<PAGE>
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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, 1999
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.
---------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1625841
---------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15435 CLAYTON ROAD, BALLWIN, MISSOURI 63011
------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (636) 227-3000
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
--------------------------------------
(Title of class)
Preferred Share Purchase Rights
-------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 2000, the aggregate market value of the registrant's voting
stock held by non-affiliates was approximately $67.3 million based on the
closing sales price of $11.43 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, 2000: 9,957,826
================================================================================
<PAGE>
PART I
Item 1. Business
- -----------------
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" or the "Bank"). The Company was originally
incorporated at the direction of the Board of Directors of Jefferson Heritage
for the purpose of becoming the holding company for Jefferson Heritage 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-Panola Savings Association, Carthage, Texas ("Shelby-
Panola") in cash transactions accounted for as purchases. Upon completion of the
acquisitions, North Texas, Longview and Shelby-Panola were consolidated under a
single federal charter and operated as First Federal Savings Bank of North Texas
("First Federal"). In 1996, the Company acquired Texas Heritage Savings
Association/Banc in Rowlett, Texas ("Texas Heritage") in exchange for cash and
stock in another transaction accounted for as a purchase. The Texas Heritage
acquisition added four branches in the suburban Dallas counties of Dallas,
Rockwell and Tarrant. Upon completion of the acquisition, Texas Heritage was
merged into First Federal. In 1997, the Company acquired L&B Financial, Inc.,
the holding company for Loan & Building State Savings Bank, Sulphur Springs,
Texas ("L&B Financial") for cash and stock in a purchase transaction. 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.
Upon completion of the acquisition, the operations of L&B Financial were also
merged into First Federal. The following table provides certain additional
information regarding the Company's Texas acquisitions:
<TABLE>
<CAPTION>
Consideration
-------------------------
Stock Excess
Date of Name of # of ----------------- Cost Over
Acquisition Institution Asset Size Branches Cash Shares Value Fair Value
- ----------- ----------- ---------- -------- ----- --------- ----- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
5/31/95 North Texas $190.7 5 $28.3 -- $ -- $11.9
5/31/95 Longview 134.5 5 12.8 -- -- 2.4
7/13/95 Shelby-Panola 55.6 1 10.9 -- -- 6.3
12/30/96 Texas Heritage 71.8 4 5.1 446,302 5.1 5.9
2/28/97 L&B Financial 141.8 6 15.3 1,095,900 15.3 5.9
</TABLE>
On December 31, 1998, the Company merged First Federal into Jefferson
Heritage creating a 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 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.
2
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The executive offices of the Company are located at 15435 Clayton Road,
Ballwin, Missouri 63011 and its main telephone number is (636) 227-3000.
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.
Like most savings institutions, the principal business of Jefferson Heritage
historically consisted of the origination of home mortgages funded by deposits
drawn through its branch network. In response to market changes, however, the
Bank has continually expanded its product mix and refined its methods of
reaching customers. In recent years, the Bank has emphasized residential
construction and development lending and commercial mortgages in addition to its
traditional permanent residential mortgage financing. Jefferson Heritage has
supplemented direct home mortgage originations with purchases from mortgage
brokers and now originates loans for the secondary markets as well as for its
portfolio. The Bank's loan product mix also includes a variety of consumer loans
such as home equity lines of credit and automobile loans. To fund its lending
operations, Jefferson Heritage has relied to an increasing degree on borrowings
from the FHLB System. Management's strategy is to continue the evolution of
Jefferson Heritage into a more "bank-like" organization with a more diversified
loan portfolio and higher levels of non-interest income from fees and services.
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.
During 1999, Jefferson Heritage established a new mortgage banking
subsidiary, Jefferson Heritage Mortgage Company ("JHMC"), in order to originate
loans in growing markets in which Jefferson Heritage does not currently have a
presence. JHMC currently maintains loan production offices in Denton, Austin and
El Paso, Texas, Nashville, Tennessee, Seattle, Washington and St. Louis,
Missouri and is considering other locations. JHMC originates loans for both
resale on the secondary market and for the Bank's portfolio.
Jefferson Heritage's deposits are insured, up to applicable limits for each
depositor by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). Jefferson
Heritage is currently a member of the Federal Home Loan Bank ("FHLB") of Des
Moines, which is one 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) nine offices in the suburban Dallas
counties of Denton, Tarrant, Dallas, Rockwell and Wise, Texas; (iii) nine
offices in the northeastern Texas counties of Gregg, Bowie, Franklin, Hopkins,
Morris and Titus; and (iv) one office in Panola County, Texas. With $1.6 billion
in assets at December 31, 1999, Jefferson Heritage is one of the largest savings
associations headquartered in the State of Missouri.
The St. Louis metropolitan area has a population of approximately 2.5
million, representing an increase of approximately 3% since 1980. 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-
3
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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 is home to 20 Fortune 1000
companies and ranks fourth 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 15435 Clayton Road,
Ballwin, Missouri 63011 and its main telephone number is (636) 227-3000.
Jefferson Heritage maintains a website at www.jeffersonheritage.com.
-------------------------
Financial Modernization Legislation
On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
("G-L-B") Act authorizes affiliations between banking, securities and insurance
firms and authorizes bank holding companies and national banks to engage in a
variety of new financial activities. Among the new activities that will be
permitted to bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant banking. The Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), in
consultation with the Secretary of the Treasury, may approve additional
financial activities. National bank subsidiaries will be permitted to engage in
similar financial activities but only on an agency basis unless they are one of
the 50 largest banks in the country. National bank subsidiaries will be
prohibited from insurance underwriting, real estate development and, for at
least five years, merchant banking. The G-L-B Act, however, prohibits future
acquisitions of existing unitary savings and loan holding companies, like the
Company, by firms which are engaged in commercial activities and limits the
permissible activities of unitary holding companies formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-L-
B Act. The G-L-B Act directs the federal banking agencies, the National Credit
Union Administration, the Secretary of the Treasury, the Securities and Exchange
Commission and the Federal Trade Commission, after consultation with the
National Association of Insurance
4
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Commissioners, to promulgate implementing regulations within six months of
enactment. The privacy provisions will become effective six months thereafter.
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of FHLB
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small agri-
businesses. The G-L-B Act makes membership in the FHLB voluntary for federal
savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
which may acquire control of the Company, it may facilitate affiliations with
companies in the financial services industry.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio totaled $1.2
billion at December 31, 1999, representing 78.3% of total assets at that date.
At December 31, 1998, the loan portfolio of Jefferson Heritage totaled $1.1
billion, or 80.8% of its assets.
Although the Company's loan portfolio continues to consist primarily of
loans secured by residential real estate, the Company over the past several
years has increased the proportion of that portfolio represented by residential
construction and development loans. At December 31, 1999, $806.1 million, or
58.9% of the total loan portfolio, consisted of permanent loans secured by
single-family real estate. Loans for the construction and development of single-
family residential real estate totaled $320.9 million, or 23.4% of the Company's
total loan portfolio at that date. At December 31, 1999, 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 4.0% of the total loan portfolio, at December
31, 1999.
During 1999, the Company increased its commercial real estate lending. At
December 31, 1999, loans secured by commercial real estate totaled $155.7
million, or 11.4% 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 $15.7 million, or 1.2% of the Company's total loan
portfolio at December 31, 1999. Commercial loans which consist of mortgage
warehouse lines of credit secured by single-family mortgages, totaled $15.8
million, or 1.2%, of the total loan portfolio.
As a result of the increasing role of JHMC, the Company's real estate loan
portfolio has become more diversified geographically although the majority of
its loans continue to be secured by properties in its traditional markets of
Missouri and Texas. The Company estimates that approximately 34.3% of Jefferson
Heritage's loans are secured by properties in the State of Missouri and 41.4% of
Jefferson Heritage's loans are secured by properties in the State of Texas.
5
<PAGE>
Set forth below is selected data relating to the composition of the
Company's loan portfolio by type of loan on the dates indicated. As of December
31, 1999, the Company had no concentrations of loans exceeding 10% of total
loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------- -------------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
--------- ------- ---------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Real estate loans:
Single-family (1).......... $ 801,054 58.51% $ 840,164 69.72% $647,735 66.72% $623,754 63.51% $629,327 75.74%
Home equity................ 54,949 4.01 54,857 4.55 54,156 5.58 44,924 4.57 26,826 3.23
FHA insured/VA guaranteed.. 5,078 0.37 1,517 0.13 2,073 0.21 968 0.10 1,065 0.13
Commercial................. 155,659 11.37 72,602 6.03 80,758 8.32 56,667 5.77 61,485 7.40
Construction and
development............... 320,917 23.44 208,207 17.28 163,390 16.83 242,143 24.66 105,339 12.68
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans... 1,337,657 97.70 1,177,347 97.71 948,112 97.65 968,456 98.61 824,042 99.18
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Commercial.................. 15,755 1.15 17,330 1.44 9,775 1.01 5,000 0.51 2,000 0.24
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Automobile................. 2,699 0.21 2,021 0.17 3,134 0.32 1,649 0.17 875 0.10
Loans secured by savings
deposits.................. 4,986 0.36 4,776 0.40 5,532 0.57 3,658 0.37 3,410 0.41
Education.................. 31 0.00 78 0.01 191 0.02 178 0.02 229 0.03
Other...................... 7,973 0.58 3,441 0.27 4,179 0.43 3,195 0.32 341 0.04
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans...... 15,689 1.15 10,316 0.85 13,036 1.34 8,680 0.88 4,855 0.58
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable... 1,369,101 100.00% 1,204,993 100.00% 970,923 100.00% 982,136 100.00% 830,897 100.00%
====== ====== ====== ====== ======
Add (deduct):
Loans in process........... (127,229) (83,586) (38,126) (89,573) (38,458)
Unearned (discounts)
premiums, net............. 3,614 (494) (1,112) (1,786) (621)
Deferred loan costs
(fees), net............... 378 4,236 1,417 1,157 1,363
Allowance for losses....... (6,938) (6,659) (8,182) (6,529) (5,096)
---------- ---------- -------- -------- --------
Loans receivable, net..... $1,238,926 $1,118,490 $924,920 $885,405 $788,085
========== ========== ======== ======== ========
- ------------------------
</TABLE>
(1) Includes loans held for sale of $21,644,000, $5,867,000, $2,821,000,
$1,787,000 and $752,000 at December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
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Loan Portfolio Sensitivity. The following table sets forth certain
information as of December 31, 1999 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 long-term 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
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(In thousands)
Residential real estate.............. $ 39,161 $166,210 $655,710 $ 861,081
Commercial real estate............... 15,572 52,293 87,794 155,659
Construction and development......... 230,973 88,721 1,223 320,917
Commercial........................... 15,292 463 -- 15,755
Consumer............................. 6,726 7,696 1,267 15,689
-------- -------- -------- ----------
Total............................ $307,724 $315,383 $745,994 $1,369,101
======== ======== ======== ==========
</TABLE>
The following table sets forth as of December 31, 1999 the dollar amount of
the loans maturing subsequent to the year ending December 31, 2000 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....... $178,278 $643,641 $ 821,919
Commercial real estate........ 57,823 82,264 140,087
Construction and development.. 2,826 87,119 89,945
Commercial.................... 295 168 463
Consumer...................... 4,624 4,339 8,963
-------- -------- ----------
Total...................... $243,846 $817,531 $1,061,377
======== ======== ==========
</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. During 1999, the Company
consolidated its single-family permanent mortgage loan origination activities in
JHMC which originates loans both on behalf of the Bank and for resale into the
secondary market. JHMC is staffed by commissioned loan representatives who
identify origination opportunities in the areas served by its loan production
offices. The Bank does not accept loans from JHMC unless the loans meet the same
underwriting criteria that the Bank has traditionally used in originating 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. The Company significantly increased its loan purchases in
order to replenish its portfolio
7
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of adjustable-rate mortgages which had declined as a result of refinancing
activity during recent years. Purchases of single-family residential mortgages
decreased to $201.9 million in 1999 from $384.1 million in 1998. During 1999,
the Company also purchased $65.1 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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<PAGE>
The following table sets forth certain information with respect to the loan
origination, purchase and sale activity of the Company during the periods
indicated, including loans acquired in business combinations.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction and development.................. $328,565 $153,530 $172,505
Single-family................................. 117,455 149,833 140,878
Home equity................................... 38,479 37,202 35,106
FHA insured/VA guaranteed..................... 17,508 2,551 1,029
Commercial real estate........................ 55,585 21,516 10,453
Commercial...................................... 7,117 8,000 8,587
Consumer........................................ 10,702 6,400 9,310
-------- -------- --------
Total loans originated...................... 575,411 379,032 377,868
-------- -------- --------
Loans purchased:
Real estate loans:
Single-family................................. 201,853 384,077 48,738
Commercial.................................... 54,205 936 773
Construction.................................. 10,893 21,113 --
Consumer........................................ 3,630 -- --
-------- -------- --------
Total loans purchased....................... 270,581 406,126 49,511
-------- -------- --------
Loans acquired in business combinations:
Real estate loans:
Construction.................................. -- -- 3,111
Single-family................................. -- -- 44,974
Home improvement.............................. -- -- 13
FHA insured/VA guaranteed..................... -- -- 116
Commercial real estate........................ -- -- 19,803
Consumer........................................ -- -- 5,063
Less allowance for loss, unearned discount and
deferred fees................................. -- -- (2,658)
-------- -------- --------
Total loans acquired in acquisitions.......... -- -- 70,422
-------- -------- --------
Loans sold - residential real estate.............. 144,134 119,379 45,232
-------- -------- --------
Total loans sold.............................. 144,134 119,379 45,232
-------- -------- --------
Principal repayments.............................. 580,742 471,986 409,383
Decrease (increase) in other items, net........... (679) (223) (3,671)
-------- -------- --------
Net increase...................................... $120,437 $193,570 $ 39,515
======== ======== ========
</TABLE>
9
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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.
The Board of Directors has established lending guidelines which require the
approval of specified officers or members of the Senior Loan Committee for
various loans. The Senior Loan Committee consists of five senior officers and
four non-employee directors. Single-family mortgages (including home equity and
home improvement loans) of up to $254,000 and consumer loans of up to $25,000
may be approved by certain specified officers or a member of the Senior Loan
Committee. Single-family loans between $254,001 and $650,000 and consumer loans
between $25,001 and $50,000 require the approval of at least two of the
specified officers or members of the Senior Loan Committee. Single-family loans
between $650,001 and $1,000,000 and consumer loans between $50,001 and $100,000
may be made on the approval of three specified officers or members of the Senior
Loan Committee. Single-family loans in greater amounts may be made with the
approval of at least three specified officers and a majority of the Senior Loan
Committee including at least two director members while consumer loans in excess
$100,000 require the approval of at least three specified officers and one
member of the Senior Loan Committee.
Non-residential real estate loans including construction, acquisition and
development loans, land loans and commercial real estate mortgages and lines of
credit up to $250,000 and commercial loans up to $100,000 require the approval
of at least two specified officers or members of the Senior Loan Committee. Non-
residential real estate loans between $250,001 and $750,000 and commercial loans
between $100,001 and $250,000 require the approval of at least three of the
specified officers or members of the Senior Loan Committee. Non-residential real
estate loans of between $750,001 and $1,000,000 may be made on the approval of
at least three specified officers including at least one senior officer and non-
residential real estate loans between $1,000,001 and $2,000,000 may be made with
the approval of four officers including at least one of the senior officers.
Commercial loans between $250,001 and $500,000 require the approval of at least
three specified officers or members of the Senior Loan Committee and commercial
loans between $500,001 and $1,000,000 require the approval of at least four of
these officers or Senior Loan Committee members. Non-residential real estate
loans in excess of $2,000,000 and commercial loans in excess of $1,000,000 may
only be made with the approval of seven members of the Senior Loan Committee
including at least two outside directors.
To provide a prompt response to existing customers, the 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
additional approval, however, ratification is required by the Senior 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.
10
<PAGE>
Upon receipt of a loan applic ation 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.
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, 1999, Jefferson Heritage would be permitted to lend up to $16.7
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 $13.3 million
at December 31, 1999. At December 31, 1999, the Company's largest loan consisted
of a $8.5 million commercial construction loan secured by 25.7 acres of
commercial undeveloped land.
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 with maturities 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.
One-to-two year adjustable-rate loans, however, are underwritten on the basis of
the borrower's ability to pay at a rate 200 basis points above the initial rate.
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
generally does not originate or purchase such loans. At December 31, 1999,
Jefferson Heritage held approximately $120.9 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
11
<PAGE>
interest rates, the risk of default on adjustable-rate mortgage loans may
increase due to the upward adjustment of interest costs to the borrower.
Further, the adjustable-rate mortgages originated by the Company may provide for
initial rates of interest below the rates which would apply were the index used
for pricing applied initially. These loans are subject to increased risk of
delinquency or default as the higher, fully-indexed rate of interest
subsequently comes into effect, replacing the lower initial rate. Although
adjustable-rate mortgage loans allow the Company to increase the sensitivity of
its asset base to changes in interest rates, the extent of this interest rate
sensitivity is limited by the periodic and lifetime interest rate adjustment
limitations. Accordingly, there can be no assurance that yields on the Company's
adjustable-rate mortgages will adjust sufficiently to compensate for increases
in the Company's cost of funds. Because borrowers may generally prepay
adjustable-rate residential mortgage loans without penalty, such mortgages
expose the Company to prepayment risk in a declining interest rate environment.
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. Jefferson Heritage may make home equity loans with loan-to-
value ratios in excess of 80% if the borrower obtains private mortgage insurance
for the amount in excess of 80%. 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 began
offering such loans on a limited basis during 1998. At December 31, 1999, total
outstanding home equity loans totaled $54.9 million, or 4.0% 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, 1999, the principal concentrations in the Company's
commercial real estate loan portfolio were as follows:
<TABLE>
<CAPTION>
Amount
Type of Loan (In thousands)
------------ --------------
<S> <C>
Office buildings................ $ 49,617
Multi-family.................... 37,353
Hotels and restaurants.......... 29,613
Other........................... 39,076
--------
$155,659
========
</TABLE>
The Company's two largest commercial real estate loans at December 31, 1999
were a $3.9 million loan secured by two retail centers in Springfield, Missouri
and a $4.2 million loan secured by an office building in St. Louis, Missouri. At
December 31, 1999, the Company's ten largest commercial real estate loans
amounted to $33.3 million, or 21.4% of the Company's portfolio of commercial
real estate loans. None of these loans were past due at December 31, 1999.
12
<PAGE>
At December 31, 1999, commercial real estate loans totaled $155.7 million,
or 11.4% of the Company's total loan portfolio, as compared to $72.6 million, or
6.0%, at December 31, 1998. The Company originated $10.5 million, $21.5 million
and $55.6 million of commercial real estate loans during the years ended
December 31, 1997, 1998 and 1999, respectively.
The Company's commercial real estate loans have a maximum term and
amortization of 30 years, but typically have balloon terms ranging from three to
five years. Commercial real estate loans generally are made with interest rates
that adjust annually or more frequently based upon changes in the Treasury Index
or other index utilized, including prime rate and cost of funds indices, plus a
negotiated margin.
Commercial real estate lending entails significant additional risks as
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly impacted by supply and demand conditions in the market for office
and retail space, and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. To mitigate these risks, the Company limits
its commercial real estate lending to market areas in which it has traditionally
operated or which it has only entered after thorough research including a
favorable economic analysis by an independent advisor. In addition, the Company
has limited its commercial real estate lending to borrowers with whom the
Company or its personnel are familiar. 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, 1999, Jefferson Heritage was permitted to invest in non-residential
real property loans in an aggregate amount equal to $420.3 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. The Company has begun
originating construction loans outside its traditional market areas in Missouri
and Texas. The Company, however, does not begin originating loans in other
markets until management has thoroughly familiarized itself with these markets.
At December 31, 1999, the Company's loan portfolio included $283.8 million in
construction loans all of which were for the construction of single-family homes
or development of land to build 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, 1999, 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, 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
13
<PAGE>
(including interest) of construction. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Company may be required to
advance funds beyond the amount originally committed to permit completion of the
development. If the estimate of value proves to be inaccurate, the Company may
be confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment. The ability of a developer
to sell developed lots or completed dwelling units will depend on, among other
things, demand, pricing, availability of comparable properties and economic
conditions.
Consumer Lending. Consumer loans originated by the Company include
automobile loans, education loans and loans secured by savings deposits. At
December 31, 1999, consumer loans totaled $15.7 million, or 1.2% 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, 1999, total
loans on savings deposits were $5.0 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, 1999, $75,000 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 mortgage warehouse lines of credit totaling $11.0 million
at December 31, 1999 to five 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.
14
<PAGE>
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.
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, 1999, the Company was servicing approximately
$146.7 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.
15
<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>
December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Restructured loans...................... $1,022 $1,245 $ 210 $ 179 $ 546
------ ------ ------ ------ ------
Nonaccruing loans:
Residential real estate............... $3,308 $1,740 $1,826 $1,169 $1,687
Commercial real estate................ 2,506 58 1,214 -- 26
Construction.......................... 1,340 1,829 2,294 11 707
Commercial............................ 216 -- -- 74 15
Consumer.............................. 75 82 72 232 42
------ ------ ------ ------ ------
Total nonaccruing loans............. 7,445 3,709 5,406 1,486 2,477
Applicable allowance for losses..... (903) (30) (152) (43) --
------ ------ ------ ------ ------
Nonaccruing loans, net.......... 6,542 3,679 5,254 1,443 2,477
------ ------ ------ ------ ------
Total restructured and
nonaccruing loans, net...... 7,564 4,924 5,464 1,622 3,023
------ ------ ------ ------ ------
Nonperforming loans, net as a
percentage of net loans....... 0.61% 0.44% 0.59% 0.18% 0.38%
====== ====== ====== ====== ======
Foreclosed assets:
Residential real estate............... $ 902 $ 217 $ 880 $1,584 $ 436
Commercial real estate................ 161 1,625 1,315 1,195 3,163
Construction.......................... 469 1,399 2,596 2,115 343
Commercial............................ -- -- -- -- --
------ ------ ------ ------ ------
Total foreclosed assets............. 1,532 3,241 4,791 4,894 3,942
Applicable allowance for losses..... (10) (360) (535) (434) (272)
------ ------ ------ ------ ------
Foreclosed assets, net.......... 1,522 2,881 4,256 4,460 3,670
------ ------ ------ ------ ------
Nonperforming assets, net....... $9,086 $7,805 $9,720 $6,082 $6,693
====== ====== ====== ====== ======
Nonperforming assets, net as a
percentage of total assets.... 0.57% 0.56% 0.79% 0.53% 0.59%
====== ====== ====== ====== ======
</TABLE>
Total nonperforming assets increased to $9.1 million (or 0.57% of assets)
at December 31, 1999 from $7.8 million (or 0.56% of assets) at December 31, 1998
after decreasing from $9.7 million (or 0.79% of assets) at December 31, 1997.
The increase in non-performing assets during 1999 is attributable to a $2.9
million increase in nonaccruing loans, partially offset by a $1.4 million
decrease in foreclosed assets and a $233,000 decrease in restructured loans. The
increase in nonaccruing loans during 1999 is attributed primarily to a $2.4
million increase in non-accruing commercial real estate loans and a $1.6 million
increase in non-accruing residential loans partially offset by a $489,000
decrease in nonaccruing construction loans. The increase in nonaccruing
commercial real estate loans was primarily due to the classification of a $2.2
million loan, secured by a retail shopping center in Missouri, as nonaccrual due
to the borrower's inability to make timely payments. At December 31, 1999, this
loan was 59 days past due. Nonaccruing residential real estate loans at
December 31, 1999 consisted of 53 single-family permanent loans compared to 38
such loans at December 31, 1998. 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 during 1998
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, 1999 consisted of nine loans for
the construction of single-family residences.
16
<PAGE>
At December 31, 1999, the Company's foreclosed assets consisted primarily
of one commercial real estate property carried at $148,000, two single-family
construction loans carried at $321,000, two land loans at $161,000 and eight
permanent single-family loans at $902,000. See "-- Real Estate Acquired Through
Foreclosure." The Company's restructured loans consist of 36 loans totaling
approximately $1.0 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, 1999, the Company had four single-family
construction loans totaling $723,000 that were more than 90 days past the
maturity date with regard to principal repayment. Interest 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, 1999, gross interest income of
approximately $756,000 and $93,000, 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
$406,000 was included in income during the year ended December 31, 1999 on
nonaccruing loans. Approximately $93,000 in interest on restructured loans was
included in income during the year ended December 31, 1999.
At December 31, 1999, there were $947,000 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,
1999 it had $10.2 million, net of reserves, in assets classified as substandard,
$165,000 in assets classified as doubtful and $1.1 million in assets classified
as loss. Substandard assets included $3.4 million in residential loans, $49,000
in consumer loans, $2.7 million in construction and development loans, $2.3
million in commercial real estate loans, $140,000 in commercial loans and $1.5
million, net of reserves, in real estate acquired through foreclosure. Assets
classified as loss, which are fully reserved, consisted of $10,000 in real
estate acquired through foreclosure and $1.0 million 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.
17
<PAGE>
The Company's methodology for establishing the allowance for loan losses
takes into consideration probable losses in the loan portfolio. 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
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, 1999 was 93.2%. During 1998 the Company recaptured $1.2 million of excess
loan loss reserves. The OTS, after a 1997 examination, had required the
Company's former 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.
18
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $6,659 $ 8,182 $6,529 $5,096 $3,471
Reserves acquired in business combinations.. -- -- 1,156 851 1,378
Loans charged-off:..........................
Residential real estate.................... (95) (64) (91) (24) --
Commercial real estate..................... (99) (152) -- -- (91)
Construction............................... -- (90) (546) (42) (31)
Commercial................................. -- -- (7) -- --
Consumer................................... (47) (26) (137) (12) --
------ ------- ------ ------ ------
Total charge-offs......................... (241) (332) (781) (78) (122)
------ ------- ------ ------ ------
Recoveries:
Residential real estate.................... -- 3 18 -- --
Commercial real estate..................... -- -- -- -- --
Construction............................... -- -- -- -- --
Commercial................................. -- -- -- -- --
Consumer................................... -- 6 -- -- 2
------ ------- ------ ------ ------
Total recoveries.......................... -- 9 18 -- 2
------ ------- ------ ------ ------
Net loans charged-off....................... (241) (323) (763) (78) (120)
------ ------- ------ ------ ------
Provision charged to expense................ 520 (1,200) 1,260 660 367
------ ------- ------ ------ ------
Balance at end of period.................... $6,938 $ 6,659 $8,182 $6,529 $5,096
====== ======= ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period........ 0.02% 0.03% 0.08% 0.01% 0.02%
====== ======= ====== ====== ======
Ratio of allowance to net loans............. 0.56% 0.60% 0.88% 0.74% 0.65%
====== ======= ====== ====== ======
</TABLE>
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,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- --------------------------
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....... $1,127 62.89% $1,066 74.40% $1,640 72.51%
Commercial real estate........ 1,626 11.37 1,977 6.03 2,896 8.32
Construction and development.. 1,758 23.44 1,437 17.28 1,557 16.83
Commercial.................... 214 1.15 69 1.44 43 1.01
Consumer...................... 134 1.15 144 0.85 107 1.34
Unallocated................... 2,079 -- 1,966 -- 1,939 --
------ ------ ------ ------ ------ ------
$6,938 100.00% $6,659 100.00% $8,182 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1996 1995
-------------------- ------------------------
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............... $1,354 68.18% $1,050 79.10%
Commercial real estate................ 1,199 5.77 535 7.40
Construction and development.......... 3,007 24.66 139 12.68
Commercial............................ 4 0.51 -- 0.24
Consumer.............................. 152 0.88 71 0.58
Unallocated........................... 813 -- 3,301 --
------ ------ ------ ------
$6,529 100.00% $5,096 100.00%
====== ====== ====== ======
</TABLE>
Included in the above amounts are specific reserves totaling $1.1 million,
$30,000, $696,000, $108,000 and $26,000 at December 31, 1999, 1998, 1997, 1996
and 1995, respectively.
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, 1999, 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,
1999, the Company's largest foreclosed asset was a single-family residential
property in St. Louis County, Missouri which was acquired in July 1999 resulting
in a carrying value of $346,000.
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 primarily planned amortization class ("PAC")
tranches collateralized by federal agency securities with weighted average lives
aggregating approximately 4.5 years at December 31, 1999. 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 constant 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."
20
<PAGE>
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 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,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
Amount % Amount % Amount %
-------- ------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA................................. $ 5,650 4.8% $ 4,497 13.9% $60,641 70.9%
FHLMC................................ 19,683 16.6 2,682 8.3 5,550 6.5
FNMA................................. 29,478 24.9 9,130 28.2 11,596 13.6
CMOs................................. 63,636 53.7 16,055 49.6 7,693 9.0
-------- ----- ------- ----- ------- -----
Total mortgage-backed securities.. $118,447 100.0% $32,364 100.0% $85,480 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
The following table sets forth the scheduled maturities, amortized cost,
market values and weighted average yields for the Company's mortgage-backed
securities at December 31, 1999. 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, 1999
--------------------------------------------------------------------------------------
Five Through
One Year or Less One to Five Years Ten Years After 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>
GNMA................... $ -- -- % $ 6 8.00% $ -- -- % $ 5,857 6.13%
FHLMC.................. 511 6.84 6 7.45 2,860 6.11 17,115 6.67
FNMA................... 367 5.57 -- -- 17,215 5.91 13,126 6.74
CMOs................... -- -- -- -- -- -- 66,343 6.07
--------- --------- --------- --------
Total mortgage-backed
securities available
for sale............ $878 6.31 $12 7.70 $20,075 5.94 $102,441 6.26
========= ========= ========= ========
<CAPTION>
At December 31, 1999
-------------------------------------
Total
-------------------------------------
Approximate Weighted
Amortized Market Average
Cost Value Yield
--------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
GNMA...................................... $ 5,863 $ 5,650 6.13%
FHLMC..................................... 20,492 19,683 6.60
FNMA...................................... 30,708 29,478 6.26
CMOs...................................... 66,343 63,636 6.07
-------- --------
Total mortgage-backed
securities available for sale........... $123,406 $118,447 6.21
======== ========
</TABLE>
21
<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 1999 were approximately 16.9% and
1.4%, respectively.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated. At December 31, 1999, 1998 and
1997, all investment securities were classified as available for sale.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Investment securities (at fair value):
U.S. government and federal agency obligations.. $ 93,675 $154,495 $129,660
Taxable municipal bonds......................... 2,876 -- --
Corporate bonds................................. 6,389 -- --
Tax-exempt municipal bonds...................... 402 116 337
-------- -------- --------
Total investment securities................. 103,342 154,611 129,997
-------- -------- --------
Other investments (at cost):
Interest-bearing deposits....................... 9,458 11,271 12,673
Federal funds sold.............................. -- -- 9,870
Stock in FHLB................................... 24,254 11,881 16,741
-------- -------- --------
Total investments........................... $137,054 $177,763 $169,281
======== ======== ========
</TABLE>
22
<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, 1999. Yields on tax-exempt securities are calculated
on the basis of actual interest paid and not on a tax-equivalent basis.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------------------------------------------
One Year or Less One to Five to Years Five to Ten Years After 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......... $ -- --% $66,714 6.01% $29,998 6.40% $ -- --%
Taxable municipal bonds...... -- -- -- -- -- -- 3,065 6.11
Corporate bonds.............. -- -- 6,576 6.14 -- -- -- --
Tax-exempt municipal bonds... -- -- 400 4.80 -- -- -- --
------- ------- ------- -------
Total investment securities.... $ -- -- $73,690 6.02 $29,998 6.40 $3,065 6.11
======== ======= ======= =======
<CAPTION>
cccccvc At December 31, 1999
----------------------------------------
Total
----------------------------------------
Weighted
Amortized Market Average
Cost Value Yield
--------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and federal
agency obligations............ $ 96,712% $93,675 6.13%
Taxable municipal bonds......... 3,065 2,876 6.11
Corporate bonds................. 6,576 6,389 6.14
Tax-exempt municipal
bonds.......................... 400 402 4.80
-------- --------
Total investment securities......... $106,753 $103,342 6.13
======== ========
</TABLE>
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. Jefferson Heritage has established a website through which customers may
access accounts, pay bills and transfer funds. Substantially all of Jefferson
Heritage's depositors are Missouri or 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, 1999 At December 31, 1998
------------------------------------- ---------------------------------------
Increase Increase
(Decrease) (Decrease)
% of From Prior % of From Prior
Balance Deposits Year Balance Deposits Year
-------- --------- ---------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement savings..... $ 63,041 6.47% $ 18,044 $ 44,997 4.33% $ (3,753)
NOW and noninterest-bearing........ 95,248 9.76 (49,370) 55,625 5.36 20,944
Money market....................... 66,473 6.82 17,130 138,336 13.32 (12,278)
-------- ------ -------- ---------- ------ --------
Total............................ 224,762 23.05 (14,197) 238,958 23.01 4,913
-------- ------ -------- ---------- ------ --------
Certificates of deposit:
Fixed-rate, fixed-term........... -- -- (4,984) 4,984 0.48 (236)
Three-month senior citizens...... 166 0.02 13 153 0.01 (6)
3-month.......................... 4,190 0.43 1,108 3,082 0.30 194
6-month.......................... 31,836 3.27 (19,614) 51,450 4.96 (406)
9-month.......................... 150,110 15.39 140,156 9,954 0.96 (357)
1-year........................... 166,594 17.08 (47,412) 214,005 20.61 41,886
15-month......................... 46,473 4.77 46,473 -- -- --
18-month......................... 97,458 9.99 (60,410) 157,868 15.21 (64,394)
21 month......................... 190 0.02 (9,912) 10,102 0.97 (5,680)
2-year........................... 73,507 7.54 (28,534) 102,041 9.83 27,971
30-month......................... 44,949 4.61 (5,895) 50,844 4.90 12,746
3-year and over.................. 95,209 9.77 (20,388) 115,597 11.13 (7,693)
Jumbo certificates............... 38,586 3.96 (38,172) 76,758 7.39 (15,059)
Other............................ 935 0.10 (1,445) 2,380 0.24 (584)
-------- ------ -------- ---------- ------ --------
Total certificates of deposit.. 750,203 76.95 (49,015) 799,218 76.99 (11,618)
-------- ------ -------- ---------- ------ --------
Total.......................... $974,965 100.00% $(63,211) $1,038,176 100.00% $ (6,705)
======== ====== ======== ========== ====== ========
<CAPTION>
At December 31, 1997
-----------------------
% of
Balance Deposit
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Passbook and statement savings..... $ 48,750 4.67%
NOW and noninterest-bearing........ 57,174 5.47
Money market....................... 128,121 12.26
---------- ------
Total............................ 234,045 22.40
---------- ------
Certificates of deposit:
Fixed-rate, fixed-term........... 5,220 0.50
Three-month senior citizens...... 159 0.01
3-month.......................... 2,888 0.28
6-month.......................... 51,856 4.96
9-month.......................... 10,311 0.99
1-year........................... 172,119 16.47
15-month......................... -- --
18-month......................... 222,262 21.27
21 month......................... 15,782 1.51
2-year........................... 74,070 7.09
30-month......................... 38,098 3.65
3-year and over.................. 123,290 11.80
Jumbo certificates............... 91,817 8.79
Other............................ 2,964 0.28
---------- ------
Total certificates of deposit.. 810,836 77.60
---------- ------
Total.......................... $1,044,881 100.00%
========== ======
</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,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
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................ $ 44,844 2.52% $ 47,367 2.39% $ 51,417 2.49%
NOW...................... 90,293 2.05 77,904 1.94 82,175 2.35
Money market............. 103,167 3.82 108,671 4.41 96,157 4.35
Certificates of deposit.. 763,031 5.28 809,340 5.61 818,438 5.63
---------- ---------- ----------
Total deposits....... $1,001,335 4.72% $1,043,282 5.06% $1,048,187 5.10%
========== ========== ==========
</TABLE>
The following table sets forth the Company's time deposits classified by
rates as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
2 - 3.99%......... $ 4,448 $ 2,185 $ 167
4 - 5.99%......... 688,609 703,813 697,045
6 - 7.99%......... 57,147 93,220 113,483
8 - 9.99%......... -- -- 141
-------- -------- --------
$750,204 $799,218 $810,836
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of the Company's
time deposits in specified interest rate categories at December 31, 1999.
<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%......... $ 113 $ -- $ -- $ -- $ 113
3 - 3.99%......... 4,335 -- -- -- 4,335
4 - 4.99%......... 251,427 29,182 10,007 2,939 293,555
5 - 5.99%......... 328,598 44,039 16,085 6,332 395,054
6 - 6.99%......... 35,039 1,562 7,442 1,691 45,734
7 - 7.99%......... 10,222 -- 173 1,018 11,413
-------- --------- ---------- -------- --------
$629,734 $ 74,783 $ 33,707 $ 11,980 $750,204
======== ========= ========== ======== ========
</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 FHLB of Des Moines, 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,
1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
<S> <C>
Three months or less........... $ 15,763
Over three through six months.. 22,216
Over six through 12 months..... 45,251
Over 12 months................. 12,167
------------
Total....................... $ 95,397
============
</TABLE>
The following table sets forth the Company's deposit activities for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Deposits.............................................. $1,115,873 $1,071,243 $1,003,419
Withdrawals........................................... 1,214,944 1,117,196 1,046,835
---------- ---------- ----------
Net withdrawals...................................... (99,071) (45,953) (43,416)
Sale of branch deposits............................... -- -- (3,217)
Deposits purchased in acquisitions, net of
purchase accounting adjustments...................... -- -- 104,876
Amortization of purchase accounting market valuation.. 129 129 129
Interest credited on deposits......................... 35,731 39,119 39,440
---------- ---------- ----------
Net increase (decrease) in deposits.................. $ (63,211) $ (6,705) $ 97,812
========== ========== ==========
</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
FHLB of Des Moines 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 FHLB 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 FHLB
of Des Moines are secured by Jefferson Heritage's stock in the FHLB and a
portion of its mortgage-backed securities and mortgage loan portfolio.
At December 31, 1999, the Company had $466.2 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 $2.1 million were outstanding on a note from a commercial bank to
the Company. The
26
<PAGE>
proceeds from this latter borrowing were used to fund the acquisition of
additional shares by the Employee Stock Ownership Plan.
The following table sets forth certain information regarding the Company's
short-term borrowings at the dates and for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
(Dollars in thousands)
Amounts outstanding at period end:
FHLB advances.............................................. $409,631 $199,321 $48,079
Other short-term borrowings................................ 56,600 7,595 14,791
Commercial bank debt....................................... 2,138 2,599 3,039
Weighted average rate paid at period end:
FHLB advances.............................................. 5.45% 4.94% 6.01%
Other short-term borrowings................................ 5.60 4.88 6.25
Commercial bank debt....................................... 6.65 7.65 8.90
Maximum amount of borrowings outstanding at any month end:
FHLB advances.............................................. $409,636 $199,321 $96,650
Other short-term borrowings................................ 81,000 7,600 20,900
Commercial bank debt....................................... 2,599 3,039 3,430
Approximate average amounts outstanding during period:
FHLB advances.............................................. $335,905 $ 84,038 $67,749
Other short-term borrowings................................ 26,176 1,823 9,338
Commercial bank debt....................................... 2,347 2,799 3,210
Approximate weighted average rate paid during period (1):
FHLB advances.............................................. 5.23% 5.26% 6.05%
Other short-term borrowings................................ 5.69 5.67 4.24
Commercial bank debt....................................... 7.30 7.68 7.77
</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, 1999, the net book value of Jefferson Heritage's investment in and loans to
its service corporations was $184.4 million. Operations of the subsidiaries
accounted for $6.5 million, or 6.42% of consolidated total income for the year
ended December 31, 1999.
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<PAGE>
Jefferson Heritage's four subsidiaries are described below.
JHMC was incorporated in 1999 to originate residential mortgage and
construction loans for resale into the secondary market and to Jefferson
Heritage. JHMC currently operates from offices in Denton, Austin and El Paso,
Texas, Nashville, Tennessee, Seattle, Washington and St. Louis, Missouri.
Jefferson Financial, Inc.'s activities are limited to serving as trustee
for loan originations and the sale of tax deferred annuity and investment
products. Jefferson Financial, Inc. is also a licensed insurance agency.
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 carrying value of $0. 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, Rockwell, Tarrant, Wise, Gregg, Shelby, Panola, Bowie, Camp, Franklin,
Hopkins, Morris and Titus Counties, Texas.
28
<PAGE>
Employees
As of December 31, 1999, the Company and its subsidiaries had 330 full-time
and 46 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. 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. Because the Company became a unitary savings and
loan holding company prior to May 4, 1999, there are generally no restrictions
on its activities. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation of an activity by a unitary
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 subsidiaries 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. Unless the acquiror was a unitary savings
and loan holding company on May 4, 1999 (or became a unitary savings and loan
holding company pursuant to an application pending as of that date), no company
may acquire control of the Company unless the company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under the Bank Holding Company Act of 1956 as
amended by the G-L-B Act. Financial holding companies may engage in activities
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, has determined to be financial in nature or incidental to a financial
activity or complementary to a financial activity provided that the
complementary activity does not pose a risk
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<PAGE>
to safety and soundness. Financial holding companies that were not previously
bank holding companies may continue to engage in limited non-financial
activities for up to ten years after the effective date of the G-L-B Act (with
provision for extension for up to five additional years by the Federal Reserve
Board) provided that the financial holding company is predominantly engaged in
financial activities.
Savings and loan holding companies are prohibited from acquiring, without
prior approval of the Director of OTS, (i) control of any other savings
association or savings and loan holding company or substantially all the assets
thereof, or (ii) more than 5% of the voting shares of a savings association or
holding company thereof which is not a subsidiary. Except with the prior
written approval of the Director of OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may also acquire control of any savings
association, other than a subsidiary savings association, or of any other
savings and loan holding company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under Missouri law, no foreign association or foreign holding company shall
acquire any proprietary interest in, or control of, or merge, or enter into any
merger agreement, with any association except in accordance with such rules and
regulations as the Missouri Director shall promulgate providing for the
licensing, admission, qualifications and operating requirements of foreign
associations. The term foreign association is defined as any association with
its principal office located outside Missouri. A foreign holding company is any
company or corporation authorized or existing under the laws of any jurisdiction
or authority which directly or indirectly controls a foreign association. The
laws of Missouri provide that foreign associations which conduct their principal
operations in a state adjoining Missouri, and which are not controlled by a
foreign holding company incorporated in or which conducts its principal
operations in a state not adjoining Missouri may merge with or acquire control
of associations conducting their principal operations in Missouri if the
adjoining state permits associations which conduct their principal operations in
Missouri to acquire control of savings and loan associations in such adjoining
state under conditions which are substantially the same as those imposed by that
state on savings and loan associations conducting their principal operations in
that state.
Regulation of Jefferson Heritage
General. Jefferson Heritage is subject to extensive examination and
regulation by the OTS which acts as both its chartering authority and its
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 elsewhere 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
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<PAGE>
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.
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, 1999, Jefferson Heritage had $697,000 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
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<PAGE>
defined, generally, as the present value of expected cash inflows from existing
assets and off-balance sheet contracts less the present value of expected cash
outflows from existing liabilities. A savings institution is considered to have
a "normal" level of interest rate risk exposure if the decline in its net
portfolio value after an immediate 200 basis point increase or decrease in
market interest rates (whichever results in the greater decline) is less than
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk would be required to
deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets. Implementation of the interest rate risk component has been
delayed and the Company has not been required to determine whether it will be
required to deduct an interest rate risk component from capital.
The table below presents Jefferson Heritage's capital position relative to
the minimum requirements under the OTS regulatory capital regulations as in
effect at December 31, 1999.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
-------- ----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital...................................... $105,070 6.69%
Tangible capital requirement.......................... 23,570 1.50
-------- -----
Excess................................................ $ 81,500 5.19%
======== =====
Tier 1/core capital................................... $105,070 6.69%
Core capital requirement.............................. 47,141 3.00
-------- -----
Excess................................................ $ 57,929 3.69%
======== =====
Total capital (i.e., core and supplementary capital).. $110,712 10.90%
Risk-based capital requirement........................ 81,222 8.00
-------- -----
Excess................................................ $ 29,490 2.90%
======== =====
</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
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<PAGE>
for any relevant capital measure (an "undercapitalized institution") may be: (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses. The
capital restoration plan must include a guarantee by the institution's holding
company that the institution will comply with the plan until it has been
adequately capitalized on average for four consecutive quarters, under which the
holding company would be liable up to the lesser of 5% of the institution's
total assets or the amount necessary to bring the institution into capital
compliance as of the date it failed to comply with its capital restoration plan.
A "significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within specified time periods.
Under regulations jointly adopted by the federal banking regulators, a
savings association'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). The following table shows the capital ratio
requirements for each prompt corrective action category:
<TABLE>
<CAPTION>
Adequately Significantly
Well Capitalized Capitalized Undercapitalized Undercapitalized
---------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
</TABLE>
___________
* 3.0% if institution has a composite 1 CAMELS rating.
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 undercapitalized) 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
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<PAGE>
national bank; (ii) the branching powers of the institution are restricted to
those of a national bank; and (iii) 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 unless the activity or investment is permissible for a national bank
and a savings association.
In order to satisfy the QTL Test, a savings association must either satisfy
the definition of domestic building and loan association under the Internal
Revenue Code or its Qualified Thrift Investments must represent at least 65% of
portfolio assets. Qualified Thrift Investments include investments in
residential mortgages, home equity loans, loans made for educational purposes,
small business loans, credit card loans and mortgage-backed securities.
Portfolio assets are defined as total assets less goodwill and other
intangibles, property used by a savings association in its business and
liquidity investments in an amount not exceeding 20% of assets. A savings
association shall be deemed a Qualified Thrift Lender as long as its percentage
of Qualified Thrift Investments continues to equal or exceed 65% in at least
nine out of each 12 months. A savings association that fails to maintain QTL
status will be permitted to requalify once, and if it fails the QTL Test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired. At December 31, 1999, 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, or is under common
control with the savings association. Any subsidiary of a savings association
that would be deemed a financial subsidiary of a national bank is also treated
as an affiliate for purposes of the aggregate limit on transactions with
affiliates. 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 of 1956 which prohibit extensions of
credit
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<PAGE>
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
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, 1999, Jefferson Heritage had an aggregate total of
approximately $9 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 its insured deposits to the FDIC for insurance of its 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 have reduced to zero and institutions in the worst
risk assessment classification will be assessed at the rate of 0.27% of insured
deposits. In addition, FDIC-insured institutions are required to pay
assessments to the FDIC 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
35
<PAGE>
thrifts. Until December 31, 1999, SAIF-insured institutions were required to pay
FICO assessments at five times the rate at which Bank Insurance Fund ("BIF")
members were assessed. 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 1999, were approximately 16.9% and 1.4%,
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 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,
1999, of $24.3 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, 1999,
Jefferson Heritage had $460.9 million in advances and other borrowings from the
FHLB of Des Moines and $5.3 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 $44.3 million of transaction accounts, plus 10% on the remainder.
This percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of December 31, 1999, 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
36
<PAGE>
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 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 its corporate offices at 15435
Clayton Road, Ballwin, Missouri, 63011 and nine branch offices and one loan
office in the St. Louis area. The corporate offices which opened during 1999
have 18,900 square feet of space, a total investment of $2.7 million and a net
book value of $2.1 million at December 31, 1999. The other offices comprise
approximately 54,800 square feet, a total investment of $10.4 million and a net
book value of $4.5 million at December 31, 1999.
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 $1.6 million and a net book value of $1.3
million at December 31, 1999. The 20 offices comprise approximately 87,000
square feet, a total investment of $7.8 million and a net book value of $5.5
million at December 31, 1999.
37
<PAGE>
Jefferson Heritage leases an office at 3,100 West End Avenue, Nashville,
Tennessee with approximately 3,583 square feet, a total investment of $85,000
and a net book value of $83,000 at December 31, 1999.
The net book value of the Company's investment in premises and equipment
totaled approximately $14.2 million at December 31, 1999. 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.
- -------------------------
On August 10, 1999, a suit was filed in the United States District Court
for the Southern District of Illinois under the caption West v. Hofman, et al.
alleging that certain officers and directors of the Company and others issued
false and misleading statements and failed to disclose material facts concerning
the Company's operations, earnings, merger and/or sale. The suit was
subsequently amended to name the Company as a defendant. The suit sought class
action status for all persons who purchased the Company's common stock between
January 1, 1998 and April 14, 1999 and unspecified money damages. The suit was
subsequently dismissed without prejudice and refiled without naming the Company
as a defendant.
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, 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
The Company's common stock, par value $.01 per share (the "Common Stock"),
is traded on the Nasdaq National Market(SM) under the symbol "JSBA." As of
December 31, 1999, there were 9,957,826 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 Market(SM) and the cash
dividends declared on the Common Stock for each full quarterly period during the
last two fiscal years.
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------- ---------------------------------------------
Dividends Dividends
Quarter Ended: High Low Close Declared High Low Close Declared
- ------------- ---- --- ----- -------- ---- --- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 16 3/4 $ 11 3/8 $ 11 3/8 $0.07 $30 1/4 $19 7/8 $30 1/4 $0.07
June 30 14 1/2 10 5/8 13 7/8 0.07 31 7/8 29 1/8 31 1/4 0.07
September 30 13 10 11/16 11 5/8 0.07 31 9/16 16 16 3/8 0.07
December 31 12 1/4 10 7/16 10 9/16 0.07 16 5/16 11 13 1/8 0.07
</TABLE>
38
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
Financial Condition Data:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Cash and investments.................... $ 149,196 $ 185,366 $ 178,321 $ 125,176 $ 85,801
Mortgage-backed securities.............. 118,447 32,364 85,480 95,203 232,883
Loans receivable, net................... 1,238,926 1,118,490 924,920 885,405 788,085
Excess cost over fair value of
net assets acquired.................... 20,088 22,141 23,849 19,746 14,496
Accrued income and other assets......... 56,277 25,099 25,485 22,549 21,664
---------- ---------- ---------- ---------- ----------
Total assets.......................... $1,582,934 $1,383,460 $1,238,055 $1,148,079 $1,142,929
========== ========== ========== ========== ==========
Savings deposits........................ $ 974,965 $1,038,177 $1,044,881 $ 947,069 $ 870,179
Borrowed money.......................... 468,370 209,516 65,908 97,682 174,962
Accrued expenses and other liabilities.. 13,518 11,928 11,006 13,409 17,537
---------- ---------- ---------- ---------- ----------
Total liabilities..................... 1,456,853 1,259,621 1,121,795 1,058,160 1,062,678
Stockholders' equity.................... 126,081 123,839 116,260 89,919 80,251
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity............................... $1,582,934 $1,383,460 $1,238,055 $1,148,079 $1,142,929
========== ========== ========== ========== ==========
Book value per common share (1)......... $ 13.28 $ 13.13 $ 12.52 $ 11.17 $ 10.75
========== ========== ========== ========== ==========
</TABLE>
- -------------
(1) Book value per share computation excludes shares in the ESOP that have not
been allocated or committed to be released.
Operating Data:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest and dividend income.................. $107,738 $91,737 $95,306 $81,690 $73,044
Interest expense.............................. 66,543 57,581 58,144 52,158 50,298
-------- ------- ------- ------- -------
Net interest income......................... 41,195 34,156 37,162 29,532 22,746
Provision for losses on loans................. 520 (1,200) 1,260 660 367
-------- ------- ------- ------- -------
Net interest income after provision
for losses on loans........................ 40,675 35,356 35,902 28,872 22,379
-------- ------- ------- ------- -------
Noninterest income:
Gain on sales of investment securities, net.. 20 -- 1,144 -- --
Gain (loss) on sales of mortgage-backed
securities, net............................. 37 48 (583) (1,296) --
Gain on sales of loans, net.................. 2,276 1,858 575 374 227
Real estate operations, net.................. (163) 201 71 453 765
Other........................................ 2,682 2,246 2,306 1,587 1,490
-------- ------- ------- ------- -------
Total noninterest income.................... 4,852 4,353 3,513 1,118 2,482
-------- ------- ------- ------- -------
Noninterest expense:
General and administrative expense........... 26,696 24,276 21,103 18,570 14,451
SAIF special assessment...................... -- -- -- 5,599 --
Amortization of excess cost over
fair value of net assets acquired........... 1,793 1,809 1,711 1,023 504
-------- ------- ------- ------- -------
Total noninterest expense................... 28,489 26,085 22,814 25,192 14,955
-------- ------- ------- ------- -------
Income before income taxes.................. 17,038 13,624 16,601 4,798 9,906
Income tax expense............................ 6,888 6,039 6,370 1,982 3,536
-------- ------- ------- ------- -------
Net income.................................. $ 10,150 $ 7,585 $10,231 $ 2,816 $ 6,370
======== ======= ======= ======= =======
Earnings per share, basic..................... $ 1.07 $ 0.81 $ 1.13 $ 0.37 $ 0.84
Earnings per share, diluted................... 1.05 0.78 1.08 0.35 0.80
======== ======= ======= ======= =======
Dividends per share........................... $ 0.28 $ 0.28 $ 0.22 $ 0.16 $ --
======== ======= ======= ======= =======
</TABLE>
39
<PAGE>
Key Operating Ratios:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Return on average assets................ 0.67% 0.60% 0.81% 0.25% 0.61%
Return on average equity................ 8.10 6.28 9.49 3.43 8.28
Average equity to average assets........ 8.28 9.49 8.58 7.37 7.37
Stockholders' equity to total assets
(end of period)....................... 7.97 8.95 9.39 7.83 7.02
Dividend payout ratio................... 26.17 34.57 19.47 43.24 --
Net interest margin..................... 2.83 2.81 3.10 2.75 2.24
Interest rate spread.................... 2.54 2.47 2.80 2.45 1.89
Average interest-earning assets to
average interest-bearing liabilities.. 106.34 107.21 106.17 106.14 107.31
Noninterest expense to average assets... 1.88 2.05 1.82 2.26 1.43
Allowance for loan losses to
net loans (end of period)............. 0.56 0.60 0.88 0.74 0.65
Nonperforming assets, net to total
assets (end of period)................ 0.57 0.56 0.79 0.53 0.59
Net charge-offs to average loans........ 0.02 0.03 0.08 0.01 0.02
Efficiency ratio........................ 61.87 67.74 56.09 82.19 59.28
</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 and loans
secured by commercial real estate. The Company also originates, 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, the level of loan loss provisions
and operating expenses affects net income.
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 areas served by the Company.
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
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 acquisition of L&B Financial was accounted for using the purchase
method of accounting. Under the purchase method of accounting, the results of
operations of L&B Financial are included in the Company's results of operations
from the date of its acquisition. The excess of cost over fair value of assets
acquired was $5.9 million. L&B Financial was merged into the Bank upon the
completion of the acquisition.
Financial Condition
The Company's primary strategy is to continue building its core banking
business, which is the origination of loans funded by savings deposits and
borrowings from the Federal Home Loan Bank ("FHLB"). The Company continues to
emphasize construction lending and has begun placing more emphasis on commercial
real estate lending. During the fourth quarter of 1999 the Company sold $59.3
million of single-family, adjustable-rate loans which had previously been
classified as held for sale. The loans are being replaced with higher yielding
assets, including construction and commercial real estate loans. In addition
the Company continues to emphasize the origination and sale of single-family,
fixed-rate loans through the Bank's subsidiary, Jefferson Heritage Mortgage
Company (the "Mortgage Company"). During 1999 the Mortgage Company opened
offices in three new markets: Austin and El Paso, Texas and Nashville,
Tennessee.
The Company's total assets increased $199.5 million, or 14.4%, to $1.583
billion at December 31, 1999 compared to $1.383 billion at December 31, 1998.
Net loans receivable increased $120.4 million, or 10.8%, to $1.24 billion at
December 31, 1999 compared to $1.12 billion at December 31, 1998. Loan
origination activity in 1999 hit record levels, totaling $575.4 million compared
to $379.0 million in 1998. Construction and development loan originations
totaled $328.6 million, or 57% of total loan originations, during 1999 compared
to $153.5 million, or 40.5% of total loan originations, during 1998. Commercial
real estate loan originations totaled $55.6 million, or 10% of total loan
originations, during 1999 compared to $21.5 million, or 6% of total loan
originations, during 1998. Loan purchases totaled $270.6 million during the
year ended December 31, 1999, compared to $406.1 million in 1998. Loan
purchases in 1999 included $54.2 million of commercial real estate loans and
$10.9 million of construction and development loans compared to $936,000 and
$21.1 million, respectively, in 1998. Principal repayments experienced a 23%
increase in 1999, totaling $580.7 million compared to $472.0 million in 1998.
The increase in repayments was the result of the higher level of construction
and development lending, which generally has maturities of one to two years. At
December 31, 1999, construction and development loans represented 23% and
commercial loans represented 11% of gross loans receivable compared to 17% and
6%, respectively, at December 31, 1998.
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 1999, the Company shifted its emphasis
primarily to mortgage-backed securities issued by agencies of the U.S.
Government. Mortgage-backed securities increased $86.1 million, or 266.0%, from
$32.4 million at December 31, 1998 to $118.4 million at December 31, 1999.
Investment securities, interest-bearing deposits and federal funds sold
decreased $53.1 million, or 32.0%, from $165.9 million at December 31, 1998 to
$112.8 million at December 31, 1999. The Company also purchased $25 million in
bank owned life insurance during 1999. The
41
<PAGE>
policies cover all employees at the date of purchase and are intended to help
defray the cost of the Company's employee benefits.
The Company has substantial borrowing capacity with the Federal Home Loan
Bank of Des Moines and generally chooses between savings deposits and
borrowings, depending on their relative costs, when funding its investing
activities. During 1999, the Company chose to fund a large portion of its
investing activities with borrowings from the Federal Home Loan Bank since such
borrowings were generally less expensive than the cost of attracting savings
deposits with similar maturities. Deposits decreased $63.2 million, or 6.1%,
from $1.038 billion at December 31, 1998 to $975.0 million at December 31, 1999.
During fiscal year 1999, approximately $35.7 million of interest was credited to
accounts. Borrowed money increased $258.9 million, or 123.5%, from $209.5
million at December 31 1998 to $468.4 million at December 31, 1999.
Stockholders' equity increased by $2.2 million, or 1.8%, during 1999, to
$126.1 million at December 31, 1999. Contributing to the growth in stockholders'
equity were net income of $10.2 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 a $5.3 million increase, net of
tax, in unrealized losses on available-for-sale investments, the payment of $2.6
million in dividends on the Company's common stock and the repurchase of 216,100
shares of common stock in the open market for $2.6 million. Stockholders' equity
as a percentage of assets decreased to 7.97% at December 31, 1999, compared to
8.95% at December 31, 1998 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.
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.
42
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- -------------------------- ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ----------- -------- ----- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................. $1,198,802 $ 92,122 7.68% $ 956,637 $75,314 7.87% $ 943,041 $78,665 8.34%
Mortgage-backed securities....... 107,211 6,535 6.10 51,009 3,088 6.05 97,602 5,979 6.13
Investment securities............ 116,455 7,253 6.23 169,356 11,024 6.51 114,827 8,198 7.14
Other interest-earning assets.... 31,035 1,828 5.89 37,496 2,311 6.16 42,719 2,464 5.77
---------- -------- ---------- ------- ---------- -------
Total interest-earning
assets.................... 1,453,503 107,738 7.41 1,214,498 91,737 7.55 1,198,189 95,306 7.95
-------- ------- -------
Noninterest-earning assets.......... 59,342 58,013 57,961
---------- ---------- ----------
Total assets................ $1,512,845 $1,272,511 $1,256,150
========== ========== ==========
Interest-bearing liabilities:
Savings deposits:
Passbook and statement savings,
NOW, and money market
accounts.................. $ 238,304 $ 6,950 2.92 $ 233,942 $ 7,443 3.18 $ 229,750 $ 7,396 3.22
Certificates of deposit....... 763,031 40,317 5.28 809,340 45,427 5.61 818,437 46,058 5.63
---------- -------- ---------- ------- ---------- -------
Total savings deposits...... 1,001,335 47,267 4.72 1,043,282 52,870 5.07 1,048,187 53,454 5.10
Borrowed money................... 365,501 19,276 5.27 89,545 4,711 5.26 80,422 4,690 5.83
---------- -------- ---------- ------- ---------- -------
Total interest-bearing
liabilities............... 1,366,836 66,543 4.87 1,132,827 57,581 5.08 1,128,609 58,144 5.15
-------- ------- -------
Noninterest-bearing liabilities..... 20,771 18,866 19,716
---------- ---------- ----------
Total liabilities........... 1,387,607 1,151,693 1,148,325
Stockholders' equity................ 125,238 120,818 107,825
---------- ---------- ----------
Total liabilities and
stockholders' equity...... $1,512,845 $1,272,511 $1,256,150
========== ========== ==========
Net interest income................. $ 41,195 $34,156 $37,162
======== ======= =======
Interest rate spread................ 2.54% 2.47% 2.80%
====== ====== ======
Net interest margin................. 2.83% 2.81% 3.10%
====== ====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities.............. 106.34 % 107.21% 106.17%
========== ========== =======
</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,
----------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------------------- ------------------------------
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 ....................... $18,664 $(1,856) $16,808 $ 1,123 $(4,474) $(3,351)
Mortgage-backed securities.............. 3,421 26 3,447 (2,814) (77) (2,891)
Investment securities................... (3,315) (456) (3,771) 3,603 (777) (2,826)
Other interest-earning assets .......... (385) (98) (483) (313) 160 (153)
------- ------- ------- ------- ------- -------
Total interest and dividend
income..................... 18,385 (2,384) 16,001 1,599 (5,168) (3,569)
------- ------- ------- ------- ------- -------
Interest expense:
Savings deposits:
Passbook and statement savings,
NOW, and money market accounts ... 135 (628) (493) 137 (90) 47
Certificates of deposit ............. (2,520) (2,590) (5,110) (478) (153) (631)
------- ------- ------- ------- ------- -------
Total savings deposits ........ (2,385) (3,218) (5,603) (341) (243) (584)
Borrowed money ......................... 14,556 9 14,565 504 (483) 21
------- ------- ------- ------- ------- -------
Total interest expense......... 12,171 (3,209) 8,962 163 (726) (563)
------- ------- ------- ------- ------- -------
Change in net interest income.. $ 6,214 $ 825 $ 7,039 $ 1,436 $(4,442) $(3,006)
======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Net Income. Net income increased $2.6 million, or 33.8%, to $10.2 million
for the year ended December 31, 1999 compared to $7.6 million for the year ended
December 31, 1998. Net interest income increased $7.0 million, provision for
losses on loans increased $1.7 million, noninterest income increased $.5
million, and noninterest expense increased $2.4 million. Return on average
stockholders' equity and return on average assets were 8.10% and .67%,
respectively, for the year ended December 31, 1999 compared to 6.28% and .60%,
respectively, for 1998. Basic and diluted earnings per share for year ended
December 31, 1999 were $1.07 and $1.05, respectively, compared to $.81 and $.78,
respectively, for 1998.
Net Interest Income. Net interest income increased $7.0 million, or 20.6%,
to $41.2 million for the year ended December 31, 1999 compared to $34.2 million
for 1998. The increase was due to an increase in the average balance of
interest-earning assets to $1.5 billion for the year ended December 31, 1999
from $1.3 billion for 1998 combined with an increase in the interest rate spread
to 2.54% for 1999 from 2.47% for 1998. The increase in the average balance of
interest-earning assets was primarily the result of strong loan growth. The
improvement in the interest rate spread was the result of a 21 basis point
decline in the average cost of interest-bearing liabilities partially offset by
a 14 basis point decline in the average yield on interest earning assets.
Interest and Dividend Income. Total interest and dividend income increased
$16.0 million, or 17.4%, to $107.7 million for 1999 compared to $91.7 million
for 1998 as the result of a $239.0 million, or 19.7%, increase in the
44
<PAGE>
average balance of interest-earning assets partially offset by a decrease in the
average yield on interest-earning assets to 7.41% for 1999 from 7.55% for 1998.
Interest income on loans receivable increased $16.8 million, or 22.3%,
resulting from a $242.2 million, or 25.3%, increase in the average balance of
loans receivable to $1.2 billion for 1999 compared to $956.6 million for 1998,
partially offset by a decline in the average yield to 7.68% from 7.87% during
the same periods. The high level of loan originations and repayments
experienced over the past year resulted in a shift of the loan portfolio into
lower yielding loans.
Interest income on mortgage-backed securities increased $3.4 million as the
result of a $56.2 million increase in the average balance and a 5 basis point
increase in the average yield. Interest income on investment securities
decreased $3.8 million, or 34.2%, as the result of a $52.9 million decrease in
the average balance and a 28 basis point decrease in the average yield.
Interest income on other interest-earning assets decreased $.5 million as the
result of a $6.5 million decrease in the average balance and a 27 basis point
decrease in the average yield. Funds from maturing investments were reinvested
in higher yielding loans receivable and mortgage-backed securities.
Interest Expense. Total interest expense increased $9.0 million, or 15.6%,
to $66.5 million for 1999 compared to $57.6 million for 1998 as the result of a
$234.0 million increase in the average balance of interest-bearing liabilities
partially offset by a decrease in the average cost of interest-bearing
liabilities to 4.87% for 1999 from 5.08% for 1998.
Interest expense on borrowed money increased $14.6 million, or 309.1%,
primarily as the result of a $276.0 million, or 308.2%, increase in the average
balance. Proceeds from new borrowings were used to fund growth in loans
receivable and mortgage-backed securities and to fund savings outflows.
Interest expense on savings deposits decreased $5.6 million due to a decrease in
the average cost from 5.07% in 1998 to 4.72% in 1999 and a $41.9 million
decrease in the average balance.
Provision For Losses On Loans. The Bank recorded a $520,000 provision for
losses on loans during the year ended December 31, 1999. During 1998, the Bank
recaptured $1.2 million of loan loss reserves by recording a credit to the
provision for losses on loans. The allowance for losses on loans is maintained
at a level considered adequate to absorb probable loan losses determined on the
basis of management's continuing review and evaluation of the loan portfolio and
its judgment 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, 1999 decreased to
$242,000, or .02% of average loans outstanding, compared to $332,000, or .03% of
average loans outstanding, during the year ended December 31, 1998. The
allowance for losses on loans was $6.9 million, or .56% of net loans, at
December 31, 1999 compared to $6.7 million, or .60% of net loans receivable, at
December 31, 1998. Nonaccruing loans were $7.4 million, or .60% of net loans,
at December 31, 1999 compared to $3.7 million, or .33% of net loans, at December
31, 1998. The increase in nonaccrual loans is primarily attributable to a $2.4
million increase in nonaccruing commercial real estate loans and a $1.6 million
increase in nonaccruing residential real estate loans, partially offset by a $.4
million decrease in nonaccruing construction loans. The increase in nonaccruing
commercial real estate loans is primarily due to the classification of a $2.2
million loan, secured by a retail shopping center in Missouri, as nonaccrual due
to the borrower's inability to make timely payments. At December 31, 1999 the
loan was 59 days past due. Nonacrruing residential real estate loans at
December 31, 1999 consist of 53 single-family permanent loans compared to 38
loans at December 31, 1998. The ratio of nonperforming assets to total assets
increased slightly to .57% at December 31, 1999 compared to .56% at December 31,
1998. Management believes the allowance for loan losses is adequate at December
31, 1999.
Noninterest Income. Total noninterest income for the year ended December
31, 1999 increased $.5 million, or 11.4%, to $4.9 million compared to $4.4
million for the year ended December 31, 1998. Gain on sales of loans increased
$.4 million, or 22.5%, to $2.3 million for 1999 compared to $1.9 million for
1998 due to an increase in loans sold during 1999 to $144.1 million compared to
$119.4 million during 1998. The increase in loan sales was primarily
45
<PAGE>
caused by the sale of $59.3 million of single-family, adjustable-rate loans
which had previously been classified as held for sale during the fourth quarter
of 1999.
Real estate operations decreased $364,000 primarily due to $181,000 in
provisions for losses and $75,000 in net gains on the sales of real estate
acquired through foreclosure during 1999 compared to $256,000 in net gains on
sales during 1998. Other noninterest income increased $433,000 primarily due to
income from bank owned life insurance and increases in check processing fees and
gain on sale of office properties. Income from bank owned life insurance
increased $173,000 due to the purchase of $25.0 million of bank owned life
insurance during November 1999. Fees received for checks processed for the Bank
by one of its vendors increased $109,000 during 1999. Such fees are based on
the volume of checks processed for the Bank, which increased during 1999. Gain
on sale of office properties increased $83,000 as a result of the sale of one of
the Bank's branch office buildings in Texas. Servicing and other loan fees
decreased $141,000 due primarily to a decrease in fees received from customers
for loans converted from adjustable-rate to fixed-rate products. The higher
level of interest rates on fixed-rate loans during 1999 resulted in a lower
level of loan conversions. Fees for other services to customers increased
$143,000 primarily due to a $74,000 increase in ATM fees. The Bank expanded its
ATM availability during 1999.
Noninterest Expense. Total noninterest expense increased $2.4 million, or
9.2%, to $28.5 million for the year ended December 31, 1999 compared to $26.1
million for 1998. The ratio of noninterest expense to average assets improved
to 1.88% for the 1999 period compared to 2.05% for 1998.
Advertising expense increased $1.1 million, to $1.7 million for the year
ended December 31, 1999 compared to $561,000 for 1998 due to expenses associated
with the Bank's name change and additional advertising for the Bank's products
and services. Other noninterest expense increased $880,000, to $5.2 million for
the year ended December 31, 1999 from $4.3 million for 1998 due primarily to
expenses associated with the implementation of additional products and services
associated with the Bank's retail banking strategy and expenses associated with
the Mortgage Company's entrance into new market areas.
Compensation and employee benefits increased $238,000, to $13.6 million for
the year ended December 31, 1999 from $13.4 million for 1998. The increase in
compensation and employee benefits was the result of additional personnel hired
to implement the Bank's expanded retail banking products and services, the
Mortgage Company's expansion into new market areas, and normal salary increases.
These increases were partially offset by a decrease in ESOP expense due to a
reduction in the average stock price between the respective periods. ESOP
expense is based on the average market value of the Company's stock, which
decreased approximately 46.3% between the respective periods.
Legal, examination, and other professional fees increased $294,000, to $2.0
million for the year ended December 31, 1999 from $1.8 million for 1998 due
primarily to expenses related to the standstill agreement signed by several of
the Company's major stockholders in the first quarter of 1999 and expenses
related to defending the threatened class action lawsuit initiated by one of the
Company's stockholders. Occupancy expense increased $213,000, to $3.5 million
for the year ended December 31, 1999 from $3.3 million for 1998 due primarily to
increases in repairs and maintenance expenses and rent expense associated with
the Mortgage Company's expansion into new market areas. Federal insurance
premiums decreased $348,000, to $611,000 for the year ended December 31, 1999
from $959,000 for 1998 due to the decrease in the balance of savings deposits
and a reduction in the Bank's FDIC insurance premium rate.
Income Tax Expense. The Company provides for state and federal income tax
expense based upon income before income taxes. 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. The effective tax rate for 1999 was 40.4% compared to 44.3% for 1998.
The effective tax rates for 1999 and
46
<PAGE>
1998 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.
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
0.60%, respectively, for the year ended December 31, 1998 compared to 9.49% and
0.81%, respectively, for the year ended December 31, 1997. Basic and diluted
earnings per share for the year ended December 31, 1998 were $0.81 and $0.78,
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.
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
47
<PAGE>
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
0.03% of average loans outstanding, compared to $781,000, or 0.08% of average
loans outstanding during the year ended December 31, 1997. The allowance for
losses on loans was $6.7 million, or 0.60% of net loans, at December 31, 1998
compared to $8.2 million, or 0.88%, at December 31, 1997. Nonaccruing loans
were $3.7 million, or 0.33 % of net loans, at December 31, 1998 compared to $5.4
million, or 0.58% 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 0.79% at December 31, 1997 to 0.56% 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 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.
48
<PAGE>
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.
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.
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 managing 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.
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, 1999, 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
49
<PAGE>
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...................... $390,232 $ 479,416 $285,210 $ 84,068 $1,238,926
Mortgage-backed securities............ 4,629 15,618 39,449 58,751 118,447
Investment securities and other
interest-earning assets.............. 83,628 -- 50,435 2,991 137,054
-------- --------- -------- -------- ----------
Total interest-earning assets....... 478,489 495,034 375,094 145,810 1,494,427
-------- --------- -------- -------- ----------
Interest-bearing liabilities:
Savings deposits....................... 230,654 556,120 155,551 32,640 974,965
Borrowed money......................... 143,850 100,361 217,211 6,948 468,370
-------- --------- -------- -------- ----------
Total interest-bearing liabilities.. 374,504 656,481 372,762 39,588 1,443,335
-------- --------- -------- -------- ----------
Interest sensitivity gap............ $103,985 $(161,447) $ 2,332 $106,222 $ 51,092
======== ========= ======== ======== ==========
Cumulative interest
sensitivity gap.................... $103,985 $ (57,462) $(55,130) $ 51,092
======== ========= ======== ========
Ratio of cumulative gap to
total assets....................... 7.52% (4.15)% (3.98)% 3.69%
======== ========= ======== ========
</TABLE>
A static gap report consists of an inventory of the dollar amounts of
assets and liabilities that have the potential to mature or reprice within a
particular period. It does not consider the probability that potential
maturities or repricings of interest-sensitive accounts will occur, or to what
extent.
The Company's interest rate sensitivity is also monitored by management
through the use of a model, which internally generates estimates of the change
in the Company's net portfolio value ("NPV") over a range of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the market
value of assets in the same scenario. The OTS also produces a similar analysis
using its own model based upon data submitted on the quarterly Thrift Financial
Reports filed by the Bank. 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 under the internal model as of
December 31, 1999:
50
<PAGE>
<TABLE>
<CAPTION>
NPV as % of
Net Portfolio Value Portfolio Value of Assets
---------------------------- --------------------------
Change in Interest Rates Dollar Percent NPV Change (in
in Basis Points (rate shock) Amount Change Change Ratio Basis Points)
- -------------------------------- -------- --------- ------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 300.......................... $ 58,921 $(51,357) (46.6)% 3.93% (312)
+ 200.......................... 78,566 (31,712) (28.8) 5.16 (189)
+ 100.......................... 94,885 (15,393) (14.0) 6.14 (91)
Static......................... 110,278 -- -- 7.05 --
- 100.......................... 118,659 8,381 7.6 7.52 47
- 200.......................... 121,213 10,935 9.9 7.63 58
- 300.......................... 116,672 6,394 5.8 7.31 26
</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 the Bank. The
Company's assets consist almost entirely of its investments in and advances to
the Bank. Its primary funding needs are for interest payments on certain bank
debt, funds for the payment of dividends to stockholders and open market
purchases on its common stock. To fund these activities, the Company is
dependent on future earnings, dividends from the Bank, or borrowings. The Bank
is subject to certain regulatory limitations with respect to the payment of
dividends to the Company. At December 31, 1999, the Bank had a total of
approximately $9 million available for the payment of additional dividends to
the Company under these regulations. The Bank met all existing regulatory
capital requirements at December 31, 1999.
The Bank 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. The Bank has consistently maintained liquidity in excess of
required amounts. The Bank' liquidity ratio was 19.42% at December 31, 1999
compared to 18.42% at December 31, 1998.
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
51
<PAGE>
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, 1999, 1998,
and 1997, cash and cash equivalents totaled $21.6 million, $18.9 million, and
$31.6 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, 1999, 1998, and 1997
are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income.............................................. $ 10,150 $ 7,585 $ 10,231
Adjustments to reconcile net income to net cash
provided by operating activities....................... 64,775 5,720 1,566
--------- --------- --------
Net cash provided by operating activities............. 74,925 13,305 11,797
Net cash provided by (used in) investing activities...... (263,688) (158,193) 42,488
Net cash provided by (used in) financing activities...... 191,489 132,179 (46,407)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents.. 2,726 (12,709) 7,878
Cash and cash equivalents at beginning of year........... 18,874 31,583 23,705
--------- --------- --------
Cash and cash equivalents at end of year.............. $ 21,600 $ 18,874 $ 31,583
========= ========= ========
</TABLE>
The Company's operating activities continued to provide strong cash flows
during 1999. The primary sources of cash from operating activities during 1999
were the sale of loans held for sale, which increased by $51.3 million from 1998
to 1999, and net income. The primary source of cash from operating activities
during 1998 and 1997 was net income.
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 originations and purchases, investing activities were a significant user of
cash during 1999 and 1998 rather than being a provider of cash as they were in
1997. During the years ended December 31, 1999, 1998, and 1997, the Company
originated loans in the amounts of $575.4 million, $379.0 million, and $377.9
million, respectively. Purchases of mortgage loans totaled $270.6 million,
$406.1 million, and $49.5 million, respectively, in those same periods.
Purchases of investment and mortgage-backed securities totaled $131.4 million,
$185.2 million, and $193.3 million, respectively, in those same periods.
These activities were funded in part by principal payments on loans and
mortgage-backed securities and maturities of investment securities totaling
$658.8 million, $640.0 million, and $452.3 million during the years ended
December 31, 1999, 1998, and 1997, respectively. During 1997, 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 1999 and 1998.
The primary financing activities of the Company are borrowings from the
Federal Home Loan Bank and the attraction of savings deposits. Borrowed money
increased $258.9 million and $143.6 million during the years ended
52
<PAGE>
December 31, 1999 and December 31, 1998, respectively. By contrast, borrowed
money decreased $31.8 million during the year ended December 31, 1997. Savings
deposits decreased $63.2 million and $6.8 million during the years ended
December 31, 1999 and December 31, 1998, respectively. During the year ended
December 31, 1997, savings deposits increased $97.8 million. The increase in
1997 includes deposits assumed in the acquisition of L&B Financial in the amount
of $104.9 million. The Company's higher level of borrowings during 1999 and 1998
turned its financing activities into a provider of cash flows in 1999 and 1998
rather than a user of cash as they had been in 1997.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1999 the Company had commitments
to originate loans of $31.0 million, and to purchase residential adjustable rate
mortgages of $1.3 million. Certificates of deposit, which are scheduled to
mature in one year or less at December 31, 1999 totaled $629.7 million.
Management believes that a significant portion of such deposits will remain with
the Company.
Year 2000 Readiness Disclosure
The Company has been 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 has not experienced any significant
disruptions to its financial or operating activities caused by failure of its
computerized systems resulting from Year 2000 issues. Management does not
expect Year 2000 issues to have a material adverse effect on the Company's
operations or financial results in 2000. The primary expense involved in the
implementation of the Company's Year 2000 readiness efforts has been management
and staff time, which the Company estimates to have been approximately 9,400
hours for the year ended December 31, 1999.
The Company has no information that indicates a significant vendor or
service provider may be unable to sell goods or provide services to the Company
or that any significant customer may be unable to purchase from the Company
because of Year 2000 issues. The Company has not received any notifications
from borrowers which indicates that a borrower has experienced significant
issues which may impact their ability to service their loan or which may impact
their borrowing agreement terms or covenants. Further, the Company has not
received any notifications from any regulatory agency that any significant
regulatory action is being, or may be taken, against the Company as a result of
Year 2000 issues.
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 generally require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations.
Unlike most industrial companies, nearly all of the Company's assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction nor to
the same extent as the prices of goods and services.
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which establishes standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position
53
<PAGE>
and measure those instruments at fair value. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 33, an Amendment of FASB
Statement No. 133", which defers the effective date of SFAS 133 from fiscal
years beginning after June 15, 1999 to fiscal years beginning after June 15,
2000. Earlier application of SFAS No. 133, as amended, is encouraged but should
not be applied retroactively to financial statements of prior periods. The
Company is currently evaluating the requirements and impact of SFAS No. 133, as
amended.
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
Consolidated Financial Statements Page
- --------------------------------- ----
Independent Auditors' Report 55
Consolidated Balance Sheets as of December 31, 1999 and 1998 56
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 57
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997 58
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 60
Notes to Consolidated Financial Statements 61
Supplementary Financial Data 85
- ----------------------------
54
<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, 1999 and
1998 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, 1999. 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, 1999 and 1998 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
St. Louis, Missouri
January 31, 2000
JEFFERSON SAVINGS BANCORP, INC. 55
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash $ 12,141,714 $ 7,602,268
Interest-bearing deposits 9,457,864 11,271,419
-------------- --------------
Cash and cash equivalents 21,599,578 18,873,687
Investment securities available for sale, at fair value
(amortized cost of $106,752,636 and $154,058,689 at
December 31, 1999 and 1998, respectively) 103,342,199 154,610,594
Mortgage-backed securities available for sale, at fair value
(amortized cost of $123,405,642 and $32,492,371 at
December 31, 1999 and 1998, respectively) 118,447,068 32,363,687
Loans receivable, net 1,238,926,455 1,118,489,946
Investment in real estate, net 1,521,668 2,880,759
Stock in Federal Home Loan Banks 24,254,100 11,881,400
Bank owned life insurance 25,178,920 -
Office properties and equipment, net 14,212,864 10,528,413
Deferred tax asset 3,718,000 -
Excess cost over fair value of net assets acquired 20,088,429 22,141,345
Accrued income and other assets 11,645,132 11,689,680
-------------- --------------
$1,582,934,413 $1,383,459,511
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $ 974,965,236 $1,038,176,484
Borrowed money 468,369,843 209,515,534
Deferred tax liability - 1,467,000
Advance payments by borrowers for taxes and insurance 3,377,641 2,963,938
Accrued expenses and other liabilities 10,140,344 7,497,854
-------------- --------------
Total liabilities 1,456,853,064 1,259,620,810
-------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ($.01 par value): Authorized 5,000,000
shares; none issued - -
Common stock ($.01 par value): Authorized 20,000,000
shares; issued 10,100,112 and 10,098,373 shares at
December 31, 1999 and 1998, respectively 101,001 100,984
Additional paid-in capital 64,958,775 65,404,131
Retained earnings, subject to certain restrictions 71,469,492 63,957,771
Accumulated other comprehensive income (loss) (5,021,011) 254,221
Unamortized restricted stock awards (65,908) (74,243)
Unearned ESOP shares (3,678,225) (4,684,142)
Treasury stock, at cost: 142,286 shares and 73,240 shares
at December 31, 1999 and 1998, respectively (1,682,775) (1,120,021)
-------------- --------------
Total stockholders' equity 126,081,349 123,838,701
-------------- --------------
$1,582,934,413 $1,383,459,511
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS BANCORP, INC. 56
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Interest and dividend income:
Loans receivable $ 92,122,283 $75,313,978 $78,664,717
Mortgage-backed securities 6,535,089 3,087,812 5,978,803
Investment securities 7,253,189 11,023,714 8,198,008
Interest-bearing deposits and federal funds sold 678,739 1,608,885 1,345,222
Stock in Federal Home Loan Banks 1,148,891 702,384 1,118,936
------------ ----------- -----------
Total interest and dividend income 107,738,191 91,736,773 95,305,686
------------ ----------- -----------
Interest expense:
Savings deposits 47,267,338 52,869,613 53,453,991
Borrowed money 19,275,682 4,711,277 4,689,451
------------ ----------- -----------
Total interest expense 66,543,020 57,580,890 58,143,442
------------ ----------- -----------
Net interest income 41,195,171 34,155,883 37,162,244
Provision for losses on loans 520,000 (1,200,000) 1,260,000
------------ ----------- -----------
Net interest income after provision
for losses on loans 40,675,171 35,355,883 35,902,244
------------ ----------- -----------
Noninterest income:
Servicing and other loan fees 750,647 891,611 789,675
Fees for other services to customers 1,178,752 1,036,157 1,035,822
Gain on sales of investment securities, net 19,985 - 1,144,210
Gain (loss) on sales of mortgage-backed securities, net 36,990 48,166 (582,966)
Gain on sales of loans, net 2,276,037 1,858,343 574,969
Real estate operations, net (163,378) 200,632 71,032
Other 752,540 319,374 480,393
------------ ----------- -----------
Total noninterest income 4,851,573 4,354,283 3,513,135
------------ ----------- -----------
Noninterest expense:
General and administrative:
Compensation and employee benefits 13,625,932 13,387,855 11,602,322
Occupancy 3,515,119 3,302,208 2,777,801
Advertising 1,702,845 560,505 563,718
Federal deposit insurance premiums 610,922 958,837 855,817
Legal, examination, and other professional fees 2,047,762 1,753,563 1,427,827
Other 5,193,282 4,313,248 3,876,040
------------ ----------- -----------
Total general and administrative 26,695,862 24,276,216 21,103,525
Amortization of excess cost over fair value of
net assets acquired 1,792,801 1,809,099 1,710,843
------------ ----------- -----------
Total noninterest expense 28,488,663 26,085,315 22,814,368
------------ ----------- -----------
Income before income taxes 17,038,081 13,624,851 16,601,011
Income tax expense 6,888,000 6,039,500 6,370,000
------------ ----------- -----------
Net income $ 10,150,081 $ 7,585,351 $10,231,011
============ =========== ===========
Earnings per share, basic $1.07 $.81 $1.13
Earnings per share, diluted 1.05 .78 1.08
==== ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS BANCORP, INC. 57
<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, 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 ($.28 per share) - - - (2,605,819)
Release of ESOP shares in lieu of cash
dividends on allocated ESOP shares - - 67,413 -
Stock issued in dividend reinvestment
and stock purchase plan - - 92,724 -
Amortization of restricted
stock awards - - - -
Tax benefit of restricted
stock awards vested - - 431,000 -
Amortization of ESOP shares - - 2,024,098 -
Stock options exercised 62,375 624 (543,597) -
Purchase of treasury stock - - - -
Tax benefit of non-incentive stock
options exercised - - 535,000 -
------------ --------- ----------- ------------
Balance at December 31, 1998 10,098,373 100,984 65,404,131 63,957,771
Comprehensive income:
Net income - - - 10,150,081
Other comprehensive income, net of
reclassification adjustment - - - -
Total comprehensive income
Dividends paid ($.28 per share) - - - (2,638,360)
Release of ESOP shares in lieu of cash
dividends on allocated ESOP shares - - 29,875 -
Stock issued in dividend reinvestment
and stock purchase plan - - (16,324) -
Amortization of restricted
stock awards - - 14,167 -
Amortization of ESOP shares - - 596,372 -
Stock options exercised 1,739 17 (1,221,446) -
Purchase of treasury stock - - - -
Tax benefit of non-incentive stock
options exercised - - 152,000 -
------------ --------- ----------- ------------
Balance at December 31, 1999 10,100,112 $101,001 $64,958,775 $71,469,492
============ ========= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS BANCORP, INC. 58
<PAGE>
<TABLE>
<CAPTION>
Accumulated Unamortized Total
other restricted Unearned Treasury stock stock-
comprehensive stock ESOP --------------- holders'
income (loss) awards shares Shares Dollars equity
------------- ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
$ 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
- - - - - 10,150,081
(5,275,232) - - - - (5,275,232)
------------
4,874,849
- - - - - (2,638,360)
- - 116,140 - - 146,015
- - - 10,986 140,497 124,173
- 8,335 - - - 22,502
- - 889,777 - - 1,486,149
- - - 136,068 1,911,695 690,266
- - - (216,100) (2,614,946) (2,614,946)
- - - - - 152,000
- ----------------- ----------- ------------ -------------- ------------ ------------
$ (5,021,011) $ (65,908) $(3,678,225) (142,286) $(1,682,775) $126,081,349
================= =========== ============ ============== ============ ============
</TABLE>
JEFFERSON SAVINGS BANCORP, INC. 59
<PAGE>
Consolidated Statements Of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,150,081 $ 7,585,351 $ 10,231,011
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,167,306 5,968,688 3,963,754
Provision for losses on loans 520,000 (1,200,000) 1,260,000
Provision for losses on real estate 181,000 - 264,000
Net gain on sales of assets (2,538,782) (2,219,639) (1,689,427)
Loans originated for sale (54,010,911) (90,652,032) (33,406,835)
Loans purchased for sale (30,220,802) - -
Sale of loans held for sale 144,133,880 92,794,776 35,356,956
Deferred income taxes (1,668,000) 1,080,200 150,000
Stock dividend from Federal Home Loan Banks (53,100) (183,500) (210,600)
Other, net 3,264,480 130,789 (4,121,428)
------------- ------------- -------------
Net cash provided by operating activities 74,925,152 13,304,633 11,797,431
------------- ------------- -------------
Cash flows from investing activities:
Principal payments on:
Loans receivable 580,741,542 471,986,332 409,382,688
Mortgage-backed securities 8,836,723 22,527,254 22,327,204
Proceeds from maturity of investment securities 69,235,000 145,522,130 20,625,000
Proceeds from sale of:
Loans receivable - 26,583,763 9,875,541
Mortgage-backed securities available for sale 4,676,186 45,347,468 97,661,265
Investment securities available for sale 5,010,938 - 76,380,742
Redemption of Federal Home Loan Bank stock 3,060,000 8,924,400 11,200
Cash invested in:
Loans receivable originated (521,399,704) (288,380,636) (344,460,751)
Loans receivable purchased (240,359,999) (406,125,630) (49,511,372)
Mortgage-backed securities (104,532,688) (15,182,351) (65,055,352)
Investment securities (26,888,870) (169,970,312) (128,242,847)
Stock in Federal Home Loan Banks (15,379,600) (3,880,800) -
Bank owned life insurance (25,000,000) - -
Proceeds from sale of real estate 3,406,463 5,272,018 4,866,075
Cash paid for acquisitions - - (15,266,182)
Cash and cash equivalents from acquisitions - - 8,296,533
Sale of branch deposits, net - - (2,708,045)
Other, net (5,094,045) (816,846) (1,693,426)
------------- ------------- -------------
Net cash (used in) provided by investing activities (263,688,054) (158,193,210) 42,488,273
------------- ------------- -------------
Cash flows from financing activities:
Decrease in savings deposits, net (63,340,352) (6,833,750) (3,975,781)
Increase (decrease) in borrowed money, net 258,854,309 143,607,277 (41,773,870)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 413,703 (586,860) 112,458
Dividends paid (2,638,360) (2,605,820) (2,011,820)
Shares sold to ESOP - - 928,167
Purchase of treasury stock (2,614,946) (2,424,006) -
Stock options exercised 690,266 786,885 148,570
Other, net 124,173 235,540 164,076
------------- ------------- -------------
Net cash provided by (used in) financing activities 191,488,793 132,179,266 (46,408,200)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 2,725,891 (12,709,311) 7,877,504
Cash and cash equivalents at beginning of year 18,873,687 31,582,998 23,705,494
------------- ------------- -------------
Cash and cash equivalents at end of year $ 21,599,578 $ 18,873,687 $ 31,582,998
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 66,681,414 $ 57,586,127 $ 58,690,604
Income taxes paid 8,734,783 4,895,159 7,250,893
Noncash investing activities:
Stock issued for acquisitions - - 15,276,847
Additions to real estate acquired in settlement
of loans or through foreclosure 2,579,500 4,715,707 5,577,945
Loans originated to finance the sale of real estate 140,650 1,129,600 745,950
Noncash financing activity - interest credited 35,731,257 39,119,232 39,439,947
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
JEFFERSON SAVINGS BANCORP, INC. 60
<PAGE>
- --------------------------------------------------------------------------------
(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 Heritage Bank
("Jefferson Heritage"). Jefferson Heritage's wholly owned subsidiaries are
Jefferson Financial, 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
Basic earnings per share ("EPS"), is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
Only employee stock ownership plan shares that have been allocated or
committed to be released are considered outstanding for earnings per share
calculations.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers all interest-bearing deposits and federal funds sold to be cash
equivalents.
Investments in Mortgage-backed and Investment Securities
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.
JEFFERSON SAVINGS BANCORP, INC. 61
<PAGE>
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 probable loan losses determined on the
basis of management's continuing review and evaluation of the loan portfolio and
its judgment 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 loan portfolio. Such agencies may
require Jefferson Heritage to increase the allowance for loan losses based on
their judgment 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.
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
JEFFERSON SAVINGS BANCORP, INC. 62
<PAGE>
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.
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 133, "Accounting for Derivative Instruments and Hedging Activities",
establishes standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 33, an Amendment of FASB Statement No. 133", which defers
the effective date of SFAS 133 from fiscal years beginning after June 15, 1999
to fiscal years beginning after June 15, 2000. Earlier application of SFAS No.
133, as amended, is encouraged but should not be applied retroactively to
financial statements of prior periods. The Company is currently evaluating the
requirements and impact of SFAS No. 133, as amended.
Reclassification
Certain reclassifications of 1998 and 1997 information have been made to
conform with the 1999 presentation.
JEFFERSON SAVINGS BANCORP, INC. 63
<PAGE>
- --------------------------------------------------------------------------------
(2) Earnings Per Share
- --------------------------------------------------------------------------------
The following table reconciles the numerators and denominators for basic
and diluted earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Net income (basic and diluted earnings per share) $10,150,081 $7,585,351 $10,231,011
=========== ========== ===========
Denominator:
Average shares outstanding (basic earnings per share) 9,489,251 9,364,960 9,034,922
Effect of dilutive stock options 196,746 404,347 445,226
----------- ---------- -----------
Average shares outstanding after assumed
conversions (diluted earnings per share) 9,685,997 9,769,307 9,480,148
=========== ========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(3) Business Combinations
- --------------------------------------------------------------------------------
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 acquisition of L&B Financial was accounted for using the purchase
method of accounting. Under the purchase method of accounting, the results of
operations of L&B Financial are included in the Company's results of operations
from the date of its acquisition. The excess of cost over fair value of assets
acquired was $5.9 million. L&B Financial was merged into the Bank upon the
completion of the acquisition.
- --------------------------------------------------------------------------------
(4) Regulatory Matters
- --------------------------------------------------------------------------------
The Company and Jefferson Heritage 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 Jefferson Heritage 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. Jefferson Heritage is subject to
regulations which require minimum capital levels in order to pay dividends
without OTS approval. At December 31, 1998, Jefferson Heritage had an aggregate
total of approximately $9 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, 1999,
Jefferson Heritage met all OTS capital requirements.
Jefferson Heritage 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
JEFFERSON SAVINGS BANCORP, INC. 64
<PAGE>
same definition as core capital. Jefferson Heritage was considered well
capitalized at December 31, 1999 and 1998.
Following are the actual and required capital amounts and ratios as of
December 31, 1999:
<TABLE>
<CAPTION>
Requirements under
prompt corrective action provisions
---------------------------------------------------
Actual Requirements Well capitalized Adequately capitalized
---------- ---------------- ------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------------ ------- ----------- ------------- ------------- ------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital: /(1)/ $105,069,562 6.69% $23,570,453 1.50% NA NA
Core capital: /(1)/ 105,069,562 6.69% 47,140,905 3.00% $ 78,568,175 5.00% $62,854,540 4.00%
Risk-based capital: /(2)/ 110,711,655 10.90% 81,221,766 8.00% 101,527,207 10.00% 81,221,766 8.00%
Tier I capital: /(2)/ 105,069,572 10.35% NA 60,916,324 6.00% 40,610,883 4.00%
</TABLE>
Following are the actual and required capital amounts and ratios as of
December 31, 1998:
<TABLE>
<CAPTION>
Requirements under
prompt corrective action provisions
-----------------------------------
Actual Requirements Well capitalized Adequately capitalized
---------- ------------ ---------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------------ ------ ---------- ------------ ------------ --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital: /(1)/ $ 92,447,569 6.79% $20,413,648 1.50% NA NA
Core capital: /(1)/ 92,447,569 6.79% 40,827,296 3.00% $ 68,045,493 5.00% $54,436,394 4.00%
Risk-based capital: /(2)/ 98,456,162 11.34% 69,469,828 8.00% 86,837,285 10.00% 69,469,828 8.00%
Tier I capital: /(2)/ 92,447,569 10.65% NA 52,102,371 6.00% 34,734,914 4.00%
</TABLE>
(1) To adjusted total assets
(2) To risk-weighted assets
JEFFERSON SAVINGS BANCORP, INC. 65
<PAGE>
- --------------------------------------------------------------------------------
(5) Investment Securities
- --------------------------------------------------------------------------------
The amortized cost and fair value of debt securities classified as
available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Fair
cost gains losses value
------------ --------- ------------- -------------
<S> <C> <C> <C> <C>
United States government and
agency obligations $ 96,711,459 $ - $(3,036,257) $ 93,675,202
Corporate bonds 6,576,072 - (186,572) 6,389,500
Municipal bonds 3,465,105 1,732 (189,340) 3,277,497
------------ -------- ----------- ------------
$106,752,636 $ 1,732 $(3,412,169) $103,342,199
============ ======== =========== ============
December 31, 1998
-----------------------------------------------------
Gross Gross
unreal- unreal-
Amortized ized ized Fair
cost gains losses value
------------ --------- ------------ -------------
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
============ ======== =========== ============
</TABLE>
Gross realized gains, gross realized losses, and gross proceeds on sales of
investment securities available for sale were $19,985, $0 and $5,010,938 in
1999, and $1,183,565, $39,355 and $76,380,742 in 1997, respectively. There were
no sales during 1998.
The amortized cost and fair value of investment securities, by contractual
maturity, are summarized as follows:
December 31, 1999
---------------------------
Amortized Fair
cost value
---- -----
One to five years $ 73,690,174 $ 71,473,184
Five to 10 years 29,997,357 28,993,250
More than 10 years 3,065,105 2,875,765
------------ ------------
$106,752,636 $103,342,199
============ ============
Weighted average interest rate 6.13%
====
JEFFERSON SAVINGS BANCORP, INC. 66
<PAGE>
- --------------------------------------------------------------------------------
(6) 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, 1999
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
GNMA $ 5,862,618 $ - $ (212,448) $ 5,650,170
FHLMC 20,491,746 - (809,133) 19,682,613
FNMA 30,708,146 12,512 (1,242,585) 29,478,073
Collateralized mortgage
obligations 66,343,132 - (2,706,920) 63,636,212
------------ -------- ----------- ------------
$123,405,642 $ 12,512 $(4,971,086) $118,447,068
============ ======== =========== ============
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------ ---------- ------------ -------------
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
============ ======== =========== ============
</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>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Gross realized gains $ 47,685 $ 48,166 $ 367,348
Gross realized losses (10,695) - (950,314)
---------- ----------- -----------
Net realized gain (loss) $ 36,990 $ 48,166 $ (582,966)
========== =========== ===========
Gross proceeds $4,676,186 $45,347,468 $97,661,265
========== =========== ===========
</TABLE>
The amortized cost and fair value of mortgage-backed securities at December
31, 1999, 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.
JEFFERSON SAVINGS BANACORP, INC. 67
<PAGE>
December 31, 1999
--------------------------------------
Amortized Fair
cost value
--------------------- --------------
Within one year $ 878,383 $ 871,344
One to five years 11,604 11,581
Five to ten years 20,075,181 19,156,118
After ten years 102,440,474 98,408,025
-------------- --------------
$ 123,405,642 $ 118,447,068
============== ==============
Weighted average interest rate 6.21%
====
- -------------------------------------------------------------------------------
(7) Loans Receivable, Net
- -------------------------------------------------------------------------------
Loans receivable are summarized as follows:
December 31,
---------------------
1999 1998
---- ----
Loans secured by real estate:
Residential:
Conventional $ 779,409,767 $ 834,296,425
Home equity 54,948,920 54,856,853
FHA insured/VA guaranteed 5,078,181 1,517,227
Held for sale 21,643,649 5,867,489
Construction and development 320,917,254 208,207,220
Commercial 155,659,267 72,601,740
-------------- --------------
Total loans secured by real estate 1,337,657,038 1,177,346,954
Other loans:
Commercial secured by first mortgage loans 15,755,018 17,330,488
Automobile loans 2,698,752 2,021,033
Loans secured by savings deposits 4,986,103 4,776,491
Education loans 30,875 78,000
Other 7,973,542 3,441,179
-------------- --------------
1,369,101,328 1,204,994,145
Add (deduct):
Loans in process (127,228,768) (83,586,484)
Unearned premiums, net 3,613,390 2,235,346
Deferred loan costs, net 378,405 1,506,233
Allowance for loan losses (6,937,900) (6,659,294)
-------------- --------------
$1,238,926,455 $1,118,489,946
============== ==============
Weighted average interest rate at end of year 7.95% 7.64%
==== ====
Loans serviced for others at December 31, 1999, 1998, and 1997 totaled
approximately $146.7 million, $105.2 million, and $85.8 million, respectively.
JEFFERSON SAVINGS BANCORP, INC. 68
<PAGE>
A summary of impaired loans, which includes nonaccrual loans, follows:
December 31,
---------------
1999 1998
---- ----
Nonaccrual loans $7,445,195 $3,709,029
Impaired loans continuing to accrue interest 947,182 2,486,631
---------- ----------
Total impaired loans $8,392,377 $6,195,660
========== ==========
Impaired loans with related allowance
for loan losses $3,843,916 $ 61,728
Allowance for losses on impaired loans 1,027,336 30,335
Impaired loans with no related allowance
for loan losses 4,548,461 6,133,932
Interest on impaired loans which would have been recorded under the
original terms of the loans and cash receipts of interest was $794,000 and
$444,000, respectively, for the year ended December 31, 1999. 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. The average balance of impaired loans
totaled $7.7 million, $6.1 million and $6.2 million during the years ended
December 31, 1999, 1998 and 1997, respectively.
Activity in the allowance for loan losses is summarized as follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year $6,659,294 $ 8,182,268 $6,528,601
Allowance from purchase acquisitions - - 1,155,764
Provision charged to expense 520,000 (1,200,000) 1,260,000
Recoveries 344 8,552 18,810
Charge-offs (241,738) (331,526) (780,907)
---------- ----------- ----------
Balance at end of year $6,937,900 $ 6,659,294 $8,182,268
========== =========== ==========
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 $920,876 and $703,995 at
December 31, 1999 and 1998, respectively.
Activity in loans to executive officers and directors is summarized as
follows:
Balance at December 31, 1998 $703,995
New loans or advances 247,500
Repayments (56,042)
Change in director and officer status 25,423
--------
Balance at December 31, 1999 $920,876
========
JEFFERSON SAVINGS BANCORP, INC. 69
<PAGE>
- -------------------------------------------------------------------------------
(8) Investment in Real Estate, Net
- -------------------------------------------------------------------------------
Investment in real estate is summarized as follows:
December 31,
------------
1999 1998
---- ----
Real estate acquired through foreclosure $1,531,668 $3,240,795
Less allowance for losses 10,000 360,036
---------- ----------
$1,521,668 $2,880,759
========== ==========
Activity in the allowance for losses is summarized as follows:
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 360,036 $ 534,835 $ 433,849
Allowance from purchase acquisitions - - 100,000
Provision charged to expense 181,000 - 264,000
Charge-offs (531,036) (174,799) (263,014)
---------- ---------- ----------
Balance at end of year $ 10,000 $ 360,036 $ 534,835
========== ========== ==========
The results of real estate operations are summarized as follows:
1999 1998 1997
---- ---- ----
Gain from sales of real estate, net $ 74,609 $256,135 $ 475,829
Provision for losses on real estate (181,000) - (264,000)
Operating income (expense), net (56,987) (55,503) (140,797)
--------- -------- ---------
$(163,378) $200,632 $ 71,032
========= ======== =========
JEFFERSON SAVINGS BANCORP, INC. 70
<PAGE>
- -------------------------------------------------------------------------------
(9) Office Properties and Equipment
- -------------------------------------------------------------------------------
Office properties and equipment are summarized as follows:
December 31,
------------------
1999 1998
---- ----
Land $ 2,467,254 $ 2,469,283
Office buildings 7,607,724 6,913,701
Leasehold improvements 1,774,035 1,029,320
Furniture and equipment 11,125,222 7,836,173
----------- -----------
22,974,235 18,248,477
Less accumulated depreciation and amortization 8,761,371 7,720,064
----------- -----------
$14,212,864 $10,528,413
=========== ===========
Depreciation and amortization expense totaled $1,459,997, $1,633,814, and
$1,305,362 for the years ended December 31, 1999, 1998, and 1997, 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:
Year ending December 31:
2000 $ 688,470
2001 636,588
2002 495,948
2003 447,410
2004 367,064
Thereafter 212,671
----------
$2,848,151
==========
Net rent expense for 1999, 1998, and 1997 is summarized as follows:
1999 1998 1997
---- ---- ----
Rent expense $ 620,028 $ 443,877 $ 402,540
Rent income (170,294) (190,807) (229,069)
--------- --------- ----------
$ 449,734 $ 253,070 $ 173,471
========= ========= ==========
- ----------------------------------------------------------------------------
(10) Accrued Income and Other Assets
- ----------------------------------------------------------------------------
Accrued income and other assets are summarized as follows:
December 31,
------------------
1999 1998
---- ----
Accrued interest:
Loans receivable $ 8,568,248 $ 6,731,103
Mortgage-backed securities 649,519 180,841
Investment securities 924,791 1,946,294
------------ -----------
10,142,558 8,858,238
Accounts receivable 261,496 236,682
Other 1,241,078 2,594,760
------------ -----------
$ 11,645,132 $11,689,680
============ ===========
JEFFERSON SAVINGS BANCORP, INC. 71
<PAGE>
- --------------------------------------------------------------------------------
(11) Savings Deposits
- --------------------------------------------------------------------------------
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
------------------------- --------------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Noninterest bearing $ 16,295,374 - % $ 9,090,104 - %
NOW 78,952,629 2.62 46,535,345 1.63
Money market 66,472,891 3.88 138,335,707 4.07
Passbook and statement savings 63,040,735 2.82 44,997,033 2.27
------------ --------------
224,761,629 2.86 238,958,189 3.10
Certificates of deposit less than $100,000 654,806,893 698,804,094
Certificates of deposit greater than $100,000 95,396,714 100,414,201
------------ --------------
Total certificates of deposit 750,203,607 5.34 799,218,295 5.57
------------ --------------
Total savings deposits $974,965,236 4.77% $1,038,176,484 5.00%
============ ==== ============== ====
</TABLE>
Investment and mortgage-backed securities totaling $5.7 million were pledged
against certain deposits over $100,000 at December 31, 1999. 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:
December 31,
--------------------
1999 1998
---- ----
2.00-2.99% $ 113,060 132,635
3.00-3.99% 4,334,820 2,052,052
4.00-4.99% 293,555,272 118,197,321
5.00-5.99% 395,053,026 585,615,997
6.00-6.99% 45,734,705 76,044,931
7.00-7.99% 11,412,724 17,175,359
------------ ------------
$750,203,607 799,218,295
============ ============
The scheduled maturities of the certificates of deposit are summarized as
follows:
December 31, 1999
-----------------
Percent
Amount of total
------ --------
Within one year $629,733,380 83.9%
Second year 74,782,684 10.0
Third year 33,707,411 4.5
Fourth year 7,647,389 1.0
Fifth year 3,198,500 0.4
Thereafter 1,134,243 0.2
------------ -----
$750,203,607 100.0%
============ =====
JEFFERSON SAVINGS BANCORP, INC. 72
<PAGE>
Interest expense on savings deposits by type is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
NOW $ 1,853,062 $ 1,514,817 $ 1,928,299
Money market 3,946,000 4,763,820 4,186,233
Passbook and statement savings 1,130,046 1,131,782 1,281,232
Certificates of deposit 40,338,230 45,459,194 46,058,227
------------ ------------- -------------
$ 47,267,338 $ 52,869,613 $53,453,991
============ ============= =============
</TABLE>
- --------------------------------------------------------------------------------
(12) Borrowed Money
- --------------------------------------------------------------------------------
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1999 1998
------------------------ ------------------------
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%
Federal funds purchased 56,600,000 5.60% -
Advances from Federal Home Loan
Banks due:
1999 - 34,232,582 5.51
2000 160,000,000 5.74 5,000,000 5.05
2001 20,000,000 5.49 30,000,000 4.56
2002 30,000,000 5.87 -
2003 45,000,000 5.19 30,000,000 4.79
2004 30,000,000 5.81 -
2008 55,000,000 4.78 90,000,000 4.81
2009 60,000,000 5.04 -
2013 9,299,975 5.76 9,752,333 5.76
2015 331,581 6.92 336,182 6.92
Commercial bank debt due in 2000 2,138,287 6.65 2,599,124 7.65
------------ ------------
$468,369,843 5.48% $209,515,534 4.98%
============ ==== ============ ====
</TABLE>
At December 31, 1999, the total unused lines of credit with the Federal
Home Loan Bank totaled $25.0 million. The terms of the agreements call for
interest rates that vary daily. These borrowings averaged $16.2 million, $1.8
million, and $9.3 million during the years ended December 31, 1999, 1998, and
1997, respectively. The maximum amount outstanding at any month-end during 1999,
1998, and 1997 was $25.0 million, $7.6 million, and $20.9 million, respectively.
Advances from FHLBs averaged $335.9 million, $84.0 million, and $67.7
million during 1999, 1998, and 1997, respectively. The maximum amount
outstanding at any month-end was $409.6 million, $199.3 million, and $96.7
million during the years ended December 31, 1999, 1998, and 1997, 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, 1999, borrowings from the FHLBs were collateralized by all
stock in the FHLBs and blanket liens on first mortgage loans.
JEFFERSON SAVINGS BANCORP, INC. 73
<PAGE>
The commercial bank debt is collateralized by Jefferson Heritage stock. The
debt matures on May 31, 2001 and required annual principal payments of $314,923
and quarterly interest payments.
Interest expense on borrowed money, by type, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Lines of credit with the FHLBs $ 499,417 $ 51,210 $ 372,472
Advances from FHLBs 17,521,027 4,420,046 4,076,773
Interest on federal funds purchased 1,083,998 25,204 -
Interest rate cap agreements, net - - (9,005)
Interest on commercial bank debt 171,240 214,817 249,211
----------- ---------- ----------
$19,275,682 $4,711,277 $4,689,451
=========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(13) Accrued Expenses and Other Liabilities
- --------------------------------------------------------------------------------
Accrued expenses and other liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Accrued interest payable:
Savings deposits $ 207,210 $ 283,436
Borrowed money 154,077 216,245
----------- ----------
361,287 499,681
Accounts payable for check fundings, net 3,397,697 3,606,102
Accrued compensation and benefits expense 1,642,575 1,334,225
Accounts payable 543,804 460,791
Unremitted payments on loans serviced for others 2,022,116 596,556
Deferred gain from sales of real estate - 160,024
Other 2,172,865 840,475
----------- ----------
$10,140,344 $7,497,854
=========== ==========
</TABLE>
JEFFERSON SAVINGS BANCORP, INC. 74
<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 Company used the percentage of taxable income method for 1995 in
determining the bad debt deduction for tax purposes.
The special bad debt deduction accorded thrift institutions is covered
under Section 593 of the Internal Revenue Code ("IRC"). On August 20, 1996, the
Small Business Job Protection Act of 1996 (the "Act") was signed into law. This
Act included the repeal of Section 593 effective for tax years beginning after
December 31, 1995. As a result, thrift institutions are no longer allowed a
percentage method bad debt deduction. The repeal of the thrift reserve method
generally requires thrift institutions to recapture into income the portion of
tax bad debt reserves accumulated since 1987 ("base year reserve"). The
recapture will generally be taken into income ratably over six tax years. The
Company met a residential loan requirement for tax years beginning in 1996 and
1997; recapture of the reserve was deferred until the tax year beginning in
1998. During the year 1999, the Company recaptured $577,000 of tax bad debt
reserve At December 31 1999, the Company had bad debts deducted for tax purposes
in excess of the base year reserve of approximately $3.0 million. The Company
has recognized a deferred income tax liability for this amount.
Certain events covered by IRC Section 593(e), which was not repealed, will
trigger a recapture of the base year reserve. The base year reserve of thrift
institutions would be recaptured if a thrift ceases to qualify as a bank for
federal income tax purposes. The base year reserves of thrift institutions also
remain subject to income tax penalty provisions which, in general, require
recapture upon certain stock redemptions of, and excess distributions to,
stockholders. At December 31, 1999, 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>
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Current expense:
Federal $ 8,344,000 $4,948,300 $6,214,000
State 212,000 11,000 6,000
Deferred - federal and state (1,668,000) 1,080,200 150,000
----------- ---------- ----------
$ 6,888,000 $6,039,500 $6,370,000
=========== ========== ==========
</TABLE>
The reasons for the difference between expected income tax expense,
computed at the statutory federal income tax rate, and actual income tax expense
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
income tax expense $5,963,328 35.0% $4,768,698 35.0% $5,810,354 35.0%
Items affecting federal
income tax rate:
Goodwill amortization 627,480 3.7 633,185 4.6 598,795 3.6
Other, net 297,192 1.7 637,617 4.7 (39,149) (.2)
---------- ---- ---------- ---- ---------- ----
$6,888,000 40.4% $6,039,500 44.3% $6,370,000 38.4%
========== ==== ========== ==== ========== ====
</TABLE>
JEFFERSON SAVINGS BANCORP, INC. 75
<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,
---------------------------
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Book provision for loan loss in excess of tax $ 2,199,000 $ 2,437,000
Deferred profit on real estate sold 21,000 82,000
Deferred compensation and stock bonus awards 668,000 527,000
Purchase accounting adjustments 171,000 279,000
Unrealized loss on securities available for sale 3,348,000 -
Other - 98,000
----------- -----------
Total gross deferred tax assets 6,407,000 3,423,000
----------- -----------
Deferred tax liabilities:
Deferred loan costs, net (399,000) (1,591,000)
Office properties and equipment, principally due to
differences in depreciation (460,000) (460,000)
FHLB stock dividends, principally due to deferral of
income for tax reporting (233,000) (874,000)
Installment sales of real estate acquired for development
and sale (393,000) (455,000)
Tax bad debt deductions in excess of base year amount (1,114,000) (1,315,000)
Unrealized gain on securities available for sale - (169,000)
Other (90,000) (26,000)
----------- -----------
Total gross deferred tax liabilities (2,689,000) (4,890,000)
----------- -----------
Net deferred tax asset (liability) $ 3,718,000 $(1,467,000)
=========== ===========
</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 $176,000,
$172,000, and $155,000 for the years ended December 31, 1999, 1998, and 1997,
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 shares committed to be released. Compensation expense associated with
the ESOP was $1,486,149, $2,988,136, and $2,061,055 for the years ended December
31, 1999, 1998, and 1997, respectively.
JEFFERSON SAVINGS BANCORP, INC. 76
<PAGE>
The ESOP shares as of December 31, 1999 were as follows:
Allocated shares 611,366
Unearned shares 458,546
-----------
Total ESOP shares 1,069,912
===========
Fair value of unearned shares
at December 31, 1999 $11,300,945
===========
The Company has management recognition plans ("MRPs") to reward and retain
personnel of experience and ability in key positions of responsibility. The MRPs
hold 14,848 shares of the Company's common stock which were contributed by the
Company. During 1999, the Company granted 10,000 of such shares in the form of
restricted stock to an eligible employee that are paid under a vesting schedule
of five years. The unearned shares held by the MRPs are recorded in the
consolidated financial statements as a charge to a contra equity account. The
contra equity account is amortized to expense over the period of vesting. The
related expense was $22,502, $45,908, and $239,326 for the years ended December
31, 1999, 1998, and 1997, respectively. No MRP shares were granted during the
years ended December 31, 1998 and 1997.
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 $25,450, $39,400, and $39,400 for
the years ended December 31, 1999, 1998, and 1997, respectively.
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 for each of the years ended December
31,1999, 1998, and 1997, 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, 1999, there were 1,764 options available
for grant.
A summary of stock options outstanding at December 31, 1999 follows:
Year Options Options Remaining Exercise
granted outstanding exercisable contractual life price
------- ----------- ----------- ---------------- -----
1993 343,424 343,424 3.27 years $ 5.00
1995 772 618 5.13 years 8.18
1996 1,235 741 6.13 years 12.87
1999 153,000 - 9.44 years 12.54
------- -------
Total 498,431 344,783
======= =======
Weighted average 5.18 years 7.34
JEFFERSON SAVINGS BANCORP, INC. 77
<PAGE>
Changes in options outstanding were as follows:
Weighted
Number of average
shares price
------ -----
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
Granted 161,000 12.59
Exercised (137,807) 5.00
Forfeited (10,000) 13.70
--------
Balance at December 31, 1999 498,431 $ 7.34
======== ======
The Company applies APB opinion No. 25 in accounting for stock options and,
accordingly, no compensation cost has been recognized in the consolidated
financial statements. Had the Company determined compensation cost for stock
options granted in 1999 based on the fair value at the grant date under
SFAS No. 123, the Company's net income in 1999 would have been reduced to the
pro forma amount indicated below:
Net income:
As reported $10,150,081
Pro forma 10,068,978
===========
Earnings per share - basic:
As reported $ 1.07
Pro forma 1.06
===========
Earnings per share - diluted:
As reported $ 1.05
Pro forma 1.04
===========
The per share fair value of stock options granted in 1999 were estimated on
the grant dates of February 17, 1999 and December 15, 1999 at $7.37 and $6.64
respectively, using the Black-Scholes option-pricing model. The following
assumptions were used to determine the per share fair value of the stock options
granted in 1999: dividend yield of 2.65%; risk free interest rate of 5.37% and
6.62% for the February 17, 1999 and December 15, 1999 options, respectively;
expected volatility of 61.42% and 72.76% for the February 17, 1999 and December
15, 1999 options, respectively; and an estimated life of 10 years. Disclosure of
the fair value based method of accounting for stock options granted during the
years ended December 31, 1998 and 1997 as required by SFAS 123 is not presented
due to the immaterial effect of stock options granted. No amounts have been
charged to expense in connection with this plan.
JEFFERSON SAVINGS BANCORP, INC. 78
<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, 1999, the Company had outstanding commitments to originate
adjustable and fixed rate mortgage loans, home equity loans and nonmortgage
loans totaling approximately $23.7 million, $5.3 million, $1.1 million and $0.9
million, respectively; to purchase adjustable rate mortgage loans totaling
approximately $1.3 million; and to sell fixed rate mortgage loans totaling
approximately $11.6 million. In addition, the Company had unused home equity
lines of credit totaling $59.6 million. Commitments to originate loans are
extended for periods up to 120 days. Commitments outstanding at December 31,
1999 to originate fixed rate mortgage loans were issued at rates ranging from
6.50% to 10.25%. Commitments to extend credit may involve, to varying degrees,
elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheet. The amount of credit risk in the
event of nonperformance by the other party to the commitment is represented by
the contractual amount of the loan when originated. Interest rate risk on
commitments to extend credit results from the possibility that interest rates
may have moved unfavorably from the position of the Company since the time the
commitment was made.
The Company is involved in various litigation in the ordinary course of
business. In the opinion of management and the Company's counsel, at the
present time, disposition of the suits and claims will not have a material
effect on the Company's financial position.
- --------------------------------------------------------------------------------
(20) Liquidation Account
- --------------------------------------------------------------------------------
On April 8, 1993, Jefferson Heritage converted from a mutual savings
association to a capital stock savings association. At the time of conversion,
Jefferson Heritage established a liquidation account in an amount equal to the
regulatory capital of Jefferson Heritage as of September 30, 1992 (the date of
the most recent balance sheet included in the offering circular related to the
Conversion). The liquidation account is maintained for the benefit of any
person with a deposit account of $50 or more in Jefferson Heritage on March 31,
1992 ("Eligible Depositor") who continues to maintain his/her deposits in
Jefferson Heritage after
JEFFERSON SAVINGS BANCORP, INC. 79
<PAGE>
that date. In the event of a complete liquidation of Jefferson Heritage, 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, 1999 was approximately $9.8 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
Jefferson Heritage's regulatory capital 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,
----------------------------------------
1999 1998
--------------- ----------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 21,600 $ 21,600 $ 18,874 $ 18,874
Investment securities 103,342 103,342 154,611 154,611
Mortgage-backed securities 118,447 118,447 32,364 32,364
Loans receivable 1,238,926 1,228,538 1,118,490 1,132,792
Stock in Federal Home Loan Banks 24,254 24,254 11,881 11,881
Accrued interest receivable 10,492 10,492 8,858 8,858
---------- ---------- ---------- ----------
$1,517,061 $1,506,673 $1,345,078 $1,359,380
========== ========== ========== ==========
Financial liabilities:
Savings deposits:
Passbook and statement savings,
NOW, and money market accounts $ 224,761 $ 224,761 $ 238,958 $ 238,958
Certificates of deposit 750,204 745,036 799,218 799,280
Borrowed money 468,370 460,325 209,516 209,309
Accrued interest payable 361 361 500 500
---------- ---------- ---------- ----------
$1,443,696 $1,430,483 $1,248,192 $1,248,047
========== ========== ========== ==========
</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.
Investment Securities and Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
JEFFERSON SAVINGS BANCORP, INC. 80
<PAGE>
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.
JEFFERSON SAVINGS BANCORP, INC. 81
<PAGE>
- --------------------------------------------------------------------------------
(22) Parent Company Financial Information
- --------------------------------------------------------------------------------
The following are condensed balance sheets as of December 31, 1999 and 1998
and condensed statements of income and cash flows for the years ended December
31, 1999, 1998, and 1997 for Jefferson Savings Bancorp, Inc. (parent company
only):
<TABLE>
<CAPTION>
Condensed Balance Sheets December 31,
------------------------ -----------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Assets:
Investment in subsidiaries $120,290 $114,963
Advances to subsidiaries 8,338 11,731
Other assets 54 64
-------- --------
$128,682 $126,758
======== ========
Liabilities and stockholders' equity:
Commercial bank debt $ 2,138 $ 2,599
Other liabilities 463 320
Stockholders' equity 126,081 123,839
-------- --------
$128,682 $126,758
======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income 1999 1998 1997
------------------------------ -------- -------- -------
(in thousands)
<S> <C> <C> <C>
Interest income $ 858 $ 651 $ 743
Interest expense 171 215 249
Dividends from subsidiaries - 8,000 -
Other noninterest income 16 71 -
-------- -------- -------
703 8,507 494
Operating expenses 1,167 717 553
-------- -------- -------
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries (464) 7,790 (59)
Income tax expense (benefit) (163) (72) (19)
-------- -------- -------
Income (loss) before equity in undistributed
earnings of subsidiaries (301) 7,862 (40)
Equity in undistributed earnings of subsidiaries 10,451 (277) 10,271
-------- -------- -------
Net income $ 10,150 $ 7,585 $10,231
======== ======== =======
</TABLE>
JEFFERSON SAVINGS BANCORP, INC. 82
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows 1999 1998 1997
---------------------------------- ---- ---- ----
(in thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 10,150 $ 7,585 $ 10,231
Net income of subsidiaries (10,450) (7,723) (10,271)
Dividends from subsidiaries - 8,000 -
Other, net 1,807 3,236 1,889
-------- ------- --------
Net cash provided by operating activities 1,507 11,098 1,849
-------- ------- --------
Investing activities:
Advances to subsidiaries 3,393 (6,651) (687)
Proceeds from sale of real estate - - -
Cash paid for acquisitions - - -
-------- ------- --------
Net cash provided by (used in) investing
activities 3,393 (6,651) (687)
-------- ------- --------
Financing activities:
Dividends paid (2,638) (2,606) (2,012)
Principal payments on commercial bank debt (461) (440) (391)
Shares sold to ESOP - - 928
Proceeds from stock options exercised 690 787 149
Repurchase of treasury stock (2,615) (2,424) -
Proceeds from dividend reinvestment and
stock purchase plan 124 236 164
-------- ------- --------
Net cash used in financing activities (4,900) (4,447) (1,162)
-------- ------- --------
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
Capital contribution to subsidiary - - 14,604
======== ======= ========
</TABLE>
- --------------------------------------------------------------------------------
(23) Segment Information
- --------------------------------------------------------------------------------
The Company combined its two subsidiary banks into one charter effective
December 31, 1998 and operated as a single business segment during 1999. 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 and 1997:
Year Ended December 31, 1998
----------------------------
Missouri Texas Other Consolidated
-------- ----- ----- ------------
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
=========== =========== ========= ===========
JEFFERSON SAVINGS BANCORP, INC. 83
<PAGE>
<TABLE>
<CAPTION>
Balances at December 31, 1998:
<S> <C> <C> <C> <C>
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>
- --------------------------------------------------------------------------------
(24) Comprehensive Income
- --------------------------------------------------------------------------------
For the years ended December 31, 1999, 1998 and 1997, unrealized gains and
losses on assets available for sale were the Company's only other comprehensive
income component. Comprehensive income for 1999, 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $10,150,081 $ 7,585,351 $ 10,231,011
Other comprehensive income (loss):
Realized and unrealized holding gain (loss)
arising during the period, net of tax benefit of
$3,494,031 and $64,087 in 1999
and 1998, respectively, and tax expense of
$443,826 in 1997 (5,241,047) (96,130) 665,738
Less reclassification adjustment for realized
gain (loss) included in net income, net of tax 34,185 28,900 336,746
----------- ----------- ------------
Total other comprehensive income (loss) (5,275,232) (125,030) 328,992
----------- ----------- ------------
Total comprehensive income $ 4,874,849 $ 7,460,321 $ 10,560,003
=========== =========== ============
</TABLE>
JEFFERSON SAVINGS BANCORP, INC. 84
<PAGE>
<TABLE>
<CAPTION>
Supplementary Data
Quarterly Financial Data
1999 1/st/ Qtr. 2/nd/ Qtr. 3/rd/ Qtr. 4/th/ Qtr.
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income ................................. $ 24,762 $ 27,045 $ 27,521 $28,410
Interest expense ............................................. 15,304 16,570 16,983 17,686
--------- -------- ------ -------
Net interest income ........................... 9,458 10,475 10,538 10,724
Provision for losses on loans ................................ -- -- -- 520
--------- -------- ------ -------
Net interest income after
provision for losses on loans............. 9,458 10,475 10,538 10,204
--------- -------- ------- -------
Noninterest income:
Gains on sales of investment securities, net.............. 37 -- -- --
Gain on sales of loans, net............................... 247 198 526 1,304
Real estate operations, net............................... (98) (70) 23 (19)
Other..................................................... 581 623 577 923
--------- -------- ------- -------
Total noninterest income...................... 767 751 1,126 2,208
--------- -------- ------- -------
Noninterest expense:
General and administrative................................ 5,667 6,919 6,706 7,404
Amortization of excess cost over
fair value of net assets acquired..................... 449 448 448 448
--------- -------- ------- -------
Total noninterest expense..................... 6,116 7,367 7,154 7,852
--------- -------- ------- -------
Income before income taxes ................... 4,109 3,859 4,510 4,560
Income tax expense ........................................... 1,680 1,567 1,809 1,832
--------- -------- ------- -------
Net income.................................... $ 2,429 $ 2,292 $ 2,701 $ 2,728
========= ======== ======= =======
Earnings per share, basic..................................... $ 0.26 $ 0.24 $ 0.28 $ 0.29
Earnings per share, diluted................................... 0.25 0.24 0.28 0.28
========= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1/st/ Qtr. 2/nd/ Qtr. 3/rd/ Qtr. 4/th/ Qtr.
---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income ................................. $ 22,781 $ 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
========= ======== ======== =======
</TABLE>
85
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Directors. The following table sets forth, for each current director,
his name, age as of December 31, 1999, the year he first became a director of
the Company's principal subsidiary, Jefferson Heritage, and the expiration of
his current term as a director of the Company. Each of the Company's current
directors (other than Mr. Miller who was first elected a director in 1995 and
Messrs. Barkau and Holland who were first elected in 1999) were initially
appointed as directors in 1992 in connection with the incorporation and
organization of the Company. Each director of the Company also is a member of
the Board of Directors of Jefferson Heritage. Except as described in Item 13.
--------
Certain Relationships and Related Transactions, there are no arrangements or
- ----------------------------------------------
understandings between the Company and any director pursuant to which such
person has been selected as a director for director of the Company, and no
director or executive officer is related to any other director or executive
officer by blood, marriage or adoption.
Year First
Elected as Current
Director of Term
Name Age the Bank to Expire
---- --- -------- ---------
Brad Barkau 48 1999 2002
William W. Canfield 61 1987 2000
Lloyd D. Doerflinger 64 1958 2002
Gary L. Holland 60 1999 2002
David V. McCay 57 1989 2001
Forrest W. Miller, Jr. 56 1995 2001
Edward G. Throop 50 1985 2000
Presented below is certain biographical information concerning the
Company's current directors. Unless otherwise stated, all directors have held
the positions indicated for at least the past five years.
Brad Barkau - Mr. Barkau is an attorney with the firm of Barkau &
Unverfehrt, P.C. in Nashville, Illinois. He is also a registered representative
with Equitable Financial Cos. Mr. Barkau serves on the Board of Directors of Old
Exchange National Bank, Okawville, Illinois. He is also active in youth and
religious organizations in Okawville, Illinois.
William W. Canfield - Mr. Canfield is the President of TALX
Corporation, St. Louis, Missouri, which is engaged in developing and marketing
interactive voice response systems.
Lloyd D. Doerflinger - Mr. Doerflinger currently is retired. From 1988
until 1989, he was the acting President and Chief Executive Officer of Jefferson
Heritage. He currently is active in charitable and religious organizations in
St. Louis and Florida.
Gary L. Holland - Mr. Holland is the President of Holland Motors
Corporation, a full-line General Motors dealership in Harrisburg, Illinois,
which he founded in 1986. Mr. Holland also served as a director and Chairman of
86
<PAGE>
the Board of Harrisburg Bancshares, Inc., the holding company for Harrisburg
National Bank, Harrisburg, Illinois from January 1992 to May 1995.
David V. McCay - Mr. McCay is Chairman of the Board of Chief Executive
Officer of the Company and has been Chief Executive Officer of the Bank since
1989. Prior to joining the Bank, from 1973 to 1989, Mr. McCay was employed by
the Boatmen's National Bank of St. Louis, leaving as President-South Region and
Director of the Indirect Lending/Leasing Division. Mr. McCay has served in
various capacities with numerous civic and charitable organizations, including
the South County Y.M.C.A., the American Cancer Society, and the United Way. He
was an instructor at the St. Louis Chapter of the American Institute of Banking
for nineteen years.
Forrest W. Miller, Jr. - Mr. Miller and his wife are the owners of
Royale Orleans Banquet Center. He is a past State President of the Missouri
Restaurant Association and is a former President and Chairman of the Board of
the St. Louis Chapter of the Missouri Restaurant Association. He is currently
active in many civic and charitable organizations.
Edward G. Throop - Mr. Throop is President of C4 Corporation, a real
estate development firm headquartered in Chesterfield, Missouri. He is a member
of the Chesterfield Chamber of Commerce and the St. Louis Counts.
Executive Officers Who Are Not Directors
The following sets forth information including their ages as of
December 31, 1999 with respect to executive officers of the Company who do not
serve on the Board of Directors. Executive officers are appointed annually by
the Board of Directors.
Joe L. Williams, 49, became President and Chief Operating Officer
effective January 1, 1999 and was elected to the Bank's Board of Directors on
the same date. Prior to that time, Mr. Williams had served as President of the
Company's former Texas subsidiary, First Federal Savings Bank of North Texas
("First Federal"), since August 1, 1997. Mr. Williams served as President and
Chief Executive Officer of Texas Heritage Savings Association/Banc from 1984 to
1996 when it was merged into First Federal, and served as a senior vice
president of First Garland Savings, Garland, Texas from 1974 to 1984.
Paul J. Milano, 43, has served as Senior Vice President, Treasurer,
Chief Financial Officer and Senior Accounting Officer of the Company since 1992.
He joined the Bank as Chief Accounting Officer in 1990 and has served as Senior
Vice President and Senior Accounting Officer of the Bank since January 1992.
Prior to joining the Bank, he served for nine years with KPMG LLP, leaving in
1990 as Manager. He is a member of the American Institute of Certified Public
Accountants, the Missouri Society of Certified Public Accountants, and the
Financial Managers Society.
James M. Allison, 47, has served as Senior Vice President and Senior
Operations Officer of the Bank since 1998. Mr. Allison is responsible of all
operations and technology activities including deposit services, facilities,
security, information systems, project management, mainframe, and network
operations. Mr. Allison has over twenty years experience in retail banking,
customer service, and bank operations management. He is a graduate of Southern
Illinois University, Edwardsville, and the University of Virginia Graduate
School of Retail Bank Management.
John P. Deves, 35, has served as Senior Vice President, Residential
Lending Division since August 1999. Prior to that time, Mr. Deves had served as
Senior Vice President of the Retail Banking and Loan Sales Divisions, and
Financial Services for the Bank. Mr. Deves has been with the Bank since 1991. He
is currently responsible for mortgage loan production, underwriting, closing and
delivery systems, and secondary marketing for both the Bank and Jefferson
Heritage Mortgage Company.
Lisa G. Frederick, 37, has served as Senior Vice President, Retail
Banking Division, since December 1999. Ms. Frederick was hired by the Bank in
June 1999 to assist in the conversion of the traditional thrift culture to a
87
<PAGE>
retail/commercial banking operation. She is responsible for all Jefferson
Heritage Banking centers and oversees corporate marketing and financial
services. Ms. Frederick has over twenty years of retail banking experience with
several local financial institutions.
John A. (Jack) Fox, 35, has served as Senior Vice President, Investment
Officer of the Company since December 1999. He joined the Bank as Vice
President, Investment Officer in February 1999. Prior to joining the Bank, he
worked with several area financial institutions in asset/liability and
investment portfolio management. Mr. Fox is a member of the American Bar
Association and the Bar Association of Metropolitan Saint Louis. Mr. Fox's
responsibilities include investment portfolio management, strategic liability
positioning, and asset/liability management.
Mark R. Mesnier, 37, has served as Senior Vice President, Commercial
Lending Division, since November 1999. Prior to that time, Mr. Mesnier served as
Vice President, Commercial Loan Officer for the Bank. Mr. Mesnier has fifteen
years experience in the areas of residential mortgage lending, finance, and
commercial real estate lending with several local and national financial
institutions. He has been with the Bank for six years. Mr. Mesnier is
responsible for the Bank's commercial real estate and commercial non-real estate
loan portfolios.
Bryan L. Sandlin, 38, has served as Senior Vice President, Construction
Lending Division, since November 1999. Prior to that time, Mr. Sandlin had
served as Vice President of the Bank's and First Federal Savings Bank of North
Texas' Construction Loan Department. He served as Vice President of Texas
Heritage Savings Association/Banc from 1986 to 1996 until it merged with First
Federal. Mr. Sandlin is responsible for the Construction Lending Division which
generates approximately $300 million in gross annual loan production and
maintains a portfolio with average earning balances of $200 million. Mr. Sandlin
is a member of the Board of Directors for the Dallas Metropolitan Home Builders
Association and a member of the National Association of Review Appraisers.
Ellen A. Stanko, 38, has served as Senior Vice President, Human
Resources, since May 1999. She has been with the Bank since 1983 in the human
resources area. Ms. Stanko is responsible for all of the human resources
activities including payroll, benefits, staffing, employment laws, affirmative
action, and training. She has a bachelor's degree in personnel administration
and a master's degree in human resources development. Ms. Stanko serves on
several business career advisory committees for local high schools and assists
with their career preparation programs.
Kevin M. Voss, 43, has served as Senior Vice President since May 1999.
He joined the Bank in 1998 as Director of Internal Audit and Senior Compliance
Officer. Prior to joining the Bank, he served as an Audit Manager for
NationsBank for thirteen years and also had seven years of public accounting
experience with Coopers & Lybrand and KPMG LLP. Mr. Voss is a member of the
American Institute of Certified Public Accountants.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to regulations promulgated under the Exchange Act, the
Company's officers and directors and all persons who own more than 10% of the
Common Stock ("Reporting Persons") are required to file reports detailing their
ownership and changes of ownership in the Common Stock and to furnish the
Company with copies of all such ownership reports that are filed. Based solely
on the Company's review of the copies of such ownership reports which it has
received in the past fiscal year or with respect to the past fiscal year, or
written representations that no annual report of changes in beneficial ownership
were required, the Company believes that during fiscal year 1999 and prior
fiscal years all Reporting Persons have complied with these reporting
requirements, except for Messrs. Williams and Allison who were late filing Forms
5 for 1999.
88
<PAGE>
Item 11. Executive Compensation
- --------------------------------
Summary Compensation Table. The following table sets forth the cash and
noncash compensation for each of the last three fiscal years awarded to or
earned by the Chief Executive Officer and each other executive officer of the
Company whose salary and bonus earned in fiscal year 1999 exceeded $100,000 for
services rendered in all capacities to the Company and its subsidiaries (the
"Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------------------ ---------------------------
Restricted Securities
Name and Other Annual Stock Underlying All Other
Principal Position Year Salary Bonus Compensation(1) Award(s)(2) Options Compensation(3)
- ------------------ ---- ------ ----- --------------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
David V. McCay 1999 $287,307 $ -- $ -- $ -- -- $39,557
Chairman of the Board 1998 276,666 -- -- -- -- 41,714
and Chief Executive 1997 271,092 -- -- -- -- 65,184
Officer
Joe L. Williams 1999 169,434 -- -- 135,000 15,000 33,953
President and Chief 1998 140,000 -- -- -- -- 34,164
Operating Officer 1997 128,566 -- -- -- -- 21,327
Paul J. Milano 1999 118,087 -- -- -- -- 29,054
Senior Vice President, 1998 108,000 -- -- -- -- 39,412
Treasurer, Chief 1997 105,700 -- -- -- -- 62,621
Financial Officer and
Senior Accounting Officer
</TABLE>
_______________
(1) Executive officers of the Company receive indirect compensation in the
form of certain perquisites and other personal benefits. In each case,
the amount of such benefits received by each Named Executive Officer in
fiscal years 1999, 1998 and 1997 did not exceed 10% of the Named
Executive Officer's salary and bonus.
(2) Based on the closing price of the Company's Common Stock on the date of
grant as reported on the Nasdaq National Market(SM) ($13.50 per share).
Mr. Williams' shares of restricted stock vest at the rate of 20% per
year beginning one year from the date of grant (February 17, 1999).
Shares are held by the MRP Trust until vested. Any dividends received
by the MRP Trust with respect to such shares will be payable to Mr.
Williams upon vesting.
(3) For fiscal year 1999, all other compensation consisted of $4,788,
$3,913 and $3,543 in Company matching contributions to the 401(k) Plan
on behalf of Messrs. McCay, Williams and Milano, respectively, and
$34,769, $30,040, $26,457 which was the value of shares of the Common
Stock allocated to each of their respective accounts in the ESOP based
on the closing price of the Common Stock as reported on the Nasdaq
National Market(SM) on December 31, 1999 ($10.5625 per share).
89
<PAGE>
Options Grants in Last Fiscal Year. The following table contains
information concerning the grants of stock options to the Named Executive
Officers during fiscal year 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to for Option Term (2)
Options Employees in Exercise Expiration -------------------
Name Granted (1) Fiscal Year Price Date 5% 10%
- ---- ----------- ----------- ----- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
David V. McCay -- --% $ -- -- $ -- $ --
Joe L. Williams 15,000 14.3 13.50 02/17/09 101,250 202,500
Paul J. Milano -- -- -- -- -- --
</TABLE>
_______________
(1) All options were granted on February 17, 1999 and vest and become
exercisable at the rate of 20% per year beginning one year from the date of
grant. To the extent not already exercisable, the options generally become
immediately exercisable in the event of a change in control of the Company,
generally defined as the acquisition of beneficial ownership of 25% or more
of the Company's voting securities by any person or group of persons.
(2) The potential realizable dollar value of a grant consists of the product of
(a) the difference between (i) the product of the per share market price at
the time of grant and the sum of 1 plus the adjusted stock price
appreciation rate (the assumed rate of appreciation compounded annually
over the term of the option) and (ii) the per share exercise price of the
option, and (b) the number of securities underlying the grant at fiscal
year-end.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. The following table sets forth information concerning options exercised
during the last fiscal year and the number and potential realizable value at the
end of the fiscal year of options held by each of the Named Executive Officers.
No stock appreciation rights ("SARs") have been granted under the 1993 Stock
Option and Incentive Plan.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year-End at Fiscal Year-End (2)
Acquired on Value ---------------------------- ----------------------------
Name Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David V. McCay -- $ -- 114,672 -- $637,862 --
Joe L. Williams -- -- -- 15,000 -- --
Paul J. Milano 6,000 33,750 27,702 -- 292,602 --
</TABLE>
_________________
(1) Based on the difference between the closing price of the Common Stock on
the date of exercise ($10.625 per share) and the exercise price ($5.00 per
share) multiplied by the number of shares acquired.
(2) Calculated based on the product of (a) the number of shares subject to
option times (b) the difference between the closing sale price of the
Common Stock on December 31, 1999 as reported on the Nasdaq National
Market(SM) ($10.5625 per share), and the exercise price of the options.
Options are considered in-the-money if the exercise price of the option is
less than the fair market value of the Common Stock. None of Mr. Williams'
options were in-the-money at year-end.
Employment and Change-in-Control Agreements. The Company and the Bank have
entered into an employment agreement with David V. McCay, Chief Executive
Officer of the Bank and Chairman of the Board and Chief Executive Officer of the
Company. Mr. McCay's employment agreement initially became effective for a term
of three years as of the date of completion of the Bank's conversion to stock
form (the "Conversion"). On each
90
<PAGE>
anniversary date from the date of commencement of his employment agreement, the
term of employment may be extended for an additional one-year period beyond the
then-effective expiration date, upon a determination by the Board of Directors
of the Company or the Bank that the performance of Mr. McCay has met the
required standards and that the employment agreement should be extended. Mr.
McCay's employment agreement has previously been extended through April 8, 2003.
Mr. McCay receives a current base salary of $276,666 per annum, and the
Employment Agreement provides for a salary review by the Board of Directors not
less often than annually, as well as inclusion in any discretionary bonus plans,
retirement and medical plans, customary fringe benefits and vacation and sick
leave. Mr. McCay's employment agreement will terminate upon his death or
disability and is terminable by the Bank for "just cause" as defined in the
employment agreement. In the event of termination for "just cause," no severance
benefits are available. If the Bank terminates Mr. McCay without just cause, he
will be entitled to a continuation of his salary and benefits from the date of
termination through the remaining term of the employment agreement plus an
additional 12-month period, but in no event in excess of three years' salary. If
his employment agreement is terminated due to Mr. McCay's "disability" (as
defined in the employment agreement), he will be entitled to a continuation of
his salary and benefits until the end of the one-year period following
termination, less any amounts received under the Bank's disability insurance
plan. Mr. McCay may voluntarily terminate his employment agreement by providing
60 days' written notice to the Boards of Directors of the Bank and the Company,
in which case he is entitled to receive only his compensation, vested rights and
benefits up to the date of termination. If, before attaining age 65, Mr. McCay's
employment terminates for reasons other than just cause, then he and his
dependents will continue to participate in the Bank's group health plan until he
attains age 65 (or would have attained age 65 had he lived).
Mr. McCay's employment agreement provides that in the event of his
involuntary termination of employment in connection with, or within 12 months
after, any Change in Control of the Bank or the Company, other than for "just
cause," he will be paid within 10 days of such termination an amount equal to
2.99 times his "base amount," as defined under Section 280G(b)(3) of the
Internal Revenue Code of 1986 (the "Code"). "Change in Control" generally refers
to the following circumstances: (i) the acquisition, other than from the Company
or the Bank, by any individual, entity or group, of the beneficial ownership of
more than 25% of the Company's or Bank's outstanding voting securities; (ii) the
individuals constituting the current Board of Directors of the Company or the
Bank (the "Incumbent Board") or individuals whose election or nomination was
approved by a majority of the Incumbent Board (but excluding any person whose
initial assumption of office was in connection with an actual or threatened
election contest) cease to constitute at least a majority of the Board of
Directors; (iii) the approval by the stockholders of the Company or the Bank of
a reorganization, merger or consolidation in which the beneficial owners of the
Company's voting securities do not beneficially own more than 65% of the voting
securities of the resulting entity or a complete liquidation or dissolution of
the Company or the Bank or the sale or other disposition of all or substantially
all of the assets of the Company or the Bank; or (iv) the acquisition and
exercise of a controlling influence over the management or policies of the
Company or the Bank by any person or persons acting as a group. Mr. McCay's
employment agreement also provides for a similar lump-sum payment to be made in
the event of his voluntary termination of employment within twelve months
following a Change in Control, upon the occurrence, or within 90 days
thereafter, of certain specified events following the Change in Control, which
have not been consented to in writing by Mr. McCay, including (i) requiring him
to move his personal residence or perform his principal executive functions more
than 35 miles from the Bank's current primary office, (ii) a reduction in his
base compensation as then in effect, (iii) a significant reduction in the
compensation and benefits provided for under his employment agreement, (iv)
assigning duties and responsibilities to him which are substantially
inconsistent with those normally associated with his position with the Company
and the Bank, (v) significantly diminishing his authority and responsibility,
and (vi) failing to re-elect him to the Company's or the Bank's Board of
Directors. The maximum payments that would be made to Mr. McCay under his
employment agreement assuming his termination of employment under the foregoing
circumstances at December 31, 1999 would have been approximately $827,231.
Effective May 21, 1999, the Company and the Bank entered into an
employment agreement with Joe L. Williams pursuant to which he is employed as
the President and Chief Operating Officer of the Company and the Bank,
respectively. Mr. Williams' employment contract has a term of three years and
may be extended for such additional one-year periods as the parties may agree to
in writing. Mr. Williams' employment agreement provides for an annual salary of
$165,000 subject to increase from time to time in accordance with the normal
business practices of the
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<PAGE>
Company and the Bank. In addition, Mr. Williams is entitled to participate in
the executive bonus plan and certain other corporate benefits. Mr. Williams'
employment agreement will terminate upon his death, disability or resignation
and may be terminated by the Bank for cause as defined in the agreement. In the
event of a termination for cause, Mr. Williams will have no right to
compensation or benefits after termination. A termination of Mr. Williams'
employment by the Company or the Bank without cause will not prejudice his right
to receive the compensation and benefits provided for under the agreement. In
the event his employment is terminated for disability, Mr. Williams will receive
the benefits provided by the Bank's disability insurance policy which shall be
no less than those currently provided under Texas Heritage's disability
insurance policy. In the event of Mr. Williams' lawful termination for cause or
by resignation, Mr. Williams has agreed for a period of two years following such
termination not to participate in the banking or financial business in the
counties in which the Bank maintains a branch office, not to solicit any banking
business from any customer of the Company or the Bank or their subsidiaries and
not to impart any confidential information or knowledge relative to the Company
or the Bank. Mr. Williams' employment agreement provides that in the event his
employment is terminated by the Company or the Bank, without his prior written
consent and for a reason other than cause, in connection with or within 12
months after a change in control of the Company or the Bank, he will be paid
within ten days of such termination an amount equal to 2.99 times his base
amount as defined in Section 280G(b)(3) of the Code. For this purpose, change in
control has the same definition as in Mr. McCay's employment agreement. Mr.
Williams' employment agreement provides for a similar lump sum payment in the
event of his voluntary termination of employment within 12 months following a
change in control upon the occurrence, or within 90 days thereafter, of certain
specified events which have not been consented to in writing by Mr. Williams
including (i) requiring him to move his personal residence or perform his
principal executive functions more than 35 miles from the primary office from
which he functioned as of the date of the agreement, (ii) a reduction in his
base compensation as then in effect, (iii) a significant reduction in the
compensation and benefits provided for under the employment agreement, taken as
a whole, (iv) assigning duties and responsibilities to him which are
substantially inconsistent with those normally associated with his position with
the Company and the Bank, and (v) significantly diminishing his authority and
responsibility. The maximum payments that would be made to Mr. Williams under
his employment agreement assuming his termination of employment under the
foregoing circumstances at December 31, 1999 would have been approximately
$493,350.
Effective January 1, 2000, the Company and the Bank entered into a change-
in-control agreement with Senior Vice President Paul J. Milano pursuant to which
he will be entitled to receive a lump sum payment equal to his salary for the
previous calendar year if the Company terminates his employment for a reason
other than just cause or his death or disability, in connection with or within
12 months after a change-in-control. For this purpose, change-in-control has the
same definition as in Mr. McCay's employment agreement. Mr. Milano will be
entitled to a similar payment if he terminates his employment for Good Reason
immediately before, after or pursuant to a change-in-control. For this purpose,
Good Reason is defined as a material change in position, title, compensation,
status, responsibilities, or working conditions in effect immediately before,
pursuant to or after the change-in-control or relocation of his place of
employment more than 50 miles from his place of employment immediately before
the change-in-control. Assuming a termination in connection with a change-in-
control during the year 2000, Mr. Milano would be entitled to a payment of
$118,087 under the change-in-control agreement.
Supplemental Retirement Agreement. In order to secure the continuing
services of David V. McCay, the Board of Directors of the Bank has entered into
a Supplemental Retirement Agreement (the "SRA") with Mr. McCay. Upon termination
of his employment with the Bank, Mr. McCay will be entitled under the SRA to
receive annual payments from the Bank for the remainder of his life in an amount
equal to (i) the product of his "Vested Percentage" times 75% of his "Average
Annual Compensation," less (ii) 50% of the sum of the annual social security
benefits payable to Mr. McCay upon his termination of employment, plus the
annual amount he would receive if his employer-provided benefits under the
401(k) Savings Plan were paid in the form of a 50% joint and survivor annuity
(the "Offset Amount"). "Vested Percentage" is determined pursuant to a schedule
contained in the SRA that increases the Vested Percentage by 3% annually,
assuming Mr. McCay's continued service as an employee of the Association, from
66% at age 55 to 100% at age 65. "Average Annual Compensation" means Mr.
McCay's highest annual compensation for three of the five calendar years
preceding his termination of employment. In the event of termination due to
disability, Mr. McCay would receive annual payments in the amount of 75% of his
Average Annual Compensation less
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<PAGE>
50% of his Offset Amount. In the event Mr. McCay's spouse survives him, she will
be entitled to receive 50% of the amount Mr. McCay would have received had he
retired on the date of his death, assuming his Vested Percentage was 100%.
Termination for "just cause" (as defined in his employment agreement) would
result in his forfeiture of all SRA benefits, unless the Bank's Board of
Directors determines to the contrary. In the event Mr. McCay's employment is
terminated for other than "just cause" or in the event of termination in
connection with a Change in Control, as defined in his employment agreement,
then the Vested Percentage shall be increased to be 100% and the benefits shall
be due and payable to him as provided for in the SRA.
The following table sets forth the annual retirement benefits that Mr.
McCay would receive under the SRA prior to deduction of the Offset Amount at
various compensation levels at the specified ages.
<TABLE>
<CAPTION>
Specified Age
Average Annual --------------------------------------------------
Compensation 55 56 59 62 65
- ---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$ 200,000 $100,000 $105,000 $120,000 $135,000 $150,000
350,000 175,000 183,750 210,000 236,250 262,500
500,000 250,000 262,500 300,000 337,500 375,000
750,000 375,000 393,750 450,000 506,250 562,500
</TABLE>
"Compensation" equals salary and bonus as disclosed in the Summary
Compensation Table, as well as any additional amounts that would be included as
W-2 earnings paid to Mr. McCay and amounts withheld from Mr. McCay under the
401(k) Plan.
Director Compensation
Each member of the Board of Directors of the Company (other than Mr. McCay
who receives no fees for his service on the Board of Directors) receives a
monthly fee of $2,000 and a fee of $250 for each committee meeting attended.
Directors of the Bank (other than Mr. McCay) are also eligible to receive a fee
of $500 for each meeting of the Board of Directors held on a day other than the
day of a meeting of the Company's Board of Directors although no such fees were
paid during fiscal year 1999. Although directors of the Bank may individually
enter into agreements with the Bank under which payment of their board fees will
be deferred to a specified future date, as of the date hereof, no director has
entered into such an agreement with the Bank.
The Company has adopted the Directors' Retirement Plan (the "Directors'
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. Each such director
will receive, on each of the three annual 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. If a non-employee director
dies before receiving all payments due under the Directors' Plan, any remaining
payments will be made to his designated beneficiary. The Company will pay plan
benefits from its general assets.
Each non-employee director on the effective date of the Jefferson Savings
Bancorp, Inc. 1993 Stock Option and Incentive Plan (the "Option Plan")
(specifically, Directors Canfield, Doerflinger and Throop and former Directors
Bick, Magwitz and Monnig) received options to purchase 60,172 shares of Common
Stock at an exercise price equal to $5.00 per share on a split adjusted basis.
All such options held by current directors will expire on April 8, 2003 if not
sooner exercised. In its sole discretion, the committee that administers the
Option Plan may grant to non-employee directors additional options with a per
share exercise price equal to the market value of a share of Common Stock on the
date of grant.
Compensation Committee Interlocks And Insider Participation
For fiscal year 1999, the Company's Compensation Committee consisted of
Directors David V. McCay, Edward G. Throop, William W. Canfield and Brad Barkau.
The Compensation Committee meets periodically to evaluate the
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<PAGE>
compensation and fringe benefits of the directors, officers and employees and to
recommend changes and to monitor and evaluate employee morale. Mr. McCay does
not participate in deliberations regarding his compensation.
Item 12. Security Ownership of Certain Beneficial Owners And Management
- ------------------------------------------------------------------------
The following table sets forth, as of December 31, 1999, the
beneficial ownership of the Common Stock by each of the Company's directors and
Named Executive Officers, by all directors and executive officers as a group and
by all persons who have filed the reports required of persons beneficially
owning more than 5% of the Common Stock or who were known to the Company to
beneficially own more than 5% of the Common Stock outstanding at December 31,
1999.
<TABLE>
<CAPTION>
Amount and Nature of Percent of Shares of
Name Beneficial Ownership (1) Common Stock Outstanding (2)
---- ------------------------ ----------------------------
<S> <C> <C>
Brad Barkau 17,978 (3) 0.18%
William W. Canfield 120,994 (4) 1.22%
Lloyd D. Doerflinger 79,072 (5) 0.79%
Gary L. Holland 415,265 (6) 4.17%
David V. McCay 205,022 (7) 2.06%
Forrest W. Miller, Jr. 25,189 (8) 0.25%
Edward G. Throop 250,142 2.51%
Joe L. Williams 39,283 (9) 0.39%
Paul J. Milano 104,678 (10) 1.05%
All Directors and Executive 1,393,885 (11) 14.00%
Officers as a Group (17 persons)
Mary Kathryn Drake 1,000,900 (12) 10.05%
2104 Dornoch
League City, Texas 77573
Intrepid, Ltd. 748,500 7.52%
#7 Wild Tamarind Drive
Nassau, Bahamas
Firstar Corporation 1,319,624 (13) 13.25%
777 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
</TABLE>
__________________
(1) For purposes of this table, a person is deemed to be the beneficial owner
of shares of Common Stock if he or she has or shares voting or investment
power with respect to such Common Stock or has the right to acquire
beneficial ownership at any time within 60 days from December 31, 1999. As
used herein, "voting power" is the power to vote or direct the voting of
shares and "investment power" is the power to dispose or direct the
disposition of shares. Except as otherwise noted, ownership is direct, and
the named persons exercise sole voting and investment power over the shares
of the Common Stock. Ownership figures for Messrs. Canfield and Doerflinger
each include 53,172 and 60,172 shares of Common Stock, respectively, which
they have the right to acquire pursuant to options. Ownership figures for
Messrs. McCay, Williams and Milano include 114,672, 3,000 and 27,702
shares, respectively, which they had the right to acquire pursuant to
options exercisable within 60 days of December 31, 1999.
(2) In calculating the percentage ownership of each named individual and the
group, the number of shares outstanding is deemed to include any shares of
the Common Stock which the individual or the group has the right to acquire
within 60 days of December 31, 1999.
94
<PAGE>
(3) Held as custodian for his minor children.
(4) Includes 16,000 shares held by spouse, as to which Mr. Canfield disclaims
beneficial ownership, and 23,200 shares held in his individual retirement
accounts ("IRAs").
(5) Includes 5,000 shares held in Mr. Doerflinger's IRA and 13,902 shares held
as trustee.
(6) Includes 415,165 shares held by The Gary Holland Trust.
(7) Includes 3,200 shares held by spouse as to which Mr. McCay disclaims
beneficial ownership, 48,080 shares held as trustee, 14,371 shares held in
his account in the Bank's 401(k) Savings Plan (the "401(k) Plan"), 24,699
shares allocated to his account in the Jefferson Savings Bancorp, Inc.
Employee Stock Ownership Plan and Trust (the "ESOP") and 114,672 shares
which he has the right to acquire pursuant to options.
(8) Includes 9,173 shares held jointly, 2,008 shares held in Mr. Miller's IRA,
3,008 shares held as trustee for the Royale Orleans Incorporated Retirement
Plan, and 11,000 shares held by Royale Orleans Incorporated of which he is
President.
(9) Includes 7,155 shares allocated to his account in the ESOP and 2,606 held
in his 401(k) Plan account. Does not include 8,000 unvested shares of
restricted stock previously awarded to Mr. Williams.
(10) Includes 3,000 shares held in Mr. Milano's IRA, 8,632 shares held in his
401(k) Plan account and 20,072 shares allocated to his ESOP account.
(11) Includes shares held in the various capacities described in the footnotes
above. Includes 34,913 shares held in 401(k) Plan accounts of executive
officers and 87,738 shares allocated to their accounts in the ESOP.
Includes 303,654 shares which directors and executive officers of the
Company have the right to acquire pursuant to options exercisable within 60
days of December 31, 1999. Does not include 458,546 unallocated shares held
by the ESOP, the voting of which shares is directed by the ESOP Trustee in
the same proportion that employees vote allocated shares.
(12) According to the statement on Schedule 13D filed by Ms. Drake, 975,700
shares are held by the Arboleda Limited Partnership. Includes 25,000 shares
held as trustee for the William K. Drake Defined Benefit Plan and 200
shares held by William K. Drake.
(13) Includes 1,071,074 shares held by Mercantile Trust Company, N.A. as trustee
for the Jefferson Savings Bancorp, Inc. Employee Stock Ownership Plan. The
ESOP Trustee votes all allocated shares in accordance with the instructions
of the participants. Unallocated shares and allocated shares for which no
voting instructions have been received are voted by the ESOP Trustee in the
same proportion as participants direct the voting of allocated shares or,
in the absence of such voting direction, as directed by the Company, or in
the absence of such direction by the Company, in the ESOP Trustee's sole
discretion. At December 31, 1999, 612,528 shares had been allocated and
458,546 shares were unallocated.
Item 13. Certain Relationships And Related Transactions
- --------------------------------------------------------
The Bank offers loans to officers and directors and employees of the
Company and its subsidiaries in the ordinary course of business. Loans to
executive officers and directors are made by the Bank on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. These loans do not involve more
than the normal risk of collectibility or present other unfavorable features.
Set forth below is certain information at December 31, 1999 relating to
loans made to directors and executive officers (not including affiliates) of the
Company whose total aggregate balances exceeded $60,000 at any time since
January 1, 1999. All such loans were made by the Bank. Except for Mr. Williams'
residential mortgage which was originally made at the employee rate of Texas
Heritage Savings Association/Banc, all such loans were made at the prevailing
interest rates and on terms available to other customers of the Bank.
<TABLE>
<CAPTION>
Balance at Highest
Name and Relation Date Original December Balance Since
to Company Type of Loan Originated Amount 31, 1999 January 1, 1999
- ---------------------- ------------- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
William W. Canfield Residential Mortgage (1)(2) 11/20/98 $ 400,000 $ 390,759 $ 399,275
Director Home Equity Loan 11/20/98 160,000 15,000 15,000
Lloyd D. Doerflinger Residential Mortgage (1) 1/23/89 260,000 147,364 162,991
Director
Joe L. Williams Residential Mortgage(1)(3) 6/4/87 116,000 59,918 65,631
President and Chief Installment Loan 2/7/97 21,500 7,025 12,082
Operating Officer Share Loan 4/13/98 30,139 26,344 27,159
Kevin M. Voss Resident Mortgage (1) 7/9/99 212,500 198,668 212,500
Senior Vice President
</TABLE>
95
<PAGE>
__________________
(1) Loans secured by a first mortgage on the borrower's primary residence.
(2) Loan proceeds were used to refinance previously outstanding loans.
(3) Adjustable-rate loan originally made at employee rate of Texas
Heritage Savings Association/Banc (50 basis points over cost-of-
funds).
During 1999, the Company acquired a customer service voice response
system from TALX Corporation, of which Mr. Canfield is President and Chief
Executive Officer and a greater than 10% stockholder. The Company's total
payments to TALX Corporation for the installation, maintenance and usage of this
system during 1999 were $68,000.
The Shareholder Agreement. On May 5, 1999, the Company entered into an
agreement (the "Shareholder Agreement") with Gary L. Holland, The Gary Holland
Trust, Brad Barkau, William Drake, Mary K. Drake, The Mary K. Drake Family
Limited Partnership, The William K. Drake Defined Benefit Plan, Contango Limited
Partnership, Howard Watson, Susan M. Watson and Intrepid, Ltd. (the
"Shareholders") pursuant to which the Board of Directors agreed to increase the
size of the Board of Directors to seven members and to nominate, recommend to
stockholders and solicit proxies in favor of the election of Gary L. Holland,
Brad Barkau and Lloyd D. Doerflinger as management's nominees for election for
three-year terms as directors at the 1999 Annual Meeting and Mr. Holland agreed
to terminate his solicitation of proxies for a separate slate of nominees and to
withdraw certain regulatory filings made in connection therewith. Upon their
election to the Board of Directors, the Company has agreed to elect Messrs.
Holland and Barkau to the Bank's Board of Directors and to cause them to remain
on such board for as long as they serve as directors of the Company. The Company
has further agreed to appoint either Mr. Holland or Mr. Barkau (but not both) to
the Executive Committee, the Outside Loan Committee, and the Employee
Compensation and Benefit Committee of the Company or the Bank (as requested by
Messrs. Holland and Barkau) and to allow them to remain on such committees for
so long as they serve as directors of the Company. Under the Shareholder
Agreement, the Company will not take any action to prevent Messrs. Holland and
Barkau from participating in the management and affairs of the Company to the
same extent as other directors and will extend the same benefits and treatment
to Messrs. Holland and Barkau as are extended to other directors. In the event
that either Mr. Holland or Mr. Barkau is unwilling or unable to serve his
initial term, the Board of Directors agreed to promptly fill the vacancy with a
nominee recommended by whichever of Mr. Holland or Mr. Barkau remains in office
and agreed to by two-thirds of the directors then in office. The Company has
agreed not to seek the removal of either Mr. Holland or Mr. Barkau as a director
absent a determination by the unanimous vote of the Board of Directors (other
than Messrs. Holland and Barkau) that there is clear and convincing evidence
that removal should be submitted to shareholders in accordance with the
Company's Certificate of Incorporation. The Company also has agreed not to
reconfigure, reclassify or increase or decrease the size of its Board of
Directors, except in accordance with its Certificate of Incorporation, during
the initial term of Messrs. Holland and Barkau. In addition, the Company has
agreed not to allege that activities of the Shareholders violate certain
provisions of the federal securities and banking laws or of the Company's
Certificate of Incorporation. For as long as Messrs. Holland and Barkau serve on
the Board of Directors pursuant to the Shareholder Agreement, the Company has
agreed not to issue any preferred stock with voting rights (other than in the
event of default in the payment of dividends) or securities convertible into or
rights to acquire such preferred stock unless the issuance has been approved
either by a unanimous vote of the Board of Directors or by 80% of the
outstanding shares. Pursuant to the Shareholder Agreement, the Company has
agreed to reimburse Mr. Holland for up to $100,000 in expenses incurred by him
in connection with his proxy solicitation and related matters and to reimburse
Messrs. Holland and Barkau for up to $15,000 in legal fees per calendar year in
the event they believe they need separate counsel in order to carry out their
duties as directors. The Company also agreed to use its reasonable efforts to
cause any new director nominated by the Board of Directors to agree to be bound
by the Shareholder Agreement. The Shareholders each agreed to vote in favor of
management's three Class I nominees at the Annual Meeting and also agreed, among
other things, that until the earlier of the day after the 2000 annual meeting or
July 31, 2000: (i) except in connection with a merger, consolidation or other
combination or a sale of substantially all the Company's assets, they will not
participate in any proxy solicitation in opposition to the recommendation of a
majority of the Board of Directors or initiate a shareholder proposal; (ii) they
will vote for management's nominees at the 2000 annual meeting provided that
Messrs. Holland and Barkau will have certain rights to object to a nominee other
than Messrs. Canfield, Throop or Joe L. Williams; and (iii) except to the extent
that action is required of Messrs. Holland or Barkau to fill a vacancy in the
Board created in the event that the other is unwilling
96
<PAGE>
or unable to serve, they will not nominate any individual to the Board of
Directors other than management's nominees. In addition to the Company, the
present directors and, in certain circumstances, officers have agreed to the
covenants described above.
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
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
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>
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+ 1999 Executive and Senior Officers' Incentive Bonus Plan
</TABLE>
97
<PAGE>
<TABLE>
<S> <C>
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.
10.16 Shareholder Agreement, dated May 5, 1999, by and among Jefferson Savings
Bancorp, Inc., Gary L. Holland, The Gary Holland Trust, Brad Barkau,
William Drake, Mary K. Drake, The Mary K. Drake Family Limited
Partnership, The William K. Drake Defined Benefit Plan, Contango Limited
Partnership, Howard Watson, Susan M. Watson and Intrepid, Ltd. ******
10.17+ Employment Agreement between Jefferson Savings Bancorp, Inc.,
Jefferson Heritage Bank and Joe L. Williams
10.18+ Change-in Control Agreement between Jefferson Savings Bancorp, Inc.,
Jefferson Heritage Bank and Paul J. Milano
21 Subsidiaries of the Registrant
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 Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999
*** 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.
******* Incorporated by reference from Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(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, 1999.
(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.
98
<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 24, 2000 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 24, 2000
------------------------------------------------
David V. McCay
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Joe L. Williams March 24, 2000
------------------------------------------------
Joe L. Williams
President and Chief Operating Officer
By: /s/ Paul J. Milano March 24, 2000
------------------------------------------------
Paul J. Milano
Senior Vice President, Treasurer, Chief
Financial Officer and Senior Accounting Officer
(Principal Financial and Accounting Officer)
By: /s/ Brad Barkau March 24, 2000
------------------------------------------------
Brad Barkau
Director
By: /s/ William W. Canfield March 24, 2000
------------------------------------------------
William W. Canfield
Director
By: /s/ Lloyd D. Doerflinger, Jr. March 24, 2000
------------------------------------------------
Lloyd D. Doerflinger, Jr.
Director
By: /s/ Gary L. Holland March 24, 2000
------------------------------------------------
Gary L. Holland
Director
By: /s/ Forrest W. Miller, Jr. March 24, 2000
------------------------------------------------
Forrest W. Miller, Jr.
Director
By: /s/ Edward G. Throop March 24, 2000
------------------------------------------------
Edward G. Throop
Director
<PAGE>
JEFFERSON SAVINGS BANCORP, INC
1999 EXECUTIVE AND SENIOR OFFICER'S INCENTIVE BONUS PLAN
Eligibility for Incentive Bonus Program:
1. David McCay, COB & CEO, 60% of base salary if 100% of the EPS
objective is achieved.
2. Joe Williams, President & COO, 50% of base salary if 100% of the EPS
objective is achieved.
3. Senior Vice Presidents, Division Heads, 40% of base salary if 100% of
the EPS objective is achieved.
4. Other Senior Vice Presidents 30% of base salary if 100% of the EPS
objective is achieved.
5. Vice Presidents not receiving commissions or overrides, 20% of base
salary if 100% of the EPS objective is achieved.
6. EPS objective determined annually by the Board of Directors at the
recommendation of the outside directors of the Employee Compensation
and Benefits Committee
7. All eligible Incentive Bonus participants must be employed when the
annual bonus is paid
8. Eligible participants in the Incentive Bonus Program must have
completed one full year of employment to receive the maximum bonus
consideration
9. Those eligible participants, without one full year of service, that
are hired between January 1/st/ and June 30/th/ are eligible for 50%
of the maximum bonus consideration
10. No consideration will be given for the payment of an incentive bonus
unless, at least 90% of the EPS objective is achieved
11. Annual Incentive Bonuses will be considered for payment after the
Company's outside auditors have signed off on the Company's annual EPS
12. EPS targets are net of all expenses including bonus accruals and are
rounded to the nearest cent.
<PAGE>
Payment scale:
Total % of
Achieved of Target EPS Target Bonus
150% 200%
140% 160%
130% 140%
120% 125%
110% 115%
100% 100%
95% 50%
90% 40%
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 21/st/ day of May, 1999, by and among JEFFERSON SAVINGS BANCORP, INC., a
Delaware corporation (the "Company"), JEFFERSON HERITAGE BANK, a federal savings
association and wholly owned subsidiary of the Company (the "Bank"), and JOE L.
WILLIAMS ("Officer").
RECITALS
A. WHEREAS, the Bank and the Company desire to assure themselves of the
services of Officer to the Company and the Bank, and Officer also desires to
provide his services to the Company and the Bank on a full time basis pursuant
to the terms and conditions set forth in this Agreement.
B. WHEREAS, The parties hereto desire to set forth their mutual
understandings and agreements with respect to the foregoing.
AGREEMENT
In consideration of the foregoing, the mutual covenants herein contained
and other good and valuable consideration (the receipt, adequacy and sufficiency
of which are hereby acknowledged by the parties by their execution hereof), the
parties agree as follows:
Section 1. Employment. The Bank agrees to employ Officer as President and
---------- ----------
Chief Operating Officer of the Bank, and the Company agrees to employ Officer as
President and Chief Operating Officer of the Company, and Officer agrees to be
so employed, during the term of this Agreement upon the terms and conditions
hereinafter set forth (the "Employment").
Section 2. Term of Agreement. The term of the Employment under this
---------- -----------------
Agreement (the "Term") shall commence on the date hereof and shall continue in
full force and effect for a period of three (3) years thereafter subject to the
provisions of Section 5 and Section 11 hereof. The Term may be extended for such
additional one (1) year periods as the parties hereto may agree upon in writing
from time to time.
Section 3. Duties. During the Term of this Agreement, Officer shall devote
---------- ------
his full business time and best efforts in carrying out his duties as President
and Chief Operating Officer of Bank and Company as aforesaid, including without
limitation (i) maintaining, promoting and developing customer relations, (ii)
supporting and promoting the interests of the Company and the Bank, and (iii)
such other duties as are appropriate for an employee holding an executive level
position as may be assigned to Officer by the Company and the Bank. Officer
covenants and agrees to diligently, exclusively and faithfully serve the Company
and the Bank or their respective successors and to devote his full business
time, attention, time, care, undivided loyalty and best efforts to the
performance of such services and the fulfillment of duties attendant thereto.
Section 4. Compensation. As full consideration for all services Officer
---------- ------------
shall render to the Company and the Bank hereunder, the Company and the Bank
shall compensate Officer in the following manner:
<PAGE>
(a) Annual Salary. The Company and the Bank shall pay Officer an
-------------
annual salary of One Hundred Sixty Five Thousand Dollars ($165,000.00), payable
in the manner and in accordance with their customary payroll practices.
Officer's annual salary may be increased from time to time in accordance with
their customary payrolll practices. Officer's annual salary may be increased
from time to time in accordance with the normal business practices of the
Company and the Bank as determined by their respective Boards of Directors.
Officer shall not receive additional compensation or fees for service on the
Board of Directors of the Company or the Bank or any committees thereof.
(b) Bonus. In addition to his annual salary, Officer shall, during
-----
the Term of this Agreement, be eligible to participate in the Company's and/or
the Bank's executive bonus plan, as such plan may exist from time to time, at
such level as determined at the sole discretion of their respective Boards of
Directors.
(c) Other Benefits.
--------------
(i) Corporate Benefits. Officer shall, during the Term of this
------------------
Agreement, be entitled to participate in any and all employee welfare
plans, employee benefit plans, retirement plans, medical plans and similar
plans of the Company or the Bank generally now or hereafter in effect and
open to participation by qualifying employees of the Company or the Bank
generally (in accordance with the eligibility and other requirements
established for such corporate benefits).
(ii) Reimbursement for Business Expenses. Officer shall, during
------------------------------------
the Term of this Agreement, receive reimbursement in full for all
reasonable business and travel expenses incurred by Officer in performing
his duties hereunder.
(iii) Vacation. Officer shall, during the Term of this
--------
Agreement, receive such amount of paid vacation during each calendar year
in accordance with the normal vacation policy of the Bank, but in no event
less than four (4) weeks during each calendar year.
(iv) Automobile. Officer shall, during the Term of this
----------
Agreement, be provided an automobile for use in the performance of his
duties to the Company and the Bank, as consistent with the Company's and
the Bank's policies as now or hereafter in effect with respect to the
furnishing of automobiles to their officers.
Section 5. Termination. Subject to Section 7 hereof, the Board of
---------- -----------
Directors of the Company or the Bank may terminate Officer's employment at any
time, but any such termination other than for Cause (as hereinafter defined)
shall not prejudice Officer's right to compensation or other benefits expressly
provided for under this Agreement. Upon termination of Officer's employment
during the Term of this Agreement because of death, Disability, Resignation or
Cause, this Agreement shall terminate with neither party having any further
rights or obligations except as provided in this Section 5 and Sections 6, 7, 8
and 10 below. As used above, the terms "Disability," "Resignation" and "Cause"
shall have the meanings set forth below.
(a) Disability. "Disability" shall mean termination because of
----------
Officer's absence from duties with the Company or the Bank on a full time basis
for the waiting period specified in the Disability Insurance Policy of the
Company or the Bank, as a result of incapacity due to physical or mental
illness.
(b) Resignation. "Resignation" shall mean voluntary termination by
-----------
Officer for any reason whatsoever, except as provided in Section 7 hereof.
2
<PAGE>
(c) Cause. "Cause" shall mean termination upon (A) Officer's
-----
continued failure to substantially perform duties for the Company and the Bank
(other than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to
Officer by the Board of Directors of the Company, which specifically identifies
the manner in which such Board of Directors believes that Officer has not been
substantially performing his duties, or (B) Officer's misconduct which is
reasonably believed to be materially injurious to the Company or the Bank, which
shall be deemed to include Officer's personal dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule or regulation (other
than minor traffic violations or similar offenses) or final cease and desist
order, or material breach of this Agreement.
(d) Notice of Termination. Any termination pursuant to this Section 5
---------------------
shall be communicated by written Notice of Termination delivered to the other
party hereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth, in reasonable detail, the facts and
circumstances claimed to provide a basis for termination of Officer's employment
under the provision so indicated.
(e) Date of Termination. "Date of Termination" shall mean the date on
-------------------
which a Notice of Termination is given.
Section 6. Certain Benefits Upon Termination Due to Disability; Termination
---------- ----------------------------------------------------------------
For Cause. If, during the Term of this Agreement, Officer's employment by the
- ---------
Bank shall be terminated because of Disability, then Officer shall receive the
benefits provided by the Bank's Disability Insurance Policy, which benefits
shall be no less than those currently provided under Texas Heritage's Disability
Insurance Policy. Officer shall have no right to receive compensation or
benefits for any period after termination for Cause.
Section 7. Change in Control.
---------- -----------------
(a) Termination. Notwithstanding any provision herein to the
-----------
contrary, if Officer's employment under this Agreement is terminated by the
Company or the Bank, without Officer's prior written consent and for a reason
other than Cause, in connection with or within twelve (12) months after any
change in control of the Company or the Bank, Officer shall be paid an amount
equal to the product of 2.99 times his "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), and
regulations promulgated thereunder. Said sum shall be paid in one lump sum
within ten (10) days of such termination.
(b) Definition of Change in Control. The term "change in
-------------------------------
control" shall mean :
(i) the acquisition, other than from the Company or the
Bank, by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 25% or more of either the then
outstanding shares of Common Stock of the Company or the Bank or the
combined voting power of the then outstanding voting securities of the
Company or the Bank entitled to vote generally in the election of
directors, but excluding, for this purpose, any such acquisition by the
Company or the Bank or any subsidiaries in which the Company or the Bank
own directly or indirectly, a proprietary interest of more than
3
<PAGE>
50% (the "Subsidiaries"), or any employee benefit plan (or related trust)
of the Company or the Bank or their Subsidiaries;
(ii) individuals who, as of the date hereof, constitute the
Board of Directors (the "Incumbent Board") of the Company or the Bank cease
for any reason to constitute at least a majority of the Board of Directors,
provided that any individual becoming a director subsequent to the date
hereof whose election, or nomination for election by the Company's or the
Bank's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company or the Bank (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act);
(iii) approval by the stockholders of the Company or the Bank of
a reorganization, merger or consolidation of the Company or the Bank, in
each case, with respect to which all or substantially all of the
individuals and entities who were the respective beneficial owners of the
Common Stock and voting securities of the Company or the Bank immediately
prior to such reorganization, merger or consolidation do not, following
such reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than 65% of, respectively, the then outstanding shares of
Common Stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such reorganization, merger
or consolidation, or a complete liquidation or dissolution of the Company
or the Bank or of the sale or other disposition of all or substantially all
of the assets of the Company or the Bank; or
(iv) the acquisition and exercise of a controlling influence
over the management or policies of the Company or the Bank by any person or
by persons acting as a group within the meaning of Section 13(d) of the
Securities Exchange Act of 1934."
(c) Change in Circumstance of Employment. Notwithstanding any other
------------------------------------
provision of this Agreement to the contrary, Officer may voluntarily terminate
his employment under this Agreement within twelve (12) months following a change
in control of the Company or the Bank, and the Officer shall thereupon be
entitled to receive the payment described in Section 7(a) of this Agreement,
upon the occurrence of any of the following events, or within ninety (90) days
thereafter, which have not been consented to in advance by Officer in writing:
(i) the requirement that Officer move his personal residence, or
perform his principal duties, more than thirty-five (35) miles from the
primary offices from which Officer functions as of the date of this
Agreement;
(ii) a reduction in Officer's base compensation as in effect on
the date of this Agreement or as the same may be increased from time to
time:
(iii) a significant reduction in the compensation and benefits
provided for under this Agreement, taken as a whole;
4
<PAGE>
(iv) the assignment to Officer of duties and responsibilities
substantially inconsistent with those normally associated with his position
as referenced in Section l of this Agreement; or
(v) a significant diminution in Officer's responsibilities or
authority (including reporting responsibilities) in connection with his
employment with the Company or the Bank.
Section 8. Covenant Not to Compete. Officers agrees that, in the event
---------- -----------------------
that his employment with the Company or the Bank is lawfully terminated because
of Cause or Resignation, he will not Carry on or Participate in the Banking or
Financial Business (as such activity is defined below) in the counties in which
the Bank maintains a branch office (the "Trade Area"), for a period of two (2)
years (the "Noncompetition Period") after such termination. As used in this
Agreement, the term "Carry on or Participate in the Banking or Financial
Business" shall mean engaging in material competition, directly or indirectly,
with the Company or the Bank (and/or their Subsidiaries or affiliates, or their
successors or assigns) solely or jointly with others, as a director, officer,
employee, agent, partner, joint venturer, advisor, consultant, stockholder,
individual proprietor or lender or, in any other manner or capacity whatever,
engaging in or rendering material banking or financial services to any other
bank, savings association, holding company, mortgage company, finance company,
loan company or other financial institution or business which is in competition
with the Company or the Bank (and/or their Subsidiaries or affiliates or their
successors or assigns) and which such other business has a main office, branch
office, loan production office or which otherwise solicits business directly or
indirectly within the Trade Area. In addition to the foregoing, for a period of
two (2) years after such termination, Officer shall not solicit any banking
business from any customer of the Company or the Bank or their Subsidiaries. As
used in this Section 8, the term "stockholder" shall not include any investment
in a public corporation where Officer owns less than 5% of the stock issued and
outstanding.
Section 9. Provisions Relating to the Non-Compete Covenant. Officer
---------- -----------------------------------------------
acknowledges and agrees that the restrictions contained in Section 8 are
reasonable. In the event, however, that any of such restrictions are considered
unreasonable by a court of competent jurisdiction, then the court so holding may
effect any change to the restrictions necessary to render the same enforceable
by the court. Officer acknowledges that any violation by him of the provisions
of Section 8 could cause serious and irreparable harm to the Company and the
Bank incapable of being measured in money damages. Accordingly, Officer
acknowledges and agrees that, in the event of a breach or threatened breach by
him of the provisions of Section 8, the Company and the Bank, or either of them,
shall be entitled to seek, in addition to other rights or remedies, an
injunction or restraining order against Officer.
Section 10. Confidential Information. Officer agrees that he shall not, to
----------- ------------------------
the detriment of the Company or the Bank (and/or their Subsidiaries or
affiliates, or their successors or assigns), impart any confidential information
or knowledge relative to the Company or the Bank (and/or their Subsidiaries or
affiliates, or their successors or assigns), to any person or entity, corporate
or otherwise, without specific prior written permission from the Company to do
so, and Officer agrees that all such information or knowledge shall be kept
strictly confidential. Officer confirms and agrees that such information
constitutes the exclusive property of the Company and the Bank. The provisions
of this Section 10 shall survive any termination of this Agreement for a period
of two (2) years.
Section 11. Regulatory Compliance Matters.
----------- -----------------------------
(a) If Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs as the result of a notice
served under Section 8(e)(3) or (g)(l) of the Federal
5
<PAGE>
Deposit Insurance Act, the Bank's obligations hereunder shall be suspended for
the period of time Officer is so suspended or temporarily prohibited beginning
on the date of service of such notice to the Bank, unless such suspension of
Officer is stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay Officer all or part of the
compensation withheld while its obligations hereunder were suspended, and (ii)
reinstate, in whole or in part, any of such obligations.
(b) If Officer is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(l) of the Federal Deposit Insurance Act, all obligations
of the Bank hereunder shall terminate as of the effective date of the order and
the Bank shall not be required to provide Officer with a Notice of Termination.
Notwithstanding the foregoing, the obligations provided in Section 8 and Section
10 hereof, and any rights of the parties hereunder which have vested as of such
effective date, shall not be affected.
(c) If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations of the parties hereunder shall
terminate as of the date of the default and the Bank shall not be required to
provide Officer with a Notice of Termination. Notwithstanding the foregoing, the
obligations provided in Section 8 and Section 10 hereof, and any rights of the
parties hereunder which have vested as of the date of default, shall not be
affected.
(d) All obligations hereunder shall be terminated, except to the
extent it is determined that continuation of this Agreement is necessary for the
continued operation of the Bank (i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act, or (ii) by the Director or his or her designee,
at the time the Director or his or her designee approves a supervisory merger to
resolve problems related to the operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. In any such
event, the Bank shall not be required to provide Officer with a Notice of
Termination. Notwithstanding the foregoing, any rights of the parties hereunder
which have already vested shall not be affected by any action described in this
Section 1 l(d).
Section 12. Notices. All notices or other communications hereunder shall be
----------- -------
in writing and shall be deemed to have been given when personally delivered or
deposited in the United States mail, certified or registered, return receipt
requested, postage prepaid, or sent by Federal Express or other recognized
overnight courier service that provides proof of delivery, and addressed as
follows:
(a) if to the Company:
Jefferson Savings Bancorp, Inc.
14915 Manchester Road
Ballwin, Missouri 63011
Attention: David V. McCay
Chairman of the Board and Chief Executive Officer
with a copy to,
John K. Pruellage, Esq.
Lewis, Rice & Fingersh, L.C.
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
6
<PAGE>
(b) if to the Bank:
Jefferson Heritage Bank
14915 Manchester Road
Ballwin, Missouri 63011
Attention: David V. McCay
Chairman of the Board and President
with a copy to,
John K. Pruellage, Esq.
Lewis, Rice & Fingersh, L.C.
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
(c) if to Officer:
Joe L. Williams
5109 Greensboro
Sachse, Texas 75048
or to such other address as notice shall have been given pursuant to the
provisions hereof.
Section 13. Amendment and Modification. No amendment, modification,
----------- --------------------------
supplement, termination, consent or waiver of any provision of this Agreement,
nor consent to any departure herefrom, shall in any event be effective unless
the same is in writing and is signed by the party against whom enforcement of
the same is sought. Any waiver of any provision of this Agreement and any
consent to any departure from the terms of any provision of this Agreement is to
be effective only in the specific instance and for the specific purpose for
which given.
Section 14. Assignment. No party may assign or transfer any of its rights
----------- ----------
or obligations under this Agreement to any other person without the prior
written consent of the other party hereto.
Section 15. Cautions. Captions contained in this Agreement have been
----------- --------
inserted herein only as a matter of convenience and in no way define, limit,
extend or describe the scope of this Agreement or the intent of any provision
hereof.
Section 16. Compliance with Law. None of the terms or provisions of this
----------- -------------------
Agreement require any of the parties to take any action prohibited by, or
contrary to, applicable law.
Section 17. Counterparts. This Agreement may be executed by the parties on
----------- ------------
any number of separate counterparts, and all such counterparts so executed
constitute one agreement binding on all the parties notwithstanding that all the
parties are not signatories to the same counterpart.
Section 18. Entire Agreement. This Agreement constitutes the entire
----------- ----------------
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior agreements, letters of intent, understandings, negotiations
and discussions of the parties, whether oral or written.
7
<PAGE>
Section 19. Failure or Delay. No failure on the part of any party to
----------- ----------------
exercise, and no delay in exercising, any right, power or privilege hereunder
operates as a waiver thereof; nor does any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof, or the exercise of any other right, power or privilege. No notice to or
demand on any party in any case entitles such party to any other or further
notice or demand in similar or other circumstances.
Section 20. Further Assurances. The parties shall execute and deliver such
----------- ------------------
further instruments and do such further acts and things as may reasonably be
required to carry out the intent and purpose of this Agreement.
Section 21. Governing Law. This Agreement and the rights and obligations
----------- -------------
of the parties hereunder are to be governed by and construed and interpreted in
accordance with the laws of the State of Missouri applicable to contracts made
and to be performed wholly within Texas, without regard to choice or conflict of
laws rules.
Section 22. Successors and Assigns. All provisions of this Agreement are
----------- ----------------------
binding upon, inure to the benefit of, and are enforceable by or against, the
parties and their respective heirs, executors, administrators or other legal
representatives and permitted successors and assigns.
Section 23. Termination of Prior Agreement. The Employment Agreement,
----------- ------------------------------
dated as of December 30, 1996, by and among the Company, the Bank (as successor
to First Federal Savings Bank of North Texas) and Officer is hereby terminated
and is of no further force or effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
JEFFERSON SAVINGS BANCORP, INC.
By: /s/ David V. McCay
------------------
David V. McCay
Chairman of the Board
JEFFERSON HERITAGE BANK
By: /s/ David V. McCay
------------------
David V. McCay
Chairman of the Board
/s/ Joe L. Williams
-------------------
JOE L. WILLIAMS
8
<PAGE>
EXHIBIT 10.18
CHANGE IN CONTROL AGREEMENT
This CHANGE IN CONTROL AGREEMENT (this "Agreement"), is entered into by and
between JEFFERSON SAVINGS BANCORP, INC., a Delaware corporation ("Company"),
JEFFERSON HERITAGE BANK, a federal savings association ("Bank"), and Paul J.
Milano ("Employee").
RECITALS
WHEREAS, Employee is a key employee of Company and/or Bank.
WHEREAS, Company's Board of Directors ("Board") has determined that it is
in the best interests of Company and its shareholders to assure Employee's
continued dedication, time, attention, and loyalty, notwithstanding the
possibility, threat, or occurrence of a Change in Control, as defined below.
WHEREAS, in furtherance of that goal, the Board wishes to provide Employee
with certain benefits, if his employment should terminate as a result of a
Change in Control.
WHEREAS, in reliance on this Agreement, Employee is willing to continue his
employment with Company and/or Bank on the terms as may be agreed to by
Employee, Bank and Company from time to time.
NOW, THEREFORE, for and in consideration of the mutual covenants and
conditions herein, the sufficiency of which consideration is acknowledged by the
parties hereto, the parties hereby agree as follows:
AGREEMENT
1. Duration of Agreement. This Agreement shall be effective January 1,
2000 ("Effective Date"), and shall continue until the end of the Term, as
defined below.
2. Definitions. The following words and phrases, when capitalized, shall
have the following meanings for purposes of this Agreement:
(a) Anniversary Date. "Anniversary Date" means each anniversary of
the Effective Date occurring during the Term, as defined below.
(b) Change in Control. "Change in Control" means:
(i) the acquisition, other than from Company or Bank, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 25% or more of either the
then outstanding shares of Common Stock of Company or Bank or the
combined voting power of the then outstanding voting securities of
Company or Bank entitled to vote generally in the election of
<PAGE>
directors, but excluding, for this purpose, any such acquisition by
Company or Bank or any subsidiaries in which Company or Bank owns,
directly or indirectly, a proprietary interest of more than 50% (the
"Subsidiaries"), or any employee benefit plan (ore related trust) of
Company or Bank or their Subsidiaries;
(ii) individuals who, as of the date hereof, constitute the Board
of Directors (the "Incumbent Board") of Company or Bank cease for any
reason to constitute at least a majority of the Board of Directors,
provided that any individual becoming a director subsequent to the
date hereof whose election, or nomination for election by Company's or
Bank's shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered
as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of Company
or Bank (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act);
(iii) approval by the stockholders of Company or Bank of a
reorganization, merger or consolidation of Company, in each case, with
respect to which all or substantially all of the individuals and
entities who were the respective beneficial owners of the Common Stock
and voting securities of Company or Bank immediately prior to such
reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than 65% of, respectively, the then outstanding
shares of Common Stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such reorganization, merger or consolidation, or a
complete liquidation or dissolution of Company or Bank or of the sale
or other disposition of all or substantially all of the assets of
Company or Bank; or
(iv) the acquisition and exercise of a controlling influence over
the management or policies of Company of Bank by any person or by
persons acting as a group within the meaning of Section 13(d) of the
Securities Exchange Act of 1934.
(c) Change in Control Date. "Change in Control Date" means the date
as of which a Change in Control occurs.
(d) Disability. "Disability" means Employee's inability to perform
the material duties of his employment because of physical or mental illness,
which inability is likely to last for a period of one year or longer.
(e) Good Reason. "Good Reason" means a material change in position,
title, compensation, status, responsibilities, or working conditions in effect
immediately before, pursuant to or after the Change in Control or relocation of
Employee's place of employment to a location
2
<PAGE>
more than fifty (50) miles from Employee's place of employment immediately
before the Change in Control.
(f) Initial Term. The "Initial Term" shall be the period beginning on
the Effective Date and ending on the first anniversary of the Effective Date. On
the first anniversary of the Effective Date and on each Anniversary Date
thereafter, this Agreement shall be renewed for one additional year, provided,
however, that any such renewal is approved in advance by the Board of Directors
of the Company and the Bank in a duly adopted resolution (hereinafter, the
Initial Term and all subsequent terms are referred to herein as "Term").
Notwithstanding anything herein contained, the Term shall automatically be
terminated as provided in Section 5 hereof or upon the earliest to occur of (i)
the payment of the benefits under Section 3 hereof, or (ii) the expiration of
one (1) year from the Change in Control Date.
(g) Just Cause. "Just Cause" means and shall be limited to the
following:
(1) Employee's willful and continued failure to perform (other
than a failure resulting from Employee's illness or Disability) his stated
employment duties after a demand for substantial performance is delivered to
Employee on behalf of the Board that specifically identifies the manner in which
it alleges that Employee has failed to perform his duties and Employee's failure
to take appropriate actions to correct such failure within thirty (30) days; or
(2) Employee's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease and desist order or material breach of any
provision of this Agreement.
For purposes of subsection (g) of Section 2, no act or failure to act on
Employee's part shall be considered "willful" unless done, or omitted to be
done, by Employee not in good faith and without reasonable belief that his
action or omission was in the best interests of Company and Bank.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Just Cause unless and until the Board has delivered to him a copy
of a notice of termination, and after reasonable notice to him and an
opportunity for him, together with counsel, to be heard before the Board, and at
least two-thirds of the Board finds, in its reasonable opinion, that Employee
was guilty of conduct set forth above in clause (1) or (2) and specifying the
particulars thereof in detail.
3. Termination of Employee's Employment After or Pursuant to a Change in
Control. If Employee terminates his employment for Good Reason immediately
before, after or pursuant to the Change in Control, or if Company terminates
Employee's employment after or pursuant to the Change in Control for a reason
other than Just Cause or Employee's death or Disability, in connection with or
within twelve (12) months after a Change in Control, Employee shall be paid an
amount equal to the annual salary of Employee in effect at the time such
termination occurs. Said sum shall be paid in one lump sum within ten (10) days
of such termination.
3
<PAGE>
4. Company's Obligation to Provide Information. After termination of
Employee's employment pursuant to any provision of this Agreement, Company and
Bank shall promptly provide Employee with reasonably requested information
relating to his retirement, benefits and payments under this Agreement, and
other post-employment benefits.
5. Termination or Supervision Under Federal Law.
(a) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA"), all
obligations of the Bank under this Agreement shall terminate, as of the
effective date of the order, but vested rights of the parties shall not be
affected.
(b) If the Bank is in default (as defined in Section 3(x)(1) of
FDIA), all obligations under this Agreement shall terminate as of the date of
default; however, this Paragraph shall not affect the vested rights of the
parties.
(c) All obligations under this Agreement shall terminate, except to
the extent that continuation of this Agreement is necessary for the continued
operation of the Bank: (i) by the Director of the Office of Thrift Supervision
("Director of OTS"), or his or her designee, at the time that the Federal
Deposit Insurance Corporation ("FDIC") enters into an agreement to provide
assistance to or on behalf of the Bank under the authority contained in Section
13(c) of FDIA; or (ii) by the Director of the OTS, or his or her designee at the
time that the Director of the OTS, or his or her designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Such action shall not affect any vested rights of the parties.
(d) If a notice served under Section 8(e)(3) or (g)(1) of the FDIA
(12 U.S.C. 1818(e)(3) and (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank shall (i) pay the Employee all or part of the
compensation withheld white its contract obligations were suspended, and (ii)
reinstate (in whole or in part) any of its obligations which were suspended.
6. Binding Effect and Assignment. This Agreement shall inure to the
benefit of and shall be binding upon the parties to this Agreement and their
respective executors, administrators, heirs, personal representatives,
successors, and assigns, but neither this Agreement nor any right created by
this Agreement may be assigned or transferred by either party. Notwithstanding
the foregoing, Company and Bank shall assign this Agreement to any person or
entity succeeding to substantially all of the business and assets of Company or
Bank upon a Change in Control, and upon such a Change in Control, Company or
Bank shall obtain the assumption of this Agreement by its successor.
7. Notices. Any notice to a party required or permitted to be given by
this Agreement shall be in writing and shall be deemed given when mailed by
registered or certified mail, if to
4
<PAGE>
Company or Bank, at the following address: Jefferson Savings Bancorp, Inc.,
15435 Clayton Road, Ballwin, Missouri 63011 Attention: Corporate Secretary (or
such other address designated by Company in writing to Employee as provided in
this Section), and, if to Employee, at the address set forth below Employee's
signature (or such other address designated by Employee in writing to Company as
provided in this Section).
8. Severability. If any term, provision, covenant, or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void,
or unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired, or invalidated.
9. Amendments. This Agreement may not be modified, amended, altered, or
supplemented except upon the execution and delivery of a written agreement
executed by Company, Bank and Employee.
10. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Missouri.
11. Integration. This Agreement supersedes all prior agreements between
the parties with respect to the matters covered herein.
12. Counterparts. This Agreement may be signed in two counterparts, each
of which shall be deemed to be an original but which together shall constitute
one and the same instrument.
13. Effect of Headings. The section headings in this Agreement are for
convenience only and shall not affect the construction of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
Company: Bank:
JEFFERSON SAVINGS BANCORP, INC. JEFFERSON HERITAGE BANK
By: /s/ David V. McCay By: /s/ Joe L. Williams
------------------------------ -------------------------------
Name: David V. McCay Name: Joe L. Williams
---------------------------- -----------------------------
Title: Chairman of the Board & CEO Title: President and Chief Operating
--------------------------- -----------------------------
Officer
Employee: /s/ Paul J. Milano
--------------------------
Name: Paul J. Milano
------------------------------
Address: 17417 Emily Way Ct.
---------------------------
Chesterfield, MO 63005
------------------------------------
------------------------------------
5
<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%
Subsidiaries of Jefferson Heritage Bank
- ---------------------------------------
Jefferson Heritage Mortgage Company Texas 100%
Jefferson Financial, 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
(No. 333-09063) on Form S-3 and (Number 33-56324) on Form S-8 of Jefferson
Savings Bancorp, Inc. of our report dated January 31, 2000, relating to the
consolidated balance sheets of Jefferson Savings Bancorp, Inc. and subsidiaries
as of December 31, 1999 and 1998, 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, 1999, which report
appears in the December 31, 1999 annual report on Form 10-K of Jefferson Savings
Bancorp, Inc.
/s/ KPMG LLP
St. Louis, Missouri
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,141,714
<INT-BEARING-DEPOSITS> 9,457,864
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 221,789,267
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,369,101,328
<ALLOWANCE> 6,937,900
<TOTAL-ASSETS> 1,582,934,413
<DEPOSITS> 974,965,236
<SHORT-TERM> 468,369,843
<LIABILITIES-OTHER> 13,517,985
<LONG-TERM> 0
0
0
<COMMON> 101,001
<OTHER-SE> 125,980,348
<TOTAL-LIABILITIES-AND-EQUITY> 1,582,934,413
<INTEREST-LOAN> 92,122,283
<INTEREST-INVEST> 13,788,278
<INTEREST-OTHER> 1,827,630
<INTEREST-TOTAL> 107,738,191
<INTEREST-DEPOSIT> 47,267,338
<INTEREST-EXPENSE> 66,543,020
<INTEREST-INCOME-NET> 41,195,171
<LOAN-LOSSES> 520,000
<SECURITIES-GAINS> 36,990
<EXPENSE-OTHER> 28,488,663
<INCOME-PRETAX> 17,038,081
<INCOME-PRE-EXTRAORDINARY> 10,150,081
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,150,081
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 2.83
<LOANS-NON> 7,445,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,022,000
<LOANS-PROBLEM> 8,392,000
<ALLOWANCE-OPEN> 6,659,294
<CHARGE-OFFS> 241,738
<RECOVERIES> 344
<ALLOWANCE-CLOSE> 6,937,900
<ALLOWANCE-DOMESTIC> 4,319,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,079,000
</TABLE>
