<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1998
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
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(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 15, 1999, the aggregate market value of the registrant's voting
stock held by non-affiliates was approximately $82 million based on the closing
sales price of $13.25 per share of the registrant's Common Stock on such date as
quoted on the Nasdaq National Market/SM/. 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 affiliates.
Number of shares of Common Stock outstanding as of March 15, 1999: 10,067,882
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 1999 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 Heritage Bank, a federal savings bank headquartered in Ballwin,
Missouri ("Jefferson Heritage"). The Company was originally incorporated at the
direction of the Board of Directors of Jefferson Heritage for the purpose of
becoming a holding company for Jefferson Savings upon its conversion from mutual
to stock form which was consummated on April 8, 1993.
Beginning in 1995, the Company sought to build a franchise in the State of
Texas through a series of acquisitions. 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-Payola Savings Association, Carthage, Texas ("Shelby-
Payola") 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-Payola had one branch and total assets of approximately
$55.6 million. Upon completion of the acquisitions, North Texas, Longview and
Shelby-Payola were consolidated under a single federal charter and operated as
First Federal Savings Bank of North Texas ("First Federal"). 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") with $71.8 million assets
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"). As a result of the Texas
Heritage acquisition, the Company added four branches in the suburban Dallas
counties of Dallas, Rockwell and Tarrant. The acquisition was accounted for
using the purchase method and 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 First Federal.
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") with $141 million in assets for a combination of approximately $15
million in cash and 1,095,900 shares of Common Stock. 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 First Federal.
On December 31, 1998, the Company merged First Federal into Jefferson
Heritage (the "Merger") resulting in a combined 31 branch network in two states.
Changes in Texas banking laws removed the necessity for the Company to operate
two separate charters and resulted in a stronger capital base, more flexibility
in deployment of capital between the Missouri and Texas markets, efficiency in
administration and certain anticipated tax advantages. Reflecting the Company's
emphasis on developing a retail banking culture, Jefferson Heritage subsequently
changed its name from Jefferson Savings and Loan Association, F.A. to Jefferson
Heritage Bank on January 20, 1999.
The Company is currently classified as a unitary 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 Jefferson Heritage and
operating the business of a savings association through Jefferson Heritage.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the consolidated operations of
Jefferson Heritage and its 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.
2
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Jefferson Heritage
General. Jefferson Heritage was originally founded in 1927 as a Missouri
mutual savings association. Jefferson Heritage converted to stock form in 1993
and converted to a federal charter in 1995. In 1998, Jefferson Heritage merged
with the Company's other subsidiary savings institution, First Federal, to
consolidate the business operations of the two entities into Jefferson Heritage.
The principal business of Jefferson Heritage 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. To further supplement originations, the Company has undertaken
residential mortgage loan purchases both in and out of its market area. See --
"Origination, Purchase and Sale of Loans." Jefferson Heritage emphasizes the
origination of loans for the purchase or construction of owner-occupied, single-
family (one- to four-unit) residential property, and, also, promotes the
origination of home equity loans as market conditions and local law permit. In
addition, Jefferson Heritage offers loans for the purchase or construction of
commercial real estate and loans for the acquisition and development of land for
residential purposes. To a lesser extent, Jefferson Heritage originates
consumer loans, including automobile loans, education loans and loans secured by
savings deposits.
Jefferson Heritage derives its 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.
Jefferson Heritage's 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 maturities of investments, sales of loans and operating
revenues.
Jefferson Heritage's 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. Jefferson
Heritage is currently a member of the Federal Home Loan Banks ("FHLBs") of Des
Moines and Dallas, which are two of the 12 district banks comprising the FHLB
System. Jefferson Heritage is subject to comprehensive regulation and
examination by the OTS which is also the chartering authority for Jefferson
Heritage. Such regulation is intended primarily for the protection of
depositors.
Jefferson Heritage's market area consists of the following locations in
Missouri and Texas in which Jefferson Heritage's branch offices are located:
(i) ten offices located in the City of St. Louis, Jefferson County, St. Louis
County and St. Charles County, Missouri; (ii) ten offices in the suburban Dallas
counties of Denton, Collin, Tarrant, Dallas, Rockwell and Wise, Texas; (iii) ten
offices in the northeastern Texas counties of Gregg, Harrison, Bowie, Franklin,
Hopkins, Morris and Titus; and (iv) one office in Panola County, Texas. With
$1.4 billion in assets at December 31, 1998, Jefferson Heritage is one of the
largest savings associations headquartered in the State of Missouri. At
December 31, 1998, over 63.4% of Jefferson Heritage's total loan portfolio was
secured by properties located in Jefferson Heritage's market area and over 94.0%
of Jefferson Heritage's deposits were from residents of Jefferson Heritage'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 3.3% for
the month of December 1998 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
3
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in the United States based on the number of Fortune 100 industrial corporations
headquartered in the region, and ranks sixth in the nation in terms of
headquarters of companies listed among the Fortune 500 largest industrial and
service corporations.
The Dallas/Fort Worth metropolitan area has a population of approximately
3.9 million, representing an increase of 17.5% from the beginning of the 1980's,
according the 1990 U.S. Census Bureau statistics. The population growth in the
Dallas/Fort Worth area was influenced by the availability of land for
development, the presence of highways and the emergence of major employment
centers. Population growth is expected to continue through the year 2000 at a
growth rate of 1.4% per year.
The economy of the Dallas/Forth Worth area has a large manufacturing base
in the areas of military hardware, electronics, automobiles, industrial
equipment, oil-field parts, food products and chemicals. Other major industries
in the area include banking, insurance, weapons manufacturing, communications,
oil and gas production and air transportation. Major corporations in the
Dallas/Fort Worth area include Fujitsu, GTE, Exxon, MCI/WorldCom, and J.C.
Penny. The average median income for the Dallas/Fort Worth area is approximately
$36,696 and the unemployment rate is lower than the national and state
unemployment rates. In a survey of 75 metropolitan areas conducted by PHH
Homequity, Inc., Dallas ranked second among cities where corporations relocated
during 1996, and has been ranked in the top 5 in each of the five previous
years. It is anticipated that the construction of the $5.7 billion privately
funded bullet train connecting Dallas to other major cities in Texas will bring
economic growth and create new jobs.
Jefferson Heritage's executive offices are located at 14915 Manchester
Road, Ballwin, Missouri 63011 and its main telephone number is (314) 227-3000.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio totaled $1.1
billion at December 31, 1998, representing 80.8% of total assets at that date.
At December 31, 1997, the loan portfolio of Jefferson Heritage totaled $924.9
million, or 74.7% of its assets. It is the Company's policy to concentrate its
loan origination activities within the market areas of Jefferson Heritage. The
Company estimates that approximately 39.3% of Jefferson Heritage's loans are
secured by properties in the State of Missouri and 35.5% of Jefferson Heritage'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, 1998, $841.7 million, or
69.9% of the total loan portfolio, consisted of permanent loans secured by
single-family real estate. The Company also makes conventional mortgage loans
for the purpose of constructing single-family residences. At December 31, 1998,
loans for the construction and development of single-family residential real
estate totaled $208.2 million, or 17.3% of the Company's total loan portfolio.
At December 31, 1998, 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 $54.9 million, or 4.6%
of the total loan portfolio, at December 31, 1998.
At December 31, 1998, loans secured by commercial real estate totaled $72.6
million, or 6.0% of the total loan portfolio. To a limited extent, Jefferson
Heritage originates consumer and commercial loans. Consumer loans, which
primarily consist of automobile loans, education loans and loans secured by
savings deposits, totaled $10.3 million, or 0.9% of the Company's total loan
portfolio at December 31, 1998. Commercial loans totaled $17.3 million, or
1.4%, 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, 1998, the Company had no concentrations of loans exceeding 10% of
total loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
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)........... $ 840,164 69.72% $647,735 66.72% $623,754 63.51% $629,327 75.74% $501,307 84.98%
Home equity................. 54,857 4.55 54,156 5.58 44,924 4.57 26,826 3.23 22,685 3.84
FHA insured/VA guaranteed... 1,517 0.13 2,073 0.21 968 0.10 1,065 0.13 931 0.16
Commercial.................. 72,602 6.03 80,758 8.32 56,667 5.77 61,485 7.40 56,192 9.52
Construction and development 208,207 17.28 163,390 16.83 242,143 24.66 105,339 12.68 5,945 1.67
---------- ------ -------- ------ -------- ------ -------- ------ --------
Total real estate loans.... 1,177,347 97.71 948,112 97.65 968,456 98.61 824,042 99.18 587,060 99.51
-------- ------ -------- ------ -------- ------ --------
Commercial................... 17,330 1.44 9,775 1.01 5,000 0.51 2,000 0.24 2,000 0.34
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Automobile.................. 2,021 0.17 3,134 0.32 1,649 0.17 875 0.10 148 0.02
Loans secured by savings
deposits................... 4,776 0.40 5,532 0.57 3,658 0.37 3,410 0.41 297 0.05
Education................... 78 0.01 191 0.02 178 0.02 229 0.03 224 0.04
Other....................... 3,441 0.27 4,179 0.43 3,195 0.32 341 0.04 213 0.04
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans....... 10,316 0.85 13,036 1.34 8,680 0.88 4,855 0.58 882 0.15
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable.... 1,204,993 100.00% 970,923 100.00% 982,136 100.00% 830,897 100.00% 589,942 100.00%
====== ====== ====== ====== ======
Add (deduct):
Loans in process............ (83,586) (38,126) (89,573) (38,458) (3,755)
Unearned (discounts)
premiums, net.............. (494) (1,112) (1,786) (621) 111
Deferred loan costs (fees),
net........................ 4,236 1,417 1,157 1,363 2,163
Allowance for losses........ (6,659) (8,182) (6,529) (5,096) (3,471)
---------- -------- -------- -------- --------
Loans receivable, net...... $1,118,490 $924,920 $885,405 $788,085 $584,990
========== ======== ======== ======== ========
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</TABLE>
(1) Includes loans held for sale of $5,867,000, $2,821,000, $1,787,000 and
$752,000 at December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
5
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Loan Portfolio Sensitivity. The following table sets forth certain
information as of December 31, 1998 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............... $ 27,210 $139,885 $729,443 $ 896,538
Commercial real estate................ 10,234 27,946 34,422 72,602
Construction and development.......... 176,508 30,681 1,018 208,207
Commercial............................ 15,330 2,000 -- 17,330
Consumer.............................. 5,549 4,247 520 10,316
-------- -------- -------- ----------
Total............................. $234,831 $204,759 $765,403 $1,204,993
======== ======== ======== ==========
</TABLE>
The following table sets forth as of December 31, 1998 the dollar amount of
the loans maturing subsequent to the year ending December 31, 1999 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........ $163,754 $705,574 $869,328
Commercial real estate......... 16,364 46,004 62,368
Construction and development... 4,957 26,742 31,699
Commercial..................... -- 2,000 2,000
Consumer....................... 3,935 832 4,767
-------- -------- --------
Total....................... $189,010 $781,152 $970,162
======== ======== ========
</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 Jefferson Heritage's market area.
Loan representatives are paid commissions on all loans originated by Jefferson
Heritage pursuant to their referrals. No loans may be originated by Jefferson
Heritage pursuant to this
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program unless the borrower meets the same underwriting criteria as applied to
Jefferson Heritage'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. During the year ended December 31, 1998, the Company
significantly increased its loan purchases in order to replenish its portfolio
of adjustable-rate mortgages which had declined as a result of refinancing
activity during recent years. Purchases of single family residential mortgages
increased to $384.1 million in 1998 from $48.7 million in 1997. The Company
purchased these loans from a mortgage banker with offices throughout the United
States and its purchased loans are secured by properties in approximately 38
states. During 1998, the Company also purchased $22.0 million of commercial and
construction loans.
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.
Jefferson Heritage sells whole loans to institutional investors. 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. Jefferson Heritage
generally obtains 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, Jefferson Heritage may charge an origination fee
depending on competition, which Jefferson Heritage 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,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction and development................... $153,530 $172,505 $234,192
Single-family.................................. 149,833 140,878 66,754
Home equity.................................... 37,202 35,106 37,130
FHA insured/VA guaranteed...................... 2,551 1,029 793
Commercial real estate......................... 21,516 10,453 12,017
Commercial....................................... 8,000 8,587 3,418
Consumer......................................... 6,400 9,310 3,842
-------- -------- --------
Total loans originated....................... 379,032 377,868 358,146
-------- -------- --------
Loans purchased:
Real estate loans:
Single-family.................................. 384,077 48,738 8,644
Commercial..................................... 936 773 473
Construction................................... 21,113 -- --
Commercial....................................... -- -- --
-------- -------- --------
Total loans purchased........................ 406,126 49,511 9,117
-------- -------- --------
Loans acquired in business combinations:
Real estate loans:
Construction................................... -- 3,111 23,311
Single-family.................................. -- 44,974 28,141
Home improvement............................... -- 13 --
FHA insured/VA guaranteed...................... -- 116 286
Commercial real estate......................... -- 19,803 13,453
Consumer......................................... -- 5,063 2,181
Less allowance for loss, unearned discount and
deferred fees.................................. -- (2,658) (11,333)
-------- -------- --------
Total loans acquired in acquisitions........... -- 70,422 56,039
-------- -------- --------
Loans sold - residential real estate............... 119,379 45,232 32,893
-------- -------- --------
Total loans sold............................... 119,379 45,232 32,893
-------- -------- --------
Principal repayments............................... 471,986 409,383 290,969
Decrease (increase) in other items, net............ (223) (3,671) (2,120)
-------- -------- --------
Net increase....................................... $193,570 $ 39,515 $ 97,320
======== ======== ========
</TABLE>
8
<PAGE>
Loan Underwriting Policies. Jefferson Heritage's lending activities are
subject to written, non-discriminatory underwriting standards and loan
origination procedures prescribed by Jefferson Heritage's Board 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 Jefferson Heritage's Board of Directors.
Jefferson Heritage has established an inside loan committee (consisting of
eight senior officers) and an outside loan committee (consisting of three non-
employee directors) whose approvals are required for most loans other than
consumer loans. Real estate secured loans of $250,000 or less and non-real
estate commercial loans of $100,000 or less require the approval of at least two
members of the inside loan committee. Single-family mortgages (including home
equity and home improvement loans) of $250,001 to $750,000 and other real estate
secured loans of $250,001 to $1,000,000 as well as commercial loans of $100,001
to $250,000 require the approval of three members of the inside loan committee.
Single family residential loans of between $750,001 to $1,000,000, other real
estate secured loans of $1,000,000 to $2,000,000 and commercial loans of
$250,001 to $500,000 require the approval of four members of the inside loan
committee. Commercial loans of between $500,001 and $1,000,000 require the
approval of five members of the inside loan committee. Single family
residential loans in excess of $1,000,000, other real estate secured loans in
excess of $2,000,000 and commercial loans in excess of $1,000,000 require the
approval of four members of the inside loan committee and two members of the
outside loan committee. Consumer loans of $2,500 to $25,000 may be made on the
approval of a branch manager and certain other specified officers or inside loan
committee members. Consumer loans of $25,001 to $50,000 require the approval of
a branch manager plus an additional officer or member of the inside loan
committee. Consumer loans of $50,001 to $100,000 require the approval of three
officers (including a member of the inside loan committee) and consumer loans in
excess of $100,000 require the approval of two officers and three members of the
inside loan committee. Except for consumer loans of $2,500 or less, Jefferson
Heritage does not grant loan authority to individual officers.
To provide a prompt response to existing customers, the inside loan
committee may approve new loans and extensions of credit to existing loan
customers and pre-approved line of credit borrowers up to 10%, not exceeding
$500,000, of the borrower's existing loan commitment. For loans that would
normally require outside loan committee approval, however ratification is
required by the outside loan committee within 30 days of approval of the
application.
Jefferson Heritage's 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 Jefferson Heritage makes 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 Jefferson Heritage's 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 Jefferson Heritage.
9
<PAGE>
Jefferson Heritage is permitted to lend up to 100% of the appraised value
of the real property securing a mortgage loan. However, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
Jefferson Heritage is 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. Jefferson Heritage 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. Jefferson Heritage generally
limits the loan-to-value ratio on commercial real estate mortgage loans to 80%.
Under federal law, Jefferson Heritage may not make loans to a single
borrower that exceed in the aggregate 15% of its unimpaired capital and
unimpaired surplus. Based on its unimpaired capital and unimpaired surplus at
December 31, 1998, Jefferson Heritage would be permitted to lend up to $14.9
million to one borrower. Jefferson Heritage's Board of Directors has set an
internal limit equal to 80% of this legal lending limit which was $11.9 million
at December 31, 1998. At December 31, 1998, the Company's largest loan
consisted of a $10.2 million line-of-credit secured by single-family residential
properties.
Interest rates charged on loans are affected principally by competitive
factors, the demand for such loans and the supply of funds available for lending
purposes and, in the case of fixed-rate, single-family residential loans, rates
established by FHLMC. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including those of the
Federal Reserve Board, legislative and tax policies and government budgetary
matters.
Residential Real Estate Lending. Jefferson Heritage historically has been
and continues to be an originator of single-family, residential real estate
loans in the Missouri and Texas market areas. Jefferson Heritage currently
originates 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.
Jefferson Heritage offers 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, which is generally 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 Jefferson Heritage, as well as many
other financial institutions, may 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, Jefferson Heritage
no longer originates or purchases such loans. At December 31, 1998, Jefferson
Heritage held approximately $51.5 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,
10
<PAGE>
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.
Jefferson Heritage also originates 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 had not offered home equity loans in Texas prior
to 1998. Effective January 1, 1998, the Texas constitution was amended to
permit the encumbrance of homesteads for non-recourse, closed-end, home equity
loans provided that the aggregate indebtedness secured by the homestead does not
exceed 80% of its fair market value. Jefferson Heritage offered such loans on a
limited basis during 1998. At December 31, 1998, total outstanding home equity
loans totaled $54.9 million, or 4.6% of the Company's total loan portfolio.
Commercial Real Estate Lending. The Company currently originates
commercial real estate loans which are generally secured by apartments, retail
stores, hotels, office buildings, warehouses and other income-producing
commercial property.
At December 31, 1998, the principal concentrations in the Company's
commercial real estate loan portfolio were as follows:
Amount
Type of Loan (In thousands)
------------ --------------
<TABLE>
<CAPTION>
<S> <C>
Office buildings......... $16,437
Multi-family............. 19,895
Hotels and restaurants... 9,486
Other.................... 26,784
-------
$72,602
=======
</TABLE>
The Company's two largest commercial real estate loans at December 31, 1998
were a $4.0 million loan secured by two retail centers in Springfield, Missouri
and a $3.0 million loan secured by a country club and leasehold on a golf course
in St. Charles County. At December 31, 1998, the Company's ten largest
commercial real estate loans amounted to $22.9 million, or 31.5% of the
Company's portfolio of commercial real estate loans. None of these loans were
on non-accrual at December 31, 1998.
At December 31, 1998, commercial real estate loans totaled $72.6 million,
or 6.0% of the Company's total loan portfolio, as compared to $80.8 million, or
8.3%, at December 31, 1997. The Company originated $12.0 million, $10.5 million
and $21.5 million of commercial real estate loans during the years ended
December 31, 1996, 1997 and 1998, 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
11
<PAGE>
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
generally the Company's policy to obtain personal guarantees and annual
financial statements from all principals obtaining commercial real estate loans.
The Company 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 31, 1998, Jefferson Heritage was permitted to invest in nonresidential
real property loans in an aggregate amount equal to $369.8 million.
Construction Lending. Through Jefferson Heritage, 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, 1998, the
Company's loan portfolio included $208.2 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, 1998, 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 Jefferson Heritage's
permanent mortgage loan financing for the subject property.
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 Jefferson Heritage, 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.
12
<PAGE>
Consumer Lending. Consumer loans originated by the Company include
automobile loans, education loans and loans secured by savings deposits. At
December 31, 1998, consumer loans totaled $10.3 million, or 0.9% of the
Company's total loan portfolio.
Automobile loans are secured by both new and late-model used cars and are
generally limited to 80% of the "sticker price" or purchase price, whichever is
lower, or the loan value as published by the National Automobile Dealers
Association. Automobile loans are only made to the borrower-owner on a direct
basis. New cars are financed for a period of up to 60 months, while used cars
are financed for 48 months or less. Collision insurance is required for all
automobile loans.
The Company makes savings deposit loans for up to 100% of the depositor's
savings deposit balance. The interest rate is normally two percentage points
above the rate paid on the savings account, and the account must be pledged as
collateral to secure the loan. Savings deposit loans are payable on demand.
Interest is billed on a monthly or quarterly basis. At December 31, 1998, total
loans on savings deposits were $4.8 million, or 0.4% of the total loan
portfolio.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various 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, 1998, $82,000 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. Jefferson Heritage is also authorized to invest up to
20% of its assets in loans for commercial, corporate, business or agricultural
purposes but have traditionally not engaged in this form of lending. Jefferson
Heritage has extended warehouse lines of credit totaling $14.0 million at
December 31, 1998 to four local mortgage brokers. Under these arrangements,
Jefferson Heritage 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 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 or
costs with respect to such loan are taken into or charged against income at such
time. See Note 1 of Notes to Consolidated Financial Statements.
13
<PAGE>
In addition to the foregoing fees, the Company receives fees for servicing
loans which have been sold to other financial institutions or to FHLMC or FNMA.
Servicing activities include the collection and processing of mortgage payments,
accounting for loan funds and paying real estate taxes, hazard insurance and
other loan-related expenses out of escrowed funds. As compensation for these
services, the Company is generally permitted to retain a portion of the monthly
payment. Loan servicing fees have not been a significant source of income for
the Company. At December 31, 1998, the Company was servicing approximately
$105.2 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 generally 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. 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,
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Restructured loans....................... $1,245 $ 210 $ 179 $ 546 $ --
------ ------ ------ ------ ------
Nonaccruing loans:
Residential real estate................ $1,740 $1,826 $1,169 $1,687 $ 249
Commercial real estate................. 58 1,214 -- 26 --
Construction........................... 1,829 2,294 11 707 --
Commercial............................. -- -- 74 15 --
Consumer............................... 82 72 232 42 --
------ ------ ------ ------ ------
Total nonaccruing loans.............. 3,709 5,406 1,486 2,477 249
Applicable allowance for losses...... (30) (152) (43) -- --
------ ------ ------ ------ ------
Nonaccruing loans, net........... 3,679 5,254 1,443 2,477 249
------ ------ ------ ------ ------
Total restructured and
nonaccruing loans, net....... 4,924 5,464 1,622 3,023 249
------ ------ ------ ------ ------
Nonperforming loans, net as a
percentage of net loans........ 0.44% 0.59% 0.18% 0.38% 0.04%
====== ====== ====== ====== ======
Foreclosed assets:
Residential............................ $ 217 $ 880 $1,584 $ 436 $ 70
Commercial............................. 1,625 1,315 1,195 3,163 3,002
Construction........................... 1,399 2,596 2,115 343 --
Commercial............................. -- -- -- -- --
------ ------ ------ ------ ------
Total foreclosed assets.............. 3,241 4,791 4,894 3,942 3,072
Applicable allowance for losses...... (360) (535) (434) (272) (455)
------ ------ ------ ------ ------
Foreclosed assets, net........... 2,881 4,256 4,460 3,670 2,617
------ ------ ------ ------ ------
Nonperforming assets, net........ $7,805 $9,720 $6,082 $6,693 $2,866
====== ====== ====== ====== ======
Nonperforming assets, net as a
percentage of total assets..... 0.56% 0.79% 0.53% 0.59% 0.33%
====== ====== ====== ====== ======
</TABLE>
Total nonperforming assets decreased from $9.7 million (or 0.79% of assets)
at December 31, 1997 to $7.8 million (or 0.56% of assets) at December 31, 1998
after increasing from $6.1 million (or 0.53% of assets) at December 31, 1996.
The decrease in nonperforming assets during 1998 is attributed to a $1.6 million
decrease in nonaccruing loans and a $1.4 million decrease in foreclosed assets,
partially offset by a $1.0 million increase in restructured loans. The decrease
in nonaccruing loans is attributed primarily to a $1.2 million decrease in
nonaccruing commercial real estate loans and a $465,000 decrease in nonaccruing
construction loans. Nonaccruing construction loans at December 31, 1998
consists of eight loans for the construction of single-family residences and one
commercial real estate loan in Texas.
At December 31, 1998, the Company's foreclosed assets consisted primarily
of one commercial real estate property carried at $846,000, eleven single-family
construction loans carried at $1.4 million, three land loans at $447,000 and
seven permanent single-family loans at $217,000. See " -- Real Estate Acquired
Through Foreclosure." The Company's restructured loans consist of 37 loans
totaling approximately $1.2 million, primarily secured by single-family
residences located in Texas. Not included in restructured loans is a $3.0
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, 1998, the Company had
three single-family construction loans totaling $537,000 that were more than 90
days past the maturity date with regard to principal repayment. Interest
15
<PAGE>
payments on the loans were less than 90 days past due and the loans were still
accruing interest. Since the interest due on these loans were less than 90 days
past due, the loans are not considered nonperforming assets.
During the year ended December 31, 1998, gross interest income of
approximately $615,000 and $108,000, 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
$412,000 was included in income during the year ended December 31, 1998 on
nonaccruing loans. Approximately $111,000 in interest on restructured loans was
included in income during the year ended December 31, 1998.
At December 31, 1998, there were $2.5 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,
1998 it had $10.4 million, net of reserves, in assets classified as substandard,
no assets classified as doubtful and $403,000 in assets classified as loss.
Substandard assets included $1.9 million in residential loans, $53,000 in
consumer loans, $3.1 million in construction and development loans, $2.5 million
in commercial real estate loans and $2.9 million, net of reserves, in real
estate acquired through foreclosure. Assets classified as loss, which are fully
reserved, consisted of $359,000 in real estate acquired through foreclosure and
$44,000 in loans.
Allowance for Loan Losses. In originating and purchasing 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 and trends, evaluation of economic conditions, changes in
the composition of the loan portfolio, and regular reviews of delinquencies and
loan portfolio quality. The Company increases its allowance for loan losses by
charging provisions for 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 the OTS. In addition, management conducts
annual reviews on large loans due to their size and complexity. Loans subject
to grading include delinquent loans and any loans that have been placed on a
watch list. Specific allowances are provided for individual loans when it is
probable the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The amount of any specific allowance
necessary is determined based on the present value of expected future cash
flows discounted at the loan's effective interest rate or the fair value of the
collateral for collateral-dependent loans. At the date of foreclosure, the
Company transfers the property to real estate acquired through foreclosure at
the lower of cost or fair value less selling expenses. Any amount of cost in
excess of fair value less selling expenses is charged-off against the allowance
for loan losses. If, upon ultimate disposition of the
16
<PAGE>
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.
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, 1998 was 179.5%. During 1998, the Company recaptured $1.2 million of excess
loan loss reserves. The OTS, after a 1997 examination, had required the
Company's Texas subsidiary, First Federal, to base its loan loss reserves on
certain thrift industry average loss experiences that were significantly higher
than the actual loss experience of First Federal and to curtail its higher
margin lending for land acquisition and development loans. As a result of the
1998 OTS examination, the OTS terminated the 1997 Supervisory Agreement, which
removed these requirements. The Company increased its provision for loan losses
during 1997 primarily due to the results of the OTS examination previously
mentioned.
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,
------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $ 8,182 $6,529 $5,096 $3,471 $3,190
Reserves acquired in business combinations... -- 1,156 851 1,378 --
Loans charged-off:
Residential real estate.................... (64) (91) (24) -- (19)
Commercial real estate..................... (152) -- -- (91) --
Construction............................... (90) (546) (42) (31) --
Commercial................................. -- (7) -- -- --
Consumer................................... (26) (137) (12) -- --
------- ------ ------ ------ ------
Total charge-offs....................... (332) (781) (78) (122) (19)
------- ------ ------ ------ ------
Recoveries:
Residential real estate.................... 3 18 -- -- --
Commercial real estate..................... -- -- -- -- --
Construction............................... -- -- -- -- --
Commercial................................. -- -- -- -- --
Consumer................................... 6 -- -- 2 --
------- ------ ------ ------ ------
Total recoveries........................ 9 18 -- 2 --
------- ------ ------ ------ ------
Net loans charged-off........................ (323) (763) (78) (120) (19)
------- ------ ------ ------ ------
Provision charged to expense................. (1,200) 1,260 660 367 300
------- ------ ------ ------ ------
Balance at end of period..................... $ 6,659 $8,182 $6,529 $5,096 $3,471
======= ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period........ 0.03% 0.08% 0.01% 0.02% 0.01%
======= ====== ====== ====== ======
Ratio of allowance to net loans.............. 0.60% 0.88% 0.74% 0.65% 0.59%
======= ====== ====== ====== ======
</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. 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,
-------------------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------------- -------------------------------
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........ $1,066 74.40% $ 1,640 72.51% $ 1,354 68.18%
Commercial real estate......... 1,977 6.03 2,896 8.32 1,199 5.77
Construction and development... 1,437 17.28 1,557 16.83 3,007 24.66
Commercial..................... 69 1.44 43 1.01 4 0.51
Consumer....................... 144 0.85 107 1.34 152 0.88
Unallocated.................... 1,966 -- 1,939 -- 813 --
------ ------ ------- ------- ----------- ---------------
$6,659 100.00% $ 8,182 100.00% $ 6,529 100.00%
====== ====== ======= ======= =========== ===============
<CAPTION>
At December 31,
-------------------------------------------------------
1995 1994
---------------------- ------------------------
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........ $1,050 79.10% $ 529 88.98%
Commercial real estate......... 535 7.40 875 9.52
Construction and development... 139 12.68 -- 1.01
Commercial..................... -- 0.24 -- 0.34
Consumer....................... 71 0.58 7 --
Unallocated.................... 3,301 -- 2,060 --
------ ------ ------- ------
$5,096 100.00% $ 3,471 100.00%
====== ====== ======= ======
</TABLE>
Included in the above amounts are specific reserves totaling $30,000,
$696,000, $108,000 and $26,000 at December 31, 1998, 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. 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 the lower of cost or 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, 1998, the Company held no foreclosed assets for which market prices
were unavailable. Subsequent to foreclosure, real estate acquired through
foreclosure is periodically evaluated by management and an allowance for loss is
established if the estimated fair value of the property, less estimated costs to
sell, declines. At December 31, 1998, 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 $846,000.
18
<PAGE>
Mortgage-Backed Securities
The Company maintains a portfolio of mortgage-backed securities in the form
of Government National Mortgage Association ("GNMA"), FNMA and FHLMC
participation certificates. 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 3.5 years at December 31, 1998. 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 Jefferson Heritage meet certain definitional tests for
favorable treatment under federal banking and tax laws. See "Regulation of
Jefferson Heritage -- 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 mortgage-backed securities.
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,
-------------------------------------------------------
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
------- ------ ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA.................................. $ 4,497 13.9% $60,641 70.9% $31,762 33.4%
FHLMC................................. 2,682 8.3 5,550 6.5 19,550 20.5
FNMA.................................. 9,130 28.2 11,596 13.6 14,991 15.7
CMOs.................................. 16,055 49.6 7,693 9.0 28,900 30.4
------- ----- ------- ----- ------- -----
Total mortgage-backed securities... $32,364 100.0% $85,480 100.0% $95,203 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
19
<PAGE>
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, 1998. 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, 1998
--------------------------------------------------------------------------------------------
One Year One to Five Five Through After Ten
or Less Years Ten Years Years
-------------------- --------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
- -----------------------------
GNMA....................... $ -- -- % $ 10 8.14% $ -- -- % $ 4,532 5.50%
FHLMC...................... -- -- 829 6.53 -- -- 1,828 7.37
FNMA....................... -- -- 623 6.44 -- -- 8,423 6.93
CMOs....................... -- -- -- -- -- -- 16,247 5.85
--------- ------ --------- -------
Total mortgage-backed
securities available for
sale.................... $ -- -- % $1,462 6.51 $ -- -- $31,030 6.18
========= ====== ========= =======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------
Total
-----------------------------------
Approximate Weighted
Amortized Market Average
Cost Value Yield
--------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Available for Sale:
- -----------------------------
GNMA....................... $ 4,542 $ 4,497 5.51%
FHLMC...................... 2,657 2,682 7.11
FNMA....................... 9,046 9,130 6.90
CMOs....................... 16,247 16,055 5.85
------- -------
Total mortgage-backed
securities available for
sale.................... $32,492 $32,364 6.20
======= =======
</TABLE>
20
<PAGE>
Investment Activities
Jefferson Heritage maintains a substantial portfolios of investment
securities in order to provide liquidity for its operations as well as for
income. Jefferson Heritage is 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.
Jefferson Heritage purchases investment securities pursuant to guidelines
established by and under the supervision of the Investment Committee. 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 portfolio of Jefferson
Heritage 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 investment grade with a maturity of less than three years.
Jefferson Heritage is 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
Jefferson Heritage for the month of December 1998 were approximately 21% and 2%,
respectively.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated. At December 31, 1998, 1997 and
1996, all investment securities were classified as available for sale.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1998 1997 1996
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Investment securities (at fair value):
U.S. government and federal agency obligations... $154,495 $129,660 $ 85,339
Tax-exempt municipal bonds....................... 116 337 363
-------- -------- --------
Total investment securities.................. 154,611 129,997 85,702
-------- -------- --------
Other investments (at cost):
Interest-bearing deposits........................ 11,271 12,673 11,531
Federal funds sold............................... -- 9,870 4,815
Stock in FHLB.................................... 11,881 16,741 15,769
-------- -------- --------
Total investments $177,763 $169,281 $117,817
======== ======== ========
</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, 1998. Yields on tax-exempt securities are calculated
on the basis of actual interest and not on a tax-equivalent basis.
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------------------------
One Year One to Five Five to Greater than
or Less Years Ten Years Ten Years
---------------------- ------------------------ -------------------- ---------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
-------- ---------- -------- --------- --------- --------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
federal
agency obligations..... $128,954 6.37% $14,990 6.49% $10,000 5.68% $ -- -- %
Tax-exempt municipal
bonds................... 80 5.21 35 5.50 -- -- -- --
-------- -------- -------- -------
Total investment securities.. $129,034 6.37 $15,025 6.49 $10,000 5.68 $ -- --
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Total
---------------------------------------
Approximate Weighted
Amortized Market Average
Cost Value Yield
--------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and
federal
agency obligations..... $153,944 $154,495 6.34%
Tax-exempt municipal
bonds................... 115 116 5.30
-------- --------
Total investment securities.. $154,059 $154,611 6.34
======== ========
</TABLE>
22
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of funds for the lending and
investment activities of Jefferson Heritage and for general operational
purposes. In addition to deposits, Jefferson Heritage derives funds from
borrowed money, loan principal and interest repayments, maturities of investment
securities and interest payments thereon. Although loan repayments are a
relatively stable source of funds, deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds, or on a longer term basis for general operational
purposes.
Deposits. Jefferson Heritage attracts deposits principally from within its
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 its deposit
accounts are established by Jefferson Heritage on a periodic basis. Jefferson
Heritage generally reviews its deposit mix and pricing on a weekly basis. In
determining the characteristics of its deposit accounts, Jefferson Heritage
considers 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.
Jefferson Heritage competes for deposits with other institutions in its
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 Jefferson Heritage's depositors are Missouri
residents and Texas residents.
23
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by Jefferson Heritage between the dates
indicated.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997 At December 31, 1996
----------------------------------- --------------------------------- ------------------------
Increase Increase
(Decrease) (Decrease)
% of From Prior % of From Prior % of
Balance Deposits Year Balance Deposits Year Balance Deposits
---------- --------- --------- ---------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and statement
savings..................... $ 44,997 4.33% $ (3,753) $ 48,750 4.67% $ 390 $ 48,360 5.11%
NOW and noninterest-bearing.. 55,625 5.36 20,944 57,174 5.47 6,136 51,038 5.39
Money market................. 138,336 13.32 (12,278) 128,121 12.26 19,165 108,956 11.50
---------- ------ -------- ---------- ------ -------- -------- ------
Total...................... 238,958 23.01 4,913 234,045 22.40 25,691 208,354 22.00
---------- ------ -------- ---------- ------ -------- -------- ------
Certificates of deposit:
Fixed-rate, fixed-term..... 4,984 0.48 (236) 5,220 0.50 (3,487) 8,707 0.92
7-31 days.................. -- -- -- -- -- (49) 49 0.01
Three-month senior citizens 153 0.01 (6) 159 0.01 (34) 193 0.02
3-month.................... 3,082 0.30 194 2,888 0.28 (1,120) 4,008 0.42
6-month.................... 51,450 4.96 (406) 51,856 4.96 (3,828) 55,684 5.88
9-month.................... 9,954 0.96 (357) 10,311 0.99 (9,887) 20,198 2.13
11-month................... -- -- -- -- -- -- -- --
1-year..................... 214,005 20.61 41,886 172,119 16.47 (43,791) 215,910 22.80
13-month................... -- -- -- -- -- (199) 199 0.02
14-month................... -- -- -- -- -- (99) 99 0.01
15-month................... -- -- -- -- -- (13,548) 13,548 1.43
18-month................... 157,868 15.21 (64,394) 222,262 21.27 73,186 149,076 15.74
21 month................... 10,102 0.97 (5,680) 15,782 1.51 15,782 -- --
2-year..................... 102,041 9.83 27,971 74,070 7.09 6,382 67,688 7.15
30-month................... 50,844 4.90 12,746 38,098 3.65 4,890 33,208 3.51
3-year and over............ 115,597 11.13 (7,693) 123,290 11.80 13,008 110,282 11.64
Jumbo certificates......... 76,758 7.39 (15,059) 91,817 8.79 35,365 56,452 5.96
Other...................... 2,380 0.24 (584) 2,964 0.28 (450) 3,414 0.36
---------- ------ -------- ---------- ------ -------- -------- ------
Total certificates of
deposit................. 799,218 76.99 (11,618) 810,836 77.60 72,121 738,715 78.00
---------- ------ -------- ---------- ------ -------- -------- ------
Total.................... $1,038,176 100.00% $ (6,705) $1,044,881 100.00% $ 97,812 $947,069 100.00%
========== ====== ======== ========== ====== ======== ======== ======
</TABLE>
24
<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,
-------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
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................. $ 47,367 2.39% $ 51,417 2.49% $ 49,246 2.48%
NOW....................... 77,904 1.94 82,175 2.35 55,350 1.76
Money market.............. 108,671 4.41 96,157 4.35 88,034 4.39
Certificates of deposit... 809,340 5.61 818,438 5.63 682,640 5.61
---------- ---------- --------
Total deposits........ $1,043,282 5.06% $1,048,187 5.10% $875,270 5.07%
========== ========== ========
</TABLE>
The following table sets forth the Company's time deposits classified by
rates as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
2 - 3.99%... $ 2,185 $ 167 $ 385
4 - 5.99%... 703,813 697,045 622,173
6 - 7.99%... 93,220 113,483 115,905
8 - 9.99%... -- 141 252
-------- -------- --------
$799,218 $810,836 $738,715
========= ======== ========
</TABLE>
The following table sets forth the amount and maturities of the Company's
time deposits in specified interest rate categories at December 31, 1998.
<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%.... $ 133 $ -- $ -- $ -- $ 133
3 - 3.99%.... 2,052 -- -- -- 2,052
4 - 4.99%.... 90,215 23,898 3,498 586 118,197
5 - 5.99%.... 390,857 153,693 29,806 11,260 585,616
6 - 6.99%.... 32,213 33,979 1,507 8,346 76,045
7 - 7.99%.... 3,771 12,325 -- 1,079 17,175
-------- -------- -------- ------- --------
$519,241 $223,895 $ 34,811 $21,271 $799,218
======== ======== ======== ======= ========
</TABLE>
25
<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,
1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
---------------- ------------
(In thousands)
<S> <C>
Three months or less............ $ 12,450
Over three through six months... 19,909
Over six through 12 months...... 34,772
Over 12 months.................. 33,283
--------
Total........................ $100,414
========
</TABLE>
The following table sets forth the Company's deposit activities for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
(In thousands)
Deposits............................................... $1,071,243 $1,003,419 $794,822
Withdrawals............................................ 1,117,196 1,046,835 815,763
---------- ---------- --------
Net withdrawals....................................... (45,953) (43,416) (20,941)
Sale of branch deposits................................ -- (3,217) --
Deposits purchased in acquisitions, net of
purchase accounting adjustments....................... -- 104,876 64,740
Amortization of purchase accounting market valuation... 129 129 129
Interest credited on deposits.......................... 39,119 39,440 32,963
---------- ---------- --------
Net increase (decrease) in deposits................... $ (6,705) $ 97,812 $ 76,891
========== ========== ========
</TABLE>
Borrowings. Savings deposits historically have been the primary source of
funds for Jefferson Heritage's lending, investments and general operating
activities. Jefferson Heritage is authorized, however, to use advances from the
FHLBs to supplement its investing activities and generally chooses between
savings deposits and borrowings, depending on their relative costs, when funding
its investing activities. The FHLBs function as central reserve banks providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB System, Jefferson Heritage is required to own stock in
the FHLBs in which it is a member and is 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 Jefferson Heritage's stock in the FHLBs and a portion of its mortgage-backed
securities and mortgage loan portfolio.
At December 31, 1998, the Company had $206.9 million in FHLB advances and
lines of credit outstanding. Certain FHLB advances are subject to calls without
prepayment penalties at dates earlier than the actual maturity dates. Additional
borrowings of $2.6 million were outstanding on a note from a commercial bank to
the Company. The proceeds from this latter borrowing were used to fund the
acquisition of additional shares by the Employee Stock Ownership Plan.
26
<PAGE>
The following table sets forth certain information regarding the Company's
short-term borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
--------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Amounts outstanding at period end:
FHLB advances............................................... $199,321 $48,079 $ 66,761
Other short-term borrowings................................. 7,595 14,791 27,490
Commercial bank debt........................................ 2,599 3,039 3,430
Weighted average rate paid at period end:
FHLB advances............................................... 4.94% 6.01% 5.98%
Other short-term borrowings................................. 4.88 6.25 6.11
Commercial bank debt........................................ 7.65 8.90 9.15
Maximum amount of borrowings outstanding at any month end:
FHLB advances............................................... $199,321 $96,650 $150,500
Other short-term borrowings................................. 7,600 20,900 29,200
Commercial bank debt........................................ 3,039 3,430 3,779
Approximate average amounts outstanding during period:
FHLB advances............................................... $ 84,038 $67,749 $116,846
Other short-term borrowings................................. 1,823 9,338 17,408
Commercial bank debt........................................ 2,799 3,210 3,575
Approximate weighted average rate paid during period (1):
FHLB advances............................................... 5.26% 6.05% 5.89%
Other short-term borrowings................................. 5.67 4.24 4.68
Commercial bank debt........................................ 7.68 7.77 7.63
- --------------------
</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
Jefferson Heritage conducts certain of its activities through "service
corporation" subsidiaries. Federal associations like Jefferson Heritage
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, 1998, the net book value of Jefferson Heritage's investment in and loans to
its service corporations was $134.7 million. Operations of the subsidiaries
accounted for $3.7 million, or 49.2% of consolidated total income for the year
ended December 31, 1998.
Jefferson Heritage's three subsidiaries are described below.
J.S. Services, Inc.'s 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.
27
<PAGE>
Jefferson Financial Corporation is an investment subsidiary formed under
the Texas Business Corporation Act on October 12, 1995 to own and manage
Jefferson Heritage'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.
First Service Corporation, Inc. was originally established to develop,
build and service real estate projects in the Longview, Texas 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.
Jefferson Heritage is 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 Jefferson Heritage are currently permissible for national banks. See
"Regulation of Jefferson Heritage -- Regulatory Capital Requirements."
Competition
The Company faces strong competition both in originating real estate and
other loans and in attracting deposits. The Company competes for real estate and
other loans principally on the basis of interest rates and the loan fees it
charges, the types of loans it originates and the quality of services it
provides to borrowers. Its primary competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers making loans secured by real estate located in the Company's market
areas. Commercial banks, credit unions, and finance companies provide vigorous
competition in consumer lending.
The Company attracts all its deposits through its branch offices primarily
from the communities in which those branch offices are located. Consequently,
competition for deposits is principally from other savings institutions,
commercial banks, credit unions and brokers in these communities. The Company
competes for deposits and loans by offering a variety of deposit accounts at
competitive rates, a wide array of loan products, convenient business hours and
branch locations, a commitment to outstanding customer service and a well-
trained staff. In addition, the Company believes it has developed strong
relationships with local businesses, realtors, and the public in general.
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, Rockwell, 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, 1998, the Company and its subsidiaries had 266 full-time
and 45 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 a subsidiary of a savings and loan holding company,
Jefferson Heritage is subject to certain restrictions in its dealings with the
Company and affiliates thereof.
28
<PAGE>
The Company is required to file certain reports with, and otherwise comply with
the rules and regulations of the SEC under the federal securities laws.
Activities Restrictions. Upon consummation of the merger, the Company
became a unitary savings and loan 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 Jefferson Heritage -- Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings association,
other than through merger or other business combination with Jefferson Heritage,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidi aries (other than
Jefferson Heritage or other subsidiary savings institutions) would thereafter be
subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings institution
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,
upon prior notice to, and no objection by the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies; or (vii) those activities authorized by the
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.
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).
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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.
Regulation of Jefferson Heritage
General. Jefferson Heritage is 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 Jefferson Heritage must comply with various federal regulatory requirements.
The FDIC also has the authority to conduct special examinations of Jefferson
Heritage because its deposits are insured by the SAIF. Jefferson Heritage must
file reports with these agencies describing its activities and financial
condition. Jefferson Heritage is 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 else where herein.
Regulatory Capital Requirements. Under OTS capital standards, savings
associations must maintain "tangible" capital equal to not less than 1.5% of
adjusted total assets, "Tier 1" or "core" capital equal to 4.0% of adjusted
total assets (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system) 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 and core capital
are 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." Tier 1 and core capital are 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 and
nonmortgage 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 investments in any unconsolidated includable
subsidiary in which the savings association has a minority interest and, for
purposes of the core capital requirement, qualifying supervisory goodwill.
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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, 1998, Jefferson Heritage had $607,000 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 on-balance-sheet 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, cash and securities
backed by the full faith and credit of the U.S. government are given a 0% risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC, are assigned a 20% risk weight. Single-family
first mortgages not more than 90 days past due with loan-to-value ratios not
exceeding 80%, multi-family first mortgages not more than 90 days past due with
loan-to-value ratios not exceeding 80% (75% if rate is adjustable), annual net
operating income equal to not less than 120% of debt service (115% if rate is
adjustable), and certain qualifying loans for the construction of one- to four-
family residences pre-sold to home purchasers are assigned a risk weight of 50%.
Consumer loans, non-qualifying residential construction loans and commercial
real estate loans, repossessed assets and assets more than 90 days past due, as
well as all other assets not specifically categorized, are assigned a risk
weight of 100%. The portion of equity investments not deducted from core or
supplementary capital is assigned a 100% risk-weight.
The OTS risk-based capital regulations have been amended to require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is
measured in terms of the sensitivity of its "net portfolio value" to changes in
interest rates. Net portfolio value is defined, generally, as the present value
of expected cash inflows from existing assets and off-balance sheet contracts
less the present value of expected cash outflows from existing liabilities. A
savings institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent 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.
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The table below presents Jefferson Heritage's capital position relative to
the minimum requirements under the OTS regulatory capital regulations as in
effect at December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
-------- ------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital....................................... $92,448 6.79%
Tangible capital requirement........................... 20,414 1.50
------- -----
Excess................................................. $72,034 5.29%
======= =====
Tier 1/core capital.................................... $92,448 6.79%
Core capital requirement............................... 40,827 3.00
------- -----
Excess................................................. $51,621 3.79%
======= =====
Total capital (i.e., core and supplementary capital)... $98,456 11.34%
Risk-based capital requirement......................... 69,470 8.00
------- -----
Excess................................................. $28,986 3.34%
======= =====
- ------------------------
</TABLE>
(1) Based upon adjusted total assets for purposes of the tangible and Tier
1/core capital requirements, and risk-weighted assets for purposes of the
risk-based capital requirement.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association. Such
circumstances would include a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk and certain risks
arising from non-traditional activities. The Director of OTS may treat the
failure of any savings association to maintain capital at or above such level as
an unsafe or unsound practice and may issue a directive requiring any savings
association which fails to maintain capital at or above the minimum level
required by the Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date 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
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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 specified time periods.
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 CAMELS
rating category. For information regarding the position of Jefferson Heritage
with respect to the FDICIA prompt corrective action rules, see Note 3 of Notes
to Consolidated Financial Statements included under Item 8 hereof.
Qualified Thrift Lender Test. A savings association that does not meet the
QTL Test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution are restricted to those of a national bank; (iii) the
institution will not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the institution will be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three years
from the date the institution ceases to be a Qualified Thrift Lender, it must
cease any activity, and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
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
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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, 1998, Jefferson Heritage was 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. Jefferson
Heritage is 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 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. Jefferson Heritage is 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, Jefferson Heritage is not
permitted to pay dividends on its capital stock if its regulatory capital would
thereby be reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of Jefferson Heritage at the
time of its conversion to stock form and the liquidation accounts assumed by
Jefferson Heritage as a result of acquisitions. The liquidation accounts assumed
by Jefferson Heritage did not materially affect the ability of Jefferson
Heritage to pay dividends.
Savings associations must submit notice to the OTS prior to making a
capital distribution (including cash dividends, stock repurchases and amounts
paid to stockholders of another institution in a cash merger) if (a) they would
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not be well capitalized after the distribution, (b) the distribution would
result in the retirement of any of the association's common or preferred stock
or debt counted as its regulatory capital, or (c) the association is a
subsidiary of a holding company. A savings association must make application to
the OTS to pay a capital distribution if (x) the association would not be
adequately capitalized following the distribution, (y) the association's total
distributions for the calendar year exceeds the association's net income for the
calendar year to date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate applicable law or
regulation or an agreement with or condition imposed by the OTS.
At December 31, 1998, Jefferson Heritage had an aggregate total of
approximately $14 million that was available for distribution to the Company as
dividends or other capital distributions without application to the OTS under
the foregoing regulations.
In addition to the foregoing, earnings of Jefferson Heritage 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 Jefferson Heritage on
the amount of earnings removed from the reserves for such distributions. See
"Taxation."
Deposit Insurance. Jefferson Heritage is 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.
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. Jefferson Heritage is 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 Jefferson
Heritage for the month of December 1998, were approximately 21% and 2%,
respectively.
Federal Home Loan Bank System. Jefferson Heritage is a member 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
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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. Jefferson Heritage was in compliance with this requirement with an
investment in FHLB of Des Moines stock at December 31, 1998, of $11.9 million.
The FHLB of Des Moines is 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 FHLB and its Board
of Directors. As of December 31, 1998, Jefferson Heritage had $162.4 million in
advances and other borrowings from the FHLB of Des Moines and $44.5 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 $46.5 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, 1998, Jefferson Heritage met its 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 Jefferson Heritage, 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
36
<PAGE>
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 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
Jefferson Heritage, are subject to a special financial institutions tax, based
on adjusted federal taxable income without regard to net operating loss
carryforwards, at the rate of 7% of income apportioned to Missouri. 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 Jefferson
Heritage 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, Jefferson
Heritage 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 Jefferson Heritage 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.
Jefferson Heritage is subject to an annual Texas franchise tax equal to the
greater of $2.50 per $1,000 of net taxable capital apportioned to Texas or $4.50
per $100 of net taxable earned surplus apportioned to Texas. Net taxable earned
surplus is Jefferson Heritage'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
- -------------------
Jefferson Heritage'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 $3.8 million and net book value of $1.4 million at December 31, 1998. The
nine offices comprise approximately 43,000 square feet, a total investment of
$6.5 million and a net book value of $3.1 million at December 31, 1998.
Jefferson Heritage's offices in Texas consist of a central office at 321 W.
Oak, Denton, Texas, 76201 and 20 additional offices located in north and
northeast Texas. The central office, built in 1957, has approximately 9,848
square feet, a total investment of $1.3 million and a net book value of $1.1
million at December 31, 1998. The 20 offices comprise approximately 87,000
square feet, a total investment of $6.7 million and a net book value of $4.9
million at December 31, 1998.
The net book value of the Company's investment in premises and equipment
totaled approximately $10.5 million at December 31, 1998. 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, 1998.
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 MarketSM under the symbol "JSBA." As of March
15, 1999, there were 10,067,882 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 Jefferson Heritage. For a discussion of
various regulatory restrictions on the payment of dividends by Jefferson
Heritage, see Item 1. Business -- Regulation of Jefferson Heritage -- Dividend
-----------------
Limitations.
The following table sets forth the high, low and closing sales prices for
the Common Stock as reported on the Nasdaq National MarketSM 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>
1998 1997
------------------------------------------- ------------------------------------------------
Dividends Dividends
Quarter Ended: High Low Close Declared High Low Close Declared
- ------------- ---- --- ----- --------- ---- --- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $ 30 1/4 $ 19 7/8 $ 30 1/4 $0.07 $ 15 1/4 $ 12 5/8 $ 14 1/4 $ 0.05
June 30 31 7/8 29 1/8 31 1/4 0.07 15 5/16 13 7/8 15 1/8 0.05
September 30 31 9/16 16 16 3/8 0.07 20 3/16 14 1/8 20 3/16 0.05
December 31 16 5/16 11 13 1/8 0.07 22 19 1/4 20 1/2 0.07
</TABLE>
38
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
<TABLE>
<CAPTION>
Financial Condition Data:
At December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Cash and investments........................... $ 185,366 $ 178,321 $ 125,176 $ 85,801 $ 50,207
Mortgage-backed securities..................... 32,364 85,480 95,203 232,883 209,777
Loans receivable, net.......................... 1,118,490 924,920 885,405 788,085 584,990
Excess cost over fair value of
net assets acquired........................... 22,141 23,849 19,746 14,496 --
Accrued income and other assets................ 25,099 25,485 22,549 21,664 15,607
---------- ---------- ---------- ---------- --------
Total assets................................. $1,383,460 $1,238,055 $1,148,079 $1,142,929 $860,581
========== ========== ========== ========== ========
Savings deposits............................... $1,038,177 $1,044,881 $ 947,069 $ 870,179 $511,936
Borrowed money................................. 209,516 65,908 97,682 174,962 261,960
Accrued expenses and other liabilities......... 11,928 11,006 13,409 17,537 13,946
---------- ---------- ---------- ---------- --------
Total liabilities............................ 1,259,621 1,121,795 1,058,160 1,062,678 787,842
Stockholders' equity........................... 123,839 116,260 89,919 80,251 72,739
---------- ---------- ---------- ---------- --------
Total liabilities and stockholders' equity... $1,383,460 $1,238,055 $1,148,079 $1,142,929 $860,581
========== ========== ========== ========== ========
Book value per common share (1)................ $13.13 $12.52 $11.17 $10.75 $9.35
========== ========== ========== ========== ========
- -------------
</TABLE>
(1) Book value per share computation excludes shares in the ESOP that have not
been allocated or committed to be released.
<TABLE>
<CAPTION>
Operating Data:
Year Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest and dividend income................... $91,737 $95,306 $81,690 $73,044 $44,991
Interest expense............................... 57,581 58,144 52,158 50,298 27,470
------- ------- ------- ------- -------
Net interest income.......................... 34,156 37,162 29,532 22,746 17,521
Provision for losses on loans.................. (1,200) 1,260 660 367 300
------- ------- ------- ------- -------
Net interest income after provision
for losses on loans......................... 35,356 35,902 28,872 22,379 17,221
------- ------- ------- ------- -------
Noninterest income:
Gain on sales of investment securities, net... -- 1,144 -- -- --
Gain (loss) on sales of mortgage-backed
securities, net.............................. 48 (583) (1,296) -- 158
Gain on sales of loans, net................... 1,858 575 374 227 265
Real estate operations, net................... 201 71 453 765 98
Other......................................... 2,246 2,306 1,587 1,490 904
------- ------- ------- ------- -------
Total noninterest income..................... 4,353 3,513 1,118 2,482 1,425
------- ------- ------- ------- -------
Noninterest expense:
General and administrative expense............ 24,276 21,103 18,570 14,451 10,012
SAIF special assessment....................... -- -- 5,599 -- --
Amortization of excess cost over
fair value of net assets acquired............ 1,809 1,711 1,023 504 --
------- ------- ------- ------- -------
Total noninterest expense.................... 26,085 22,814 25,192 14,955 10,012
------- ------- ------- ------- -------
Income before income taxes................... 13,624 16,601 4,798 9,906 8,634
Income tax expense............................. 6,039 6,370 1,982 3,536 3,272
------- ------- ------- ------- -------
Net income................................... $ 7,585 $10,231 $ 2,816 $ 6,370 $ 5,362
======= ======= ======= ======= =======
Earnings per share, basic...................... $ 0.81 $1.13 $0.37 $0.84 $0.69
Earnings per share, diluted.................... 0.78 1.08 0.35 0.80 0.66
======= ======= ======= ======= =======
Dividends per share $ 0.28 $0.22 $0.16 $ -- $ --
======= ======= ======= ======= =======
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Key Operating Ratios:
Year Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average assets................. 0.60% 0.81% 0.25% 0.61% 0.73%
Return on average equity................. 6.28 9.49 3.43 8.28 7.41
Average equity to average assets......... 9.49 8.58 7.37 7.37 9.84
Stockholders' equity to total assets
(end of period)........................ 8.95 9.39 7.83 7.02 8.45
Dividend payout ratio.................... 34.57 19.47 43.24 -- --
Net interest margin...................... 2.81 3.10 2.75 2.24 2.43
Interest rate spread..................... 2.47 2.80 2.45 1.89 2.01
Average interest-earning assets to
average interest-bearing liabilities... 107.21 106.17 106.14 107.31 110.92
Noninterest expense to average assets.... 2.05 1.82 2.26 1.43 1.36
Allowance for loan losses to
net loans (end of period).............. 0.60 0.88 0.74 0.65 0.59
Nonperforming assets, net to total
assets (end of period)................. 0.56 0.79 0.53 0.59 0.33
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
General
The principal business of the Company is the origination of permanent and
construction loans secured by single-family residential properties. The Company
also originates loans secured by commercial real estate and, on a smaller scale,
consumer loans. The Company additionally maintains substantial portfolios of
investment and mortgage-backed securities. These investing activities are
funded primarily by the solicitation of deposits from the general public through
its branches and, to a lesser extent, by borrowings from the Federal Home Loan
Banks.
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. In addition, net income is affected by the level
of loan loss provisions and operating expenses.
The operations of the Company, and the banking 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, 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.
40
<PAGE>
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements, including such statement with respect to
Year 2000 readiness, to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
Business Combinations
During the past several years, the Company has built a franchise in the
State of Texas through acquisitions. The Company initially acquired three thrift
institutions with combined assets of $381 million during 1995. Upon completion
of the acquisitions, the institutions were consolidated under a single federal
charter and operated under the common name of First Federal Savings Bank of
North Texas ("First Federal").
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. 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 Company acquired L&B Financial, Inc. in Sulphur Springs, Texas ("L&B
Financial") on February 28, 1997 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 acquisitions of Texas Heritage and L&B Financial were both accounted
for using the purchase method of accounting. Under the purchase method of
accounting, the results of operations of Texas Heritage and L&B Financial are
included in the Company's results of operations from the dates of their
acquisitions. The excess of cost over fair value of assets acquired was $6.3
million in the case of Texas Heritage and $5.9 million in the case of L&B
Financial. Both Texas Heritage and L&B Financial were merged into First Federal
upon the completion of their acquisitions.
During 1997, the Company shifted its focus from expansion thorough
acquisitions to integration of its Texas operations. On September 25, 1997,
First Federal entered into a supervisory agreement with the Office of Thrift
Supervision ("OTS"), its primary regulator, in which it agreed to take
corrective actions with respect to certain matters primarily related to its
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 made to
any one borrower. Following a subsequent examination, the supervisory agreement
was terminated on May 18, 1998.
Changes in Texas banking laws removed the necessity for the Company to
operate two separate charters. Effective December 31, 1998, the Company merged
First Federal into its principal subsidiary Jefferson Savings and Loan
Association, F.A. ("Jefferson Savings"), resulting in a combined 29 branch
network in two states. The merger resulted in a stronger capital base, more
flexibility in the deployment of capital between Missouri and Texas, efficiency
in administration and certain anticipated tax advantages. Reflecting the
Company's emphasis on developing a retail banking culture, Jefferson Savings
subsequently changed its name to Jefferson Heritage Bank ("Jefferson Heritage")
on January 20, 1999.
Financial Condition
The Company's primary strategy is to continue building its core retail
banking business, which is the origination of loans funded by savings deposits.
During 1998, the entire banking industry continued to experience high levels of
loan refinancings. As a result, principal repayments on the Company's loans
outpaced the demand for the Company's adjustable-rate loan products. The
Company sought to supplement loan production with loan purchases. Net loans
receivable increased $193.6 million, or 20.9%, from $924.9 million at December
31, 1997 to $1,118.5 million at December 31, 1998. Loan origination activity in
1998 continued to be strong, totaling $379.0 million compared to
41
<PAGE>
$377.9 million in 1997. However, principal repayments experienced a 15% increase
during 1998, totaling $472.0 million compared to $409.4 million during 1997.
Loan purchases totaled $406.1 million during the year ended December 31, 1998,
compared to $49.5 million during 1997.
The Company supplements asset growth with the purchase of investment and
mortgage-backed securities. It chooses between these two types of investments
depending on the instruments' interest rate risk characteristics and the yields
available in the market. During 1998, the Company shifted its emphasis
primarily to securities issued by agencies of the U.S. Government. Mortgage-
backed securities decreased $53.1 million, or 62.1%, from $85.5 million at
December 31, 1997 to $32.4 million at December 31, 1998. Investment securities,
interest-bearing deposits and federal funds sold increased $13.4 million, or
8.7%, from $152.5 million at December 31, 1997 to $165.9 million at December 31,
1998.
The Company has substantial borrowing capacity with the Federal Home Loan
Bank ("FHLB") of Des Moines and generally chooses between savings deposits and
borrowings, depending on their relative costs, when funding its investing
activities. Deposits decreased $6.7 million, or 0.6%, from $1,044.9 million at
December 31, 1997 to $1,038.2 million at December 31, 1998. During fiscal year
1998, approximately $39.1 million of interest was credited to accounts.
Borrowed money increased $143.6 million, or 217.9%, from $65.9 million at
December 31, 1997 to $209.5 million at December 31, 1998. The growth in
borrowed money generally resulted from the funding of loan purchases in the last
half of 1998.
Stockholders' equity increased by $7.6 million, or 6.5%, during 1998 to
$123.8 million at December 31, 1998. Contributing to the growth in stockholders'
equity were net income of $7.6 million, the amortization of stock awards under
the Company's Employee Stock Ownership Plan ("ESOP") and Management Recognition
Plans ("MRPs"), and the exercise of stock options. These increases in
stockholders' equity were partially offset by the payment of $2.6 million in
dividends on the Company's common stock and the repurchase of 157,200 shares of
common stock in the open market for $2.4 million. The Company's board of
directors approved, on September 3, 1998, the repurchase of up to 300,000 shares
of its common stock in the open market. Stockholders' equity as a percentage of
assets decreased to 8.95% at December 31, 1998, compared to 9.39% at December
31, 1997 consistent with management's plan to better leverage stockholders'
equity.
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.
42
<PAGE>
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,
-------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ----------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------- -------- ------ ----------- -------- ------ ------ -------- ----
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable............ $ 956,637 $ 75,314 7.87% $ 943,041 $ 78,665 8.34% $ 805,575 $ 64,911 8.06%
Mortgage-backed securities.. 51,009 3,088 6.05 97,602 5,979 6.13 176,145 10,858 6.16
Investment securities....... 169,356 11,024 6.51 114,827 8,198 7.14 63,631 4,280 6.73
Other interest-earning
assets..................... 37,496 2,311 6.16 42,719 2,464 5.77 30,091 1,641 5.45
Total interest-earning ---------- --------- ---------- -------- ----------- ---------
assets............. 1,214,498 91,737 7.55 1,198,189 95,306 7.95 1,075,442 81,690 7.60
--------- ------ ---------
Noninterest-earning assets..... 58,013 57,961 38,437
---------- ---------- -----------
Total assets.......... $1,272,511 $1,256,150 $ 1,113,879
========== ========== ===========
Interest-bearing liabilities:
Savings deposits:
Passbook and statement
savings, NOW, and money
market accounts......... $ 233,942 $ 7,443 3.18 $ 229,750 $ 7,396 3.22 $ 192,630 $ 6,063 3.15
Certificates of deposit.. 809,340 45,427 5.61 818,437 46,058 5.63 682,640 38,303 5.61
------------ ------- ------------ ------- ----------- ---------
Total savings deposits 1,043,282 52,870 5.07 1,048,187 53,454 5.10 875,270 44,366 5.07
Borrowed money.............. 89,545 4,711 5.26 80,422 4,690 5.83 137,986 7,792 5.65
---------- ------- ------------ ------- ----------- ---------
Total interest-bearing
liabilities........ 1,132,827 57,581 5.08 1,128,609 58,144 5.15 1,013,256 52,158 5.15
------- ------- ---------
Noninterest-bearing liabilities 18,866 19,716 18,507
---------- ------------ -------------
Total liabilities..... 1,151,693 1,148,325 1,031,763
Stockholders' equity........... 120,818 107,825 82,116
---------- ------------ -------------
Total liabilities and
stockholders' equity. $ 1,272,511 $ 1,256,150 $ 1,113,879
============ ============ =============
Net interest income............ $34,156 $ 37,162 $ 29,532
======= ======== =========
Interest rate spread........... 2.47% 2.80% 2.45%
===== ===== =====
Net interest margin............ 2.81% 3.10% 2.75%
===== ===== =====
Ratio of average interest
-earning assets to average
interest-bearing
liabilities......... 107.21% 106.17% 106.14%
======= ======= =======
</TABLE>
43
<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,
--------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------------ -----------------------------
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 ........................ $ 1,123 $(4,474) $(3,351) $11,427 $2,327 $13,754
Mortgage-backed securities............... (2,814) (77) (2,891) (4,826) (53) (4,879)
Investment securities.................... 3,603 (777) (2,826) 3,642 276 3,918
Other interest-earning assets ........... (313) 160 (153) 722 101 823
------- ------- ------- ------- ------ -------
Total interest and dividend
income...................... 1,599 (5,168) (3,569) 10,965 2,651 13,616
------- ------- ------- ------- ------ -------
Interest expense:
Savings deposits:
Passbook and statement savings,
NOW, and money market accounts .... 137 (90) 47 1,195 138 1,333
Certificates of deposit .............. (478) (153) (631) 7,618 137 7,755
------- ------- ------- ------- ------ -------
Total savings deposits ......... (341) (243) (584) 8,813 275 9,088
Borrowed money .......................... 504 (483) 21 (3,343) 241 (3,102)
------- ------- ------- ------- ------ -------
Total interest expense.......... 163 (726) (563) 5,470 516 5,986
------- ------- ------- ------- ------ -------
Change in net interest income... $ 1,436 $(4,442) $(3,006) $ 5,495 $2,135 $ 7,630
======= ======= ======= ======= ====== =======
</TABLE>
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Net Income. Net income for the year ended December 31, 1998 was $7.6
million compared to $10.2 million for the year ended December 31, 1997. Return
on average stockholders' equity and return on average assets were 6.28% and
.60%, respectively, for the year ended December 31, 1998 compared to 9.49% and
.81%, respectively, for the year ended December 31, 1997. Basic and diluted
earnings per share for the year ended December 31, 1998 were $.81 and $.78,
respectively, compared to $1.13 and $1.08, respectively for 1997.
Net Interest Income. Net interest income decreased $3.0 million, or 8.1%,
from $37.2 million for the year ended December 31, 1997, to $34.2 million for
the year ended December 31, 1998. The decrease was due to a decrease in the
Company's interest rate spread from 2.80% during 1997 to 2.47% during 1998
partially offset by an increase in the average balance of interest-earning
assets from $1.198 billion for the year ended December 31, 1997 to $1.215
billion for the year ended December 31, 1998. The decrease in the Company's
interest rate spread was primarily due to a decrease in the average yield on
loans receivable. The improvement in the average balance of interest-earning
assets was primarily the result of growth in the average balance of loans
receivable.
Interest and Dividend Income. Total interest and dividend income decreased
from $95.3 million for the year ended December 31, 1997 to $91.7 million for the
year ended December 31, 1998. The decrease resulted from the decrease in the
average yield on interest-earning assets from 7.95% for the year ended December
31, 1997 to 7.55% for the year ended December 31, 1998 partially offset by a
$16.3 million, or 1.4%, increase in the average volume of interest-earning
assets.
44
<PAGE>
Interest income on loans receivable decreased $3.4 million, or 4.3%. The
decrease in interest income from loans receivable is attributable to a decrease
in the average yield on the loan portfolio from 8.34% during the year ended
December 31, 1997 to 7.87% during the year ended December 31, 1998 partially
offset by a $13.6 million increase in the average balance of loans receivable
during the year ended December 31, 1998. Refinancings continued to erode the
Company's higher yielding loans resulting in a shift in the Company's loan
portfolio into lower margin loans. The Company invests in adjustable-rate loans
to limit its exposure to interest rate risk and its ongoing strategy continues
to focus on rebuilding the adjustable-rate loan portfolio and on enhancing its
interest rate margin through other areas of lending. In order to be competitive
with fixed-rate loans in a low interest rate environment, however, adjustable
rate loan products must be priced at a narrower spread over the Company's cost
of funds during the first year after origination resulting in additional
pressure on the Company's net interest margin.
Interest income on mortgage-backed securities decreased $2.9 million, or
48.3%. Nearly all of the decrease was attributable to the $46.6 million decrease
in the average balance of mortgage-backed securities as management shifted the
proceeds from sales and repayments into loans receivable and investment
securities. Interest income on investment securities increased $2.8 million, or
34.5%. The increase was due to a $54.5 million increase in the average balance
outstanding partially offset by a decrease in the average yield on the
investment portfolio from 7.14% during the year ended December 31, 1997 to 6.51%
during the year ended December 31, 1998. The decrease in the average yield on
the investment portfolio was due to a decline in market interest rates between
the periods.
Interest Expense. Total interest expense decreased $563,000, or 1.0%, from
$58.1 million for the year ended December 31, 1997 to $57.6 million for the year
ended December 31, 1997 due to decrease in interest expense on savings deposits
which was partially offset by an increase in interest expense on borrowed money.
Interest expense on savings deposits decreased $584,000 from $53.5 million for
the year ended December 31, 1997 to $52.9 million for the year ended December
31, 1998. This decrease was the result of a $4.9 million decrease in the
average balance of savings deposits and a decrease in the average cost of
deposits from 5.10% during 1997 to 5.07% during 1998. Interest expense on
borrowed money increased $22,000 for the year ended December 31, 1998 due to a
$9.1 million increase in the average balance partially offset by a decrease in
the average cost of borrowed money from 5.83% for the year ended December 31,
1997 to 5.26% for the year ended December 31, 1998. The bulk of the Company's
new borrowings was made late in 1998 at rates lower than those on existing
borrowings resulting in a decline in the average cost of borrowed money and only
a small increase in the average balance.
Provision for Losses on Loans. The Company recaptured $1.2 million of loan
loss reserves during the year ended December 31, 1998 by recording a credit to
the provision for losses on loans. The provision for losses on loans for the
year ended December 31, 1997 totaled $1,260,000. The OTS, after a 1997
examination, had required the Company's Texas subsidiary, First Federal, to base
its loan loss reserves on certain thrift industry average loss experiences that
were significantly higher than the actual loss experience of First Federal. As
a result of the 1998 OTS examination, the OTS removed these requirements, and
the Company, like other financial institutions, can now maintain its allowance
for loan losses at an amount considered adequate to provide for potential losses
in its loan portfolio. The allowance for losses on loans is maintained at a
level considered adequate to absorb potential loan losses determined on the
basis of management's continuing review and evaluation of the loan portfolio and
its judgement as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experiences
and trends, changes in the composition of the loan portfolio, the current volume
and condition of loans outstanding and the probability of collecting all amounts
due. Loan charge-offs for the year ended December 31, 1998 were $332,000, or
.03% of average loans outstanding, compared to $781,000, or .08% of average
loans outstanding during the year ended December 31, 1997. The allowance for
losses on loans was $6.7 million, or .60% of net loans, at December 31, 1998
compared to $8.2 million, or .88%, at December 31, 1997. Nonaccruing loans were
$3.7 million, or .33 % of net loans, at December 31, 1998 compared to $5.4
million, or .58% of net loans, at December 31, 1997. The ratio of nonperforming
assets to total assets decreased, largely as the result of the decrease in
nonaccruing loans, from .79% at December 31, 1997 to .56% at December 31, 1998.
Management believes the allowance for loan losses is adequate at December 31,
1998.
Noninterest Income. Total noninterest income for the year ended December
31, 1998 increased $841,000, or 23.9%, to $4.4 million compared to $3.5 million
for the year ended December 31, 1997. Gain on sales of loans
45
<PAGE>
increased $1.3 million from $575,000 for 1997 to $1.9 million for 1998 due to an
increase in loan sales from $45.2 million in 1997 to $119.4 million in 1998. The
increase in loan sales reflects the decline in interest rates on home mortgages
which increased demand for fixed rate mortgage loans which the Company
originates for resale in the secondary market. The gains on sales of loans
represent origination and other fees retained by the Company in connection with
the sales of long-term, fixed-rate loans to institutional investors generally on
an individual loan basis. The Company generally does not hold this type of loan
in its portfolio due to its interest rate characteristics. Additionally, the
Company sells loans out of portfolio when loans convert from adjustable rate to
fixed rate loans.
Combined net gains on sales investment and mortgage-backed securities
declined $513,000 during 1998 due to a decrease in sales activity. 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
combined net gain of $561,000. During 1998, the Company sold no investment
securities and $45.3 million in available-for-sale mortgage-backed securities,
resulting in a net gain on sale of mortgage-backed securities of $48,000.
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 during 1997 to strengthen the interest rate risk profile of its
balance sheet.
Real estate operations increased $130,000, or 182.4%, from $71,000 for the
year ended December 31, 1997 to $201,000 for the year ended December 31, 1998
primarily due to $180,000 in provisions for losses on real estate acquired
through foreclosure recorded during 1997. Servicing and other loan fees
increased $102,000, or 12.97%, from $790,000 for the year ended December 31,
1997 to $892,000 for the year ended December 31, 1998 primarily as the result of
an increase in the average balance of loans serviced during 1998. Other
noninterest income decreased $161,000, or 33.5%, from $480,000 for the year
ended December 31, 1997 to $319,000 for the year ended December 31, 1998. The
Company recorded a $186,000 gain on the sale of a branch during 1997. No such
sales occurred during 1998.
Noninterest Expense. Total noninterest expense increased $3.3 million, or
14.3%, from $22.8 million for the year ended December 31, 1997 to $26.1 million
for the year ended December 31, 1998. Compensation and employee benefits
increased $1.8 million, or 15.4%, from $11.6 million for the year ended December
31, 1997 to $13.4 million for the year ended December 31, 1998. A large part of
this increase was due to increased expenses associated with the Company's
employee stock ownership plan ("ESOP") which increased $927,000, or 38.6%, from
$2.4 million during 1997 to $3.3 million during 1998. Employee benefit expense
associated with the Company's ESOP is based on the average market value of the
Company's common stock, which increased approximately 39% during 1998 compared
to 1997. In addition, the Company recorded a $251,000 charge to earnings during
the second quarter of 1998 in connection with a change in the method of
allocating benefits under the ESOP. Since the inception of the ESOP in 1993,
terminated employees who were participants were only allocated ESOP shares for
the year of termination if they were employed by the Company on the last day of
the year. Such participants should have been allocated shares for the year of
termination if they met certain hours-of-service requirements during that year.
The remainder of the increase was due to normal salary increases and the hiring
of additional staff to implement the Company's retail banking strategy.
Compensation expense for 1997 was also reduced by the reversal of a $439,000
accrual for prior-year bonuses which the Board determined not to pay in view of
declines in the market price of the Company's stock.
Occupancy expense increased $524,000 from $2.8 million for the year ended
December 31, 1997 to $3.3 million for the year ended December 31, 1998 primarily
due to additional depreciation expense resulting from the purchase of additional
premises and equipment and increases in rent expense and real estate taxes.
Other noninterest expense increased $437,000, or 11.3%, from $3.9 million for
the year ended December 31, 1997 to $4.3 million for the year ended December 31,
1998 primarily as the result of the inclusion of twelve full months of operating
expense in 1998 associated with the operation of L&B Financial, which the
Company purchased on February 28, 1997, expenses incurred in connection with the
expansion of the loan quality control function, and management's decision to
provide full-time security guards in certain offices. Legal, examination, and
other professional fees increased $326,000, or 22.8%, from $1.4 million for the
year ended December 31, 1997 to $1.8 million for the year ended December 31,
1998 due to increased legal expenses associated with acquisition activities and
the operation of the Company's ESOP. Federal insurance premiums increased
$103,000 primarily due to the inclusion of twelve full months of expense during
the year ended December 31, 1998 associated with the deposits acquired from L&B
Financial.
46
<PAGE>
Income Tax Expense. The Company provides for state and federal income tax
expense based upon income before income taxes. The effective tax rate for 1998
was 44.3% compared to 38.4% for 1997. The effective tax rates for 1998 and 1997
differ from the statutory tax rate of 35.0% primarily due to the
nondeductability of the amortization of excess cost over fair values of net
assets acquired and the excess of market value over cost of ESOP shares
amortized. 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, 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.
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 was attributable to a $137.5
million increase in the average balance of loans receivable during the year
47
<PAGE>
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, reduce
borrowed money, and reduce interest rate risk.
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 were 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 year ended December 31, 1996 to $53.5 million for the
year 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 were included in the average balance for all of 1997
and the deposits of L&B Financial were 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 year ended December 31,
1996 to $4.7 million for the year 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 .08% of
average loans outstanding, compared to $78,000, or .01% 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 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 consisted 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. The allowance for losses on loans is maintained at a
level considered adequate to absorb potential loan losses determined on the
basis of management's continuing review and evaluation of the loan portfolio and
its judgement as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experiences
and trends, changes in the composition of the loan portfolio, the current volume
and condition of loans outstanding and the probability of collecting all amounts
due.
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
48
<PAGE>
securities resulting in a combined net gain on sale of $561,000. 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 its interest rate risk profile. In addition, a portion
of the proceeds from the sales was used to repay borrowed money. During 1996,
the Company sold $147.5 million in available-for-sale mortgage-backed securities
at a net loss of $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. 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. Total 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 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.
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 effective tax rate for 1998 was 44.3%
compared to 38.4% for 1997. The effective tax rates for 1998 and 1997 differ
from the statutory tax rate of 35.0% primarily due to the nondeductability of
the amortization of excess cost over fair values of net assets acquired and the
excess of market value over cost of ESOP shares amortized. 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
49
<PAGE>
of the Company's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled.
Interest-Rate Risk Sensitivity
The primary component of the Company's net income is derived from the
spread between interest-earning asset yields and the cost of interest-bearing
liabilities. In a changing interest rate environment this spread can widen or
narrow depending on the relative repricing and maturities of interest-earning
assets and interest-bearing liabilities. A principal strategy of the Company
has been to achieve acceptable net interest margins while decreasing the
sensitivity of its earnings to interest rate fluctuations by matching more
closely the cash flows and effective maturities or repricings of its interest-
sensitive assets and liabilities. In implementing this strategy, the Company
has sought to increase the sensitivity of its assets to changing interest rates
by emphasizing the origination and/or purchase of adjustable-rate mortgage loans
and mortgage-backed securities with shorter terms and/or adjustable rates. The
Company also originates fixed-rate mortgage loans which are generally sold in
the secondary market. The Company actively manages the maturity and repricing
characteristics of its liabilities and has sought to limit the interest
sensitivity of its liabilities by emphasizing certificates of deposit with
maturities of one year or longer. The Company has utilized short-term
borrowings from Federal Home Loan Banks to fund loans and mortgage-backed
securities with adjustable interest rates or balloon features.
Interest rate risk at a given point in time can be represented by an
interest rate sensitivity position ("gap"). The following table sets forth the
amounts of interest-earning assets and interest-bearing liabilities outstanding
at December 31, 1998, 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.......................... $343,280 $437,830 $ 289,207 $48,173 $1,118,490
Mortgage-backed securities................ 7,338 8,335 1,710 14,981 32,364
Investment securities and other
interest-earning assets................. 92,449 60,209 15,077 10,028 177,763
-------- -------- --------- ------- ----------
Total interest-earning assets........ 443,067 506,374 305,994 73,182 1,328,617
-------- -------- --------- ------- ----------
Interest-bearing liabilities:
Savings deposits........................... 195,317 533,992 282,617 26,250 1,038,176
Borrowed money............................. 19,360 44,129 142,270 3,757 209,516
-------- -------- --------- ------- ----------
Total interest-bearing liabilities... 214,677 578,121 424,887 30,007 1,247,692
-------- -------- --------- ------- ----------
Interest sensitivity gap............. $228,390 $(71,747) $(118,893) $43,175 $ 80,925
======== ======== ========= ======= ==========
Cumulative interest
sensitivity gap.................... $228,390 $156,643 $ 37,750 $80,925
======== ======== ========= =======
Ratio of cumulative gap to
total assets....................... 16.51% 11.32% 2.73% 5.85%
======== ======== ========= =======
</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.
50
<PAGE>
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, 1998:
<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........................... $ 87,516 $(14,523) (14.2)% 6.49% (96)
+ 300........................... 96,358 (5,681) (5.6) 7.09 (36)
+ 200........................... 101,549 (490) (0.5) 7.44 (1)
+ 100........................... 104,301 2,262 2.2 7.61 16
Static.......................... 102,039 -- -- 7.45 --
- 100........................... 98,570 (3,469) (3.4) 7.20 (25)
- 200........................... 98,848 (3,191) (3.1) 7.20 (25)
- 300........................... 100,555 (1,484) (1.5) 7.29 (16)
- 400........................... 104,423 2,384 2.3 7.53 8
</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.
Liquidity and Capital Resources
The Company currently has no business other than that of Jefferson
Heritage. 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 Jefferson Heritage, or borrowings. Jefferson Heritage
is subject to certain regulatory limitations with respect to the payment of
dividends to the Company. At December 31, 1998, Jefferson Heritage had a total
of approximately $14 million available for the payment of additional dividends
to the Company under these regulations. Jefferson Heritage met all existing
regulatory capital requirements at December 31, 1998.
51
<PAGE>
Jefferson Heritage is 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
borrowings due within one year. Jefferson Heritage has consistently maintained
liquidity in excess of required amounts. Jefferson Heritage's liquidity ratio
was 18.42% at December 31, 1998. Jefferson Savings' and First Federal's
liquidity ratios were 19.54% and 23.42%, respectively, at December 31, 1997.
The Company's primary sources of funds are deposits, borrowings, proceeds
from principal and interest payments on loans and mortgage-backed securities,
proceeds from maturing investment securities and cash flows from operations.
Borrowings consist primarily of advances and lines of credit from the Federal
Home Loan Banks. While scheduled amortization of loans securities and mortgage-
backed securities and maturities of investment 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, 1998, 1997,
and 1996, cash and cash equivalents totaled $18.9 million, $31.6 million, and
$23.7 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, 1998, 1997, and 1996
are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income........................................... $ 7,585 $ 10,231 $ 2,816
Adjustments to reconcile net income to net cash
provided by operating activities.................... 5,720 1,566 (1,574)
--------- -------- --------
Net cash provided by operating activities.......... 13,305 11,797 1,242
Net cash provided by (used in) investing activities... (158,193) 42,488 69,979
Net cash provided by (used in) financing activities... 132,179 (46,407) (68,206)
--------- -------- --------
Net increase in cash and cash equivalents.......... (12,709) 7,878 3,015
Cash and cash equivalents at beginning of year........ 31,583 23,705 20,690
--------- -------- --------
Cash and cash equivalents at end of year........... $ 18,874 $ 31,583 $ 23,705
========= ======== ========
</TABLE>
The Company's operating activities continued to provide strong cash flows
during 1998. Although the primary source of cash continued to be net income, a
greater portion of operating cash flows were attributable to non-cash
adjustments for items such as depreciation and amortization expense which
increased by approximately $2.0 million from 1997 to 1998.
The primary investing activity of the Company is the origination and/or
purchase of mortgage loans. The Company also purchases investment and mortgage-
backed securities to supplement loan production. As the result of increased
loan purchases, investing activities were a significant user of cash during 1998
rather than being a provider of cash as they were in 1997 and 1996. During the
years ended December 31, 1998, 1997, and 1996, the Company originated loans in
the amounts of $379.0 million, $377.9 million, and $358.1 million, respectively.
Purchases of mortgage loans totaled $406.1 million, $49.5 million, and $9.1
million, respectively, in those same periods. Purchases of investment and
mortgage-backed securities totaled $185.2 million, $193.3 million, and $92.8
million, respectively, in those same periods.
52
<PAGE>
These activities were funded in part by principal payments on loans and
mortgage-backed securities and maturities of investment securities totaling
$640.0 million, $452.3 million, and $343.7 million during the years ended
December 31, 1998, 1997, and 1996, respectively. During 1997 and 1996, the
Company 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. Due to the increased volume
of its loan purchases, however, the Company had to fund a significant portion of
its investing activities from financing activities in 1998.
The primary financing activity of the Company is the attraction of savings
deposits supplemented by borrowings from the Federal Home Loan Bank. Savings
deposits decreased $6.8 million during the year ended December 31, 1998. During
the years ended December 31, 1997 and 1996, savings deposits increased $97.8
million, and $76.9 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 increased $143.6
million during the year ended December 31, 1998. By contrast, borrowed money
decreased $31.8 million and $77.3 million during the years ended December 31,
1997 and 1996, respectively. The Company's higher level of borrowings during
1998 turned its financing activities into a provider of cash flows in 1998
rather than a user of cash as they had been in 1997 and 1996.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1998 the Company had commitments
to originate loans of $36.4 million, and to purchase residential adjustable rate
mortgages of $6.3 million. Certificates of deposit which are scheduled to
mature in one year or less at December 31, 1998 totaled $519.2 million.
Management believes that a significant portion of such deposits will remain with
the Company.
Year 2000 Readiness Disclosure
The Company is subject to risks associated with the "Year 2000" issue, a
term which refers to uncertainties about the ability of various date processing
hardware and software systems to interpret dates correctly after the beginning
of the Year 2000. The Company began working on its Year 2000 plan in 1998 and
formed a Project Committee (Committee) that reports monthly to the board of
Directors. The Committee has formulated a Comprehensive Year 2000 Plan (Plan)
which follows guidelines outlined by the Federal Financial Institutions
Examination Council (FFIEC). The FFIEC requires all banks to develop a plan
that includes five phases relating to awareness, assessment, renovation,
validations and implementation. The Plan establishes a timetable and summarizes
each major phase of the project and the estimated costs to renovate and test
systems in preparation for the Year 2000.
The awareness phase included a Company-wide campaign to communicate the
problem and the potential ramifications to the organization. Concurrent with
this phase, the committee began the assessment phase, which included the
inventorying of systems that may be impacted. The business use of each
inventoried item was then analyzed and prioritized in varying degrees from
critical to non-critical, based upon the perceived adverse effect on the
financial condition of the Company in the event of a loss or interruption in the
use of each system. The renovation, validation and implementation phases
consist of testing the individual systems and replacing or reconfiguring systems
that are not Year 2000 compliant. The Company has completed the awareness and
assessment phases of the project.
The Company has identified its most critically important system as its on-
line account processing system which the Company maintains on its own mainframe
computer using third party vendor application software. The Company has
extensively tested the ability of the mainframe computer to handle the Year 2000
date change under a variety of circumstances and believes that its mainframe
hardware and software, as currently configured, will not be adversely affected
by the Year 2000 problem. The Company has identified various other less
critical internal data-processing and software systems that could potentially be
affected by the Year 2000 problem. These consist primarily of desk-top personal
computers and the word-processing and other software used on them. These
systems have been tested and have either been found to be Year 2000 ready or
replaced with systems that are Year 2000 ready. In the normal course of
business, the Company continually upgrades its computer systems and software.
These upgrades are tested as they are installed.
53
<PAGE>
To date, the primary expense involved in the implementation of the
Company's Year 2000 Plan has been management and staff time which the Company
estimates to have been approximately 2,500 hours through the end of 1998. To
the extent that any modifications to third party vendor software have been
required, these modifications have been made by the vendors without any direct
additional cost to the Company. The costs of equipment upgrades have either not
been material or involved equipment that had already reached the end of its
useful life and was due for replacement in any event.
As part of its Year 2000 Plan, the Company has been identifying and
assessing the Year 2000 risks posed by third parties including customers and
other entities whose operations may affect the Company's business. In this
regard, the Company has been working to increase the Year 2000 awareness of its
loan customers through mailings and other communications. The Company has
surveyed its larger commercial loan customers as to their Year 2000 readiness
and considers Year 2000 exposure in underwriting commercial loans. The majority
of the Company's loan customers, however, are either individuals or small
businesses which are not dependent on information technology in their day-to-day
operations and are therefore not considered to pose a direct Year 2000 risk.
Although the Company's loan customers may be collaterally affected by the Year
2000 problems of others (such as the failure of their employers to make timely
salary payments), the Company believes that its portfolio is sufficiently
diversified that such failures will not have a material impact on operations.
In its day-to-day operations, the Company also deals with a number of other
third parties whose Year 2000 readiness may affect the Company's operations.
These third parties include the FNMA and FHLMC to which it sells mortgage loans,
various mortgage banks from which it purchases mortgage loans, credit bureaus,
the FHLBs and a variety of other third parties. Pursuant to its Year 2000 Plan,
the Company has corresponded with each of these entities and received assurances
as to their Year 2000 readiness. When feasible, the Company has participated in
testing of all automated links to these entities. On the basis of these inquires
and testing, the Company does not believe that Year 2000 issues related to these
entities will have a material impact on the Company operations.
The Plan also includes provisions which address the Year 2000 compliance of
environmental systems, which include items such as security systems and heating
and air conditioning systems. No significant business risks have been revealed
regarding these types of systems. Additional investigating is scheduled for
first quarter 1999.
Concurrent with the development and execution of the Plan is the evolution
of the Company's year 2000 Contingent Plan (Contingency Plan). The Contingency
Plan addresses a wide variety of issues including: failure of a system during
Year 2000 testing, failure of electrical, telecommunications, or water systems,
failure of a system during the century date change and liquidity plan. Special
consideration has been given to the weekend of the century date change. The
Contingency Plan is intended to be a changing document based on the ongoing
results of the project and is updated on a regular basis.
The risks associated with the Year 2000 issue can be grouped into two
categories. The first is the risk that one or more of the Company's internal
systems will be adversely affected by the century date change. On the basis of
its testing and preparation, the Company believes that the risk of a failure in
a critical system is low. Accordingly, the Company believes that its primary
internal risk is a failure in a less critical environment that will not
materially disrupt operations.
The second risk category consists of external risks which are largely
outside of the Company's control. The Company would be most seriously affected
if Year 2000 failures of others caused basic services such as electrical power,
telecommunications or government agencies to be disrupted. Although the
preparation of such providers has been reviewed, there can be no assurance that
Year 2000 failures of third parties will not have a material adverse impact on
the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
54
<PAGE>
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Impact of New Accounting Standards
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. The Company adopted SFAS 130 on January
1, 1998 and displays comprehensive income in the consolidated statements of
stockholders' equity and comprehensive income.
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 a disclosure requirement only and there is no effect on the
Company's financial position or results of operations, see footnote 23 for
segment information.
Accounting for Derivative Instruments and Hedging Activities. The FASB
issued SFAS 133 which provides a comprehensive and consistent standard for the
recognition and measurement of derivative and hedging activities. The Company
has not yet determined the financial impact to its financial condition or
results of operations but plans to adopt SFAS 133 on January 1, 2000.
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.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Consolidated Financial Statements Page
- --------------------------------- ----
<S> <C>
Independent Auditors' Report 56
Consolidated Balance Sheets as of December 31, 1998 and 1997 57
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 58
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996 59
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 61
Notes to Consolidated Financial Statements 62
Supplementary Financial Data 88
- -----------------------------
</TABLE>
55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Jefferson Savings Bancorp, Inc.
Ballwin, Missouri:
We have audited the accompanying consolidated balance sheets of Jefferson
Savings Bancorp, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1997 and the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
St. Louis, Missouri
January 28, 1999
56
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------ --------------
<S> <C> <C>
Cash $ 7,602,268 $ 9,039,932
Interest-bearing deposits 11,271,419 12,673,066
Federal funds sold - 9,870,000
-------------- --------------
Cash and cash equivalents 18,873,687 31,582,998
Investment securities available for sale, at fair value
(amortized cost of $154,058,689 and $129,574,313 at
December 31, 1998 and 1997, respectively) 154,610,594 129,996,500
Mortgage-backed securities available for sale, at fair value
(amortized cost of $32,492,371 and $85,270,031 at
December 31, 1998 and 1997, respectively) 32,363,687 85,480,293
Loans receivable, net 1,118,489,946 924,919,606
Investment in real estate, net 2,880,759 4,255,921
Stock in Federal Home Loan Banks 11,881,400 16,741,500
Office properties and equipment, net 10,528,413 11,532,147
Excess cost over fair value of net assets acquired 22,141,345 23,848,993
Accrued income and other assets 11,689,680 9,697,539
-------------- --------------
$1,383,459,511 $1,238,055,497
============== ==============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Savings deposits $1,038,176,484 $1,044,881,130
Borrowed money 209,515,534 65,908,257
Deferred tax liability 1,467,000 471,000
Advance payments by borrowers for taxes and insurance 2,963,938 3,550,798
Accrued expenses and other liabilities 7,497,854 6,984,474
-------------- --------------
Total liabilities 1,259,620,810 1,121,795,659
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value): Authorized 5,000,000
shares; none issued - -
Common stock ($.01 par value): Authorized 20,000,000
shares; issued 10,098,373 and 10,035,998 shares at
December 31, 1998 and 1997, respectively 100,984 100,360
Additional paid-in capital 65,404,131 62,797,493
Retained earnings, subject to certain restrictions 63,957,771 58,978,239
Accumulated other comprehensive income 254,221 379,251
Unamortized restricted stock awards (74,243) (120,151)
Unearned ESOP shares (4,684,142) (5,706,665)
Treasury stock, at cost: 73,240 shares and 21,106 shares
at December 31, 1998 and 1997, respectively (1,120,021) (168,689)
-------------- --------------
Total stockholders' equity 123,838,701 116,259,838
-------------- --------------
$1,383,459,511 $1,238,055,497
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income:
Loans receivable $75,313,978 $78,664,717 $64,911,063
Mortgage-backed securities 3,087,812 5,978,803 10,858,270
Investment securities 11,023,714 8,198,008 4,280,168
Interest-bearing deposits and federal funds sold 1,608,885 1,345,222 583,224
Stock in Federal Home Loan Banks 702,384 1,118,936 1,057,478
----------- ----------- -----------
Total interest and dividend income 91,736,773 95,305,686 81,690,203
----------- ----------- -----------
Interest expense:
Savings deposits 52,869,613 53,453,991 44,365,648
Borrowed money 4,711,277 4,689,451 7,792,206
----------- ----------- -----------
Total interest expense 57,580,890 58,143,442 52,157,854
----------- ----------- -----------
Net interest income 34,155,883 37,162,244 29,532,349
Provision for losses on loans (1,200,000) 1,260,000 660,000
----------- ----------- -----------
Net interest income after provision
for losses on loans 35,355,883 35,902,244 28,872,349
----------- ----------- -----------
Noninterest income:
Servicing and other loan fees 891,611 789,675 638,200
Fees for other services to customers 1,036,157 1,035,822 505,107
Gain on sales of investment securities, net - 1,144,210 -
Gain (loss) on sales of mortgage-backed securities, net 48,166 (582,966) (1,296,134)
Gain on sales of loans, net 1,858,343 574,969 373,739
Real estate operations, net 200,632 71,032 453,101
Other 319,374 480,393 443,950
----------- ----------- -----------
Total noninterest income 4,354,283 3,513,135 1,117,963
----------- ----------- -----------
Noninterest expense:
General and administrative:
Compensation and employee benefits 13,387,855 11,602,322 9,613,987
Occupancy 3,302,208 2,777,801 2,122,183
Advertising 560,505 563,718 465,767
Federal deposit insurance premiums 958,837 855,817 2,147,752
Legal, examination, and other professional fees 1,753,563 1,427,827 1,212,294
Other 4,313,248 3,876,040 3,008,409
----------- ----------- -----------
Total general and administrative 24,276,216 21,103,525 18,570,392
SAIF special assessment - - 5,598,880
Amortization of excess cost over fair value of
net assets acquired 1,809,099 1,710,843 1,022,642
----------- ----------- -----------
Total noninterest expense 26,085,315 22,814,368 25,191,914
----------- ----------- -----------
Income before income taxes 13,624,851 16,601,011 4,798,398
Income tax expense 6,039,500 6,370,000 1,982,200
----------- ----------- -----------
Net income $ 7,585,351 $10,231,011 $ 2,816,198
=========== =========== ===========
Earnings per share, basic $ .81 $ 1.13 $ .37
Earnings per share, diluted .78 1.08 .35
==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Common stock Additional
-------------------- paid-in Retained
Shares Dollars capital earnings
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 8,940,098 $ 89,400 $ 43,152,576 $ 49,140,260
Comprehensive income:
Net income - - - 2,816,198
Other comprehensive income, net of
reclassification adjustment - - -
Total comprehensive income
Dividends paid ($.16 per share) - - - (1,197,410)
Release of ESOP shares in lieu of cash
dividends on allocated ESOP shares - - 9,353 -
Stock issued in dividend reinvestment
and stock purchase plan - - 14,272 -
Amortization of restricted
stock awards - - - -
Tax benefit of restricted
stock awards vested - - 265,000 -
Amortization of ESOP shares - - 691,082 -
Stock issued to acquire Texas Heritage - - 1,593,297 -
Stock options exercised - - (50,439) -
Tax benefit of non-incentive stock
options exercised - - 52,000 -
---------- ------- ---------- ----------
Balance at December 31, 1996 8,940,098 89,400 45,727,141 50,759,048
Comprehensive income:
Net income - - - 10,231,011
Other comprehensive income, net of
reclassification adjustment - - - -
Total comprehensive income
Dividends paid ($.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 -
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
Comprehensive income:
Net income - - - 7,585,351
Other comprehensive income, net of
reclassification adjustment - - - -
Total comprehensive income
Dividends paid ($.28 per share) - - - (2,605,819)
Release of ESOP shares in lieu of cash
dividends on allocated ESOP shares - - 67,413 -
Stock issued in dividend reinvestment
and stock purchase plan - - 92,724 -
Amortization of restricted
stock awards
Tax benefit of restricted
stock awards vested - - 431,000 -
Amortization of ESOP shares - - 2,024,098 -
Stock options exercised 62,375 624 (543,597) -
Purchase of treasury stock - - - -
Tax benefit of non-incentive stock
options exercised - - 535,000 -
---------- -------- ---------- ----------
Balance at December 31, 1998 10,098,373 $100,984 $65,404,131 $63,957,771
========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
<TABLE>
<CAPTION>
Accumulated Unamortized Total
other restricted Unearned Treasury stock stock-
comprehensive stock ESOP --------------------------- holders'
income awards shares Shares Dollars equity
- ----------------------- ----------- -------- -------------- ------- --------
<S> <C> <C> <C> <C> <C>
$(666,313) $ (616,055) $(6,115,907) (592,972) $(4,733,223) $ 80,250,738
- - - - - 2,816,198
716,572 - - - - 716,572
------------
3,532,770
- - - - - (1,197,410)
- - 24,505 - - 33,858
- - - 4,338 34,617 48,889
- 256,578 - - - 256,578
- - - - - 265,000
- - 745,990 - - 1,437,072
- - - 446,302 3,561,491 5,154,788
- - - 16,926 135,069 84,630
- - - - - 52,000
----------- ----------- ----------- ---------- ----------- ------------
50,259 (359,477) (5,345,412) (125,406) (1,002,046) 89,918,913
- - - - - 10,231,011
328,992 - - - - 328,992
------------
10,560,003
- - - - - (2,011,820)
- - 41,533 - - 76,347
- - - 10,018 80,044 164,075
- 239,326 - - - 239,326
- - - - - 162,000
- - 942,859 - - 2,061,055
- - (672,884) - - 14,603,963
- - (672,761) 64,568 515,898 255,406
- - - 29,714 237,415 148,570
- - - - - 82,000
----------- ----------- ----------- ---------- ----------- ------------
379,251 (120,151) (5,706,665) (21,106) (168,689) 116,259,838
- - - - - 7,585,351
(125,030) - - - - (125,030)
------------
7,460,321
- - - - - (2,605,819)
- - 58,485 - - 125,898
- - - 11,311 142,816 235,540
- 45,908 - - - 45,908
- - - - - 431,000
- - 964,038 - - 2,988,136
- - - 93,755 1,329,858 786,885
- - - (157,200) (2,424,006) (2,424,006)
- - - - - 535,000
----------- ---------- ----------- --------- ----------- ------------
$ 254,221 $ (74,243) $(4,684,142) (73,240) $(1,120,021) $123,838,701
=========== ========== =========== ========= =========== ============
</TABLE>
60
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,585,351 $ 10,231,011 $ 2,816,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,968,688 3,963,754 2,503,912
Provision for losses on loans (1,200,000) 1,260,000 660,000
Provision for losses on real estate - 264,000 200,000
Net gain on sales of assets (2,219,639) (1,689,427) (4,090)
Loans originated for sale (90,652,032) (33,406,835) (27,764,507)
Sale of loans held for sale 92,794,776 35,356,956 27,019,117
Deferred income taxes 1,080,200 150,000 (250,000)
Stock dividend from Federal Home Loan Banks (183,500) (210,600) (151,800)
Other, net 130,789 (4,121,428) (3,787,048)
------------- ------------- -------------
Net cash provided by operating activities 13,304,633 11,797,431 1,241,782
------------- ------------- -------------
Cash flows from investing activities:
Principal payments on:
Loans receivable 471,986,332 409,382,688 290,969,097
Mortgage-backed securities 22,527,254 22,327,204 22,378,652
Proceeds from maturity of investment securities 145,522,130 20,625,000 30,335,000
Proceeds from sale of:
Loans receivable 26,583,763 9,875,541 5,873,494
Mortgage-backed securities available for sale 45,347,468 97,661,265 147,471,014
Investment securities available for sale - 76,380,742 -
Redemption of Federal Home Loan Bank stock 8,924,400 11,200 1,572,400
Cash invested in:
Loans receivable originated (288,380,636) (344,460,751) (330,381,304)
Loans receivable purchased (406,125,630) (49,511,372) (9,117,125)
Mortgage-backed securities (15,182,351) (65,055,352) (29,836,277)
Investment securities (169,970,312) (128,242,847) (62,997,500)
Federal Home Loan Bank stock (3,880,800) - -
Proceeds from sale of real estate 5,272,018 4,866,075 4,947,530
Cash paid for acquisitions - (15,266,182) (5,147,225)
Cash and cash equivalents from acquisitions - 8,296,533 5,584,393
Sale of branch deposits, net - (2,708,045) -
Other, net (816,846) (1,693,426) (1,673,269)
------------- ------------- -------------
Net cash provided by (used in) investing activities (158,193,210) 42,488,273 69,978,880
------------- ------------- -------------
Cash flows from financing activities:
Increase (decrease) in savings deposits, net (6,833,750) (3,975,781) 12,021,140
Increase (decrease) in borrowed money, net 143,607,277 (41,773,870) (79,041,170)
Increase (decrease) in advance payments by borrowers
for taxes and insurance (586,860) 112,458 (122,011)
Dividends paid (2,605,820) (2,011,820) (1,197,410)
Shares sold to ESOP - 928,167 -
Purchase of treasury stock (2,424,006) - -
Stock options exercised 786,885 148,570 84,630
Other, net 235,540 164,076 48,889
------------- ------------- -------------
Net cash provided by (used in) financing activities 132,179,266 (46,408,200) (68,205,932)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents (12,709,311) 7,877,504 3,014,730
Cash and cash equivalents at beginning of year 31,582,998 23,705,494 20,690,764
------------- ------------- -------------
Cash and cash equivalents at end of year $ 18,873,687 $ 31,582,998 $ 23,705,494
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 57,570,342 $ 58,690,604 $ 52,419,826
Income taxes paid 4,895,159 7,250,893 2,492,384
Noncash investing activities:
Stock issued for acquisitions - 15,276,847 5,154,788
Additions to real estate acquired in settlement
of loans or through foreclosure 4,715,707 5,577,945 3,867,980
Loans originated to finance the sale of real estate 1,129,600 745,950 133,726
Noncash financing activity - interest credited 39,119,232 39,439,947 32,963,462
============= ============= =============
</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 subsidiary, Jefferson Savings and
Loan Association F.A. ("Jefferson Savings"). On December 31, 1998, the Company
merged First Federal Savings Bank of North Texas ("First Federal") into
Jefferson Savings. On January 20, 1999, Jefferson Savings changed its name to
Jefferson Heritage Bank ("Jefferson Heritage"). Jefferson Heritage's wholly
owned subsidiaries are J.S. Services, Inc., Jefferson Financial Corporation and
First Service Corporation, 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") 128, "Earnings per Share", on December 31, 1997. SFAS 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 similar to fully-diluted earnings
per share.
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.
62
<PAGE>
Investments in Mortgage-backed and Investment Securities
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. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity, adjusted for anticipated prepayments. 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.
Loans Receivable and Related Fees
Loans receivable held for portfolio are carried at cost. 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.
The allowance for loan losses is increased by provisions charged to expenses
and reduced by loans charged off, net of recoveries. It is maintained at a
level considered adequate to absorb potential loan losses determined on the
basis of management's continuing review and evaluation of the loan portfolio and
its judgement as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loan loss experiences
and trends, changes in the composition of the loan portfolio, the current volume
and condition of loans outstanding and the probability of collecting all amounts
due. In addition, various regulatory agencies, as an intregal part of the
examination process, periodically review the Company's subsidiary bank's loan
portfolio. Such agencies may require the Company's subsidiary bank to increase
the allowance for loan losses based on their judgement about and interpretation
of information available to them at the time of their examination.
Loans are considered impaired when it becomes probable that the Company will
be unable to collect all amounts due according to the contractual terms of the
loan agreement.
63
<PAGE>
Investment in Real Estate
Real estate acquired through foreclosure is recorded at the lower of cost or
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 less estimated costs to sell.
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.
Gains on sales of real estate are 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 gain is deferred until such criteria are met.
Stock in Federal Home Loan Banks
The Company's subsidiary, as a member of the Federal Home Loan Bank System
administered by the Federal Housing Finance Board, is required to maintain an
investment in capital stock of the Federal Home Loan Bank ("FHLB") in an amount
equal to a specified percentage of mortgage loans, total assets or advances from
the FHLB to the subsidiary. 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 three
to eight 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. Such
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts of these assets may not be recoverable.
Interest Rate Cap Agreements
Premiums paid for interest rate cap agreements are amortized to interest
expense over the terms of the agreements. Unamortized premiums are classified
as other assets in the consolidated balance sheets. Amounts receivable under
cap agreements are accrued as a reduction of interest expense.
Income Taxes
The Company files a consolidated federal income tax return with its
subsidiaries. Deferred income taxes are provided on income and expense items
that are recognized for financial reporting purposes in periods different from
the period in which items are recognized for income tax purposes.
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.
64
<PAGE>
Stock-based Compensation
SFAS 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 123. Stock-based compensation plans of the Company to
which SFAS 123 applies are the management recognition plans and the Incentive
Plan and Stock Option which are set forth in notes 15 and 16 to the consolidated
financial statements, respectively.
New Accounting Standards
SFAS 130, "Reporting Comprehensive Income", 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. The Company adopted SFAS 130 on January 1, 1998 and displays
comprehensive income in the consolidated statements of stockholders' equity and
comprehensive income.
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information", 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 a disclosure requirement
only and there is no effect on the Company's financial position or results of
operations, see footnote 23 for segment information.
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities",
provides a comprehensive and consistent standard for the recognition and
measurement of derivative and hedging activities. The Company has not yet
determined the financial impact to its financial condition or results of
operations but plans to adopt SFAS 133 on January 1, 2000.
Reclassification
Certain reclassifications of 1997 and 1996 information have been made to
conform with the 1998 presentation.
(2) Business Combinations
Information relating to business combinations accounted for as purchases for
the three-year period ended December 31, 1998 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>
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>
65
<PAGE>
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, 1997 and January 1, 1996,
respectively:
<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>
(3) Regulatory Matters
The Company and its subsidiary 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 thrift 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 association is
subject to regulations which require minimum capital levels in order to pay
dividends without OTS approval. At December 31, 1998, the savings association
subsidiary 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, 1998,
Jefferson Savings met all OTS capital requirements.
Jefferson Savings is 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, 1998 and 1997.
66
<PAGE>
Following are the actual and required capital amounts and ratios as of
December 31, 1998:
<TABLE>
<CAPTION>
Prompt Corrective
Action Provisions -
Actual Requirements Well capitalized
------ ------------ ----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ------------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital:(1) $92,447,569 6.79% $20,413,648 1.50% NA
Core capital:(1) 92,447,569 6.79% 40,827,296 3.00% $68,045,493 5.00%
Risk-based capital:(2) 98,456,162 11.34% 69,469,828 8.00% 86,837,285 10.00%
Tier I capital:(2) 92,447,569 10.65% NA 52,102,371 6.00%
</TABLE>
Following are the actual and required capital amounts and ratios as of
December 31, 1997:
<TABLE>
<CAPTION>
Prompt Corrective
Action Provisions -
Actual Requirements Well capitalized
-------- ------------ ----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ---------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital:(1)
Jefferson Savings $51,915,396 7.80% $9,989,414 1.50% NA
First Federal 38,138,562 6.95% 8,230,669 1.50% NA
Core capital:(1)
Jefferson Savings 51,915,396 7.80% 19,978,828 3.00% $33,298,047 5.00%
First Federal 38,138,562 6.95% 16,461,339 3.00% 27,435,564 5.00%
Risk-based capital:(2)
Jefferson Savings 53,808,774 14.43% 29,826,727 8.00% 37,283,409 10.00%
First Federal 42,375,705 12.21% 27,754,354 8.00% 34,692,943 10.00%
Tier I capital:(2)
Jefferson Savings 51,915,396 13.92% NA 22,370,046 6.00%
First Federal 38,138,562 10.99% NA 20,815,766 6.00%
</TABLE>
(1) To adjusted total assets
(2) To risk-weighted assets
On September 25, 1997, First Federal entered into a supervisory agreement with
the OTS in connection with an examination of First Federal. First Federal
agreed to take corrective actions with respect to certain matters primarily
related to its 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. Following a subsequent examination, the supervisory
agreement was terminated on May 18, 1998.
67
<PAGE>
(4) Investment Securities
The amortized cost and fair value of debt securities classified as available
for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Fair
cost gains losses value
------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
United States government and
agency obligations $153,943,373 $651,414 $(100,000) $154,494,787
Tax-exempt municipal bond 115,316 491 - 115,807
------------ --------- --------- ------------
$154,058,689 $651,905 $(100,000) $154,610,594
============ ========= ========== ============
<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>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities available for sale were $1,183,565, $39,355 and
$76,380,742 in 1997, respectively. There were no sales during 1998 or 1996.
The amortized cost and fair value of investment securities, by contractual
maturity, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Amortized Fair
cost value
------------ -------------
<S> <C> <C>
Within one year $129,034,239 $129,446,539
One to five years 15,024,450 15,264,055
Five to 10 years 10,000,000 9,900,000
------------ ------------
$154,058,689 $154,610,594
============ ============
Weighted average interest rate 6.34%
====
</TABLE>
68
<PAGE>
(5) Mortgage-Backed Securities
The amortized cost and fair value of mortgage-backed securities, classified as
available for sale, are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- --------- ---------- -------------
<S> <C> <C> <C> <C>
GNMA $ 4,542,453 $ 174 $ (46,119) $ 4,496,508
FHLMC 2,657,470 31,541 (6,867) 2,682,144
FNMA 9,045,479 86,583 (1,909) 9,130,153
Collateralized mortgage
obligations 16,246,969 2,770 (194,857) 16,054,882
----------- -------- --------- -----------
$32,492,371 $121,068 $(249,752) $32,363,687
=========== ======== ========= ===========
<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>
Gross realized gains, gross realized losses, and gross proceeds on sales of
mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Gross realized gains $ 48,166 $ 367,348 $ 1,318,142
Gross realized losses - (950,314) (2,614,276)
----------- ----------- ------------
Net realized gain (loss) $ 48,166 $ (582,966) $ (1,296,134)
=========== =========== ============
Gross proceeds $45,347,468 $97,661,265 $147,471,014
=========== =========== ============
</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.
69
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
----------------------------
Amortized Fair
cost value
----------- ------------
<S> <C> <C>
Within one year $ - $ -
One to five years 1,462,048 1,474,644
Five to ten years - -
After ten years 31,030,323 30,889,043
----------- ------------
$32,492,371 $32,363,687
=========== ============
Weighted average interest rate 6.20%
====
</TABLE>
(6) Loans Receivable, Net
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional $ 834,296,425 $645,541,593
Home equity 54,856,853 54,156,400
FHA insured/VA guaranteed 1,517,227 2,073,344
Held for sale 5,867,489 2,192,868
Construction and development 208,207,220 163,389,597
Commercial 72,601,740 80,758,341
-------------- ------------
Total loans secured by real estate 1,177,346,954 948,112,143
Other loans:
Commercial secured by first mortgage loans 17,330,488 9,775,000
Automobile loans 2,021,033 3,133,757
Loans secured by savings deposits 4,776,491 5,531,514
Education loans 78,000 191,459
Other 3,441,179 4,179,450
-------------- ------------
1,204,994,145 970,923,323
Add (deduct):
Loans in process (83,586,484) (38,125,984)
Unearned discounts, net (494,458) (1,112,417)
Deferred loan costs, net 4,236,037 1,416,952
Allowance for loan losses (6,659,294) (8,182,268)
-------------- ------------
$1,118,489,946 $924,919,606
============== ============
Weighted average interest rate at end of year 7.64% 8.20%
==== ====
</TABLE>
Loans serviced for others at December 31, 1998, 1997, and 1996 totaled
approximately $105.2 million, $85.8 million, and $58.0 million, respectively.
70
<PAGE>
A summary of impaired loans, which includes nonaccrual loans, follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- -----------
<S> <C> <C>
Nonaccrual loans $3,709,029 $5,406,498
Impaired loans continuing to accrue interest 2,486,631 3,266,667
---------- ----------
Total impaired loans $6,195,660 $8,673,165
========== ==========
Impaired loans with related allowance
for loan losses $ 61,728 $2,914,345
Allowance for losses on impaired loans 30,335 695,785
Impaired loans with no related allowance
for loan losses 6,133,932 5,758,820
Average balance of impaired loans
during the year 6,116,066 6,181,553
========== ==========
</TABLE>
Interest on impaired loans which would have been recorded under the original
terms of the loans and cash receipts of interest was $615,000 and $412,000,
respectively, for the year ended December 31, 1998. Interest on impaired loans
which would have been recorded under the original terms of the loans and cash
receipts of interest was $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 was $137,000
and $61,000, respectively, for the year ended December 31, 1996.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 8,182,268 $6,528,601 $5,095,856
Allowance from purchase acquisitions - 1,155,764 850,893
Provision charged to expense (1,200,000) 1,260,000 660,000
Recoveries 8,552 18,810 -
Charge-offs (331,526) (780,907) (78,148)
----------- ---------- ----------
Balance at end of year $ 6,659,294 $8,182,268 $6,528,601
=========== ========== ==========
</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 $703,996 and $1,739,544
at December 31, 1998 and 1997, respectively.
Activity in loans to executive officers and directors is summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $ 1,739,544
New loans or advances 645,364
Repayments (1,289,549)
Change in director and officer status (391,364)
-----------
Balance at December 31, 1998 $ 703,995
===========
</TABLE>
71
<PAGE>
(7) Investment in Real Estate, Net
Investment in real estate is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Real estate acquired through foreclosure $3,240,795 $4,790,756
Less allowance for losses 360,036 534,835
---------- ----------
$2,880,759 $4,255,921
========== ==========
</TABLE>
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
Real
estate Real
acquired estate
for acquired
development through
and sale foreclosure Total
---------- ---------- -----------
<S> <C> <C> <C>
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
Charge-offs - (174,799) (174,799)
----------- --------- -----------
Balance at December 31, 1998 $ - $ 360,036 $ 360,036
=========== ========= ===========
</TABLE>
The results of real estate operations are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Gain from sales of real estate, net $256,135 $ 475,829 $ 878,315
Provision for losses on real estate - (264,000) (200,000)
Operating income (expense), net (55,503) (140,797) (225,214)
-------- --------- ---------
$200,632 $ 71,032 $ 453,101
======== ========= =========
</TABLE>
72
<PAGE>
(8) Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---------- -------------
<S> <C> <C>
Land $ 2,469,283 $ 2,650,533
Office buildings 6,913,701 6,938,754
Leasehold improvements 1,029,320 1,025,680
Furniture and equipment 7,836,173 7,651,301
----------- -----------
18,248,477 18,266,268
Less accumulated depreciation and amortization 7,720,064 6,734,121
----------- -----------
$10,528,413 $11,532,147
=========== ===========
</TABLE>
Depreciation and amortization expense totaled $1,633,814, $1,305,362, and
$866,889 for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company leases certain of its facilities and equipment under noncancelable
operating leases. These leases expire at various dates and contain options for
renewal. The future minimum rental obligations under the terms of the leases
are summarized as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $299,863
2000 189,794
2001 150,228
2002 66,336
2003 66,336
Thereafter 16,584
--------
$789,141
========
</TABLE>
Net rent expense for 1998, 1997, and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Rent expense $ 443,877 $ 402,540 $ 374,237
Rent income (190,807) (229,069) (103,938)
--------- --------- ---------
$ 253,070 $ 173,471 $ 270,299
========= ========= =========
</TABLE>
(9) Accrued Income and Other Assets
Accrued income and other assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Accrued interest:
Loans receivable $ 6,731,103 $5,871,685
Mortgage-backed securities 180,841 422,209
Investment securities 1,946,294 1,808,476
----------- ----------
8,858,238 8,102,370
Accounts receivable 236,682 321,748
Other 2,594,760 1,273,421
----------- ----------
$11,689,680 $9,697,539
=========== ==========
</TABLE>
73
<PAGE>
(10) Savings Deposits
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1998 1997
----------------------------- -------------------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
--------------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Noninterest bearing $ 9,090,104 - % $ 10,164,832 - %
NOW 46,535,345 1.63 47,009,006 2.34
Money market 138,335,707 4.07 128,121,415 4.26
Passbook and statement savings 44,997,033 2.27 48,750,251 2.48
-------------- --------------
238,958,189 3.10 234,045,504 3.32
Certificates of deposit less than $100,000 698,804,094 711,694,970
Certificates of deposit greater than $100,000 100,414,201 99,140,656
-------------- -----------
Total certificates of deposit 799,218,295 5.57 810,835,626 5.74
-------------- --------------
Total savings deposits $1,038,176,484 5.00% $1,044,881,130 5.20%
============== ==== ============== ====
</TABLE>
Investment and mortgage-backed securities totaling $7.6 million were pledged
against certain deposits over $100,000 at December 31, 1998.
Certificates of deposit, by rate, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------- ------------
<S> <C> <C>
2.00-2.99% $ 132,635 $ 166,824
3.00-3.99% 2,052,052 -
4.00-4.99% 118,197,321 47,836,606
5.00-5.99% 585,615,997 649,208,453
6.00-6.99% 76,044,931 94,406,592
7.00-7.99% 17,175,359 19,075,867
8.00-8.99% - 141,284
------------ ------------
$799,218,295 $810,835,626
============ ============
</TABLE>
The scheduled maturities of the certificates of deposit are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
Percent
Amount of total
----------- -----------
<S> <C> <C>
Within one year $519,240,785 65.0%
Second year 223,895,168 28.0
Third year 34,811,221 4.3
Fourth year 12,422,795 1.6
Fifth year 7,543,143 .9
Thereafter 1,305,183 .2
------------ -----
$799,218,295 100.0%
============ =====
</TABLE>
74
<PAGE>
Interest expense on savings deposits by type is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ------------
<S> <C> <C> <C>
NOW $ 1,514,817 $ 1,928,299 $ 974,885
Money market 4,763,820 4,186,233 3,877,708
Passbook and statement savings 1,131,782 1,281,232 1,209,597
Certificates of deposit 45,459,194 46,058,227 38,303,458
----------- ----------- -----------
$52,869,613 $53,453,991 $44,365,648
=========== =========== ===========
</TABLE>
(11) Borrowed Money
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997
----------------------- --------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
------------- -------- ----------- --------
<S> <C> <C> <C> <C>
Lines of credit with Federal Home
Loan Banks $ 7,595,313 4.88 % $14,790,625 6.25%
------------ -----------
Advances from Federal Home Loan
Banks due:
1998 - - 23,290,533 6.14
1999 34,232,582 5.51 19,447,595 5.94
2000 5,000,000 5.05 5,000,000 5.66
2001 30,000,000 4.56 - -
2003 30,000,000 4.79 - -
2008 90,000,000 4.81 - -
2013 9,752,333 5.76 - -
2015 336,182 6.92 340,475 6.92
------------ -----------
199,321,097 4.95 48,078,603 6.01
Commercial bank debt due in 1999 2,599,124 7.65 3,039,029 8.90
------------ -----------
$209,515,534 4.98% $65,908,257 6.20%
============ ===== =========== ========
</TABLE>
At December 31, 1998, the total unused lines of credit with the Federal Home
Loan Bank totaled $17.4 million. The terms of the agreements call for interest
rates that vary daily. These borrowings averaged $1.8 million, $9.3 million,
and $17.4 million during the years ended December 31, 1998, 1997, and 1996,
respectively. The maximum amount outstanding at any month-end during 1998,
1997, and 1996 was $7.6 million, $20.9 million, and $29.2 million, respectively.
Advances from FHLBs averaged $84.0 million, $67.7 million, and $116.8 million
during 1998, 1997, and 1996, respectively. The maximum amount outstanding at
any month-end was $199.3 million, $96.7 million, and $150.5 million during the
years ended December 31, 1998, 1997, and 1996, respectively. Certain FHLB
advances are subject to calls without prepayment penalties by the FHLB at dates
earlier than the actual maturity dates shown in the above table.
At December 31, 1998, borrowings from the FHLBs were collateralized by all
stock in the FHLBs and
75
<PAGE>
blanket liens on first mortgage loans.
The commercial bank debt is collateralized by Jefferson Savings stock. The
debt matures on May 31, 2001 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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Lines of credit with the FHLBs $ 51,210 $ 372,472 $ 813,911
Advances from FHLBs 4,420,046 4,076,773 6,878,467
Interest on federal funds purchased 25,204 - 11,083
Interest rate cap agreements, net - (9,005) (183,947)
Interest on commercial bank debt 214,817 249,211 272,692
---------- ---------- ----------
$4,711,277 $4,689,451 $7,792,206
========== ========== ==========
</TABLE>
(12) Interest Rate Cap Agreements
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on short-term borrowings. Such agreements involve a
certain amount of credit risk in that a counterparty to an agreement may
default. The amounts potentially subject to credit risk are the future cash
flows under the agreements and not the notional principal amounts. These
agreements, entered into during 1994, provide for payments to the Company on a
quarterly basis to the extent the 90-day LIBOR rises above 4.25% on a notional
principal amount of $20 million. The Company's interest rate cap agreements at
December 31, 1996 matured during 1997.
(13) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Accrued interest payable:
Savings deposits $ 283,436 $ 372,901
Borrowed money 216,245 116,232
---------- ----------
499,681 489,133
Accounts payable for check fundings, net 3,606,102 3,142,253
Income taxes payable - 320,547
Accrued compensation and benefits expense 1,334,225 1,009,925
Accounts payable 460,791 691,269
Unremitted payments on loans serviced for others 596,556 289,758
Deferred gain from sales of real estate 160,024 -
Other 840,475 1,041,589
---------- ----------
$7,497,854 $6,984,474
========== ==========
</TABLE>
76
<PAGE>
(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 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. The
Company met a residential loan requirement for tax years beginning in 1996 and
1997 and recapture of the reserve was deferred until the tax year beginning in
1998. During the year 1998, the Company recaptured $597,000 of tax bad debt
reserve. At December 31, 1998, the Company had bad debts deducted for tax
purposes in excess of the base year reserve of approximately $3.5 million. The
Company has recognized a deferred income tax liability on this amount.
Certain events covered by IRC Section 593(e), which was not repealed, will
trigger a recapture of the base year reserve. The base year reserve of thrift
institutions would be recaptured if a thrift ceases to qualify as a bank for
federal income tax purposes. The base year reserves of thrift institutions also
remain subject to income tax penalty provisions which, in general, require
recapture upon certain stock redemptions of, and excess distributions to,
stockholders. At December 31, 1998, 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>
1998 1997 1996
---------- ----------- ------------
<S> <C> <C> <C>
Current expense:
Federal $4,948,300 $6,214,000 $2,070,355
State 11,000 6,000 161,845
Deferred - federal and state 1,080,200 150,000 (250,000)
---------- ---------- ----------
$6,039,500 $6,370,000 $1,982,200
========== ========== ==========
</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>
1998 1997 1996
-------------------- --------------------- ------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ---------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
income tax expense $4,768,698 35.0% $5,810,354 35.0% $1,631,455 34.0%
Items affecting federal
income tax rate:
Goodwill amortization 633,185 4.6 598,795 3.6 347,698 7.2
Other, net 637,617 4.7 (39,149) (.2) 3,047 .1
---------- ---- ---------- ------ ---------- ----
$6,039,500 44.3% $6,370,000 38.4% $1,982,200 41.3%
========== ==== ========== ====== ========== ====
</TABLE>
77
<PAGE>
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,
----------------------------
1998 1997
------------ -------------
<S> <C> <C>
Deferred tax assets:
Book provision for loan loss in excess of tax $ 2,437,000 $ 2,853,000
Deferred gain from sale of real estate 82,000 22,000
Deferred compensation and stock bonus awards 527,000 532,000
Purchase accounting adjustments 279,000 399,000
Other 98,000 42,000
----------- -----------
Total gross deferred tax assets 3,423,000 3,848,000
----------- -----------
Deferred tax liabilities:
Deferred loan costs, net (1,591,000) (540,000)
Office properties and equipment, principally due to
differences in depreciation (460,000) (397,000)
FHLB stock dividends, principally due to deferral of
income for tax reporting (874,000) (882,000)
Installment sales of real estate acquired for development
and sale (455,000) (602,000)
Tax bad debt deductions in excess of base year amount (1,315,000) (1,534,000)
Unrealized gain on securities available for sale (169,000) (253,200)
Other (26,000) (110,800)
----------- -----------
Total gross deferred tax liabilities (4,890,000) (4,319,000)
----------- -----------
Net deferred tax liability $(1,467,000) $ (471,000)
=========== ===========
</TABLE>
(15) Benefit Plans
The Company sponsors a thrift savings plan qualifying under Section 401(k) of
the Internal Revenue Code. The plan covers substantially all employees with one
year of service. Participants may designate up to 10% of their annual
compensation as their contribution to the plan. Under the plan, contributions
by employees of up to 3% of their annual compensation are partially matched by
the Company. Matching contributions by the Company totaled approximately
$172,000, $155,000, and $129,000 for the years ended December 31, 1998, 1997,
and 1996, 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. The Company recognizes compensation expense equal to the fair
value of ESOP shares committed to be released. Compensation expense associated
with the ESOP was $2,988,136, $2,061,055, and $1,437,072 for the years ended
December 31, 1998, 1997, and 1996, respectively.
78
<PAGE>
The ESOP shares as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Allocated shares 555,297
Unearned shares 591,474
-----------
Total ESOP shares 1,146,771
===========
Fair value of unearned shares
at December 31, 1998 $15,051,369
===========
</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 343,848 shares of the Company's common stock which were contributed by the
Company. 329,000 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. As of December 31, 1998, all shares awarded were fully
vested. The related expense was $45,908, $239,326, and $256,578 for the years
ended December 31, 1998, 1997, and 1996, respectively. No MRP shares were
awarded during the years ended December 31, 1998, 1997, or 1996.
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 expense was approximately $39,400 for each
of the years ended December 31, 1998, 1997, and 1996.
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 expense was approximately $300,900, $300,900, and $150,900 for the years
ended December 31, 1998, 1997, and 1996, 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, 1998, there were 152,764 options
available for grant. A summary of stock options outstanding at December 31,
1998 follows:
79
<PAGE>
<TABLE>
Year Options Options Remaining Exercise
granted outstanding exercisable contractual life price
------- ----------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
1993 481,231 481,231 4.27 years $ 5.00
1995 772 463 6.13 years 8.18
1996 1,235 309 7.13 years 12.87
1997 2,000 400 8.38 years 14.50
------- -------
Total 485,238 482,403
======= =======
Weighted average 4.30 years 5.06
</TABLE>
Changes in options outstanding were as follows:
<TABLE>
<CAPTION>
Weighted
Number of average
shares price
--------- ---------
<S> <C> <C>
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
Granted - -
Exercised (156,130) 5.04
Forfeited (1,600) 14.50
--------
Balance at December 31, 1998 485,238 5.06
======== ======
</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, 1998, 1997, and 1996 as required by
SFAS No. 123 is not presented due to the immaterial effects of stock options
granted.
The following table reconciles the numerators and denominators for basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Numerator:
Net income (basic and diluted earnings per share) $7,585,351 $10,231,011 $2,816,198
========== =========== ==========
Denominator:
Average shares outstanding (basic earnings per share) 9,364,960 9,034,922 7,541,314
Effect of dilutive stock options 404,347 445,226 407,600
---------- ----------- ----------
Average shares outstanding after assumed
conversions (diluted earnings per share) 9,769,307 9,480,148 7,948,914
========== =========== ==========
</TABLE>
80
<PAGE>
(17) Dividend Reinvestment and Stock Purchase Plan
During 1996 the Company adopted a Dividend Reinvestment and Stock Purchase
Plan which allows stockholders to reinvest dividends and/or purchase additional
shares of the Company's common stock without payment of any brokerage commission
or service charge. If the shares are purchased in the market or in private
transactions, the price of shares purchased will be the actual purchase price,
exclusive of brokerage commissions and expenses. If the shares are purchased
directly from the Company, the purchase price will equal the average of the high
and low trade prices for shares of the Company's common stock as reported on the
Nasdaq Stock Market, reduced by a discount of 2%.
(18) Stockholder Protection Rights
On August 17, 1994, the Company adopted a stockholder protection rights plan
(the "Plan") designed to protect stockholders from coercive or unfair takeover
tactics by a hostile acquirer seeking to gain control of the Company without
offering a fair price to all its stockholders.
Under the Plan, each stockholder of record on September 7, 1994 received a
dividend distribution of one Right for each outstanding share of common stock.
Each Right entitles the holder to buy one unit of a new series of Junior
Participating Preferred Stock, Series E at an exercise price of $60 per unit.
In the event that a person or group acquires 19.9% or more of the Company's
outstanding common stock, each Right will entitle the holder to purchase the
number of shares of common stock of the Company having a value of twice the
Right's exercise price.
The Rights will expire on August 17, 2004 and will thereafter have no value.
The Rights are redeemable by the Board of Directors at a redemption price of
$0.01 per Right at any time prior to expiration.
(19) Commitments and Contingencies
As of December 31, 1998, the Company had outstanding commitments to originate
adjustable and fixed rate mortgage loans and home equity loans totaling
approximately $21.1 million, $13.0 million, and $2.3 million, respectively; to
purchase adjustable rate mortgage loans totaling approximately $6.3 million; and
to sell fixed rate mortgage loans totaling approximately $11.7 million. In
addition, the Company had unused home equity lines of credit totaling $54.9
million. Commitments to originate loans are extended for periods up to 120
days. Commitments outstanding at December 31, 1998 to originate fixed rate
mortgage loans were issued at rates ranging from 6.25% 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
81
<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 his/her 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, 1998 was approximately $11.2 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,
----------------------------------------------------
1998 1997
---------------------- --------------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
----------- ---------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 18,874 $ 18,874 $ 31,583 $ 31,583
Investment securities 154,611 154,611 129,997 129,997
Mortgage-backed securities 32,364 32,364 85,480 85,480
Loans receivable 1,118,490 1,132,792 924,920 944,341
Stock in Federal Home Loan Banks 11,881 11,881 16,742 16,742
Accrued interest receivable 8,858 8,858 8,102 8,102
---------- ---------- ---------- ----------
$1,345,078 $1,359,380 $1,196,824 $1,216,245
========== ========== ========== ==========
Financial liabilities:
Savings deposits:
Passbook and statement savings,
NOW, and money market accounts $ 238,958 $ 238,958 $ 234,046 $ 234,046
Certificates of deposit 799,218 799,280 810,835 813,808
Borrowed money 209,516 209,309 65,908 67,823
Accrued interest payable 500 500 489 489
---------- ---------- ---------- ----------
$1,248,192 $1,248,047 $1,111,278 $1,116,166
========== ========== ========== ==========
</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.
82
<PAGE>
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.
Savings Deposits
The fair value of savings deposits with no stated maturity, such as passbook,
NOW, and money market accounts, is equal to the amount payable on demand.
The fair value of certificates of deposit, all of which have stated
maturities, is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
Borrowed Money
The fair value of borrowed money is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently available for similar borrowings.
Accrued Interest Receivable and Accrued Interest Payable
The carrying value is considered a reasonable estimate of fair value of these
financial instruments due to their short-term nature.
83
<PAGE>
(22) Parent Company Financial Information
The following are condensed balance sheets as of December 31, 1998 and 1997
and condensed statements of income and cash flows for the years ended December
31, 1998, 1997, and 1996 for Jefferson Savings Bancorp, Inc. (parent company
only):
<TABLE>
<CAPTION>
(In thousands)
Condensed Balance Sheets 1998 1997
------------------------ ------- ---------
<S> <C> <C>
Assets:
Investment in subsidiaries $114,963 $114,399
Advances to subsidiaries 11,731 5,080
Other assets 64 159
-------- --------
$126,758 $119,638
======== ========
Liabilities and stockholders' equity:
Commercial bank debt $ 2,599 $ 3,039
Other liabilities 320 339
Stockholders' equity 123,839 116,260
-------- --------
$126,758 $119,638
======== ========
<CAPTION>
(in thousands)
Condensed Statements of Income 1998 1997 1996
------------------------------ ------ ------- ------
<S> <C> <C> <C>
Interest income $ 651 $ 743 $ 812
Interest expense 215 249 273
Dividends from subsidiaries 8,000 - -
Gain on real estate operations - - 319
Other noninterest income 71 - -
------ ------- ------
8,507 494 858
Operating expenses 717 553 761
------ ------- ------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries 7,790 (59) 97
Income tax expense (benefit) (72) (19) 129
------ ------- ------
Income (loss) before equity in undistributed
earnings of subsidiaries 7,862 (40) (32)
Equity in undistributed earnings of subsidiaries (277) 10,271 2,848
------ ------- ------
Net income $7,585 $10,231 $2,816
====== ======= ======
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
Condensed Statements of Cash Flows 1998 1997 1996
---------------------------------- --------- ------------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 7,585 $ 10,231 $ 2,816
Net income of subsidiaries (7,723) (10,271) (2,848)
Dividends from subsidiaries 8,000 - -
Other, net 3,236 1,889 1,551
------- -------- -------
Net cash provided by operating activities 11,098 1,849 1,519
------- -------- -------
Investing activities:
Advances to subsidiaries (6,651) (687) (1,343)
Proceeds from sale of real estate - - 1,237
Cash paid for acquisitions - - -
------- -------- -------
Net cash used in investing activities (6,651) (687) (106)
------- -------- -------
Financing activities:
Dividends paid (2,606) (2,012) (1,197)
Principal payments on commercial bank debt (440) (391) (349)
Purchase of ESOP shares - - -
Shares sold to ESOP - 928 -
Proceeds from stock options exercised 787 149 84
Repurchase of treasury stock (2,424) - -
Proceeds from dividend reinvestment and
stock purchase plan 236 164 49
------- ------- -------
Net cash provided by (used in)
financing activities (4,447) (1,162) (1,413)
------- ------- -------
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 contribution to subsidiary - 14,604 5,155
======= ======= =======
</TABLE>
(23) Segment Information
As previously discussed in Note 1, the Company combined its two subsidiary
banks into one charter effective December 31, 1998. Prior to that combination,
management used loan and deposit balances, net income and related growth rates
and financial ratios to measure performance of each subsidiary bank. The
following table shows the financial information of the Company's reportable
divisions (formerly subsidiary banks) for 1998, 1997 and 1996:
85
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
Missouri Texas Other Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Results of Operations:
Net interest income $15,852,829 $17,803,532 $ 499,522 34,155,883
Provision for loan losses 700,000 (1,900,000) -- (1,200,000)
Noninterest income 3,088,590 1,319,211 (53,518) 4,354,283
Noninterest expense 11,587,052 13,842,899 655,364 26,085,315
Income taxes 2,598,500 3,513,000 (72,000) $ 6,039,500
----------- ----------- ------------ -----------
Net income $ 4,055,867 $ 3,666,844 $ (137,360) $ 7,585,351
=========== =========== ============ ===========
Balances at December 31, 1998:
Loans $ 659,981,683 $ 458,508,263 $ -- $ 1,118,489,946
Assets 805,598,777 594,665,141 (16,804,407) 1,383,459,511
Deposits 558,943,936 479,232,548 -- 1,038,176,484
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
Missouri Texas Other Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Results of Operations:
Net interest income $ 16,426,905 $ 20,104,746 $ 630,593 $ 37,162,244
Provision for loan losses 420,000 840,000 -- 1,260,000
Noninterest income 2,075,091 1,635,609 (197,565) 3,513,135
Noninterest expense 9,204,359 13,117,722 492,287 22,814,368
Income taxes 2,886,000 3,503,000 (19,000) 6,370,000
----------- ------------ --------- -----------
Net income $ 5,991,637 $ 4,279,633 $ (40,259) $ 10,231,011
=========== ============ ========= ===========
Balances at December 31, 1997:
Loans $ 519,962,382 $ 405,148,200 $ (190,976) $ 924,919,606
Assets 666,107,800 573,159,288 (1,211,591) 1,238,055,497
Deposits 560,140,131 484,740,999 -- 1,044,881,130
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
Missouri Texas Other Consolidated
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Results of Operations:
Net interest income $ 15,343,638 $ 13,487,446 $701,265 $ 29,532,349
Provision for loan losses (2,240,000) 2,900,000 -- 660,000
Noninterest income 91,487 929,814 96,662 1,117,963
Noninterest expense 14,606,070 9,884,715 701,129 25,191,914
Income taxes 1,028,600 824,900 128,700 1,982,200
------------ ------------ -------- --------------
Net income $ 2,040,455 $ 807,645 $(31,902) $ 2,816,198
============ ============ ======== ==============
Balances at December 31, 1996:
Loans $515,605,756 $369,799,306 $ -- $ 885,405,062
Assets 685,249,226 462,578,877 250,972 1,148,079,075
Deposits 555,243,588 391,825,084 -- 947,068,672
</TABLE>
(24) Comprehensive Income
On January 1, 1998 the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. For the years
ended December 31, 1998, 1997 and 1996, unrealized gains and losses on assets
available for sale were the Company's only other comprehensive income component.
Comprehensive income for 1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net income $7,585,351 10,231,011 2,816,198
Other comprehensive income (loss):
Realized and unrealized holding gain (loss)
arising during the period, net of tax (96,130) 665,738 (61,108)
Less: reclassification adjustment for realized
gain (loss) included in net income, net of tax 28,900 336,746 (777,680)
----------- ---------- ----------
Total other comprehensive income (loss) (125,030) 328,992 716,572
----------- ---------- ----------
Total comprehensive income $7,460,321 10,560,003 3,532,770
=========== ========== ==========
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Supplementary Data
- ------------------
Quarterly Financial Data
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income......................... $22,781 $22,465 $22,628 $23,862
Interest expense..................................... 14,036 14,155 14,403 14,986
------- ------- ------- -------
Net interest income............................... 8,745 8,310 8,225 8,876
Provision for losses on loans........................ -- (1,200) -- --
------- ------- ------- -------
Net interest income after
provision for losses on loans................... 8,745 9,510 8,225 8,876
------- ------- ------- -------
Noninterest income:
Gains on sales of investment securities, net....... -- 48 -- --
Gain on sales of loans, net......................... 629 452 342 436
Real estate operations, net......................... 35 129 (6) 42
Other............................................... 649 497 534 567
------- ------- ------- -------
Total noninterest income......................... 1,313 1,126 870 1,045
------- ------- ------- -------
Noninterest expense:
General and administrative.......................... 5,817 6,653 5,863 5,942
Amortization of excess cost over
fair value of net assets acquired.................. 451 453 453 453
------- ------- ------- -------
Total noninterest expense........................ 6,268 7,106 6,316 6,395
------- ------- ------- -------
Income before income taxes....................... 3,790 3,530 2,779 3,526
Income tax expense................................... 1,594 1,710 1,237 1,499
------- ------- ------- -------
Net income....................................... $ 2,196 $ 1,820 $ 1,542 $ 2,027
======= ======= ======= =======
Earnings per share, basic............................ $0.24 $0.19 $0.16 $0.22
Earnings per share, diluted.......................... 0.22 0.18 0.16 0.21
======= ======= ======= =======
<CAPTION>
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th 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
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>
88
<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 1999 Annual Meeting of Stockholders (the "Proxy Statement") which will
be filed within 120 days of the Company's fiscal year end and is incorporated
herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Director
Compensation" and "Executive Compensation and Other Benefits" in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Securities Ownership of Management" in the
Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Transactions" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) List of Documents Filed as Part of this Report
----------------------------------------------
(1) Financial Statements. The following consolidated financial statements
are filed under Item 8 hereof:
Independent Auditors' Report
89
<PAGE>
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
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>
No. Description
-- -----------
<S> <C> <C> <C>
3.1 Certificate of Incorporation *
3.2 Bylaws **
4.1 Specimen Stock Certificate ***
4.2 Rights Agreement, dated August 17, 1994,
between Jefferson Savings Bancorp, Inc.
and Boatmen's Trust Company ****
10.1+ Jefferson Savings Bancorp, Inc. 1993 Stock
Option and Incentive Plan *
10.2+ Jefferson Savings Bancorp, Inc. Management
Recognition Plan "A" *
10.3+ Jefferson Savings Bancorp, Inc. Management
Recognition Plan "B" *
10.4+ Jefferson Savings Bancorp, Inc. Management
Recognition Plan "C" *
10.5+ Jefferson Savings Bancorp, Inc. Management
Recognition Plan "D" *
10.6+ Jefferson Savings Bancorp, Inc. Directors'
Retirement Plan *****
10.7+ Employment Agreement between Jefferson
Savings Bancorp, Inc., Jefferson Savings
and Loan Association and David V. McCay *
10.8+ Supplemental Retirement Agreement between
Jefferson Savings and Loan Association and
David V. McCay *
10.9+ Form of Director's Deferred Compensation
Agreement *
10.10+ Jefferson Savings and Loan Association
Bonus Plan *
10.11 [Reserved]
10.12+ Sixth Amendment to Employment Agreement, dated
May 20, 1998, between Jefferson Savings Bancorp,
Inc., Jefferson Savings and Loan Association and
David V. McCay. ******
10.13+ First Amendment to Jefferson Savings and Loan
Association Supplemental Retirement Agreement,
dated May 20, 1998, by and between Jefferson
Savings and Loan Association and David V. McCay. ******
10.14+ Amendment No. 2 to Jefferson Savings Bancorp, Inc.
1993 Stock Option and Incentive Plan, dated
May 20, 1998. ******
10.15+ Trust Agreement for Jefferson Savings and Loan
Association Supplemental Retirement Agreement,
dated May 20, 1998, by and between Jefferson
Savings and Loan Association and Mercantile Bank,
N.A. ******
21 Subsidiaries of the Registrant
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
No. Description
-- -----------
<S> <C> <C> <C>
23 Consent of KPMG LLP
27 Financial Data Schedule (EDGAR only)
</TABLE>
- -------------------
(+) Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
* Incorporated by reference from Registration Statement on Form S-1
filed December 23, 1992 (File No. 33-56324)
** Incorporated by reference from Annual Report on Form 10-K for the
year ended December 31, 1995
*** Incorporated by reference from Registration Statement on Form 8-A
filed March 30, 1993 (File No. 0-21466)
**** Incorporated by reference from Registration Statement on Form 8-A
filed August 19, 1994.
***** Incorporated by reference from Pre-Effective Amendment No. 2 to
Registration Statement on Form S-1 filed February 10, 1993
(File No. 33-56324)
****** Incorporated by reference from Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
(b) Reports on Form 8-K. The Registrant did not file any Current Reports
-------------------
on Form 8-K during the last quarter of the fiscal year ending December 31, 1998.
(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.
91
<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 29, 1999 By: /s/ David V. McCay
--------------------------------------
David V. McCay
Chairman of the Board 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 29, 1999
------------------------------------
David V. McCay
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Joseph L. Williams March 29, 1999
------------------------------------
President and Chief Operating Officer
By: /s/ Paul J. Milano March 29, 1999
------------------------------------
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 29, 1999
------------------------------------
Frank C. Bick
Director
By: /s/ William W. Canfield March 29, 1999
-------------------------------------
William W. Canfield
Director
By: /s/ Lloyd D. Doerflinger, Jr. March 29, 1999
-------------------------------------
Lloyd D. Doerflinger, Jr.
Director
By: /s/ Forrest W. Miller, Jr. March 29, 1999
-------------------------------------
Forrest W. Miller, Jr.
Director
By: /s/ Edward G. Throop March 29, 1999
-------------------------------------
Edward G. Throop
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 Heritage Bank United States 100%
Jefferson Acquisition Co. Missouri 100%
<CAPTION>
Subsidiaries of Jefferson Heritage Bank
- ---------------------------------------
<S> <C> <C>
J.S. Services, Inc. Missouri 100%
Jefferson Financial Corporation Texas 100%
First Service Corporation, Inc. Texas 100%
- ---------------------------
</TABLE>
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the Annual Report on
Form 10-K.
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
-----------------------------
The Board of Directors
Jefferson Savings Bancorp, Inc.
We consent to incorporation by reference in the registration statement (Number
333-09063) on Form S-3 and (Number 33-56324) on Form S-8 of Jefferson Savings
Bancorp, Inc. of our report dated January 28, 1999, relating to the consolidated
balance sheets of Jefferson Savings Bancorp, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the December 31, 1998 annual report on Form 10-K of Jefferson Savings Bancorp,
Inc.
/s/ KPMG LLP
St. Louis, Missouri
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,602,268
<INT-BEARING-DEPOSITS> 11,271,419
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 186,974,281
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,118,489,946
<ALLOWANCE> 6,659,294
<TOTAL-ASSETS> 1,383,459,511
<DEPOSITS> 1,038,176,484
<SHORT-TERM> 209,515,534
<LIABILITIES-OTHER> 11,928,792
<LONG-TERM> 0
0
0
<COMMON> 100,984
<OTHER-SE> 128,737,717
<TOTAL-LIABILITIES-AND-EQUITY> 1,383,459,511
<INTEREST-LOAN> 75,313,978
<INTEREST-INVEST> 14,111,526
<INTEREST-OTHER> 2,311,269
<INTEREST-TOTAL> 91,736,773
<INTEREST-DEPOSIT> 52,869,613
<INTEREST-EXPENSE> 57,580,890
<INTEREST-INCOME-NET> 34,155,883
<LOAN-LOSSES> (1,200,000)
<SECURITIES-GAINS> 48,166
<EXPENSE-OTHER> 26,085,315
<INCOME-PRETAX> 13,624,851
<INCOME-PRE-EXTRAORDINARY> 7,585,351
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,585,351
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 2.81
<LOANS-NON> 3,709,029
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,245,000
<LOANS-PROBLEM> 2,500,000
<ALLOWANCE-OPEN> 8,182,268
<CHARGE-OFFS> 331,526
<RECOVERIES> 8,552
<ALLOWANCE-CLOSE> 6,659,294
<ALLOWANCE-DOMESTIC> 3,693,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,966,000
</TABLE>
