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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _______________
Commission File No. 0-22850
JEFFBANKS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2189480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1609 Walnut Street
Philadelphia, PA 19103
(Address of registrant's (Zip Code)
principal executive officers)
Registrant's telephone number, including area code: (215) 564-5040
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part II
of this Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon closing sale price as quoted on NASDAQ National
Market on February 28, 1997: $90,618,752.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 3,964,464 shares as
of March 15, 1997.
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PART I
ITEM 1. BUSINESS
General
JeffBanks, Inc. (the "Company") is a Pennsylvania chartered, registered
bank holding company headquartered in Philadelphia with two wholly-owned
subsidiaries, Jefferson Bank ("Jefferson PA") and Jefferson Bank of New Jersey
("Jefferson NJ"). The Company operates principally through its subsidiary banks,
which are engaged in the commercial banking business in Philadelphia,
Pennsylvania and its immediately adjacent Pennsylvania and New Jersey suburbs.
The Company currently operates an executive office, twenty-seven retail branch
offices and a mortgage loan production office.
During the past three years, the Company has experienced substantial
growth, reflecting internal growth and the acquisitions of the Bank of Chester
County and Security First Bank in 1994 and Constitution Bank in 1995. For the
three-year period ended December 31, 1996, the Company's total assets grew from
$633.9 million to $1.0 billion, its interest bearing liabilities grew from
$571.0 million to $912.3 million and its shareholders' equity grew from $56.6
million (including minority interests) to $80.3 million. The Company also
enjoyed increased profitability during the period. The Company's income
increased from $4.7 million (before minority interests and dividend on preferred
stock of subsidiary) for 1993 to $9.2 million for 1996. Return on average assets
increased from .83% for 1993 to .97% for 1996. Subsequent to the Company's
fiscal year end, on January 21, 1997, the Company acquired United Valley Bank
with total assets of $121.1 million.
The Company's primary strategy for further growth is to establish a
reputation and market presence as the "small and middle-market business bank."
The Company has sought to implement its strategy by targeting the banking needs
of high net worth or high income individuals within its market area and the
businesses which they own or control. To attract this market, the Company
provides specialized commercial lending, cash management, lease financing and
personal credit services. In particular, in its commercial lending, the Company
seeks to respond to its targeted market by customizing the terms of its loans to
the specific or special needs of individual customers or their businesses. Such
services are also intended to aid in generating loans and deposits from the
Company's targeted market. The Company believes that satisfactory attention to
this selected market requires a combination of the services of the type
described above (which the Company believes are frequently unavailable at small
banks), and the personal attention of senior management (which the Company
believes is often unavailable to such customers at major financial
institutions). The customers in this market generally require relatively small
amounts of credit (almost never in excess of $5 million, and often less than $1
million), but often seek customized solutions to their financial requirements.
The Company provides a wide range of banking services for both
individuals and businesses in addition to the more specialized services referred
to previously. For individuals, the Company provides services which include
demand, interest checking, money market, certificates of deposit and other
saving accounts. The Company also offers home banking by computers, selected
banking services, telephone transfer services, automatic teller services through
the MAC inter-bank automated teller system, night depository services,
safe-deposit facilities, consumer loan programs (including installment loans for
home
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repairs and for the purchase of consumer goods such as automobiles and
boats), home equity loans, credit card plans with Visa and Mastercard, revolving
lines of credit, automobile leases, residential construction loans and permanent
mortgages for single family and multi-family homes. For businesses, the Company
additionally offers short-term loans for seasonal and working capital purposes,
term loans secured by real estate and other assets, loans for construction and
expansion needs, equipment and automobile leasing and loan programs, revolving
credit plans and other commercial loans, cash management services and merchant
credit card programs. Trust services are marketed in conjunction with several
partners.
Deposits obtained through the Company's branch banking system have been
the principal source of funds for use in the Company's lending activities. At
December 31, 1996, the Company had total deposits of $682.5 million. Of that
total, 42% represented time deposits, 40% represented interest checking and
savings and money market deposits and 18% represented demand (non-interest
bearing) deposits.
At December 31, 1996, the Company had a net loan portfolio (excluding
mortgage loans held for sale) of $727.4 million, representing 72% of total
assets at that date. The loan portfolio of the Company is categorized into
commercial, commercial mortgage, residential mortgage, construction, consumer
(including automobile loans and home equity lines of credit) and direct lease
financing. At December 31, 1996, commercial mortgages and other commercial loans
were $499.1 million or approximately 69% of the Company's net loan portfolio.
Although in making its loans the Company relies upon its evaluation of the
creditworthiness and debt-servicing capability of a borrower, its loans often
are secured by residential or commercial real property, automobiles, equipment,
fixtures and other collateral. However, exceptions may be made to this general
operating philosophy. The Company does not generally engage in non-recourse
lending (i.e., lending as to which the lender only looks to the asset securing
the loan for repayment) and generally will require the principals of any
commercial borrower to personally guarantee the loan with some exceptions. The
Company does not generally engage in out-of-area lending, although it may accept
significant amounts of out-of-area collateral security (such as a second home or
other collateral) from borrowers in the Philadelphia area.
The Company has been active in originating residential mortgage loans
for the purposes of resale to the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation and other entities. For the year ended
December 31, 1996, the Company originated $26.6 million of mortgage loans. The
Company originates these loans primarily through its branches and existing
network of customers and generally retains the servicing on loans sold.
Originations are sold without recourse to the Company. The Company generally
obtains commitments to sell its mortgage originations as they are made, to
minimize the interest rate risk of holding such originations. At December 31,
1996, the Company had approximately $725,000 of mortgage loans held for sale.
Additionally, the Company periodically purchases the right to service
other portfolios located in its geographic markets. Amounts so purchased are
subject to, and limited by, management's assessment of the prepayment risk of
the underlying portfolio. Under its mortgage servicing arrangements, the Company
collects and remits loan payments, maintains related account records, makes or
monitors insurance and tax payments, makes any required physical inspections of
property, contacts delinquent mortgagors, and supervises foreclosures and
property dispositions. At December 31, 1996, the Company was servicing real
estate loans for other investors in an aggregate principal amount of
approximately $245.3 million.
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Competition
In its Philadelphia metropolitan service area, the Company is subject
to intense competition for customers from numerous commercial banks, savings and
loan associations and other financial institutions. The Company actively
competes with these institutions for deposits and local retail and commercial
accounts. Many of its competitors have significantly greater financial resources
than the Company. In consumer transactions, which typically involve loans in
amounts far less than the lending limit of either of the subsidiary banks, the
Company believes it is able to compete on a substantially equal basis with
larger financial institutions. In commercial loan transactions, Jefferson PA's
lending limit to a single customer (approximately $15.0 million as of December
31, 1996) enables the Company to compete effectively for the credit needs of
moderate-sized and small businesses, while the lending limit of Jefferson NJ
(approximately $1.5 million at December 31, 1996) enables it to effectively
compete for the credit needs of small businesses. These lending limits are,
however, considerably below those of various competing institutions, which makes
it difficult, and in some cases impossible, for the Company to compete
effectively when the amount of the loan or financing required is in excess of
the lending limits of its subsidiary banks. In competing with other banks, as
well as savings and loan associations and other financial institutions, the
Company seeks to provide personalized services through officers' and directors'
knowledge of the Company's primary service area and customers. The size of such
customers, in management's opinion, often inhibits close attention to their
needs by larger institutions.
In addition to competition from other commercial banks and savings and
loan associations, commercial banks are experiencing competition from
non-traditional sources. Industrial, retail, securities and insurance companies
through their financial services units, through various new products and
services, are providing significant competition in traditional banking
activities. These competitors are not regulated on the same basis as banks.
Acquisition Activity
The Company made several acquisitions in 1994 and 1995, in addition to
its acquisition of the minority interest in Jefferson NJ, as follows. An
additional acquisition was consummated in the first quarter of 1997.
Bank of Chester County. On March 29, 1994, the Company, through
Jefferson PA, completed a merger with the Bank of Chester County ("Chester
County") pursuant to which it acquired that institution. Under the terms of the
merger, each share of Chester County common stock was converted into .25 of a
share of the Company's common stock, resulting in the issuance of 111,530 shares
of the Company's common stock. Chester County was a Pennsylvania chartered, FDIC
insured banking institution engaged in commercial and retail banking with three
locations in Chester County. Chester County had total assets of $57.8 million at
the time of acquisition.
Security First Bank. On December 22, 1994, the Company, through
Jefferson PA, completed a merger with Security First Bank ("Security First"),
pursuant to which it acquired that institution. Under the terms of the merger,
each share of Security First common stock was converted into .3397 of a share of
the Company's common stock, resulting in the issuance of 202,932 shares of the
Company's common stock. Security First was a Pennsylvania chartered, FDIC
insured banking institution engaged in commercial and
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retail banking with one location in Delaware County. Security First had total
assets of $33.8 million at the time of acquisition.
Constitution Bank. On August 4, 1995, the Company, through Jefferson
PA, completed a merger with Constitution Bank ("Constitution"), pursuant to
which it acquired that institution. Under the terms of the merger, each share of
Constitution common stock was converted into .05909 of a share of the Company's
common stock, resulting in the issuance of 106,456 shares of the Company's
common stock. Constitution was a Pennsylvania chartered banking institution
engaged in commercial and retail banking with two offices in Philadelphia.
Constitution had total assets of $122.0 million at the time of acquisition.
United Valley Bank. On January 21, 1997, the Company, through Jefferson
PA, completed a merger with United Valley Bank ("UVB") pursuant to which it
acquired that institution. Under the terms of the merger, each share of UVB
common stock was converted into .339 of a share of the Company's common stock,
resulting in the issuance of 749,278 shares of the Company's common stock. In
addition, outstanding warrants to purchase the acquired institution's common
stock were converted into warrants to purchase 255,381 shares of the Company's
common stock, with an exercise price of $11.80 per share. UVB was a Pennsylvania
chartered banking institution engaged in commercial and retail banking with one
principal office in Philadelphia. UVB had total assets of $121.1 million at the
time of acquisition. The acquisition will be accounted for under the pooling of
interests method of accounting. All prior acquisitions had been accounted for
under the purchase method.
Services to Subsidiary Banks
The Company provides a number of services to Jefferson PA and Jefferson
NJ, including arranging for and maintaining computer services, insurance
coverage, marketing and advertising, internal audit services, and loan review
services (primarily review of loan quality, loan documentation, supervision of
the loan watch list and workouts on problem loans). The Company received fees
from its subsidiary banks for such services aggregating $3.1 million in 1996,
$2.9 million in 1995 and $2.5 million in 1994. On a consolidated basis, for
financial reporting purposes, these fees are eliminated, except to the extent
they have reduced income applicable to minority interests in 1993 and prior
years.
SUPERVISION AND REGULATION
The Company and its banking subsidiaries are extensively regulated
under both federal and state law. The regulation and supervision of the Company
and its bank subsidiaries is designed primarily for the protection of depositors
and not the respective institutions or their shareholders. To the extent that
the following information describes statutory and regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. A change in applicable law or regulation may have a
material effect on the business of the Company or its bank subsidiaries.
General
The Company is a registered bank holding company under the Bank Holding
Company Act of
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1956 (the "Holding Company Act"). As such, it is required to file
an annual report with the FRB and such additional information as the FRB may
require pursuant to the Holding Company Act, and is subject to regular
examination by the FRB. The Holding Company Act limits the activities which may
be engaged in by the Company and its subsidiaries to those of banking and the
management of banking organizations, and to certain non-banking activities,
including those activities which the FRB has found, by order or regulation, to
be so closely related to banking or managing or controlling banks as to be
proper incidents thereto. Such activities include, among other things, and,
subject to certain limitations, operating a mortgage company, finance company,
credit card company or factoring company; performing certain data processing
operations; providing certain investment and financial advice; acting as an
insurance agent for certain types of credit related insurance and providing
certain securities brokerage services for customers. The Company has no present
plans to engage in any of these activities other than through its subsidiary
banks. The FRB has adopted certain capital adequacy guidelines pertaining to
bank holding companies. The Company currently exceeds all such guidelines. For a
discussion of these guidelines, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of Operations: Liquidity
and Capital Resources."
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner. It is the FRB policy
that, in serving as a source of strength to its subsidiary banks, a bank holding
company should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks. A
bank holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the FRB to be
an unsafe and unsound banking practice, and/or a violation of FRB regulations.
The FRB has also issued policy statements which provide that bank
holding companies generally should pay dividends only out of current operating
earnings.
The Company is subject to additional regulation by the Pennsylvania
Department of Banking (the "PA Department"). Pennsylvania law currently permits
Pennsylvania bank holding companies to own an unlimited number of banking
subsidiaries.
Limitations on Dividends from Subsidiary Banks
There are various legal limitations on the extent to which Jefferson PA
and Jefferson NJ may pay dividends to the Company. With respect to Jefferson PA,
the Pennsylvania Banking Code of 1965, as amended (the "1965 Code"), provides
that dividends may be declared and paid only out of accumulated net earnings
(undivided profits). Where surplus is less than 50% of the amount of Jefferson
PA's capital (defined as par value multiplied by the number of shares
outstanding), no dividend may be paid or declared without the prior approval of
the PA Department until surplus is equal to 50% of the total amount of capital.
Where surplus is less than 100% of capital, until such time as surplus equals
capital, at least 10% of net earnings must be transferred to surplus prior to
the declaration of a dividend. The PA Department has the power to issue orders
prohibiting the payment of dividends where such payment is
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deemed to be an unsafe or unsound banking practice.
With respect to Jefferson NJ, the New Jersey Banking Act of 1948, as
amended (the "1948 Act"), provides that a bank may declare and pay dividends on
its capital stock if stated capital will not be reduced following the payment of
any such dividend. A bank also may not pay a dividend if, after payment thereof,
it will have a surplus of less than 50% of stated capital unless such dividend
would not reduce surplus.
As of December 31, 1996, Jefferson PA had $26.1 million of undivided
profits legally available for the payment of dividends. Jefferson NJ had no
surplus available for the payment of dividends as of such date.
Pennsylvania Regulation of Jefferson PA
As a Pennsylvania state-chartered commercial bank, Jefferson PA is
subject to the applicable provisions of the 1965 Code, and the regulations of
the PA Department adopted thereunder. Jefferson PA derives its lending and
investment powers from these laws and is subject to examination from time to
time by the PA Department. The most recently concluded examination of Jefferson
PA by the PA Department was conducted as of September 30, 1995. The 1965 Code
provides for extensive regulation of the business of Jefferson PA, including
limitations on the amount of interest it may charge on various loans,
limitations on the amount of credit it may extend to any one customer and
limitations on its ownership of shares of stock in other entities, including
banks and trust companies. Any merger of Jefferson PA and another institution
must receive the prior approval of the PA Department. In addition, the 1965 Code
prohibits any person from acquiring more than 10% of any class of outstanding
stock of any bank (5% of any such class if the bank had net operating loss carry
forwards, as defined in the Internal Revenue Code, in excess of 20% of the banks
total shareholders' equity), without the prior approval of the PA Department.
Exempted from prior approval of the PA Department are stock acquisitions by the
issuing bank or a person who controls the bank and acquisitions through a merger
or consolidation approved by the U.S. Comptroller of the Currency. The 1965 Code
regulates the establishment of branch offices and sets minimum capital stock and
surplus requirements (with which Jefferson PA complies). Under the 1965 Code,
banks are permitted to operate branch offices statewide. Approval of the PA
Department is required for amendments to the Articles of Incorporation of
Jefferson PA.
Pennsylvania has adopted a reciprocal interstate banking law which
currently permits, subject to certain conditions, out-of-state bank holding
companies located in all fifty states to acquire banks and bank holding
companies in Pennsylvania, provided Pennsylvania bank holding companies are
accorded reciprocal rights. Subject to the reciprocity requirement and to the
prior approval of the PA Department, Pennsylvania permits out-of-state bank
holding companies to enter the state either by acquisition of an existing
Pennsylvania bank or bank holding company or by establishment of a new bank in
Pennsylvania. Approval of the PA Department is also required if a Pennsylvania
bank holding company acquires an out-of-state bank or bank holding company.
Currently, the interstate banking laws determined by the PA Department to be
fully reciprocal with the Pennsylvania law include the laws of the states of New
Jersey, New York and Ohio. However the Riegle-Neal Act, summarized below, will
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supersede Pennsylvania law, subject to certain conditions.
New Jersey Regulation of Jefferson NJ
As a state-chartered commercial bank, Jefferson NJ is subject to the
applicable provisions of the 1948 Act and the regulations of the New Jersey
Department of Banking (the "NJ Department") adopted thereunder. Jefferson NJ
derives its lending and investment powers from these laws, and is subject to
examination from time to time by the NJ Department. The most recent examination
of Jefferson NJ by the NJ Department was as of September 5, 1995. Jefferson NJ
is required to comply with various provisions of New Jersey law regarding its
deposit and lending business, including limitations on the amount of interest it
may charge on various loans, limitations on the amount of credit it may extend
to any one customer, restrictions on the amount of capital which may be used for
fixed assets and limitations on the amount and nature of its investment in
certain entities. In addition, New Jersey law sets minimum capital stock and
surplus requirements (with which Jefferson NJ presently complies) and regulates
the establishment of branch offices. Approval of the NJ Department is also
required for amendments to the Certificate of Incorporation of Jefferson NJ.
Under the 1948 Act, banks are generally permitted to operate branch
offices statewide, except that a bank generally may not establish a branch
office in a municipality other than the municipality in which it maintains its
principal office which has a population of less than 10,000 persons and in which
another banking institution maintains its principal office. Certain capital
stock and surplus requirements (with which Jefferson NJ presently complies) also
must be satisfied in order to establish additional branch offices.
New Jersey has a reciprocal interstate banking law which permits,
subject to certain conditions, out-of-state bank holding companies to acquire
New Jersey banks or bank holding companies or to establish banks in New Jersey,
provided the laws of the jurisdiction in which the operations of the
out-of-state bank holding company's banking subsidiaries are principally
conducted afford reciprocity to New Jersey-based banking institutions.
Currently, the interstate banking laws determined by the NJ Department to be
fully reciprocal with the New Jersey law include the laws of the states of
Pennsylvania, New York and Delaware. However, the Riegle-Neal Act, summarized
below, will supersede New Jersey law, subject to certain conditions.
FDIC Regulation
Jefferson PA and Jefferson NJ are members of the FDIC and, therefore,
are subject to additional regulation by that agency. The FDIC must approve the
establishment of new branch offices. Dividend payments by a bank are generally
prohibited where the bank is in default on its FDIC assessments. Moreover, the
FDIC has the power to issue orders prohibiting the payment of dividends where
such payment is deemed to be an unsafe or unsound banking practice. The
subsidiary banks are subject to examinations from time to time by the FDIC. The
most recently concluded examination of Jefferson PA by the FDIC was conducted as
of September 30, 1996. The most recent examination of Jefferson NJ
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was conducted as of September 30, 1996. As members of the FDIC, Jefferson PA and
Jefferson NJ are assessed annual premiums based on the amount of their deposits
and in part on ratings given them by the FDIC. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Results of Operations:
Non-Interest Expense." Neither subsidiary bank is a member of the Federal
Reserve System.
Regulations Concerning Liquidity and Capital
Each regulatory agency referred to above evaluates the adequacy of
liquidity of the Company and/or its subsidiary banks at the time of their
respective examinations. None of these agencies has required specific liquidity
amounts or percentages. Instead, to assess adequacy the agencies consider a
variety of factors including historical deposit stability, success in generating
new deposits, loan demand and other factors. Based upon current liquidity levels
and policies, each agency has, as a result of its most recently concluded
examination, determined liquidity and related policies to be adequate. For a
discussion of capital adequacy guidelines promulgated by regulators, and the
compliance of the Company and its subsidiary banks with such guidelines, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations: Liquidity and Capital Resources."
Federal Change in Control and Acquisition Regulation.
Under the Change in Bank Control Act of 1978 and regulations
thereunder, persons who intend to acquire control of a bank or bank holding
company are required to give at least 60 days prior written notice to the FRB
(in the case of a bank holding company) or the FDIC (in the case of a
state-chartered non-member bank such as Jefferson PA or Jefferson NJ). Control
for the purpose of this regulation exists when the acquiring party obtains
voting control of at least 25% of any class of the bank's or holding company's
voting securities. Subject to rebuttal, control is presumed to exist when the
acquiring party obtains voting control of at least 10% of any class of the
bank's or holding company's voting securities if (i) securities issued by the
bank or holding company are registered pursuant to Section 12 of the Exchange
Act, or (ii) following the acquisition, there would be no holder of that class
of the bank's or holding company's voting securities with a holding larger than
the acquiring party. Under the Holding Company Act, a company cannot acquire
control of a bank or a bank holding company without the prior approval of the
FRB. Control has substantially the same definition for these purposes as under
the Change in Bank Control Act of 1978. The Change in Bank Control Act of 1978
and the regulations promulgated thereunder authorize the FRB or FDIC, as the
case may be, to disapprove any such acquisition on certain specified grounds.
With respect to the acquisition of banking organizations, the Company is
required to obtain the prior approval of the FRB before it may merge or
consolidate with another bank holding company, acquire all or substantially all
of the assets of any bank, or acquire ownership or control of any voting shares
of any bank, if, after such share acquisition, it will own or control more than
5% of the voting shares of such bank. The Holding Company Act generally
prohibits the FRB from approving the acquisition by the Company, or any
subsidiary, of any voting shares of, or interest in, or all or substantially all
of the assets of, any bank located outside Pennsylvania, unless specifically
authorized by the laws of the state in which the target bank is located.
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In addition, under the Bank Merger Act of 1956, as amended, the
approval of the appropriate federal bank regulatory agency (the FRB, the
Comptroller of the Currency or the FDIC, depending on the resulting institution)
is required before either subsidiary bank may merge or consolidate with, or
acquire all or substantially all of the assets of, another bank.
FIRREA
Although the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") pertains primarily to thrift depository institutions
(such as savings and loan associations), certain of FIRREA's provisions may
affect the Company's subsidiary banks. In particular, FIRREA imposes certain
"cross-guarantee" provisions which are applicable to the subsidiary banks, as
more fully described below.
Under FIRREA, all commonly controlled insured depository institutions
are liable to the FDIC for any loss the FDIC incurs in connection with defaults
of or assistance granted to their affiliated depository institutions. Under such
"cross-guarantee" arrangements, each depository institution subsidiary could be
subject to claims for amounts the FDIC actually loses in connection with the
operation of or assistance granted to an affiliated depository institution in
the event it were ultimately to be taken over by the FDIC. Accordingly, one of
the Company's subsidiary banks could be subject to "cross-guarantee" claims by
the FDIC for losses sustained by the FDIC in the event such agency is required
to operate or assist the other subsidiary bank, or any insured depository
institution which may be formed or acquired by the Company in the future.
The Improvement Act
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(the "Improvement Act") financial institutions are subject to increased
regulatory scrutiny and must comply with certain operational, managerial and
compensation standards developed by FDIC regulations. Under the Improvement Act,
institutions must be classified in one of five defined categories (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized). In the event an institution's
capital deteriorates to the undercapitalized category or below, the Improvement
Act prescribes an increasing amount of regulatory intervention, including the
adoption by a bank of a capital restoration plan, a guarantee of the plan by its
parent holding company and the placement of a hold on increases in assets,
number of branches and lines of business. If capital has reached the
significantly or critically undercapitalized levels, further material
restrictions can be imposed, including restrictions on interest payable on
accounts, dismissal of management and (in critically undercapitalized
situations) appointment of a receiver or conservator. Critically
undercapitalized institutions generally may not, beginning 60 days after
becoming critically undercapitalized, make any payment of principal or interest
on their subordinated debt. For well capitalized institutions, the Improvement
Act provides authority for regulatory intervention where the institution is
deemed to be engaging in unsafe or unsound practices or receives a less than
satisfactory examination report rating for asset quality, management, earnings
or liquidity. All but well capitalized institutions are prohibited from
accepting brokered deposits without prior regulatory approval. For
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information concerning capital requirements applicable to the Company's
subsidiary banks and their capital levels at December 31, 1996, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations: Liquidity and Capital Resources." As set forth
therein, under currently existing standards, the Company and both of its
subsidiary banks are deemed to be "well capitalized".
The Improvement Act also requires federal banking regulators to issue
new rules establishing certain minimum standards to which an institution must
adhere, including standards requiring a maximum ratio of classified assets to
capital, minimum earnings sufficient to absorb losses and, to the extent
feasible, a minimum ratio of market value to book value. Additional regulations
are required to be developed relating to internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits. The Improvement Act also requires all institutions in general to
undergo an annual regulatory examination and requires an institution with total
assets of at least $500 million to have annual audits, establish an independent
audit committee of its board of directors and undergo an annual regulatory
examination.
The Riegle-Neal Act
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal Act") was enacted into law on September 29, 1994. The law
eliminated substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies as of September 29, 1995. The law will also
permit interstate branching by banks effective as of June 1, 1997, subject to
the ability of states to opt-out completely or to set an earlier effective date.
In response to the Riegle-Neal Act, on July 6, 1995, Pennsylvania adopted
legislation permitting out-of-state bank holding companies unrestricted access
to acquire Pennsylvania banks. The Pennsylvania legislation permits out-of-state
banks to set up branches in Pennsylvania so long as their home state
reciprocates by allowing Pennsylvania banks to open branches there. New Jersey
has not yet adopted legislation to set an earlier effective date for the
Riegle-Neal Act, although such legislation is currently pending. The Company
anticipates that the effect of these new laws will be to increase competition
within the markets in which the Company now operates, although the Company
cannot predict the extent to which competition will increase in such markets or
the timing of such increase.
-11-
<PAGE>
ITEM 2. PROPERTY
The Company and its subsidiary banks currently operate twenty-seven
retail branch offices, one bank executive office, one mortgage loan production
office and an operations center. The Company's executive offices occupy a
portion of one of Jefferson PA's branch offices. Twenty-one of these offices
occupy approximately 109,000 square feet and are leased under leases expiring
between 1994 and 2011. During 1996, the Company paid aggregate rentals of $1.7
million under these leases. Six offices are owned and occupy approximately
27,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceeding. However,
its subsidiary banks are involved in routine litigation in the normal course of
their business. In the opinion of the Company, final disposition of this
litigation will not have a material adverse effect on the financial condition or
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
-12-
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol "JEFF." The following table sets forth, on a quarterly basis,
the high and low bid prices for the Company's common stock for the Company's two
most recent fiscal years as reported by Nasdaq, together with quarterly dividend
payment information for such period:
Cash Dividends
1995 High Low Per Share
---- ---- --- --------------
First Quarter................... $21.50 $18.50 $.125
Second Quarter.................. 23.25 19.25 .125
Third Quarter................... 25.00 23.25 .125
Fourth Quarter.................. 26.00 22.00 .15
Cash Dividends
1996 High Low Per Share
---- ---- --- --------------
First Quarter................... $23.25 $21.25 .15
Second Quarter.................. 23.00 22.25 .15
Third Quarter................... 28.38 22.75 .15
Fourth Quarter.................. 28.50 26.75 .15
As of March 5, 1996, there were approximately 2,900 holders of the Company's
Common Stock.
-13-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial and operating information
of the Company should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements of the Company, including the notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income................................. $74,672 $64,317 $46,943 $40,475 $41,491
Interest expense................................ 34,044 28,229 17,412 16,591 19,422
------- ------- ------- ------- -------
Net interest income............................. 40,628 36,088 29,531 23,884 22,069
Provision for credit losses..................... 2,982 3,135 1,857 1,829 3,153
------- ------- ------- ------- -------
Net interest income after provision for credit 37,646 32,953 27,674 22,055 18,916
losses.............................................
Non-interest income(1)(2)....................... 7,119 6,508 5,343 5,495 4,907
Non-interest expense............................ 30,393 27,647 23,755 20,741 18,609
------- ------- ------- ------- -------
Income before income taxes, dividends on preferred 14,372 11,814 9,262 6,809 5,214
stock and minority interest...................
Income taxes(3)................................. 5,173 4,153 3,081 2,062 1,714
------- ------- ------- ------- -------
Income before dividends on preferred stock and 9,199 7,661 6,181 4,747 3,500
minority interest.............................
Dividends on preferred stock of subsidiary...... 789 646
Minority interest in net income of subsidiaries. 1,191 877
------- ------- ------- ------- -------
Net income............................. $ 9,199 $ 7,661 $ 6,181 $ 2,767 $ 1,977
======== ======== ======== ======== ========
Per Common Share Data:
Net income(4)................................... $ 2.26 $ 2.10 $ 1.86 $ 1.64 $ 1.16
Fully diluted net income(4)..................... 2.26 1.94 1.71 1.49 1.16
Book value...................................... 19.45 18.20 17.51 17.04 15.84
Fully diluted book value(5)..................... 19.45 18.20 16.70 16.21 15.07
Balance Sheet Data:
Total assets.................................... $1,005,038 $939,006 $751,525 $633,936 $558,211
Total loans(6).................................. 739,019 673,788 551,865 459,281 438,929
Allowance for credit losses..................... (10,859) (14,032) (7,728) (5,283) (5,094)
Investment securities(7)........................ 159,449 145,762 80,628 96,550 46,431
Goodwill........................................ 8,776 8,978 809 135 156
Deposits........................................ 682,489 724,967 619,131 535,509 503,660
Securities sold under repurchase agreements..... 73,764 46,549 16,229 16,211 7,893
FHLB advances 124,000 75,000 35,274 10,274
Subordinated notes and debentures 32,000 9,000 9,000 9,000
Minority interest............................... 437 15,690
Convertible preferred stock and related surplus. 12,835 12,845 5,346
Common shareholders' equity..................... 80,254 73,311 51,541 43,350 19,916
Selected Operating Ratios:
Return on average assets........................ .97% .96% .95% .83% .66%
Return on average common equity................. 12.04% 11.30% 10.75% 10.72% 7.63%
Net interest margin............................. 4.58% 4.87% 4.89% 4.47% 4.46%
Ratio of earnings to fixed charges.............. 141% 133% 136% 125% 116%
Dividend payout ratio........................... 26.06% 24.82% 20.34%
Selected Capital and Asset Quality Ratios:
Equity/assets................................... 7.99% 7.80% 8.57% 8.86% 4.52%
Non-performing loans/total loans(8)............. 1.31% 1.80% 1.60% 1.14% 1.31%
Non-performing assets/total loans and
non-performing assets(9)....................... 1.78% 2.34% 2.40% 2.18% 2.32%
Allowance for credit losses/total loans......... 1.47% 2.08% 1.40% 1.15% 1.16%
Allowance for credit losses/non-performing
assets(9)....................................... 81.97% 88.42% 57.97% 52.13% 49.54%
Net charge-offs/average loans................... .88% .48% .51% .38% .54%
</TABLE>
- -------------------------
(1) Includes gain on sale of securities of $245,000 in 1996, $333,000 in 1995,
$128,000 in 1994, $376,000 in 1993 and $605,000 in 1992.
(2) Effective October 1, 1995, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The effect of adoption was not significant to the
Company's financial position or results of operations.
(3) Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The effect of adoption
-14-
<PAGE>
was not significant to the Company's financial position or results of
operations.
(4) Net income per share is based upon the respective weighted average number of
common shares outstanding, as follows: 4,077,656 (1996); 3,116,505 (1995);
2,617,962 (1994); 1,368,705 (1993) and 1,244,066 (1992), after giving
retroactive effect to a 5% stock dividend declared on January 17, 1996. Fully
diluted net income per share in 1995, 1994 and 1993 gives effect to the increase
in average shares that would be outstanding, and the increase in net income
applicable to common stock that would result from, the assumed conversion of the
Company's dilutive preferred stock.
(5) Fully diluted book values in 1994 through 1992 give effect to the increase
in average shares that would be outstanding, and the increase in common equity
that would result from, the assumed conversion of the Company's dilutive
convertible preferred stock.
(6) Includes mortgage loans held for sale of $725,000 (1996), $484,000 (1995),
$380,000 (1994), $19.0 million (1993) and $7.0 million (1992).
(7) Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." The adoption had no effect
on the Company's financial position or results of operations.
(8) Non-performing loans consist of non-accrual loans and renegotiated loans and
exclude loans past due 90 days or more still accruing interest. Effective
January 1, 1995, the Company adopted SFAS No. 114 "Accounting for Impairment of
a Loan," as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." The effect of adoption was not
significant to the Company's financial position or results of operations.
(9) Non-performing assets consist of non-accrual loans, renegotiated loans and
other real estate owned and exclude loans past due 90 days or more still
accruing interest.
(10) All acquisitions through December 31, 1996, have been accounted for under
the purchase method of accounting and accordingly, the results of these
entities' operations are included from their respective dates of acquisition.
-15-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the consolidated
financial statements of the Company and related notes included elsewhere herein.
Overview
Net income of the Company increased to $9.2 million in 1996 from $7.7
million in 1995 and $6.2 million in 1994. Non-accrual loans were $9.7 million at
December 31, 1996, compared to $12.1 million a year earlier. Non-performing
assets amounted to $13.2 million at December 31, 1996 and $15.9 million at
December 31, 1995(1). The decrease in non-performing loans and assets reflected
the third quarter 1996 charge-off of amounts previously recorded in the Banks
reserve for credit losses.(1) Approximately 83% of a total of $3.9 million in
such charge-offs reduced the non-accrual loan category. Non-performing assets
also reflected a decrease in other real estate owned to $3.5 million at December
31, 1996 from $3.8 million at December 31, 1995(1).
As set forth in "Results of Operations - General," below, the Company's
results of operations depend primarily on its net interest income. Reflecting
increased loan balances resulting from internal growth and the Constitution
acquisition, the Company's interest income increased in 1996 and 1995. Net
interest income in 1996 increased approximately 13% over 1995 which increased
22% over 1994. The net interest margin, expressed as net interest income divided
by average interest earning assets, decreased to 4.58% in 1996 from 4.87% in
1995 and 4.89% in 1994. The 1996 reduction in the net interest margin reflected
the impact of a lower prime rate which contributed to lower loan yields. While
yields on many categories of interest bearing liabilities were also lower,
yields in other categories were increased due to market pressure. Further, the
proportion of higher cost non-deposit funding increased, contributing to other
increases in the cost of funds. In 1995, the Company maintained net interest
margins at approximately the prior year's level by continuing to maintain
interest rates on many core deposits at lower levels more consistent with
industry averages, and as a result of growth in demand deposit balances. Net
loans at December 31, 1996 increased 10% or $68.4 million over the prior year
reflecting internal growth. Net loans at December 31, 1995 increased 21%, or
$115.6 million over the prior year amount. Of that increase, approximately $72.0
million resulted from the acquisition of Constitution. Net loans at December 31,
1994 increased 20% or $90.1 million over the prior year amount. Of that
increase, approximately $60.0 million resulted from the acquisition of Chester
County and Security First. See "Business - Acquisition Activity." As of December
31, 1996, the capital ratios of the Company and each of its subsidiary banks
significantly exceeded the "well-capitalized" standard established by regulatory
authorities. See "Liquidity and Capital Resources," below.
In the first quarter of 1997, the Company issued $25 million of 9 1/4%
of junior subordinated debentures to JBI Capital Trust I, a Delaware Business
Trust, in which the Company owns all of the common equity. The trust issued $25
million of preferred securities to investors, secured by the junior subordinated
debentures and the guarantee of the Company. Although the junior subordinated
debentures
- ------------------
(1) Non-accrual loans and non-performing assets exclude loans past due 90 days
or more still accruing interest.
-16-
<PAGE>
will be treated as debt of the Company, they currently qualify for tier 1
capital treatment. The securities have no maturity date and are callable by the
Company on or after March 31, 2002, or earlier in the event the deduction of
related interest for federal income taxes is prohibited, treatment as tier 1
capital is no longer permitted and in certain other circumstances.
See "Liquidity and Capital Resources" below.
Results of Operations
General. The Company's results of operations depend primarily on net
interest income, which is the difference between interest income on interest
earning assets and interest expense on interest bearing liabilities. Interest
earning assets consist principally of loans and investment securities, while
interest bearing liabilities consist primarily of deposits. The Company's net
income is also affected by the provision for credit losses and the level of
non-interest income as well as by non-interest expenses, including salary and
employee benefits, occupancy costs, data processing expense, charges relating to
non-performing and other classified assets and other expenses.
Net Income. Net income was $9.2 million in 1996 compared to $7.7
million in 1995 and $6.2 million in 1994. The increases in net income in 1996
and 1995 reflect increases in net interest income which increased 13% and 22%,
respectively, over prior year periods. These increases reflected the impact of
increased loan balances, while net interest margins expressed as net interest
income divided by average interest earning assets, decreased in 1996 compared to
1995. The 1996 reduction in the net interest margin reflected the impact of a
lower prime rate which contributed to lower loan yields. While yields on many
categories of interest bearing liabilities were also lower, yields in other
categories were increased due to market pressure. Further, the proportion of
higher cost non-deposit funding increased, contributing to other increases in
the cost of funds. Net interest margins were comparable in 1995 and 1994. In
1995, the Company maintained net interest margins at approximately the prior
year's level by continuing to maintain interest rates on many core deposits at
lower levels more consistent with industry averages, and as a result of growth
in demand deposit balances. See "Net Interest Income and Average Balances,"
below. Repricing opportunities for loans and the shift in deposit base to lower
cost demand, interest checking, savings and money market deposits served to
increase net interest margins in 1994. In 1994, the Company reduced its cost of
funds to levels more consistent with industry averages by maintaining interest
rates on many core deposits at or below their lowered prior year levels when
rates had generally declined. Concurrently, the Company was able to increase
loan rates during 1994 when rates generally rose. The provision for credit
losses amounted to $3.0 million in 1996, $3.1 million in 1995 and $1.9 million
in 1994. See "Financial Condition - Provision for Credit Losses," below. Service
fees on deposit accounts increased to $3.0 million in 1996, compared to $2.7
million in 1995 and $2.2 million in 1994. Increases in merchant card fees during
these periods were significantly offset by increases in related expense,
reflected under non-interest expense as merchant credit card deposit expense.
See "Results of Operations - Net Interest Income and Average Balances" and
"Non-Interest Income," below.
Net Interest Income and Average Balances. Net interest income was $40.6
million in 1996, compared to $36.1 million in 1995 and $29.5 million in 1994.
Yields on interest earning assets decreased to 8.40% in 1996 from 8.66% in 1995,
a difference of .26%, and reflected the impact of a lower prime rate and other
market interest rates. While yields on many categories of interest bearing
liabilities were also
-17-
<PAGE>
lower, yields in other categories were increased due to market pressure.
Further, the proportion of higher cost non-deposit funding increased,
contributing to other increases in the cost of funds. Accordingly, the cost of
interest bearing liabilities of 4.53% in 1996, was comparable to the 4.57% in
1995. While yields on time deposits and interest checking decreased in 1996 as
compared to 1995, yields on savings and money markets increased. The ratio of
higher cost non-deposit funding consisting of securities sold under repurchase
agreements, subordinated debentures and FHLB advances, to deposits, also
increased in 1996 compared to 1995. Expressed as a percentage of deposits, that
ratio was 23% in 1996 compared to 13% in 1995. Yields on interest earning assets
increased to 8.66% in 1995 from 7.77% in 1994, a difference of .89% as assets
were repriced to market interest rates which continued their cycle of 1994
increases into the first half of 1995, when the Wall Street Journal prime peaked
at 9%. Decreases in interest rates in the latter half of 1995 were too modest to
offset the effect of the increases in the first half of the year. Such decreases
did result in a prime rate of 8.75% for most of the latter half of 1995.
Accordingly, the cost of interest bearing liabilities also increased, to 4.57%
in 1995, from 3.49% in 1994, a difference of 1.08% as liabilities adjusted to
market interest rates more rapidly than assets. In 1995 the Company was
nonetheless able to maintain interest rates on many core deposits at lower
levels (relative to market rates) which were more consistent with industry
averages, as it had done in 1994. Also in 1995, increases in demand deposits
served to partially offset the impact of increases in the cost of interest
bearing liabilities. Accordingly, net interest margins of 4.87% in 1995 and
4.89% in 1994 were comparable. However, the Company's cost of funds, which was
high relative to the industry before 1994, may increase in the future. In
addition to matching its local competitors' rates, which may fluctuate
significantly, a higher relative proportion of certificates of deposit, if
required to fund loan growth or increase liquidity, might serve to increase the
cost of funds.
The following tables present the average daily balances of assets, liabilities
and shareholders' equity and the respective interest earned or paid on interest
earning assets and interest bearing liabilities, as well as average rates for
the periods indicated:
-18-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------------------------------- ----------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Mortgages held for sale $ 658 $ 47 7.14% $ 867 $ 69 7.96%
Loans net of unearned discount(1) 695,479 63,438 9.12% 608,385 56,739 9.33%
Allowance for credit losses (13,127) (9,750)
------------ ------------ ------------ ------------
Loans, net 683,010 63,485 9.29% 599,502 56,808 9.48%
Investment Securities:
Held to maturity:
Taxable investment securities 544 34 6.25% 4,199 233 5.55%
Non-taxable investment securities 687 53 7.71%(2) 632 49 7.75%(2)
Available for sale:
Taxable investment securities 147,486 8,614 5.84% 85,219 4,597 5.39%
Non-taxable investment securities 6,970 571 8.19%(2) 2,962 226 7.63%(2)
Federal funds sold 39,368 2,127 5.40% 41,436 2,498 6.03%
------------ ------------ ------------ ------------ -
Net interest earning assets 878,065 74,884 733,950 64,411
Cash and due from banks 29,051 30,639
Accrued interest receivable 5,908 4,809
Bank premises and equipment 13,303 12,448
Other real estate owned 3,714 6,080
Other assets 20,782 12,718
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing) $110,827 $105,006
Interest checking 68,719 $ 1,317 1.92% 60,101 $ 1,273 2.12%
Savings and money market 191,473 5,877 3.07% 163,989 4,866 2.97%
Time 328,434 17,996 5.48% 309,152 17,479 5.65%
------------ ------------ ------------ ------------ -
Total deposits 699,453 25,190 638,248 23,618
Securities sold under repurchase agreements 71,805 2,834 3.95% 27,962 980 3.50%
Subordinated notes and debentures 26,565 2,401 9.04% 9,000 855 9.50%
FHLB advances 65,292 3,619 5.54% 47,309 2,776 5.87%
Accrued interest payable 7,351 6,725
Other liabilities 4,989 3,324
Shareholders' equity:
Common stock $ 3,927 $ 3,246
Preferred stock and related surplus 11,235
Additional paid-in capital 52,924 35,857
Retained earnings 19,565 17,458
------------ ------------
Total shareholders' equity $ 76,416 $ 67,796
============ ============
Average total interest earning assets $891,192 74,884 8.40% $743,700 $ 64,411 8.66%
Average total interest bearing liabilities $752,288 $34,044 4.53% $617,513 $ 28,229 4.57%
------------ ------------
Net yield on average interest earning $891,192 $40,840 4.58% $743,700 $ 36,182 4.87%
assets (net interest margin) ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
---------------------------------
1994
---------------------------------
Average Average
Balance Interest Rate
---------------------------------
<S> <C> <C> <C>
Assets:
Interest earning assets:
Mortgages held for sale $ 4,114 $ 321 7.80%
Loans net of unearned discount(1) 487,505 41,586 8.53%
Allowance for credit losses (7,003)
---------- ---------
Loans, net 484,616 41,907 8.65%
Investment Securities:
Held to maturity:
Taxable investment securities 5,973 374 6.26%
Non-taxable investment securities 425 33 7.76%(2)
Available for sale:
Taxable investment securities 80,018 3,528 4.41%
Non-taxable investment securities 3,720 274 7.37(2)
Federal funds sold 24,098 931 3.86%
---------- ---------
Net interest earning assets 598,850 47,047
Cash and due from banks 25,300
Accrued interest receivable 3,875
Bank premises and equipment 10,318
Other real estate owned 5,208
Other assets 5,468
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing) $ 85,331
Interest checking 52,877 $ 1,056 2.00%
Savings and money market 160,291 4,270 2.66%
Time 240,014 10,035 4.18%
---------- ---------
Total deposits 538,513 15,361
Securities sold under repurchase agreements 21,699 498 2.30%
Subordinated notes and debentures 9,000 855 9.50%
FHLB advances 15,359 698 4.54%
Accrued interest payable 4,050
Other liabilities 460
Shareholders' equity:
Common stock $ 2,506
Preferred stock and related surplus 12,840
Additional paid-in capital 30,382
Retained earnings 13,070
----------
Total shareholders' equity $ 58,798
==========
Average total interest earning assets $605,853 $47,047 7.77%
Average total interest bearing liabilities $499,240 $17,412 3.49%
----------
Net yield on average interest earning $605,853 $29,635 4.89%
assets (net interest margin) ==========
</TABLE>
(1) Non-accrual loans have been included in the appropriate average loan balance
category, but interest on non-accrual loans has not been included for
purposes of determining interest income.
(2) The interest earned on non-taxable investment securities is shown on a tax
equivalent basis assuming a federal tax rate of 34% for all periods.
-19-
<PAGE>
The following table presents a summary of the principal components of
and changes in interest income and interest expense of the Company for the
periods indicated:
<TABLE>
<CAPTION>
Change from Prior Year
-------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995
-------------------------------------------------------------------------------------------
1996 1995 1994 Amount Percent Amount Percent
------------ ------------- ------------ ----------- -------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Mortgages held for sale $ 47 $ 69 $ 321 $ (22) (32%) $ (252) (79%)
Interest and fees on loans 63,438 56,739 41,586 6,699 12% 15,153 36%
Interest on investment securities:
Held to maturity:
U.S. Treasury securities 102 77 (102) (100%) 25 32%
Federal agency obligations 34 131 297 (97) (74%) (166) (56%)
State and municipal obligations 35 32 22 3 9% 10 45%
Available for sale:
U.S. Treasury securities 3,159 1,964 2,821 1,195 61% (857) (30%)
Federal agency obligations 4,960 2,321 569 2,639 114% 1,752 308%
State and municipal obligations 377 149 181 228 153% (32) (18%)
Other 495 312 138 183 59% 174 126%
Interest on federal funds sold 2,127 2,498 931 (371) (15%) 1,567 168%
------------ ------------- ------------ ----------- -----------
Total interest income 74,672 64,317 46,943 10,355 16% 17,374 37%
------------ ------------- ------------ ----------- -----------
Interest Expense:
Deposits 25,190 23,618 15,361 1,572 7% 8,257 54%
FHLB advances 3,619 2,776 698 843 30% 2,078 298%
Securities sold under
repurchase agreements 2,834 980 498 1,854 189% 482 97%
Subordinated notes and debentures 2,401 855 855 1,546 181%
------------ ------------- ------------ ----------- -----------
Total interest expense 34,044 28,229 17,412 5,815 21% 10,817 62%
------------ ------------- ------------ ----------- -----------
Net interest income $40,628 $36,088 $29,531 $4,540 13% $6,557 22%
============ ============= ============ =========== ===========
</TABLE>
-20-
<PAGE>
The following table sets forth changes in net interest income
attributable either to changes in volume (average balances) or to changes in
average rates for interest earning assets and interest bearing liabilities:
<TABLE>
<CAPTION>
1996 Versus 1995 1995 Versus 1994
----------------------------------------- -------------------------------------
Net Due to Net Due to
Increase Changes in Increase Changes in
(Decrease) Volume Rate (Decrease) Volume Rate
----------------------------------------- -------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Mortgages held for sale $ (22) $ (15) $ (7) $ (252) $ (257) $ 5
Loans 6,699 7,912 (1,213) 15,153 11,010 4,143
Investment securities:
Held to maturity:
Taxable investment securities (199) (233) 34 (141) (102) (39)
Non-taxable investment securities 3 3 10 10
Available for sale:
Taxable investment securities 4,017 3,608 409 1,069 241 828
Non-taxable investment securities 228 216 12 (32) (38) 6
Federal funds sold and securities
purchased under agreements to resell (371) (120) (251) 1,567 881 686
------------ ------------ ------------- ------------- ------------ --------
Total increase (decrease) in interest income 10,355 11,371 (1,016) 17,374 11,745 5,629
------------ ------------ ------------- ------------- ------------ --------
Interest Expense:
Interest checking 44 131 (87) 217 151 66
Savings and money market 1,013 839 174 596 100 496
Time deposits 515 1,023 (508) 7,444 3,349 4,095
Securities sold under repurchase agreements 1,854 1,716 138 482 171 311
Subordinated notes and debentures 1,546 1,556 (10)
FHLB advances 843 987 (144) 2,078 1,823 255
------------ ------------ ------------- ------------- ------------ --------
Total increase (decrease) in interest expense 5,815 6,252 (437) 10,817 5,594 5,223
------------ ------------ ------------- ------------- ------------ --------
Changes in net interest income $ 4,540 $ 5,119 $ (579) $ 6,557 $ 6,151 $ 406
============ ============ ============= ============= ============ ========
</TABLE>
During 1996, average interest earning assets totaled $891.2 million, an
increase of $147.5 million or 20% over 1995, as compared to an increase of
$137.8 million or 23% in 1995 over 1994. Of the $147.5 million increase in 1996,
$86.9 million resulted from increased average loan balances, and primarily
reflected the full year impact in 1996 from the Constitution acquisition on
August 4, 1995. Of the $137.8 million increase in 1995, $117.6 million resulted
from increased average loan balances, which included $33.3 million of average
loan balances resulting from the Constitution acquisition, $21.9 million from
the Security First acquisition on December 22, 1994, and $9.6 million from the
full year effect in 1995 from the Chester County acquisition on March 29, 1994.
Of the $69.5 million increase in 1994, $57.8 million resulted from increased
average loan balances, which included the $28.7 million of average loan balances
resulting from the Chester County acquisition. As the Security First acquisition
occurred on December 22, 1994, it had an insignificant effect on the 1994 annual
average. The average rate on interest earning assets was 8.40% in 1996, 8.66% in
1995 and 7.77% in 1994. During 1996, average interest bearing liabilities
totaled $752.3 million, an increase of $134.8 million or 22% over 1995 compared
to an increase of $118.3 million or 24% in 1995 from 1994. Of the $134.8 million
increase in 1996, $36.1 million resulted from increases in interest checking,
savings and money market accounts. Of the $118.3 million increase in 1995, $10.9
million resulted from increases in interest checking savings and money market
accounts. The average rate on interest bearing liabilities decreased to 4.53% in
1996 after increasing to 4.57% in 1995 from 3.49% in 1994.
-21-
<PAGE>
Non-Interest Income. The following table provides a summary of
non-interest income:
Year Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Non-interest income:
Service fees on deposit accounts...................$3,011 $2,654 $2,191
Gain on sales of residential mortgages............. 419 261 405
Gain on sales of investment securities............. 245 333 128
Mortgage servicing fees ........................... 819 885 742
Merchant credit card deposit fees.................. 1,593 1,247 871
Other.............................................. 1,032 1,128 1,006
------ ------ ------
Total..............................................$7,119 $6,508 $5,343
====== ====== ======
Total non-interest income for 1996 was $7.1 million, an increase of
$611,000 or 9% from 1995, which in turn had shown an increase of $1.2 million or
22% from the prior year. Service fees on deposit accounts increased by 13% and
21% respectively in 1996 and 1995, as compared to the prior year periods and
totaled $3 million in 1996. The increase in 1996 reflected the full year impact
of the Constitution acquisition, and internal growth. The increase in 1995
reflected the impact of the Constitution and Security First acquisitions, as
well as the full year impact of the Chester County acquisition. Throughout the
three year period ended 1996, there were no significant increases in service
charge amounts. Thus, most of the increases resulted from increases in both
volume of accounts and number of charges.
Gain on the sales of residential mortgages for 1996 amounted to
$419,000, an increase of $158,000 or 61% from 1995, which in turn had shown a
decrease of $144,000 or 36% from the prior year. The increase in 1996 reflected
the implementation of SFAS No.122 "Accounting For Mortgage Servicing Rights"
which mandated the recognition of income resulting from originated mortgage
servicing rights and was effective with the fourth quarter of 1995. Resulting
income for 1996 and 1995 was, respectively, $279,000 and $72,000. The reduction
in 1995 resulted primarily from decreased refinancing volume due to the
increased levels of market interest rates during that period. The Company
generally sells all the residential mortgage loans it originates under fixed
price commitments from the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation and other entities. Gain on the sales of
residential mortgage loans is recognized at the time of sale and substantially
all such gains result from fees collected on such loans.
Sales of securities resulted in net gains of $245,000 in 1996, as
compared to $333,000 in 1995 and $128,000 in 1994. In structuring the Company's
investment portfolio, management attempts to lock in yields in the most
advantageous rate environments. In 1996 and in the latter half of 1995,
investment securities available for sale were sold and replaced with securities
offering higher yields. Sales of investment securities available for sale in
1994, all made in the first quarter, amounted to $18.7 million, and reflected
management's expectation of increases in market interest rates. The anticipated
interest rate increases occurred shortly thereafter and there were no additional
sales in 1994.
Mortgage servicing fees were $819,000 in 1996, compared to $885,000 in
1995 and $742,000 in 1994. The decrease in 1996 reflected the impact of
reductions in the servicing portfolio to $245.3 million
-22-
<PAGE>
at December 31, 1996, from $254.2 million at December 31, 1995. The reductions
reflected paydowns and insignificant portfolio purchases in 1996. The increase
in 1995 mortgage servicing fees over the prior year resulted primarily from the
fourth quarter 1994 purchase of servicing rights to a $70.0 million mortgage
portfolio. At December 31, 1996 and 1995, the remaining unamortized purchase
price amounts for mortgage servicing rights were $799,000 and $982,000,
respectively, and are being amortized over the estimated lives of the
portfolios.
Merchant credit card fees increased in 1996 as compared to 1995 which
had increased significantly over 1994. Most of the increases, which resulted
primarily from increases in volume, are offset by increases in related expense,
reflected under non-interest expense as merchant credit card deposit expense.
Non-Interest Expense. The following table provides a summary of
non-interest expense, by category of expense:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Non-interest expense:
Salaries and employee benefits............................. $13,671 $12,218 $10,809
Occupancy.................................................. 3,217 3,029 2,738
Depreciation............................................... 1,598 1,510 1,351
FDIC insurance............................................. 28 731 1,221
Data processing............................................ 967 1,135 885
Legal and auditing......................................... 1,010 847 564
Stationery, printing, and supplies......................... 841 700 470
Shares tax................................................. 634 476 338
Advertising................................................ 1,155 704 440
Other real estate-owned maintenance expense................ 230 362 204
Loss on sale and write-downs of other real estate owned.... 56 298 324
Amortization of intangibles................................ 1,262 816 237
Merchant credit card deposit............................... 1,218 984 637
Other...................................................... 4,506 3,837 3,537
----- ----- -----
Total............................................ $30,393 $27,647 $23,755
======= ======= =======
</TABLE>
Total non-interest expense for 1996 was $30.4 million, an increase of
$2.7 million or 10% over the $27.6 million in 1995, which had increased $3.9
million or 16% over 1994. Salaries and employee benefits represent the largest
component of non-interest expense. Increases over the respective prior year
periods were $1.5 million or 12% in 1996 and $1.4 million or 13% in 1995. The
increases in salary and employee benefits in 1996 over 1995, and in 1995 over
1994, reflected the expansion of the commercial and consumer loan departments
and the addition of new branches. Salaries and employee benefits in 1995 also
reflected decreases in mortgage department staffing levels resulting primarily
from reduced mortgage refinancing originations in that year.
Of the 1996 increase in salary and benefits of $1.5 million, $222,000
resulted from commercial loan department expansion, $124,000 resulted from
consumer loan department expansion and $430,000 resulted from additional
branches. Of the 1995 increase in salary and employee benefits of $1.4 million,
$366,000 resulted from commercial loan department expansion, $92,000 resulted
from consumer loan
-23-
<PAGE>
department expansion, and approximately $334,000 resulted from additional
branches. In 1995, ESOP and 401(k) contributions amounted to $279,000, an
increase of $98,000 over 1994. In 1995, reductions in salary expense in the
mortgage department from the prior year amounted to approximately $126,000. The
increases in 1996 and 1995 also reflected annual merit increases which averaged
3% to 4.5%.
Occupancy expense totaled $3.2 million in 1996 compared to $3.0 million
in 1995 and $2.7 million in 1994. The $188,000 increase in 1996 reflected the
expense of a branch from the Constitution acquisition and four additional new
branches. Of the $291,000 increase in 1995, $249,000 resulted from additional
branch locations. Depreciation expense was $1.6 million in 1996, $1.5 million in
1995, and $1.4 million in 1994. The increases in 1996 and 1995 as compared to
respective prior year periods reflected the impact of the new branches.
The FDIC insurance assessment for 1996 amounted to $28,000 compared to
$731,000 in 1995 and $1.2 million in 1994. The $703,000 reduction in 1996 and
the $490,000 reduction in 1995 as compared to respective prior years resulted
from reductions in assessment rates. For 1997, assessments are scheduled to be
maintained at de minimus amounts; however, larger assessments may be
re-instituted at any time, and may be subject to periodic increases or
decreases.
Data processing expense amounted to $967,000 in 1996, $1.1 million in
1995 and $885,000 in 1994. The $168,000 decrease in 1996 compared to 1995
reflected reductions in data processing fees resulting from a new outsourcing
contract. The $250,000 increase in 1995 over 1994 reflected increases in
transaction volume resulting primarily from acquisitions.
Legal and auditing expense amounted to $1.0 million in 1996, $847,000
in 1995 and $564,000 in 1994. The $163,000 increase in 1996 over 1995 reflected
legal fees on several unrelated matters. Of the $283,000 increase in 1995,
$108,000 reflected an increase in case management fees and $47,000 reflected
increased expense for Securities Exchange Commission and other regulatory
filings.
Stationery printing and supplies amounted to $841,000 in 1996, $700,000
in 1995 and $470,000 in 1994. The $141,000 increase in 1996 and $230,000
increase in 1995 over respective prior years reflected the impact of
acquisitions and additional branch locations.
The shares tax is a tax assessed in Pennsylvania in lieu of a state
income tax. The tax is assessed at the rate of 1.25% against a six year moving
average of shareholders' equity. Accordingly, increases in expense of $158,000
in 1996 and $138,000 in 1995 over the respective prior years reflected the
impact of increases in shareholders' equity resulting from capital offerings,
acquisitions and retained earnings.
Advertising expense amounted to $1.2 million in 1996, $704,000 in 1995
and $440,000 in 1994. Of the $534,000 increase in 1996 over 1995, $125,000
resulted form promotional expense in connection with credit card programs.
Approximately $125,000 of the increase resulted form a one time advertising
campaign promoting personal transaction accounts. A total of $65,000 resulted
from introductory advertising of new telephone and computer banking services. Of
the $264,000 increase in 1995 over 1994, $138,000 resulted from newspaper
advertising campaigns promoting certificates of deposit.
Amortization of intangibles amounted to $1.3 million in 1996, $816,000
in 1995, and $237,000 in
-24-
<PAGE>
1994. Substantially all of the $446,000 increase in 1996 over 1995 resulted from
the full year impact of the Constitution acquisition. A total of $208,000
resulted from increased related goodwill amortization, and $231,000 resulted
from related core deposit intangibles amortization. Of the $579,000 increase in
1995 over 1994, $384,000 resulted from goodwill amortization substantially all
of which resulted from the Constitution and Security First acquisitions.
Goodwill from each of those acquisitions is being amortized over a fifteen year
period. Additionally, a total of $93,000 resulted from core deposit intangibles
amortization, primarily from the Constitution acquisition, and $87,000 resulted
from amortization of purchased mortgage servicing rights on new purchases.
Merchant credit card deposit expense increased in 1996 as compared to
1995 which had increased significantly over 1994. Most of the increases, which
resulted primarily from increases in volume, are offset by increases in related
income, reflected under non-interest income as merchant credit card deposit
fees.
Income Taxes. The Company's income tax provision was $5.2 million in
1996 compared to $4.2 million in 1995 and $3.1 million in 1994. The effective
income tax rate was 36% in 1996, 35% in 1995 and 33% in 1994. The increases in
the effective rate in 1996 and 1995 over 1994 were primarily due to increases in
taxable income and an increase in non-deductible amortization. This was
partially offset by an increase in tax-exempt investment income.
Liquidity and Capital Resources
Liquidity defines the ability of the Company to generate funds to
support asset growth, meet deposit withdrawals, satisfy borrowing needs,
maintain reserve requirements and otherwise operate on an ongoing basis. During
the past three years, the liquidity needs of the Company were primarily met by
cash on hand, deposits in other banks, federal funds sold and the sale of
investment securities. The Company invests its funds not needed for operations
("excess liquidity") primarily in daily federal funds and securities.
The major source of funds for the Company's investing activities are
cash inflows resulting from net increases in deposits. Advances from the FHLB
are also periodically utilized. Net increases in FHLB advances amounted to $49.0
million in 1996 as compared to $39.7 million in 1995 and $25.0 million in 1994.
Net deposits decreased $42.5 million in 1996 after increasing $5.6 million and
$3.7 million respectively in 1995 and 1994. The decrease in 1996 reflected
seasonal fluctuations. Funding was directed primarily at cash outflows required
by net increases in loans of $74.1 million, $47.4 million and $54.6 million,
respectively, in 1996, 1995 and 1994. Cash flows in 1996 were also increased
from an offering of $23 million of 8.75% subordinated notes.
In addition to demand, interest checking and savings and money market
deposit growth, the Company utilizes certificates of deposit to fund its loans.
Amounts of such certificates have historically been generated by matching upper
market Philadelphia-area certificate of deposit rates.
Operating activities include cash outflows for residential mortgages
originated for sale, which amounted to $26.6 million, $20.5 million and $36.6
million, respectively, in 1996, 1995 and 1994. Outflows for mortgages originated
for sale are generally offset within 90 days by the receipt of related sales
-25-
<PAGE>
proceeds. Securities cash outflows represent purchases of investment securities.
Investment securities available for sale may be sold for liquidity purposes as
necessary. Investment securities held to maturity are available for liquidity
after such maturity.
The cash flow balances from the banks acquired by the Company were
excluded from the consolidated statements of cash flows and from the preceding
discussion since they arose when such banks were independent of the Company.
The Company knows of no adverse conditions which would impact the
continued short or long term use of its cash inflows as heretofore described. To
enhance liquidity, Jefferson PA maintains membership in the FHLB. Thus, it may
obtain overnight funding of up to 10% of its total assets at rates approximately
.25% over daily federal funds rates by pledging first mortgage residential
collateral against such advances. Longer term funding at rates approximately
.40% over U.S. Treasury rates is also available. As of December 31, 1996, the
Company had outstanding $124.0 million of overnight advances, all of which
matured in January 1997.
Both the Company and its subsidiary banks are required to comply with
certain "risk-based" capital adequacy guidelines issued by the FRB (for the
Company) and the FDIC (for the subsidiary banks). The risk-based capital
guidelines assign varying risk weights to the individual assets held by a bank.
The guidelines also assign weights to the "credit-equivalent" amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts. Under these guidelines, institutions are expected to
meet minimum ratios for "qualifying total capital" and tier 1 capital to
risk-weighted assets of 8% and 4% respectively and a minimum leverage ratio (the
ratio of Tier 1 capital to total average assets) of 3% plus an additional
cushion of between 1% and 2%. As used in the guidelines, "Tier 1 capital"
includes common shareholders' equity, certain qualifying perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries, less goodwill. "Tier 2 capital" components (limited in the
aggregate to one-half of total qualifying capital) include allowances for credit
losses (within limits), certain excess levels of perpetual preferred stock and
certain types of "hybrid" capital instruments, subordinated debt and other
preferred stock. The subordinated debt component of Tier 2 capital is reduced by
20% per year over the last five years of the term of the subordinated debt. The
following table sets forth the regulatory capital ratios of the Company,
Jefferson PA and Jefferson NJ as of December 31, 1996, together with the minimum
ratios required under the regulation for an institution to be deemed "well
capitalized":
<TABLE>
<CAPTION>
Tier 1 Capital Total Capital
to Risk-Weighted to Risk-Weighted
Leverage Ratio(1) Assets Ratio Assets Ratio
---------------- ----------------- ----------------
December 31, December 31, December 31,
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Entity:
The Company............................ 7.09% 6.54% 9.61% 9.16% 15.31% 11.74%
Jefferson PA........................... 6.92% 6.01% 9.22% 8.26% 14.81% 10.92%
Jefferson NJ........................... 8.10% 12.16% 11.16% 17.56% 16.88% 18.13%
"Well capitalized" institution (under
FDIC Regulations)...................... 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
</TABLE>
- ----------------
(1) The "leverage ratio" is the ratio of tier 1 capital to total average assets.
-26-
<PAGE>
At December 31, 1996, both the Company and its subsidiary banks were
"well-capitalized" under FDIC regulations.
Asset and Liability Management
The management of rate sensitive assets and liabilities is essential to
controlling interest rate risk and optimizing interest margins. An interest rate
sensitive asset or liability is one that, within a defined time period, either
matures or experiences an interest rate change in line with general market
rates. Interest rate sensitivity measures the relative volatility of a bank's
interest margin resulting from changes in market interest rates.
The following table summarizes repricing intervals for interest earning
assets and interest bearing liabilities as of December 31, 1996, and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of falling
interest rates, a positive gap would tend to adversely affect net interest
income, while a negative gap would tend to result in an increase in net interest
income. During a period of rising interest rates, a positive gap would tend to
result in an increase in net interest income while a negative gap would tend to
affect net interest income adversely. To the extent loans presented in this
table are on a demand basis, they are categorized as to maturity based upon
their stated amortization schedule.
-27-
<PAGE>
<TABLE>
<CAPTION>
1-90 91-180 180-364 1-2 3-5 Over 5
Days Days Days Years Years Years
-----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Mortgages held for sale $ 725
Loans net of unearned discount 321,666 $ 54,522 $ 64,258 $110,905 $147,337 $ 39,606
Investment securities:
Held to maturity:
Taxable investment securities
Non-taxable investment securities 267 420
Available for sale:
Taxable investment securities 7,012 10,031 29,875 45,360 33,874 5,466
Non-taxable investment securities 250 51 350 606 547 12,673
Other 12,667
Federal funds sold 33,950
------------ ------------ ------------ ------------ ------------- ------------
Total interest earning assets 376,270 64,604 94,483 156,871 182,025 58,165
------------ ------------ ------------ ------------ ------------- ------------
Interest bearing liabilities:
Interest checking 88,295
Savings and money market 182,735
Time deposits 103,926 74,724 81,572 17,261 10,074 770
Securities sold under repurchase agreements 73,764
FHLB advances 124,000
Subordinated notes and debentures 32,000
------------ ------------ ------------ ------------ ------------- ------------
Total interest bearing liabilities 572,720 74,724 81,572 17,261 10,074 32,770
------------ ------------ ------------ ------------ ------------- ------------
Gap $(196,450) $ (10,120) $ 12,911 $ 139,610 $ 171,951 $ 25,395
============ ============ ============ ============ ============= ============
Cumulative gap $(196,450) $(206,570) $(193,659) $ (54,049) $ 117,902 $ 143,297
============ ============ ============ ============ ============= ============
Gap to assets ratio (20%) (1%) 1% 14% 17% 3%
Cumulative gap to assets ratio (20%) (21%) (19%) (5%) 12% 14%
</TABLE>
The method used to analyze interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same or similar time periods. The interest rates on certain assets and
liabilities may change at different times than changes in market interest rates,
with some changing in advance of changes in market rates and some lagging behind
changes in market rates. Also, certain assets, e.g., adjustable rate loans,
often have provisions which may limit changes in interest rates each time the
interest rate changes and on a cumulative basis over the life of the loan.
Additionally, the actual prepayments and withdrawals experienced by the Company
in the event of a change in interest rates may deviate significantly from those
assumed in calculating the data shown in the table. Finally, the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Financial Condition
General. Total average assets of the Company amounted to $950.8 million
in 1996, $800.6 million in 1995, and $649.0 million in 1994. This amounted to a
$150.2 million or 19% increase in 1996 over 1995, as compared with an increase
of $151.6 million or 23% in 1995 over 1994. In 1996, increases in average assets
reflected the full year effect of the Constitution acquisition. Total average
assets increased during 1995 primarily as a result of the 1995 Constitution
acquisition and the full
-28-
<PAGE>
year effect of the 1994 Security First and Chester County acquisitions. Total
assets increased during 1994 primarily as a result of the Chester County
acquisition. Capital position in 1996 was enhanced by the $23.0 million offering
of the Company's 8.75% subordinated notes. See "Liquidity and Capital
Resources," above.
Investment Portfolio. The following tables present the book and
approximate market values for each major category of the Company's investment
securities for securities, both held to maturity as well as securities available
for sale:
December 31,
------------------------------------
1996 1995
Book(1) Market Book(1) Market
----- ------- ----- -------
(in thousands)
Securities Held to Maturity:
U.S. Treasury securities................. $ 2,000 $ 1,999
Federal agency obligations............... 1,197 1,198
State and municipal obligations..........$ 687 $ 701 692 711
------ ------ ------- ------
Total investment securities
held to maturity(2)................... $ 687 $ 701 $3,889 $3,908
===== ===== ====== ======
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1996 1995 1994
Book(1) Market Book(1) Market Book(1) Market
----- ------- ----- ------- ----- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury securities............... $ 62,554 $ 62,533 $54,524 $54,527 $53,269 $51,632
Federal agency obligations............. 68,668 68,745 75,274 75,946 9,142 8,950
State and municipal obligations........ 14,234 14,477 2,584 2,617 3,448 3,368
Other securities....................... 13,007 13,007 8,783 8,783 3,699 3,699
--------- -------- ------- ------- ------- -------
Total investment securities
available for sale(2)................ $158,463 $158,762 $141,165 $141,873 $69,558 $67,649
======== ======== ======== ======== ======= =======
</TABLE>
(1) Book value for securities held to maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received. Effective January 1, 1994, the Company adopted SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities".
Prior thereto, all investment securities were categorized as available for
sale and carried at the lower of amortized cost or market.
(2) Except for U.S. Treasury and agency securities, investments in the
securities of any one issuer do not exceed 10% of the total amount of
investment securities held.
-29-
<PAGE>
To enhance liquidity and diversification of its interest earning
assets, the Company has been increasing its investment portfolio. To optimize
liquidity, investments consist primarily of U.S. Treasury and agency securities.
The Company has been increasing the average maturity of its investment portfolio
by purchasing Federal agency securities in the five year maturity range, and
municipal securities in the fifteen to twenty year maturity range.
Investment securities with a carrying value of $85.6 million and $55.6
million at December 31, 1996 and 1995, respectively, were pledged to secure
deposits of state and local governments, federal government agencies, and
securities sold under repurchase agreements as required or permitted by law.
The following table shows the contractual maturity distribution of the
investment securities portfolio and the weighted average yield of such
securities as of December 31, 1996:
<TABLE>
<CAPTION>
After After
One to Five to Over
One Year Average Five Average Ten Average Ten
or less Yield (1) Years Yield (1) Years Yield (1) Years
------------ ------------ ----------- ------------ ------------ ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury securities
Federal agency obligations
State and municipal obligations $ 267 7.05% $ 420 8.17%
----------- ------------
Total held to maturity $ 267 $ 420
=========== ============
Weighted average yield (1) 7.05% 8.17%
============ ===========
Available for Sale:
U.S. Treasury securities $ 26,087 5.31% $36,446 5.94%
Federal agency obligations 15,400 5.90% 26,246 6.15% $10,037 5.68% $17,062
State and municipal obligations 600 7.66% 1,204 6.34% 437 7.92% 12,236
Other securities 240 8.58% 12,767
------------ ----------- ------------ -----------
Total available for sale $ 42,087 $63,896 $10,714 $42,065
============ ========== ============ ============
Weighted average yield (1) 5.56% 6.03% 5.84%
============ ============ ===========
Average
Yield (1) Total
------------ -----------
<S> <C> <C>
Held to Maturity:
U.S. Treasury securities
Federal agency obligations
State and municipal obligations $ 687
-----------
Total held to maturity $ 687
===========
Weighted average yield (1)
Available for Sale:
U.S. Treasury securities $ 62,533
Federal agency obligations 6.51% 68,745
State and municipal obligations 8.52% 14,477
Other securities 5.75% 13,007
-----------
Total available for sale $158,762
===========
Weighted average yield (1) 6.86%
============
(1) Yields on tax-exempt obligations have been computed on a tax equivalent
basis assuming a federal tax rate of 34%.
</TABLE>
<PAGE>
Loan Portfolio. The mainstay of the Company's lending business
continues to be commercial loans and commercial mortgages. However, other lines
of business are also being pursued. Accordingly, while commercial loans and
commercial mortgages grew to $437.9 million at December 31, 1996, a $161.7
million increase over December 31, 1992, consumer loans, primarily indirect
automobile loans, grew by $108.8 million during that period and amounted to
$162.7 million at December 31, 1996. The construction loan portfolio, comprised
primarily of single family residential construction loans, also increased $25.3
million during the period, to a total of $61.2 million.
The following table summarizes the loan portfolio of the Company by
loan category and amount at December 31 for the past five years. The loan
categories correspond to the Company's internal classifications. Net loans are
stated at the amount of unpaid principal, and are net of unearned discount and
unearned loan fees. Loans with a principal amount in excess of 2% of the
Company's capital are generally considered to be "large" loans. By these
standards, large loans were those exceeding $1.6 million, $1.5 million and $1.3
million at December 31, 1996, 1995 and 1994, respectively. Large loans as a
percentage
-30-
<PAGE>
of total loans at December 31, 1996, 1995 and 1994 were 12%, 13% and 10%,
respectively.
<TABLE>
<CAPTION>
Book Value
-------------------------------------------------------------------------
December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Mortgages held for sale.............. $ 725 $ 484 $ 380 $ 19,009 $ 7,018
--------- --------- ----- -------- -------
Residential mortgages................ 61,179 55,691 57,599 47,320 56,790
Commercial mortgages................. 176,494 186,750 125,006 114,090 100,250
Commercial loans(1).................. 261,401 242,715 211,855 173,760 175,911
Construction loans................... 61,228 56,322 48,400 38,427 35,904
Consumer loans....................... 162,740 117,088 94,157 56,330 53,933
Overdrafts........................... 1,289 1,096 912 508 1,812
Lease financing, net................. 13,963 13,642 13,556 9,837 7,311
-------- -------- --------- ------- --------
Net loans (before allowance
for credit losses)................. 738,294 673,304 551,485 440,272 431,911
-------- ------- ------- -------- --------
Total (net loans and mortgages
held for sale).................. $739,019 $673,788 $551,865 $459,281 $438,929
======== ======== ======== ======== ========
</TABLE>
- ----------------------
(1) At December 31, 1996, commercial loans secured by real property totaled
$165.5 million.
The following table summarizes the loan portfolio of the Company by
loan category and amount at December 31, 1996 and corresponds to appropriate
regulatory definitions:
Book Value
--------------
(in thousands)
Loans secured by real estate:
Construction and land development...................................$ 65,505
Secured by 1-4 family residential properties........................ 195,145
Secured by multifamily (5 or more) residential properties........... 19,241
Secured by non-family, non-residential properties................... 216,133
Commercial and industrial loans:
To U.S. addresses (domicile)........................................ 95,880
Loans to individuals for household, family
and other personal expenditures:
Credit cards and related plans...................................... 7,233
Other............................................................... 120,826
Tax-exempt industrial development obligations........................ 3,419
All other loans...................................................... 1,674
Lease financing receivables, net of unearned income.................. 13,963
--------
Total...........................................................$739,019
========
-31-
<PAGE>
The following table presents selected loan categories at December 31,
1996 by maturity. Loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less:
Period to Maturity
-------------------------------------------
Within One to Five After
One Year Years Five Years Total
-------- ----------- ----------- -------
(in thousands)
Commercial................. $213,997 $175,288 $48,610 $437,895
Construction............... 55,105 6,123 61,228
-------- -------- -------- --------
Total.................. $269,102 $181,411 $48,610 $499,123
======== ======== ======= =======
Amount of loans:
Loans at fixed rates..... $ 137,763 $43,547
Loans at variable rates.. 43,648 5,063
------- ------
Total................. $181,411 $48,610
======= ======
The following table presents loans, including mortgages held for sale,
as of December 31, 1996 by maturity:
Period to Maturity
-------------------------------------------
Within One to Five After
One Year Years Five Years Total
-------- ----------- ----------- -------
(in thousands)
Mortgages held for sale......$ 725 $ 725
Loans at fixed rates......... 129,296 $245,357 $68,331 442,984
Loans at variable rates...... 228,875 61,372 5,063 295,310
-------- -------- -------- --------
Total...................$358,896 $306,729 $73,394 $739,019
======== ======== ======= ========
Non-Performing Loans. Loans are considered to be non-performing if they
are on a non-accrual basis or terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a weakening in the
financial positions of the borrowers. A loan which is past due 90 days or more
and still accruing interest remains on accrual status only when it is both
adequately secured as to principal and accruing interest and is in the process
of collection. Non-accrual loans were $9.7 million, $12.1 million, $8.1 million,
$4.4 million and $5.4 million, respectively, at December 31, 1996, 1995, 1994,
1993 and 1992(1). Non-performing assets amounted to $13.2 million, $15.9
million, $13.3 million, $10.1 million and $10.3 million, respectively, at those
dates(1). Non-performing assets included other real estate owned of $3.5
million, $3.8 million, $4.5 million, $4.9 million and $4.5 million,
respectively, at December 31, 1996, 1995, 1994, 1993 and 1992(1). Of the $9.7
million in non-accrual loans(1) at December 31, 1996, $2.6
-32-
- ------------------
(1) Excluding loans past due 90 days or more and still accruing interest.
<PAGE>
million resulted from the Constitution acquisition while most amounts form other
acquisitions had been eliminated. Of the $12.1 million in non-accrual loans at
December 31, 1995, $3.0 million resulted from the Constitution acquisition, and
$895,000 remained from the Chester County and Security First acquisitions.
Activity in 1996, a year in which there were no acquisitions, reflected $4.5
million of additions, $619,000 of transfers to other real estate owned, $656,000
of returns to accrual status, $4.4 million of charge offs and $1.2 million of
payments. Activity in 1995, excluding the remaining year end balances from the
Constitution acquisition, reflected $7.5 million of additions, $2.3 million of
transfers to other real estate owned, $1.4 million of returns to accrual status,
$1.6 million of charge-offs and $1.1 million of payments. Non-accrual loans were
$8.1 million at December 31, 1994 representing an increase of $3.7 million over
the prior year(1). That increase reflected approximately $1.7 million resulting
from the Chester County and Security First acquisitions. The balance of the
increase consisted primarily of two loans. The larger of these two loans
originally was in the amount of $1.4 million, $637,000 of which was charged off
and the balance of which was recovered through a sale. Loans 90 days or more
past due at December 31, 1996 were $4.5 million. The $2.4 million decrease from
the prior year end reflected the elimination of substantially all amounts
resulting from the Constitution acquisition. Loans past due 90 days or more at
December 31, 1995 were $6.9 million and reflected $2.2 million from the
Constitution acquisition. Although significant increases in non-accrual loans
resulted from acquisitions, management believes that such loans are adequately
reserved in the allowance for credit losses. See "Summary of Credit Loss
Experience" below.
Other real estate owned at December 31, 1996 totaled $3.5 million,
compared to $3.8 million at December 31, 1995. The December 31, 1996 total
included approximately $625,000 from the Constitution acquisition. Activity in
1996, a year in which there were no acquisitions, reflected additions of $4.1
million with sales and other receipts of $3.1 million and charge offs of $1.2
million. Other real estate owned at December 31, 1995 totaled $3.8 million, a
decrease of $740,000 from December 31, 1994. The balance at December 31, 1995
included insignificant amounts from the Chester County and Security First
acquisitions and $2.2 million of other real estate owned from the Constitution
acquisition. The balance at December 31, 1994 included approximately $917,000
resulting from the Chester County and Security First acquisitions. Significant
activity in 1995, excluding remaining year end balances from the Constitution
acquisition, reflected additions of $3.9 million with sales and other receipts
of $6.3 million and charge offs of $539,000. Significant activity in 1994,
excluding remaining year end balances from acquisitions, included approximately
$2.6 million of additions, $3.3 million of sales proceeds, and $608,000 of write
downs to market value and other charge-offs.
- -----------------------
(1) Excluding loans past due 90 days or more and still accruing interest.
-33-
<PAGE>
The following table presents the principal amounts of non-accrual and
renegotiated loans (excluding loans past due 90 days or more and still accruing
interest) at December 31 for the years 1996 through 1992 in addition to a
schedule presenting loans contractually past due 90 days or more as to interest
or principal still accruing interest. Totals for other real estate owned are
also presented.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ----------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $ 9,710 $ 12,118 $ 8,088 $ 4,419 $ 5,445
Loans renegotiated to provide a reduction
or deferral of interest or principal 0 0 750 797 298
------------ ------------ ----------- ------------ ------------
Total non-performing loans(1) 9,710 12,118 8,838 5,216 5,743
------------ ------------ ----------- ------------ ------------
Other real estate owned 3,537 3,751 4,491 4,918 4,539
------------ ------------ ----------- ------------ ------------
Total non-performing assets(1) $ 13,247 $ 15,869 $ 13,329 $ 10,134 $ 10,282
============ ============ =========== ============ ============
Non-performing loans/total loans(1) 1.31% 1.80% 1.60% 1.14% 1.31%
Non-performing assets/total loans and
non-performing assets(1) 1.78% 2.34% 2.40% 2.18% 2.32%
Loans past due 90 days or more as to
interest or principal payments still
accruing interest and not included in
non-accrual loans $ 4,456 $ 6,876 $ 5,789 $ 4,560 $ 3,607
----------- ----------- ----------- ------------ --------
</TABLE>
Interest Accrual Policies. Interest income is accrued as it is earned
on a simple interest basis. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions which
may affect the borrower's ability to repay and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
Loans on which the accrual of interest had been discontinued or reduced,
amounted to $9.7 million, $12.1 million and $8.1 million at December 31, 1996,
1995 and 1994, respectively. If interest on non-accrual loans(1) had been
accrued, such income would have been approximately $963,000, $774,000 and
$802,000 for the years ended December 31, 1996, 1995 and 1994, respectively(1) .
At December 31, 1996 and 1995, there were no commitments to lend additional
funds to borrowers whose loans were classified as non-accrual.
The balance of impaired loans was $9.7 million and $12.1 million
respectively at December 31, 1996 and 1995. The Company identifies a loan as
impaired when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreements. The allowance for
credit loss associated with impaired loans was $2.8 million and $3.1 million
respectively at December 31, 1996 and 1995. The average recorded investment in
impaired loans was $11.3 million in 1996 and the income recognized on impaired
loans during 1996 was $0. The average recorded investment in impaired loans was
$9.9 million in 1995 and the income recognized on impaired loans during 1995 was
$-0-. Total cash collected on impaired loans during 1996 and 1995 was
respectively $1.2 million and $1.1 million which was credited to the principal
balance outstanding on such loans. Respective interest which would have
- -----------------------
(1) Non-accrual loans and non-performing assets exclude loans past due 90 days
or more still accruing interest.
-34-
<PAGE>
been accrued on impaired loans during 1996 and 1995 was $963,000 and $774,000.
The Company's policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method. The Company
recognizes income on non-accrual loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Company. If these factors do not exist, the
Company will not recognize income.
Provision for Credit Losses. The provision for credit losses is an
amount charged against earnings to fund the reserve for possible future losses
on existing loans. In order to determine the amount of the provision for credit
losses, the Company conducts a quarterly review of the loan portfolio to
evaluate overall credit quality. This evaluation consists of an analysis of
individual loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
changes in non-performing loans, the capability of specific borrowers to repay
specific loan obligations as well as current loan collateral values. The Company
also considers past estimates of possible loan losses as compared with actual
losses, potential problems relating to sizable loans and large loan
concentrations (if any). As adjustments become identified, they are reported in
earnings for the period in which they become known.
The provision for credit losses was $3.0 million in 1996, as compared
to $3.1 million in 1995 and $1.9 million in 1994. The ratio of the allowance for
credit losses to total loans was 1.47%, 2.08% and 1.40% respectively at December
31, 1996, 1995 and 1994. The ratio of the allowance for credit losses to
non-performing assets was 82%, 88% and 58% at December 31, 1996, 1995 and 1994.
The ratio of the allowance for credit losses to non-accrual loans, including
loans 90 days past due still accruing interest, was 77%, 74% and 56% at December
31, 1996, 1995 and 1994, respectively. The decrease in the December 31, 1996
allowance for credit losses to $10.9 million from $14.0 at December 31, 1995
reflects the charge-off in the third quarter of 1996 of $3.9 million which had
previously been recorded in the allowance for credit losses. The increases in
the allowance in 1995 and 1994, to $14.0 million and $7.7 million, respectively,
include allowances for credit losses on problem loans resulting from acquired
banks. The $3.0 million provision for credit losses for 1996 was comparable to
the $3.1 million provision for 1995. The $1.3 million increase in 1995 over the
prior year in the provision for credit losses, to a total of $3.1 million, was
required by the ongoing quarterly analyses of adequacy of the allowance for
credit losses. Jefferson PA charge-offs, excluding the effect of acquisitions,
amounted to $5.6 million in 1996, $3.3 million in 1995 and $2.4 million in 1994.
The $2.3 million increase in 1996 Jefferson PA charge offs over 1995 reflected
the charge-off of amounts already reflected in the allowance for credit losses.
The determination to charge off most of these amounts was a judgment that the
collection process was more extended than anticipated. Substantially all of the
respective $1.1 million and $672,000 of recoveries in 1996 and 1995, and the
majority of the $513,000 of recoveries in 1994, resulted from loans originating
in the portfolios of acquired banks.
In 1993 and 1994, quarterly provisions for credit losses were within
budgeted ranges of $400,000 to $500,000. Quarterly provisions in 1995, in
chronological order, were $540,000, $615,000, $1,215,000 and $765,000. As noted
above, the increases in these quarters were required by the ongoing quarterly
analyses of adequacy of the allowance for credit losses. The $1,215,000 included
a special provision of $500,000 resulting from a management decision to
eliminate a problem credit by disposing of the underlying real estate collateral
at a then current loss instead of pursuing a lengthy work out, as was previously
intended. Chronological quarterly provisions for 1996 were $624,000, $703,000,
$786,000 and $867,002 and
-35-
<PAGE>
reflected budgeted amounts, supported by ongoing quarterly analyses of adequacy
of the allowance for credit losses.
Summary of Credit Loss Experience. The following table summarizes the
credit loss experience of the Company for each of the past five years:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance in allowance for credit losses
at beginning of year........................ $ 14,032 $7,727 $5,283 $5,094 4,233
-------- ------ ------ ------ -----
Loans charged-off:
Commercial................................. 1,788 1,584 853 183 854
Construction............................... 473 167 134
Real estate mortgage....................... 4,272 1,588 1,768 1,274 1,209
Credit Card................................ 160 16
Installment and lease financing.............. 522 435 236 243 157
------- ------ ------ ------ ------
Total................................... 7,215 3,623 3,024 1,700 2,354
------- ------ ------ ------ ------
Recoveries:
Commercial................................. 108 184 289
Construction............................... 1
Real estate mortgage....................... 901 437 196 31 41
Credit Card................................
Installment and lease financing............ 51 51 28 28 21
------- ------ ------- ------ ------
Total................................... 1,060 672 513 60 62
--------- ------ ------- ------ ------
Net charge-offs.............................. 6,155 2,951 2,511 1,640 2,292
Purchase of Chester County................... 2,434
Purchase of Security First................... 664
Purchase of Constitution .................... 6,121
Provision charged to operations.............. 2,982 3,135 1,857 1,829 3,153
------- ------ ------ ------ ------
Balance in allowance for credit
losses at end of period.................... $10,859 $14,032 $7,727 $5,283 $5,094
======= ======= ====== ====== ======
Net charge-offs/average loans................ .88% .48% .51% .38% .54%
</TABLE>
Management of the Company has not attempted to allocate specific
portions of the allowance for credit losses to specific loan categories.
However, the Company regularly monitors the credit-worthiness and financial
condition of its significant borrowers, in all loan categories.
The Company determines the level of its allowance for possible credit
losses based on a number of factors. An analysis of individual commercial
business loans, commercial real estate and construction loans as well as
internally classified loans is conducted and specific reserves are allocated for
those credits which are determined to have weaknesses. In addition, an analysis
based upon historical loss experience is conducted. In this analysis, the
Company applies its loss experience over the preceding eight fiscal quarters in
each loan portfolio segment to the balance outstanding in such segment at the
end of the period as to which the determination of allowance adequacy is being
made, and uses this analysis as a predictor of future loss. In conjunction with
the above analyses, the Company considers both internal and external
-36-
<PAGE>
factors which may affect the adequacy of the allowance for possible credit
losses. Such factors may include, but are not limited to, present and
prospective industry trends and regional and national economic conditions, past
estimates of possible loan losses as compared to actual losses, potential
problems with sizable loans and large loan concentrations. The Board of
Directors reviews management's assessments at least on a quarterly basis.
Historically, the Company has not generally been an unsecured lender
either to businesses or individuals, and most of its loans are secured by some
form of collateral. However, exceptions may be made to this general operating
philosophy from time to time. For most loans, which are collateralized, the
primary risk element, other than fraud, relates to the market acceptability and
appropriate value of the collateral securing the loans.
Commitments. In the normal course of its business, the Company makes
commitments to extend credit and issues standby letters of credit. Generally,
such commitments are provided by the Company as a service to customers with
which the Company has other relationships. Commitments to extend credit amounted
to $200.0 million and $158.8 million at December 31, 1996 and 1995,
respectively. Outstanding letters of credit amounted to $8.0 million and $16.1
million at December 31, 1996 and 1995, respectively.
Deposits. One of the primary components of sound growth and
profitability is core deposit accumulation and retention. Core deposits consist
of all deposits except public funds and certificates of deposit in excess of
$100,000. Since core deposits exclude certificates of deposit issued in excess
of $100,000, it is the Company's general policy to issue such certificates only
to customers with which the Company has other relationships. At December 31,
1996, total deposits were approximately $682.5 million, a decrease of
approximately $42.5 million or 6% from December 31, 1995. The decrease for 1996
reflected seasonal fluctuations. At December 31, 1995, total deposits were
approximately $725.0 million, an increase of approximately $105.9 million or 17%
over 1994. Year end core deposits as a percentage of total deposits were
approximately 89% for 1996 and 91% for 1995 while the percentage of certificates
of deposit in excess of $100,000 was 11% and 9% in those respective years.
-37-
<PAGE>
The following tables present the average balances and rates paid on
deposits for each of the years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------------- ---------- -------------- ---------- --------------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand (non-interest bearing) $110,827 $105,006 $ 85,331
Interest checking 68,719 1.92% 60,101 2.12% 52,877 2.00%
Savings and money market 191,473 3.07% 163,989 2.97% 160,291 2.66%
Time 328,434 5.48% 309,152 5.65% 240,014 4.18%
--------- -------- --------
Total deposits $699,453 $638,248 $538,513
========= ======== ========
</TABLE>
As of December 31, 1996, the Company had total time deposits of
approximately $288.3 million. The following table summarizes the composition of
these deposits:
Percentage of
Total Time
Amount Deposits
------- ------------
(dollars in thousands)
Certificates of deposit in excess of $100,000...... $ 74,657 26%
Individual retirement accounts..................... 33,000 11%
Other time deposits................................ 180,670 63%
-------- ----
Total.......................................... $288,327 100%
======== ====
The remaining maturity on certificates of deposit of $100,000 or more
as of December 31, 1996 is presented below:
Amount
--------
(in thousands)
Maturity:
Three months or less................................$37,702
Three to six months................................. 19,916
Six to 12 months.................................... 11,577
Over 12 months...................................... 5,462
-------
Total...........................................$74,657
=======
Impact of Inflation. The financial statements and related financial
data presented in this report have been prepared in accordance with generally
accepted accounting principles which require the measurement
-38-
<PAGE>
of financial position and operating results in terms of historical dollars
without considering changes in the relative purchasing power of money over time
due to inflation. The primary impact of inflation on the operation of the
Company is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services. The
Company believes that continuation of its efforts to manage the rates, liquidity
and interest sensitivity of the Company's assets and liabilities is necessary to
generate an acceptable return on assets.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Financial Statement Schedules are set
forth at pages 40 to 62 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-39-
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
JeffBanks, Inc.
We have audited the accompanying consolidated balance sheets of
JeffBanks, Inc. (formerly State Bancshares, Inc.) and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
JeffBanks, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period then ended in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 15, 1997 (except for notes 2 and 7, as
to which the dates are January 21, 1997 and
February 5, 1997, respectively)
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
------------ -----------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 37,290 $ 53,309
Federal funds sold 33,950 37,575
---------- --------
71,240 90,884
Investment securities available for sale 158,762 141,873
Investment securities held to maturity 687 3,889
Mortgages held for sale 725 484
Loans, net 727,435 659,272
Premises and equipment 14,735 12,880
Accrued interest receivable 6,538 6,004
Other real estate owned 3,537 3,751
Goodwill 8,776 8,978
Other assets 12,603 10,991
---------- --------
Total assets $1,005,038 $939,006
========== ========
LIABILITIES
Deposits
Demand (non-interest bearing) $ 123,132 $145,064
Savings, money market and interest checking 271,030 245,234
Time deposits 213,670 265,866
Time deposits, $100,000 and over 74,657 68,803
---------- --------
682,489 724,967
Securities sold under repurchase agreements 73,764 46,549
FHLB advances 124,000 75,000
Subordinated notes and debentures 32,000 9,000
Accrued interest payable 6,496 6,216
Other liabilities 6,035 3,963
---------- --------
Total liabilities 924,784 865,695
---------- --------
SHAREHOLDERS' EQUITY
Common stock - authorized, 10,000,000 shares of $1.00 par value; issued and
outstanding, 3,964,464 and 3,946,776 shares, respectively 3,964 3,947
Additional paid-in capital 53,865 53,470
Retained earnings 22,229 15,427
Net unrealized gain on securities available for sale 196 467
---------- --------
Total shareholders' equity 80,254 73,311
---------- --------
Total liabilities and shareholders' equity $1,005,038 $939,006
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
December 31,
---------------------------------------------
1996 1995 1994
--------- ------ --------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans, including fees $ 63,485 $ 56,808 $ 41,907
Investment securities 9,060 5,011 4,105
Federal funds sold 2,127 2,498 931
-------- --------- ---------
74,672 64,317 46,943
-------- --------- ---------
Interest expense
Time deposits, $100,000 and over 4,455 3,938 2,014
Other deposits 20,735 19,680 13,346
FHLB advances 3,619 2,776 698
Subordinated notes and debentures 2,401 855 855
Securities sold under repurchase agreements 2,834 980 499
-------- --------- ---------
34,044 28,229 17,412
-------- --------- ---------
Net interest income 40,628 36,088 29,531
Provision for credit losses 2,982 3,135 1,857
--------- --------- ---------
Net interest income after provision for credit losses 37,646 32,953 27,674
-------- --------- ---------
Non-interest income
Service fees on deposit accounts 3,011 2,654 2,191
Gain on sales of residential mortgages 419 261 405
Gain on sales of investment securities 245 333 128
Mortgage servicing fees 819 885 742
Merchant credit card deposit fees 1,593 1,247 871
Other 1,032 1,128 1,006
-------- --------- ---------
7,119 6,508 5,343
-------- --------- ---------
Non-interest expense
Salaries and employee benefits 13,671 12,218 10,809
Occupancy expense 3,217 3,029 2,738
Depreciation 1,598 1,510 1,351
FDIC expense 28 731 1,221
Data processing expense 967 1,135 885
Legal and auditing 1,010 847 564
Stationery, printing and supplies 841 700 470
Shares tax 634 476 338
Advertising 1,155 704 440
Other real estate owned maintenance expense 230 362 204
Loss on sale and write-downs of other real estate owned 56 298 324
Amortization of intangibles 1,262 816 237
Merchant credit card deposit expense 1,218 984 637
Other 4,506 3,837 3,537
-------- --------- ---------
30,393 27,647 23,755
-------- --------- ---------
Income before income taxes 14,372 11,814 9,262
Income taxes 5,173 4,153 3,081
-------- --------- ---------
Net income $ 9,199 $ 7,661 $ 6,181
======== ========= =========
Net income applicable to common stock $ 9,199 $ 6,534 $ 4,868
======== ========= =========
Per share data
Net income per common share - primary $ 2.26 $ 2.10 $ 1.86
Net income per common share - fully diluted $ 2.26 $ 1.94 $ 1.71
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net unrealized
Additional gain (loss)
paid-in Retained on securities
Common stock Preferred stock capital earnings available for sale Total
------------ --------------- ---------- -------- ------------------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $2,384 $186 $42,485 $11,139 $ - $56,194
Change in accounting for
investments on January 1,
1994 - - - - 62 62
Net income - - - 6,181 - 6,181
Purchase of The Bank of
Chester County 112 - 1,896 - 2,008
Purchase of Security
First Bank 203 - 2,955 - - 3,158
Conversion of preferred stock 1 - (1) - - -
Issuance of common stock
for 401(k) plan 8 - 131 - - 139
Issuance of options
granted and exercised
by underwriters of
common stock 1 - 15 (16) - -
Additional costs of 1993
stock issuance - - (105) - - (105)
Shares issued to acquire
minority interest in
Jefferson Bank
of New Jersey 25 - 338 - - 363
Cash dividends on preferred
stock - - - (1,313) - (1,313)
Cash dividends on common
stock - - - (990) - (990)
Net unrealized loss on securities
available for sale - - - - (1,321) (1,321)
------ ---- ------- ------- ------- -------
Balance at December 31, 1994 2,734 186 47,714 15,001 (1,259) 64,376
</TABLE>
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
<TABLE>
<CAPTION>
Net unrealized
Additional gain (loss)
paid-in Retained on securities
Common stock Preferred stock capital earnings available for sale Total
------------ --------------- ---------- -------- ------------------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income $ - $ - $ - $ 7,661 $ - $ 7,661
Purchase of Constitution Bank 107 - 2,075 - - 2,182
Conversion of preferred stock 907 (186) (822) - - (101)
Issuance of common stock
for 401(k) plan 11 - 219 - - 230
Cost to acquire minority interest
in Jefferson Bank of
New Jersey - - (15) - - (15)
Cash dividends on preferred
stock - - - (1,127) - (1,127)
Cash dividends on common
stock - - - (1,621) - (1,621)
Change in net unrealized loss
on securities available
for sale - - - - 1,726 1,726
5% stock dividend 188 - 4,299 (4,487) - -
------ ---- ------- ------- ------- -------
Balance at December 31,
1995 3,947 - 53,470 15,427 467 73,311
Net income - - - 9,199 - 9,199
Issuance of common stock
for 401(k) plan 10 - 255 - - 265
Cost to establish a dividend
reinvestment plan - - (26) - - (26)
Issuance of common stock
for dividend reinvestment
plan 7 - 166 - - 173
Cash dividends on common
stock - - - (2,397) - (2,397)
Change in net unrealized loss
on securities available
for sale - - - - (271) (271)
------ ---- ------- ------- ------- -------
Balance at December 31,
1996 $3,964 $ - $53,865 $22,229 $ 196 $80,254
====== ==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1996 1995 1994
---------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 9,199 $ 7,661 $ 6,181
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 3,754 3,068 2,240
Provision for credit losses 2,982 3,135 1,857
Gain on sales of investment securities (245) (333) (128)
Mortgage loans originated for sale (26,602) (20,497) (36,606)
Mortgage loan sales 26,361 20,394 55,235
Increase in interest receivable (534) (676) (17)
Increase (decrease) in interest payable 280 (258) 1,314
Increase in other assets (2,531) (1,462) (368)
Increase (decrease) in other liabilities 2,072 946 (2,103)
-------- --------- --------
Net cash provided by operating activities 14,736 11,978 27,605
-------- --------- --------
Investing activities
Proceeds from sales of investment securities available for sale 11,827 31,147 18,668
Proceeds from maturities of investment securities available for sale 65,264 36,212 20,395
Proceeds from maturities of investment securities held to maturity 3,196 4,018 -
Purchases of investment securities available for sale (95,035) (129,264) (4,105)
Purchases of investment securities held to maturity - - (12,979)
Proceeds from sales of other real estate owned 3,147 6,297 3,336
Net increase in loans (74,078) (47,380) (54,601)
Cash of entities acquired - 8,698 13,695
Purchases of premises and equipment (3,453) (1,846) (2,362)
-------- --------- --------
Net cash used in investing activities (89,132) (92,118) (17,953)
-------- --------- --------
Financing activities
Net (decrease) increase in deposits (42,478) 5,576 3,676
Net increase in repurchase agreements 27,215 30,320 18
Proceeds from issuance of common stock 412 113 33
Proceeds from FHLB advances 49,000 39,726 25,000
Proceeds from issuance of subordinated notes and debentures 23,000 - -
Dividends paid on preferred stock - (1,127) (1,313)
Dividends paid on common stock (2,397) (1,621) (990)
-------- --------- --------
Net cash provided by financing activities 54,752 72,987 26,424
-------- --------- --------
Net (decrease) increase in cash and cash equivalents (19,644) (7,153) 36,076
Cash and cash equivalents at beginning of year 90,884 98,037 61,961
-------- --------- --------
Cash and cash equivalents at end of year $ 71,240 $ 90,884 $ 98,037
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The accounting policies followed by JeffBanks, Inc. (the Company) and its
wholly-owned subsidiaries, Jefferson Bank (JBPA) and Jefferson Bank of New
Jersey (JBNJ) (collectively referred to as the Banks), conform to generally
accepted accounting principles and predominant practices within the banking
industry. The Company is registered under the Bank Holding Company Act of
1956. The Banks are state-chartered banks regulated by the Pennsylvania
Department of Banking and the New Jersey Department of Banking,
respectively, and the Federal Deposit Insurance Corporation. In 1995, the
Company changed its name to JeffBanks, Inc. from State Bancshares, Inc.
The Banks operate as commercial banks offering a wide variety of commercial
loans and, to a lesser degree, consumer credits, primarily indirect
automobile loans. Their primary future strategic aim is to establish a
reputation and market presence as the "small and middle market business
bank" in their principal markets. The Company funds its loans primarily by
offering time, savings and money market, and demand deposit accounts to both
commercial enterprises and individuals. Additionally, the Company
originates, and in limited amounts, purchases residential mortgage loans,
and services such loans which are owned by other investors. Also, the
Company serves as a processor of merchant credit card deposits. However,
these activities are peripheral to the Company's core business of commercial
and consumer lending, and represent less significant aspects of its
operations, as determined by their net contributions to net income.
Principal markets consist of Philadelphia and contiguous Pennsylvania and
southern New Jersey counties.
The Company and the Banks are subject to regulations of certain state and
federal agencies and, accordingly, they are periodically examined by those
regulatory authorities. As a consequence of the extensive regulation of
commercial banking activities, the Banks' business is particularly
susceptible to being affected by state and federal legislation and
regulations.
Basis of financial statement presentation
The accounting and reporting policies of the Company and the Banks conform
with generally accepted accounting principles and predominant practices
within the banking industry. All intercompany balances and transactions have
been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions also affect reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates implicit in these
financial statements are as follows.
The principal estimates that are particularly susceptible to significant
change in the near term relate to the allowance for credit losses; certain
intangible assets, such as goodwill, core deposits and mortgage servicing
rights; and other real estate owned.
The evaluation of the adequacy of the allowance for credit losses includes,
among other factors, an analysis of historical loss rates, by category,
applied to current loan totals. However, actual losses may be higher or
lower than historical trends, which vary. Actual losses on specified problem
loans, which also are provided for in the evaluation, may vary from
estimated loss percentages, which are established based upon a limited
number of potential loss classifications.
Substantially all outstanding goodwill resulted from the acquisition of
Constitution Bank, a central Philadelphia institution which had developed a
compelling, if not predominant, market position of being the small business
bank in Philadelphia. As the result of Constitution Bank's market
penetration, JBPA had formulated its own strategy to create such a market
role. Accordingly, implicit in the purchase of the Constitution Bank
franchise was the acquisition of that role. However, if such measured
benefits, including new business, are not derived, estimated amortization
may increase and/or a charge for impairment may be recognized.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
Core deposit intangibles are amortized over estimated lives of deposit
accounts. However, decreases in deposit lives may result in increased
amortization and/or a charge for impairment may be recognized.
Purchased and originated mortgage servicing rights are amortized consistent
with prepayment estimates. However, if prepayments differ from those
estimates, or if market values decline in excess of amortization, future
amortization may increase and/or a charge for impairment may be recognized.
Other real estate owned is written down to market based both upon estimates
derived through appraisals and other resources. However, realization of
sales proceeds may ultimately be higher or lower than those estimates.
Financial instruments
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value
of Financial Instruments," which requires all entities to disclose the
estimated fair value of their assets and liabilities considered to be
financial instruments. Financial instruments requiring disclosure consist
primarily of investment securities, loans and deposits.
Investment securities
The Company accounts for its investment securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This standard requires investments in securities to be classified in one of
three categories: held to maturity, trading or available for sale.
Investments in debt securities, for which management has both the ability
and intent to hold to maturity, are carried at amortized cost. Investments
in debt securities, which management believes may be sold prior to maturity
due to changes in interest rates, prepayment risk and equity, liquidity
requirements or other factors, are classified as available for sale. Net
unrealized gains and losses for such securities, net of tax effect, are
required to be recognized as a separate component of shareholders' equity
and excluded from the determination of net income. The Company does not
engage in security trading. Security transactions are accounted for on a
trade date basis. Prior to the adoption of SFAS No. 115, investment
securities that were principally debt securities were stated at cost and
adjusted for amortization of premiums and accretion of discounts computed by
the interest method. Gains or losses on disposition of investment securities
are based on the net proceeds and the adjusted carrying amount of the
securities sold using the specific identification method.
Loans and allowance for credit losses
Loans are stated at the amount of unpaid principal and are net of unearned
discount, unearned loan fees and an allowance for credit losses. The
allowance for credit losses is established through a provision for credit
losses charged to expense. Loan principal considered to be uncollectible by
management is charged against the allowance for credit losses. The allowance
is an amount that management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible based upon an
evaluation of known and inherent risks in the loan portfolio. The evaluation
takes into consideration such factors as changes in the nature and size of
the loan portfolio, overall portfolio quality, specific problem loans, and
current and future economic conditions which may affect the borrowers'
ability to pay. The evaluation details historical losses by loan category,
the resulting loss rates for which are projected at current loan total
amounts. Loss estimates for specified problem loans are also detailed.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
Interest income is accrued as earned on a simple interest basis. Accrual of
interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. When a loan is placed on such non-accrual status, all accumulated
accrued interest receivable applicable to periods prior to the current year
is charged off to the allowance for credit losses. Interest which had
accrued in the current year is reversed out of current period income.
Payments received subsequent to the non-accrual classification are applied
as a reduction of principal in accordance with both regulatory guidelines
and generally accepted accounting principles. Loans 90 days or more past due
and still accruing interest must have both principal and accruing interest
adequately secured and must be in the process of collection.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," on January 1, 1995. This standard requires that a creditor measure
impairment based on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. Regardless of the measurement method, a creditor must measure
impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable. In October 1994, SFAS No. 114 was
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," which allows creditors to use their
existing methods for recognizing interest income on impaired loans. Because
the Company already recognized such reductions of value through its
provision for credit losses, the adoption of SFAS No. 114, as amended by
SFAS No. 118, did not have a material impact on its financial condition or
results of operations.
Bank premises and equipment
Bank premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation. Depreciation expense is computed on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are depreciated over the shorter of the estimated
useful lives of the improvements or the terms of the related leases.
Other real estate owned
Other real estate owned, representing property acquired through foreclosure,
is carried at the lower of the principal balance of the secured loan or fair
value less estimated disposal costs of the acquired property. Costs relating
to holding the assets are charged to expense. Loans in the amount of
$934,000 and $3,496,000 in 1996 and 1995, respectively, were made on
competitive terms and in conformity with normal underwriting standards to
facilitate the sale of other real estate owned.
Core deposit intangibles
As a result of the Constitution Bank acquisition in 1995, the Company
recognized approximately $2,300,000 of core deposit intangibles which is
being amortized on a straight-line basis over approximately seven years. The
unamortized balance at December 31, 1996 and 1995 was $1,889,286 and
$2,207,000, respectively.
Other assets
Deferred financing fees of $1,451,000, related to the issuance of
subordinated notes and debentures, are being amortized over the 10-year
terms of the instruments and are included in other assets. The unamortized
balances at December 31, 1996 and 1995 were $1,206,000 and $292,000,
respectively.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
Beginning in 1996, certain direct origination costs for credit cards were
capitalized and are being amortized over a two-year period. At December 31,
1996, the unamortized balance was $582,000.
Mortgage servicing
JBPA performs various servicing functions on loans owned by others. A fee,
usually based on a percentage of the outstanding principal balance of the
loan, is received for these services. At December 31, 1996 and 1995, JBPA
was servicing approximately $245,329,000 and $254,232,000, respectively, of
loans for others.
During 1996, 1995 and 1994, the Banks purchased $15,000, $258,000 and
$876,000, respectively, of mortgage servicing rights. Amortization is based
upon the ratio of servicing fees earned during the period to total servicing
fees expected over the estimated lives of the portfolios. Additional
amortization is recognized when prepayments exceed expected amounts.
Unamortized purchased mortgage servicing rights are included in other assets
and amounted to $799,000 and $982,000 at December 31, 1996 and 1995,
respectively. Amortization expense amounted to $198,000, $190,000 and
$104,000 in 1996, 1995 and 1994, respectively. At December 31, 1996 and
1995, JBPA maintained $460,000 and $422,000, respectively, of escrow
balances associated with the servicing portfolio.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights," effective October 1, 1995. The Company originates mortgages under a
definitive plan to sell or securitize those loans and allocates the cost of
the loans to originated mortgage servicing rights and the loans based on
relative fair values at the date of origination. Originated mortgage
servicing rights of $279,000 and $72,000 for 1996 and 1995, respectively,
resulted from the respective origination of $22,317,000 and $5,768,000 of
mortgages in those years. Amortization on originated mortgage servicing
rights is recognized in accordance with policies for purchased mortgages, as
previously discussed. The carrying values of purchased and originated
mortgage servicing rights at December 31, 1996 approximate fair value.
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishment of liabilities. This
statement is effective for transfers of financial assets, servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. Adoption of this statement is not expected to have a material
impact on the Company's consolidated financial position or results of
operations.
Long-lived assets
The FASB issued a new standard, SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
provides guidance on when to recognize and how to measure impairment losses
of long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The Banks adopted this new standard for
the year ended December 31, 1996. The adoption of this new statement did not
have a material impact on the Banks' financial position or results of
operations.
Mortgages held for sale
Mortgages held for sale are recorded at cost, which approximates market.
These mortgages are typically sold within three months of origination
without recourse to the Banks. Gain on the sales of residential mortgages is
recognized at the time of sale, and substantially all such gains result
from the recognition of previously deferred fees collected upon the
origination of such loans.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
Restrictions on cash and due from banks
The Banks are required to maintain reserves against customer demand deposits
by keeping cash on hand or balances with the Federal Reserve Bank in a
non-interest bearing account. The amounts of those reserves and cash
balances at December 31, 1996 and 1995 were approximately $7,569,000 and
$9,203,000, respectively.
Earnings per common share
Primary earnings per common share are calculated by dividing net income
applicable to common stock by the weighted average number of common shares
and stock option common share equivalents outstanding during the period
(4,077,656, 3,116,505 and 2,617,962 in 1996, 1995 and 1994, respectively)
after giving retroactive effect to a 5% stock dividend declared on January
17, 1996. For 1995 and 1994, fully diluted earnings per share give effect to
the increase in average shares that would be outstanding, and the increase
in net income applicable to common stock that would result, from the assumed
conversion of the Company's dilutive convertible preferred stock. All of the
Company's preferred stock was converted into common stock in October 1995.
Subsequent to those conversions, fully diluted earnings per share are
computed consistent with the primary earnings per share computation, as
previously discussed.
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
on January 1, 1996, which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, the standard permits entities to continue accounting
for employee stock options and similar equity instruments under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The Company's stock option plans are
accounted for under APB Opinion No. 25.
Advertising costs
The Company expenses advertising costs as incurred.
Employee benefit plans
The Banks have certain employee benefit plans covering substantially all
employees. The Banks accrue such costs as incurred.
Statement of cash flows
Cash and cash equivalents are defined as cash on hand, cash items in the
process of collection, amounts due from banks and federal funds sold with an
original maturity of three months or less. Cash paid for income taxes was
$3,275,000, $2,170,000 and $2,425,000 in 1996, 1995 and 1994, respectively.
Cash paid for interest was $33,764,000, $28,194,000 and $15,568,000 in 1996,
1995 and 1994, respectively. Loans transferred to other real estate owned
were $4,188,000, $6,097,000 and $3,601,000 in 1996, 1995 and 1994,
respectively.
The consolidated statement of cash flows for the year ended December 31,
1995 excludes the effect of Constitution Bank and the consolidated statement
of cash flows for the year ended December 31, 1994 excludes the effect of
The Bank of Chester County and Security First Bank acquisitions, as those
business combinations did not involve related cash flows.
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - ACQUISITIONS AND MERGERS
On January 21, 1997, the Company, through JBPA, completed a merger with
United Valley Bank. Under the terms of the merger, each share of United
Valley Bank common stock was converted into .339 of a share of the Company's
common stock, resulting in the issuance of 749,278 shares of the Company's
common stock. In addition, outstanding warrants to purchase the acquired
institution's common stock were converted into warrants to purchase 255,381
shares of the Company's common stock, with an exercise price of $11.80 per
share. This transaction will be accounted for under the pooling of interests
method of accounting.
On August 4, 1995, the Company, through JBPA, completed a merger with
Constitution Bank. Under the terms of the merger, each share of Constitution
Bank common stock was converted into .05909 of a share of the Company's
common stock, resulting in the issuance of 106,456 shares of the Company's
common stock. This transaction was accounted for under the purchase method
of accounting. A total of $9,091,000 of goodwill and $2,300,000 of core
deposit intangibles were recorded and are being amortized over 15 and 7
years, respectively. The unamortized balances at December 31, 1996 were
$8,243,000 and $1,889,286, respectively.
On December 22, 1994, the Company, through JBPA, completed a merger with
Security First Bank (Security First). Under the terms of the merger, each
share of Security First common stock was converted into .3397 of a share of
the Company's common stock, resulting in the issuance of 202,932 shares of
the Company's common stock. This transaction was accounted for under the
purchase method of accounting. A total of $493,000 of goodwill was recorded
in other assets and is being amortized over a 15-year period.
On November 30, 1994, the Company, through a tender offer, issued 25,597
shares of common stock to acquire the remaining minority interest ownership
of JBNJ. Under the terms of the tender offer, each share of JBNJ common
stock was converted into .6 of a share of the Company's common stock.
Issuance costs amounted to $111,000.
On March 29, 1994, the Company, through JBPA, completed a merger with The
Bank of Chester County (Chester County). Under the terms of the merger, each
share of Chester County common stock was converted into .25 of a share of
the Company's common stock, resulting in the issuance of 111,530 shares of
the Company's common stock. This transaction was accounted for under the
purchase method of accounting. At the date of acquisition, Chester County
premises and land were increased to their fair market values of $1,521,000
and $300,000, respectively. There is no remaining goodwill resulting from
this purchase.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and the approximate fair
value of the Company's available for sale and held to maturity securities
are as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 62,554 $ 57 $ 78 $ 62,533
Federal agency obligations 68,668 232 155 68,745
State and municipal obligations 14,234 262 19 14,477
Other securities 13,007 - - 13,007
-------- ----- ---- --------
$158,463 $ 551 $252 $158,762
======== ===== ==== ========
Held to maturity
State and municipal obligations $ 687 $ 14 $ - $ 701
======== ===== ==== ========
</TABLE>
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 54,524 $ 88 $ 85 $ 54,527
Federal agency obligations 75,274 714 42 75,946
State and municipal obligations 2,584 40 7 2,617
Other securities 8,783 - - 8,783
-------- ----- ---- --------
$141,165 $ 842 $134 $141,873
======== ===== ==== ========
Held to maturity
U.S. Treasury securities $ 2,000 $ - $ 1 $ 1,999
Federal agency obligations 1,197 1 - 1,198
State and municipal obligations 692 19 - 711
-------- ----- ---- --------
$ 3,889 $ 20 $ 1 $ 3,908
======== ===== ==== ========
</TABLE>
The following table lists maturities of debt and equity securities at
December 31, 1996 classified as available for sale and held to maturity:
<TABLE>
<CAPTION>
Available for sale Held to maturity
-------------------------- ---------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
--------- --------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 42,057 $ 42,087 $ - $ -
Due after one year through five years 63,885 63,896 267 271
Due after five years through ten years 10,726 10,714 420 430
Due after ten years 29,128 29,398 - -
-------- -------- ---- -----
145,796 146,095 687 701
Federal Home Loan Bank of Pittsburgh stock 12,667 12,667 - -
-------- -------- ---- -----
$158,463 $158,762 $687 $ 701
======== ======= ===== =====
</TABLE>
Proceeds on sales of securities classified as available for sale were
$11,827,000, $31,147,000 and $18,668,000 in 1996, 1995 and 1994,
respectively. Realized gains and losses on sales of investment securities
were $245,000 and $-0-; $334,000 and $1,000; and $181,000 and $53,000 in
1996, 1995 and 1994, respectively.
Tax-exempt interest income on state and municipal obligations classified as
either investment securities or loans was $668,000, $439,000 and $463,000 in
1996, 1995 and 1994, respectively.
Investment securities with an aggregate carrying value of approximately
$85,567,000 and $55,594,000 at December 31, 1996 and 1995, respectively,
were pledged to secure public deposits and for other purposes required or
permitted by law.
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - LOANS
Major classifications of loans are as follows:
1996 1995
-------- --------
(in thousands)
Commercial $261,401 $242,715
Commercial mortgage 176,494 186,750
Residential mortgage 61,179 55,691
Consumer loans 162,740 117,088
Construction 61,228 56,322
Direct financing leases, net 13,963 13,642
Overdrafts 1,289 1,096
-------- --------
738,294 673,304
Allowance for credit losses (10,859) (14,032)
-------- --------
$727,435 $659,272
======== ========
Changes in the allowance for credit losses are as follows:
1996 1995 1994
------- ------- -------
(in thousands)
Balance at beginning of year $14,032 $ 7,727 $ 5,283
Provision charged to operations 2,982 3,135 1,857
Loans charged off (7,215) (3,623) (3,024)
Recoveries 1,060 672 513
Purchase of Chester County - - 2,434
Purchase of Security First - - 664
Purchase of Constitution Bank - 6,121 -
------- ------- -------
Balance at end of year $10,859 $14,032 $ 7,727
======= ======= =======
The balance of impaired loans was $9,710,000 and $12,118,000 at December 31,
1996 and 1995, respectively. The Banks have identified a loan as impaired
when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreements. The allowance for
credit loss associated with impaired loans was $2,800,000 and $3,100,000 at
December 31, 1996 and 1995, respectively. The average recorded investment in
impaired loans was $11,296,000 in 1996 and the income recognized on impaired
loans during 1996 was $-0-. Total cash collected on impaired loans during
1996 was $1,196,000, all of which was credited to the principal balance
outstanding on such loans. Interest which would have been accrued on
impaired loans during 1996 and 1995 was $963,000 and $774,000, respectively.
The average recorded investment in impaired loans was $9,939,000 in 1995 and
the income recognized on impaired loans during 1995 was $-0-. Total cash
collected on impaired loans during 1995 was $1,148,000, all of which was
credited to the principal balance outstanding on such loans. Interest which
would have been accrued on impaired loans during 1995 was $774,000. The
Banks' policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method. The Banks
recognize income on non-accrual loans under the cash basis when the loans
are both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Banks; if these factors do not exist, the
Banks will not recognize income.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - LOANS - Continued
Loans on which the accrual of interest has been discontinued or reduced
amounted to $9,710,000 and $12,118,000 at December 31, 1996 and 1995,
respectively. If interest on those non-earning loans had been accrued, such
income would have been $802,000 in 1994. Loans past due 90 days or more as
to interest or principal payments still accruing interest at December 31,
1996 and 1995 were $4,456,000 and $6,876,000, respectively. At December 31,
1996 and 1995, there were no commitments to lend additional funds to
borrowers whose loans are classified as non-accrual.
Loans totalling $155,000,000 and $100,000,000 at December 31, 1996 and 1995,
respectively, were pledged as collateral to secure advances from the Federal
Home Loan Bank (FHLB).
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
Estimated
useful lives 1996 1995
--------------- ------ ------
(in thousands)
<S> <C> <C> <C>
Land - $ 2,670 $ 2,445
Building 10 to 40 years 3,913 3,709
Furniture, fixtures and equipment 5 to 8 years 14,703 12,014
Leasehold improvements 5 to 20 years 8,129 7,892
-------- -------
29,415 26,060
Accumulated depreciation (14,680) (13,180)
-------- -------
$ 14,735 $12,880
======== =======
</TABLE>
NOTE 6 - DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was $74,657 and $68,803 in 1996 and 1995,
respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit
are as follows:
1997 $260,222
1998 17,261
1999 2,915
2000 4,791
2001 and thereafter 3,138
--------
$288,327
========
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - DEBT
FHLB advances
At December 31, 1996, JBPA had $124,000,000 in advances maturing in January
1997, with an interest rate of 6.75%. The maximum amount outstanding at any
month-end was $124,000,000. Maturing advances are generally renewed for
periods ranging from one day to three months. For 1996, the average amount
outstanding was $65,292,000, with a weighted average interest rate of 5.54%.
At December 31, 1996, JBPA had approximately $23,000,000 in unused advances
from the FHLB.
At December 31, 1995, JBPA had $75,000,000 in advances maturing in January
1996, with an interest rate of 5.65%. The maximum amount outstanding at any
time was $75,000,000. For 1995, the average amount outstanding was
$47,309,000, with a weighted average interest rate of 5.87%. At December 31,
1995, JBPA had approximately $75,000,000 in unused advances from the FHLB.
Subordinated notes and debentures
On February 5, 1997, the Company issued $25,000,000 of 9.25% of junior
subordinated debentures to JBI Capital Trust I, a Delaware Business Trust,
in which the Company owns all of the common equity. The trust issued
$25,000,000 of preferred securities to investors, secured by the junior
subordinated debentures and the guarantee of the Company. Although the
junior subordinated debentures will be treated as debt of the Company, they
currently qualify for Tier I capital treatment.
In March 1996, the Company issued $23,000,000 of 8.75% subordinated notes
due April 1, 2006. The notes are redeemable at the option of the Company, in
whole or in part, at any time on or after April 1, 2001, at their stated
principal amount plus accrued interest, if any. Interest is payable
semi-annually on April 1 and October 1.
In February 1993, JBPA issued $9,000,000 of 9.5% subordinated debentures due
February 15, 2003. The debentures are redeemable at the option of JBPA, in
whole or in part, at any time on or after February 15, 2000, at their stated
principal amount plus accrued interest, if any. Interest is payable
semi-annually on February 15 and August 15. The note agreement restricts the
payment of cash dividends and any other distributions to (i) 50% of the
cumulative net income of JBPA since JBPA's inception plus (ii) $500,000
without the consent of a majority of the holders of the subordinated
debentures. JBPA shall also not redeem or repurchase any of its preferred or
common stock subject to the above limitation.
NOTE 8 - SHAREHOLDERS' EQUITY
On January 17, 1996, the Company declared a 5% common stock dividend,
payable March 15, 1996, in addition to its regular quarterly cash dividend.
Quarterly cash dividends per common share totalled $.60 in 1996, $.525 in
1995 and $.40 in 1994.
The JBPA preferred stock, which was converted in 1993 into the Company's
preferred stock, was all converted into shares of the Company's common stock
in October 1995. The number of shares of common stock which were issued on
conversion was determined by dividing the original issue price of such
preferred stock by the conversion price, as adjusted for the conversion of
JBPA common stock into the Company's common stock and to reflect certain
increases and decreases in the amount of common stock outstanding. Each
share of Series B, 12%, $5,000 face value, and Series C, 11%, $5,000 face
value, preferred stock was converted into common stock at a price of $17.10
per share. Each share of Series D, 9.5%, $1,000 face value, preferred stock
was converted into common stock at a price of $11.00 per share. Each share
of Series E, 8%, $20.00 face value, preferred stock was converted into
common stock at a price of $16.00 per share. Additionally, each share of
9.5%, $1,000 face value, preferred stock was converted into common stock at
a price of $13.50 per share. As a result of the above conversions, 906,930
shares of the Company's common stock were issued.
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - INCOME TAXES
An analysis of current and deferred income taxes is as follows:
1996 1995 1994
---- ---- ----
(in thousands)
Current $ 2,863 $ 3,438 $ 2,207
Deferred 2,310 715 874
--------- ----------- ----------
Total $ 5,173 $ 4,153 $ 3,081
========= ========= =========
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate $4,887 $4,017 $3,148
Increase (decrease) in taxes resulting from
Tax-exempt loan and investment income (192) (151) (132)
Non-deductible amortization 388 151 18
Other, net 90 136 47
------ ------ ------
Applicable income tax $5,173 $4,153 $3,081
====== ====== ======
</TABLE>
The net deferred tax asset (liability) consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Allowance for credit losses $ 2,479 $ 3,235
Deferred loan fees 116 155
Allowance for real estate owned 1,027 1,036
Purchased net operating loss carryforwards 3,909 5,344
------- -------
Total deferred tax assets 7,531 9,770
Deferred asset valuation allowance (6,348) (6,348)
------- -------
Net deferred tax asset 1,183 3,422
------- -------
Accumulated depreciation (2,015) (1,957)
Net unrealized gain on securities available for sale (101) (240)
Other (28) (15)
------- -------
Total deferred tax liabilities (2,144) (2,212)
------- -------
Net deferred tax asset (liability) $ (961) $ 1,210
======= =======
</TABLE>
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company established an Employee Stock Ownership Plan (ESOP) for
employees of the Banks. Contributions to this plan are made by the Company
in amounts determined by the Board of Directors. Contributions by the
Company amounted to $215,000, $201,000 and $113,000 in 1996, 1995 and 1994,
respectively. Contributions are distributed to the Banks in proportion to
their respective employee salaries.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - EMPLOYEE BENEFIT PLANS - Continued
In 1993, the Company established a 401(k) plan which was effective in 1994
covering substantially all employees. The Company matches $.25 for each
dollar contributed by participants up to an annual maximum of $2,000 per
participant. The Company's matching contributions were $95,000 and $78,000
in 1996 and 1995, respectively.
NOTE 11 - STOCK OPTIONS
The Company maintains a Key Employee Stock Option Plan (the Plan). Under the
Plan, options to purchase a maximum of 350,000 shares of the Company's
common stock may be issued to executive officers and other key employees of
the Company who occupy responsible managerial or professional positions and
who have the capability of making a substantial contribution to the success
of the Company, as selected by the Plan committee. Directors and independent
contractors who, in the judgment of the Plan committee, have contributed to
the success of the Company are also eligible to participate subject to
certain limitations. Options granted under the Plan may be either qualified
or non-qualified. Option prices must be 100% of fair market value of the
shares on the date of grant and the exercise period may not exceed 10 years,
except that, in the case of qualified options granted to persons holding 10%
or more of the combined voting power of the Company, the option exercise
price may not be less than 110% of the fair market value of the shares on
the date of grant and the exercise period for any option may not exceed five
years. Vesting of options granted under the Plan is determined by the Plan
committee. The Plan committee has the right, in its discretion, to permit an
optionee to be paid the difference between the option exercise price and the
fair market value of the option shares on the date of option exercise. An
additional plan comparable to the Key Employee Stock Option Plan with a
maximum of 250,000 shares issuable has been approved, but no grants
thereunder have been made.
At December 31, 1996, 1995 and 1994, there were exercisable options
outstanding to purchase 63,000 shares of the Company's common stock at
$14.29 per share and 30,707 shares at $13.85 per share under former plans of
the Company and JBPA. No options were granted, exercised or expired during
1996, 1995 or 1994.
Had compensation cost for the plans been determined based on the fair value
of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1995
----- ----
(in thousands)
<S> <C> <C> <C>
Net income As reported $ 9,199 $ 6,534
Pro forma $ 9,114 $ 5,975
Primary earnings per share As reported $ 2.26 $ 2.10
Pro forma $ 2.24 $ 1.92
Fully diluted earnings per share As reported $ 2.26 $ 1.94
Pro forma $ 2.24 $ 1.76
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants before 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: dividend yield
of 2.5% for both years; expected volatility of 10% for both years; risk-free
interest rates of 6.19% and 6.28%; and expected lives of 10 years for both
years.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 11 - STOCK OPTIONS - Continued
A summary of the status of the Company's option plans as of December 31,
1996, 1995 and 1994 and the changes during the years ending on those dates
is represented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- ------
Weighted Weighted
average average
exercise exercise
Shares price Shares price Shares
------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
Outstanding, beginning of year 364,082 $ 17.56 259,082 $ 15.99 93,707
Granted 15,500 23.13 105,000 21.43 165,375
Exercised - - - - -
Terminated - - - - -
------- ------- ------- ------- -------
Outstanding, end of year 379,582 $ 17.78 364,082 $ 17.56 259,082
------- -------- ------- -------- -------
Options exercisable at year-end 379,582 364,082 259,082
======= ======= =======
Weighted average fair value of options
granted during the year $ 5.61 $ 5.59
======= =======
</TABLE>
The following information applies to options outstanding at December 31,
1996:
Number outstanding 379,582
Range of exercise prices $13.85 - $24.88
Weighted average exercise price $17.78
Weighted average remaining contractual life 8.43 years
NOTE 12 - RELATED PARTY TRANSACTIONS
At December 31, 1996 and 1995, loans outstanding to certain officers and
directors of the Company and their subsidiaries and companies in which they
have material ownership amounted to $15,946,000 and $10,468,000,
respectively. An analysis of activity in loans to related parties at
December 31, 1996 and 1995 resulted in new loans of $10,394,000 and
$6,126,000, respectively; reductions of $4,747,000 and $660,000,
respectively, representing payments; and respective reductions and additions
of $170,000 and $730,000, respectively, representing changes in the
composition of related parties. Deposits of these individuals and their
affiliated companies at December 31, 1996 and 1995 were $6,942,000 and
$7,438,000, respectively.
The Banks lease premises from several limited partnerships whose partners
are persons related to the Company. Rental expense under these leases was
$355,000, $340,000 and $334,000 in 1996, 1995 and 1994, respectively.
The Company incurred $606,000, $392,000 and $436,000 in 1996, 1995 and 1994,
respectively, in legal fees to Ledgewood Law Firm for legal services related
to the acquisition of the minority interest in the Banks, capital offerings,
the acquisitions of United Valley Bank, Constitution Bank, Chester County,
and Security First, and other matters. A member of the Board of the Company
was also a principal of Ledgewood Law Firm; however, in 1996, the
relationship was terminated.
The Banks are parties to a management agreement with the Company under which
the Company provides services in the areas of management, accounting,
internal audit, loan review, marketing and advertising. Total charges for
such services amounted to $3,061,000, $2,945,000 and $2,477,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. These fees were
eliminated in consolidation.
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain of its operating facilities under non-cancellable
operating leases expiring in 1996 through 2011. The leases require payment
by the Company of the real estate taxes and insurance on the leased
properties. Approximate future minimum annual rental payments are as follows
(in thousands):
Year ending December 31
1997 $ 1,700
1998 1,563
1999 1,511
2000 1,431
2001 1,234
Thereafter 4,688
--------
$ 12,127
========
Rental expense amounted to $1,753,000, $1,680,000 and $1,493,000 in 1996,
1995 and 1994, respectively.
Other
In the normal course of business, the Banks have been named as defendants in
several lawsuits. Although the ultimate outcome of these suits cannot be
ascertained at this time, it is the opinion of management that the
resolution of such suits will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the
Company, as for most financial institutions, the majority of its assets and
liabilities are considered financial instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Company's general practice and intent to hold
its financial instruments to maturity and not to engage in trading or sales
activities, except for certain loans. Therefore, the Company had to use
significant estimations and present value calculations to prepare this
disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Company using the best
available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values, and recorded book balances at December 31, 1996 and 1995 are
outlined below.
For cash and due from banks, the recorded book values of $71,240,000 and
$90,884,000 at December 31, 1996 and 1995, respectively, approximate fair
values. The estimated fair values of investment securities are based on
quoted market prices, if available. Estimated fair values are based on
quoted market prices of comparable instruments if quoted market prices are
not available.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The net loan portfolio at December 31, 1996 and 1995 has been valued using a
present value discounted cash flow where market prices were not available.
The discount rate used in these calculations is the estimated current market
rate adjusted for credit risk. The carrying value of accrued interest
approximates fair value.
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ------------ -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities $159,449 $159,463 $145,762 $145,781
Loans, including mortgages held for sale 728,160 727,391 659,756 665,210
</TABLE>
The estimated fair values of demand deposits (i.e., interest (checking) and
non-interest bearing demand accounts, savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). The carrying amounts
of variable rate accounts and certificates of deposit approximate their fair
values at the reporting date. The carrying amount of accrued interest
payable approximates its fair value.
Virtually all time deposits with stated maturities totalling $288,327,000
and $334,669,000 mature or reprice within one year of December 31, 1996 and
1995, respectively; therefore, the recorded book value of such deposits
approximates their fair value.
The recorded book balance of subordinated debentures of $32,000,000 and
$9,000,000 at December 31, 1996 and 1995, respectively, had an approximate
fair value of $32,500,000 and $9,500,000, respectively.
The fair values of the FHLB advances totalling $124,000,000 and $75,000,000
are estimated to approximate their recorded book balances at December 31,
1996 and 1995, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totalled approximately
$207,893,000 and $174,882,000 at December 31, 1996 and 1995, respectively,
and primarily comprise unfunded loan commitments which are generally priced
at market at the time of funding.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Banks are parties to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable. Those instruments
involve, to varying degrees, elements of credit and interest rate risks in
excess of the amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Banks have in particular classes of financial instruments.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK - Continued
The Banks' exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional
amount of those instruments. The Banks use the same credit policies in
making commitments and conditional obligations as they do for
on-balance-sheet instruments.
Unless noted otherwise, the Banks do not require collateral or other
security to support financial instruments with credit risk. The approximate
contract amounts are as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $199,875 $158,784
Standby letters of credit and financial guarantees written 8,018 16,098
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Banks upon extension of
credit, is based on management's credit evaluation.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Banks hold
residential or commercial real estate, accounts receivable, inventory and
equipment as collateral supporting those commitments for which collateral is
deemed necessary. The extent of collateral held for those commitments at
December 31, 1996 varies up to 100%.
The Banks grant loans primarily to customers in Philadelphia and its
immediately adjacent suburban Pennsylvania counties which include Chester,
Delaware and Montgomery and southern New Jersey which includes Camden and
Burlington counties. Although the Banks have diversified loan portfolios, a
large portion of their loans are secured by commercial or residential real
property. The Banks do not generally engage in non-recourse lending and
typically will require the principals of any commercial borrower to obligate
themselves personally on the loan. Although the Banks have diversified loan
portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector. The distribution of
commitments to extend credit approximates the distribution of loans
outstanding. Commercial and standby letters of credit were granted primarily
to commercial borrowers.
NOTE 16 - REGULATORY MATTERS
The Bank Holding Company Act of 1956 restricts the amount of dividends the
Company can pay. Accordingly, dividends should generally only be paid out of
current earnings, as defined.
The Pennsylvania Banking Code of 1965 restricts the amount of dividends JBPA
can pay. Accordingly, dividends may be declared and paid only out of net
earnings, as defined.
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 16 - REGULATORY MATTERS - Continued
Where surplus, as defined, is less than 50% of the amount of JBPA's capital,
no dividend may be paid or declared without the prior approval of the
Pennsylvania Department of Banking (the Department) until the surplus, as
defined, is equal to 50% of the total amount of capital. Where surplus, as
defined, is less than 100% of capital, until such time as surplus equals
capital, JBPA must transfer at least 10% of its net earnings to surplus, as
defined, prior to the declaration of a dividend. The Department has the
power to issue orders prohibiting the payment of dividends where such
payment is deemed to be an unsafe or unsound banking practice.
The New Jersey Banking Act of 1948 restricts the amount of dividends paid on
JBNJ capital stock. Accordingly, no dividends shall be paid by JBNJ on its
capital stock unless, following the payment of such dividends, the capital
stock of JBNJ will be unimpaired, and (1) JBNJ will have a surplus, as
defined, of not less than 50% of its capital, or, if not, (2) the payment of
such dividend will not reduce the surplus, as defined, of JBNJ.
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, both the Company and the Bank meet specific
capital guidelines that involve quantitative measures of the Company's
and Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's and Bank's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). As of December 31, 1996,
management believes that the Company and the Banks meet all capital adequacy
requirements to which they are subject to.
As of the most recent notification from the Department of Banking of the
Commonwealth of Pennsylvania, the Federal Deposit Insurance Corporation
(FDIC) and the New Jersey Department of Banking, respectively, categorized
the Company and the Banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized,
the Company and the Banks must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category.
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital (to risk-weighted
assets)
Company $110,241 15.31% $57,590 8.00% $71,987 10.00%
JBPA 99,173 14.81 53,570 8.00 66,963 10.00
JBNJ 9,912 16.88 4,698 8.00 5,872 10.00
Tier I capital (to risk-weighted
assets)
Company 69,217 9.61 28,810 4.00 43,216 6.00
JBPA 61,774 9.22 26,800 4.00 40,200 6.00
JBNJ 6,554 11.16 2,349 4.00 3,527 6.00
Tier I capital (to average assets)
Company 69,217 7.09 39,050 4.00 48,813 5.00
JBPA 61,774 6.92 35,708 4.00 44,634 5.00
JBNJ 6,554 8.10 3,236 4.00 4,046 5.00
As of December 31, 1995
Total capital (to risk-weighted
assets)
Company 78,683 11.74 53,617 8.00 67,021 10.00
JBPA 68,775 10.92 50,384 8.00 62,980 10.00
JBNJ 9,224 18.13 4,070 8.00 5,088 10.00
Tier I capital (to risk-weighted
assets)
Company 61,432 9.16 26,826 4.00 40,239 6.00
JBPA 52,043 8.26 25,202 4.00 37,804 6.00
JBNJ 8,937 17.56 2,036 4.00 3,054 6.00
Tier I capital (to average assets)
Company 61,432 6.54 37,573 4.00 46,966 5.00
JBPA 52,043 6.01 34,637 4.00 43,297 5.00
JBNJ 8,937 12.16 2,940 4.00 3,675 5.00
</TABLE>
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 17 - SEGMENT INFORMATION
The Company operates primarily as a commercial bank. Additionally, certain
mortgage banking activities are pursued and include the origination and
purchase of mortgage loans, the sale of mortgage loans in the secondary
market and the servicing of mortgage loans.
Segment information is as follows:
<TABLE>
<CAPTION>
Commercial Mortgage
banking banking Consolidated
---------- -------- ------------
(in thousands)
<S> <C> <C> <C>
Year ended December 31, 1996
Total revenue $ 80,406 $ 1,385 $ 81,791
Income before income taxes 14,156 216 14,372
Identifiable assets, end of year 1,004,239 799 1,005,038
Year ended December 31, 1995
Total revenue 69,611 1,214 70,825
Income (loss) before income taxes 11,991 (177) 11,814
Identifiable assets, end of year 937,952 1,054 939,006
Year ended December 31, 1994
Total revenue 51,082 1,204 52,286
Income (loss) before income taxes 9,698 (436) 9,262
Identifiable assets, end of year 750,611 914 751,525
</TABLE>
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The condensed financial information for JeffBanks, Inc. (parent company
only) is as follows:
CONDENSED BALANCE SHEETS
December 31,
---------------
1996 1995
---- ----
(in thousands)
Assets
Cash $ 713 $ 241
Equity investment in the Banks 79,661 73,016
Investment in the Banks' subordinated notes 23,000 -
Accrued interest receivable 503 -
Premises and equipment, net 177 226
-------- -------
$104,054 $73,483
======== =======
Liabilities and shareholders' equity
Subordinated notes $23,000 $ -
Accrued interest payable 503 -
Other liabilities 297 172
-------- -------
23,800 172
-------- -------
Shareholders' equity
Common stock 3,964 3,947
Additional paid-in capital 53,865 53,470
Retained earnings 22,229 15,427
Net unrealized gain on investment securities
available for sale 196 467
-------- --------
80,254 73,311
-------- --------
$104,054 $73,483
======== ========
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1996 1995 1994
-------- ------ -------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from the Banks $ 2,356 $ 2,749 $ 2,302
Interest income from the Banks 1,542 - -
Management service fees from the Banks 3,061 2,945 2,477
------- ------- -------
Total income 6,959 5,694 4,779
------- ------- -------
Expenses
Interest on subordinated notes 1,542 - -
Salaries and employee benefits 1,189 1,046 964
Occupancy expense 55 56 63
Depreciation 49 40 20
Data processing expense 930 1,073 812
Advertising 453 312 292
Insurance 345 351 268
Other 40 73 113
------- ------- -------
Total expenses 4,603 2,951 2,532
------- ------- -------
Income before equity in undistributed
net income of the Banks 2,356 2,743 2,247
Equity in undistributed net income of the Banks 6,843 4,918 3,934
------- ------- -------
Net income $ 9,199 $ 7,661 $ 6,181
======= ======= =======
Net income applicable to common stock $ 9,199 $ 6,534 $ 4,868
======= ======= =======
</TABLE>
(Continued)
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1996 1995 1994
---- ---- -----
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 9,199 $ 7,661 $ 6,181
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 49 40 20
Equity in undistributed net income of the Banks (6,843) (4,918) (3,934)
Increase in other liabilities 126 69 124
Decrease in other assets - - 66
------- ------- -------
Net cash provided by operating activities 2,531 2,852 2,457
------- ------- -------
Investing activities
Purchases of premises and equipment - (144) (11)
Purchases of investment securities available for sale (100) - -
------- ------- -------
Net cash used in investing activities (100) (144) (11)
------- ------- -------
Financing activities
Dividends paid on preferred stock - (1,127) (1,312)
Dividends paid on common stock (2,397) (1,621) (990)
Proceeds from issuance of common stock 438 230 33
Costs to acquire minority interest in JBNJ - (15) (111)
------- ------- -------
Net cash used in by financing activities (1,959) (2,533) (2,380)
------- ------- -------
Net increase in cash 472 175 66
Cash at beginning of year 241 66 -
------- ------- -------
Cash at end of year $ 713 $ 241 $ 66
======= ======= =======
</TABLE>
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Company
which, in the opinion of management, reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the Company's results of operations.
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------------
December 31 September 30 June 30 March 31
-------------- ------------ ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1996
Interest income $19,292 $18,838 $18,435 $18,107
Interest expense 8,827 8,681 8,499 8,037
Net interest income 10,465 10,157 9,936 10,070
Provision for credit losses 867 786 705 624
Gain on sale of securities 96 71 78 -
Other operating income 1,838 1,750 1,727 1,559
Other operating expenses 7,682 7,616 7,664 7,431
Income before income taxes 3,850 3,576 3,372 3,574
Net income 2,456 2,308 2,156 2,279
Per share data
Average common shares outstanding 4,127 4,081 4,028 4,022
Net income per common share - primary .60 .57 .54 .55
Net income per common share - fully diluted .60 .57 .54 .55
1995
Interest income $18,096 $16,979 $15,319 $13,923
Interest expense 8,247 7,579 6,752 5,651
Net interest income 9,849 9,400 8,567 8,272
Provision for credit losses 765 1,215 615 540
Gain on sale of securities 56 122 35 120
Other operating income 1,843 1,500 1,382 1,450
Other operating expenses 7,456 6,782 6,633 6,776
Income before income taxes 3,527 3,025 2,736 2,526
Net income 2,236 1,944 1,809 1,672
Net income applicable to common stock 2,082 1,624 1,484 1,344
Per share data
Average common shares outstanding 3,534 3,048 2,960 2,922
Net income per common share - primary .59 .53 .50 .48
Net income per common share - fully diluted .55 .49 .47 .43
</TABLE>
PART III
The information called for by Part III of this report is incorporated
herein by reference to the Company's definitive proxy statement for its 1996
annual meeting of shareholders which will be filed not later than 120 days from
the end of the Company's fiscal year (April 29, 1997).
-62-
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)1. Financial Statements
Report of Independent Certified Public Accountants
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None.
3. Exhibits
Exhibits 3, 10 ,12 and 21 appear in Exhibits 3, 2, 12 and 21,
respectively, of the Company's registration statement on Form S-4, as amended,
Registration No. 333-16261, each of which such exhibits is hereby incorporated
herein by reference. Exhibits 4.1, 4.2, 4.3, and 4.4 appear in Exhibits 4.1,
4.2, 4.3, and 4.4 of the Company's registration statement on Form S-3, as
amended, Registration No. 333-20111, each of which such exhibits is hereby
incorporated herein by reference.
Exhibit 23(a) Consent of Grant Thornton LLP
(b) Reports on Form 8-K during the fourth quarter
The Company filed a Form 8-K on October 9, 1996 containing an Agreement
and Plan of Merger with United Valley Bank., Inc. and its wholly-owned
subsidiary United Valley Bank, which Agreement was executed by the
Company on September 5, 1996.
-63-
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
--------------------------------------------------
We have issued our reports dated January 15, 1997 (except for notes 2
and 6, as to which the dates are January 21, 1997 and February 5, 1997,
respectively) accompanying the consolidated financial statements incorporated
by reference or included in the Annual Report of JeffBanks, Inc. (formerly
named State Bancshares, Inc.) and Subsidiaries on Form 10-K for the year ended
December 31, 1996. We hereby consent to the incorporation by reference of said
reports in the Registration Statements of JeffBanks, Inc. on Forms S-3 (File
No. 333-20111, effective January 30, 1997, File No. 333-18775, effective
Janaury 21, 1997 and File No. 33-99988, effective November 24, 1995) and
Form S-8 (File No. 33-80654 and File No. 33-80656, effective June 23, 1994).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 37,290
<INT-BEARING-DEPOSITS> 2,406
<FED-FUNDS-SOLD> 33,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 158,762
<INVESTMENTS-CARRYING> 687
<INVESTMENTS-MARKET> 701
<LOANS> 739,019
<ALLOWANCE> 10,859
<TOTAL-ASSETS> 1,005,038
<DEPOSITS> 682,489
<SHORT-TERM> 124,000
<LIABILITIES-OTHER> 12,531
<LONG-TERM> 32,000
0
0
<COMMON> 3,964
<OTHER-SE> 76,290
<TOTAL-LIABILITIES-AND-EQUITY> 1,005,038
<INTEREST-LOAN> 63,485
<INTEREST-INVEST> 9,060
<INTEREST-OTHER> 2,127
<INTEREST-TOTAL> 74,672
<INTEREST-DEPOSIT> 25,190
<INTEREST-EXPENSE> 34,044
<INTEREST-INCOME-NET> 40,628
<LOAN-LOSSES> 2,982
<SECURITIES-GAINS> 245
<EXPENSE-OTHER> 30,393
<INCOME-PRETAX> 14,372
<INCOME-PRE-EXTRAORDINARY> 9,199
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,199
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.26
<YIELD-ACTUAL> 4.58
<LOANS-NON> 9,710
<LOANS-PAST> 4,456
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,032
<CHARGE-OFFS> 7,215
<RECOVERIES> 1,060
<ALLOWANCE-CLOSE> 10,859
<ALLOWANCE-DOMESTIC> 10,859
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
