
62
<PAGE>
The following table reconciles the numerators and denominators for basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Net income (basic and diluted earnings per share) $10,231,011 $2,816,198 $6,369,507
=========== ========== ==========
Denominator:
Average shares outstanding (basic earnings per share) 9,034,922 7,541,314 7,621,698
Effect of dilutive stock options 445,226 407,600 344,936
----------- ---------- ----------
Average shares outstanding after assumed
conversions (diluted earnings per share) 9,480,148 7,948,914 7,966,634
=========== ========== ==========
</TABLE>
Only employee stock ownership plan 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.
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 amortization of premiums and discounts.
Available-for-sale securities, which consist of investment and mortgage-backed
securities, and all equity securities are carried at fair value. Unrealized
holding gains and losses, net of tax, 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 upon sale.
Any declines in the fair value of individual 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 for the foreseeable future. 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
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. Gains or losses on sales of
loans are recognized at the time of sale and are determined by specific
identification.
Unearned discounts on non-real estate loans and premiums and discounts on
purchased loans are amortized using the interest method.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Management estimates a
specific allowance for losses on impaired loans by considering various risk
factors, including geographic location, independent appraisals of loan
collateral, and payment history. In addition to the allowance for losses on
impaired loans, an overall unallocated allowance is established to provide for
unidentified credit losses. In this regard, management considers numerous
factors, including, but not necessarily limited to, general economic conditions,
loan portfolio composition and prior loss experience.
INVESTMENT IN REAL ESTATE
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 COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess 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.
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.
64
<PAGE>
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
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 disclose the effect of the fair value based method in
accordance with 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 1996 and 1995 information have been made to
conform with the 1997 presentation.
(2) BUSINESS COMBINATIONS
Information relating to business combinations accounted for as purchases for
the three-year period ended December 31, 1997 is summarized below. Under the
purchase method of accounting, the results of operations of the acquired
institutions are included in the Company's results of operations since the dates
of their acquisitions.
<TABLE>
<CAPTION>
Common
shares issued
Cash ------------- Goodwill Assets
Merger Date Paid Shares Dollars Created Acquired
----------- ---- ------ ------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
North Texas Savings and Loan Association, Denton, Texas May 31, 1995 $28.3 - - $ 11.9 $ 190.7
First Federal Savings Bank of Longview, Longview, Texas May 31, 1995 12.8 - - 2.4 134.5
Shelby-Panola Savings Association, Carthage, Texas July 13, 1995 10.9 - - .6 55.6
Texas Heritage Savings Association/Banc, Rowlett, Texas December 30, 1996 5.1 446,302 5.1 6.3 71.8
L&B Financial, Inc., Sulphur Springs, Texas February 28, 1997 15.3 1,095,900 15.3 5.9 140.8
</TABLE>
The following unaudited information presents pro forma results of operations
of the Company for the years ended December 31, 1997 and 1996, assuming the
acquisitions had taken place on January 1, 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net interest income $37,792 $36,524
Net income 9,714 2,849
======= =======
Earnings per share, basic $ 1.05 $ .32
Earnings per share, diluted 1.01 .30
======= =======
</TABLE>
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) REGULATORY MATTERS
The Company and its subsidiaries are subject to extensive examination and
regulation by the Office of Thrift Supervision (OTS) which acts as both the
chartering authority and the primary federal banking regulator. The Federal
Deposit Insurance Corporation also has examination authority because the
deposits of the subsidiary thrifts are federally insured.
Subsidiary dividends are the principal source of funds for payment of
dividends by the Company to its stockholders. Savings association subsidiaries
are required to give the OTS 30 days' prior notice of any proposed declaration
of dividends to the holding company. The subsidiary savings associations are
subject to regulations which require minimum capital levels in order to pay
dividends without OTS approval. At December 31, 1997, the savings association
subsidiaries had an aggregate total of approximately $14 million that was
available for distribution to the Company without prior approval of the OTS.
The capital regulations of the 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
ratio. 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, 1997, both
Jefferson Savings and First Federal met all OTS capital requirements.
Jefferson Savings and First Federal are also subject to the regulatory
framework for prompt corrective action. To be categorized as well 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. For purposes of this
regulation, Tier I capital has the same definition as core capital. Jefferson
Savings was considered well capitalized at December 31, 1997 and 1996. First
Federal was considered well capitalized at December 31, 1997 and adequately
capitalized at December 31, 1996.
Following are the actual and required capital amounts and ratios as of
December 31, 1997:
<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 $51,915,396 7.80% $9,989,414 1.50% NA NA
First Federal 38,138,562 6.95% 8,230,669 1.50% NA NA
Core capital:/(1)/
Jefferson Savings 51,915,396 7.80% 19,978,828 3.00% $33,298,047 5.00% $26,638,438 4.00%
First Federal 38,138,562 6.95% 16,461,339 3.00% 27,435,564 5.00% 21,948,451 4.00%
Risk-based capital:/(2)/
Jefferson Savings 53,808,774 14.43% 29,826,727 8.00% 37,283,409 10.00% 29,826,727 8.00%
First Federal 42,375,705 12.21% 27,754,354 8.00% 34,692,943 10.00% 27,754,354 8.00%
Tier I capital:/(2)/
Jefferson Savings 51,915,396 13.92% NA 22,370,046 6.00% 14,913,364 4.00%
First Federal 38,138,562 10.99% NA 20,815,766 6.00% 13,877,177 4.00%
</TABLE>
66
<PAGE>
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 $45,679,759 6.64% $10,318,409 1.50% NA NA
First Federal 23,375,655 5.31% 6,607,595 1.50% NA NA
Core capital:/(1)/
Jefferson Savings 45,679,759 6.64% 20,636,818 3.00% $34,394,697 5.00% $27,515,758 4.00%
First Federal 23,375,655 5.31% 13,215,189 3.00% 22,025,315 5.00% 17,620,252 4.00%
Risk-based capital:/(2)/
Jefferson Savings 47,193,139 11.36% 33,229,271 8.00% 41,536,589 10.00% 33,229,271 8.00%
First Federal 27,104,063 9.13% 23,760,823 8.00% 29,701,029 10.00% 23,760,823 8.00%
Tier I capital:/(2)/
Jefferson Savings 45,679,759 11.00% NA 24,921,954 6.00% 16,614,636 4.00%
First Federal 23,375,655 7.87% NA 17,820,617 6.00% 11,880,412 4.00%
</TABLE>
(1) To adjusted total assets
(2) To risk-weighted assets
On September 25, 1997, First Federal entered into a Supervisory Agreement
("Agreement") with the OTS in connection with an OTS examination of the Bank for
the period ended December 31, 1996. First Federal agreed to take corrective
actions with respect to certain matters primarily related to lending and asset
classification functions, including compliance with lending limits, the review
of the loan portfolio in accordance with the asset classification policy and the
correction of technical exceptions found in First Federal's credit and
collateral files. First Federal also agreed to curtail loans for acquisition
and development purposes without prior OTS approval and to restrict the amount
of residential construction loans it may make to one borrower. During the course
of the examination and in its formal examination response to the OTS, First
Federal advised the OTS that it had already taken, or committed to take,
substantially all of the actions required by the agreement, including internally
imposed restrictions on lending activities that are more stringent than those
called for by the Agreement. First Federal and the Company believe that First
Federal is in compliance with the terms of the Agreement.
(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, 1997
--------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Fair
cost gains losses value
------------ --------- --------- -------------
<S> <C> <C> <C> <C>
United States government and
agency obligations $129,237,790 $459,571 $(38,352) $129,659,009
Tax-exempt municipal bond 336,523 968 - 337,491
------------ -------- --------- -------------
$129,574,313 $460,539 $(38,352) $129,996,500
============ ======== ========= =============
</TABLE>
67
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross realized gains $ 1,183,565 $ - $ -
Gross realized losses (39,355) - -
----------- ------------ -----------
Net realized gain $ 1,144,210 $ - $ -
=========== ============ ===========
Gross proceeds $76,380,742 $ - $ 3,880,781
=========== ============ ===========
</TABLE>
The amortized cost and fair value of investment securities, by contractual
maturity, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Amortized Fair
cost value
---- -----
<S> <C> <C>
Within one year $ 80,954,059 $ 81,188,431
One to five years 33,620,254 33,813,869
Five to 10 years 15,000,000 14,994,200
------------ ------------
$129,574,313 $129,996,500
============ ============
Weighted average interest rate 6.81%
====
</TABLE>
(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, 1997
-----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA $60,547,930 $ 93,050 $ (1) $60,640,979
FHLMC 5,510,025 47,420 (7,125) 5,550,320
FNMA 11,470,379 160,126 (34,817) 11,595,688
Collateralized mortgage
obligations 7,741,697 92 (48,483) 7,693,306
----------- -------- -------- -----------
$85,270,031 $300,688 $(90,426) $85,480,293
=========== ======== ======== ===========
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA $31,403,313 $ 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>
Gross realized gains, gross realized losses, and gross proceeds on sales of
mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross realized gains $ 367,348 $ 1,318,142 $ -
Gross realized losses (950,314) (2,614,276) -
----------- ------------- ------------
Net realized gain (loss) $ (582,966) $ (1,296,134) $ -
=========== ============= ============
Gross proceeds $97,661,265 $ 147,471,014 $ 55,412,739
=========== ============= ============
</TABLE>
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 possible prepayments.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------
Amortized Fair
cost value
----------- -----------
<S> <C> <C>
Within one year $ 2,031,205 $ 2,053,046
One to five years 2,062,182 2,068,439
Five to ten years - -
After ten years 81,176,644 81,358,808
----------- -----------
$85,270,031 $85,480,293
=========== ===========
Weighted average interest rate 5.66%
====
</TABLE>
69
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) LOANS RECEIVABLE, NET
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1996
------------ ------------
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional $645,541,593 $620,934,461
Home equity 54,156,400 44,923,700
FHA insured/VA guaranteed 2,073,344 967,822
Held for sale 2,192,868 2,820,623
Construction and development 163,389,597 242,142,690
Commercial 80,758,341 56,666,869
------------ ------------
Total loans secured by real estate 948,112,143 968,456,165
Other loans:
Commercial secured by first mortgage loans 9,775,000 5,000,000
Automobile loans 3,133,757 1,648,668
Loans secured by savings deposits 5,531,514 3,658,476
Education loans 191,459 177,749
Other 4,179,450 3,195,261
------------ ------------
970,923,323 982,136,319
Add (deduct):
Loans in process (38,125,984) (89,573,006)
Unearned discounts, net (1,112,417) (1,786,152)
Deferred loan costs, net 1,416,952 1,156,502
Allowance for loan losses (8,182,268) (6,528,601)
------------ ------------
$924,919,606 $885,405,062
============ ============
Weighted average interest rate at end of year 8.20% 8.17%
==== ====
</TABLE>
Loans serviced for others at December 31, 1997, 1996, and 1995 totaled
approximately $85.8 million, $58.0 million, and $54.6 million, respectively.
A summary of impaired loans, which includes nonaccrual loans, follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans $5,406,498 $1,486,193
Impaired loans continuing to accrue interest 3,266,667 1,748,924
---------- ----------
Total impaired loans $8,673,165 $3,235,117
========== ==========
Impaired loans with related allowance
for loan losses $2,914,345 $ 387,970
Allowance for losses on impaired loans 695,785 80,465
Impaired loans with no related allowance
for loan losses 5,758,820 2,847,147
Average balance of impaired loans
during the year 6,181,553 3,256,772
========== ==========
</TABLE>
70
<PAGE>
Interest on impaired loans which would have been recorded under the original
terms of the loans and cash receipts of interest were $797,000 and $570,000,
respectively, for the year ended December 31, 1997. 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.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $6,528,601 $5,095,856 $3,470,908
Allowance from purchase acquisitions 1,155,764 850,893 1,378,050
Provision charged to expense 1,260,000 660,000 367,153
Recoveries 18,810 1,575
Charge-offs (780,907) (78,148) (121,830)
---------- ---------- ----------
Balance at end of year $8,182,268 $6,528,601 $5,095,856
========== ========== ==========
</TABLE>
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 $1,739,544 and
$1,841,569 at December 31, 1997 and 1996, respectively.
Activity in loans to executive officers and directors is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1996 $1,841,569
New loans or advances 523,837
Repayments (734,929)
Change in director and officer status 109,067
----------
Balance at December 31, 1997 $1,739,544
==========
</TABLE>
(7) INVESTMENT IN REAL ESTATE, NET
Investment in real estate is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Real estate acquired through foreclosure $4,790,756 $4,894,051
Less allowance for losses 534,835 433,849
---------- ----------
$4,255,921 $4,460,202
========== ==========
</TABLE>
71
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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
Provision - 264,000 264,000
Charge-offs - (263,014) (263,014)
Acquisition of L&B Financial - 100,000 100,000
----------- --------- -----------
Balance at December 31, 1997 $ - $ 534,835 $ 534,835
=========== ========= ===========
</TABLE>
The results of real estate operations are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gain from sales of real estate, net $ 475,829 $ 878,315 $629,974
Provision for losses on real estate (264,000) (200,000) -
Operating income (expense), net (140,797) (225,214) 135,277
--------- --------- --------
$ 71,032 $ 453,101 $765,251
========= ========= ========
</TABLE>
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Land $ 2,650,533 $ 2,066,270
Office buildings 6,938,754 5,998,551
Leasehold improvements 1,025,680 1,033,208
Furniture and equipment 7,651,301 5,544,356
----------- -----------
18,266,268 14,642,385
Less accumulated depreciation and amortization 6,734,121 4,974,534
----------- -----------
$11,532,147 $ 9,667,851
=========== ===========
</TABLE>
Depreciation and amortization expense totaled $1,305,362, $866,889, and
$707,323 for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company leases certain of its facilities and equipment under noncancelable
operating leases. These
72
<PAGE>
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>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $377,373
1999 203,941
2000 118,918
2001 78,468
2002 66,576
Thereafter 83,220
--------
$928,496
========
</TABLE>
Net rent expense for 1997, 1996, and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Rent expense $ 402,540 $ 374,237 $ 319,943
Rent income (229,069) (103,938) (110,552)
--------- --------- ---------
$ 173,471 $ 270,299 $ 209,391
========= ========= =========
</TABLE>
(9) ACCRUED INCOME AND OTHER ASSETS
Accrued income and other assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Accrued interest:
Loans receivable $5,871,685 $6,349,988
Mortgage-backed securities 422,209 565,724
Investment securities 1,808,476 720,930
Interest rate cap agreements - 44,696
---------- ----------
8,102,370 7,681,338
Accounts receivable 321,748 321,878
Interest rate cap premiums - 10,639
Other 1,273,421 406,721
---------- ----------
$9,697,539 $8,420,576
========== ==========
</TABLE>
(10) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1997 1996
------------------------ ----------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
-------------- -------- ------------ --------
<S> <C> <C> <C> <C>
Non-interest bearing $ 10,164,832 -% $ 9,805,226 -%
NOW 47,009,006 2.34 41,232,878 2.29
Money market 128,121,415 4.26 108,955,371 4.12
Passbook and statement savings 48,750,251 2.48 48,360,266 2.43
-------------- ------------
234,045,504 3.32 208,353,741 3.17
Certificates of deposit 810,835,626 5.74 738,714,931 5.67
-------------- ------------
Total savings deposits $1,044,881,130 5.20% $947,068,672 5.12%
============== ==== ============ ====
</TABLE>
73
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment and mortgage-backed securities totaling $15.4 million were pledged
against certain deposits over $100,000 at December 31, 1997.
Certificates of deposit, by rate, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
2.00-2.99% $ 166,824 $ 305,115
3.00-3.99% - 80,114
4.00-4.99% 47,836,606 41,092,223
5.00-5.99% 649,208,453 581,080,551
6.00-6.99% 94,406,592 100,319,367
7.00-7.99% 19,075,867 15,585,135
8.00-8.99% 141,284 252,426
------------ ------------
$810,835,626 $738,714,931
============ ============
</TABLE>
The scheduled maturities of the certificates of deposit are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Percent
Amount of total
------------ --------
<S> <C> <C>
Within one year $570,837,908 70.4%
Second year 148,590,150 18.3
Third year 65,301,286 8.1
Fourth year 11,079,545 1.4
Fifth year 12,062,891 1.5
Thereafter 2,963,846 .3
------------ -----
$810,835,626 100.0%
============ =====
</TABLE>
Interest expense on savings deposits by type is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NOW $ 1,928,299 $ 974,885 $ 741,819
Money market 4,186,233 3,877,708 3,501,849
Passbook and statement savings 1,281,232 1,209,597 1,277,893
Certificates of deposit 46,058,227 38,303,458 31,473,566
----------- ----------- -----------
$53,453,991 $44,365,648 $36,995,127
=========== =========== ===========
</TABLE>
74
<PAGE>
(11) BORROWED MONEY
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996
---------------------- ---------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Lines of credit with Federal Home
Loan Banks $14,790,625 6.25% $27,490,486 6.11%
----------- -----------
Advances from Federal Home Loan
Banks due:
1997 - 30,000,000 5.81
1998 23,290,533 6.14 20,770,491 6.16
1999 19,447,595 5.94 15,646,366 6.05
2000 5,000,000 5.66 - -
2015 340,475 6.92 344,484 6.92
----------- -----------
48,078,603 6.01 66,761,341 5.98
Commercial bank debt due in 1998 3,039,029 8.90 3,430,300 9.15
----------- -----------
$65,908,257 6.20% $97,682,127 6.13%
=========== ========= =========== ========
</TABLE>
At December 31, 1997, the total unused lines of credit with the Federal Home
Loan Banks totaled $51.2 million. The terms of the agreements call
for interest rates that vary daily. These borrowings averaged $9.3 million,
$17.4 million, and $30.8 million during the years ended December 31, 1997, 1996,
and 1995, respectively. The maximum amount outstanding at any month-end during
1997, 1996, and 1995 was $20.9 million, $29.2 million, and $55.2 million,
respectively.
Advances from FHLBs averaged $67.7 million, $116.8 million, and $183.1 million
during 1997, 1996, and 1995, respectively. The maximum amount outstanding at
any month-end was $96.7 million, $150.5 million, and $212.9 million during the
years ended December 31, 1997, 1996, and 1995, respectively.
At December 31, 1997 borrowings from the FHLBs were collateralized by all
stock in the FHLBs and blanket liens on first mortgage loans.
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.
Interest expense on borrowed money, by type, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Lines of credit with the FHLBs $ 372,472 $ 813,911 $ 1,761,931
Advances from FHLBs 4,076,773 6,878,467 11,082,926
Securities sold under agreements
to repurchase - - 1,310,598
Interest on federal funds purchased - 11,083 -
Interest rate cap agreements, net (9,005) (183,947) (985,055)
Interest on commercial bank debt 249,211 272,692 132,029
---------- ---------- -----------
$4,689,451 $7,792,206 $13,302,429
========== ========== ===========
</TABLE>
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 matured during 1997.
(13) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Accrued interest payable:
Savings deposits $ 372,901 $ 428,358
Borrowed money 116,232 56,110
---------- ----------
489,133 484,468
Accounts payable for check fundings, net 3,142,253 3,930,808
Income taxes payable 320,547 645,241
Accrued compensation and benefits expense 1,009,925 1,151,648
Accounts payable 691,269 783,453
Unremitted payments on loans serviced for others 289,758 689,186
Unearned profit on real estate sales - 147,925
Other 1,041,589 1,368,210
---------- ----------
$6,984,474 $9,200,939
========== ==========
</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 1995 in determining the
bad debt deduction for tax purposes.
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 of 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, 1997, the Company had bad debts
deducted for tax purposes in excess of the base year reserve of approximately
$4.1 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
76
<PAGE>
income tax penalty provisions which, in general, require recapture upon certain
stock redemptions of, and excess distributions to, stockholders. At December 31,
1997, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current expense:
Federal $6,214,000 $2,070,355 $3,580,000
State 6,000 161,845 86,000
Deferred federal and state 150,000 (250,000) (130,000)
---------- ---------- ----------
$6,370,000 $1,982,200 $3,536,000
========== ========== ==========
</TABLE>
The reasons for the difference between expected income tax expense, computed
at the statutory federal income tax rate, and actual income tax expense are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
income tax expense $5,810,354 35.0% $1,631,455 34.0% $3,367,872 34.0%
Items affecting federal
income tax rate:
Goodwill amortization 598,795 3.6 347,698 7.2 171,252 1.7
Other, net (39,149) (.2) 3,047 .1 (3,124) -
---------- ---- ---------- ---- ---------- ----
$6,370,000 38.4% $1,982,200 41.3% $3,536,000 35.7%
========== ==== ========== ==== ========== ====
</TABLE>
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,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Book provision for loan loss in excess of tax $ 2,853,000 $ 2,323,000
Deferred profit on real estate sold 22,000 47,000
Deferred compensation and stock bonus awards 532,000 332,000
Purchase accounting adjustments 399,000 -
Other 42,000 87,000
----------- -----------
Total gross deferred tax assets 3,848,000 2,789,000
----------- -----------
Deferred tax liabilities:
Deferred loan costs, net (540,000) (593,000)
Office properties and equipment, principally due to
differences in depreciation (397,000) (337,000)
FHLB stock dividends, principally due to deferral of
income for tax reporting (882,000) (772,000)
Installment sales of real estate acquired for development
and sale (602,000) (780,000)
Purchase accounting adjustments - (179,000)
Tax bad debt deductions in excess of base year amount (1,534,000) (1,332,000)
Unrealized gain on securities available for sale (253,200) (34,000)
Other (110,800) (86,000)
----------- -----------
Total gross deferred tax liabilities (4,319,000) (4,113,000)
----------- -----------
Net deferred tax liability $ (471,000) $(1,324,000)
=========== ===========
</TABLE>
77
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
$155,000, $129,000, and $65,000 for the years ended December 31, 1997, 1996, and
1995, 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 periods
ranging from 7 to 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 which are allocated among the participants based upon their
pro rata share ownership.
The cost of shares held by the ESOP is 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 $2,061,055,
$1,437,072, and $785,930 for the years ended December 31, 1997, 1996, and 1995,
respectively.
The ESOP shares as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares 482,754
Unearned shares 730,508
-----------
Total ESOP shares 1,213,262
===========
Fair value of unearned shares
at December 31, 1997 $14,975,414
===========
</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 $239,326, $256,578, and
$401,158 for the years ended December 31, 1997, 1996, and 1995, respectively.
No MRP shares were awarded during the years ended December 31, 1997, 1996, or
1995. As such, the SFAS No. 123 disclosure requirements of the proforma effects
of the fair value based method of accounting for shares granted are not
applicable.
The Company has a retirement plan for its non-employee directors who retire
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, 1997, 1996, and 1995.
78
<PAGE>
During 1993, the Company entered into a supplemental retirement agreement 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 $300,900, $150,900, and $150,900 for
the years ended December 31, 1997, 1996, and 1995, respectively.
(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 859,624 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, 1997, there were 151,164 options
available for grant. A summary of stock options outstanding at December 31,
1997 follows:
<TABLE>
<CAPTION>
Year Options Options Remaining Exercise
granted outstanding exercisable contractual life price
------- ----------- ----------- ---------------- --------
<S> <C> <C> <C> <C>
1993 636,652 592,798 5.27 years $ 5.00
1995 772 308 7.13 years 8.18
1996 1,544 308 8.13 years 12.87
1997 4,000 - 9.38 years 14.50
------- -------
Total 642,968 593,414
======= =======
Weighted average 5.31 years 5.08
</TABLE>
Changes in options outstanding were as follows:
<TABLE>
<CAPTION>
Weighted
Number of average
shares price
--------- --------
<S> <C> <C>
Balance at December 31, 1994 701,916 $ 5.00
Granted 772 8.18
Exercised (16,000) 5.00
Forfeited (2,316) 5.00
-------
Balance at December 31, 1995 684,372 5.00
Granted 1,544 12.87
Exercised (16,926) 5.00
Forfeited -
-------
Balance at December 31, 1996 668,990 5.02
Granted 4,000 14.50
Exercised (29,714) 5.00
Forfeited (308) 5.00
-------
Balance at December 31, 1997 642,968 5.08
======= ======
</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, 1997, 1996 and 1995 as required by
SFAS No. 123 is not presented due to the immaterial effects of stock options
granted.
79
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1997, the Company had outstanding commitments to originate
adjustable and fixed rate mortgage loans and home equity loans totaling
approximately $16.6 million, $8.7 million, and $1.1 million, respectively; to
purchase adjustable rate mortgage loans totaling approximately $4.6 million; and
to sell fixed rate mortgage loans totaling approximately $3.9 million. In
addition, the Company had unused equity lines of credit totaling $45.0 million.
Commitments to originate loans are extended for periods up to 120 days.
Commitments outstanding at December 31, 1997, to originate fixed rate mortgage
loans were issued at rates ranging from 6.75% to 10.50%. 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
80
<PAGE>
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 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, 1997 was approximately $12.5 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,
-------------------------------------------------
1997 1996
----------------------- ------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
---------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 31,583 $ 31,583 $ 23,705 $ 23,705
Investment securities 129,997 129,997 85,702 85,702
Mortgage-backed securities 85,480 85,480 95,203 95,203
Loans receivable 924,920 944,341 885,405 898,707
Stock in Federal Home Loan Banks 16,742 16,742 15,769 15,769
Interest rate cap agreements - - 11 20
Accrued interest receivable 8,102 8,102 7,681 7,681
---------- ---------- ---------- ----------
$1,196,824 $1,216,245 $1,113,476 $1,126,787
========== ========== ========== ==========
Financial liabilities:
Savings deposits:
Passbook and statement
savings, NOW, and
money market accounts $ 234,046 $ 234,046 $ 208,354 $ 208,354
Certificates of deposit 810,835 813,808 738,715 742,171
Borrowed money 65,908 67,823 97,682 97,543
Accrued interest payable 489 489 484 484
---------- ---------- ---------- ----------
$1,111,278 $1,116,166 $1,045,235 $1,045,548
========== ========== ========== ==========
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument listed above:
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.
81
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES AND 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.
82
<PAGE>
(22) PARENT COMPANY FINANCIAL INFORMATION
The following are condensed balance sheets as of December 31, 1997 and 1996
and condensed statements of income and cash flows for the years ended
December 31, 1997, 1996, and 1995 for Jefferson Savings Bancorp, Inc. (parent
company only):
<TABLE>
<CAPTION>
(In thousands)
Condensed Balance Sheets 1997 1996
------------------------ ---- ----
<S> <C> <C>
Assets:
Investment in subsidiaries $114,399 $88,951
Advances to subsidiaries 5,080 4,393
Other assets 159 274
-------- -------
$119,638 $93,618
======== =======
Liabilities and stockholders' equity:
Commercial bank debt $ 3,039 $ 3,430
Other liabilities 339 269
Stockholders' equity 116,260 89,919
-------- -------
$119,638 $93,618
======== =======
<CAPTION>
(In thousands)
Condensed Statements of Income 1997 1996 1995
------------------------------ ---- ---- ----
<S> <C> <C> <C>
Interest income $ 743 $ 812 $ 894
Interest expense 249 273 132
Dividends from subsidiaries - - 39,064
Gain on real estate operations - 319 150
------- ------- --------
494 858 39,976
Operating expenses 553 761 459
------- ------- --------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries (59) 97 39,517
Income tax expense (benefit) (19) 129 160
------- ------- --------
Income (loss) before undistributed earnings
of subsidiaries (40) (32) 39,357
Equity in undistributed earnings of subsidiaries 10,271 2,848 (32,987)
------- ------- --------
Net income $10,231 $ 2,816 $ 6,370
======= ======= ========
</TABLE>
83
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(In thousands)
Condensed Statements of Cash Flows 1997 1996 1995
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 10,231 $ 2,816 $ 6,370
Net income of subsidiaries (10,271) (2,848) (6,077)
Dividends from subsidiaries - - 39,064
Other, net 1,889 1,551 1,857
-------- ------- --------
Net cash provided by operating activities 1,849 1,519 41,214
-------- ------- --------
Investing activities:
Advances to subsidiaries (687) (1,343) 10,504
Proceeds from sale of real estate - 1,237 183
Cash paid for acquisitions - - (51,981)
-------- ------- --------
Net cash used in investing activities (687) (106) (41,294)
-------- ------- --------
Financing activities:
Dividends paid (2,012) (1,197) -
Change in borrowed money (391) (349) 3,779
Purchase of ESOP shares - - (3,779)
Shares sold to ESOP 928
Proceeds from stock options exercised 149 84 80
Proceeds from dividend reinvestment and
stock purchase plan 164 49 -
-------- ------- --------
Net cash provided by (used in)
financing activities (1,162) (1,413) 80
-------- ------- --------
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 $ 15,277 $ 5,155 $ -
Capital injection to subsidiary 14,604 5,155 -
======= ====== =======
</TABLE>
84
<PAGE>
SUPPLEMENTARY DATA
- ------------------
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1/ST/ QTR. 2/ND/ QTR. 3/RD/ QTR. 4/TH/ QTR.
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest and dividend income.................................... $ 22,712 $ 25,042 $ 24,388 $ 23,164
Interest expense................................................ 13,790 14,945 14,956 14,453
---------- ---------- ---------- ----------
Net interest income.......................................... 8,922 10,097 9,432 8,711
Provision for losses on loans................................... 306 606 246 102
---------- ---------- ---------- ----------
Net interest income after
provision for losses on loans.............................. 8,616 9,491 9,186 8,609
---------- ---------- ---------- ----------
Noninterest income:
Gains on sales of investment securities, net.................. -- -- -- 203
Gain (loss) on sale of mortgage-backed securities.............. -- -- (937) 354
Gain on sales of loans, net.................................... 58 81 215 221
Results of real estate operations, net......................... 44 89 (21) (41)
Other.......................................................... 581 605 606 514
---------- ---------- ---------- ----------
Total noninterest income.................................... 683 775 804 1,251
---------- ---------- ---------- ----------
Noninterest expense:
General and administrative..................................... 4,702 5,493 5,698 5,210
Amortization of excess cost over
fair value of net assets acquired............................. 354 450 453 454
---------- ---------- ---------- ----------
Total noninterest expense................................... 5,056 5,943 6,151 5,664
---------- ---------- ---------- ----------
Income before income taxes.................................. 4,243 4,323 3,839 4,196
Income tax expense.............................................. 1,622 1,652 1,480 1,616
---------- ---------- ---------- ----------
Net income.................................................. $ 2,621 $ 2,671 $ 2,359 $ 2,580
========== ========== ========== ==========
Earnings per share, basic....................................... $ 0.31 $ 0.29 $ 0.25 $ 0.28
Earnings per share, diluted..................................... 0.30 0.28 0.24 0.26
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996 1/ST/ QTR. 2/ND/ QTR. 3/RD/ QTR. 4/TH/ 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
Results of 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, basic................................. $ 0.26 $ 0.22 $ (0.38) $ 0.27
Earnings (loss) per share, diluted............................... 0.25 0.20 (0.38) 0.26
========== ========== ========== ==========
</TABLE>
85
<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 1998 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:
86
<PAGE>
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
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
- --- ----------- -------------
<C> <S> <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 *
10.11 Supervisory Agreement 90
21 Subsidiaries of the Registrant 99
23 Consent of Independent Auditors 100
27.1 Financial Data Schedule (EDGAR only)
27.2 Restated 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)
87
<PAGE>
(B) REPORTS ON FORM 8-K. On October 3, 1997, the Company filed a Current
-------------------
Report on Form 8-K reporting under Item 5 that its First Federal Savings Bank of
North Texas subsidiary had entered into a supervisory agreement with the Office
of Thrift Supervision. No financial statements were filed with 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.
88
<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 27, 1998 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 27, 1998
-----------------------------------
David V. McCay
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Gary G. Honerkamp March 27, 1998
-----------------------------------
Gary G. Honerkamp
Senior Vice President and Secretary
By: /s/ Paul J. Milano March 27, 1998
------------------------------------
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 27, 1998
------------------------------------
Frank C. Bick
Director
By: /s/ William W. Canfield March 27, 1998
------------------------------------
William W. Canfield
Director
By: /s/ Lloyd D. Doerflinger, Jr. March 27, 1998
------------------------------------
Lloyd D. Doerflinger, Jr.
Director
By: /s/ Forrest W. Miller, Jr. March 27, 1998
------------------------------------
Forrest W. Miller, Jr.
Director
By: /s/ Edward G. Throop March 27, 1998
------------------------------------
Edward G. Throop
Director
<PAGE>
EXHIBIT 10.11
-------------
SUPERVISORY AGREEMENT
---------------------
This Supervisory Agreement ("Agreement") is made and is effective this ____
day of ___________, 1997 (the "Effective Date")., by and between First Federal
Savings Bank of North Texas (the "Association"), a federally chartered stock
association, having its main office located at Denton, Texas, and the Office of
Thrift Supervision ("OTS"), an office within the United States Department of the
Treasury, having its principal executive offices located at 1700 G Street, N.W.,
Washington, D.C., acting through its Midwest Regional Director or his/her
designee ("Regional Director").
WHEREAS, the OTS is the primary federal regulator of the Association; and
WHEREAS, based on the OTS Report of Examination of the Association, which
commenced on March 24, 1997 ("ROE"), the OTS is of the opinion that the
Association has engaged in acts and practices that: (i) have resulted in
violations of certain of the laws or regulations to which the Association is
subject and/or (ii) are considered to be unsafe and unsound; and
WHEREAS, the OTS is of the opinion that grounds exist for the initiation of
administrative proceedings against the Association; and
WHEREAS, the OTS is of the view that it is appropriate to take measures
intended to ensure that the Association will: (i) comply with all applicable
laws and regulations and (ii) engage in safe and sound practices; and
WHEREAS, the Association, acting through its Board of Directors (the
"Board"), without admitting or denying any violations of laws or regulations
and/or unsafe and unsound practices, wishes to cooperate with the OTS and to
evidence the intent to: (i) comply with all applicable laws and regulations and
(ii) engage in safe and sound practices.
NOW THEREFORE, in consideration of the above premises, the mutual
undertakings set forth herein, the parties hereto agree as follows:
COMPLIANCE WITH LAWS, REGULATIONS AND SAFE AND SOUND
----------------------------------------------------
PRACTICES
---------
1. COMPLIANCE WITH LAWS, REGULATIONS AND SAFE AND SOUND PRACTICES
--------------------------------------------------------------
The Association and its Board and Officers shall take all necessary and
appropriate actions to achieve compliance with the following laws, regulations,
and safe and sound business practices:
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 2
(A) Section 5(v) of the Home Owners' Loan Act, 12 U.S.C. (S) 1464(v)
(regarding reports of condition);
(B) Section 560.93 of the OTS Regulations, 12 C.F.R. (S) 560.93 (regarding
lending limitations);
(C) Section 560.101(b) of the OTS Regulations, 12 C.F.R. (S) 560.101(b)
(regarding real estate lending standards);
(D) Section 560.160 of the OTS Regulations, 12 C.F.R. (S) 560.160
(regarding classification of assets);
(E) Part 562 of the OTS Regulations, 12 C.F.R. Part 562 (regarding
regulatory reporting standards);
(F) Section 563.161 of the OTS Regulations, 12 C.F.R. (S) 563.161
(regarding management and financial policies/compensation);
(G) Section 563.170(c) of the OTS Regulations, 12 C.F.R. (S) 563.170(c)
(regarding establishment and maintenance of records);
(H) Section 564.4 of the OTS Regulations, 12 C.F.R. (S) 564.4 (regarding
minimum appraisal standards);
(I) Section 11 of the Home Owners' Loan Act ("HOLA"), 12 U.S.C. (S) 1468,
incorporating Sections 22(g), 22(h), 23A and 23B of the Federal
Reserve Act, 12 U.S.C. (S)(S) 375a, 375b, 371c and 371c-1
(transactions with affiliates, extension of credit to executive
officers, directors, and principal shareholders).
(J) Section 563.43 of the OTS Regulations, 12 C.F.R. (S) 563.43 (regarding
loans to executive officers, directors, and principal shareholders).
CORRECTIVE PROVISIONS
---------------------
2. VIOLATIONS
----------
(a) The Association and its Board of Directors shall use its best efforts
to correct each violation of the loans-to-one borrower limitation, and
all other violations
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 3
of law or regulation noted in the March 24, 1997 Report of Examination
and adopt procedures to prevent future violations .
(b) The Board shall review a complete listing of the loans-to-one borrower
violations, and all other violations detailed in the March 24, 1997
Report of Examination, on a monthly basis and shall prepare a report
with an explanation of the actions taken to correct the violations. A
copy of the Report shall be submitted to the OTS monthly.
3. THRIFT FINANCIAL REPORTS
------------------------
The Association and its Board shall immediately adopt the procedures and
controls approved by the OTS relating to the preparation of the Thrift
Financial Reports ("TFR's").
4. ASSET CLASSIFICATION
--------------------
(a) By October 31, 1997, the Association and its Board shall complete a
comprehensive review of all loans $500,000 or greater, excluding
single-family permanent loans, in accordance with a revised internal
Asset Review/Asset Classification Policy that has been approved by the
OTS.
(b) By December 31, 1997, the Association and its Board shall complete a
comprehensive review of all loans over $250,000 and no greater than
$500,000, excluding single-family permanent loans, in accordance with
a revised Internal Asset Review/Asset Classification Policy that has
been approved by the OTS.
(c) By December 31, 1997, the Association and its Board shall:
(i) provide for training of Association staff to ensure competence in
the areas of lending and asset classification or shall recruit
and hire staff who is experienced in those areas; and
(ii) maintain staff who is competent to conduct appropriate credit
analysis and to administer and/or monitor the loan portfolio in a
prudent manner.
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 4
5. CREDIT AND COLLATERAL EXCEPTIONS
--------------------------------
(a) The Association and its Board shall use its best efforts to correct
each of the credit and collateral exceptions as noted in the March 24,
1997 OTS Report of Examination.
(b) The Association and its Board shall revise and implement the system
and procedures to monitor and request the necessary financial
information to ensure an accurate ongoing system of financial
analysis.
6. INTERNAL AUDIT
--------------
By December 31, 1997, the Association and its Board shall expand the
internal audit function to address all necessary areas as provided for in
the OTS Thrift Activities Handbook.
7. MANAGEMENT
----------
(a) On an ongoing basis, the Association and its Board shall:
(i) revise committee membership to ensure independence between the
loan committee and asset classification committee;
(ii) develop written job descriptions for officers which outline
duties, responsibilities and authorities, and develop clear and
consistent formal lines of authority and communication
throughout the organization;
(iii) expand the information reviewed by the Board and management to
include loans-to-one borrower violations, credit and collateral
exceptions, renewal and extensions, aging of construction
loans, consolidated past due loans, and balance sheet variance
analysis reports.
(b) By September 30, 1997, the Association and its Board shall review and
revise the Association's business plan. All assumptions should be
reasonable, well supported, and include projected risk-based capital
computations.
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 5
8. LENDING ACTIVITY
----------------
(a) Without the prior written approval of the OTS, the Association shall
not make any loans for acquisition, development and construction
("ADC") purposes.
(b) On an ongoing basis, the Association and its Board shall develop,
adopt, and implement prudent underwriting policies and procedures in
keeping with industry standards and addressing construction lending,
ADC lending, commercial real estate, credit analysis, asset
classification, allowance for loan and lessee losses, and appraisals.
(c) On an ongoing basis, the Association and its Board shall retain an
independent appraiser to prepare a written appraisal review on all
loans and credit applications greater than $1 million.
(d) Until the Association and its Board has reduced its classified assets
to 25 percent or less of Tier 1 core capital plus its allowance for
loan and lease losses, the Association shall restrict its residential
construction lending to a maximum credit line to any one borrower to
75 percent of the Association's legal lending limit.
MISCELLANEOUS
-------------
9. COMPLIANCE WITH AGREEMENT
-------------------------
The Board and officers of the Association shall take immediate action to
cause the Association to comply with the terms of this Agreement and shall
take all actions necessary or appropriate thereafter to cause the
Association to continue to carry out the provisions of this Agreement.
10. DEFINITIONS
-----------
All technical words or terms used in this Agreement for which meanings are
not specified or otherwise provided by the provisions of this Agreement
shall, insofar as applicable, have meanings as defined in Chapter V of
Title 12 of the CODE OF FEDERAL REGULATIONS, Home Owners' Loan Act
---------------------------
("HOLA"), Federal Deposit Insurance Act ("FDIA"), or OTS Memoranda. Any
such technical words or terms used in this Agreement and undefined in said
CODE OF FEDERAL REGULATIONS, HOLA, FDIA, or OTS Memoranda
---------------------------
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 6
shall have meanings that are in accordance with the best custom and usage in the
savings and loan industry.
11. SUCCESSOR STATUTES, REGULATIONS, GUIDANCE, AMENDMENTS
-----------------------------------------------------
Reference in this Agreement to provisions of statutes, regulations, and OTS
memoranda shall be deemed to include references to all amendments to such
provisions as have been made as of the Effective Date and references to
successor provisions as they become applicable.
12. DURATION, TERMINATION OR SUSPENSION OF AGREEMENT
------------------------------------------------
(a) This Agreement shall: (i) become effective upon its execution by the
OTS, through its authorized representative, whose signature appears
below, and (ii) remain in effect until terminated, modified or
suspended in writing by the OTS, acting through its Director or the
Regional Director (including any authorized designee thereof).
(b) The Regional Director, in his or her sole discretion, may, by written
notice, suspend any or all provisions of this Agreement.
13. TIME LIMITS
-----------
Time limitations for compliance with the terms of this Agreement run from
the Effective Date, unless otherwise noted.
14. EFFECT OF HEADINGS
------------------
The Section headings herein are for convenience only and shall not affect
the construction hereof.
15. SEPARABILITY CLAUSE
-------------------
In case any provision in this Agreement is ruled to be invalid, illegal or
unenforceable by the decision of any Court of competent jurisdiction, the
validity, legality and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby, unless the Regional
Director, in his/her sole discretion, determines otherwise.
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 7
16. NO VIOLATIONS OF LAW, RULE, REGULATION OR POLICY STATEMENT AUTHORIZED: OTS
--------------------------------------------------------------------------
NOT RESTRICTED
- --------------
Nothing in this Agreement shall be construed as:
(a) allowing the Association to violate any law, rule, regulation, or
policy statement to which it is subject; or
(b) restricting the OTS from taking such action(s) that are appropriate in
fulfilling the responsibilities placed upon it by law, including,
without limitation, any type of supervisory enforcement or resolution
action that the OTS determines to be appropriate.
17. SUCCESSORS IN INTEREST/BENEFIT
------------------------------
The terms and provisions of this Agreement shall be binding upon and inure
to the benefit of, the parties hereto and their successors in interest.
Nothing in this Agreement, express or implied, shall give to any person or
entity, other than the parties hereto, the Federal Deposit Insurance
Corporation and their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.
18. SIGNATURE OF DIRECTORS
----------------------
Each director of the Association signing the Agreement attests, by such
act, that she or he, as the case may be, voted in favor of the resolution,
in the form attached to this Agreement, authorizing the execution of this
Agreement by the Association.
19. INTEGRATION CLAUSE AND RESERVATION OF ENFORCEMENT POWERS
--------------------------------------------------------
(a) This Agreement represents, as of the Effective Date, the final written
agreement of the parties with respect to the subject matter hereof and
constitutes the sole agreement of the parties, as of the Effective
Date, with respect to such subject matter.
(b) Notwithstanding subparagraph (a) hereof, nothing in this Agreement
shall be construed to prevent the OTS from taking enforcement action
which the OTS otherwise would be authorized to take;
(i) against any institution-affiliated party of the Association; or
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 8
(ii) against the Association for either:
(A) any matter outside of the subject matter addressed by
Paragraph 1 hereof; or
(B) any matter, regardless of the subject matter, arising after
March 24, 1997.
20. ENFORCEABILITY OF AGREEMENT
---------------------------
The Association represents and warrants that this Agreement has been duly
authorized, executed, and delivered, and constitutes, in accordance with
its terms, a valid and binding obligation of the Association. The
Association acknowledges that this Agreement is a "written agreement"
entered into with the OTS within the meaning of Section 8 of the FDIA, 12
U.S.C. (S) 1818.
<PAGE>
First FSB of North Texas
Supervisory Agreement
page 9
IN WITNESS WHEREOF, the OTS, acting by and through the Regional Director,
and the Association, in accordance with a duly adopted resolution of its Board
(copy attached hereto), hereby execute this Agreement as of the Effective Date.
OFFICE OF THRIFT SUPERVISION THE ASSOCIATION
By: _______________________________ By: /s/ David V. McCay
David E. Bradley ----------------------------
Regional Deputy Director Chief Executive Officer
DIRECTORS OF THE ASSOCIATION
----------------------------
/s/ David V. McCay /s/ Marjorie Pitner
- --------------------------------- -------------------------------
Director Director
/s/ Joe Williams /s/ Carl Deegan
- --------------------------------- -------------------------------
Director Director
/s/ Richard Hayes /s/ Richard Allen (Advisory)
- --------------------------------- -------------------------------
Director Director
/s/ Mark Hannah, Jr.
- --------------------------------- _______________________________
Director Director
/s/ Paul J. Milano
- --------------------------------- _______________________________
Director Director
/s/ Michael J. Whitten ______________________________
- --------------------------------- Director
Director
/s/ Ike Harris (Advisory) _______________________________
- --------------------------------- Director
Director
/s/ C. Glynn Lowe _______________________________
- --------------------------------- Director
Director
/s/ G.R. Womack ______________________________
- -------------------------------- Director
Director
<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 February 6, 1998, relating to the consolidated
balance sheets of Jefferson Savings Bancorp, Inc. and subsidiaries as of
December 31, 1997 and 1996, 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, 1997, which report appears in the December 31, 1997
annual report on Form 10-K of Jefferson Savings Bancorp, Inc.
KPMG Peat Marwick LLP
St. Louis, Missouri
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,040
<INT-BEARING-DEPOSITS> 12,673
<FED-FUNDS-SOLD> 9,870
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 215,477
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 933,102
<ALLOWANCE> 8,182
<TOTAL-ASSETS> 1,238,055
<DEPOSITS> 1,044,881
<SHORT-TERM> 65,908
<LIABILITIES-OTHER> 11,006
<LONG-TERM> 0
0
0
<COMMON> 100
<OTHER-SE> 116,159
<TOTAL-LIABILITIES-AND-EQUITY> 1,238,055
<INTEREST-LOAN> 78,665
<INTEREST-INVEST> 14,177
<INTEREST-OTHER> 2,464
<INTEREST-TOTAL> 95,306
<INTEREST-DEPOSIT> 53,454
<INTEREST-EXPENSE> 58,143
<INTEREST-INCOME-NET> 37,162
<LOAN-LOSSES> 1,260
<SECURITIES-GAINS> 561
<EXPENSE-OTHER> 22,814
<INCOME-PRETAX> 16,601
<INCOME-PRE-EXTRAORDINARY> 10,231
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,231
<EPS-PRIMARY> 1.13<F1>
<EPS-DILUTED> 1.08<F1>
<YIELD-ACTUAL> 3.10
<LOANS-NON> 5,254
<LOANS-PAST> 623
<LOANS-TROUBLED> 210
<LOANS-PROBLEM> 3,300
<ALLOWANCE-OPEN> 6,529
<CHARGE-OFFS> 781
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 8,182
<ALLOWANCE-DOMESTIC> 6,243
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,939
<FN>
<F1>REFLECTS TWO-FOR-ONE STOCK SPLIT EFFECTED THROUGH 100% STOCK DIVIDEND
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<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> 15,139
<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> 0.37<F1>
<EPS-DILUTED> 0.35<F1>
<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
<FN>
<F1>RESTATED FOR SFAS 128 AND TWO-FOR-ONE STOCK SPLIT
</FN>
</TABLE>
