FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended Commission file number 0-22850
September 30, 1998
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 principal executive offices) (Zip Code)
Registrant's telephone number, including
area code 215-861-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 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
Number of Shares of Common Stock Outstanding at September 30, 1998: 10,371,105
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Balance Sheet
UNAUDITED
September 30, December 31,
1998 1997
Assets: (in thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks ....................................... $ 52,376 $ 52,601
Federal funds sold ............................................ 100,325 95,236
---------- ----------
152,701 147,837
Investment securities available for sale .......................... 322,973 364,501
Investment securities held to maturity ............................ 678 682
Mortgages held for sale ........................................... 4,346 4,327
Loans, net ........................................................ 1,170,564 987,681
Premises and equipment, net ....................................... 23,468 19,518
Accrued interest receivable ....................................... 13,343 9,094
Other real estate owned ........................................... 3,836 2,265
Goodwill .......................................................... 4,153 4,435
Other assets ...................................................... 16,971 20,670
========== ==========
Total assets .................................................. $1,713,033 $1,561,010
========== ==========
Liabilities and shareholders' equity:
Deposits:
Demand (non-interest bearing) ................................. $ 176,346 $ 156,167
Savings and money market ...................................... 457,486 421,321
Time deposits ................................................. 507,916 398,476
Time deposits, $100,000 and over .............................. 134,023 109,663
---------- ----------
1,275,771 1,085,627
Securities sold under repurchase agreements ....................... 41,577 70,911
FHLB advances and other borrowed funds ............................ 189,186 203,511
Subordinated notes and debentures ................................. 32,000 34,750
Trust preferred securities ........................................ 25,300 25,300
Accrued interest payable .......................................... 15,249 15,734
Other liabilities ................................................. 4,279 3,371
---------- ----------
Total liabilities ............................................. 1,583,362 1,439,204
---------- ----------
Shareholders' equity:
Common Stock - authorized, 20,000,000 shares of $1 par value;
issued and outstanding 10,371,105 and 6,094,000 shares,
respectively ................................................ 10,371 6,094
Additional paid-in capital .................................... 96,956 95,150
Retained earnings ............................................. 19,376 19,308
Net unrealized gain on investment securities available for sale 2,968 1,254
---------- ----------
Total shareholders' equity .................................... 129,671 121,806
========== ==========
Total liabilities and shareholders' equity .................... $1,713,033 $1,561,010
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statements of Income
UNAUDITED
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans including fees .......................... $ 73,891 $ 65,073 $ 26,736 $ 22,512
Investment securities ......................... 16,409 13,866 5,185 4,641
Federal funds sold ............................ 2,165 2,737 855 1,383
-------- -------- -------- --------
92,465 81,676 32,776 28,536
-------- -------- -------- --------
Interest expense:
Time deposits, $100,000 and over .............. 4,860 4,052 1,854 1,548
Other deposits ................................ 30,867 25,785 12,041 9,412
FHLB advances and other borrowed funds ........ 5,893 4,894 1,224 1,479
Subordinated notes and debentures ............. 2,310 2,311 770 770
Trust preferred securities .................... 1,755 1,534 585 585
Securities sold under repurchase agreements ... 1,837 2,256 495 737
-------- -------- -------- --------
47,522 40,832 16,969 14,531
-------- -------- -------- --------
Net interest income ........................ 44,943 40,844 15,807 14,005
Provision for credit losses ....................... 4,653 2,740 1,140 945
-------- -------- -------- --------
Net interest income after provision
for credit losses ......................... 40,290 38,104 14,667 13,060
-------- -------- -------- --------
Non-interest income:
Service fees on deposit accounts .............. 2,609 2,581 912 926
Gain on sales of residential mortgages and
capitalized mortgage servicing rights ....... 2,360 2,129 671 766
Gain on sale of mortgage servicing rights ..... 625
Mortgage servicing fees ....................... 891 889 309 275
Merchant credit card deposit fees ............. 1,660 1,433 598 466
Credit card fee income ........................ 442 269 131 108
Gain on sale of commercial loans .............. 711
Gain on sales of investment securities ........ 569 330 262 183
Other ......................................... 1,670 1,307 568 564
-------- -------- -------- --------
10,826 9,649 3,451 3,288
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits ................ 18,343 16,199 5,677 5,457
Occupancy expense ............................. 3,537 3,116 1,315 1,057
Depreciation .................................. 1,826 1,530 590 523
FDIC expense .................................. 101 390 33 107
Data processing expense ....................... 926 753 324 210
Legal ......................................... 1,633 2,043 512 230
Stationery, printing and supplies ............. 943 732 344 217
Shares tax .................................... 797 719 214 242
Advertising ................................... 1,040 906 257 298
Other real estate owned maintenance expense 307 163 278 61
Loss on sale and write-downs of other
real estate owned ............................ 51 447 22 274
Amortization of intangibles ................... 731 1,028 298 362
Credit card origination expense ............... 661 386 236 132
Credit card processing expense ................ 643 370 218 134
Merchant card expense ......................... 1,318 1,135 484 385
Loss on other assets .......................... 1,000
Other ......................................... 7,037 5,474 2,528 1,662
-------- -------- -------- --------
40,894 35,391 13,330 11,351
-------- -------- -------- --------
Income before income taxes ........................ 10,222 12,362 4,788 4,997
Income taxes ...................................... 2,909 3,341 1,110 1,516
-------- -------- -------- --------
Income before dividends on preferred stock ........ 7,313 9,021 3,678 3,481
Preferred stock dividends ......................... (339) (128)
-------- -------- -------- --------
Net income ................................. $ 7,313 $ 8,682 $ 3,678 $ 3,353
======== ======== ======== ========
Per share data:
Average number of common shares (basic) ........... 10,273 9,551 10,342 9,964
Average number of common shares (diluted) ......... 11,051 10,152 11,077 10,654
Net income per common share (basic) ............... $ 0.71 $ 0.91 $ 0.36 $ 0.34
Net income per common share (diluted) ............. $ 0.66 $ 0.86 $ 0.33 $ 0.32
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
Accumulated
comprehensive
income:
net unrealized
gain
on securities
Common Additional Retained available Comprehensive
Stock paid-in-capital earnings for sale income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ...................... $ 6,094 $ 95,150 $ 19,308 $ 1,254 $ 121,806
Net income ........................................ -- -- 7,313 -- $ 7,313 7,313
Issuance of common stock for
dividend reinvestment plan ....................... 4 165 -- -- -- 169
Warrants exercised ................................ 126 1,641 -- -- -- 1,767
Cash dividends on common stock .................... -- -- (3,098) -- -- (3,098)
Stock split ....................................... 4,147 (4,147) -- -- --
Other comprehensive income, net of tax
Unrealized gain on securities, net
of reclassification adjustment (see disclosure) - -- -- 1,714 2,028 1,714
---------
Other comprehensive income ....................... -- -- -- -- 2,028
---------
Comprehensive income .............................. -- -- -- -- $ 9,341
--------- --------- --------- --------- ========= ---------
Balance at September 30, 1998 ..................... $ 10,371 $ 96,956 $ 19,376 $ 2,968 $ 129,671
========= ========= ========= ========= =========
<FN>
Disclosure of reclassification amount:
Unrealized holding gains arising during period ................... $ 2,028
Less: reclassification adjustment for gains included in net income (314)
-------
Net unrealized gains on securities ............................... $ 1,714
=======
</FN>
</TABLE>
<TABLE>
<CAPTION>
Accumulated
comprehensive
income:
net unrealized
gain
on securities
Common Additional Retained available Comprehensive
Stock paid-in-capital earnings for sale income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 .......................... $ 10,317 $ 96,348 $ 16,897 $ 835 $ 124,397
Net income ........................................ -- -- 3,678 -- $ 3,678 3,678
Issuance of common stock for
dividend reinvestment plan ....................... 3 88 -- -- -- 91
Warrants exercised ................................ 51 520 -- -- -- 571
Cash dividends on common stock .................... -- -- (1,199) -- -- (1,199)
Stock split ....................................... -- -- -- -- -- --
Other comprehensive income, net of tax
Unrealized gain on securities, net
of reclassification adjustment (see disclosure) - -- -- 2,133 2,209 2,133
---------
Other comprehensive income ....................... -- -- -- -- 2,209
---------
Comprehensive income .............................. -- -- -- -- $ 5,887
--------- --------- --------- --------- ========= ---------
Balance at September 30, 1998 ..................... $ 10,371 $ 96,956 $ 19,376 $ 2,968 $ 129,671
========= ========= ========= ========= =========
<FN>
Disclosure of reclassification amount:
Unrealized holding gains arising during period ................... $ 2,209
Less: reclassification adjustment for gains included in net income (76)
-------
Net unrealized gains on securities ............................... $ 2,133
=======
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
Accumulated
comprehensive
income:
net unrealized
gain (loss)
Additional on securities
Common Preferred paid-in Retained available Comprehensive
Stock Stock -capital earnings for sale income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .................... $ 5,148 $ 166 $ 79,286 $ 16,061 $ (493) $100,168
Net income ...................................... -- -- 9,021 -- $ 9,021 9,021
Issuance of common stock for
401(K) plan ................................... 18 -- 456 -- -- 474
Issuance of common stock for
dividend reinvestment plan ..................... 5 -- 145 -- -- 150
Issuance of preferred stock as
dividends ...................................... -- 18 558 (446) 130
Conversion of preferred stock ................... 92 (92) --
Stock issued to acquire minority interest ....... 481 -- 8,331 8,812
Warrants exercised .............................. 19 -- 320 -- -- 339
Cash dividends on common stock .................. -- -- -- (2,374) -- (2,374)
5% stock dividend ............................... 237 -- 6,103 (6,343) -- (3)
Other comprehensive income, net of tax
Unrealized gain on securities, net
of reclassification adjustment (see disclosure) -- -- -- -- 1,496 1,563 1,496
-------
Other comprehensive income ..................... -- -- -- -- -- 1,563
-------
Comprehensive income ............................ -- -- -- -- -- $10,584
--------- ---------- --------- --------- --------- ======= --------
Balance at September 30, 1997 ................... $ 6,000 $ 92 $ 95,199 $ 15,919 $ 1,003 $118,213
========= ========== ========= ========= ========= ========
<FN>
Disclosure of reclassification amount:
Unrealized holding gain arising during period .................... $ 1,563
Less: reclassification adjustment for gains included in net income (67)
-------
Net unrealized gain on securities ................................ $ 1,496
=======
</FN>
</TABLE>
<TABLE>
<CAPTION>
Accumulated
comprehensive
income:
net unrealized
gain (loss)
Additional on securities
Common Preferred paid-in Retained available Comprehensive
Stock Stock -capital earnings for sale income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 ........................ $ 5,434 $ 170 $ 86,192 $ 13,751 $ (124) $ 105,423
Net income ...................................... -- -- -- 3,481 -- $ 3,481 3,481
Issuance of common stock for
401(K) plan ................................... 4 -- 117 -- -- -- 121
Issuance of common stock for
dividend reinvestment plan ..................... 2 -- 79 -- -- -- 81
Issuance of preferred stock as
dividends ...................................... -- -- 361 (466) -- -- (105)
Conversion of preferred stock ................... 78 (78) -- -- -- --
Stock issued to acquire minority interest ....... 481 -- 8,331 -- -- 8,812
Warrants exercised .............................. 1 -- 119 -- -- -- 120
Cash dividends on common stock .................. -- -- -- (847) -- -- (847)
Other comprehensive income, net of tax
Unrealized losses on securities, net
of reclassification adjustment (see disclosure) -- -- -- -- 1,127 1,224 1,127
---------
Other comprehensive income ..................... -- -- -- -- -- 1,224
---------
Comprehensive income ............................ -- -- -- -- -- $ 4,705
--------- ------- --------- --------- --------- ========= ---------
Balance at September 30, 1997 ................... $ 6,000 $ 92 $ 95,199 $ 15,919 $ 1,003 $ 118,213
========= ======== ========= ========= ========= =========
<FN>
Disclosure of reclassification amount:
Unrealized holding gain arising during period .................... $ 1,224
Less: reclassification adjustment for gains included in net income (97)
-------
Net unrealized gain on securities ................................ $ 1,127
=======
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statements of Cash Flows
UNAUDITED
Nine Months Ended September 30,
1998 1997
(in thousands)
<S> <C> <C>
Operating activities:
Net income ......................................................... $ 7,313 $ 9,021
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ...................................... 2,895 3,612
Provision for credit losses ........................................ 4,653 2,740
Gain on sales of investment securities ............................. (569) (330)
Gain on sales of assets ............................................ -- (711)
Mortgage loans originated for sale ................................. (137,554) (85,862)
Mortgage loan sales ................................................ 137,535 77,616
Increase in interest receivable .................................... (4,249) (919)
(Decrease) increase in interest payable ............................ (486) 2,110
Decrease in other assets ........................................... 2,327 1,396
Increase in other liabilities ...................................... 908 1,156
--------- ---------
Net cash provided by operating activities ....................... 12,773 9,829
--------- ---------
Investing activities:
Proceeds from sales of investment securities available for sale .... 149,784 84,492
Proceeds from maturities of investment securities available for sale 73,568 45,923
Proceeds from maturities of investment securities held to maturity . -- 7,829
Purchase of investment securities available for sale ............... (179,148) (159,628)
Proceeds from sales of other real estate owned ..................... 1,368 1,852
Net increase in loans .............................................. (190,475) (42,632)
Purchase of premises and equipment ................................. (5,579) (3,468)
--------- ---------
Net cash used in investing activities ........................... (150,482) (65,632)
--------- ---------
Financing activities:
Net increase in deposits ........................................... 190,144 114,733
Net decrease in repurchase agreements .............................. (29,334) (3,613)
Net proceeds from issuance of common stock ......................... 1,936 9,777
Net proceeds from issuance of preferred stock ...................... -- 106
Net decrease in FHLB advances ...................................... (14,325) (17,374)
Net decrease in subordinated notes and debentures .................. (2,750) --
Proceeds from issuance of preferred securities ..................... -- 25,300
Dividends paid on common stock ..................................... (3,098) (2,374)
--------- ---------
Net cash provided by financing activities ....................... 142,573 126,555
--------- ---------
Net increase in cash and cash equivalents ............................... 4,864 70,752
Cash and cash equivalents at beginning of year .......................... 147,837 97,529
========= =========
Cash and cash equivalents at end of period .............................. $ 152,701 $ 168,281
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Note 1 - Allowance for Credit Losses:
Nine months ended September 30,
1998 1997
(in thousands)
Balance, beginning of period .. $ 14,136 $ 16,794
Provision charged to operations 4,653 2,740
Loans charged off ............. (5,792) (7,287)
Recoveries .................... 893 2,208
-------- --------
Balance, end of period ........ $ 13,890 $ 14,455
======== ========
The balances of impaired loans were $13,320,000 and $10,009,000
respectively, at September 30, 1998 and 1997. The allowance for credit losses
associated with impaired loans was $3,134,000 and $2,336,000 respectively, at
those dates. Total cash collected on impaired loans during the first nine months
of 1998 and 1997, respectively, was $2,259,000 and $2,651,000, all of which was
credited to the principal balance outstanding on such loans. Interest which
would have been accrued on impaired loans during those respective periods was
$700,000 and $771,000. No related interest income was recognized during the
period.
Note 2 - Investment Securities:
The carrying value and approximate market value of investment securities at
September 30, 1998, were as follows:
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
(in thousands)
Available for Sale:
U.S. treasury securities ...... $ 15,366 $ 168 $ -- $ 15,534
Federal agency obligations .... 36,955 327 -- 37,282
Mortgage backed securities .... 190,493 1,599 451 191,641
State and municipal obligations 49,670 2,933 -- 52,603
Other securities .............. 25,919 2 8 25,913
======== ======== ======== ========
Total ......................... $318,403 $ 5,029 $ 459 $322,973
======== ======== ======== ========
Held to Maturity:
State and municipal obligations 678 21 -- 699
======== ======== ======== ========
Total ......................... $ 678 $ 21 $ -- $ 699
======== ======== ======== ========
Note 3:
The unaudited interim financial statements furnished reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature, except as discussed in these notes.
Note 4:
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 128, Earnings Per Share ("EPS") which eliminates primary
and fully diluted EPS and instead requires presentation of basic and diluted EPS
in conjunction with the disclosure of the methodology used in computing such
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average common shares outstanding during the
period. Diluted EPS takes into consideration the potential dilution that could
occur if securities or other contracts to issue common stock were exercised and
converted into common stock.
Note 5:
Certain captions in the financial statements presented for prior periods
have been reclassified to conform with the current period presentation.
Note 6:
The American Institute of Certified Public Accountants ("AICPA") has issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides accounting
guidance on capitalization of costs associated with software specifically
developed or obtained for internal use. This statement is effective for
Financial Statements issued after December 15, 1998. The effect of adoption is
not expected to be material.
Note 7:
Gain on sales of mortgage servicing rights of $625,000 reflected the sales
of servicing on loans originated prior to 1996 after which the capitalization of
servicing rights was required. The sales were made as a result of prepayment
concerns, an analysis of market conditions and the impact of the servicing
portfolio acquired in the acquisition of a mortgage company (see Note 11).
Note 8:
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activity." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative (gains and losses) depends on the intended use of the derivative and
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application is permitted
only as of the beginning of any fiscal quarter. The Company is currently
reviewing the provisions of SFAS No. 133.
Note 9:
On July 14, 1998 the Company declared a 5 for 3 stock split effected as a
dividend of two shares of common stock for three shares held. That split is
reflected in the September 30, 1998 financial statements and earnings per share
computations for all periods.
Note 10:
On July 31, 1998, the Company completed a merger with Regent Bancshares
Corp. and Regent National Bank ("Regent") accounted for as a pooling of
interests, which accordingly required restatement of financial statements. Under
terms of the merger, each share of common stock was as of that date converted to
.505 shares of the Company's common stock, resulting in the issuance of
1,721,960 shares of the Company's common stock, as adjusted for the stock split
decribed in Note 9. Each option to acquire Regent common stock would be
converted into an option to acquire .505 of a share of the Company's common
stock, resulting in the issuance of up to 184,830 shares of the Company's common
stock if all outstanding Regent options are converted.
Note 11:
On August 14, 1998, the Company completed a merger with Pioneer Mortgage,
Inc. ("Pioneer") accounted for as a pooling of interests, which accordingly
required restatement of financial statements. The changes reflecting such
restatement were not material. Pioneer is a mortgage company which operates
within the Company's southern New Jersey market with seven mortgage loan
originators.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The matters discussed in this Form 10Q that are forward looking statements
relate to future events or the future financial performance of JeffBanks, Inc.
(the "Company") and are based on current management expectations that involve
risks and uncertainties. Such statements are only predictions and actual events
or performance may differ materially from the events or performance expressed in
any such forward looking statements.
Results of Operations
Net income. Net income for the Company amounted to $7.3 million for the nine
months ended September 30, 1998 as compared to $8.7 million for the nine months
ended September 30, 1997, a decrease of approximately 16%. The decline resulted
from the Regent acquisition, which was accounted for as a pooling of interests,
requiring restatement of the Company's financial statements. The decline
reflected approximately $2 million of non-interest expenses which were directly
related to the consolidation of the acquisition, as well as a $1.5 million
provision for credit losses in 1998 compared to $100,000 in 1997 for Regent. The
increase in the provision was the amount necessary to increase the reserve to
levels determined by an analysis which applied estimated loss ratios to various
categories of Regent loans. Also in 1998, Regent recognized a $1.0 million loss
on truck leases which were originally collateral against a loan, and which
Regent had classified as an other asset in 1997. In 1998, based upon the minimal
current and future expected collections and other analysis, the loss was
recognized. Significant cost savings resulting from the merger were not
reflected in the periods prior to third quarter 1998, during which quarter the
majority of cost savings were already being realized. Third quarter net income
of $3.7 million reflected approximately $615,000 of tax effected expenses
related to the merger.
Net Interest Income and Average Balances. Net interest income was $44.9 million
for the first nine months of 1998, compared to $40.8 million for the first nine
months of 1997, an increase of $4.1 million or 10%. Yields on interest earning
assets, on a tax equivalent basis, decreased to 8.30% for the first nine months
of 1998 from 8.52% in the prior year period, a difference of .22 %. The decrease
reflected lower loan yields, and the impact of holding a greater proportion of
lower rate indirect automobile loans, as compared to the prior year. The cost of
interest bearing liabilities decreased to 4.92% for the first nine months of
1998 from 4.95% in the prior year period, a difference of .03%. Accordingly, the
net interest margin on the Company's interest earning assets decreased to 4.11%
in 1998 as compared to 4.28% in the comparable prior year period, a difference
of .17%.
Average balances for non-interest bearing demand deposits increased to
$160.8 million in 1998 compared to $141.0 million in 1997, an increase of $19.8
million or 14%. Average balances for savings, money market and interest checking
increased to $467.9 million in 1998 compared to $374.3 million in the comparable
1997 period, an increase of $93.6 million or 25%. Of the increase, approximately
$47.9 million reflected increases in short term money market deposits from
entities at which a director of the Company is an officer. Savings and money
market deposits at September 30, 1998 reflected $50.5 million of such deposits.
Interest on the deposits is paid at money market rates.
In the first nine months of 1998, average interest earning assets totaled
$1.515 billion, an increase of $221.8 million or 17% over the 1997 comparable
period. Reflected in that net increase was a $150.7 million or 16% increase in
average loans to $1.083 billion. In the second and third quarters of 1998, the
Company made fixed rate loans totaling $99.2 million to an employee stock
ownership plan. The loans were made to reduce the Company's exposure to lower
interest rate environments. The loans represent a refinancing and are
grandfathered as to partial tax exempt status under current tax laws; thus, 50%
of the interest thereon is tax exempt.
Non-Interest Income. Total non-interest income for the first nine months of 1998
was $10.8 million compared to $9.6 million for the first nine months of 1997, an
increase of $1.2 million or 13%. Gain on sales of mortgage servicing rights of
$625,000 reflected the sales of servicing on loans originated prior to 1996
after which the capitalization of servicing rights was required. The sales were
made as a result of prepayment concerns, an analysis of market conditions and
the impact of the servicing portfolio acquired in the acquisition of Pioneer.
Gain on sales of residential mortgages and capitalized mortgage servicing rights
increased to $2.4 million in 1998, an increase of $231,000 or 11% over 1997. The
increase in 1998 reflected an increase in residential mortgage loan
originations. Gain on sales of securities increased to $569,000 for the first
nine months of 1998, an increase of $239,000 over 1997. The majority of the
sales were made for asset liability management purposes as a result of the
disproportionately large securities portfolio acquired in the merger with
Regent. Other income increased to $1.7 million for the first nine months of
1998, an increase of $363,000 or 28% from the comparable 1997 period. The
increase reflected an increase of $256,000 in service charges for non customer
usage of ATMs over 1997.
Non-Interest Expense. Total non-interest expense for the first nine months of
1998, was $40.9 million, compared to $35.4 million for the comparable prior year
period, an increase of $5.5 million or 16%. Salaries and employee benefits
amounted to $18.3 million in the first nine months of 1998 compared to $16.2
million for the first nine months of 1997, an increase of $2.1 million or 13%.
The increase reflected increases of approximately $391,000 resulting from new
branches, approximately $209,000 in the consumer loan department and $328,000 in
the commercial loan department. The increase also reflected $859,000 resulting
from the merger with Regent, substantially all of which resulted from payments
to departing employees under the terms of various employment contracts.
Occupancy expense increased to $3.5 million in 1998, from $3.1 miilion in
1997, an increase of $421,000 or 13%. Reflected in that increase is
approximately $175,000 termination expense for a lease abandoned in connection
with the Regent merger. Other increases reflect new branches and additional
office space for the Company's principal office.
Depreciation expense increased to $1.8 million for the first nine months of
1998, an increase of $296,000 or 19% from the comparable 1997 period. The
increase reflected the implementation of approximately $1.6 million of hardware
and software for a branch automation and sales tracking system.
FDIC expense decreased to $101,000 in 1998 as compared with $390,000 in
1997, as a result of increases in Regent capital ratios which resulted in
decreases in its assessment.
Data processing expense increased to $926,000 in 1998, an increase of
$173,000 or 23% over the prior year. Approximately one third of the increase
resulted from charges related to the conversion of Regent computer processing.
Legal expense decreased to $1.6 million in 1998, a decrease of $410,000 or
20% from the prior year. The primary factor in the decrease was a decrease in
Regent legal fees resulting from a program for automobile insurance premium
financing (IPF). Regent legal expense decreased to $498,000 in 1998 from $1.3
million in 1997. Additionally, in 1998, approximately $200,000 in legal fees
related to the Regent merger were incurred.
Stationery, printing and supplies increased to $943,000 for 1998, an
increase of $211,000 or 29% over the prior year. The increase reflects
approximately $50,000 of printing costs for the Regent merger, as well as
increased expenses resulting from branch growth.
Advertising expense increased to $1.0 million for the first nine months of
1998, an increase of $134,000 or 15% over the prior year. Expenditures in 1998
were increased to promote various bank services and locations to reach customers
who might be displaced as a result of in-market bank mergers, and other
strategies.
Other real estate owned maintenance expense increased to $307,000 for 1998,
an increase of $144,000 or 88% over 1997. The 1998 amount related to expenses on
approximately 30 properties.
Amortization of intangibles decreased to $731,000 for the first nine months
of 1998, a decrease of $297,000 or 29% from the prior year. The decrease
resulted primarily from the year end 1997 reduction in the valuation allowance
for deferred tax assets acquired as a result of the acquisition of Constitution
Bank. That reduction increased related realizable deferred tax assets and
decreased goodwill, and corresponding goodwill amortization.
Credit card origination expense increased to $661,000 for the first nine
months of 1998, an increase of $275,000, or 71% over 1997. The increase
reflected origination costs incurred in connection with the Company's efforts to
expand its retail credit card portfolio.
Credit card processing expense increased to $643,000 for the first nine
months of 1998, an increase of $273,000, or 74% over 1997. The increase
reflected increases in the outstanding number of credit card accounts, and
related increases in transaction volume.
Merchant card expense increases of $183,000 in 1998 as compared to 1997
were more than offset by a $227,000 increase in related merchant credit card
deposit fees shown under non-interest income.
The $1.0 million loss on other assets in 1998 resulted from the write off
of balances due on truck leases which were originally collateral against a loan,
and which Regent had classified as an other asset. In 1998, based upon the
minimal current and future expected collections and other analysis, the loss was
recognized.
Other expense increased to $7.0 million in 1998 from $5.5 million in 1997,
an increase of $1.5 million or 27%. Included in other expense in 1998 was a
$275,000 Regent expense for an investment banker, and $450,000 of other expenses
related to the consolidation of Regent. Those other expenses included a $249,000
loss on personal property which could not be located, or was worthless, and
approximately $100,000 of accounting and registration fees. Also reflected in
the increase in other expense was a $150,000 increase in telephone expense.
Significant cost savings resulting from the Regent merger were not
reflected in periods prior to third quarter 1998, during which quarter the
majority of cost savings were already being realized. Third quarter non-interest
expense reflected, in the aggregate, merger and consolidation expenses of
approximately $800,000. On an after tax basis, those expenses served to reduce
third quarter net income by approximately $615,000.
Income Taxes. The effective tax rate of 28% for the first nine months of
1998 and 23% for the third quarter of 1998, reflected the grandfathered partial
tax exempt status of $99.2 million of ESOP loans made in the second and third
quarters of 1998. Tax exempt interest on state and municipal obligations also
serves to reduce effective tax rates.
Liquidity and Capital Resources. The major sources of funding for the Company's
investing activities have historically been cash inflows resulting from
increases in deposits. Such increases have been utilized primarily to fund net
increases in loans. FHLB advances have also been utilized as an alternative
funding source, when relative interest costs were less than those for deposits.
Funds not needed for operations are invested primarily in daily federal funds
sold and securities.
Net increases in loans were $190.5 million for the first nine months of
1998 as compared to net increases of $42.6 million for the comparable 1997
period. Cash outflows required for mortgage loans originated for sale amounted
to $137.6 million for the first nine months of 1998 compared to $85.9 million
for the first nine months of 1997. The majority of $149.8 million of 1998
securities sales resulted from the then current Regent management's efforts to
restructure substantially all of its $110 million securities portfolio. The
majority of 1997 securities sales also resulted from prior management's attempts
to restructure the portfolio. Rationales for the restructuring reflected
regulatory input and requirements. At September 30, 1998 the Company's
subsidiaries exceeded "well capitalized" ratios as determined by the appropriate
regulatory authorities. The following table sets forth the regulatory capital
ratios of the Company and its wholly-owned banking subsidiaries, Jefferson Bank
(Jefferson PA) and Jefferson Bank of New Jersey (Jefferson NJ) at that date.
<TABLE>
<CAPTION>
Tier 1 Capital to Tier 1 Capital to Total Capital to
Average Risk-Weighted Risk-Weighted
Assets Ratio Assets Ratio Assets Ratio
September 30, December 31, September 30, December 31, September 30, December 31,
1998 1997 1998 1997 1998 1997
Entity:
<S> <C> <C> <C> <C> <C> <C>
JBI .......................... 8.66% 9.35% 11.69% 12.83% 15.22% 17.09%
Jefferson PA ................. 7.19% 7.52% 9.54% 10.57% 13.03% 14.84%
Jefferson NJ ................. 6.72% 7.04% 9.19% 9.23% 13.11% 13.57%
"Well capitalized" institution
(under FDIC Regulations) . 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
</TABLE>
<PAGE>
Asset and Liability Management
The following table summarizes repricing intervals for interest earning assets
and interest bearing liabilities as of September 30, 1998 and the difference or
"gap" between them on an actual and cumulative basis for the periods indicated.
<TABLE>
<CAPTION>
Within Four to
Three Twelve One to Two Three to Five Over Five
Months Months Years Years Years
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities:
Federal funds sold ................ $ 100,325
Available for sale:
Taxable investment securities ... 34,139 $ 19,559 $ 14,146 $ 114,435 $ 88,091
Non-taxable investment securities 886 245 115 182 51,175
Held to maturity:
Non-taxable investment securities -- -- 258 195 225
Mortgages held for sale ............ 4,346 -- -- -- --
Loans net of unearned discount ..... 392,180 207,672 168,485 282,603 133,514
--------- --------- --------- --------- ---------
Total interest earning assets ......... 531,876 227,476 183,004 397,415 273,005
--------- --------- --------- --------- ---------
Interest bearing liabilities:
Savings and money market deposits .. 42,109 59,252 69,951 286,174 --
Time deposits ...................... 186,793 381,425 58,175 14,844 702
Securities sold under repurchase
agreements ....................... 41,577 -- -- -- --
FHLB advances ...................... 189,186 -- -- -- --
Subordinated notes and debentures .. -- -- -- 9,000 23,000
Preferred securities ............... -- -- -- -- 25,300
--------- --------- --------- --------- ---------
Total interest bearing liabilities .... 459,665 440,677 128,126 310,018 49,002
--------- --------- --------- --------- ---------
Gap ................................... $ 72,211 $(213,201) $ 54,878 $ 87,397 $ 224,003
========= ========= ========= ========= =========
Cumulative gap ........................ $ 72,211 $(140,990) $ (86,112) $ 1,285 $ 225,288
========= ========= ========= ========= =========
Gap to assets ratio ................... 4% -12% 3% 5% 13%
Cumulative gap to assets ratio ........ 4% -8% -5% * 13%
<FN>
*Less than 1%.
</FN>
</TABLE>
The above table reflects prepayment and repricing estimates which may be
modified by management and independent advisors.
<PAGE>
Loan Portfolio. The following table summarizes the loan portfolio of the Company
by loan category and amount at September 30, 1998 and corresponds to appropriate
regulatory definitions. Loans with a principal amount in excess of 2% of the
Company's equity capital are generally considered to be large loans. By this
standard, large loans were those exceeding $2.6 million at September 30, 1998.
Large loans as a percentage of total loans at that date were 16%.
Book Value
(dollars in
thousands)
Loans secured by real estate:
Construction and land development ....................... $ 98,541
Secured by 1-4 family residential properties ............ 206,731
Secured by multifamily (5 or more) residential properties 37,009
Secured by non-farm non-residential properties .......... 283,275
Commercial and industrial loans:
To U.S. addresses (domicile) ............................ 236,755
Loans to individuals for household, family and other personal
expenditures (consumer):
Credit cards and related plans .......................... 24,401
Other ................................................... 274,791
Tax exempt industrial development obligations ................ 4,217
All other loans .............................................. 1,934
Lease financing receivables, net of unearned income .......... 21,146
----------
Total ................................................... $1,188,800
==========
<PAGE>
Non-Performing Loans. The following table presents the principal amounts of non
accrual and renegotiated loans (1) at September 30, 1998 in addition to a
schedule presenting loans contractually past due 90 days or more as to interest
or principal still accruing interest. At September 30, 1998 the ratio of the
allowance for credit losses to total loans amounted to 1.17%. On an annualized
basis, the ratio of net charge-offs to average loans was .60% for the nine month
period ended September 30, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis ...... $ 13,320 $10,009 $ 9,857 $15,106 $16,695 $13,925 $ 8,955
Loans renegotiated to provide a reduction or
deferral of interest or principal ............ -- -- -- -- -- 1,367 1,493
------- ------- ------- ------- ------- ------- -------
Total non-performing loans (1) .................. 13,320 10,009 9,857 15,106 16,695 15,292 10,448
------- ------- ------- ------- ------- ------- -------
Other real estate owned ......................... 3,836 2,946 2,265 4,237 4,260 6,093 5,937
Non performing IPF receivables .................. 4,778
------- ------- ------- ------- ------- ------- -------
Total non-performing assets (1) ................. $17,156 $12,955 $12,122 $19,343 $25,733 $21,385 $16,385
======= ======= ======= ======= ======= ======= =======
Non-performing loans/total loans (1) ............ 1.12% 1.04% 0.98% 1.65% 1.90% 2.15% 1.79%
Non-performing assets/total loans and
non-performing assets (1) .................... 1.44% 1.34% 1.20% 2.11% 2.44% 2.98% 2.78%
Loans past due 90 days or more as to interest
or principal payments still accruing interest
and not included in non-accrual loans ........ $ 6,661 $ 5,201 $ 5,460 $ 5,455 $ 7,992 $ 6,584 $ 4,984
======= ======= ======= ======= ======= ======= =======
</TABLE>
Non-accrual loans(1) increased to $13.3 million at September 30, 1998 compared
to $9.9 million at December 31, 1997. The increase reflected approximately $7.5
million of additions, $1.5 million of charge-offs, $2.3 million of payments and
$367,000 transferred to other real estate.
Other real estate owned amounted to $3.8 million at September 30, 1998
compared to $2.3 million at December 31, 1997. Activity in the nine months ended
September 30, 1998 reflected $2.9 million of additions with sales and other
receipts of $1.4 million, $367,000 transfers from non-accrual and charge-offs
and other write downs of $332,000.
Interest on Non-Accrual Loans(1). If interest on non-accrual loans had been
accrued, such income would have been $700,000 and $771,000, respectively for the
first nine months of 1998 and 1997.
Provision for Credit Losses. The provision for credit losses for the first nine
months of 1998 was $4.7 million compared to $2.7 million in the first nine
months of 1997. The $2.0 million increase in 1998 over 1997 reflects an increase
in Regent's provision for credit losses to $1.5 million in 1998 compared to
$100,000 in 1997. The increase in the provision was the amount necessary to
increase the reserve to levels determined by an analysis which applied estimated
loss ratios to various categories of Regent loans.
- -----------------------------------------
(1) Excluding loans past due 90 days or more still accruing interest.
<PAGE>
Summary of Credit Loss Experience. The following table summarizes the credit
loss experience of JBI for the periods shown. The IPF charge-offs and other
Regent losses have been included in this table, as a result of the restatement
required by pooling of interest accounting, for all periods prior to the third
quarter 1998 merger date.
<TABLE>
<CAPTION>
September 30, December 31,
---------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance in the allowance for credit losses at
beginning of period ..................... $14,136 $16,794 $16,794 $21,492 $10,700 $ 8,189 $ 7,546
------- ------- ------- ------- ------- ------- -------
Loans charged-off:
Commercial .............................. 471 3,032 2,254 2,510 2,817 1,336 790
Construction ............................ 213 -- -- 473 -- 190 --
Real estate mortgage .................... 1,921 3,115 4,254 4,724 1,716 2,123 1,464
Credit card ............................. 1,874 501 835 160 16 -- --
IPF ..................................... -- -- 8,967 -- -- --
Installment and lease financing ......... 1,313 639 1,362 522 435 272 243
------- ------- ------- ------- ------- ------- -------
Total ................................ 5,792 7,287 8,705 17,356 4,984 3,921 2,497
------- ------- ------- ------- ------- ------- -------
Recoveries:
Commercial .............................. 366 165 216 109 266 393 77
Construction ............................ -- -- -- -- -- -- 1
Real estate mortgage .................... 292 1,227 1,276 901 439 196 65
Credit card ............................. 37 9 9 -- -- -- --
IPF ..................................... 752 757 1,482 -- -- --
Installment and lease financing ......... 198 55 89 51 59 28 28
------- ------- ------- ------- ------- ------- -------
Total ................................ 893 2,208 2,347 2,543 764 617 171
------- ------- ------- ------- ------- ------- -------
Net charge-offs ............................. 4,899 5,079 6,358 14,813 4,220 3,304 2,326
Acquisitions ................................ -- -- -- -- 6,121 3,098 --
Provision charged to operations ............. 4,653 2,740 3,700 10,115 8,891 2,717 2,969
------- ------- ------- ------- ------- ------- -------
Balance in allowance for credit losses at end
of period ............................... $13,890 $14,455 $14,136 $16,794 $21,492 $10,700 $ 8,189
======= ======= ======= ======= ======= ======= =======
Net charge-offs/average loans ............... 0.60% 0.73% 0.74% 1.63% 0.53% 0.51% 0.42%
</TABLE>
<PAGE>
YEAR 2000
The Company has been actively involved in Year 2000 ("Y2K") issues. The
Company has assessed its state of readiness by evaluating its information
technology ("IT") and non-IT systems. The IT systems consist of data processing
services owned by service providers, an administrative network, various
networked computers and equipment. Service providers have developed a project
time line to meet all deadlines as prescribed by the FDIC. They have provided
updates on their progress in meeting those goals which document that they are
meeting the FDIC guidelines. The administrative network is in the process of
being fully tested. All equipment and software has been updated or replaced with
Y2K-determined compliance. The Company has made the following determinations in
regard to Y2K issues relating to third parties. The Federal Reserve Bank and
other regulatory agencies, both federal and state, all purport to be in
compliance or on schedule with Y2K issues. Vendors are substantially fungible
and alternative sources for any with Y2K problems can be utilized. For
depositors the Company has provided public forums to discuss Y2K issues,
however, the Company does not anticipate any significant Y2K issues with its
deposit base. With regard to borrowers, each loan made since June 1, 1998 has
been evaluated as to its Y2K issues. Loan officers are in the process of
determining any special exposures. Based upon its knowledge of its portfolio, no
significant special exposures are known. The Company's allowance for credit
losses will reflect any potential Y2K related losses. The Company replaced
hardware and software through prior expenditures and did not accelerate any
replacement periods. All labor costs were incurred using existing staff. Outside
vendors will be utilized during the testing phase of the Company's plan. Such
incremental costs for 1999 are not currently anticipated to exceed $200,000.
The Company anticipates that the most likely worst case senario will be a
combination of several borrowers experiencing short term Y2K cash flow problems
and a pre Y2K increase in cash demand by customers. The Company does not
consider a failure of its computer system as likely because of pre Y2K
preparation. The other failure commonly discussed is a failure of the power
grid. Based upon communications with its power companies, the Company does not
consider that likely. If the Company has borrowers that experience Y2K cash flow
problems, they will be dealt with in the same routine manner by which normal
cash flow interruptions experienced by borrowers are addressed. Any increase in
cash demand will be funded by the Company's normal currency ordering procedures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
Refer to 10-K.
Part II. Other Information
Item 6. Reports on Form 8-K
1. Form 8-K filed March 31, 1998 Item (5) Other material events: the proposed
acquisition of Regent Bancshares Corp.
2. Form 8-K filed August 13, 1998 Item (2) Acquisition or disposition of assets:
the completed acquisition of Regent Bancshares Corp.
<PAGE>
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
JEFFBANKS, INC.
(Registrant)
Dated: October 30, 1998 By /s/ Paul Frenkiel
------------------------------------------
Paul Frenkiel
Chief Financial Officer
Dated: October 30, 1998 By /s/ Martin F. Egan
------------------------------------------
Martin F. Egan
Assistant Secretary
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0
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