<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
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.)
1845 Walnut Street
Philadelphia, PA 19103
(Address of registrant's principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 861-7000
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------ ------------------------------------------
- ------------------------------ ------------------------------------------
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 Stock Market on
March 16, 1998: $182,913,648.
(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: 5,050,725 shares
as of March 18, 1998.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement (the "Proxy Statement") for registrant's 1998
Annual Meeting of Shareholders to be held on May 21, 1998 are incorporated by
reference in Part III of this Form 10-K.
<PAGE>
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, thirty 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 acquisition of United Valley Bank
in 1997 and Constitution Bank in 1995. For the three-year period ended
December 31, 1997, the Company's total assets grew from $863.2 million to $1.3
billion, its deposits and interest bearing liabilities grew from $779.6
million to $1.2 billion and its shareholders' equity grew from $75.2 million
to $102.9 million. The Company also enjoyed increased profitability during the
period. The Company's income increased from $7.3 million for 1994 to $12.4
million for 1997. Return on average assets increased from .96% for 1994 to
1.04% for 1997.
The Company's primary strategy for further growth is to continue expansion
of its 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 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 (generally not 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 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, telephone
banking 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 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, including residential construction, equipment and automobile leasing,
revolving credit plans and other commercial loans, cash management services
and merchant credit card depository programs. The Company also makes indirect
automobile loans to consumers through automobile dealerships. Potential
customers for trust services are referred to several institutions which offer
trust services.
Deposits obtained through the Company's branch system have been the
principal source of funds for use in the Company's lending activities. At
December 31, 1997, the Company had total deposits of $933.6 million. Of that
total, 44% represented time deposits, 41% represented interest checking and
savings and money market deposits and 15% represented demand (non-interest
bearing) deposits.
<PAGE>
At December 31, 1997, the Company had a net loan portfolio (excluding
mortgage loans held for sale) of $894.0 million, representing 67% of total
assets at that date. The loan portfolio of the Company is categorized into
commercial, commercial mortgage, construction, direct lease financing,
consumer (including indirect and direct automobile loans and home equity),
credit card and residential mortgage. At December 31, 1997, commercial
mortgages and other commercial loans, including construction and direct
financing leases, were $566.5 million or approximately 63% 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. 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.
<PAGE>
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, 1997, the Company originated $46.2 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,
1997, the Company had approximately $3.0 million 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, pursues collection efforts with delinquent mortgagors
and supervises foreclosures and property dispositions. At December 31, 1997,
the Company was servicing real estate loans for other investors in an
aggregate principal amount of approximately $243.3 million.
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 $18.0 million
as of December 31, 1997) enables the Company to compete effectively for the
credit needs of the moderate-sized and small businesses which constitute its
target market, while the lending limit of Jefferson NJ (approximately $1.6
million at December 31, 1997) 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
loans 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 has been active in acquiring banks within its geographic
market areas, including Bank of Chester County (1994), Security First Bank
(1994) and Constitution Bank (1995).
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 was accounted for under the
pooling of interests method of accounting. All prior acquisitions had been
accounted for under the purchase method.
Regent National Bank. On March 18, 1998, the Company announced that,
through Jefferson PA, it had entered into a merger agreement with Regent
National Bank ("Regent"), pursuant to which it would acquire that institution.
Consummation of the merger is conditional upon required regulatory and
shareholder approvals. Under the terms of the pending merger, each share of
Regent common stock would be converted into .303 of a share of the Company's
common stock, resulting in the issuance of 1,032,989 shares of the Company's
common stock. In addition, outstanding options to purchase Regent's common
stock would be converted into options to purchase 111,201 shares of the
Company's common stock at an average exercise price of $26.26. Regent is a
nationally chartered banking institution engaged in commercial and retail
banking with one office in Philadelphia. Regent had total assets of $225.6
million at December 31, 1997. The acquisition would be accounted for under the
pooling of interests method of accounting.
<PAGE>
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 $2.8 million in 1997,
$3.1 million in 1996 and $2.9 million in 1995. 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 1956 (the "Holding Company Act"). As such, it is required to
file an annual report with the Federal Reserve Board ("FRB") and provide such
additional information as the FRB may require pursuant to the Holding Company
Act, and is also subjected 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 when such payment
is deemed to be an unsafe or unsound banking practice.
<PAGE>
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, 1997, Jefferson PA had $34.5 million of undivided
profits legally available for the payment of dividends. Jefferson NJ had $1.7
million available for the payment of dividends as of that 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 December 31, 1997. 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 bank's 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 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 Pennsylvania law include the laws of the states of New
Jersey, New York and Ohio. However, the Riegle-Neal Act, summarized below, has
superseded Pennsylvania law, subject to certain conditions.
New Jersey Regulation of Jefferson NJ
As a state-charted 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 deposits 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
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 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, has
superseded New Jersey law, subject to certain conditions.
<PAGE>
FDIC Regulation
Jefferson PA and Jefferson NJ are members of the Federal Deposit Insurance
Corporation ("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 when the bank is in
default on its FDIC assessments. Moreover, the FDIC has the power to issue
orders prohibiting the payment of dividends when 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 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 acquisitions by the
Company, or 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.
<PAGE>
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 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.
5
<PAGE>
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 when 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 information concerning capital requirements applicable to the Company's
subsidiary banks and their capital levels at December 31, 1997, 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") has 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 permitted 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. Both Pennsylvania and New Jersey have 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.
6
<PAGE>
ITEM 2. PROPERTY
The Company and its subsidiary banks currently operate thirty retail
branch offices, one loan production office and an operations center. In 1998,
the Company occupied a new 13,000 square foot executive office. Twenty-seven
of these offices occupy approximately 155,000 square feet and are leased under
leases expiring between 1998 and 2011. During 1997, the Company paid aggregate
rentals of $2.0 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.
7
<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 Stock 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
1996 High Low Per Share
---- ----------- ----------- ----------------
First Quarter $22.09 $20.19 $.12
Second Quarter 21.85 21.14 .12
Third Quarter 26.96 21.61 .12
Fourth Quarter 27.08 25.41 .12
Cash Dividends
1997 High Low Per Share
----------- ----------- ----------------
First Quarter $29.50 $26.50 .14
Second Quarter 28.50 26.75 .17
Third Quarter 38.38 28.25 .17
Fourth Quarter 48.00 34.00 .19
As of March 16, 1998, there were approximately 3,000 holders of the Company's
Common Stock.
8
<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,
-----------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income .............................................. $ 94,136 $ 85,204 $ 74,276 $ 54,462 $ 46,832
Interest expense ............................................. 45,140 39,079 33,049 20,583 19,252
---------- ----------- ----------- ---------- ---------
Net interest income .......................................... 48,996 46,125 41,227 33,879 27,580
Provision for credit losses .................................. 3,600 5,023 3,986 1,857 2,519
---------- ----------- ----------- ---------- ---------
Net interest income after provision for credit losses ........ 45,396 41,102 37,241 32,022 25,061
Non-interest income(1)(2) .................................... 9,649 7,305 6,969 5,814 5,879
Non-interest expense ......................................... 36,607 35,817 31,160 26,978 23,365
---------- ----------- ----------- ---------- ---------
Income before income taxes, dividends on preferred stock,
minority interest and cumulative effect of
accounting change .................................... 18,438 12,590 13,050 10,858 7,575
Income taxes(3) .............................................. 6,001 4,640 4,571 3,593 2,307
---------- ----------- ----------- ---------- ---------
Income before dividends on preferred stock, minority interest
and cumulative effect of accounting change ............... 12,437 7,950 8,479 7,265 5,268
Dividends on preferred stock of subsidiary ................... -- -- -- -- 789
Minority interest in net income of subsidiaries .............. -- -- -- -- 1,191
---------- ----------- ----------- ---------- ---------
Income before cumulative effect of accounting change ......... 12,437 7,950 8,479 7,265 3,288
Cumulative effect of change in accounting for income taxes (3) 485
Net Income ......................................... $ 12,437 $ 7,950 $ 8,479 $ 7,265 $ 3,773
========== =========== =========== ========== =========
Per Common Share Data:(4)
Net income - basic ........................................... $ 2.50 $ 1.63 $ 1.87 $ 1.72 $ 1.50
Net income - diluted ......................................... 2.33 1.54 1.63 1.57 1.33
Book value ................................................... 20.57 18.43 17.42 16.49 15.81
Book value - diluted(5) ...................................... 18.77 17.41 16.54 15.28 14.57
Balance Sheet Data:
Total assets ................................................. $1,328,624 $1,127,174 $ 1,069,692 $ 863,230 $ 740,706
Total loans(6) ............................................... 909,725 829,587 774,491 634,472 533,987
Allowance for credit losses .................................. (12,769) (13,734) (14,991) (8,986) (6,867)
Investment securities(7) ..................................... 244,169 175,238 163,572 97,108 110,415
Goodwill, net ................................................ 4,435 8,776 8,978 809 135
Deposits ..................................................... 933,630 787,139 840,516 710,669 631,091
Securities sold under repurchase agreements .................. 70,911 73,764 46,549 16,229 16,211
FHLB advances ................................................ 150,000 127,750 77,000 43,745 10,774
Subordinated notes and debentures ............................ 32,000 32,000 9,000 9,000 9,000
Trust preferred securities ................................... 25,300 -- -- -- --
Minority interest ............................................ -- -- -- -- 437
Convertible preferred stock and related surplus .............. -- -- -- 12,835 12,845
Common shareholders' equity .................................. 102,855 91,281 85,038 62,330 53,054
Selected Operating Ratios:
Return on average assets ..................................... 1.04% .74% .92% .96% .87%
Return on average common equity .............................. 12.89% 8.95% 10.74% 10.73% 10.76%
Net interest margin .......................................... 4.51% 4.59% 4.82% 4.83% 4.45%
Ratio of earnings to fixed charges ........................... 140% 132% 132% 138% 126%
Dividend payout ratio ........................................ 26.71% 30.15% 22.05% 16.63% --
Selected Capital and Asset Quality Ratios:
Equity/assets ................................................ 7.74% 8.10% 7.95% 8.71% 8.90%
Non-performing loans/total loans(8) .......................... 1.03% 1.36% 1.69% 1.83% 1.56%
Non-performing assets/total loans and non-performing assets(9) 1.27% 1.78% 2.23% 2.76% 2.64%
Allowance for credit losses/total loans ...................... 1.40% 1.66% 1.93% 1.42% 1.29%
Allowance for credit losses/non-performing assets(9) ......... 110.12% 92.76% 86.22% 50.77% 48.15%
Net charge-offs/average loans ................................ .53% .79% .58% .50% .42%
</TABLE>
- -----------
(1) Includes gain on sale of securities of $515,000 in 1997, $245,000 in
1996, $333,000 in 1995, $128,000 in 1994 and $376,000 in 1993.
(2) Effective October 1, 1995, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." Income resulting from the capitalization
of mortgage servicing rights required by that pronouncement amounted to
$554,000 in 1997, $279,000 in 1996 and $72,000 in 1995.
(3) Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." As a result of adopting SFAS No. 109, in 1993 the
Company recognized a cumulative benefit of $485,000, or $.22 and $.15
respectively in basic and diluted earnings per share.
9
<PAGE>
(4) The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing such
earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised and converted into common stock. Prior periods earnings per
share calculations have been restated to reflect the adoption of SFAS No.
128. Basic net income per share is based upon the respective weighted
average number of common shares outstanding, as follows: 4,967,000
(1997); 4,882,000 (1996); 3,936,000 (1995); 3,460,000 (1994) and
2,166,000 (1993). Diluted net income per share in all years presented
gives effect to the dilution resulting from stock options granted by the
Company or acquired companies. Diluted net income per share in 1995, 1994
and 1993 gives effect to the increase in average shares that would have
been outstanding, and the increase in net income applicable to common
stock that would have resulted from, the assumed conversion of the
Company's dilutive preferred stock. Per share amounts in all years have
been adjusted to retroactively reflect prior stock dividends.
(5) Diluted book values in all years presented give effect to the dilution
which results from stock options granted by the Company or acquired
companies. Diluted book values in 1994 through 1993 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 $2,959,000 (1997), $725,000
(1996), $484,000 (1995), $380,000 (1994) and $19.0 million (1993).
(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. As a result of the 1997 acquisition of United Valley Bank,
the financial statements have been restated to reflect the impact of
United Valley Bank. Restatement was required as the transaction was
accounted for under the pooling of interests method of accounting.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements contained in this Form 10-K Annual Report that are not
historical facts are based on current expectations. Such statements are
forward-looking (as defined in the Private Securities Litigation Reform Act of
1995) in nature and involve a number of risks and uncertainties. Actual
results may vary materially. The factors that could cause actual results to
vary materially include: the ability of the Company to maintain profitable
operations, the adequacy of the Company's allowance for credit losses, general
business and economic conditions in the Company's primary lending and
deposit-taking areas, future interest rate fluctuations, competition from
various financial and non-financial businesses, the ability of the Company to
remain in compliance with current regulatory provisions and any future changes
in such provisions, the ability of the Company to continue to generate loans
and to improve its net interest margin and other risks that may be described
from time to time in the reports the Company is required to file with the
Securities and Exchange Commission (the "Commission"). Undue reliance should
not be placed on any such forward-looking statements.
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 $12.4 million in 1997, from $8.0
million in 1996 and $8.5 million in 1995. The increases in net income
reflected increases in net interest margin and other income. In addition, in
1997, the Company acquired United Valley Bank in a transaction accounted for
as a pooling of interests, requiring the Company to restate its financial
statements to include United Valley Bank income and expense and other
financial information in all periods. As a consequence, the increase in net
income in 1997 reflected savings resulting from the consolidation of United
Valley Bank into the Company in 1997, and a reduced provision for credit
losses for United Valley Bank loans. Net income in 1996 reflected the impact
of a $1.5 million additional provision for credit losses for United Valley
Bank. The $1.5 million increase in the provision reflected amounts provided to
bring the United Valley Bank reserve to levels more consistent with
industry-wide methodologies. Non-accrual loans were $9.4 million at December
31, 1997, compared to $11.3 million a year earlier. Non-performing assets
amounted to $11.6 million at December 31, 1997 and $14.8 million at December
31, 1996(1). Non-performing assets reflected a decrease in other real estate
owned to $2.2 million at December 31, 1997 from $3.5 million at December
31,1996(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 acquisitions,
the Company's net interest income increased in 1997 and 1996. Net interest
income in 1997 increased approximately 6% over 1996 which increased 12% over
1995. The net interest margin, expressed as net interest income divided by
average interest earning assets, decreased to 4.51% in 1997 from 4.59% in 1996
and 4.82% in 1995. While the prime rate and the Company's loan and investment
yields generally rose in 1997 compared to 1996, the yield on interest bearing
liabilities increased more, and resulted in the reductions in net interest
margin. Increases in the proportion of lower yielding consumer loans
(primarily indirect automobile), partially offset the impact of higher market
interest rates. The increase in the yield on interest bearing liabilities
reflected the issuance of $25.3 million of 9.25% trust preferred securities
and increases in rates paid on certain promotional savings and money market
accounts. 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 competitive pressure, reducing the
overall decrease in yield in savings and money market accounts. 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. Total
loans at December 31, 1997 increased 10% or $80.1 million over the prior year
reflecting internal growth. Total loans at December 31, 1996 increased 7%, or
$55.1 million over the prior year amount. Total loans at December 31, 1995
increased 22% or $140.0 million over the prior year amount. Of that increase,
approximately $72.0 million resulted from the acquisition of Constitution
Bank. As of December 31, 1997, the capital ratios of the Company's subsidiary
banks significantly exceeded the "well-capitalized" standard established by
regulatory authorities. See "Liquidity and Capital Resources", below.
- -----------------------
(1) Non-accrual loans and non-performing assets exclude loans past due 90 days
or more still accruing interest.
<PAGE>
In the first quarter of 1997, the Company issued $25.3 million of 9.25%
junior subordinated deferrable interest debentures due March 31, 2027 to JBI
Capital Trust I (the Trust), a Delaware Business Trust, in which the Company
owns all of the common equity. The debentures are the sole asset of the Trust.
The Trust issued $25 million of trust preferred securities to investors.
Although the junior subordinated debentures will be treated as debt of the
Company, they currently qualify for tier 1 capital treatment, subject to
certain limitations. The Trust preferred securities are callable by the
Company on or after March 31, 2002, or earlier if the deduction of related
interest for federal income taxes is prohibited, treatment as tier 1 capital
is no longer permitted or certain other contingencies arise. The Trust
preferred securities must be redeemed upon maturity of the debentures in 2027.
The debentures are the sole asset of the Trust. See "Liquidity and Capital
Resources," below.
11
<PAGE>
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 $12.4 million in 1997 compared to $8.0 million
in 1996 and $8.5 million in 1995. The increases in net income in 1997 and 1996
reflect increases in net interest income which increased 6% and 12%,
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 1997 and 1996
compared to respective prior years. While the prime rate and the Company's
loan and investment yields generally rose in 1997 compared to 1996, the yield
on interest bearing liabilities increased more, and resulted in the reductions
in net interest margin. Increases in the proportion of lower yielding consumer
loans (primarily indirect automobile), partially offset the impact of higher
market interest rates. The increase in the yield on interest bearing
liabilities reflected the issuance of $25.3 million of 9.25% trust preferred
securities, and increases in rates paid on certain promotional savings and
money market accounts. 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 competitive pressure,
reducing the overall decrease in yield in savings and money market accounts.
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 had 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. The provision for credit losses amounted to $3.6 million in 1997,
$5.0 million in 1996 and $4.0 million in 1995. The provision for credit losses
in 1996 reflected the impact of a $1.5 million additional provision for credit
losses for United Valley Bank. That increase was reflected in the restatement
of the financial statements resulting from the pooling of interests method of
accounting utilized for that acquisition. The $1.5 million increase in the
provision reflected amounts provided to bring the United Valley Bank reserve
to levels more consistent with industry-wide methodologies. See "Financial
Condition - Provision for Credit Losses", below. In 1997 the gain on sales of
residential mortgages totaled $1.1 million, compared to $419,000 in 1996, and
reflected increases in the volume of residential mortgage loans generated.
Increases in merchant credit card deposit fees during these periods were
significantly offset by increases in related expense, reflected under
non-interest expense as merchant credit card deposit expense. Other income was
$1.5 million in 1997, compared to $903,000 in 1996 and $1.4 million in 1995.
The $642,000 increase in 1997 compared to 1996 reflected $300,000 resulting
from service charges instituted in 1997 on cash withdrawals from proprietary
ATMs by non customers. The $503,000 decrease in other income in 1996 compared
to 1995 reflected a $264,000 reduction in gains on the sale of other real
estate owned. See "Results of Operations - Net Interest Income and Average
Balances" and Non-Interest Income," below.
<PAGE>
Net Interest Income and Average Balances. Net interest income was $49.0
million in 1997, compared to $46.1 million in 1996 and $41.2 million in 1995.
Yields on interest earning assets increased to 8.55% in 1997 from 8.44% in
1996, a difference of .11%. The increase in yields reflected a higher prime
and other market interest rates, the effects of which were partially offset by
an increased proportion of lower yielding indirect automobile loans (as
compared to commercial loans). The cost of interest bearing liabilities also
reflected increases in market interest rates and increased to 4.78% in 1997
from 4.59% in 1998, a difference of .19%. The increase in the yield on
interest bearing liabilities reflected the issuance of $25.3 million of 9.25%
trust preferred securities and increases in rates paid on certain promotional
savings and money market accounts. Yields on interest earning assets decreased
to 8.44% in 1996 from 8.67% in 1995, a difference of .23%, and reflected the
impact of a lower prime and other market interest rates. While yields on
certain categories of interest bearing liabilities were also lower, yields in
other categories were increased due to competitive pressure, reducing the
overall decrease in yield in savings and money market accounts. 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 was 4.59% in 1996, compared to 4.66% in 1995. The ratio of higher
cost non-deposit funding (consisting of securities sold under repurchase
agreements, trust preferred securities, subordinated debentures and FHLB
advances to deposits), also increased in 1997 and 1996 compared to 1995,
generally increasing the Company's cost of funds. Expressed as a percentage of
deposits, that ratio was 26% in 1997, 21% in 1996 and 12% in 1995. In 1995 the
Company was able to maintain interest rates on certain 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. Net interest margins of 4.82% in 1995 and 4.83% in 1994
were comparable. 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
had 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. 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, the Company has in the past and may in the
future have a higher relative proportion of certificates of deposit or other
higher rate funding sources, to fund loan growth or increase liquidity, which
might serve to increase the cost of funds.
12
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
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..................... $ 4,079 $ 299 7.33% $ 658 $ 47 7.14%
Loans net of unearned discount(1)........... 858,136 79,118 9.22%(2) 792,219 72,638 9.17%(2)
Allowance for credit losses................. (13,452) (14,275)
----------- --------- --------- ---------
Loans, net................................. 848,763 79,417 9.36% 778,602 72,685 9.34%
Investment Securities:
Held to maturity:
Taxable investment securities 544 34 6.25%
Non-taxable investment securities...... 682 54 7.92%(2) 687 53 7.71%(2)
Available for sale:
Taxable investment securities........... 143,928 8,886 6.17% 168,851 9,828 5.82%
Non-taxable investment securities....... 39,271 3,372 8.59%(2) 7,970 660 8.28%(2)
Federal funds sold.......................... 69,833 3,731 5.34% 42,821 2,324 5.43%
----------- --------- --------- ---------
Net interest earning assets..................... 1,102,477 95,460 999,475 85,584
Cash and due from banks......................... 38,374 34,165
Accrued interest receivable..................... 7,436 6,759
Bank premises and equipment..................... 16,340 13,596
Other real estate owned......................... 3,073 4,158
Other assets.................................... 23,192 21,304
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing)............... $ 132,512 $ 125,435
Interest checking........................... 80,673 $ 1,003 1.24% 73,063 $ 1,414 1.94%
Savings and money market.................... 256,538 8,895 3.47% 233,837 7,701 3.29%
Time........................................ 384,983 21,724 5.64% 376,472 20,875 5.54%
----------- --------- --------- ---------
Total deposits.......................... 854,706 31,622 808,807 29,990
FHLB advances................................... 96,107 5,455 5.68% 69,271 3,854 5.56%
Subordinated notes and debentures............... 32,000 2,868 8.96% 26,565 2,401 9.04%
Trust preferred securities...................... 22,868 2,119 9.27%
Securities sold under repurchase agreements 70,710 3,076 4.35% 71,805 2,834 3.95%
Accrued interest payable........................ 9,810 8,771
Other liabilities............................... 8,176 5,387
Shareholders' equity:
Common stock................................ $ 4,975 $ 4,877
Preferred stock and related surplus......... - -
Additional paid-in capital.................. 67,565 61,327
Retained earnings........................... 23,975 22,647
----------- --------- --------- ---------
Total shareholders' equity.............. $.96,515 $ 88,851
----------- --------- --------- ---------
Average total interest earning assets....... $1,115,929 $95,460 8.55% $ 1,013,750 85,584 8.44%
Average total interest bearing liabilities.. $ 943,879 $45,140 4.78% $ 851,013 39,079 4.59%
----------- --------- --------- ---------
Net yield on average interest earning
assets (net interest margin)........... $1,115,929 $50,320 4.51% $ 1,013,750 46,505 4.59%
----------- --------- ----------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1995
---------------------------------------------
Average Average
Balance Interest Rate
---------- --------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest earning assets:
Mortgages held for sale..................... $ 867 $ 69 7.96%
Loans net of unearned discount(1)........... 703,334 65,715 9.34%(2)
Allowance for credit losses................. (11,100)
---------- --------
Loans, net................................. 693,101 65,784 9.49%
Investment Securities:
Held to maturity:
Taxable investment securities 4,199 233 5.55%
Non-taxable investment securities...... 632 49 7.75%(2)
Available for sale:
Taxable investment securities........... 100,654 5,433 5.40%
Non-taxable investment securities....... 4,862 321 6.60%(2)
Federal funds sold.......................... 45,485 2,721 5.98%
---------- --------
Net interest earning assets..................... 848,933 74,541
Cash and due from banks......................... 31,242
Accrued interest receivable..................... 5,566
Bank premises and equipment..................... 12,589
Other real estate owned......................... 6,080
Other assets.................................... 14,159
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing)............... $ 119,034
Interest checking........................... 63,906 $ 1,357 2.12%
Savings and money market.................... 203,110 6,719 3.31%
Time........................................ 355,719 20,211 5.68%
---------- --------
Total deposits.......................... 741,769 28,287
FHLB advances................................... 49,646 2,927 5.90%
Subordinated notes and debentures............... 9,000 855 9.50%
Trust preferred securities......................
Securities sold under repurchase agreements 27,962 980 3.50%
Accrued interest payable........................ 7,703
Other liabilities............................... 3,524
Shareholders' equity:
Common stock................................ $ 4,534
Preferred stock and related surplus......... 11,235
Additional paid-in capital.................. 44,492
Retained earnings........................... 18,704
---------- --------
Total shareholders' equity.............. $ 78,965
---------- --------
Average total interest earning assets....... $ 860,033 74,541 8.67%
Average total interest bearing liabilities.. $ 709,343 33,049 4.66%
---------- --------
Net yield on average interest earning
assets (net interest margin)........... $ 860,033 41,492 4.82%
---------- --------
</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 purpose of determining interest income.
(2) The interest earned on non-taxable loans and investment securities is
shown on a tax equivalent basis assuming a marginal federal tax rate of
35% for all periods.
- --------
(1) Non-accrual loans and non-performing assets exclude loans past due 90
days or more still accruing interest.
13
<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, 1997 1996
------------------------------- ---------------------- ------------------
1997 1996 1995 Amount Percent Amount Percent
-------- -------- -------- -------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Mortgages held for sale ....................... $ 299 $ 47 $ 69 $ 252 536% $ (22) (32%)
Interest and fees on loans .................... 78,993 72,500 65,583 6,493 9% 6,917 11%
Interest on investments securities:
Held to maturity:
U.S. Treasury securities .............. 102 (102) (100%)
Federal agency obligations ............ 34 131 (34) (100%) (97) (74%)
State and municipal obligations ....... 35 35 32 3 9%
Available for sale:
U.S. Treasury securities .............. 3,066 3,565 2,280 (499) (14%) 1,285 56%
Federal agency obligations ............ 4,975 5,282 2,538 (307) (6%) 2,744 108%
State and municipal obligations ....... 2,192 436 205 1,756 403% 231 113%
Other ................................. 845 981 615 (136) (14%) 366 60%
Interest on federal funds sold ................ 3,731 2,324 2,721 1,407 61% (397) (15%)
-------- -------- -------- -------- --------
Total interest income ......................... 94,136 85,204 74,276 8,932 10% 10,928 15%
-------- -------- -------- -------- --------
Interest Expense:
Deposits ................................. 31,622 29,990 28,287 1,632 5% 1,703 6%
FHLB advances ............................ 5,455 3,854 2,927 1,601 42% 927 32%
Subordinated notes and debentures ........ 2,868 2,401 855 467 19% 1,546 181%
Trust preferred securities ............... 2,119 2,119 100%
Securities sold under repurchase
agreements ............................ 3,076 2,834 980 242 9% 1,854 189%
-------- -------- -------- -------- --------
Total interest expense ........................ 45,140 39,079 33,049 6,061 16% 6,030 18%
-------- -------- -------- -------- --------
Net interest income ........................... $ 48,996 $ 46,125 $ 41,227 $ 2,871 6% $ 4,898 12%
-------- -------- -------- -------- --------
</TABLE>
14
<PAGE>
The following table sets forth changes in net interest income attributable
either to changes in volume (average balances) or to changes in average rate
for interest earning assets and interest bearing liabilities:
<TABLE>
<CAPTION>
1997 Versus 1996 1996 Versus 1995
------------------------------------- -------------------------------------
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. . . . . . . . . . .. . $ 252 $ 251 $ 1 $ (22) $ (15) $ (7)
Loans. . . . . . . . . . . . . . . . . . . .. . 6,493 6,065 428 6,917 8,108 (1,191)
Investments securities:
Held to maturity:
Taxable investment securities. . . . . . (34) (34) (199) (233) 34
Non-taxable investment securities. . . . 3 3
Available for sale:
Taxable investment securities. . . . . . (942) (1,430) 488 4,395 3,848 547
Non-taxable investment securities. . . . 1,756 1,747 9 231 158 73
Federal funds sold 1,407 1,319 88 (397) (154) (243)
----------- ---------- ----------- ---------- ------------ ----------
Total increase (decrease) in interest income . . 8,932 7,918 1,014 10,928 11,715 (787)
----------- ---------- ----------- ---------- ------------ ----------
Interest Expense:
Interest checking. . . . . . . . . . . . . .. . (411) 169 (580) 57 149 (92)
Savings and money market. . . . . . . . . . . 1,194 773 421 982 1,012 (30)
Time deposits. . . . . . . . . . . . . . . .. . 849 477 372 664 1,131 (467)
FHLB advances. . . . . . . . . . . . . . . .. . 1,601 1,522 79 927 1,081 (154)
Subordinated notes and debentures. . . . . .. . 467 487 (20) 1,546 1,585 (39)
Trust preferred securities. . . . . . . . . . 2,119 2,119
Securities sold under repurchase agreements.. . 242 (42) 284 1,854 1,716 138
----------- ---------- ----------- ---------- ------------ ----------
Total increase (decrease) in interest expense. . . 6,061 5,505 556 6,030 6,674 (644)
----------- ---------- ----------- ---------- ------------ ----------
Changes in net interest income. . . . . . . . . .. $ 2,871 $2,413 $ 458 $ 4,898 $ 5,041 $ (143)
============ ========== =========== ========== ============ ==========
</TABLE>
During 1997, average total interest earning assets totaled $1.1 billion,
an increase of $102.2 million or 10% over 1996, as compared to an increase of
$153.7 million or 18% in 1996 over 1995. The $102.2 million increase in 1997
reflected a $65.9 million increase in average loan balances, primarily in the
consumer category, the majority of which is comprised of indirect automobile
loans. Of the $153.7 million increase in 1996, $88.9 million resulted from
increased average loan balances, and primarily reflected the full year impact
in 1996 from the Constitution acquisition on August 4, 1995. The average rate
on interest earning assets was 8.55% in 1997, 8.44% in 1996 and 8.67% in 1995.
During 1997, average interest bearing liabilities totaled $943.9 million an
increase of $92.9 million or 11% over 1996 compared to an increase of $141.7
million or 20% in 1996 from 1995. Of the $92.9 million increase in 1997, $30.3
million resulted from increases in interest checking, savings and money market
accounts. Of the $141.7 million increase in 1996, $39.9 million resulted from
increases in interest checking, savings and money market accounts. The average
rate on interest bearing liabilities increased to 4.78% in 1997 after
decreasing to 4.59% in 1996 from 4.66% in 1995.
15
<PAGE>
Non-Interest Income. The following table provides a summary of
non-interest income:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service fees on deposit accounts. . . . . . . . $ 3,378 $ 3,181 $ 2,768
Gain on sales of residential mortgages. . . . . 1,067 419 261
Gain on sales of investment securities. . . . . 515 245 333
Mortgage servicing fees . . . . . . . . . . . . 744 819 885
Merchant credit card deposit fees . . . . . . . 1,968 1,593 1,247
Credit card fee income . . . . . . . . . . . . 432 145 69
Other . . . . . . . . . . . . . . . . . . . . . 1,545 903 1,406
---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . . . $ 9,649 $ 7,305 $ 6,969
========== ========== ==========
</TABLE>
Total non-interest income for 1997 was $9.6 million, an increase of $2.3
million or 32% from 1996, which in turn had shown an increase of $336,000 or
5% from the prior year. Service fees on deposit accounts increased by 6% and
15% respectively in 1997 and 1996, as compared to the prior year periods and
totaled $3.4 million in 1997. The increase in 1996 reflected the full year
impact of the Constitution acquisition, and internal growth. Throughout the
three year period ended 1997, 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.
Gains on the sales of residential mortgages for 1997 amounted to $1.1
million, an increase of $648,000 or 155% from 1996, which in turn had shown an
increase of $158,000 or 61% from the prior year. The increase in 1997 over the
prior year primarily reflected increases in the volume of residential mortgage
loans generated. 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 1997, 1996 and
1995 was, respectively, $554,000, $279,000 and $72,000. 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 sales of residential
mortgage loans is recognized at the time of the sale and substantially all
such gains resulted from originated mortgage servicing rights and fees
collected from borrowers.
Sales of securities resulted in net gains of $515,000 in 1997, as
compared to $245,000 in 1996 and $333,000 in 1995. In structuring the
Company's investment portfolio, management attempts to lock in yields in the
most advantageous rate environments. In 1997, 1996 and in the latter half of
1995, investment securities available for sale were sold and replaced with
securities offering higher yields.
Mortgage servicing fees were $744,000 in 1997, compared to $819,000 in
1996 and $885,000 in 1995. The decreases in 1997 and 1996 compared to
respective prior years reflected the impact of lower average balances in the
servicing portfolio with period end balances amounting to $243.3 million at
December 31, 1997, $245.3 million at December 31, 1996 and $254.2 million at
December 31, 1995. The reductions reflected paydowns and insignificant
portfolio purchases in 1997 and 1996. At December 31, 1997 and 1996, the
remaining unamortized purchase price amounts for mortgage servicing rights
were $631,000 and $799,000, respectively, and are being amortized over the
estimated lives of the portfolios. Originated mortgage servicing rights
capitalized and recognized as income were $554,000, $279,000 and $72,000
respectively in 1997, 1996 and 1995. At December 31, 1997 and 1996, the
remaining unamortized balance of capitalized mortgage servicing rights was
$761,000 and $222,000, respectively.
Credit card fee income, which includes interchange fees earned when cards
are utilized for purchases and cash advances, totaled $432,000 in 1997,
$145,000 in 1996 and $69,000 in 1995. Such fee increases were offset by
increases in related expense, reflected under non-interest expense as credit
card processing expense.
Merchant credit card fees increased in 1997 as compared to 1996 which had
increased significantly over 1995. Most of the increases, which resulted
primarily from increases in volume, were offset by increases in related
expense, reflected under non-interest expense as merchant credit card deposit
expense.
Other income was $1.5 million in 1997, compared to $903,000 in 1996 and
$1.4 million in 1995. The $642,000 increase in 1997 compared to 1996 reflected
$300,000 resulting from service charges instituted in 1997 on cash withdrawals
from proprietary ATMs by non-customers. The $503,000 decrease in other income
in 1996 compared to 1995 reflected a $264,000 reduction in gains on the sale
of other real estate owned.
16
<PAGE>
Non-Interest Expense. The following table provides a summary of
non-interest expense, by category of expense.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Non-interest expense:
<S> <C> <C> <C>
Salaries and employee benefits. . . . . . . . . . . . . . $ 16,653 $ 16,382 $ 13,954
Occupancy expense . . . . . . . . . . . . . . . . . . . . 3,709 3,847 3,528
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 1,746 1,692 1,565
FDIC insurance. . . . . . . . . . . . . . . . . . . . . . 98 29 826
Data processing expense . . . . . . . . . . . . . . . . . 802 1,235 1,309
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . 792 924 702
Stationary, printing, and supplies. . . . . . . . . . . . 849 888 675
Shares tax. . . . . . . . . . . . . . . . . . . . . . . . 791 751 592
Advertising . . . . . . . . . . . . . . . . . . . . . . . 1,008 1,223 700
Other real estate owned maintenance expense . . . . . . . 201 230 362
Loss on sale and write-downs of other real estate owned . 454 500 298
Amortization of intangibles . . . . . . . . . . . . . . . 1,310 1,262 816
Credit card origination expense . . . . . . . . . . . . . 490 235 85
Credit card processing expense. . . . . . . . . . . . . . 577 318 96
Merchant credit card deposit expense. . . . . . . . . . . 1,597 1,218 984
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 5,530 5,083 4,668
============= ============= =============
Total. . . . . . . . . . . . . . . . . . . . . . . $ 36,607 $ 35,817 $ 31,160
============= ============= =============
</TABLE>
Total non-interest expense in 1997 was $36.6 million, an increase of
$790,000 million or 2% over the $35.8 million in 1996, which had increased
$4.7 million or 15% over 1995. Various categories of non-interest expense in
1997 were reduced as compared to prior years, which include United Valley
Bank's expenses as a result of the restatement of financial statements
required by the pooling of interests method of accounting. In 1997, certain
such duplicative expenses were eliminated as noted below. These savings are
reflected in the lower 2% increase in non-interest expense in 1997, as
compared to the 15% increase in 1996, over respective prior years. Such
savings in salaries and employee benefits, the largest component of
non-interest expense, more than offset increases in the consumer loan
department, branches and other areas in 1997, and that category of expense
increased only $271,000 or 2% over the 1996 amount which had increased $2.4
million or 17% over 1995. The increase in salaries and employee benefits in
1996 over 1995 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.
Reflected in 1997 salaries and employee benefits were a $290,000 increase
attributable to the expansion of the consumer loan department and a $254,000
increase resulting from new branches. As noted, these and other increases were
more than offset by savings from the consolidation of United Valley Bank. Of
the 1996 increase in salaries and benefits of $2.4 million, $222,000 resulted
from commercial loan department expansion, $124,000 resulted from consumer
loan department expansion and $430,000 resulted from additional branches.
Additionally, salaries and benefits attributable to United Valley Bank prior
to acquisition by the Company increased approximately $1.0 million in 1996
compared to 1995. Significant amounts of that increase and other salaries and
employee benefits were reduced in 1997 as previously noted. The increases in
1997 and 1996 also reflected annual merit increases which averaged 3% to 4.5%.
Occupancy expense totaled $3.7 million in 1997 compared to $3.8 million
in 1996 and $3.5 million in 1995. The $138,000 reduction in 1997 over the
prior year reflected the termination of an office lease and the closure of two
branches, resulting from the acquisition of United Valley Bank. The $319,000
increase in 1996 reflected the expense of a branch from the Constitution
acquisition and four additional new branches. Depreciation expense was $1.7
million in 1997 and 1996 and $1.6 million in 1995. Increases reflected the
impact of new branches.
The FDIC insurance assessment for 1997 amounted to $98,000 compared to
$29,000 in 1996 and $826,000 in 1995. The $797,000 reduction in 1996 resulted
primarily from reductions in assessment rates. However, larger assessments may
be re-instituted at any time, and may be subject to periodic increases or
decreases.
17
<PAGE>
Data processing expense amounted to $802,000 in 1997, $1.2 million in
1996 and $1.3 million in 1995. The $433,000 reduction in 1997 over the prior
year reflected an $84,000 data processing contractual termination penalty as
well as approximately $268,000 of other data processing expense incurred by
United Valley Bank in 1996, the majority of which was eliminated in 1997. The
decrease also reflected reductions in data processing fees resulting from a
new outsourcing contract.
Legal expense amounted to $792,000 in 1997, $924,000 in 1996 and $702,000
in 1995. The $132,000 reduction in 1997 from the prior year reflects
approximately $125,000 of legal expense incurred by United Valley Bank in
1996, the majority of which was eliminated in 1997. The $222,000 increase in
1996 over 1995 reflected legal fees on several unrelated matters.
Stationery printing and supplies amounted to $849,000 in 1997, $888,000
in 1996 and $675,000 in 1995. The $213,000 increase in 1996 over the prior
year 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 $40,000
in 1997 and $159,000 in 1996 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 $1.0 million in 1997, $1.2 million in
1996 and $700,000 in 1995. The $215,000 reduction in 1997 over the prior year
reflects reductions in various types of advertising programs. Of the $523,000
increase in 1996 over 1995, approximately $125,000 resulted from promotional
expense in connection with credit card programs. Approximately $125,000 of the
increase resulted from a one time advertising campaign promoting personal
transaction accounts, and $65,000 of that increase resulted from introductory
advertising of new telephone and computer banking services.
Amortization of intangibles amounted to $1.3 million in 1997 and 1996 and
$816,000 in 1995. Substantially all of the $446,000 increase in 1996 over 1995
resulted from the full year impact of the Constitution acquisition. Of that
$446,000, a total of $208,000 resulted from increased related goodwill
amortization, and $231,000 resulted from related core deposit intangibles
amortization. Goodwill from acquisitions is being amortized over a fifteen
year period.
Credit card origination expense totaled $490,000 in 1997, $235,000 in
1996 and $85,000 in 1995. Increases in expense during these periods resulted
primarily from amortization of increased direct account origination
expenditures. Credit card processing expense totaled $577,000 in 1997,
$318,000 in 1996 and $96,000 in 1995. Increases in expense during these
periods resulted primarily from increases in the number of accounts and
related volume.
Merchant credit card deposit expense increased in 1997 as compared to
1996 which had increased significantly over 1995. 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.
The Company's income tax provision was $6.0 million in 1997 compared to
$4.6 million in 1996 and 1995. The effective income tax rate was 33% in 1997,
37% in 1996 and 35% in 1995. The decrease in the effective rate in 1997
compared to 1996 reflected increases in tax-exempt income. The increase in the
effective income tax rate in 1996 compared to 1995 reflected increases in
non-deductible amortization.
Premises and equipment at December 31, 1997, reflected the purchase of
approximately $1.6 million of hardware and software for a branch automation
and sales tracking system, which had been implemented by the end of that year.
A full year of related expenses will be realized beginning in 1998. Potential
offsets to the related expense include salary savings, forms savings and the
benefits of increased cross sales which are monitored by the system. Also
reflected in premises and equipment was a $1.3 million expenditure for check
imaging equipment and software which was paid for, but will not be implemented
until 1998. Potential offsets to related expenses include salary and postage
savings and additional service charge income.
In 1998, the Company occupied a new main office, initially consisting of
13,000 square feet with an initial annual rental of $200,000.
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 have been 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.
Investment securities available for sale may be sold for liquidity purposes.
Investment securities held to maturity are, after maturity, an additional
source of liquidity.
18
<PAGE>
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. Federal
Home Loan Bank ("FHLB") overnight advances may also be utilized, as they may
be less costly than other sources, and may be repaid or increased on a daily
basis.
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 deposits increased $146.5 million in 1997
after decreasing $53.4 million in 1996 and increasing $29.6 million in 1995.
The increase in 1997 reflected increases in savings, money market and time
deposits resulting from the promotional rates offered for these instruments.
The decrease in 1996 reflected seasonal fluctuations. Net increases in FHLB
advances amounted to $22.3 million in 1997 as compared to $50.8 million in
1996 and $33.3 million in 1995. Funding was directed primarily at cash
outflows required by net increases in loans of $83.1 million, $64.0 million
and $65.7 million, respectively, in 1997, 1996 and 1995. Purchases of
investment securities increased to $171.1 million in 1997, from $102.2 million
in 1996 and $131.8 million in 1995. While substantially all securities are
available for sale and therefore may be sold for liquidity purposes, $156.6
million of $244.2 million in total securities owned at December 31, 1997,
consisted of either mortgage backed securities or state and municipal
obligations. The majority of those securities were purchased in 1997 and have
longer maturities and higher yields than the majority of securities purchased
in prior years. Mortgage backed securities totaled $103.5 million at December
31, 1997 and generally had average lives of 5 years or more. State and
municipal obligations at that date totaled $53.8 million and generally had
maturities of 15 years or more. Cash flows in 1997 were increased through an
offering of $25.3 million of 9.25% trust preferred securities. Cash flows in
1996 were increased through an offering of $23 million of 8.75% subordinated
notes.
Operating activities include cash outflows for residential mortgages
originated for sale, which amounted to $46.2 million, $26.6 million and $20.5
million, respectively, in 1997, 1996 and 1995. Outflows for mortgages
originated for sale are generally offset within 90 days by the receipt of
related sales proceeds.
The cash flow effects of the Constitution Bank acquisition in 1995 were
excluded from the consolidated statements of cash flows and from the preceding
discussion since they arose when that bank was 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 in excess of 10% of its total assets at rates
approximately .25% over daily federal funds rates by pledging first mortgage
residential and other collateral against such advances. Longer term funding at
rates approximately .40% over U.S. Treasury rates is also available although
it is rarely utilized. As of December 31, 1997, the Company had outstanding
$150.0 million of overnight advances, substantially all of which matured in
January, 1998.
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 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 qualifying trust preferred securities and minority interest 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, 1997 and 1996, together with the minimum ratios required under the
regulation for an institution to be deemed "well-capitalized":
19
<PAGE>
<TABLE>
<CAPTION>
Tier 1 Capital Tier 1 Capital Total Capital
to Total Average to Risk-Weighted to Risk-Weighted
Assets Ratio Assets Ratio Assets Ratio
December 31, December 31, December 31,
------------ ------------ ------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Entity:
The Company . . . . . . . . . . . . . . . . . 9.31% 7.26% 12.27% 9.87% 16.93% 15.08%
Jefferson PA. . . . . . . . . . . . . . . . . 7.14% 7.14% 9.61% 9.57% 14.33% 14.65%
Jefferson NJ. . . . . . . . . . . . . . . . . 7.04% 8.10% 9.23% 11.16% 13.57% 16.88%
"Well capitalized" institution (under FDIC
Regulations). . . . . . . . . . . . . . 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
- ---------------
</TABLE>
At December 31, 1997, both the Company's subsidiary banks were
"well-capitalized" under FDIC regulations.
20
<PAGE>
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 estimated repricing intervals for interest
earning assets and interest bearing liabilities as of December 31,1997, 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 estimated amortization.
<TABLE>
<CAPTION>
Within Four to One to Three to Over
Three Twelve Two Five Five
Months Months Years Years Years
--------------- ------------- ----------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 92,200
Investment securities:
Available for sale:
Taxable investment securities 6,500 $ 34,436 $ 17,256 $ 13,753 $ 118,389
Non-taxable investment securities 375 1,219 251 295 51,013
Held to maturity:
Non-taxable investment securities 262 195 225
Mortgages held for sale 2,959
Loans net of unearned discount 382,484 139,440 120,866 189,643 74,333
--------------- ------------- ----------- ------------ -------------
Total interest earning assets 484,518 175,095 138,635 203,886 243,960
--------------- ------------- ----------- ------------ -------------
Interest bearing liabilities:
Savings, money market and interest checking 21,297 51,091 62,440 246,154
Time deposits 206,565 161,295 24,296 15,526 656
Securities sold under repurchase
agreements 70,911
FHLB advances 150,000
Subordinated notes and debentures - 32,000
Preferred securities - 25,300
--------------- ------------- ----------- ------------ -------------
Total interest bearing liabilities 448,773 212,386 86,736 261,680 57,956
--------------- ------------- ----------- ------------ -------------
Gap $ 35,745 $ (37,291) $ 51,899 $ (57,794) $ 186,004
=============== ============= =========== ============ =============
Cumulative gap $ 35,745 $ ( 1,546) $ 50,353 $ (7,441) $ 178,563
=============== ============= =========== ============ =============
Gap to assets ratio 3% (3%) 4% (4%) 14%
Cumulative gap to assets ratio 3% - 4% (1%) 13%
</TABLE>
- --------------------------------------------------------
* Less than 1%.
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 borrowers to service their debt may decrease in the
event of an interest rate increase.
21
<PAGE>
The following table summarizes interest earning assets and interest
bearing liabilities at December 31, 1997 by contractual maturity, except for
savings, money market and interest checking. As in the above table which
summarizes repricing intervals, contractual maturities of one day for those
instruments have been modified as a result of the Company's and industry's
experience with such accounts. The Company's historical experience with it's
savings, money market and interest checking, has demonstrated core deposit
retention notwithstanding that such instruments were not repriced during
periods when market interest rates increased. In 1997, the Company reviewed
such retention with an outside consulting firm which affirmed these
characteristics based upon their studies. Accordingly, the company classifies
significant portions of its savings, money market and interest checking as
maturing and/or repriceable in periods as shown in the following table.
<TABLE>
<CAPTION>
Within Four to One to Two to Three to Four to Over
Three Twelve Two Three Four Five Five Fair
Months Months Years Years Years Years Years Total Value
------ ------- ----- ----- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold. $ 92,200 $ 92,200 $ 92,200
(Rate) 5.50% 5.50%
Investment securities
Available for sale:
Taxable investment
securities.. 6,500 $ 34,436 $ 17,256 $ 7,778 $ 3,914 $2,061 $118,389 190,334 190,334
(Rate) 6.24% 5.88% 6.20% 6.09% 5.87% 6.60% 6.80% 6.51%
Non-taxable investment
securities... 375 1,219 251 115 180 51,013 53,153 53,153
(Rate) 6.59% 6.45% 6.08% 5.61% 6.97% 8.08% 8.01%
Held to maturity:
Non-taxable investment
securities... 262 195 225 682 699
(Rate) 7.05% 7.62% 7.62% 7.40%
Loans net of unearned
discount 126,387 240,003 133,246 100,875 80,565 53,723 174,926 909,725 913,673
(Rate) 9.32% 8.89% 8.75% 8.70% 8.48% 8.86% 8.52% 8.82%
--------- --------- -------- --------- --------- --------- --------- --------- ---------
Total interest earning
assets 225,462 275,658 151,015 108,768 84,479 56,159 344,553 1,246,094 1,250,059
--------- --------- -------- --------- --------- --------- --------- --------- ---------
Interest bearing liabilities:
Savings. money market
and interest
checking 21,297 51,376 62,451 95,544 52,062 98,252 380,982 380,982
(Rate) 5.41% 3.25% 3.04% 3.28% 2.21% 1.93% 2.86%
Time deposits........ 206,565 161,295 15,872 8,424 11,569 3,051 1,562 408,338 408,338
(Rate) 5.61% 5.49% 5.55% 6.26% 7.17% 6.63% 6.53% 6.53%
Securities sold under
repurchase
agreement 70,911 70,911 70,911
(Rate) 4.50% 4.50%
FHLB advances..... 150,000 150,000 150,000
(Rate) 5.65% 5.65%
Subordinated notes
and debentures. 32,000 32,000 30,875
(Rate) 8.98% 8.98%
Preferred Securities 25,300 25,300 23,782
(Rate) 9.25% 9.25%
--------- --------- -------- --------- --------- --------- --------- --------- ---------
Total interest bearing
liabilities 448,773 212,671 78,323 103,968 63,631 101,303 58,862 1,067,531 1,064,888
--------- --------- -------- --------- --------- --------- --------- --------- ---------
Gap.................. $(223,311) $ 62,987 $ 72,692 $ 4,800 $ 20,848 $ (45,144) $ 285,691 $ 178,563 $ 185,171
========= ========= ======== ========= ========= ========= ========= ========= =========
Cumulative gap....... $(223,311) $(160,324) $ (87,632)$ (82,832) $ (61,984) $(107,128) $ 178,563
========= ========= ======== ========= ========= ========= ========= ========= =========
Gap to assets ratio.. (17%) 5% 5% * 2% (3%) 22%
Cumulative gap to assets
ratio (17%) (12%) (7%) (6%) (5%) (8%) 13%
Less than 1%.
</TABLE>
22
<PAGE>
Financial Condition
General. Total average assets of the Company amounted to $1.2 billion in
1997, $1.1 billion in 1996, and $918.6 million in 1995, as restated to reflect
the United Valley Bank acquisition. This amounted to a $111.4 million or 10%
increase in 1997 over 1996, as compared with an increase of $160.9 million or
18% in 1996 over 1995. In 1997, increases reflected internal growth including
increases in consumer loans which are comprised primarily of indirect
automobile loans. In 1996, increases in average assets reflected the full year
effect of the Constitution Bank acquisition. Total average assets increased
during 1995 primarily as a result of the 1995 Constitution Bank acquisition
and the full year effect of the 1994 Security First Bank and Bank of Chester
County acquisitions. Regulatory capital in 1997 was increased by an offering
of $25.3 million of 9.25% trust preferred securities. Regulatory capital was
increased in 1996 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 amortized cost 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.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
Amortized Amortized Amortized
Cost Market Cost Market Cost Market
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity:
U.S. Treasury securities . . . . . .. $ 2,000 $ 1,999
Federal agency obligations . . . .. 1,197 1,198
State and municipal obligations. . .. $682 $699 $687 $701 692 711
---------------- -------------- ------------- -------------- -------------- ------------
Total investment securities
held to maturity. . . . . . . .. $682 $699 $687 $701 $ 3,889 $ 3,908
================ ============== ============= ============== ============== ============
December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
Amortized Amortized Amortized
Cost Market Cost Market Cost Market
Securities Available for Sale:
U.S. Treasury securities . . . . . . $ 42,489 $ 42,612 $ 68,580 $ 68,549 $ 61,528 $ 61,559
Federal agency obligations. . . . . . 21,060 21,148 37,127 37,201 50,598 51,123
Mortgage-backed securities . . . . .. 103,246 103,495 35,433 35,424 28,132 28,247
State and municipal obligations. . .. 51,215 53,153 15,334 15,580 4,523 4,555
Other securities. . . . . . . . . . . 23,012 23,079 17,794 17,797 14,188 14,199
---------------- -------------- ------------- -------------- -------------- -------------
Total investment securities
available for sale. . . . . . . . $ 241,022 $ 243,48 $ 174,268 $ 174,551 $ 158,969 $ 159,683
================ ============== ============= ============== ============== =============
</TABLE>
- ---------------
Except for U.S. Treasury and Federal agency securities, investments in the
securities of any one issuer do not exceed 10% of the total amount of
investment securities held.
To enhance liquidity and diversification of its interest earning assets,
the Company has increased its portfolio of investment securities, primarily in
U.S. Treasury and Federal agency securities. The Company has been increasing
the average maturity of its investment portfolio by purchasing Federal agency
mortgage-backed securities with average lives of five years or more, and
municipal securities with maturities of fifteen years or longer.
Investment securities with a carrying value of $93.3 million and $89.4
million at December 31, 1997 and 1996, 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.
23
<PAGE>
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, 1997:
<TABLE>
<CAPTION>
After After
One to Five to Over
One Year Average Five Average Ten Average Ten Average
or less Yield (1) Years Yield (1) Years Yield (1) Years Yield (1) Total
------- --------- ----- --------- ------- --------- ----- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury securities . . . . .
Federal agency obligations . . . .
State and municipal obligations. . $ 457 7.29% $ 225 7.62% $ 682
----- ----- -----
Total held to maturity. . . . $ 457 $ 225 $ 682
====== ===== ======
Weighted average yield (1) 7.29% 7.62%
---- ====
Available for Sale:
U.S. Treasury securities. . . . . $ 35,138 5.90% $ 6,613 6.16% $ 861 6.47% $42,612
Federal agency obligations. . . . 4,000 6.31% 17,148 6.17% 21,148
Mortgage backed securities. . . . 790 5.76% 6,520 6.13% 2,600 6.98% $ 93,585 6.90% 103,495
State and municipal obligations . 1,594 6.48% 546 6.28% 51,013 8.08% 53,153
Other securities. . . . . . . . . 1,008 5.79% 728 6.10% 220 8.58% 21,123 6.33% 23,079
------------- ------- ----- -------- -------
Total available for sale . . $ 42,530 $ 31,555 $ 3,681 $ 165,721 $243,487
============= ========= ======= ========= ========
Weighted average yield (1) 5.96% 6.16% 6.96% 7.19%
==== ==== ==== ====
</TABLE>
- ---------------
(1) Yields on tax-exempt obligations have been computed on a tax equivalent
basis assuming a marginal federal tax rate of 35%.
Loan Portfolio. In addition to continuing its historical emphasis on
commercial loans the Company has increasingly emphasized consumer loans,
especially indirect automobile loans. Accordingly, consumer loans, the
majority of which are comprised of indirect automobile loans, grew to $247.9
million at December 31, 1997, or 52% more than the $162.7 million at December
31, 1996, which had increased 34% over the prior year end. Commercial based
lending includes commercial loans, commercial mortgages, construction loans
and direct financing leases. Total commercial based loans decreased to $566.5
million at December 31, 1997, or 4% less than the $591.5 million at December
31, 1996, which had increased 1% over the prior year end..
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 $2.1 million, $1.8 million and
$1.7 million at December 31, 1997, 1996 and 1995, respectively. Large loans as
a percentage of total loans at December 31, 1997, 1996 and 1995 were 8%, 11%
and 11%, respectively.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Mortgages held for sale ........................ $ 2,959 $ 725 $ 484 $ 380 $ 19,009
-------- -------- -------- -------- --------
Commercial loans(1) ............................ 259,027 283,107 270,700 236,630 196,528
Commercial mortgages ........................... 214,297 228,246 241,074 173,100 158,287
Construction loans ............................. 74,496 66,182 62,405 50,182 38,427
Direct financing leases ........................ 18,649 13,963 13,642 13,556 9,837
Consumer loans ................................. 247,858 162,726 121,395 99,861 62,299
Credit cards ................................... 21,669 6,079 2,115 624 --
Residential mortgages .......................... 67,029 67,252 61,580 59,227 49,092
Overdrafts ..................................... 3,741 1,307 1,096 912 508
-------- -------- -------- -------- --------
Net loans (before allowance for credit lossses) 906,766 828,862 774,007 634,092 514,978
-------- -------- -------- -------- --------
Total net loans and mortgages held for sale $909,725 $829,587 $774,491 $634,472 $533,987
======== ======== ======== ======== ========
</TABLE>
(1) Commercial loans secured by real property approximated $149.7 million,
$165.5 million, $164.0 million, $150.2 million and $108.3 million
respectively at December 31, 1997, 1996, 1995, 1994 and 1993.
24
<PAGE>
The following table summarizes the loan portfolio of the Company by loan
category and amount at December 31, 1997 and corresponds to appropriate
regulatory definitions.
<TABLE>
<CAPTION>
Book Value
(in thousands)
<S> <C>
Loans secured by real estate:
Construction and land development ........................................... $ 74,806
Secured by 1-4 family residential properties ................................ 205,433
Secured by multifamily (5 or more) residential properties ................... 30,912
Secured by non-family, non- residential properties .......................... 245,078
Commercial and industrial loans:
To U.S. addresses (domicile) ............................................... 109,357
Loans to individuals for household, family and other personal expenditures:
Credit cards and related plans .............................................. 21,669
Other ....................................................................... 194,685
Tax-exempt industrial development obligations ............................... 5,001
All other loans ............................................................. 4,136
Lease financing receivables, net of unearned income ......................... 18,648
========
Total ................................................................... $909,725
========
</TABLE>
The following table presents selected loan categories at December 31,
1997 by maturity. Loans having no stated schedule of repayments and no stated
maturity are reported as due in one year or less. Loans at variable rates
include loans immediately repriceable, or repriceable at specified intervals
(usually three years or less) in response to changes in specified indices.
<TABLE>
<CAPTION>
Period to Maturity
Within One to Five After Five
One Year Years Years Total
-------- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Commercial and commercial mortgages . .. . $ 174,552 $ 193,084 $ 105,688 $ 473,324
Construction. . . . . . . . . . . . . .. . 59,192 15,304 74,496
============= ============= ============ =============
Total. . . . . . . . . .. . $ 233,744 $ 208,388 $ 105,688 $ 547,820
============= ============= ============ =============
Amounts of loans:
Loans at fixed rates. . . . . . . . $ 111,801 $ 38,518
Loans at variable rates. . . . .. . 96,587 67,170
============= ============
Total. . . . . . . . . .. . $ 208,388 $ 105,688
============= ============
</TABLE>
The following table presents loans, including mortgages held for sale, as
of December 31,1997 by maturity:
<TABLE>
<CAPTION>
Period to Maturity
Within One to Five After
One Year Years Five Years Total
-------------- --------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Mortgages held for sale . . . . . . . $ 2,959 $ 2,959
Loans at fixed rates . . . . . . . . . 148,186 $ 271,726 $ 82,691 502,603
Loans at variable rates. . . . . . . . 215,245 96,683 92,235 404,163
============== =============== ============= =============
Total . . . . . . . . . $ 366,390 $ 368,409 $ 174,926 $ 909,725
============== =============== ============= =============
</TABLE>
25
<PAGE>
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 $9.4 million, $11.3 million, $13.1
million, $10.2 million and $6.8 million, respectively, at December 31, 1997,
1996, 1995, 1994 and 1993 (1). Non-performing assets including other real
estate owned amounted to $11.6 million, $14.8 million, $17.4 million, $17.7
million and $14.3 million, respectively, at December 31, 1997, 1996, 1995,
1994 and 1993 (1). Of the $9.4 million in non-accrual loans (1) at December
31, 1997, $3.3 million resulted from the Constitution acquisition. Of the
$11.3 million in non-accrual loans (1) at December 31, 1996, $2.6 million
resulted from the Constitution acquisition. Of the $13.1 million in
non-accrual loans at December 31, 1995, $3.0 million resulted from the
Constitution acquisition, and $895,000 remained from other acquisitions.
Activity in non-accrual loans in 1997 reflected $5.2 million of additions,
$3.3 million of payments, $3.4 million of charge-offs, $357,000 of transfers
to other real estate owned and $91,000 of loans returned to accrual status.
Activity in 1996 reflected $5.0 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. Loans past due 90 days or more
still accruing amounted to $5.5 million in 1997, $4.5 million in 1996 and $6.9
million in 1995. The decreases in 1997 and 1996 as compared to 1995 reflect
the elimination of substantially all amounts originally resulting 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, 1997 totaled $2.2 million,
compared to $3.5 million at December 31, 1996. The December 31, 1997 total
included approximately $275,000 from the Constitution acquisition and no
remaining amounts from other acquisitions. Activity in 1997 reflected
additions of $2.1 million, sales and other receipts of $2.7 million and
charge-offs and other write downs of $671,000. The December 31, 1996 total
included approximately $625,000 from the Constitution acquisition. Activity in
1996 reflected additions of $4.1 million with sales and other receipts of $3.6
million and charge offs of $1.2 million. Other real estate owned at December
31, 1995 totaled $4.3 million, a decrease of $1.8 million from December 31,
1994. The balance at December 31, 1995 included $2.2 million of other real
estate owned from the Constitution acquisition and insignificant amounts from
other acquisitions.
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 1997 through 1993 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,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis(1) ..... $ 9,361 $11,269 $13,127 $10,240 $ 6,832
Loans renegotiated to provide a reduction or
deferral of interest or principal .............. -- 1,367 1,493
------- ------- ------- ------- -------
Total non-performing loans (1) ..................... 9,361 11,269 13,127 11,607 8,325
------- ------- ------- ------- -------
Other real estate owned ............................ 2,235 3,537 4,260 6,093 5,937
======= ======= ======= ======= =======
Total non-performing assets (1) ................... $11,596 $14,806 $17,387 $17,700 $14,262
======= ======= ======= ======= =======
Non-performing loans/total loans(1) ............... 1.03% 1.36% 1.69% 1.83% 1.56%
Non-performing assets/total loans and non-
performing assets(1) ........................... 1.27% 1.78% 2.23% 2.76% 2.64%
Loans past due 90 days or more as to interest or
principal payments still accruing interest and
not included in non-accrual loans .............. $ 5,452 $ 4,478 $ 6,898 $ 6,190 $ 4,564
======= ======= ======= ======= =======
</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 repayment ability 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 $9.4 million, $11.3 million and $13.1 million at December
31, 1997, 1996 and 1995, respectively. If interest on non-accrual loans (1)
had been accrued, such income would have been approximately $931,000, $1.1
million and $774,000 for the years ended December 31, 1997, 1996 and 1995,
respectively (1). At December 31, 1997 and 1996, there were no commitments to
lend additional funds to borrowers whose loans were classified as non-accrual.
- ---------------
(1) Excluding loans past due 90 days or more and still accruing interest.
26
<PAGE>
The balance of impaired loans was $9.4 million and $11.3 million
respectively at December 31, 1997 and 1996. 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 $2.3 million and $3.7 million
respectively at December 31, 1997 and 1996. The average recorded investment in
impaired loans was $10.3 million in 1997 and the income recognized on impaired
loans during 1997 was $-0-. The average recorded investment in impaired loans
was $12.2 million in 1996 and the income recognized on impaired loans during
1996 was $-0-. Total cash collected on impaired loans during 1997 and 1996 was
$3.3 million and $1.2 million respectively which was credited to the principal
balance outstanding on such loans. Respective interest which would have been
accrued on impaired loans during 1997 and 1996 was $931,000 and $1.1 million.
The Company recognizes income on non-accrual loans under the cash basis when
the loans are both current and the collateral on the loans 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, the size of the different
loan portfolios, current economic and market conditions, changes in
non-performing loans, the capability of specific borrowers to repay specific
loan obligations and 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 $3.6 million in 1997, as compared to
$5.0 million in 1996 and $4.0 million in 1995. The ratio of the allowance for
credit losses to total loans was 1.40%, 1.66% and 1.93% respectively at
December 31, 1997, 1996 and 1995. The ratio of the allowance for credit losses
to non-performing assets was 110%, 93% and 86% at December 31, 1997, 1996 and
1995. The ratio of the allowance for credit losses to non-accrual loans,
including loans 90 days past due still accruing interest, was 86%, 87% and 75%
at December 31, 1997, 1996 and 1995, respectively. The decrease in the
allowance for credit losses to $12.8 million at December 31, 1997 from $13.7
million at December 31, 1996 reflected , among other factors, the 4% decrease
in the commercial loan portfolio. The decrease in the December 31, 1996
allowance for credit losses to $13.7 million from $15.0 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 increase in
the allowance in 1995 to $15.0 million reflects the $6.1 million allowance for
credit losses resulting from Constitution Bank. The provision for credit
losses of $3.6 million in 1997 compared with $5.0 million in 1996, $4.0
million in 1995, $1.9 million in 1994 and $2.5 million in 1993. The $1.0
million increase in 1996 compared to 1995 reflected a $1.5 million additional
provision to bring the United Valley Bank allowance for credit losses to
levels more consistent with industry wide methodologies. The increase was
reflected in the restatement of the financial statements resulting from the
pooling of interests method of accounting utilized for that acquisition. The
$2.1 million increase in 1995 over the prior year in the provision for credit
losses was required by the ongoing quarterly analyses of adequacy of the
allowance for credit losses. The Company's charge offs, excluding the effect of
all its acquisitions, amounted to $2.8 million in 1997, $5.6 million in 1996,
$3.3 million in 1995 and $2.4 million in 1994. The $2.3 million increase in
1996 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. The majority of recoveries of $1.3 million
in 1997, $1.1 million in 1996, $672,0000 in 1995, and $513,000 in 1994,
resulted from loans originating in the portfolios of acquired banks.
In 1993 and 1994, quarterly provisions for credit losses approximated
budgeted amounts of $500,000 to $600,000. Quarterly provisions in 1995,
excluding United Valley Bank, 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 the then current loss
instead of pursuing a lengthy work out, as was previously intended.
Chronological quarterly provision for 1996, excluding United Valley Bank, were
$624,000, $703,000, $786,000 and $867,000 and reflected budgeted amounts,
supported by ongoing quarterly analyses of adequacy of the allowance for
credit losses. Provisions for United Valley Bank amounted to $2.0 million and
included $1.5 million to bring levels in the allowance to levels more
consistent with industry wide methodologies. Chronological quarterly
provisions for 1997 were $825,000, $870,000, $945,000 and $960,000 and were
consistent with budgeted amounts.
27
<PAGE>
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,
----------------------------------------------------
1997 1996 1995 1994 1993
======= ======= ======= ======= =======
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance in allowance for credit losses
at beginning of year ............................. $13,734 $14,991 $ 8,986 $ 6,867 $ 6,468
======= ======= ======= ======= =======
Loans charged-off:
Commercial ....................................... 957 1,914 2,816 1,198 736
Construction ..................................... -- 473 -- 167 --
Real estate mortgage ............................. 3,140 4,272 1,588 1,768 1,274
Credit card ...................................... 835 160 16 -- --
Installment and direct financing leases .......... 900 522 435 236 243
======= ======= ======= ======= =======
Total ......................................... 5,832 7,341 4,855 3,369 2,253
======= ======= ======= ======= =======
Recoveries:
Commercial ....................................... 216 109 265 309 73
Construction ..................................... -- -- -- -- 1
Real estate mortgage ............................. 956 901 437 196 31
Credit card ...................................... 9 -- -- -- --
Installment and direct financing leases .......... 86 51 51 28 28
======= ======= ======= ======= =======
Total ......................................... 1,267 1,061 753 533 133
======= ======= ======= ======= =======
Net charge-offs ....................................... 4,565 6,280 4,102 2,836 2,120
Purchase of Chester County ............................ 2,434
Purchase of Security First ............................ 664
Purchase of Constitution .............................. 6,121
Provision charged to operations ....................... 3,600 5,023 3,986 1,857 2,519
======= ======= ======= ======= =======
Balance in allowance for credit losses at end of
period ........................................... $12,769 $13,734 $14,991 $ 8,986 $ 6,867
======= ======= ======= ======= =======
Net charge-offs/average loans, net .................... 0.53% 0.79% 0.58% 0.50% 0.42%
</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
loans, commercial real estate, construction and other loans as well as
internally classified loans is conducted and specific reserves are allocated
for those credits which are determined to have weaknesses requiring such
allocations. 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 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 value adequacy 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 $340.8 million and $218.6 million at December 31, 1997 and 1996,
respectively. Outstanding letters of credit amounted to $11.5 million and $8.8
million at December 31, 1997 and 1996, respectively.
<PAGE>
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, 1997, total deposits were approximately $933.6 million, an increase of
approximately $146.5 million or 19% from December 31, 1996. The increase
reflected inflows resulting from promotional rates on various deposit
instruments. At December 31, 1996, total deposits were approximately $787.1
million, a decrease of approximately $53.4 million or 6% over 1995. The
decrease between 1996 and 1995 year-end amounts reflected seasonal
fluctuations. Year end core deposits as a percentage of total deposits were
approximately 89% for 1997 and 1996 while the percentage of certificates of
deposit in excess of $100,000 was 11% in those years.
28
<PAGE>
The following tables present the average balances and rates paid on
deposits for each of the years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------ ----------- -------------- ----------- --------------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Demand (non-interest bearing). . .. . $ 132,512 $ 125,435 $ 119,034
Interest checking. . . . . . . . .. . 80,673 1.24% 73,063 1.94% 63,906 2.12%
Savings and money market . . . . .. . 256,538 3.47% 233,837 3.29% 203,110 3.31%
Time . . . . . . . . . . . . . . .. . 384,983 5.64% 376,472 5.54% 355,719 5.68%
============ =========== ==========
Total Deposits . . . . . .. . $ 854,706 $ 808,807 $ 741,769
============ =========== ===========
</TABLE>
As of December 31, 1997, the Company had total time deposits of
approximately $408.3 million. The following table summarizes the composition
of these deposits.
<TABLE>
<CAPTION>
Percentage of
Total Time
Amount Deposits
------------ --------
(dollars in thousands)
<S> <C> <C>
Certificates of deposits in excess of $100,000. . . . . . $ 98,626 24%
Individual retirement accounts. . . . . . . . . . . . . . 36,560 9%
Other time deposits. . . . . . . . . . . . . . . . . . . 273,152 67%
----------- ------
Total. . . . . . . . . . . . . . . . . . . . . . $ 408,338 100%
=========== ======
</TABLE>
The remaining maturity of certificates of deposit of $100,000 or more as
of December 31, 1997 is presented:
Amount
------------
(in thousands)
Maturity:
Three months or less. . . . . . . . . . . . $ 60,244
Three to six months. . . . . . . . . . . . 14,831
Six to 12 months. . . . . . . . . . . . . . 17,520
Over 12 months. . . . . . . . . . . . . . . 6,031
===========
Total. . . . . . . . . . . . . . . $ 98,626
===========
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 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.
29
<PAGE>
Year 2000. As a control over the potential disruption which might result
from year 2000 computer malfunctions or failure of computer chips utilized in
equipment, management is in process of rectifying non-compliant software and
hardware systems throughout the institution. The bank's loan and deposit
applications are serviced by Fiserv, a publicly held corporation which
specializes in providing data processing services to financial institutions.
Management is monitoring that company's execution of its plan to bring
remaining applications into compliance. Fiserv's compliance is further under
review by a third party firm and is scheduled for additional examinations
through 1999. Management does not expect the costs of bringing the Company's
system into year 2000 compliance to have a material adverse effect on the
Company's financial condition, results of operation or liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 Managements Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Financial Statement Schedules are set forth
at pages 31 to 65 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<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. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
- -----------------------------
Philadelphia, Pennsylvania
January 15, 1998 (except for note 2, as
to which the date is March 19, 1998)
31
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents
Cash and due from banks $ 49,623 $ 45,343
Federal funds sold 92,200 41,950
---------- ----------
141,823 87,293
Investment securities available for sale 243,487 174,551
Investment securities held to maturity 682 687
Mortgages held for sale 2,959 725
Loans, net 893,997 815,128
Premises and equipment, net 18,420 14,989
Accrued interest receivable 7,518 7,299
Other real estate owned 2,235 3,537
Goodwill, net 4,435 8,776
Other assets 13,068 14,189
---------- ----------
Total assets $1,328,624 $1,127,174
========== ==========
LIABILITIES
Deposits
Demand (non-interest bearing) $ 144,310 $ 137,361
Savings, money market and interest checking 380,982 315,939
Time deposits 309,712 249,787
Time deposits, $100,000 and over 98,626 84,052
---------- ----------
933,630 787,139
Securities sold under repurchase agreements 70,911 73,764
FHLB advances 150,000 127,750
Subordinated notes and debentures 32,000 32,000
Guaranteed preferred beneficial interest in the Company's subordinated debt 25,300 --
Accrued interest payable 11,352 8,082
Other liabilities 2,576 7,158
---------- ----------
Total liabilities 1,225,769 1,035,893
---------- ----------
SHAREHOLDERS' EQUITY
Common stock - authorized, 10,000,000 shares of $1.00 par value; issued and
outstanding, 5,001,430 and 4,716,228 shares, respectively 5,001 4,716
Additional paid-in capital 71,101 64,030
Retained earnings 25,127 22,355
Net unrealized gain on securities available for sale 1,626 180
---------- ----------
Total shareholders' equity 102,855 91,281
---------- ----------
Total liabilities and shareholders' equity $1,328,624 $1,127,174
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans, including fees $79,292 $72,547 $65,652
Investment securities 11,113 10,333 5,903
Federal funds sold 3,731 2,324 2,721
------- ------- -------
94,136 85,204 74,276
------- ------- -------
Interest expense
Time deposits, $100,000 and over 5,254 5,002 4,478
Other deposits 26,368 24,988 23,809
FHLB advances 5,455 3,854 2,927
Subordinated notes and debentures 2,868 2,401 855
Trust preferred securities 2,119 -- --
Securities sold under repurchase agreements 3,076 2,834 980
------- ------- -------
45,140 39,079 33,049
------- ------- -------
Net interest income 48,996 46,125 41,227
Provision for credit losses 3,600 5,023 3,986
------- ------- -------
Net interest income after provision for credit losses 45,396 41,102 37,241
------- ------- -------
Non-interest income
Service fees on deposit accounts 3,378 3,181 2,768
Gain on sales of residential mortgages 1,067 419 261
Gain on sales of investment securities 515 245 333
Mortgage servicing fees 744 819 885
Merchant credit card deposit fees 1,968 1,593 1,247
Credit card fee income 432 145 69
Other 1,545 903 1,406
------- ------- -------
9,649 7,305 6,969
------- ------- -------
Non-interest expense
Salaries and employee benefits 16,653 16,382 13,954
Occupancy expense 3,709 3,847 3,528
Depreciation 1,746 1,692 1,565
FDIC expense 98 29 826
Data processing expense 802 1,235 1,309
Legal 792 924 702
Stationery, printing and supplies 849 888 675
Shares tax 791 751 592
Advertising 1,008 1,223 700
Other real estate owned maintenance expense 201 230 362
Loss on sale and write-downs of other real estate owned 454 500 298
Amortization of intangibles 1,310 1,262 816
Credit card origination expense 490 235 85
Credit card processing expense 577 318 96
Merchant credit card deposit expense 1,597 1,218 984
Other 5,530 5,083 4,668
------- ------- -------
36,607 35,817 31,160
------- ------- -------
Income before income taxes 18,438 12,590 13,050
Income taxes 6,001 4,640 4,571
------- ------- -------
Net income $12,437 $ 7,950 $ 8,479
======= ======= =======
Net income applicable to common stock $12,437 $ 7,950 $ 7,354
======= ======= =======
Per share data
Net income per common share - basic $ 2.50 $ 1.63 $ 1.87
Net income per common share - diluted $ 2.33 $ 1.54 $ 1.63
</TABLE>
The accompanying notes are an integral part of these statements.
33
<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, 1995 $ 3,428 $ 186 $ 57,252 $ 15,558 $ (1,259) $ 75,165
Net income -- -- -- 8,479 -- 8,479
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)
Warrants exercised 8 -- 94 -- -- 102
5% stock dividend 188 -- 4,299 (4,487) -- --
Net unrealized gain
on securities available
for sale -- -- -- -- 1,744 1,744
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 4,649 -- 63,102 16,802 485 85,038
Net income -- -- -- 7,950 -- 7,950
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
Warrants exercised 50 -- 533 -- -- 583
Cash dividends on common
stock -- -- -- (2,397) -- (2,397)
Net unrealized loss
on securities available
for sale -- -- -- -- (305) (305)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 4,716 -- 64,030 22,355 180 91,281
</TABLE>
(Continued)
34
<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 $ -- $ -- $ -- $ 12,437 $ -- $ 12,437
Issuance of common stock
for 401(k) plan 19 -- 493 -- -- 512
Issuance of common stock
for dividend reinvestment
plan 7 -- 221 -- -- 228
Warrants exercised 22 -- 251 -- -- 273
Cash dividends on common
stock -- -- -- (3,322) -- (3,322)
5% stock dividend 237 -- 6,106 (6,343) -- --
Net unrealized gain
on securities available
for sale -- -- -- -- 1,446 1,446
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 $ 5,001 $ -- $ 71,101 $ 25,127 $ 1,626 $ 102,855
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
35
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 12,437 $ 7,950 $ 8,479
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 4,099 3,947 3,123
Provision for credit losses 3,600 5,023 3,986
Gain on sales of investment securities (515) (245) (333)
Mortgage loans originated for sale (46,200) (26,602) (20,497)
Mortgage loan sales 43,966 26,361 20,394
Increase in interest receivable (219) (275) (940)
Increase in interest payable 3,270 543 215
Increase in other assets (3,277) (3,074) (1,434)
Increase in other liabilities 1,511 3,108 976
--------- --------- ---------
Net cash provided by operating activities 18,672 16,736 13,969
--------- --------- ---------
Investing activities
Proceeds from sales of investment securities available
for sale 43,187 11,827 31,147
Proceeds from maturities of investment securities available
for sale 60,795 74,205 37,431
Proceeds from maturities of investment securities held to
maturity -- 3,196 4,018
Purchases of investment securities available for sale (171,104) (102,226) (131,817)
Proceeds from sales of other real estate owned 2,390 3,147 6,421
Net increase in loans (83,112) (64,003) (65,659)
Cash of entities acquired -- -- 8,698
Purchases of premises and equipment (5,177) (3,516) (2,094)
--------- --------- ---------
Net cash used in investing activities (153,021) (77,370) (111,855)
--------- --------- ---------
Financing activities
Net increase (decrease) in deposits 146,491 (53,377) 29,587
Net (decrease) increase in repurchase agreements (2,853) 27,215 30,320
Net proceeds from issuance of common stock 1,013 995 215
Proceeds from FHLB advances 22,250 50,750 33,255
Proceeds from issuance of subordinated notes -- 23,000 --
Proceeds from issuance of preferred securities 25,300 -- --
Dividends paid on preferred stock -- -- (1,127)
Dividends paid on common stock (3,322) (2,397) (1,621)
--------- --------- ---------
Net cash provided by financing activities 188,879 46,186 90,629
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 54,530 (14,448) (7,257)
Cash and cash equivalents at beginning of year 87,293 101,741 108,998
--------- --------- ---------
Cash and cash equivalents at end of year $ 141,823 $ 87,293 $ 101,741
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
36
<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.
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. As a result of the merger with United Valley Bank as
more fully described in note 2 below, the financial statements have been
restated to reflect the impact of United Valley Bank. Restatement was
required as the transaction was accounted for under the pooling of
interests method of accounting.
The preparation of financial statements 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.
(Continued)
37
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
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. In connection with management's
evaluation of the acquisition, it was determined that the deferred tax
asset was more realizable than not. Accordingly, the deferred tax
valuation account and goodwill were reduced by $3,668,000.
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 benefits,
including new business, are not derived or JBPA changes its business plan,
estimated amortization may increase and/or a charge for impairment may be
recognized.
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.
Direct origination costs for credit cards are capitalized and amortized
over card terms to match related expense with future growth in balances
and resulting income. However, if such growth in balances and income does
not occur, estimated amortization may increase and/or a charge for
impairment may be recognized.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which is effective for years beginning after December 15, 1997.
This new standard requires entities presenting a complete set of financial
statements to include details of comprehensive income. Comprehensive
income consists of net income or loss for the current period and income,
expenses, gains, and losses that bypass the income statement and are
reported directly in a separate component of equity. The adoption of SFAS
No. 130 will not have a material effect on the presentation of the
Company's financial position or results of operations.
(Continued)
38
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which is effective for all periods beginning
after December 15, 1997. SFAS No. 131 requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate,
and their major customers. The adoption of SFAS No. 131 will not have a
material effect on the presentation of the Company's financial position or
results of operations.
Financial instruments
The FASB issued 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 cost,
adjusted for the amortization of premiums and accretion of discounts
computed by the interest method. 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. 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 that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff 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)
39
<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," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," 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. 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 the Company's 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 $511,000 and $934,000 in 1997 and 1996,
respectively, were made on competitive terms and in conformity with normal
underwriting standards to facilitate the sale of other real estate owned.
(Continued)
40
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
Goodwill and core deposit intangibles
Substantially all outstanding goodwill resulted from the acquisition of
Constitution Bank and is being amortized on a straight-line basis over
approximately 15 years. The unamortized balance at December 31, 1997 and
1996 was $3,958,000 and $8,243,000, respectively. In connection with
management's evaluation of the realizability of its deferred tax assets
associated with recent acquisitions, it was determined that the deferred
tax asset was more realizable than not. Accordingly, the deferred tax
valuation account and goodwill were reduced by $3,668,000.
Additionally, 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, 1997
and 1996 was $1,560,000 and $1,889,000, respectively.
Other assets
Deferred financing fees of $1,153,000, related to the issuance of trust
preferred securities, were incurred in 1997 and are being amortized over
the remainder of the 30-year term of the underlying obligations. The
unamortized balance at December 31, 1997 was $1,121,000.
Deferred financing fees of $1,368,000, related to the issuance of
subordinated notes and debentures, are being amortized over the remainder
of the original 10-year term of the instruments and are included in other
assets. The unamortized balances at December 31, 1997 and 1996 were
$1,061,000 and $1,206,000, respectively.
Certain direct origination costs for credit cards are capitalized and are
being amortized over a two-year or four-year period depending on the term
of the credit card. At December 31, 1997 and 1996, the unamortized balance
was $2,276,000 and $582,000, respectively.
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, 1997 and 1996, JBPA
was servicing approximately $243,294,000 and $245,329,000, respectively,
of loans for others.
During 1997, 1996 and 1995, the Banks purchased $-0-, $15,000 and
$258,000, 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 $631,000 and $799,000 at December 31, 1997
and 1996, respectively. Amortization expense amounted to $168,000,
$198,000 and $190,000 in 1997, 1996 and 1995, respectively. At December
31, 1997 and 1996, JBPA maintained $466,000 and $460,000, respectively, of
escrow balances associated with the servicing portfolio.
(Continued)
41
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No.
125," which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishments of liabilities. This
statement is effective for transfers of financial assets, servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996. 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 $554,000 and $279,000 for 1997 and 1996, respectively, resulted
from the respective origination of $46,200,000 and $22,317,000 of
mortgages in those years. Amortization on originated mortgage servicing
rights is recognized in accordance with policies for purchased mortgages,
as previously discussed. The unamortized balance of originated mortgage
servicing rights at December 31, 1997 and 1996 was $761,000 and $222,000,
respectively.
Long-lived assets
The Banks adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," for the
year ended December 31, 1996, 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 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.
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, 1997 and 1996 were approximately $9,273,000 and
$7,569,000, respectively.
(Continued)
42
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES - Continued
Earnings per common share
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with
the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities
or other contracts to issue common stock were exercised and converted into
common stock. Prior periods' earnings per share calculations have been
restated to reflect the adoption of SFAS No. 128.
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.
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.
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 $3,172,000, $3,275,000 and $2,170,000 in 1997, 1996 and 1995,
respectively. Cash paid for interest was $41,870,000, $38,799,000 and
$33,334,000 in 1997, 1996 and 1995, respectively. Loans transferred to
other real estate owned were $2,095,000, $4,188,000 and $6,097,000 in
1997, 1996 and 1995, respectively.
The consolidated statement of cash flows for the year ended December 31,
1995 excludes the effect of Constitution Bank, as that business
combination did not involve related cash flows.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentation.
43
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 2 - ACQUISITIONS AND MERGERS
On March 19, 1998, the Company announced that, through JBPA, it had
entered into a merger agreement with Regent National Bank (Regent),
pursuant to which it would acquire that institution. Consummation of the
merger is conditional upon required regulatory and shareholder approvals.
Under the terms of the pending merger, each share of Regent common stock
would be converted into .303 of a share of the Company's common stock,
resulting in the issuance of 1,032,989 shares of the Company's common
stock.
In January 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 was accounted for under the pooling of
interests method of accounting.
In August 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.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and the estimated
fair value of the Company's available for sale and held to maturity
securities are as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 42,489 $ 125 $ 2 $ 42,612
Federal agency obligations 21,060 88 -- 21,148
Mortgage-backed securities 103,246 307 58 103,495
State and municipal obligations 51,215 1,939 1 53,153
Other securities 23,012 68 1 23,079
-------- -------- -------- --------
$241,022 $ 2,527 $ 62 $243,487
======== ======== ======== ========
Held to maturity
State and municipal obligations $ 682 $ 17 $ -- $ 699
======== ======== ======== ========
</TABLE>
(Continued)
44
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 68,580 $ 57 $ 88 $ 68,549
Federal agency obligations 37,127 91 17 37,201
Mortgage-backed securities 35,433 141 150 35,424
State and municipal obligations 15,334 265 19 15,580
Other securities 17,794 3 -- 17,797
-------- -------- -------- --------
$174,268 $ 557 $ 274 $174,551
======== ======== ======== ========
Held to maturity
State and municipal obligations $ 687 $ 14 $ -- $ 701
======== ======== ======== ========
</TABLE>
The following table lists maturities of debt and equity securities at
December 31, 1997 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 $ 41,686 $ 41,740 $ -- $ --
Due after one year through five years 24,892 25,035 457 467
Due after five years through ten years 1,051 1,081 225 232
Due after ten years 49,877 51,866 -- --
-------- -------- -------- --------
117,506 119,722 682 699
Mortgage-backed securities 103,246 103,495 -- --
Federal Home Loan Bank of Pittsburgh stock 20,270 20,270 -- --
-------- -------- -------- --------
$241,022 $243,487 $ 682 $ 699
======== ======== ======== ========
</TABLE>
Proceeds on sales of securities classified as available for sale were
$43,187,000, $11,827,000 and $31,147,000 in 1997, 1996 and 1995,
respectively. Realized gains and losses on sales of investment securities
were $515,000 and $-0-; $245,000 and $-0-; and $334,000 and $1,000 in
1997, 1996 and 1995, respectively.
Tax-exempt interest income on state and municipal obligations classified
as either investment securities or loans was $2,459,000, $727,000 and
$495,000 in 1997, 1996 and 1995, respectively.
(Continued)
45
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - INVESTMENT SECURITIES - Continued
Investment securities with an aggregate carrying value of approximately
$93,285,000 and $89,442,000 at December 31, 1997 and 1996, respectively,
were pledged to secure public deposits and for other purposes required or
permitted by law.
NOTE 4 - LOANS
Major classifications of loans are as follows:
1997 1996
--------- ---------
(in thousands)
Commercial $ 259,027 $ 283,107
Commercial mortgage 214,297 228,246
Construction 74,496 66,182
Direct financing leases, net 18,649 13,963
Consumer loans 247,858 162,726
Credit card 21,669 6,079
Residential mortgage 67,029 67,252
Overdrafts 3,741 1,307
--------- ---------
906,766 828,862
Allowance for credit losses (12,769) (13,734)
--------- ---------
$ 893,997 $ 815,128
========= =========
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 13,734 $ 14,991 $ 8,986
Provision charged to operations 3,600 5,023 3,986
Loans charged off (5,832) (7,341) (4,855)
Recoveries 1,267 1,061 753
Purchase of Constitution Bank -- -- 6,121
-------- -------- --------
Balance at end of year $ 12,769 $ 13,734 $ 14,991
======== ======== ========
</TABLE>
(Continued)
46
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - LOANS - Continued
The balance of impaired loans was $9,361,000 and $11,269,000 at December
31, 1997 and 1996, 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 $2,250,000
and $3,733,000 at December 31, 1997 and 1996, respectively. The average
recorded investment on impaired loans was $10,259,000 and $12,229,000
during 1997 and 1996, respectively, and the income recognized on impaired
loans during 1997 and 1996 was $-0-. Total cash collected on impaired
loans during 1997 and 1996 was $3,217,000 and $1,196,000, respectively,
all of which was credited to the principal balance outstanding on such
loans. Interest which would have been accrued on impaired loans during
1997, 1996 and 1995 was $931,000, $1,107,000 and $774,000, respectively.
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.
Loans past due 90 days or more as to interest or principal payments still
accruing interest at December 31, 1997 and 1996 were $5,452,000 and
$4,478,000, respectively. At December 31, 1997 and 1996, there were no
commitments to lend additional funds to borrowers whose loans are
classified as non-accrual.
Loans totalling $188,000,000 and $159,000,000 at December 31, 1997 and
1996, 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>
1997 1996
Estimated -------- --------
useful lives (in thousands)
------------
<S> <C> <C> <C>
Land -- $ 2,670 $ 2,670
Building 10 to 40 years 3,990 3,913
Furniture, fixtures and equipment 5 to 12 years 18,124 14,227
Leasehold improvements 5 to 20 years 8,056 7,823
-------- --------
32,840 28,633
Accumulated depreciation (14,420) (13,644)
-------- --------
$ 18,420 $ 14,989
======== ========
</TABLE>
47
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - DEPOSITS
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was $98,626,000 and $84,052,000 in 1997 and
1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
1998 $368,136
1999 24,296
2000 11,569
2001 3,051
2002 and thereafter 1,286
---------
$408,338
NOTE 7 - DEBT ========
FHLB advances
At December 31, 1997, JBPA had $150,000,000 in advances outstanding from
the FHLB. Of that total, $148,000,000 was overnight advances with an
interest rate of 5.65%. A total of $2,000,000 at 6.35% is repayable in
March 1998. The maximum amount outstanding at any time was $150,000,000.
For 1997, the average amount outstanding was $95,147,000, with a weighted
average interest rate of 5.73%. At December 31, 1997, JBPA had
approximately $27,006,000 in unused advances from the FHLB.
At December 31, 1996, JBPA had $127,750,000 in advances outstanding from
the FHLB. Of that total, $125,750,000 was overnight advances with an
interest rate of 6.75%. A total of $2,000,000 at 6.35% is repayable in
March 1998. The maximum amount outstanding at any month-end was
$129,750,000. Maturing advances are generally renewed for periods ranging
from one day to three months. For 1996, the average amount outstanding was
$69,271,000, with a weighted average interest rate of 5.56%. At December
31, 1996, JBPA had approximately $23,000,000 in unused advances from the
FHLB.
Subordinated notes and debentures
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.
(Continued)
48
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - DEBT - Continued
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.
Guaranteed preferred beneficial interest in the Company's subordinated debt
On February 5, 1997, the Company issued $25,300,000 principal amount of
9.25% junior subordinated deferrable interest debentures due March 31,
2027 (the debentures) to JBI Capital Trust I (the Trust), a Delaware
business trust, in which the Company owns all the common equity. The
debentures are the sole asset of the Trust. The Trust issued $25,000,000
of Trust preferred securities to investors. The Company's obligations
under the debentures and related documents, taken together, constitute a
full and unconditional guarantee by the Company of the Trust's obligations
under the Trust preferred securities. Although the subordinated debentures
will be treated as debt of the Company, they currently qualify for Tier 1
capital treatment, subject to certain limitations. The Trust preferred
securities 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 or
certain other contingencies arise. The Trust preferred securities must be
redeemed upon maturity of the debentures in 2027.
NOTE 8 - SHAREHOLDERS' EQUITY
On April 1, 1997, the Company declared a 5% common stock dividend, payable
May 13, 1997. 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 $.67 in
1997, $.48 in 1996 and $.39 in 1995.
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.
49
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders $12,437 4,967 $ 2.50
Effect of dilutive securities
Options -- 366 (.17)
------- ------- --------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $12,437 5,333 $ 2.33
======= ======= ========
</TABLE>
Options to purchase 46,000 shares of common stock at $38.375 per share
were outstanding during the year. They were not included in the
computation of diluted earnings per share because the option exercise
price was greater than the average market price.
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders $7,950 4,882 $ 1.63
Effect of dilutive securities
Options -- 280 (.09)
------ ------ --------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $7,950 5,162 $ 1.54
====== ====== ========
</TABLE>
(Continued)
50
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
Year ended December 31, 1995
----------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders $7,354 3,936 $ 1.87
Effect of dilutive securities
Preferred dividends 1,125 1,002 (.19)
Options -- 260 (.05)
------ ------ --------
Diluted earnings per share
Net income available to common stockholders
plus assumed conversions $8,479 5,198 $ 1.63
====== ====== ========
</TABLE>
NOTE 10 - INCOME TAXES
An analysis of current and deferred income taxes is as follows:
1997 1996 1995
------ ------ ------
(in thousands)
Current $5,428 $3,136 $3,663
Deferred 573 1,504 908
------ ------ ------
Total $6,001 $4,640 $4,571
====== ====== ======
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate $ 6,269 $ 4,281 $ 4,437
Increase (decrease) in taxes resulting from
Tax-exempt loan and investment income (791) (210) (153)
Non-deductible amortization 389 397 151
Other, net 134 172 136
------- ------- -------
Applicable income tax $ 6,001 $ 4,640 $ 4,571
======= ======= =======
</TABLE>
(Continued)
51
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 10 - INCOME TAXES - Continued
The net deferred tax liability consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Allowance for credit losses $ 3,389 $ 3,208
Deferred loan fees 80 116
Allowance for real estate owned 655 1,055
Purchased net operating loss carryforwards 3,888 3,909
------- -------
Total deferred tax assets 8,012 8,288
Deferred asset valuation allowance (2,748) (6,348)
------- -------
Net deferred tax asset 5,264 1,940
------- -------
Accumulated depreciation (2,183) (1,988)
Net unrealized gain on securities available for sale (819) (101)
Other (52) (28)
------- -------
Total deferred tax liabilities (3,054) (2,117)
------- -------
Net deferred tax liability $ 2,210 $ (177)
======= =======
</TABLE>
During 1997, management revised its estimate of the realizable deferred
tax assets acquired as a result of the merger of Constitution Bank. The
valuation allowance was reduced, resulting in an increase in the deferred
tax assets at December 31, 1997 and a corresponding reduction in goodwill
acquired in the merger. Similarly, based upon the Company's current and
expected future taxable income levels, management revalued the deferred
tax asset to reflect a 35% expected tax rate. This change increased the
deferred tax asset and reduced deferred tax expense for 1997 by
approximately $87,000.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Stock Ownership Plan 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 $225,000, $215,000 and $201,000 in 1997, 1996 and 1995,
respectively. Contributions are distributed to the Banks in proportion to
their respective employee salaries.
The Company maintains a 401(k) plan 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 $111,000, $95,000 and $78,000 in 1997, 1996 and 1995,
respectively.
52
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - STOCK OPTIONS
The Company maintains a Key Employee Stock Option Plan (the Plan). Under
the Plan, options to purchase a maximum of 600,000 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. At December 31, 1997, options to
purchase 137,750 shares under the Plan were authorized to be issued, but
had not been granted.
As a result of the United Valley Bank merger, there are 241,120 options
outstanding which are reflected in the tables in this footnote.
Under former plans of the Company and JBPA, there were exercisable options
outstanding to purchase 66,150 shares of the Company's common stock at
$13.61 per share and 32,242 shares at $13.19 per share at December 31,
1997, 1996 and 1995. No options were granted, exercised or expired during
1997, 1996 and 1995 under these former plans.
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>
1997 1996 1995
------- ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income As reported $12,437 $7,950 $7,354
Pro forma 11,412 7,865 6,796
Net income per common share - basic As reported 2.50 1.63 1.87
Pro forma 2.29 1.61 1.69
Net income per common share - diluted As reported 2.33 1.54 1.63
Pro forma 2.14 1.52 1.45
</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.
(Continued)
53
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 12 - STOCK OPTIONS - Continued
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 1997, 1996 and 1995, respectively:
dividend yield of 2.0% in 1997 and 2.5% for both 1996 and 1995; expected
volatility of 15% in 1997 and 10% for both 1996 and 1995; risk-free
interest rates of 6.42%, 6.19% and 6.28% in 1997, 1996 and 1995,
respectively; and expected lives of 10 years for all three years.
A summary of the status of the Company's option plans as of December 31,
1997, 1996 and 1995 and the changes during the years ending on those dates
is represented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 662,591 $ 14.58 695,697 $ 14.21 594,148 $ 13.02
Granted 163,525 30.87 16,275 22.03 110,250 20.41
Exercised (23,409) 11.24 (49,381) 11.24 (8,701) 11.24
------- ------ ------- ------ ------- ------
Outstanding, end of year 802,707 $ 18.00 662,591 $ 14.58 695,697 $ 14.21
------- ====== ------- ====== ------- ======
Options exercisable at year-end 802,707 662,591 695,697
======= ======= =======
Weighted average fair value of
options granted during the
year $ 9.84 $ 5.61 $ 5.59
====== ======= =======
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
- ------------------------------------------------------------------------ -------------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average outstanding at average
Range of December 31, contractual exercise December 31, exercise
exercise prices 1997 life (years) price 1997 price
- ------------------- ------------------- ----------------- -------------- ------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$11.24 - $16.55 512,657 3.71 $ 13.35 512,657 $ 13.35
20.41 - 30.25 240,950 8.47 23.99 240,950 23.99
38.38 49,100 9.92 38.38 49,100 38.38
------- -------
802,707 802,707
======= =======
</TABLE>
54
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 13 - RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, loans outstanding to certain officers and
directors of the Company and their subsidiaries and companies in which
they have material ownership amounted to $19,486,000 and $15,946,000,
respectively. An analysis of activity in loans to related parties at
December 31, 1997 and 1996 resulted in new loans of $11,510,000 and
$10,394,000, respectively; reductions of $7,970,000 and $4,747,000,
respectively, representing payments; and respective reductions of $-0- and
$170,000, respectively, representing changes in the composition of related
parties. Deposits of these individuals and their affiliated companies at
December 31, 1997 and 1996 were $45,154,000 and $6,942,000, respectively.
The majority of the related party deposits at December 31, 1997 were
short-term in nature.
The Banks lease premises from several limited partnerships whose partners
are persons related to the Company. Rental expense under these leases was
$355,000, $355,000 and $340,000 in 1997, 1996 and 1995, respectively.
The Company incurred $589,000, $606,000 and $392,000 in 1997, 1996 and
1995, respectively, in legal fees to Ledgewood Law Firm for legal services
related to regulatory compliance, the lending function, leases, contract
review, the acquisition of the minority interest in the Banks, capital
offerings, the acquisitions of United Valley Bank, Constitution Bank, 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 $2,752,000, $3,061,000 and
$2,945,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. These fees were eliminated in consolidation.
NOTE 14 - 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
1998 $ 2,362
1999 2,062
2000 1,965
2001 1,891
2002 1,796
Thereafter 5,177
---------
$ 15,253
=========
(Continued)
55
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 14 - COMMITMENTS AND CONTINGENCIES - Continued
Rental expense amounted to $2,054,000, $1,753,000 and $1,680,000 in 1997,
1996 and 1995, 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 15 - 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, 1997 and 1996 are
outlined below.
For cash and due from banks, the recorded book values of $141,823,000 and
$87,293,000 at December 31, 1997 and 1996, 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)
56
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The net loan portfolio at December 31, 1997 and 1996 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>
1997 1996
------------------------- -------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities $244,169 $244,186 $175,238 $175,252
Loans, including mortgages held for sale 896,956 913,673 815,853 815,084
</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.
The majority of all time deposits with stated maturities totalling
$408,338,000 and $333,839,000 mature or reprice within one year of
December 31, 1997 and 1996, respectively; therefore, the recorded book
value of such deposits approximates its fair value.
The recorded book balance of subordinated debentures of $32,000,000 at
December 31, 1997 and 1996 had an approximate fair value of $30,875,000
and $32,500,000, respectively.
The recorded book balance of the guaranteed beneficial interest in the
Company's Trust preferred debt of $25,300,000 at December 31, 1997 had an
approximate fair value of $23,782,000.
The fair values of the FHLB advances totalling $150,000,000 and
$127,750,000 are estimated to approximate their recorded book balances at
December 31, 1997 and 1996, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totalled
approximately $352,294,000 and $227,427,000 at December 31, 1997 and 1996,
respectively, and primarily comprise unfunded loan commitments which are
generally priced at market at the time of funding.
57
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 16 - 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 risk 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.
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>
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit $340,810 $218,578
Standby letters of credit and financial guarantees written 11,484 8,849
</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, 1997 and 1996 varies
up to 100%.
(Continued)
58
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK - Continued
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 17 - 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. 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 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 possible
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Banks' consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company must meet specific capital
guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
(Continued)
59
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 17 - REGULATORY MATTERS - Continued
Quantitative measures established by regulations to ensure capital
adequacy require the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and core capital (as defined in the
regulations) to risk-weighted assets, and of core capital to adjusted
assets. Management believes, as of September 30, 1997, that the Banks meet
all capital adequacy requirements to which they are subject.
As of December 31, 1997, the Banks met all regulatory requirements for
classification as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Banks
must maintain minimum total risk-based, core risk-based and core 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.
As of December 31, 1997 and 1996, the Company and the Banks had the
following capital ratios:
<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>
As of December 31, 1997
Total capital
(to risk-weighted
assets)
Company $158,788 16.93% $ 75,021 8.00% $ 93,777 N/A
JBPA 120,418 14.33 67,209 8.00 84,011 10.00%
JBNJ 10,754 13.57 6,338 8.00 7,922 10.00
Tier I capital
(to risk-weighted
assets)
Company 115,053 12.27 37,511 4.00 56,266 N/A
JBPA 80,754 9.61 33,604 4.00 50,406 6.00
JBNJ 7,311 9.23 3,169 4.00 4,753 6.00
Tier I capital
(to average assets)
Company 115,053 9.31 49,417 4.00 61,772 N/A
JBPA 80,754 7.14 45,266 4.00 56,582 5.00
JBNJ 7,311 7.04 4,151 4.00 5,189 5.00
</TABLE>
(Continued)
60
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 17 - REGULATORY MATTERS - Continued
<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>
As of December 31, 1996
Total capital
(to risk-weighted
assets)
Company $122,181 15.08% $ 64,832 8.00% $ 81,040 N/A
JBPA 111,308 14.65 60,802 8.00 76,003 10.00%
JBNJ 9,912 16.88 4,698 8.00 5,872 10.00
Tier I capital
(to risk-weighted
assets)
Company 80,007 9.87 32,416 4.00 48,624 N/A
JBPA 72,760 9.57 30,401 4.00 45,602 6.00
JBNJ 6,554 11.16 2,349 4.00 3,527 6.00
Tier I capital
(to average assets)
Company 80,007 7.26 44,089 4.00 55,111 N/A
JBPA 72,760 7.14 40,767 4.00 50,959 5.00
JBNJ 6,554 8.10 3,236 4.00 4,046 5.00
</TABLE>
61
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 18 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The condensed financial information for JeffBanks, Inc. (parent company
only) is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Assets
Cash $ 920 $ 713
Equity investment in the Banks 126,452 90,588
Investment in the Banks' subordinated notes 23,000 23,000
Investment in securities available for sale 848 100
Accrued interest receivable 510 503
Premises and equipment, net 129 177
-------- --------
$151,859 $115,081
Liabilities and shareholders' equity ======== ========
Subordinated notes $ 23,000 $ 23,000
Minority interest in consolidated subsidiary 25,300 --
Accrued interest payable 503 503
Other liabilities 201 297
-------- --------
49,004 23,800
-------- --------
Shareholders' equity
Common stock 5,001 4,716
Additional paid-in capital 71,101 64,030
Retained earnings 25,127 22,355
Net unrealized gain on investment securities
available for sale 1,626 180
-------- --------
102,855 91,281
-------- --------
$151,859 $115,081
======== ========
</TABLE>
(Continued)
62
<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,
-------------------------------------------
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from the Banks $ 3,330 $ 2,356 $ 2,749
Interest income from the Banks 4,132 1,542 --
Interest from investment securities 33 -- --
Management service fees from the Banks 2,752 3,061 2,945
------- ------- -------
Total income 10,247 6,959 5,694
------- ------- -------
Expenses
Interest on subordinated notes 2,013 1,542 --
Interest on preferred securities 2,119 -- --
Salaries and employee benefits 1,053 1,189 1,046
Occupancy expense 57 55 56
Depreciation 48 49 40
Data processing expense 691 930 1,073
Advertising 326 453 312
Insurance 316 345 351
Other 63 40 73
------- ------- -------
Total expenses 6,686 4,603 2,951
------- ------- -------
Income before provision for income taxes and
equity in undistributed net income of the
Banks 3,561 2,356 2,743
Provision for income taxes 79 -- --
------- ------- -------
Income before equity in undistributed net income
of the Banks 3,482 2,356 2,743
Equity in undistributed net income of the Banks 8,955 5,594 5,736
------- ------- -------
Net income $12,437 $ 7,950 $ 8,479
======= ======= =======
Net income applicable to common stock $12,437 $ 7,950 $ 7,352
======= ======= =======
</TABLE>
(Continued)
63
<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,
------------------------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 12,437 $ 7,950 $ 8,479
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 48 49 40
Equity in undistributed net income of the Banks (8,955) (5,594) (5,736)
(Decrease) increase in other liabilities (142) 126 69
Decrease in other assets 41 -- --
-------- -------- --------
Net cash provided by operating activities 3,429 2,531 2,852
-------- -------- --------
Investing activities
Purchases of premises and equipment -- -- (144)
Purchases of investment securities available for sale (694) (100) --
-------- -------- --------
Net cash used in investing activities (694) (100) (144)
-------- -------- --------
Financing activities
Dividends paid on preferred stock -- -- (1,127)
Dividends paid on common stock (3,322) (2,397) (1,621)
Proceeds from issuance of common stock 794 438 230
Costs to acquire minority interest in JBNJ -- -- (15)
-------- -------- --------
Net cash used in financing activities (2,528) (1,959) (2,533)
-------- -------- --------
Net increase in cash 207 472 175
Cash at beginning of year 713 241 66
-------- -------- --------
Cash at end of year $ 920 $ 713 $ 241
======== ======== ========
</TABLE>
64
<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>
1997
----
Interest income $24,654 $24,338 $22,943 $22,201
Interest expense 12,027 11,773 10,927 10,413
Net interest income 12,627 12,565 12,016 11,788
Provision for credit losses 960 945 870 825
Gain on sale of securities 185 183 147 --
Other operating income 2,625 2,421 2,104 1,984
Other operating expenses 9,257 9,446 8,999 8,905
Income before income taxes 5,220 4,778 4,398 4,043
Net income 3,503 3,249 3,001 2,684
Per share data
Net income per common share - basic .70 .65 .60 .55
Net income per common share - diluted .65 .60 .57 .51
1996
----
Interest income $21,854 $21,488 $21,098 $20,764
Interest expense 10,059 9,964 9,760 9,296
Net interest income 11,795 11,524 11,338 11,468
Provision for credit losses 2,503 921 840 759
Gain on sale of securities 96 71 78 --
Other operating income 1,831 1,802 1,792 1,635
Other operating expenses 10,085 8,633 8,664 8,435
Income before income taxes 1,134 3,843 3,704 3,909
Net income 574 2,480 2,376 2,520
Per share data
Net income per common share - basic .12 .50 .48 .53
Net income per common share - diluted .11 .47 .46 .50
</TABLE>
65
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT
The information required by this item is set forth under the caption
"Directors and Executive Officers" in the Proxy Statement, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Compensation of Executive Officers and Directors" in the Proxy Statement, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, and is incorporated herein by reference.
ITEM 3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Party Transactions" in the Proxy Statement, and is
incorporated herein by reference.
66
<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
Exhibit 27 - Items 27-1 through 27-9 -
Financial Data Schedules
(b) Reports on Form 8-K during the fourth quarter
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania on March 18, 1998.
JEFFBANKS, INC.
By: /s/ BETSY Z. COHEN
---------------------------------
Betsy Z. Cohen
Chairperson of the Board
(Chief Executive Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ BETSY Z. COHEN
- -------------------------------- Date: MARCH 18, 1998
BETSY Z. COHEN, Chairperson
of the Board, Chief Executive
Officer and Director
(Chief Executive Officer)
/s/ EDWARD E. COHEN
- ------------------------------- Date: MARCH 18, 1998
EDWARD E. COHEN, Chairman
of the Executive Committee
and Director
/s/ ROBERT J. COLEMAN
- -------------------------------- Date: MARCH 18, 1998
ROBERT J. COLEMAN, Director
/s/ PAUL FRENKIEL
- -------------------------------- Date: MARCH 18, 1998
PAUL FRENKIEL, Senior Vice
President - Finance, Chief Financial
Officer and Controller ( Chief
Financial and Accounting Officer)
/s/ JOHN G. HOOPES
- -------------------------------- Date: MARCH 18, 1998
JOHN G. HOOPES, Director
/s/ HERSH KOZLOV
- -------------------------------- Date: MARCH 18, 1998
HERSH KOZLOV, Director
/s/ WILLIAM H. LAMB
- -------------------------------- Date: MARCH 18, 1998
WILLIAM H. LAMB, Director
/s/ ARTHUR MAKADON
- -------------------------------- Date: MARCH 18, 1998
ARTHUR MAKADON, Director
/s/ P. SHERRILL NEFF
- -------------------------------- Date: MARCH 18, 1998
P. SHERRILL NEFF, Director
/s/ JAMES R. SIBEL
- -------------------------------- Date: MARCH 18, 1998
JAMES R. SIBEL, Chief Credit
Officer and Director
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ HARMON S. SPOLAN
- -------------------------------- Date: MARCH 18, 1998
HARMON S. SPOLAN, President
and Director
/s/ WILLIAM D. WHITE
- -------------------------------- Date: MARCH 18, 1998
WILLIAM D. WHITE, Director
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 15, 1998 (except for note 2, as to
which the date is March 19, 1998), accompanying the consolidated financial
statements incorporated by reference or included in the Annual Report of
JeffBanks, Inc. and Subsidiaries on Form 10-K for the year ended December 31,
1997. We hereby consent to the incorporation by reference of said report in
the Registration Statements of JeffBanks, Inc. on Form S-3 (File No.
333-36240, effective September 23, 1997; File No. 333-20111, effective January
30, 1997; File No. 333-18775, effective January 21, 1997; and File No
33-99988, effective November 24, 1995), and on From S-8 (File No. 33-80654 and
File No. 33- 80656, effective June 23, 1994).
/s/ GRANT THORNTON LLP
- ----------------------------
Philadelphia, Pennsylvania
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 49623
<INT-BEARING-DEPOSITS> 799
<FED-FUNDS-SOLD> 92200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 243487
<INVESTMENTS-CARRYING> 682
<INVESTMENTS-MARKET> 699
<LOANS> 909725
<ALLOWANCE> 12769
<TOTAL-ASSETS> 1328624
<DEPOSITS> 933630
<SHORT-TERM> 150000
<LIABILITIES-OTHER> 13928
<LONG-TERM> 57300
0
0
<COMMON> 5001
<OTHER-SE> 97854
<TOTAL-LIABILITIES-AND-EQUITY> 1328624
<INTEREST-LOAN> 79292
<INTEREST-INVEST> 11113
<INTEREST-OTHER> 3731
<INTEREST-TOTAL> 94136
<INTEREST-DEPOSIT> 31622
<INTEREST-EXPENSE> 45140
<INTEREST-INCOME-NET> 48996
<LOAN-LOSSES> 3600
<SECURITIES-GAINS> 515
<EXPENSE-OTHER> 36607
<INCOME-PRETAX> 18438
<INCOME-PRE-EXTRAORDINARY> 12437
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12437
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.33
<YIELD-ACTUAL> 4.51
<LOANS-NON> 9361
<LOANS-PAST> 5452
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13734
<CHARGE-OFFS> 5832
<RECOVERIES> 1267
<ALLOWANCE-CLOSE> 12769
<ALLOWANCE-DOMESTIC> 12769
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 45343
<INT-BEARING-DEPOSITS> 2406
<FED-FUNDS-SOLD> 41950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 174551
<INVESTMENTS-CARRYING> 687
<INVESTMENTS-MARKET> 701
<LOANS> 829587
<ALLOWANCE> 13734
<TOTAL-ASSETS> 1127174
<DEPOSITS> 787139
<SHORT-TERM> 127750
<LIABILITIES-OTHER> 15240
<LONG-TERM> 32000
0
0
<COMMON> 4716
<OTHER-SE> 86565
<TOTAL-LIABILITIES-AND-EQUITY> 1127174
<INTEREST-LOAN> 72547
<INTEREST-INVEST> 10333
<INTEREST-OTHER> 2324
<INTEREST-TOTAL> 85204
<INTEREST-DEPOSIT> 29990
<INTEREST-EXPENSE> 39079
<INTEREST-INCOME-NET> 46125
<LOAN-LOSSES> 5023
<SECURITIES-GAINS> 245
<EXPENSE-OTHER> 35817
<INCOME-PRETAX> 12590
<INCOME-PRE-EXTRAORDINARY> 7950
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7950
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 4.59
<LOANS-NON> 11269
<LOANS-PAST> 4478
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14991
<CHARGE-OFFS> 7341
<RECOVERIES> 1061
<ALLOWANCE-CLOSE> 13734
<ALLOWANCE-DOMESTIC> 13734
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-END> Dec-31-1995
<CASH> 58766
<INT-BEARING-DEPOSITS> 2017
<FED-FUNDS-SOLD> 42975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 159683
<INVESTMENTS-CARRYING> 3889
<INVESTMENTS-MARKET> 3908
<LOANS> 774791
<ALLOWANCE> 14991
<TOTAL-ASSETS> 1069692
<DEPOSITS> 840516
<SHORT-TERM> 77000
<LIABILITIES-OTHER> 11589
<LONG-TERM> 9000
0
0
<COMMON> 4649
<OTHER-SE> 80389
<TOTAL-LIABILITIES-AND-EQUITY> 1069692
<INTEREST-LOAN> 65652
<INTEREST-INVEST> 5903
<INTEREST-OTHER> 2721
<INTEREST-TOTAL> 74276
<INTEREST-DEPOSIT> 28287
<INTEREST-EXPENSE> 33049
<INTEREST-INCOME-NET> 41227
<LOAN-LOSSES> 3986
<SECURITIES-GAINS> 333
<EXPENSE-OTHER> 31160
<INCOME-PRETAX> 13050
<INCOME-PRE-EXTRAORDINARY> 8479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8479
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.63
<YIELD-ACTUAL> 4.82
<LOANS-NON> 13127
<LOANS-PAST> 6898
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8986
<CHARGE-OFFS> 4855
<RECOVERIES> 753
<ALLOWANCE-CLOSE> 14991
<ALLOWANCE-DOMESTIC> 14991
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Mar-31-1997
<CASH> 39378
<INT-BEARING-DEPOSITS> 4765
<FED-FUNDS-SOLD> 45975
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 195243
<INVESTMENTS-CARRYING> 686
<INVESTMENTS-MARKET> 692
<LOANS> 843278
<ALLOWANCE> 13392
<TOTAL-ASSETS> 1163040
<DEPOSITS> 800666
<SHORT-TERM> 115000
<LIABILITIES-OTHER> 18294
<LONG-TERM> 57300
0
0
<COMMON> 4976
<OTHER-SE> 87617
<TOTAL-LIABILITIES-AND-EQUITY> 1163040
<INTEREST-LOAN> 18755
<INTEREST-INVEST> 2729
<INTEREST-OTHER> 717
<INTEREST-TOTAL> 22201
<INTEREST-DEPOSIT> 6969
<INTEREST-EXPENSE> 10413
<INTEREST-INCOME-NET> 11788
<LOAN-LOSSES> 825
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8905
<INCOME-PRETAX> 4042
<INCOME-PRE-EXTRAORDINARY> 2684
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2684
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.51
<YIELD-ACTUAL> 4.50
<LOANS-NON> 11093
<LOANS-PAST> 7385
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13734
<CHARGE-OFFS> 1269
<RECOVERIES> 102
<ALLOWANCE-CLOSE> 13392
<ALLOWANCE-DOMESTIC> 13392
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Jun-30-1997
<CASH> 47841
<INT-BEARING-DEPOSITS> 1284
<FED-FUNDS-SOLD> 52550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 172460
<INVESTMENTS-CARRYING> 685
<INVESTMENTS-MARKET> 696
<LOANS> 863530
<ALLOWANCE> 12745
<TOTAL-ASSETS> 1176012
<DEPOSITS> 818457
<SHORT-TERM> 125000
<LIABILITIES-OTHER> 15495
<LONG-TERM> 57300
0
0
<COMMON> 4988
<OTHER-SE> 91268
<TOTAL-LIABILITIES-AND-EQUITY> 1176012
<INTEREST-LOAN> 38295
<INTEREST-INVEST> 5582
<INTEREST-OTHER> 1267
<INTEREST-TOTAL> 45144
<INTEREST-DEPOSIT> 14176
<INTEREST-EXPENSE> 21340
<INTEREST-INCOME-NET> 23804
<LOAN-LOSSES> 1695
<SECURITIES-GAINS> 147
<EXPENSE-OTHER> 17904
<INCOME-PRETAX> 8440
<INCOME-PRE-EXTRAORDINARY> 5685
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5685
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 4.52
<LOANS-NON> 10109
<LOANS-PAST> 10828
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13734
<CHARGE-OFFS> 3020
<RECOVERIES> 336
<ALLOWANCE-CLOSE> 12745
<ALLOWANCE-DOMESTIC> 12745
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sep-30-1997
<CASH> 52904
<INT-BEARING-DEPOSITS> 1360
<FED-FUNDS-SOLD> 108775
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 171272
<INVESTMENTS-CARRYING> 683
<INVESTMENTS-MARKET> 698
<LOANS> 869898
<ALLOWANCE> 13032
<TOTAL-ASSETS> 1240971
<DEPOSITS> 919317
<SHORT-TERM> 75000
<LIABILITIES-OTHER> 19556
<LONG-TERM> 57300
0
0
<COMMON> 4995
<OTHER-SE> 94652
<TOTAL-LIABILITIES-AND-EQUITY> 1240971
<INTEREST-LOAN> 58755
<INTEREST-INVEST> 8107
<INTEREST-OTHER> 2620
<INTEREST-TOTAL> 69482
<INTEREST-DEPOSIT> 22823
<INTEREST-EXPENSE> 33113
<INTEREST-INCOME-NET> 36369
<LOAN-LOSSES> 2640
<SECURITIES-GAINS> 330
<EXPENSE-OTHER> 27350
<INCOME-PRETAX> 13218
<INCOME-PRE-EXTRAORDINARY> 8934
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8934
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 4.54
<LOANS-NON> 9461
<LOANS-PAST> 5137
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13734
<CHARGE-OFFS> 4478
<RECOVERIES> 1136
<ALLOWANCE-CLOSE> 13032
<ALLOWANCE-DOMESTIC> 13032
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 35572
<INT-BEARING-DEPOSITS> 400
<FED-FUNDS-SOLD> 71375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 173296
<INVESTMENTS-CARRYING> 3887
<INVESTMENTS-MARKET> 3896
<LOANS> 784960
<ALLOWANCE> 14820
<TOTAL-ASSETS> 1101359
<DEPOSITS> 850118
<SHORT-TERM> 62000
<LIABILITIES-OTHER> 13600
<LONG-TERM> 32000
0
0
<COMMON> 4676
<OTHER-SE> 82066
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 17770
<INTEREST-INVEST> 2424
<INTEREST-OTHER> 570
<INTEREST-TOTAL> 20764
<INTEREST-DEPOSIT> 7792
<INTEREST-EXPENSE> 9296
<INTEREST-INCOME-NET> 11468
<LOAN-LOSSES> 759
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8435
<INCOME-PRETAX> 3909
<INCOME-PRE-EXTRAORDINARY> 2520
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2520
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 4.68
<LOANS-NON> 14077
<LOANS-PAST> 5785
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14991
<CHARGE-OFFS> 1013
<RECOVERIES> 930
<ALLOWANCE-CLOSE> 14820
<ALLOWANCE-DOMESTIC> 14820
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Jun-30-1996
<CASH> 37888
<INT-BEARING-DEPOSITS> 300
<FED-FUNDS-SOLD> 36325
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 174868
<INVESTMENTS-CARRYING> 1047
<INVESTMENTS-MARKET> 1055
<LOANS> 798364
<ALLOWANCE> 14270
<TOTAL-ASSETS> 1079865
<DEPOSITS> 812142
<SHORT-TERM> 50750
<LIABILITIES-OTHER> 12624
<LONG-TERM> 32000
0
0
<COMMON> 4706
<OTHER-SE> 83865
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 35687
<INTEREST-INVEST> 5083
<INTEREST-OTHER> 1092
<INTEREST-TOTAL> 41862
<INTEREST-DEPOSIT> 15638
<INTEREST-EXPENSE> 19056
<INTEREST-INCOME-NET> 22806
<LOAN-LOSSES> 1599
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 17099
<INCOME-PRETAX> 7613
<INCOME-PRE-EXTRAORDINARY> 2717
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2717
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0.96
<YIELD-ACTUAL> 4.61
<LOANS-NON> 14115
<LOANS-PAST> 5279
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14991
<CHARGE-OFFS> 2496
<RECOVERIES> 176
<ALLOWANCE-CLOSE> 14270
<ALLOWANCE-DOMESTIC> 14270
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 45508
<INT-BEARING-DEPOSITS> 1106
<FED-FUNDS-SOLD> 35125
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 172944
<INVESTMENTS-CARRYING> 1046
<INVESTMENTS-MARKET> 1056
<LOANS> 799398
<ALLOWANCE> 12032
<TOTAL-ASSETS> 1090047
<DEPOSITS> 798458
<SHORT-TERM> 78750
<LIABILITIES-OTHER> 15363
<LONG-TERM> 32000
0
0
<COMMON> 4711
<OTHER-SE> 86178
<TOTAL-LIABILITIES-AND-EQUITY> 1090047
<INTEREST-LOAN> 53936
<INTEREST-INVEST> 7747
<INTEREST-OTHER> 1667
<INTEREST-TOTAL> 63350
<INTEREST-DEPOSIT> 23010
<INTEREST-EXPENSE> 29020
<INTEREST-INCOME-NET> 34330
<LOAN-LOSSES> 2520
<SECURITIES-GAINS> 149
<EXPENSE-OTHER> 25732
<INCOME-PRETAX> 11456
<INCOME-PRE-EXTRAORDINARY> 7376
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7376
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 4.59
<LOANS-NON> 11268
<LOANS-PAST> 3833
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14991
<CHARGE-OFFS> 6426
<RECOVERIES> 947
<ALLOWANCE-CLOSE> 12032
<ALLOWANCE-DOMESTIC> 12032
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
