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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------ to ------
Commission File Number 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 19103
Philadelphia, PA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (215) 861-7000
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
<S> <C>
- ----------------------------------------- ------------------------------------------
- ----------------------------------------- ------------------------------------------
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or Section 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 III of this Form 10-K or any
amendment to this Form 10-K. / /
Aggregate market value of the voting common equity held by non-affiliates
of the registrant, based upon closing sale price as quoted on The NASDAQ Stock
Market on March 16, 1999: $171,080,000. There is no non-voting common equity of
the registrant outstanding.
(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: 10,487,715 shares
of common stock were outstanding as of March 16, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement (the "Proxy Statement") for registrant's
1999 Annual Meeting of Shareholders to be held on May 21, 1999 are incorporated
by reference in Part III of this Form 10-K.
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Part I
ITEM 1. BUSINESS
General
JeffBanks, Inc. (the "Company") is a Pennsylvania chartered, registered
bank holding company headquartered in Philadelphia with two wholly-owned
subsidiaries, Jefferson Bank ("Jefferson PA") and Jefferson Bank of New Jersey
("Jefferson NJ"). The Company operates principally through its subsidiary
banks, which are engaged in the commercial banking business in Philadelphia,
Pennsylvania and its immediately adjacent Pennsylvania and New Jersey suburbs.
The Company currently operates thirty-one retail branch offices, two loan
production offices, and an operations center.
During the five year period ending December 31, 1998, the Company's total
assets grew to $1.6 billion, from $1.0 billion, its deposits grew to $1.3
billion from $823.5 million and its shareholders' equity grew to $131.7 million
from $79.8 million. The Company also enjoyed increased profits during the
period as its net income grew from $5.0 million in 1993 to $11.4 million in
1998. The Company's growth over this period reflected both internal growth and
the acquisition of Regent National Bank (1998), United Valley Bank (1997),
Constitution Bank (1995), Security First Bank (1994), and Bank of Chester
County (1994).
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 has also achieved growth through acquisitions during
the past five years. The Company will consider future acquisitions as
opportunities may arise. There can be no assurance, however, that the Company
will make future acquisitions.
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 and other saving accounts, as well as certificates of
deposit. The Company also offers home banking by computer, 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. The Company does not offer trust
services. Potential trust customers 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, 1998, the Company had total deposits of $1.3 billion. Of that
total, 47% represented time deposits, 37% represented interest checking and
savings and money market deposits and 16% represented demand (non-interest
bearing) deposits.
At December 31, 1998, the Company had a net loan portfolio (excluding
mortgage loans held for sale) of $1.2 billion, representing 74% 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, 1998, commercial mortgages and other
commercial loans, including construction and direct financing leases, were $768
million or approximately 63% of the Company's net loan portfolio. Although in
making its loans the Company relies upon
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its evaluation of the creditworthiness and debt-servicing capability of a
borrower, its loans typically are secured by residential or commercial real
property, automobiles, equipment, fixtures and other collateral. 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.
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, 1998, the Company originated $203.2 million of such mortgage
loans. The Company originates these loans through both its origination staff
and its branches 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,
1998, the Company had approximately $14.6 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, 1998,
the Company was servicing real estate loans for other investors in an aggregate
principal amount of approximately $363.4 million.
In 1995 the Company began a credit card program which, because of the
significant additional expenditures the Company would be required to make in
order to increase the size of the credit card portfolio to achieve cost
efficiency, the Company has determined to discontinue in 1999. At December 31,
1998, the credit card portfolio approximated $22.8 million. This portfolio will
be sold at the time the program is terminated.
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. In the Company's target
market of small and middle-market businesses and their owners, the Company
believes that its principal competitors include Sovereign Bank and Commerce
Bank. The Company actively competes with these and other institutions for
deposits and local retail and commercial accounts. Many of its competitors,
including Sovereign, 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 $22 million as of December 31, 1998)
enables the Company to compete effectively for the credit needs of the middle-
market and small businesses which constitute its target market, while the
lending limit of Jefferson NJ (approximately $1.7 million at December 31, 1998)
enables it to effectively compete for the credit needs of small businesses. For
middle market businesses, Jefferson NJ may rely on the lending limit of
Jefferson PA which participates in loans which exceed Jefferson NJ's lending
limit. These lending limits are, however, considerably below those of various
competing institutions. 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 and 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 and other financial
institutions within its service area. During the past two years the Company has
made the following acquisitions:
In July 1998, the Company, through Jefferson PA, acquired Regent
Bancshares, Inc. and its banking subsidiary, Regent National Bank ("Regent"),
for 1,721,960 shares of the Company's common stock and the conversion of
outstanding Regent options into options
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to purchase 184,830 shares of the Company's common stock at an average exercise
price of $15.76. Regent was a nationally chartered banking institution engaged
in commercial and retail banking with one office in Philadelphia. Regent had
total assets of $240.3 million at the time of acquisition. The acquisition was
accounted for under the pooling of interests method of accounting.
In August 1998, the Company acquired Pioneer Mortgage, Inc. ("Pioneer")
for 99,293 shares of the Company's common stock. Pioneer is a mortgage company
which operates in the southern New Jersey portion of the Company's service
area, and during 1998, originated $89 million of mortgage loans, primarily on
single family homes.
On January 21, 1997, the Company, through Jefferson PA, acquired United
Valley Bancorp, Inc. and its banking subsidiary, United Valley Bank ("UVB"),
for 1,311,236 shares of the Company's common stock and the conversion of
outstanding UVB warrants into warrants to purchase 446,916 shares of the
Company's common stock at an exercise price of $6.74 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.
Previously, the Company had acquired Constitution Bank (with $122.0
million in total assets) in 1995, Security First Bank (with $33.8 million in
total assets) in 1994 and Bank of Chester County (with $57.8 million in total
assets) in 1994.
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 - 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
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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.
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, 1998, Jefferson PA had $39.6 million of undivided
profits legally available for the payment of dividends. Jefferson NJ had $2.7
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
Pennsylvania Department of Banking 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.
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 August 17, 1998. 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.
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
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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 - 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 Holding Company Act and the Change in Bank Control
Act of 1978 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.
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.
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
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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,
1998, see "Management's Discussion and Analysis of Financial Condition and
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 permits interstate branching by banks subject to the ability of
states to opt-out completely. Both Pennsylvania and New Jersey have adopted
legislation permitting out-of-state bank holding companies to acquire in-state
banks and to establish branch banks. The Company believes that the effect of
these new laws has been, and will continue, to increase competition within the
markets in which the Company now operates, although the Company cannot state
the extent to which competition has increased in such markets or the timing of
any such future increases.
ITEM 2. PROPERTY
The Company and its subsidiary banks currently operate thirty-one retail
branch offices, two loan production offices and an operations center. In 1998,
the Company occupied a new 13,000 square foot executive office. Twenty seven of
the Company's branch offices occupying approximately 150,000 square feet, are
leased under leases expiring between 1999 and 2011. During 1998, the Company
paid aggregate rentals of $2.8 million under these leases. Seven branch offices
are owned by the Company and occupy approximately 37,000 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.
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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, all as adjusted to give effect to a stock
split (in the form of a stock dividend) in July 1998 and a 5% stock dividend in
May, 1997:
Cash Dividends
1997 High Low Per Share
- ---- ------ ------ --------------
First Quarter .......... $16.86 $15.14 $.08
Second Quarter ......... 17.10 16.05 .09
Third Quarter .......... 23.03 16.95 .08
Fourth Quarter ......... 28.80 20.40 .09
Cash Dividends
1998 High Low Per Share
- ---- ----- ------ --------------
First Quarter .......... $32.33 $25.80 $.09
Second Quarter ......... 34.65 29.25 .09
Third Quarter .......... 32.25 18.75 .11
Fourth Quarter ......... 25.00 18.75 .14
As of March 16, 1999, there were approximately 3,200 holders of the
Company's Common Stock, including individual participants in security position
listings.
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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,
--------------------------------
1998 1997
--------------- ---------------
(dollars in thousands, except per
share amounts)
<S> <C> <C>
Income Statement Data:
Interest income ................................................................ $ 123,493 $ 110,620
Interest expense ............................................................... 63,720 55,652
----------- -----------
Net interest income ............................................................ 59,773 54,968
Provision for credit losses .................................................... 5,963 3,700
----------- -----------
Net interest income after provision for credit losses .......................... 53,810 51,268
Non-interest income(1)(2) ...................................................... 15,215 13,203
Non-interest expense ........................................................... 53,593 46,570
----------- -----------
Income before income taxes and dividends on preferred stock .................... 15,432 17,901
Income taxes ................................................................... 4,000 4,570
----------- -----------
Net Income before dividends on preferred stock ................................. 11,432 13,331
Dividends on preferred stock of subsidiary ..................................... -- 467
----------- -----------
Net Income available to common shareholders ................................... 11,432 12,864
=========== ===========
Net Income excluding non-recurring Regent merger expense (3) .................. $ 13,607 $ 13,331
=========== ===========
Per Common Share Data:(4)
Net income -- basic ............................................................ $ 1.11 $ 1.33
Net income -- diluted .......................................................... 1.04 1.25
Book value ..................................................................... 12.56 11.99
Book value -- diluted(5) ....................................................... 12.20 11.04
Balance Sheet Data:
Total assets ................................................................... $ 1,637,106 $ 1,561,010
Total loans(6) ................................................................. 1,229,939 1,006,144
Allowance for credit losses .................................................... 12,407 14,136
Investment securities .......................................................... 302,043 365,183
Goodwill, net .................................................................. 4,059 4,435
Deposits ....................................................................... 1,276,280 1,085,627
Securities sold under repurchase agreements .................................... 39,635 70,911
FHLB advances .................................................................. 109,182 203,511
Subordinated notes and debentures .............................................. 32,000 34,750
Debentures relating to trust preferred securities .............................. 25,300 25,300
Convertible preferred stock and related surplus ................................ -- --
Common shareholders' equity .................................................... 131,678 121,806
Selected Operating Ratios:
Return on average assets ....................................................... 71% 95%
Return on average assets excluding non-recurring Regent merger expense (3). 85% 95%
Return on average common equity ................................................ 9.04% 11.50%
Return on average common equity excluding non-recurring Regent merger
expense (3) ................................................................... 10.76% 11.50%
Net interest margin ............................................................ 4.18% 4.28%
Ratio of earnings to fixed charges ............................................. 124% 130%
Dividend payout ratio .......................................................... 40.76% 26.31%
Selected Capital and Asset Quality Rates:
Equity/assets .................................................................. 8.04% 7.80%
Non-performing loans/total loans(7) ............................................ 1.01% 0.98%
Non-performing assets/total loans and non-performing assets(8) ................. 1.26% 1.20%
Allowance for credit losses/total loans ........................................ 1.01% 1.40%
Allowance for credit losses/non-performing assets(8) ........................... 80.13% 116.61%
Net charge-offs/average loans .................................................. 71% .67%
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
As of or for the Year Ended
December 31,
----------------------------------
1996 1995
--------------- ---------------
(dollars in thousands, except per
share amounts)
<S> <C> <C>
Income Statement Data:
Interest income ................................................................ $ 107,100 $ 95,769
Interest expense ............................................................... 51,941 45,991
----------- -----------
Net interest income ............................................................ 55,159 49,778
Provision for credit losses .................................................... 10,115 8,891
----------- -----------
Net interest income after provision for credit losses .......................... 45,044 40,887
Non-interest income(1)(2) ...................................................... 10,496 9,398
Non-interest expense ........................................................... 46,222 40,763
----------- -----------
Income before income taxes and dividends on preferred stock .................... 9,318 9,522
Income taxes ................................................................... 4,238 4,222
----------- -----------
Net Income before dividends on preferred stock ................................. 5,080 5,300
Dividends on preferred stock of subsidiary ..................................... 142 1,613
----------- -----------
Net Income available to common shareholders ................................... 4,938 3,687
=========== ===========
Net Income excluding non-recurring Regent merger expense (3) .................. $ 5,080 $ 5,300
=========== ===========
Per Common Share Data:(4)
Net income -- basic ............................................................ $ 0.56 $ 0.52
Net income -- diluted .......................................................... 0.53 0.49
Book value ..................................................................... 11.17 10.99
Book value -- diluted(5) ....................................................... 10.27 10.15
Balance Sheet Data:
Total assets ................................................................... $ 1,334,439 $ 1,338,798
Total loans(6) ................................................................. 917,383 898,202
Allowance for credit losses .................................................... 16,794 21,492
Investment securities .......................................................... 280,791 302,541
Goodwill, net .................................................................. 8,978 8,978
Deposits ....................................................................... 972,265 1,036,648
Securities sold under repurchase agreements .................................... 73,764 46,549
FHLB advances .................................................................. 127,953 120,655
Subordinated notes and debentures .............................................. 34,750 11,750
Debentures relating to trust preferred securities .............................. -- --
Convertible preferred stock and related surplus ................................ 55 56
Common shareholders' equity .................................................... 100,222 96,015
Selected Operating Ratios:
Return on average assets ....................................................... 38% .45%
Return on average assets excluding non-recurring Regent merger expense (3). 38% .45%
Return on average common equity ................................................ 4.97% 5.16%
Return on average common equity excluding non-recurring Regent merger
expense (3) ................................................................... 4.97% 5.16%
Net interest margin ............................................................ 4.43% 4.56%
Ratio of earnings to fixed charges ............................................. 117% 114%
Dividend payout ratio .......................................................... 47.23% 43.98%
Selected Capital and Asset Quality Rates:
Equity/assets .................................................................. 7.51% 7.18%
Non-performing loans/total loans(7) ............................................ 1.65% 1.86%
Non-performing assets/total loans and non-performing assets(8) ................. 2.11% 2.85%
Allowance for credit losses/total loans ........................................ 1.83% 2.39%
Allowance for credit losses/non-performing assets(8) ........................... 86.82% 83.52%
Net charge-offs/average loans .................................................. 1.63% .53%
</TABLE>
<PAGE>
[RESTUBED TABLE FOR ABOVE
<TABLE>
<CAPTION>
As of or for the
Year Ended
December 31,
---------------
1994
---------------
(dollars in
thousands,
except per
share amounts)
<S> <C>
Income Statement Data:
Interest income ................................................................ $ 71,970
Interest expense ............................................................... 32,349
-----------
Net interest income ............................................................ 39,621
Provision for credit losses .................................................... 2,717
-----------
Net interest income after provision for credit losses .......................... 36,904
Non-interest income(1)(2) ...................................................... 8,405
Non-interest expense ........................................................... 33,939
-----------
Income before income taxes and dividends on preferred stock .................... 11,370
Income taxes ................................................................... 3,829
-----------
Net Income before dividends on preferred stock ................................. 7,541
Dividends on preferred stock of subsidiary ..................................... 1,600
-----------
Net Income available to common shareholders ................................... 5,941
===========
Net Income excluding non-recurring Regent merger expense (3) .................. $ 7,541
===========
Per Common Share Data:(4)
Net income -- basic ............................................................ $ 0.93
Net income -- diluted .......................................................... 0.90
Book value ..................................................................... 10.93
Book value -- diluted(5) ....................................................... 9.69
Balance Sheet Data:
Total assets ................................................................... $ 1,110,981
Total loans(6) ................................................................. 718,502
Allowance for credit losses .................................................... 10,700
Investment securities .......................................................... 253,772
Goodwill, net .................................................................. 809
Deposits ....................................................................... 871,730
Securities sold under repurchase agreements .................................... 16,229
FHLB advances .................................................................. 106,782
Subordinated notes and debentures .............................................. 11,750
Debentures relating to trust preferred securities .............................. --
Convertible preferred stock and related surplus ................................ 12,895
Common shareholders' equity .................................................... 75,009
Selected Operating Ratios:
Return on average assets ....................................................... .75%
Return on average assets excluding non-recurring Regent merger expense (3). .75%
Return on average common equity ................................................ 8.93%
Return on average common equity excluding non-recurring Regent merger
expense (3) ................................................................... 8.93%
Net interest margin ............................................................ 4.21%
Ratio of earnings to fixed charges ............................................. 125%
Dividend payout ratio .......................................................... 16.66%
Selected Capital and Asset Quality Rates:
Equity/assets .................................................................. 7.91%
Non-performing loans/total loans(7) ............................................ 2.13%
Non-performing assets/total loans and non-performing assets(8) ................. 2.95%
Allowance for credit losses/total loans ........................................ 1.49%
Allowance for credit losses/non-performing assets(8) ........................... 50.04%
Net charge-offs/average loans .................................................. .51%
</TABLE>
8
<PAGE>
- ------------
(1) Includes gain on sale of securities of $1.2 million in 1998, $515,000 in
1997, $245,000 in 1996, $333,000 in 1995 and $128,000 in 1994.
(2) Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights." Income resulting from the capitalization of mortgage servicing
rights required by that pronouncement amounted to $1.6 million in 1998,
$666,000 in 1997, $557,000 in 1996 and $283,000 in 1995.
(3) Non-recurring Regent merger expense included 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. Non-recurring Regent merger
expense also included approximately $859,000 in employee termination
expenses, $180,000 in legal fees, losses of $249,000 on personal property
which could not be located or was worthless, a payment of $233,000 to
terminate a lease and investment banker fees of $275,000. The after-tax
impact of the non-recurring expenses on net income was $2.2 million.
(4) The Company has 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 stock options, securities or other contracts to issue common
stock were exercised and converted into common stock. Prior period
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:
10,301,000 (1998); 9,660,000 (1997); 8,775,000 (1996); 7,141,000 (1995)
and 6,367,000 (1994). 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. Per share amounts in all years have been
adjusted to retroactively reflect prior stock dividends and splits.
(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.
(6) Includes mortgage loans held for sale of $14.6 million (1998), $4.3 million
(1997), $1.3 million (1996), $2.9 million (1995) and $1.6 million (1994).
(7) 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.
(8) 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.
(9) 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. The financial statements have been restated to reflect the
impact of the acquisitions of Regent and Pioneer in 1998, and the 1997
acquisition of UVB. Restatement was required as the transactions were
accounted for under the pooling of interests method of accounting.
9
<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
The Company's results of operations for 1998, 1997 and 1996 were
significantly affected by the 1998 acquisition of Regent and the 1997
acquisition of UVB. Each of these acquisitions was accounted for as a pooling
of interests, requiring the Company to restate its financial statements to
include the pre-acquisition results of the acquired institutions for all
periods and to charge to operations certain non-recurring acquisition expenses.
The principal factors affecting the results of operations arising from the
Regent acquisition were (i) a 1998 charge to operations of $2.2 million
reflecting non-recurring acquisition expenses, (ii) a 1998 charge to operations
of $2.5 million relating to certain Regent loans and other assets that were
deemed uncollectable or for which the Company believed that higher reserves
were appropriate, and (iii) a $5.1 million charge to operations by Regent in
1996 for credit losses as compared to a $100,000 charge in 1997. The cost
savings anticipated by the Company from the Regent acquisition, which the
Company viewed as an offset to the non-recurring acquisition expenses and
credit loss charges, did not begin to be realized until the third quarter of
1998. The principal factors affecting the results of operations that resulted
from the UVB acquisition were (i) an increase of $1.5 million in the charge to
operations by UVB in 1996 for credit losses, and (ii) the positive effect in
1997 of cost savings resulting from the UVB acquisition and the reduction in
1997 of the provision for UVB credit losses to a more typical level. As a
consequence of the foregoing, the Company's net income decreased $1.9 million
(14%) in 1998 from 1997 while it increased $8.3 million (162%) in 1997 from
1996. Non-accrual loans were $12.4 million at December 31, 1998, compared to
$9.9 million and $15.1 million at December 31, 1997 and 1996, respectively.
Non-performing assets amounted to $15.5 million at December 31, 1998, $12.1
million at December 31, 1997 and $19.3 million at December 31, 1996(1).
Non-performing assets reflected an increase in other real estate owned to $3.1
million at December 31, 1998 from $2.3 million at December 31, 1997 and $4.2
million at December 31, 1996(1).
<PAGE>
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 of
Regent and UVB, the Company's net interest income increased 9% in 1998 as
compared to 1997. The net interest margin, expressed as net interest income
divided by average interest earning assets, decreased to 4.18% in 1998 from
4.28% in 1997 and 4.43% in 1996. The decline in the net interest margin from
1997 to 1998 resulted from a decline in the Company's loan and investment
yields as market interest rates decreased, (especially in the fourth quarter of
1998 when the prime rate dropped .75%), increases in the yields offered on
promotional deposits and a lag in the repricing of certificates of deposit.
While the Company's loan and investment yields generally rose in 1997 compared
to 1996, the cost of the Company's interest bearing liabilities also increased.
These increases were due in part to increases in market interest rates, to 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. In
addition, there were reductions in the yield of Regent's portfolio as a result
of decreased outstanding balances of exceptionally high yielding consumer loans
to finance automobile insurance premiums. These loans were disposed of with
significant credit losses. Further, increases in the proportion of lower
yielding indirect automobile loans partially offset the impact of higher market
interest rates on yields on other interest earning assets. Accordingly, the
yield on interest earning assets decreased from 1996 to 1997.
Total loans at December 31, 1998 increased 22%, or $223.8 million over the
prior year and reflected internal growth. Total loans at December 31, 1997
increased 10%, or $88.8 million over the prior year amount and also reflected
internal growth. Total loans at December 31, 1996 increased 2% or $19.2 million
over the prior year amount. As of December 31, 1998, the capital ratios of the
Company's subsidiary banks significantly exceeded the "well-capitalized"
standard established by regulatory authorities. See "Liquidity and
- ------------
(1) Non accrual loans and non-performing assets exclude loans past due 90 days
or more still accruing interests.
10
<PAGE>
Capital Resources", below. 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. See
"Liquidity and Capital Resources," below.
Results of Operations
General. The Company's results of operations depend primarily on net
interest income, which is the difference between interest income on interest
earning assets and interest expense on interest bearing liabilities. Interest
earning assets consist principally of loans and investment securities, while
interest bearing liabilities consist primarily of deposits. The Company's net
income is also affected by the provision for credit losses and the level of
non-interest income as well as by non-interest expenses, including salary and
employee benefits, occupancy costs, data processing expense, charges relating
to non-performing and other classified assets and other expenses.
Net Income. As set forth in the "Overview" above, the Company's net income
in 1998, 1997 and 1996 were materially affected by the Regent and UVB
acquisitions as a result of both the pooling of interests method of accounting
employed to account for these transactions and certain non-recurring
acquisition expenses. The pooling of interests method of accounting required
the Company to restate its financial statements to include the pre-acquisition
results of the acquired institutions for all periods. As a consequence, the
Company's net income decreased $1.9 million (14%) from 1997 to 1998, while it
increased $8.3 million (162%) from 1996 to 1997. The principal factors
affecting the results of operations arising from the Regent acquisition were as
follows:
(i) 1998 charges to operations of $2.2 million reflecting non-recurring
expenses such as employment contract terminations, legal, accounting
and investment banking fees.
(ii) A 1998 charge to operations of $2.5 million relating to certain Regent
loans and other assets. Of that amount, $1 million represented a loss
on a Regent loan collateralized by truck leases, which Regent had
characterized as an "other asset" in 1997. In 1998, based upon the
minimal current and future expected collections on the loans or the
collateral, a loss was recognized. The remaining $1.5 million was an
increase in loss reserves relating to the Regent loan portfolio to
levels determined by an analysis applying estimated loss ratios to the
various loan categories.
(iii) A $5.1 million charge to operations by Regent in 1996 for possible
credit losses principally relating to a discontinued Regent program of
making consumer loans to finance automobile insurance premiums. In
1997 no similar extraordinary charge was required, and the charge to
operations for possible credit losses was reduced to $100,000.
<PAGE>
The cost savings anticipated by the Company from the Regent acquisition,
which the Company viewed as an offset to the above non-recurring acquisition
expenses and credit loss charges, did not begin to be realized until the end of
the third quarter 1998, in which quarter the majority of cost savings were
already being realized. The principal factors affecting the results of
operations that resulted from the UVB acquisition were as follows:
(i) An increase of $1.5 million in the charge to operations by UVB in 1996
for possible credit losses. This increase reflected amounts UVB
believed necessary to bring UVB's reserves to levels more consistent
with industry-wide methodologies.
(ii) The positive effect in 1997 of cost savings resulting from the UVB
acquisition and the reduction in 1997 of the provision for UVB credit
losses to more typical levels.
Reflecting increased loan balances resulting from internal growth and the
Regent and UVB acquisitions, the Company's net interest income increased 9% in
1998 as compared to 1997. Net interest income in 1997 was comparable to 1996
and reflected reductions in several Regent loan categories. These reductions
included loan sales made to a potential acquirer and reduction of the
automobile insurance premium financing loans which had resulted in significant
losses as reflected in the $5.1 million 1996 provision noted above. The impact
of the consumer loan reductions was increased as a result of their
exceptionally high yields. While market interest rates and the Company's loan
and investment yields declined in 1998, especially in the fourth quarter of
1998 when the prime rate dropped .75%, increases in rates paid on promotional
deposits and a lag in the repricing of certificates of deposit contributed to
an increase in the cost of interest bearing liabilities. Although the prime
rate and many of the Company's loan and investment yields generally rose in
1997 compared to 1996, reductions in the yield of Regent's portfolio reflecting
decreased outstanding balances of exceptionally high yielding consumer
automobile insurance premium financing loans, and increases in the proportion
of lower yielding indirect automobile loans,
11
<PAGE>
contributed to a reduction in overall yields. Also, as a result of the increase
in market interest rates, the rates paid on interest bearing liabilities
increased, and resulted in the reduction in net interest margin. The increase
in the cost of interest bearing liabilities also 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 provision for
credit losses amounted to $6.0 million in 1998, $3.7 million in 1997 and $10.1
million in 1996. The provision for credit losses in 1998 reflected a $1.5
million provision for credit losses for Regent as compared to $100,000 for
1997. The provision for credit losses in 1996 reflected Regent's $5.1 million
provision which included large provisions for consumer loans to finance
automobile insurance premiums. The provision for credit losses in 1996 also
reflected the impact of a $1.5 million additional provision for credit losses
for UVB, referred to above. These increases were reflected in the restatement
of the financial statements resulting from the pooling of interests method of
accounting utilized for these acquisitions. See "Financial Condition -
Provision for Credit Losses", below.
Gain on sales of investment securities totaled $1.2 million in 1998
compared to $515,000 in 1997. The increase reflected gains on the sale of
municipal securities which were replaced by securities with longer-term
protection against being called for redemption.
Other income was $2.6 million in 1997, compared to $1.3 million in 1996.
The increase reflected a $640,000 increase in net gains on the sale of loans by
Regent. Other income in 1998 was $2.7 million and reflected $625,000 in gains
resulting from the sale of mortgage servicing. The sale was made to reduce
prepayment risk in lower interest rate environments. See "Results of Operations
- - Net Interest Income and Average Balances and Non-Interest Income," below.
Net Interest Income and Average Balances. Net interest income was $59.8
million in 1998, compared to $55.0 million in 1997 and $55.1 million in 1996.
Yields on interest earning assets decreased to 8.42% in 1998 from 8.50% in
1997, a difference of .08%. The decrease reflected general declines in loan and
investment yields, especially in the fourth quarter of 1998 when the prime rate
dropped .75%. However, the cost of interest bearing liabilities increased to
4.98% from 4.93% or .05% as decreases in the general market rates were offset
by increases in promotional rates offered by the Company and a lag in the
repricing of certificates of deposit. Yields on interest earning assets
decreased to 8.50% in 1997 from 8.57% in 1996. While the prime rate and the
Company's loan and investment yields generally rose in 1997 compared to 1996,
reductions in the yield of Regent's portfolio reflected decreased outstanding
balances of exceptionally high yielding automobile insurance premium financing
loans. An increased proportion of lower yielding indirect automobile loans (as
compared to commercial loans) also contributed to the decrease. The cost of
interest bearing liabilities also reflected increases in market interest rates
and increased to 4.93% in 1997 from 4.86% in 1996, a difference of .07%. The
increase also 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. In 1996 a reduction in the net interest margin from the prior
year reflected the impact of a lower prime and lower loan yields. 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. 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. The impact of these reductions was more than
offset by the restatement for Regent, which generally had a higher cost of
funds than the Company. 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 has
periodically been high relative to the industry increased with the restatement
for Regent, and 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,
----------------------------------------------------------------------------
1998 1997
------------------------------------ --------------------------------------
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 .............................. $ 6,419 $ 455 7.09% $ 4,079 $ 299 7.33%
Loans net of unearned discount(1) .................... 1,104,943 100,893 9.13%(2) 938,615 87,620 9.34%(2)
Allowance for credit losses .......................... (13,917) (15,509)
---------- ----------
Loans, net ........................................... 1,097,445 101,348 9.23% 927,185 87,919 9.48%
Investment Securities:
Held to maturity:
Taxable investment securities .......................
Non-taxable investment securities ................... 680 53 7.79%(2) 682 54 7.92%(2)
Available for sale:
Taxable investment securities ....................... 289,564 18,166 6.27% 260,798 16,668 6.39%
Non-taxable investment securities ................... 51,368 4,316 8.40%(2) 39,271 3,372 8.59%(2)
Federal funds sold ................................... 48,090 2,544 5.29% 73,310 3,931 5.36%
---------- -------- ---------- --------
Net interest earning assets ........................... 1,487,147 126,427 1,301,246 111,944
Cash and due from banks ............................... 46,362 41,778
Accrued interest receivable ........................... 10,033 7,436
Bank premises and equipment ........................... 21,609 16,965
Other real estate owned ............................... 2,850 3,073
Other assests ......................................... 33,946 34,009
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing) ........................ $ 172,348 $ 142,090
Interest checking .................................... 89,938 $ 1,009 1.12% 85,118 $ 1,100 1.29%
Savings and money market ............................. 370,143 14,850 4.01% 301,675 11,070 3.67%
Time ................................................. 582,471 32,999 5.67% 501,424 28,606 5.70%
---------- -------- ---------- --------
Total deposits ................................... 1,214,900 48,858 1,030,307 40,776
FHLB advances ......................................... 126,313 7,303 5.78% 111,536 6,586 5.90%
Subordinated notes and debentures ..................... 33,747 3,026 8.97% 34,750 3,095 8.91%
Debentures relating to trust preferred securities ..... 25,290 2,341 9.26% 22,868 2,119 9.27%
Securities sold under repurchase agreements ........... 52,089 2,192 4.21% 70,710 3,076 4.35%
Accrued interest payable .............................. 14,760 14,254
Other liablities ...................................... 8,390 8,194
Shareholders' equity
Common stock ......................................... $ 10,302 $ 9,660
Preferred stock and related surplus .................. -- --
Additional paid-in capital ........................... 92,408 67,565
Retained earnings .................................... 23,748 34,663
---------- ----------
Total shareholders' equity ....................... $ 126,458 $ 111,888
========== ==========
Average total interest earning assets ................ $1,501,064 $126,427 8.42% $1,316,755 $111,944 8.50%
Average total interest bearing liabilities ........... $1,279,991 $ 63,720 4.98% $1,128,081 $ 55,652 4.93%
-------- --------
Net yield on average interest earning assets (net
interest margin) .................................... $1,501,064 $ 62,707 4.18% $1,316,755 $ 56,292 4.28%
======== ========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996
------------------------------------------
Average Average
Balance Interest Rate
------------- ---------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest earning assets:
Mortgages held for sale .............................. $ 658 $ 47 7.14%
Loans net of unearned discount(1) .................... 908,079 86,236 9.50%(2)
Allowance for credit losses .......................... (17,857)
----------
Loans, net ........................................... 890,880 86,283 9.69%
Investment Securities:
Held to maturity:
Taxable investment securities ....................... 544 34 6.25%
Non-taxable investment securities ................... 687 53 7.71%(2)
Available for sale:
Taxable investment securities ....................... 292,300 18,044 6.17%
Non-taxable investment securities ................... 7,970 660 8.28%(2)
Federal funds sold ................................... 44,297 2,407 5.43%
---------- --------
Net interest earning assets ........................... 1,236,678 107,481
Cash and due from banks ............................... 38,645
Accrued interest receivable ........................... 6,759
Bank premises and equipment ........................... 14,349
Other real estate owned ............................... 4,158
Other assests ......................................... 24,713
Liabilities and Shareholders' Equity:
Deposits:
Demand (non-interest bearing) ........................ $ 136,140
Interest checking .................................... 76,846 $ 1,505 1.96%
Savings and money market ............................. 287,378 10,291 3.58%
Time ................................................. 499,129 28,452 5.70%
---------- --------
Total deposits ................................... 999,493 40,248
FHLB advances ......................................... 104,126 6,238 5.99%
Subordinated notes and debentures ..................... 29,315 2,621 8.94%
Debentures relating to trust preferred securities .....
Securities sold under repurchase agreements ........... 71,805 2,834 3.95%
Accrued interest payable .............................. 12,777
Other liablities ...................................... 9,034
Shareholders' equity
Common stock ......................................... $ 8,775
Preferred stock and related surplus .................. --
Additional paid-in capital ........................... 61,327
Retained earnings .................................... 28,651
----------
Total shareholders' equity ....................... $ 98,753
==========
Average total interest earning assets ................ $1,254,535 $107,481 8.57%
Average total interest bearing liabilities ........... $1,068,599 $ 51,941 4.86%
--------
Net yield on average interest earning assets (net
interest margin) .................................... $1,254,535 $ 55,540 4.43%
========
</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.
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>
Year Ended December 31, Year Ended December 31,
---------------------------------- ------------------------------------------------
1998 1997 1996 1998 1997
---------- ---------- ---------- ----------------------- -----------------------
Amount Percent Amount Percent
------------ --------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Mortgages held for sale .................... $ 455 $ 299 $ 47 $ 156 52% $ 252 536%
Interest and fees on loans ................. 99,469 87,495 86,098 11,974 14% 1,397 2%
Interest on investment securities:
Held to maturity:
Federal agency obligations ................ 34 (34) (100%)
State and municipal obligations ........... 34 35 34 (1) (3%) 1 3%
Available for sale:
U.S. Treasury securities ................ 1,427 3,066 3,565 (1,639) (53%) (499) (14%)
Federal agency obligations and mort-
gage backed securities ................. 13,791 12,349 13,296 1,442 12% (947) (7%)
State and municipal obligations ......... 2,825 2,192 436 633 29% 1,756 403%
Other ................................... 2,948 1,253 1,183 1,695 135% 70 6%
Interest on federal funds sold ............. 2,544 3,931 2,407 (1,387) (35%) 1,524 63%
-------- -------- -------- ---------- ------
Total interest income ...................... 123,493 110,620 107,100 12,873 12% 3,520 3%
-------- -------- -------- ---------- ------
Interest Expense:
Deposits .................................. 48,858 40,776 40,248 8,082 20% 528 1%
FHLB advances ............................. 7,303 6,586 6,238 717 11% 348 6%
Subordinated notes and debentures ......... 3,026 3,095 2,621 (69) (2%) 474 18%
Debentures relating to trust preferred
securities .............................. 2,341 2,119 -- 222 10% 2,119 100%
Securities sold under repurchase agree-
ments ................................... 2,192 3,076 2,834 (884) (29%) 242 9%
-------- -------- -------- ---------- ------
Total interest expense ..................... 63,720 55,652 51,941 8,068 14% 3,711 7%
-------- -------- -------- ---------- ------
Net interest income ........................ $ 59,773 $ 54,968 $ 55,159 $ 4,805 9% $ (191) *
======== ======== ======== ========== ======
</TABLE>
- ------------
* Less than 1%.
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>
1998 Versus 1997 1997 Versus 1996
----------------------------------------- --------------------------------------
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 ........................... $ 156 $ 166 $ (10) $ 252 $ 251 $ 1
Loans ............................................. 11,974 14,846 (2,872) 1,397 2,798 (1,401)
Investment securities:
Held to maturity:
Taxable investment securities .................. (34) (34)
Non-taxable investment securities .............. (1) (1) 1 1
Available for sale:
Taxable investment securities .................. 1,498 1,798 (300) (1,376) (2,047) 671
Non-taxable investment securities .............. 633 665 (32) 1,756 1,747 9
Federal funds sold ................................ (1,387) (1,335) (52) 1,524 1,555 (31)
---------- --------- --------- --------- --------- ---------
Total increase (decrease) in interest income ...... 12,873 16,140 (3,267) 3,520 4,270 (750)
---------- --------- --------- --------- --------- ---------
Interest Expense:
Interest checking ................................. (91) 68 (159) (405) 188 (593)
Savings and money market .......................... 3,780 2,679 1,101 779 520 259
Time deposits ..................................... 4,393 4,590 (197) 154 131 23
FHLB advances ..................................... 717 851 (134) 348 436 (88)
Subordinated notes and debentures ................. (69) (90) 21 474 484 (10)
Debentures relating to trust preferred securities . 222 224 (2) 2,119 2,119
Securities sold under repurchase agreements ....... (884) (787) (97) 242 (42) 284
---------- --------- --------- --------- --------- ---------
Total increase (decrease) in interest expense ...... 8,068 7,535 533 3,711 3,836 (125)
---------- --------- --------- --------- --------- ---------
Changes in net interest income ..................... $ 4,805 $ 8,605 $(3,800) $ (191) $ 434 $ (625)
========== ========= ========= ========= ========= =========
</TABLE>
During 1998, average total interest earning assets totaled $1.5 billion,
an increase of $184.3 million or 14% over 1997, as compared to an increase of
$62.2 million or 5% in 1997 over 1996. The $184.3 million increase in 1998
reflected a $166.3 million increase in average loan balances. The increase
resulted primarily from consumer loan growth and also included the approximate
half year effect of $99.2 million of fixed rate loans to a customer's employee
stock ownership plan. The loans represented a refinancing and are grandfathered
as to partial tax exempt status under current tax laws; thus, 50% of the
interest thereon is tax exempt. Of the $62.2 million increase in 1997, $30.5
million resulted from increased average loan balances. The average rate on
interest earning assets decreased to 8.42% in 1998 and 8.50% in 1997 from 8.57%
in 1996. During 1998, average interest bearing liabilities totaled $1.3
billion, an increase of $151.9 million or 13% over 1997 compared to an increase
of $59.5 million or 6% in 1997 from 1996. Of the $151.9 million increase in
1998, $81.0 million resulted from increases in certificates of deposit and
$68.5 million from increases in savings and money market accounts. Of the $59.5
million increase in 1997, $22.9 million resulted from the issuance of
debentures relating to the trust preferred securities. The average rate on
interest bearing liabilities increased to 4.98% in 1998 and 4.93% in 1997 from
4.86% in 1996.
15
<PAGE>
Non-Interest Income. The following table provides a summary of
non-interest income:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Non-interest income:
Service fees on deposit accounts ............... $ 3,568 $ 3,497 $ 3,284
Gain on sales of residential mortgages ......... 3,388 3,105 2,646
Gain on sales of investment securities ......... 1,152 515 245
Mortgage servicing fees ........................ 1,211 1,103 1,262
Merchant credit card deposit fees .............. 2,420 1,968 1,593
Credit card fee income ......................... 797 432 145
Other .......................................... 2,679 2,583 1,321
------- ------- -------
Total ........................................ $15,215 $13,203 $10,496
======= ======= =======
</TABLE>
Total non-interest income for 1998 was $15.2 million, an increase of $2.0
million or 15% from 1997, which in turn had shown an increase of $2.7 million
or 26% from the prior year. Service fees on deposit accounts increased by 2%
and 6% respectively in 1998 and 1997, as compared to the prior year periods and
totaled $3.6 million in 1998. Throughout the periods shown, there were no
increases in service charge amounts until the third quarter of 1998, when
maintenance and activity charges on various deposit products were increased.
Thus, most of the increases reflected above resulted from increases in volume
of accounts and number of charges.
Gain on sales of residential mortgages for 1998 amounted to $3.4 million,
an increase of $283,000 or 9% from 1997, which in turn had shown an increase of
$459,000 or 17% from the prior year. The increases in 1998 over 1997 and 1996
primarily reflected increases in the volume of residential mortgage loans
generated. Income resulting from the capitalization of originated mortgage
servicing rights included in gain on sales of residential mortgages for 1998,
1997 and 1996 was, respectively, $1.6 million, $666,000 and $557,000. The
increase in originated mortgage servicing rights in 1998 over 1997 and 1996
resulted primarily from volume. The Company generally sells substantially 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 $1.2 million in 1998, as
compared to $515,000 in 1997 and $245,000 in 1996. In 1998, the gains resulted
primarily from the sales of municipal securities available for sale which were
replaced with securities with longer term protection against being called for
redemption. In 1997 and 1996, investment securities available for sale were
sold and replaced with longer-term securities offering higher yields.
<PAGE>
Mortgage servicing fees were $1.2 million in 1998, compared to $1.1
million in 1997 and $1.3 million in 1996. The increase in 1998 compared to 1997
reflected increased average servicing balances resulting from increased
originations while the decrease in 1997 from 1996 reflected decreased average
servicing balances resulting from net paydowns. Year end servicing balances
were $363.4 million in 1998 compared to $363.8 million in 1997 and $369.4
million in 1996. However, the 1998 balance reflects the sale of $50 million of
servicing in second quarter 1998 to reduce the Company's prepayment exposure in
lower interest rate environments. At December 31, 1998 and 1997, unamortized
purchase price amounts for mortgage servicing rights were $513,000 and
$640,000, respectively, and are being amortized over the estimated lives of the
portfolios. Purchases of servicing rights in all periods shown above were
insignificant. Originated mortgage servicing rights capitalized and recognized
as income were $1.6 million, $666,000 and $557,000 respectively in 1998, 1997
and 1996. At December 31, 1998 and 1997, the remaining unamortized balance of
capitalized mortgage servicing rights was $2.4 million and $945,000
respectively, and is being amortized over the estimated lives of the portfolio.
On August 14, 1998, the Company completed a merger with Pioneer. This
acquisition was accounted for as a pooling of interests which accordingly
required restatement of financial information for gain on sale of residential
mortgages, mortgage servicing fees and servicing balances. Pioneer is a
mortgage company which operates within the Company's southern New Jersey market
with seven mortgage loan originators. The impact of this acquisition was not
material.
Credit card fee income, which includes interchange fees earned when cards
are utilized for purchases and cash advances, totaled $797,000 in 1998,
$432,000 in 1997 and $145,000 in 1996. Increases in fees were offset by
increases in related expense, reflected under non-interest expense as credit
card processing expense. As described in "Business-General", the Company plans
to discontinue its credit card program in 1999.
16
<PAGE>
Merchant credit card fees increased in 1998 as compared to 1997 which had
increased significantly over 1996. 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 $2.7 million in 1998, compared to $2.6 million in 1997
and $1.3 million in 1996. The $1.3 million increase in 1997 compared to 1996
reflected a $640,000 increase in net gains on the sale of loans by Regent. The
increase also reflected a $300,000 increase resulting from service charges
instituted in 1997 on cash withdrawals from proprietary ATM machines by
non-customers. Other income for 1998 reflected $625,000 of gains resulting from
the sale of servicing rights for loans which had been acquired in prior years.
The sales were made to reduce prepayment exposure in lower interest rate
environments.
Non-Interest Expense. The following table provides a summary of
non-interest expense, by category of expense.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Non-interest expense:
Salaries and employee benefits .................................. $24,210 $21,693 $20,765
Occupancy expense ............................................... 4,623 4,187 4,205
Depreciation .................................................... 2,451 2,070 2,023
FDIC insurance .................................................. 124 496 87
Data processing expense ......................................... 1,240 979 1,447
Legal ........................................................... 1,907 2,234 1,477
Stationary, printing, and supplies .............................. 1,303 957 941
Shares tax ...................................................... 1,010 951 904
Advertising ..................................................... 1,445 1,227 1,225
Other real estate owned maintenance expense ..................... 345 201 230
Loss on sale and write-downs of other real estate owned ......... 170 454 500
Amortization of intangibles ..................................... 919 1,360 1,371
Credit card origination expense ................................. 838 490 235
Credit card processing expense .................................. 874 577 318
Merchant credit card deposit expense ............................ 1,954 1,597 1,218
Insurance premium financing servicing ........................... -- 567 2,323
Other ........................................................... 10,180 6,530 6,953
------- ------- -------
Total ........................................................ $53,593 $46,570 $46,222
======= ======= =======
</TABLE>
<PAGE>
Total non-interest expense in 1998 was $53.6 million, an increase of $7.0
million or 15% over the $46.6 million in 1997, which had increased $348,000 or
1% over 1996. Non-interest expense in 1998 reflected $2.2 million of expenses
which were directly related to the Regent acquisition. Additionally, 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. Also, 1998 non-interest expense reflected expenses of Regent prior to
the realization of the acquisition cost savings, which were substantially
realized beginning in the third quarter. Various categories of non-interest
expense in 1997 were reduced as compared to the prior year, which included
UVB's expenses as a result of the restatement of financial statements required
by the pooling of interests method of accounting. For substantially the full
year of 1997, certain such duplicative expenses were eliminated. These savings
are reflected in the 1% increase in non-interest expense in 1997, as compared
to larger increases in other years, including 1998.
Salaries and employee benefits amounted to $24.2 million in 1998 compared
to $21.7 million in 1997 and $20.8 million in 1996. Reflected in 1998 salaries
and employee benefits was a $393,000 increase attributable to expansion of the
commercial loan department, $266,000 attributable to expansion of the consumer
loan department, $442,000 attributable to the establishment, or full year
operation, of new branches and $247,000 attributable to the expansion of the
internal computer network and information systems department. Also in 1998,
$859,000 in termination expense resulting from the merger with Regent was
recognized. This expense consisted primarily of payments to departing employees
under the terms of various employment contracts. 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 the
establishment of new branches. As noted, these and other increases were more
than offset by savings from the consolidation of UVB. Of 1996 salaries and
benefits, $222,000 resulted from commercial loan department expansion, $124,000
resulted from consumer loan department expansion and $430,000 resulted from the
expansion of additional branches. Additionally, salaries and benefits
attributable to UVB 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 1998 and 1997 also reflected annual merit increases which
averaged 3% to 4.5%.
17
<PAGE>
Occupancy expense totaled $4.6 million in 1998 compared to $4.2 million in
1997 and 1996. Occupancy expense in 1998 reflected $233,000 of charges to
terminate a Regent lease for space abandoned as a result of the acquisition.
Other increases reflect new branches and additional office space for the
Company's principal office.
The FDIC insurance assessment for 1998 amounted to $124,000 compared to
$496,000 in 1997 and $87,000 in 1996. The comparatively large assessment in
1997 resulted from disproportionately large assessments made for Regent, as a
result of its higher risk classification by the FDIC, until that institution
was recapitalized and ultimately acquired by the Company. Assessments may be
increased or decreased in the future.
Data processing expense amounted to $1.2 million in 1998, $980,000 in 1997
and $1.4 million in 1996. The $261,000 increase in 1998 compared to 1997
reflected increases in the volume of accounts and activity as well as $60,000
of termination charges related to the Regent acquisition. The $468,000
reduction in 1997 over the prior year reflected an $84,000 contractual data
processing termination penalty as well as approximately $268,000 of other data
processing expense incurred by UVB 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 $1.9 million in 1998, $2.2 million in 1997 and
$1.5 million in 1996. Legal expense in 1998 included approximately $180,000
relating to the Regent acquisition. It also reflected legal fees of
approximately $500,000 incurred by Regent including legal fees relating to
litigation to resolve various loans. The majority of such litigation is
believed by management to have been resolved by third quarter 1998. Legal
expense in 1997 and 1996 included, respectively, $1.4 million and $553,000
incurred by Regent for the consumer automobile insurance premium financing
program, as noted above, an unsuccessful merger and other matters.
Stationery, printing and supplies amounted to $1.3 million in 1998, $1.0
million in 1997 and $941,000 in 1996. The $346,000 increase in 1998 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 $59,000 in 1998
and $47,000 in 1997 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 $1.4 million in 1998 compared to $1.2
million in 1997 and 1996. The $218,000 increase in 1998 over the prior years
reflected increased promotions of various bank services and locations to reach
customers who might be displaced as a result of in-market bank mergers.
Amortization of intangibles amounted to $919,000 in 1998, compared to $1.4
million in 1997 and $1.4 million in 1996. Substantially all of the $441,000
decrease in 1998 from 1997 resulted from the year end 1997 reduction in the
valuation allowance for deferred tax assets acquired as a result of the
acquisition of Constitution Bank in 1995. That reduction increased related
realizable deferred tax assets and decreased goodwill and corresponding
goodwill amortization. Goodwill from acquisitions is being amortized over a
fifteen year period.
Insurance premium financing servicing expense was eliminated in 1998 after
amounting to $567,000 in 1997 and $2.3 million in 1996. The expense resulted
from Regent's consumer automobile insurance premium financing program which was
disposed of in 1997.
<PAGE>
Credit card origination expense totaled $838,000 in 1998, $490,000 in 1997
and $235,000 in 1996. Increases in expense during these periods resulted
primarily from amortization of increased direct account origination
expenditures. Credit card processing expense totaled $874,000 in 1998, $577,000
in 1997 and $318,000 in 1996. Increases in expense during these periods
resulted primarily from increases in the number of accounts and related
transaction volume. As previously discussed, the Company plans to discontinue
its credit card program in 1999.
18
<PAGE>
Merchant credit card deposit expense increased in 1998 as compared to 1997
which had increased significantly over 1996. 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.
Other expense was $10.2 million in 1998, $6.5 million in 1997, and $7.0
million in 1996. Of the $3.7 million increase in 1998, $1.0 million resulted
from the write-off of balances due on truck leases, which were originally
collateral against a Regent 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. Also included in other expense in
1998 were a $275,000 Regent expense for an investment banker and $450,000 of
other expenses related to the consolidation of Regent (including a $249,000 loss
on personal property which could not be located, or was worthless, and
approximately $100,000 of accounting and registration fees). Regent additionally
incurred $150,000 in increased accounting and auditing expense in 1998 prior to
its acquisition by the Company. Also reflected in the increase in other expense
in 1998 was a $210,000 increase in telephone expense, $200,000 in
transportation, courier and overnight delivery expense, $380,000 in increased
miscellaneous fraud and other write-offs, $130,000 in increased credit report
and title insurance expense, $90,000 in increased leasing losses and $80,000 in
increased contributions.
The Company's income tax provision was $4.0 million in 1998 compared to
$4.6 million in 1997 and $4.2 million in 1996. The effective income tax rate
was 26% in 1998 and in 1997, and was 45% in 1996. The tax rate for 1998 was
lower than the statutory 34% rate and reflected the Company's increased
investments in tax exempt loans and securities. The decrease in the tax rate in
1997 as compared to 1996 reflected the impact of a significant loss for Regent,
related tax benefits for which were not recognized until 1997.
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.
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 $190.7 million in 1998 and
$113.4 million in 1997 after decreasing $64.4 million in 1996. The increases in
1998 and 1997 reflected increased demand deposits, as well as increases in
savings, money market and time deposits resulting from normal deposit base
fluctuations and promotional rates offered for these instruments. The decrease
in 1996 reflected normal deposit base fluctuations. The net decreases in FHLB
advances amounted to $94.3 million in 1998 as compared to increases of $71.6
million in 1997 and $5.8 million in 1996. Funding was directed primarily at
cash outflows required by net increases in loans of $223.7 million, $93.6
million and $52.1 million, respectively, in 1998, 1997 and 1996. Purchases of
investment securities amounted to $194.2 million in 1998, $288.7 million in
1997 and $112.3 million in 1996. Increased purchases in 1998 and 1997 over 1996
reflected Regent's attempts at restructuring its securities portfolio. While
substantially all securities are available for sale and therefore may be sold
for liquidity purposes, $249.1 million of such securities owned at December 31,
1998 consisted of either mortgage backed securities or state and municipal
obligations. The majority of those securities were acquired in the Regent
acquisition or purchased in 1997 and have longer maturities and higher yields
than the majority of securities purchased in prior years. Mortgage backed
securities totaled $200.4 million at December 31, 1998 and generally had
estimated average lives of 4 to 9 years. However, those average lives could
increase or decrease significantly in the event of increases or decreases in
mortgage interest rates and resulting differences in prepayments. State and
municipal obligations at that date totaled $48.7 million and generally had
maturities of 15 to 20 years. 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 $203.2 million, $118.0 million and
$159.0 million, respectively, in 1998, 1997 and 1996. Outflows for mortgages
originated for sale are generally offset within 90 days by the receipt of
related sales proceeds.
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
19
<PAGE>
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, 1998 and 1997,
together with the minimum ratios required under the regulation for an
institution to be deemed "well-capitalized":
<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,
1998 1997 1998 1997 1998 1997
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Entity:
The Company .............................. 9.11% 9.41% 11.86% 12.87% 15.24% 17.12%
Jefferson PA ............................. 7.53% 7.59% 9.70% 10.62% 13.03% 14.87%
Jefferson NJ ............................. 6.58% 7.04% 9.30% 9.23% 13.21% 13.57%
"Well capitalized" institution (under FDIC
Regulations) ............................ 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
</TABLE>
At December 31, 1998, both the Company's subsidiary banks were
"well-capitalized" under FDIC regulations.
Asset and Liability Management
The management of rate sensitive assets and liabilities is essential to
controlling interest rate risk and optimizing interest margins. An interest
rate sensitive asset or liability is one that, within a defined time period,
either matures or experiences an interest rate change in line with general
market rates. Interest rate sensitivity measures the relative volatility of a
bank's interest margin resulting from changes in market interest rates.
As a result of the Regent acquisition, the Company at December 31, 1998
showed a net increase of approximately $100 million of mortgage-backed
securities with unamortized purchase premium of approximately $1.5 million. As
a result of the Pioneer acquisition, it acquired in excess of $120 million of
additional mortgage servicing now included in restated servicing amounts. Both
of these acquired assets increased the Company's exposure to prepayments
resulting from lower interest rate environments, which would require
reinvestment at lower rates, and accelerated expense recognition of unamortized
premium and mortgage servicing rights. In 1998, management acted to reduce
exposure to lower interest rate environments by decreasing its portfolio of
mortgage-backed securities through run-off, selling $50 million of mortgage
servicing, increasing the amounts of fixed rate loans and selling approximately
$10 million of municipal securities and replacing them with municipal
securities with longer call protection.
In the fourth quarter of 1998, market interest rates rapidly decreased, as
reflected in a .75% decrease in the prime rate. While the Company's loans tied
to prime and federal funds sold immediately adjusted to the lower rates, lags in
the repricing of certificates of deposit contributed to fourth quarter interest
margin compression. Repricing or refinancing of fixed rate loans may also serve
to compress margins in lower rate environments, as may the Company's ability to
lower deposit interest rates to offset reductions in loan and other investment
rates. Should rates rise, the Company is subject to extension risk as
prepayments and refinancing might decrease. While management attempts to
optimize its interest rate margins, there can be no assurances that such margins
can be maintained.
To manage its exposure to higher interest rate environments, the Company
intends to continue to make significant amounts of commercial loans with rates
which adjust to the prime rate or other indices. To manage its exposure to
lower interest rate environments, the Company intends to continue to make
significant amounts of fixed rate consumer and commercial loans. However, such
loans are subject to prepayment. The Company also intends to continue purchases
of fixed rate securities, certain of which cannot be prepaid or called for
specific periods. The proportionate amounts of loans which adjust to indices
versus fixed rate loans is monitored to attempt to optimize net interest
margins. The Company does not currently utilize hedges, swaps, futures, or
other such instruments.
20
<PAGE>
The following table summarizes estimated repricing intervals for interest
earning assets and interest bearing liabilities as of December 31,1998, 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 Two to Over
Three Twelve Two Five Five
Months Months Years Years Years
------------- ------------- ------------- ------------- -------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities:
Available for sale:
Taxable investment securities .................... $ 48,632 $ 40,504 $ 41,036 $ 69,890 $ 52,566
Non-taxable investment securities ................ 251 115 48,372
Held to maturity:
Non-taxable investment securities ................ 257 195 225
Mortgages held for sale ............................. 14,600
Loans net of unearned discount ...................... 408,793 231,909 156,790 265,452 152,395
--------- -------- --------- --------- ---------
Total interest earning assets ........................ 472,025 272,664 198,198 335,537 253,558
--------- -------- --------- --------- ---------
Interest bearing liabilities:
Savings, money market and interest checking ......... 69,195 133,687 263,102
Time deposits ....................................... 165,941 370,765 53,167 11,842 700
Securities sold under repurchase agreements ......... 39,635
FHLB advances ....................................... 109,182
Subordinated notes and debentures ................... -- 9,000 23,000
Debentures relating to trust preferred securities ... -- 25,300
--------- ---------
Total interest bearing liabilities ................... 383,953 370,765 186,854 283,944 49,000
--------- -------- --------- --------- ---------
Gap .................................................. $ 88,072 $(98,101) $ 11,344 $ 51,593 $ 204,558
========= ======== ========= ========= =========
Cumulative gap ....................................... $ 88,072 $(10,029) $ 1,315 $ 52,908 $ 257,466
========= ======== ========= ========= =========
Gap to assets ratio .................................. 5% (6%) 1% 3% 13%
Cumulative gap to assets ratio ....................... 5% (1%) * 3% 16%
</TABLE>
- ------------
* Less than 1%.
The method used to estimate 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, 1998 by contractual maturity. Savings,
money market and interest checking which have technical contractual maturities
of one day, have been categorized as to maturity based upon 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 1998, 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 Twelve Two Three
Months Months Years Years
-------------- -------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Investment securities
Available for sale:
Taxable investment securities ...... $ 8,009 $ 9,066 $ 9,597 $ 2,690
(Rate) 6.07% 6.31% 5.99% 5.87%
Non-taxable investment securities... 251 115
(Rate) 6.08% 5.61%
Held to maturity:
Non-taxable investment securities 257
(Rate) 7.67%
Loans net of unearned discount ...... 164,906 270,058 158,538 135,396
(Rate) 8.92% 8.46% 8.45% 8.46%
--------- --------- --------- ---------
Total interest earning assets ........ 172,915 279,375 168,507 138,086
--------- --------- --------- ---------
Interest bearing liabilities:
Savings, money market and interest
checking ........................... 69,195 133,687 161,012
(Rate) 3.34% 2.81% 2.91%
Time deposits ....................... 165,941 370,765 53,167 6,856
(Rate) 5.24% 5.42% 6.41% 6.01%
Securities sold under repurchase
agreements ......................... 39,635
(Rate) 4.16%
FHLB advances ....................... 109,182
(Rate) 5.34%
Subordinated notes and debentures ...
(Rate)
Debentures relating to trust
preferred securities ...............
(Rate)
Total interest bearing liabilities ... 383,953 370,765 186,854 167,868
--------- --------- --------- ---------
Gap .................................. $(211,038) $ (91,390) $ (18,347) $ (29,782)
========= ========= ========= =========
Cumulative gap ....................... $(211,038) $(302,428) $(320,775) $(350,557)
========= ========= ========= =========
Gap to assets ratio .................. (13%) (6%) (1%) (2%)
Cumulative gap to assets ratio ....... (13%) (18%) (20%) (21%)
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Three to Four to Over
Four Five Five Fair
Years Years Years Total Value
--------------- -------------- ------------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities
Available for sale:
Taxable investment securities ...... $ 223,266 $ 252,628 $ 252,628
(Rate) 6.23% 6.21%
Non-taxable investment securities... 48,372 48,738 48,738
(Rate) 7.93% 7.91%
Held to maturity:
Non-taxable investment securities 195 225 677 699
(Rate) 7.62% 8.15% 7.82%
Loans net of unearned discount ...... 106,815 84,727 309,499 1,229,939 1,224,244
(Rate) 8.62% 8.52% 8.03% 8.43%
------- ------ --------- ----------
Total interest earning assets ........ 107,010 84,727 581,362 1,531,982 1,526,309
------- ------ --------- ---------- ----------
Interest bearing liabilities:
Savings, money market and interest
checking ........................... 102,090 465,984 465,984
(Rate) 2.43% 2.84%
Time deposits ....................... 2,493 2,493 700 602,415 602,415
(Rate) 5.70% 5.41% 7.90% 5.47%
Securities sold under repurchase
agreements ......................... 39,635 39,635
(Rate) 4.16%
FHLB advances ....................... 109,182 109,182
(Rate) 5.34%
Subordinated notes and debentures ... 9,000 23,000 32,000 32,062
(Rate) 9.50% 8.75% 8.96%
Debentures relating to trust
preferred securities .......... 25,300 25,300 25,416
(Rate) 9.25% 9.25%
--------- ----------
Total interest bearing liabilities ... 113,583 2,493 49,000 1,274,516 1,274,694
------- ------ --------- ---------- ----------
Gap .................................. $ (6,573) $ 82,234 $ 532,362 $ 257,466 $ 251,615
========= ========= ========= ========== ==========
Cumulative gap ....................... $(357,130) $(274,896) $ 257,466
========= ========= =========
Gap to assets ratio .................. * 5% 33%
Cumulative gap to assets ratio ....... (22%) (17%) 16%
</TABLE>
- ------------
* Less than 1%.
22
<PAGE>
Financial Condition
General. Total average assets of the Company amounted to $1.6 billion in
1998, $1.4 billion in 1997, and $1.3 billion in 1996, as restated to reflect
the Regent and UVB acquisitions. This amounted to a $197.4 million or a 14%
increase in 1998 over 1997, as compared with an increase of $79.2 million or 6%
in 1997 over 1996. The majority of the 1998 increase resulted from consumer
loan growth and also included the approximate half year effect of $99.2 million
to loans to a customer's employee stock ownership plan. In 1997, increases
reflected increases in consumer loans which are comprised primarily of indirect
automobile loans. 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, both held to maturity and available for sale.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ---------- ----------- ----------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity:
Mortgage backed securities .............. $ 75,083 $ 73,250
State and municipal obligations ......... $ 677 $ 699 $ 682 $ 699 687 701
-------- -------- -------- -------- -------- --------
Other securities ........................
Total held to maturity ............... $ 677 $ 699 $ 682 $ 699 $ 75,770 $ 73,951
======== ======== ======== ======== ======== ========
Securities Available for Sale:
U.S. Treasury securities ................ $ 7,358 $ 7,468 $ 42,489 $ 42,612 $ 68,580 $ 68,549
Federal agency obligations .............. 19,251 19,376 38,032 38,141 47,127 47,201
Mortgage-backed securities .............. 199,685 200,374 204,788 204,415 54,656 53,974
State and municipal obligations ......... 46,730 48,738 51,215 53,153 15,334 15,580
Other securities ........................ 25,417 25,410 26,112 26,180 19,714 19,717
-------- -------- -------- -------- -------- --------
Total available for sale ............. $298,441 $301,366 $362,636 $364,501 $205,411 $205,021
======== ======== ======== ======== ======== ========
</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.
Investment securities with a carrying value of $47.3 million and $151.2
million at December 31, 1998 and 1997, respectively, were pledged to secure
deposits of state and local governments, federal government agencies, and
securities sold under repurchase agreements and other instruments 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, 1998:
<TABLE>
<CAPTION>
One Year One to Five
or Less Yield(1) Years Yield(1)
---------- ---------- ------------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury securities ...............
Federal agency obligations .............
Mortgage backed securities (1) .........
State and municipal obligations (2) .... $ 452 7.65%
-------
Other securities .......................
Total held to maturity ................ $ 452
=======
Weighted average yield ............... 7.65%
====
Available for Sale:
U.S. Treasury securities ............... $ 6,590 6.16%
Federal agency obligations ............. 9,779 6.23% $ 9,597 5.99%
Mortgage backed securities(1) .......... 2,690 5.87%
State and municipal obligations(2) ..... 251 6.08% 115 5.61%
Other securities ....................... 705 6.10%
-------
Total available for sale .............. $17,325 $12,402
======= =======
Weighted average yield ............... 6.19% 5.96%
==== ====
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Five to Ten Over Ten
Years Yield(1) Years Yield(1) Total
------------- ---------- ----------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury securities ...............
Federal agency obligations .............
Mortgage backed securities (1) .........
State and municipal obligations (2) .... $ 225 8.15% $ 677
------- --------
Other securities .......................
Total held to maturity ................ $ 225 $ 677
======= ========
Weighted average yield ............... 8.15%
====
Available for Sale:
U.S. Treasury securities ............... $ 878 6.47% $ 7,468
Federal agency obligations ............. 19,376
Mortgage backed securities(1) .......... 23,682 6.20% $174,002 6.20% 200,374
State and municipal obligations(2) ..... 48,372 7.93% 48,738
Other securities ....................... 200 8.58% 24,505 6.10% 25,410
------- -------- --------
Total available for sale .............. $24,760 $246,879 $301,366
======= ======== ========
Weighted average yield ............... 6.23% 6.53%
==== ====
</TABLE>
- ------------
(1) The yield on mortgage-backed securities is estimated on the basis of
prepayment assumptions.
(2) Yields on tax-exempt obligations have been computed on a tax equivalent
basis assuming a marginal federal tax rate of 35%.
<PAGE>
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 $348.7 million at
December 31, 1998, or 40% more than the $249.2 million at December 31, 1997,
which had increased 50% over the prior year end. Commercial based lending
includes commercial loans, commercial mortgages, construction loans and direct
financing leases. Total commercial based loans increased to $768.0 million at
December 31, 1998, or 18% more than the $651.9 million at December 31, 1997,
which had decreased 2% 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 $2.6 million, $2.4 million and $2.0 million at
December 31, 1998, 1997 and 1996, respectively. Large loans as a percentage of
total loans at December 31, 1998, 1997 and 1996 were 15%, 11% and 11%,
respectively.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------------ ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Mortgages held for sale .............. $ 14,600 $ 4,327 $ 3,452 $ 18,285 $ 8,551
----------- ----------- --------- --------- ---------
Commercial loans (1) ................. 426,375 299,956 328,724 318,513 263,821
Commercial mortgages ................. 231,231 246,986 244,231 257,242 186,650
Construction loans ................... 87,782 86,309 75,603 66,835 51,637
Direct financing leases .............. 22,574 18,649 13,963 13,642 13,556
Consumer loans ....................... 348,702 249,219 166,553 139,968 104,271
Credit cards ......................... 22,817 21,669 6,079 2,115 624
Residential mortgages ................ 73,023 75,288 77,471 80,506 88,480
Overdrafts ........................... 2,835 3,741 1,307 1,096 912
----------- ----------- --------- --------- ---------
Net loans (before allowance for credit
losses) ............................. 1,215,339 1,001,817 913,931 879,917 709,951
----------- ----------- --------- --------- ---------
Total net loans and mortgages held
for sale ......................... $ 1,229,939 $ 1,006,144 $ 917,383 $ 898,202 $ 718,502
=========== =========== ========= ========= =========
</TABLE>
- ------------
(1) Commercial loans secured by real property approximated $181.1 million,
$160.9 million, $166.8 million, $165.2 million and $153.4 million
respectively at December 31, 1998, 1997, 1996, 1995 and 1994.
24
<PAGE>
The following table summarizes the loan portfolio of the Company by loan
category and amount at December 31, 1998 and corresponds to appropriate
regulatory definitions.
<TABLE>
<CAPTION>
Book Value
---------------
(in thousands)
<S> <C>
Loans secured by real estate:
Construction and land development .......................................... $ 92,133
Secured by 1-4 family residential properties ............................... 219,703
Secured by multifamily (5 or more) residential properties .................. 39,042
Secured by non-family, non-residential properties .......................... 290,836
Commercial and industrial loans:
To U.S. addresses (domicile) ............................................... 245,291
Loans to individuals for household, family and other personal expenditures:
Credit cards and related plans ............................................. 24,458
Other ...................................................................... 290,406
Tax-exempt industrial development obligations .............................. 2,345
All other loans ............................................................ 3,151
Lease financing receivables, net of unearned income ........................ 22,574
----------
Total ............................................................................ $1,229,939
==========
</TABLE>
The following table presents selected loan categories at December 31, 1998
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 ......... $210,814 $216,922 $229,870 $657,606
Construction ................................ 50,429 35,009 2,344 87,782
-------- -------- -------- --------
Total ................................. $261,243 $251,931 $232,214 $745,388
======== ======== ======== ========
Amounts of loans:
Loans at fixed rates ..................... $166,859 $180,356
Loans at variable rates .................. 85,072 51,858
-------- --------
Total ................................. $251,931 $232,214
======== ========
</TABLE>
The following table presents loans, including mortgages held for sale, as
of December 31,1998 by maturity:
<TABLE>
<CAPTION>
Period to Maturity
--------------------------------------------------------
Within One to Five After Five
One Year Years Years Total
---------- ------------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Mortgages held for sale ......... $ 14,600 -- -- $ 14,600
Loans at fixed rates ............ 167,905 $ 399,717 $ 232,516 800,138
Loans at variable rates ......... 252,459 85,759 76,983 415,201
-------- --------- --------- ----------
Total ........................ $434,964 $ 485,476 $ 309,499 $1,229,939
======== ========= ========= ==========
</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 $12.4 million, $9.9 million, $15.1
million, $16.7 million and $13.9 million, respectively, at December 31, 1998,
1997, 1996, 1995 and 1994 (1). Non-performing assets including other real
estate owned amounted to $15.5 million, $12.1 million, $19.3 million, $25.7
million and $21.4 million, respectively, at December 31, 1998, 1997, 1996, 1995
and 1994 (1). Of the $2.5 million increase in non-accruals between December 31,
1998 and 1997, $1.0 million represented increases in non-accruals resulting
from the Regent loan portfolio and $1.0 million resulted from increases in
consumer loans (1). The significant decrease in non-accrual loans between
December 31, 1997 and prior years reflected the sale, by Regent, of $6.5
million of its non-performing and other problem loans (1). The majority of the
$4.8 million in Regent's insurance premium financing receivables, shown
separately in the table below, which resulted from a Regent consumer loan
program to finance automobile insurance premiums, were charged off in 1996. Of
the $12.4 million in non-accruals at December 31, 1998, a total of $1.5 million
resulted from the Regent acquisition (1). Activity in non-accrual loans in 1998
reflected $8.8 million of additions, $2.9 million of payments, $2.2 million of
charge-offs, $367,000 of transfers to other real estate owned and $952,000 of
loans returned to accrual status. Activity in 1997 reflected $5.2 million of
additions, $357,000 of transfers to other real estate owned, $91,000 of returns
to accrual status, $5.3 million of charge-offs and $4.7 million of payments.
Loans past due 90 days or more still accruing interest amounted to $7.1 million
in 1998, $5.5 million in 1997 and $5.5 million in 1996. The majority of the
increase in 1998 over 1997 resulted from increases in consumer loan
delinquencies, primarily indirect automobile loans. 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, 1998 totaled $3.1 million,
compared to $2.3 million at December 31, 1997. The balance at December 31, 1998
was not materially increased as a result of the Regent acquisition. Activity in
1998 reflected additions of $2.9 million, sales and other receipts of $1.7
million, transfers from non-accrual of $367,000 and charge-offs and other write
downs of $790,000. Activity in 1997 reflected additions of $2.1 million with
sales and other receipts of $3.3 million and charge offs of $671,000. Other
real estate owned at December 31, 1996 totaled $4.3 million, a decrease of $1.8
million from December 31, 1995.
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 1998 through 1994 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.
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- --------- ---------- --------- ----------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis (1) .................. $ 12,369 $ 9,857 $ 15,106 $ 16,695 $ 13,925
Loans renegotiated to provide a reduction or deferral of interest
or principal ................................................... -- -- -- -- 1,367
Total non-performing loans (1) .................................. --------- --------- --------- --------- ---------
12,369 9,857 15,106 16,695 15,292
Other real estate owned ......................................... --------- --------- --------- --------- ---------
Non-performing insurance premium financing receivables .......... 3,114 2,265 4,237 4,260 6,093
-- -- -- 4,778 --
Total non-performing assets (1) ................................. --------- --------- --------- --------- ---------
$ 15,483 $ 12,122 $ 19,343 $ 25,733 $ 21,385
Non-performing loans/total loans(1) ............................. ========= ========= ========= ========= =========
Non-performing assets/total loans and non- performing assets(1) 1.01% 0.98% 1.65% 1.86% 2.13%
Loans past due 90 days or more as to interest or principal pay- 1.26% 1.20% 2.11% 2.85% 2.95%
ments still accruing interest and not included in non-accrual
loans ..........................................................
$ 7,107 $ 5,460 $ 5,455 $ 7,992 $ 6,584
========= ========= ========= ========= =========
</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 $12.4 million, $9.9 million and $15.1 million at December 31, 1998,
1997 and 1996, respectively. If interest on non-accrual loans (1) had been
accrued, such income would have been approximately $985,000, $1.1 million, and
$989,000 for the years ended December 31, 1998, 1997 and 1996, respectively
(1). At December 31, 1998 and 1997, 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 $12.4 million and $9.9 million
respectively at December 31, 1998 and 1997. The Company identifies a loan as
impaired when it is probable that interest and principal will not be collected
according to the contractual terms of the loan agreements. The allowance for
credit loss associated with impaired loans was $2.8 million and $2.3 million,
respectively, at December 31, 1998 and 1997. The average recorded investment in
impaired loans was $11.6 million in 1998 and the income recognized on impaired
loans during 1998 was $-0-. The average recorded investment in impaired loans
was $10.8 million in 1997 and the income recognized on impaired loans during
1997 was $-0-. Total cash collected on impaired loans during 1998 and 1997 was
$2.8 million and $3.2 million, respectively, which was credited to the
principal balance outstanding on such loans. Respective interest which would
have been accrued on impaired loans during 1998 and 1997 was $985,000 and $1.1
million. The Company recognizes income on non-accrual loans under the cash
basis when the loans are 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 allowance 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 $6.0 million in 1998, as compared to
$3.7 million in 1997 and $10.1 million in 1996, as restated for the acquisition
of Regent, which had experienced substantial losses in 1996. The ratio of the
allowance for credit losses to non-performing assets was 80%, 117% and 87% at
December 31, 1998, 1997 and 1996, respectively. The ratio of the allowance for
credit losses to total loans was 1.01%, 1.40% and 1.83% respectively at
December 31, 1998, 1997 and 1996 on a restated basis. The ratio of the
allowance for credit losses to non-accrual loans and loans 90 days past due
still accruing interest, was 64%, 92% and 82% at December 31, 1998, 1997 and
1996, respectively. In 1998 as compared to 1997, net charge-offs for credit
cards increased by $1.8 million to $2.7 million, and net charge-offs for
installment loans increased by $476,000 and contributed to the increase in the
1998 provision. The Company is pursuing a plan to dispose of its credit card
portfolio in 1999. The 1998 increase also reflected a $1.5 million provision
for Regent, which had recorded a $100,000 provision in 1997. The increase in
Regent's provision was the amount necessary to increase it's allowance to
levels determined by an analysis which applied estimated loss ratios to various
categories of Regent loans. The decrease in the allowance for credit losses to
$14.1 million at December 31, 1997 from $16.8 million at December 31, 1996
reflected $1.9 million of previously reserved charge-offs incurred by Regent
upon the 1997 sale of $6.5 million of its non performing and other problem
loans. The provision for credit losses decreased to $3.7 million in 1997 from
$10.1 million in 1996, reflecting the disposition of those problem loans. Also
reflected in the $10.1 million 1996 provision was approximately $3.0 million
for Regent's losses in connection with its consumer automobile insurance
premium financing programs and a $1.5 million additional provision by UVB to
bring its allowance for credit losses to levels more consistent with industry
wide methodologies. The decrease in the December 31, 1996 allowance for credit
losses to $16.8 million from $21.5 million at December 31, 1995 reflected the
charge off, by the Company, in 1996 of $3.9 million which had previously been
recorded in the allowance for credit losses. The $8.9 million provision for
credit losses in 1995 reflected a $4.9 million provision by Regent primarily
for its consumer automobile insurance premium financing program, and
contributed to the increase in the allowance in 1995 to $21.5 million from
$10.7 million in 1994. Also reflected in that increase was a $6.1 million
allowance for credit losses resulting from Constitution Bank.
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>
Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- ---------- ---------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance in allowance for credit losses at beginning of year .. $ 14,136 $ 16,794 $ 21,492 $ 10,700 $ 8,189
--------- --------- --------- --------- ---------
Loans charged-off:
Commercial ................................................ 908 2,254 2,510 2,817 1,336
Construction .............................................. 213 473 190
Real estate mortgage ...................................... 2,944 4,254 4,724 1,716 2,123
Credit card ............................................... 2,714 835 160 16
IPF ....................................................... 8,967
Installment and direct financing leases ................... 2,059 1,362 522 435 272
--------- --------- --------- --------- ---------
Total .................................................. 8,838 8,705 17,356 4,984 3,921
--------- --------- --------- --------- ---------
Recoveries:
Commercial ................................................ 403 216 109 266 393
Construction .............................................. -- -- -- -- --
Real estate mortgage ...................................... 337 1,276 901 439 196
Credit card ............................................... 49 9 -- -- --
IPF ....................................................... 47 757 1,482 -- --
Installment and direct financing leases ................... 310 89 51 59 28
--------- --------- --------- --------- ---------
Total .................................................. 1,146 2,347 2,543 764 617
--------- --------- --------- --------- ---------
Net charge-offs .............................................. 7,692 6,358 14,813 4,220 3,304
Purchase of Chester County ................................... 2,434
Purchase of Security First ................................... 664
Purchase of Constitution ..................................... 6,121
Provision charged to operations .............................. 5,963 3,700 10,115 8,891 2,717
--------- --------- --------- --------- ---------
Balance in allowance for credit losses at end of period ...... $ 12,407 $ 14,136 $ 16,794 $ 21,492 $ 10,700
========= ========= ========= ========= =========
Net charge-offs/average loans ................................ 0.71% 0.67% 1.63% 0.53% 0.51%
</TABLE>
Management of the Company has not attempted to allocate specific portions
of the allowance for credit losses to specific loans or 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, in addition to an analysis based upon
historical loss experience. 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 typically 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 $370.5 million and $351.8 million at December 31, 1998 and 1997,
respectively. Standby letters of credit amounted to $27.9 million and $12.6
million at December 31, 1998 and 1997, respectively.
28
<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, 1998,
total deposits were approximately $1.3 billion, an increase of approximately
$190.7 million or 18% from December 31, 1997. At December 31, 1997, total
deposits were approximately $1.1 billion, an increase of approximately $113.4
million or 12% over 1996. The increase in both periods reflected inflows
resulting from core deposit growth and promotional rates on various deposit
instruments. Year end core deposits as a percentage of total deposits were
approximately 90% for 1998 and 1997 while the percentage of certificates of
deposit in excess of $100,000 was 10% in those years.
The following tables present the average balances and rates paid on
deposits for each of the years ended 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ -------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------------ --------- ------------ --------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand (non-interest bearing) ......... $ 172,348 $ 142,090 $ 136,140
Interest checking ..................... 89,938 1.12% 85,118 1.29% 76,846 1.96%
Savings and money market .............. 370,143 4.01% 301,675 3.67% 287,378 3.58%
Time .................................. 582,471 5.67% 501,424 5.70% 499,129 5.70%
---------- ---------- ---------
Total Deposits ..................... $1,214,900 $1,030,307 $ 999,493
========== ========== =========
</TABLE>
As of December 31, 1998, the Company had total time deposits of
approximately $602.4 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 ......... $ 125,358 21%
Individual retirement accounts ......................... 54,895 9%
Other time deposits .................................... 422,162 70%
--------- --
Total ............................................... $ 602,415 100%
========= ===
</TABLE>
The remaining maturity of certificates of deposit of $100,000 or more as
of December 31, 1998 is presented:
Amount
---------------
(in thousands)
Maturity:
Three months or less .................. $ 57,773
Three to six months ................... 57,809
Six to 12 months ...................... 8,812
Over 12 months ........................ 964
--------
Total ................................. $125,358
========
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 ("Y2K") 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
systems into Y2K compliance to have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The Company has been actively involved in 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 non-compliant equipment and software has been updated or replaced to
achieve Y2K compliance. The Company has made the following determinations in
regard to Y2K issues relating to third parties. The FRB 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, which is currently scheduled for
completion by June 30, 1999. Incremental costs for 1999 are not currently
anticipated to exceed $200,000.
The Company anticipates that the most likely worst case scenario 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 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 35 to 61 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<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 13. 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.
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
3. (i) Articles of Incorporation*
(ii) By-Laws*
4. Instruments defining the rights of security holders, including
indentures*
12. Statements re computation of ratios*
21. Subsidiaries of registrant*
(b) Reports on Form 8-k during the fourth quarter.
None.
- ------------
* Exhibits 3, 12 and 21 appear in Exhibits 3, 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. Exhibit 4 (instruments defining the rights of the Company's
equity and debt securities) is contained in the Exhibits 4 to each of the
following: (a) the Company's registration statement on Form S-3, as amended,
Registration No. 333-20111 and (b) the Company's registration statement on
Form S-2, as amended, Registration No. 333-01562, each of which such
exhibits is hereby incorporated herein by reference.
31
<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, on March 29, 1999.
JEFFBANKS, INC.
By: /s/ BETSY Z. COHEN
-------------------------
Betsy Z. Cohen
Chairperson of the Board
(Chief Executive Officer)
32
<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>
<S> <C>
/s/ BETSY Z. COHEN Date: MARCH 29, 1999
- --------------------------------------------
BETSY Z. COHEN, Chairman of the Board,
Chief Executive Officer and Director (Chief
Executive Officer)
/s/ EDWARD E. COHEN Date: MARCH 29, 1999
- --------------------------------------------
EDWARD E. COHEN, Chairman of the
Executive Committee and Director
/s/ ROBERT J. COLEMAN Date: MARCH 29, 1999
- --------------------------------------------
ROBERT J. COLEMAN, Director
/s/ PAUL FRENKIEL Date: MARCH 29, 1999
- --------------------------------------------
PAUL FRENKIEL, Senior Vice President -
Finance, Chief Financial Officer and
Controller (Chief Financial and
Accounting Officer)
/s/ ROBERT B. GOLDSTEIN Date: MARCH 29, 1999
- --------------------------------------------
ROBERT B. GOLDSTEIN, President and
Director
/s/ JOHN G. HOOPES Date: MARCH 29, 1999
- --------------------------------------------
JOHN G. HOOPES, Director
/s/ HERSH KOZLOV Date: MARCH 29, 1999
- --------------------------------------------
HERSH KOZLOV, Director
/s/ WILLIAM H. LAMB Date: MARCH 29, 1999
- --------------------------------------------
WILLIAM H. LAMB, Director
/s/ ARTHUR MAKADON Date: MARCH 29, 1999
- --------------------------------------------
ARTHUR MAKADON, Director
/s/ P. SHERRILL NEFF Date: MARCH 29, 1999
- --------------------------------------------
P. SHERRILL NEFF, Director
/s/ JOHN W. ROSE Date: MARCH 29, 1999
- --------------------------------------------
JOHN W. ROSE, Director
/s/ JAMES R. SIBEL Date: MARCH 29, 1999
- --------------------------------------------
JAMES R. SIBEL, Chief Credit Officer
and Director
/s/ WILLIAM D. WHITE Date: MARCH 29, 1999
- --------------------------------------------
WILLIAM D. WHITE, Director
</TABLE>
33
<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, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton LLP
- ----------------------------
Philadelphia, Pennsylvania
January 19, 1999
34
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ -------------
(in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks .................................................... $ 54,599 $ 52,601
Federal funds sold ......................................................... -- 95,236
---------- ----------
54,599 147,837
Investment securities available for sale ...................................... 301,366 364,501
Investment securities held to maturity ........................................ 677 682
Mortgages held for sale ....................................................... 14,600 4,327
Loans, net .................................................................... 1,202,932 987,681
Premises and equipment, net ................................................... 24,085 19,518
Accrued interest receivable ................................................... 15,929 9,094
Other real estate owned ....................................................... 3,114 2,265
Goodwill ...................................................................... 4,059 4,435
Other assets .................................................................. 15,745 20,670
---------- ----------
Total assets .............................................................. $1,637,106 $1,561,010
========== ==========
LIABILITIES
Deposits
Demand (non-interest bearing) .............................................. $ 207,881 $ 156,167
Savings and money market ................................................... 465,984 421,321
Time deposits .............................................................. 477,057 398,476
Time deposits, $100,000 and over ........................................... 125,358 109,663
---------- ----------
1,276,280 1,085,627
Securities sold under repurchase agreements ................................... 39,635 70,911
FHLB advances - short term .................................................... 55,000 148,000
FHLB advances - long term ..................................................... 54,182 55,511
Subordinated notes and debentures ............................................. 32,000 34,750
Guaranteed preferred beneficial interest in the Company's subordinated debt ... 25,300 25,300
Accrued interest payable ...................................................... 15,444 15,734
Other liabilities ............................................................. 7,587 3,371
---------- ----------
Total liabilities ......................................................... 1,505,428 1,439,204
SHAREHOLDERS' EQUITY
Common stock - authorized, 20,000,000 shares of $1.00 par value; issued and
outstanding, 10,486,620 and 6,094,000 shares, respectively ................... 10,487 6,094
Additional paid-in capital .................................................... 97,308 95,150
Retained earnings ............................................................. 21,933 19,308
Accumulated other comprehensive income ........................................ 1,950 1,254
---------- ----------
Total shareholders' equity ................................................ 131,678 121,806
---------- ----------
Total liabilities and shareholders' equity ................................ $1,637,106 $1,561,010
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
35
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
------------ ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans, including fees ........................................... $ 99,924 $ 87,794 $ 86,145
Investment securities ........................................... 21,025 18,895 18,548
Federal funds sold .............................................. 2,544 3,931 2,407
--------- -------- --------
123,493 110,620 107,100
--------- -------- --------
Interest expense
Time deposits, $100,000 and over ................................ 6,560 5,482 5,362
Other deposits .................................................. 42,298 35,294 34,886
FHLB advances ................................................... 7,303 6,586 6,238
Subordinated notes and debentures ............................... 3,026 3,095 2,621
Preferred securities ............................................ 2,341 2,119 --
Securities sold under repurchase agreements ..................... 2,192 3,076 2,834
--------- -------- --------
63,720 55,652 51,941
--------- -------- --------
Net interest income ........................................... 59,773 54,968 55,159
Provision for credit losses ...................................... 5,963 3,700 10,115
--------- -------- --------
Net interest income after provision for credit losses ......... 53,810 51,268 45,044
--------- -------- --------
Non-interest income
Service fees on deposit accounts ................................ 3,568 3,497 3,284
Mortgage servicing fees ......................................... 1,211 1,103 1,262
Gain on sales of residential mortgages and capitalized mortgage
servicing rights .............................................. 3,388 3,105 2,646
Gain on sales of investment securities .......................... 1,152 515 245
Merchant credit card deposit fees ............................... 2,420 1,968 1,593
Credit card fee income .......................................... 797 432 145
Other ........................................................... 2,679 2,583 1,321
--------- -------- --------
15,215 13,203 10,496
--------- -------- --------
Non-interest expense
Salaries and employee benefits .................................. 24,210 21,693 20,765
Occupancy expense ............................................... 4,623 4,187 4,205
Depreciation .................................................... 2,451 2,070 2,023
FDIC expense .................................................... 124 496 87
Data processing expense ......................................... 1,240 979 1,447
Legal ........................................................... 1,907 2,234 1,477
Stationery, printing and supplies ............................... 1,303 957 941
Shares tax ...................................................... 1,010 951 904
Advertising ..................................................... 1,445 1,227 1,225
Other real estate owned maintenance expense ..................... 345 201 230
Loss on sale and write-downs of other real estate owned ......... 170 454 500
Amortization of intangibles ..................................... 919 1,360 1,371
Merchant credit card deposit expense ............................ 1,954 1,597 1,218
Credit card origination expense ................................. 838 490 235
Credit card processing expense .................................. 874 577 318
IPF servicing ................................................... -- 567 2,323
Other ........................................................... 10,180 6,530 6,953
--------- -------- --------
53,593 46,570 46,222
--------- -------- --------
Income before income taxes .................................... 15,432 17,901 9,318
Income taxes ..................................................... 4,000 4,570 4,238
--------- -------- --------
Net income .................................................... 11,432 13,331 5,080
Preferred stock dividends ........................................ -- (467) (142)
--------- -------- --------
Net income available to common shareholders ................... $ 11,432 $ 12,864 $ 4,938
========= ======== ========
Per share data
Net income per common share - basic ............................. $ 1.11 $ 1.33 $ 0.56
Net income per common share - diluted ........................... $ 1.04 $ 1.25 $ 0.53
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
<TABLE>
<CAPTION>
Additional
Common Preferred paid-in
stock stock capital
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Balance at January 1, 1996 .................... $ 5,011 $ 177 $ 76,726
Net income .................................... -- -- --
Conversion of preferred stock ................. 25 (25) --
Issuance of common stock for 401(k)
plan ......................................... 10 -- 255
Issuance of common stock ...................... 45 -- 955
Costs to establish a dividend reinvestment
plan ......................................... -- -- (26)
Issuance of common stock for dividend
reinvestment plan ............................ 7 -- 166
Issuance of preferred stock as dividends ...... -- 14 383
Cash dividends on common stock ................ -- -- --
Warrants exercised ............................ 50 -- 826
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- -- --
-------- ------- --------
Comprehensive income .......................... -- -- --
Balance at December 31, 1996 .................. 5,148 166 79,285
Net income .................................... -- -- --
Issuance of common stock for 401(k)
plan ......................................... 19 -- 493
Issuance of preferred stock ................... -- 5 101
Issuance of preferred stock as dividends ...... -- 13 454
Issuance of common stock for dividend
reinvestment plan ............................ 7 -- 220
Warrants and stock options exercised .......... 22 -- 357
Conversion of preferred stock ................. 179 (179) --
Redemption of preferred stock ................. 1 (5) (139)
Stock issued to acquire minority interest ..... 481 -- 8,273
Cash dividends on common stock ................ -- -- --
5% stock dividend ............................. 237 -- 6,106
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- -- --
-------- ------- --------
Comprehensive income .......................... -- -- --
Balance at December 31, 1997 .................. 6,094 -- 95,150
Net income .................................... -- -- --
Issuance of common stock for dividend
reinvestment plan ............................ 5 -- 165
Warrants and stock options exercised .......... 257 -- 2,318
Cash dividends on common stock ................ -- -- --
Stock split ................................... 4,147 -- --
Purchase of common stock for benefit
plan ......................................... (16) -- (325)
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- -- --
-------- ------- --------
Comprehensive income .......................... -- -- --
Balance at December 31, 1998 .................. $ 10,487 $ -- $ 97,308
======== ======= ========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Accumulated
other
Retained comprehensive Comprehensive
earnings income income Total
------------ --------------- -------------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Balance at January 1, 1996 .................... $ 13,821 $ 336 -- $ 96,071
Net income .................................... 5,080 -- $ 5,080 5,080
Conversion of preferred stock ................. -- -- -- --
Issuance of common stock for 401(k)
plan ......................................... -- -- -- 265
Issuance of common stock ...................... -- -- -- 1,000
Costs to establish a dividend reinvestment
plan ......................................... -- -- -- (26)
Issuance of common stock for dividend
reinvestment plan ............................ -- -- -- 173
Issuance of preferred stock as dividends ...... (397) -- -- --
Cash dividends on common stock ................ (2,332) -- -- (2,332)
Warrants exercised ............................ -- -- -- 876
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- (830) (830) (830)
-------- ------- ------- --------
Comprehensive income .......................... -- -- $ 4,250 --
=======
Balance at December 31, 1996 .................. 16,172 (494) -- 100,277
Net income .................................... 13,331 -- 13,331 13,331
Issuance of common stock for 401(k)
plan ......................................... -- -- -- 512
Issuance of preferred stock ................... -- -- -- 106
Issuance of preferred stock as dividends ...... (467) -- -- --
Issuance of common stock for dividend
reinvestment plan ............................ -- -- -- 227
Warrants and stock options exercised .......... -- --- -- 379
Conversion of preferred stock ................. -- -- -- --
Redemption of preferred stock ................. -- -- -- (143)
Stock issued to acquire minority interest ..... -- -- -- 8,754
Cash dividends on common stock ................ (3,385) -- -- (3,385)
5% stock dividend ............................. (6,343) -- -- --
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- 1,748 1,748 1,748
-------- ------- ------- --------
Comprehensive income .......................... -- -- $15,079 --
=======
Balance at December 31, 1997 .................. 19,308 1,254 -- 121,806
Net income .................................... 11,432 -- 11,432 11,432
Issuance of common stock for dividend
reinvestment plan ............................ -- -- -- 170
Warrants and stock options exercised .......... -- -- -- 2,575
Cash dividends on common stock ................ (4,660) -- -- (4,660)
Stock split ................................... (4,147) -- -- --
Purchase of common stock for benefit
plan ......................................... -- -- -- (341)
Other comprehensive income, net of
reclassification adjustments and taxes ....... -- 696 696 696
-------- ------- ------- --------
Comprehensive income .......................... -- -- $12,128 --
=======
Balance at December 31, 1998 .................. $ 21,933 $ 1,950 $131,678
======== ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
37
<PAGE>
JeffBanks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income ..................................................... $ 11,432 $ 13,331 $ 5,080
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ................................ 4,174 4,568 5,733
Provision for credit losses .................................. 5,963 3,700 10,115
Gain on sales of investment securities ....................... (1,152) (515) (245)
Mortgage loans originated for sale ........................... (203,172) (118,022) (159,027)
Mortgage loan sales .......................................... 192,899 113,945 173,864
Increase in interest receivable .............................. (6,835) (133) (111)
(Decrease) increase in interest payable ...................... (290) 2,858 118
Decrease (increase) in other assets .......................... 4,009 (4,444) (5,495)
Increase in other liabilities ................................ 4,216 1,158 986
---------- ---------- ----------
Net cash provided by operating activities ................... 11,244 16,446 31,018
---------- ---------- ----------
Investing activities
Proceeds from sales of investment securities available for sale 157,486 128,628 31,189
Proceeds from maturities of investment securities available
for sale ..................................................... 101,221 65,285 80,548
Proceeds from maturities of investment securities held to
maturity ..................................................... -- 11,287 18,815
Purchases of investment securities available for sale .......... (194,150) (288,709) (112,256)
Proceeds from sales of other real estate owned ................. 1,629 2,390 3,147
Net increase in loans .......................................... (223,692) (93,591) (52,060)
Purchases of premises and equipment ............................ (7,018) (5,311) (3,773)
---------- ---------- ----------
Net cash used in investing activities ....................... (164,524) (180,021) (34,390)
---------- ---------- ----------
Financing activities
Net increase (decrease) in deposits ............................ 190,653 113,414 (64,385)
Net (decrease) increase in repurchase agreements ............... (31,276) (2,853) 27,215
Net proceeds from issuance of common stock ..................... 2,745 9,872 2,287
Net proceeds from issuance of preferred stock .................. -- (37) --
Purchase of common stock for benefit plan ...................... (341) -- --
(Decrease) increase in FHLB advances ........................... (94,329) 71,625 5,832
(Redemption) issuance of subordinated notes .................... (2,750) -- 23,000
Proceeds from issuance of preferred securities ................. -- 25,300 --
Dividends paid on common stock ................................. (4,660) (3,385) (2,441)
---------- ---------- ----------
Net cash provided by (used in) financing activities ......... 60,042 213,936 (8,492)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents ............ (93,238) 50,361 (11,864)
Cash and cash equivalents at beginning of year .................. 147,837 97,476 109,340
---------- ---------- ----------
Cash and cash equivalents at end of year ........................ $ 54,599 $ 147,837 $ 97,476
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
38
<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 described in note 2, the Company's acquisitions of Regent
National Bank in 1998 and United Valley Bank in 1997 were accounted for under
the pooling of interests method of accounting. Accordingly, all prior period
amounts have been restated to reflect the acquisitions.
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.
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.
<PAGE>
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 in 1996, 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.
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 recognized, 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.
39
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
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 Company's securities and loan portfolios include interest on
investments which is exempt from federal and state income tax under current tax
laws. Should tax rates be reduced or tax laws be changed to reduce exemptions,
after tax yields would be reduced.
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 has not had a
material effect on the presentation of the Company's financial position or
results of operations.
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. Management
has determined that under current conditions, the Company will report one
business segment.
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 and equity 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 and equity 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 reported in other comprehensive income and excluded from the
determination of net income. The Company does not engage in security trading.
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 also details historical losses by
loan category, the resulting loss rates for which are projected at current loan
total amounts.
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. 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.
40
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
The Company accounts for impaired loans in accordance with 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". 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.
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 $-0- and $511,000 in 1998 and 1997, respectively, were made on
competitive terms and in conformity with normal underwriting standards to
facilitate the sale of other real estate owned.
Goodwill and core deposit intangibles
Substantially all outstanding goodwill resulted from the acquisition of
Constitution Bank in 1996 and is being amortized on a straight-line basis over
approximately 15 years. The unamortized balance at December 31, 1998 and 1997
was $3,637,000 and $3,958,000, 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, at December 31, 1997, the deferred tax
valuation account and goodwill were reduced by $3,668,000.
Additionally, as a result of the Constitution Bank acquisition, 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, 1998 and 1997 was $1,231,000 and
$1,560,000, respectively.
Other assets
Deferred financing fees of $1,153,000, related to the issuance of trust
preferred securities are being amortized over the remainder of the 30-year term
of the underlying obligations. The unamortized balance at December 31, 1998 and
1997 was $1,082,000 and $1,121,000, respectively.
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, 1998 and 1997 were $916,000 and
$1,061,000, 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, 1998 and 1997, the unamortized balance was
$1,563,000 and $2,276,000, respectively.
Mortgage servicing
The Company 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, 1998 and 1997, the
Company was servicing approximately $363,350,000 and $363,805,000,
respectively, of loans for others.
During 1998, 1997 and 1996, the Banks purchased $77,000, $18,000, and
$22,000, respectively, of mortgage servicing rights. The servicing rights are
amortized in proportion to and over the period of estimated net servicing
income. Additional amortization is recognized when prepayments exceed expected
amounts. Unamortized purchased mortgage servicing rights are included in other
assets and amounted to $513,000 and $640,000 at December 31, 1998 and 1997,
respectively. Amortization expense amounted to $204,000, $178,000 and $207,000
in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, JBPA
maintained $560,000 and $466,000, respectively, of escrow balances associated
with the servicing portfolio.
41
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
On January 1, 1997, the Company adopted 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 Provision of SFAS No. 125," which provides accounting guidance on
transfers of financial assets, servicing of financial assets and
extinguishments of liabilities. The Company originates mortgages under a
definitive plan to sell or securitize those loans and service the loans owned
by the investor. Upon the transfer of the mortgage loans in a sale or a
securitization, the Company records the servicing assets retained in accordance
with SFAS No. 125. The Company recorded mortgage servicing rights of $1,599,000
and $666,000 in 1998 and 1997, respectively, resulting from the respective sales
of $192,899,000 and $113,945,000 of mortgages in those years. Amortization of
these mortgage servicing rights is recognized in accordance with policies for
purchased mortgages, as previously discussed. The unamortized balance of
mortgage servicing rights retained at December 31, 1998 and 1997 was $2,363,000
and $945,000, respectively.
Long-lived assets
The Company accounts for long-lived assets in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS No. 121 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.
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.
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, 1998 and 1997 were approximately $13,697,000 and $9,273,000,
respectively.
Earnings per common share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share,"
which eliminated 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. Earnings per
share calculations for 1996 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.
42
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
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
$4,517,000, $3,172,000 and $3,275,000 in 1998, 1997 and 1996, respectively.
Cash paid for interest was $64,011,000, $52,819,000 and $52,178,000 in 1998,
1997 and 1996, respectively. Loans transferred to other real estate owned were
$2,867,000, $2,095,000 and $4,888,000 in 1998, 1997 and 1996, respectively.
Comprehensive income
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------
Tax Net of
Before tax (expense) tax
amount benefit amount
------------ ----------- ----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities
Unrealized holding gains arising during the period ......... $ 2,235 $ (790) $ 1,445
Less reclassification adjustment for gains
(losses) realized in net income .......................... 1,152 (403) 749
------- ------- -------
Other comprehensive income, net ............................. $ 1,083 $ (387) $ 696
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------
Tax Net of
Before tax (expense) tax
amount benefit amount
------------ ----------- ----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities ........................
Unrealized holding gains arising during the period ............ $ 3,207 $ (1,124) $ 2,083
Less reclassification adjustment for gains (losses) realized in
net income .................................................. 515 (180) 335
------- -------- -------
Other comprehensive income, net ................................ $ 2,692 $ (944) $ 1,748
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------
Tax Net of
Before tax (expense) tax
amount benefit amount
------------ ----------- -----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities
Unrealized holding losses arising during the period ......... $ (1,027) $ 356 $ (671)
Less reclassification adjustment for gains
(losses) realized in net income ........................... 245 (86) 159
--------- ----- -------
Other comprehensive income, net .............................. $ (1,272) $ 442 $ (830)
========= ===== =======
</TABLE>
43
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES -- (Continued)
Other information
In June 1998, the FASB issued 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 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. Management is
currently reviewing the provisions of SFAS No. 133.
Reclassifications
Certain reclassifications have been made to the prior period financial
statements to conform to the 1998 presentation.
NOTE 2 -- ACQUISITIONS AND MERGERS
In July 1998, the Company through JBPA, completed a merger with Regent
National Bank. Under the terms of the Merger, each share of Regent National
Bank common stock was converted into .505 of a share of the Company's common
stock, as adjusted for the stock split, resulting in the issuance of 1,721,960
shares of the Company's common stock. In addition, outstanding options to
purchase the acquired institution's common stock were converted into options to
purchase 184,830 shares of the Company's common stock at an average exercise
price of $15.76 per share. This transaction was accounted for under the pooling
of interests method of accounting.
The results of operations of previous separate companies follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1998
-------------------------
Net
Revenue income
----------- -----------
(in thousands)
<S> <C> <C>
JeffBanks, Inc. .................................. $114,057 $ 14,371
Regent National Bank as of July 31, 1998 ......... 9,436 (2,939)
-------- --------
$123,493 $ 11,432
======== ========
</TABLE>
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 .593 of a share of the Company's common stock,
resulting in the issuance of 1,311,236 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 446,916 shares of the Company's
common stock, with an exercise price of $6.74 per share. This transaction was
accounted for under the pooling of interests method of accounting.
44
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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>
December 31, 1998
------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- ------------ ------------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities ................ $ 7,358 $ 110 $ -- $ 7,468
Federal agency obligations .............. 19,251 126 (1) 19,376
Mortgage-backed securities .............. 199,685 1,339 (650) 200,374
State and municipal obligations ......... 46,730 2,120 (112) 48,738
Other securities ........................ 25,417 1 (8) 25,410
-------- ------- --------- --------
Total available-for-sale ................. $298,441 $ 3,696 $ (771) $301,366
======== ======= ======== ========
Held to maturity
State and municipal obligations ......... $ 677 $ 22 $ -- $ 699
======== ======= ======== ========
Total held to maturity ................... $ 677 $ 22 $ -- $ 699
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Gross Gross
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 .............. 38,032 109 -- 38,141
Mortgage-backed securities .............. 204,788 705 (1,078) 204,415
State and municipal obligations ......... 51,215 1,939 (1) 53,153
Other securities ........................ 26,112 68 -- 26,180
-------- ------- ---------- --------
Total available-for-sale ................. $362,636 $ 2,946 $ (1,081) $364,501
======== ======= ========== ========
Held to maturity
State and municipal obligations ......... $ 682 $ 17 $ -- $ 699
======== ======= ========== ========
Total held to maturity ................... $ 682 $ 17 $ -- $ 699
======== ======= ========== ========
</TABLE>
45
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 3 -- INVESTMENT SECURITIES -- (Continued)
The following table lists maturities of debt and equity securities at
December 31, 1998 classified as available for sale and held to maturity:
<TABLE>
<CAPTION>
Available for sale Held to maturity
------------------------- ----------------------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less ........................ $ 17,253 $ 17,325 $ -- $ --
Due after one year through five years .......... 9,604 9,712 452 464
Due after five years through ten years ......... 1,029 1,078 225 235
Due after ten years ............................ 46,965 48,972 -- --
-------- -------- ----- -----
74,851 77,087 677 699
Mortgage-backed securities ..................... 199,685 200,374 -- --
FHLB of Pittsburgh stock ....................... 23,905 23,905 -- --
-------- -------- ----- -----
$298,441 $301,366 $ 677 $ 699
======== ======== ===== =====
</TABLE>
Proceeds on sales of securities classified as available for sale were
$157,486,000, $128,628,000 and $31,189,000 in 1998, 1997 and 1996,
respectively. Realized gains and losses on sales of investment securities were
$1,203,000 and $51,000, $515,000 and $-0-, and $245,000 and $-0- in 1998, 1997
and 1996, respectively.
Tax-exempt interest income on state and municipal obligations classified
as investment securities was $2,859,000, $2,227,000, and $471,000 in 1998, 1997
and 1996, respectively.
Investment securities with an aggregate carrying value of approximately
$47,281,000 and $151,188,000 at December 31, 1998 and 1997, 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:
December 31,
------------------------------
1998 1997
--------------- ------------
(in thousands)
Commercial ........................... $ 426,375 $ 299,956
Commercial mortgage .................. 231,231 246,986
Construction ......................... 87,782 86,309
Direct financing leases, net ......... 22,574 18,649
Consumer loans ....................... 348,702 249,219
Credit card .......................... 22,817 21,669
Residential mortgage ................. 73,023 75,288
Overdrafts ........................... 2,835 3,741
----------- ----------
1,215,339 1,001,817
Allowance for credit losses .......... (12,407) (14,136)
----------- ----------
$ 1,202,932 $ 987,681
=========== ==========
46
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 4 -- LOANS -- (Continued)
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year ............ $ 14,136 $ 16,794 $ 21,492
Provision charged to operations ......... 5,963 3,700 10,115
Loans charged off ....................... (8,838) (8,705) (17,356)
Recoveries .............................. 1,146 2,347 2,543
-------- -------- ---------
Balance at end of year .................. $ 12,407 $ 14,136 $ 16,794
======== ======== =========
</TABLE>
The balance of impaired loans was $12,369,000 and $9,857,000 at December
31, 1998 and 1997, 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 $2,842,000 and $2,324,000 at December 31,
1998 and 1997, respectively. The average recorded investment on impaired loans
was $11,638,000 and $10,759,000 during 1998 and 1997, respectively, and the
income recognized on impaired loans was $-0- for all periods. Total cash
collected on impaired loans during 1998 and 1997 was $2,834,000 and $3,217,000,
respectively, all of which was credited to the principal balance outstanding on
such loans. Interest which would have been accrued on impaired loans during
1998, 1997 and 1996 was $985,000, $1,142,000 and $989,000, 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, 1998 and 1997 were $7,107,000 and $5,460,000,
respectively. At December 31, 1998 and 1997, there were no commitments to lend
additional funds to borrowers whose loans were classified as non-accrual.
Loans totalling $137,000,000 and $188,000,000 at December 31, 1998 and
1997, respectively, were pledged as collateral to secure advances from the
Federal Home Loan Bank (FHLB).
Tax exempt interest on loans was $3,437,000, $232,000 and $256,000 in
1998, 1997 and 1996, respectively.
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
Estimated ----------------------------
useful lives 1998 1997
--------------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Land ...................................... -- $ 2,795 $ 2,795
Building .................................. 3 to 40 years 5,277 4,573
Furniture, fixtures and equipment ......... 3 to 12 years 24,558 19,868
Leasehold improvements .................... 4 to 35 years 10,055 8,757
--------- ---------
42,685 35,993
Accumulated depreciation .................. (18,600) (16,475)
--------- ---------
$ 24,085 $ 19,518
========= =========
</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 $125,358,000 and $109,663,000 in 1998 and 1997,
respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows (in thousands):
1999 ........................ $536,706
2000 ........................ 53,167
2001 ........................ 6,856
2002 ........................ 2,493
2003 and thereafter ......... 3,193
--------
$602,415
========
NOTE 7 -- DEBT
FHLB advances -- short term
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------- -------------
(in thousands
except percentages)
<S> <C> <C>
Balance outstanding ........................... $ 55,000 $ 148,000
Average during the year ....................... 70,471 94,107
Maximum month-end balance ..................... 150,000 127,750
Weighted average rate during the year ......... 5.71% 5.66%
Weighted average rate at December 31 .......... 4.96% 5.65%
</TABLE>
FHLB advances - long term
At December 31, 1998, JBPA had $54,182,000 in long-term advances from the
FHLB. These advances had a weighted average rate of 5.34%. Outstanding
borrowings mature as follows (in thousands):
1999 - 2001 .............. $ --
2002 ..................... 29,000
2003 ..................... 15,000
Thereafter ............... 10,182
--------
$ 54,182
========
Unused advances from the FHLB were $190,127,000 and $27,006,000 at
December 31, 1998 and 1997, respectively.
Subordinated notes and debentures
The Company issued $23,000,000 of 8.75% subordinated notes due April 1,
2006. These 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.
JBPA issued $9,000,000 of 9.5% subordinated debentures due February 15,
2003. These 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.
As a result of the Regent acquisition, there were $2,750,000 of 7.75%
subordinated debentures due September 30, 1998. These debentures were redeemed
on September 30, 1998.
48
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 7 -- DEBT -- (Continued)
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 July 10, 1998, the Company declared a 5-for-3 stock split, payable
August 20, 1998.
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 $.43 in 1998, $.34
in 1997 and $.24 in 1996.
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, 1998
------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ......................... $ 11,432 10,301 $ 1.11
Effect of dilutive securities
Stock options ....................................................... -- 655 ( .07)
-------- ------ --------
Diluted earnings per share
Net income available to common shareholders plus assumed conversions $ 11,432 10,956 $ 1.04
======== ====== ========
</TABLE>
Options to purchase 244,000 shares of common stock at an average price of
$29.90 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.
49
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 -- EARNINGS PER SHARE -- (Continued)
<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 shareholders ............ $ 12,864 9,660 $ 1.33
Effect of dilutive securities
Stock options .......................................... -- 657 ( .08)
-------- ----- --------
Diluted earnings per share
Net income available to common shareholders plus assumed
conversions ............................................ $ 12,864 10,317 $ 1.25
======== ====== ========
</TABLE>
<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 shareholders ............ $ 4,938 8,775 $ .56
Effect of dilutive securities
Stock options .......................................... -- 472 ( .03)
------- ----- -------
Diluted earnings per share
Net income available to common shareholders plus assumed
conversions ............................................ $ 4,938 9,247 $ .53
======= ===== =======
</TABLE>
NOTE 10 -- INCOME TAXES
An analysis of current and deferred income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Current ................................................. $ 2,183 $ 4,067 $ 2,182
Deferred ................................................ 1,817 503 2,056
------- ------- -------
Total ................................................ $ 4,000 $ 4,570 $ 4,238
======= ======= =======
</TABLE>
The income tax provision reconciled to the tax computed at the statutory
federal rate was as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate .......................... $ 5,248 $ 6,086 $ 3,168
Increase (decrease) in taxes resulting from
Tax-exempt loan and investment income ......... (1,975) (791) (210)
Non-deductible amortization ................... 554 389 397
Other, net .................................... 173 (1,114) 883
-------- -------- -------
Applicable income tax .................... $ 4,000 $ 4,570 $ 4,238
======== ======== =======
</TABLE>
50
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10 -- INCOME TAXES -- (Continued)
The net deferred asset consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
---------- -------------
(in thousands)
<S> <C> <C>
Allowance for credit losses .................................. $ 3,556 $ 3,881
Allowance for real estate owned .............................. 877 655
Purchased net operating loss carryforwards ................... 4,221 4,571
Other ........................................................ 55 26
-------- --------
Total deferred tax assets ................................. 8,709 9,133
Deferred asset valuation allowance ........................... (2,748) (2,748)
-------- --------
Net deferred tax asset .................................... 5,961 6,385
-------- --------
Accumulated depreciation ..................................... (3,206) (2,098)
Net unrealized gain on securities available for sale ......... (975) (611)
Deferred loan costs .......................................... (507) (462)
Other ........................................................ (244) (4)
-------- ----------
Total deferred tax liabilities ............................ (4,932) (3,175)
-------- ---------
Deferred tax asset, net of deferred tax liabilities .......... $ 1,029 $ 3,210
======== =========
</TABLE>
NOTE 11 -- EMPLOYEE BENEFIT PLANS
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 $135,000, $111,000 and $95,000 in 1998, 1997 and 1996, respectively.
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
$-0-, $225,000 and $215,000 in 1998, 1997 and 1996, respectively. Contributions
are distributed to the Banks in proportion to their respective employee
salaries.
NOTE 12 -- STOCK OPTIONS
The Company maintains a Key Employee Stock Option Plan (the Plan). Under
the Plan, options to purchase a maximum of 1,000,000 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, 1998, options to
purchase 38,300 shares under the Plan were authorized to be issued, but had not
been granted.
As a result of the Regent National Bank and United Valley Bank mergers,
there are 179,787 and 239,083 respective 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 53,738 shares of the Company's common stock at $7.91
per share at December 31, 1998. At December 31, 1997 and 1996, there were
exercisable options to purchase 110,250 shares at $8.16 and 54,738 shares at
7.91, respectively. No options were granted or expired during 1998, 1997 and
1996 under these former plans, and 110,250 shares were exercised at $8.16 in
1998.
51
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 12 -- STOCK OPTIONS -- (Continued)
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>
Year ended December 31,
---------------------------------------
1998 1997 1996
------------ ------------ ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income As reported $ 11,432 $ 13,331 $5,080
Pro forma 9,704 11,720 4,995
Net income per common share - basic As reported 1.11 1.33 .56
Pro forma .94 1.21 .54
Net income per common share - diluted As reported 1.04 1.25 .53
Pro forma .89 1.14 .51
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants before 1995.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1998, 1997 and 1996, respectively:
dividend yield of 2.59% in 1998, 2.0% in 1997 and 2.5% in 1996; expected
volatility of 22% in 1998, 15% in 1997 and 10% in 1996; risk-free interest rates
of 5.37%, 6.42% and 6.19% in 1998, 1997 and 1996, 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,
1998, 1997 and 1996 and the changes during the years ending on those dates is
represented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- -------------------------
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 .......... 1,497,425 $ 11.09 1,104,318 $ 8.75 1,159,495 $ 8.53
Granted ................................. 356,446 28.09 437,677 16.64 27,125 13.22
Exercised ............................... (362,750) 9.66 (39,015) 6.74 (82,302) 6.74
Forfeited ............................... (17,504) 20.57 (5,555) 13.54 -- --
--------- --------- ---------
Outstanding, end of year ................ 1,473,617 15.46 1,497,425 11.09 1,104,318 8.75
--------- --------- ---------
Options exercisable at year-end ......... 1,364,117 1,497,425 1,104,318
========= ========= =========
Weighted average fair value of options
granted during the year ................ $ 11.01 $ 9.84 $ 5.61
======== ======= ======
</TABLE>
<PAGE>
The following table summarizes information about options outstanding at
December 31, 1998:
<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 1998 life (years) price 1998 price
- --------------------- ---------------- -------------- ---------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$ 6.74 -- $ 9.93 519,571 3.57 $ 8.25 519,571 $ 8.25
12.11 -- 18.15 526,148 7.83 14.27 526,148 14.27
22.77 -- 32.25 427,898 9.42 27.48 318,398 28.64
------- -------
1,473,617 1,364,117
========= =========
</TABLE>
52
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 13 -- RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, loans outstanding to certain officers and
directors of the Company and their subsidiaries and companies in which they
have material ownership amounted to $13,425,000 and $19,486,000, respectively.
An analysis of activity in loans to related parties at December 31, 1998
resulted in new loans of $3,954,000; reductions of $10,063,000, representing
payments; and additions of $48,000, representing changes in the composition of
related parties. Deposits of these individuals and their affiliated companies
at December 31, 1998 and 1997 were $60,829,000 and $45,154,000, respectively.
The majority of the related party deposits at December 31, 1998 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
$633,000, $355,000 and $355,000 in 1998, 1997 and 1996, respectively.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain of its operating facilities under
non-cancellable operating leases expiring in 1999 through 2018. 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
-------------------------
1999 .................. $ 2,580
2000 .................. 2,261
2001 .................. 2,173
2002 .................. 1,986
2003 .................. 1,826
Thereafter ............ 4,857
-------
$15,683
=======
Rental expense amounted to $2,755,000, $2,207,000 and $1,927,000 in 1998,
1997 and 1996, 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, 1998 and 1997 are outlined
below.
53
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
For cash and cash equivalents, the recorded book values of $54,599,000 and
$147,837,000 at December 31, 1998 and 1997, 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.
<TABLE>
<CAPTION>
1998 1997
--------------------------- -------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities ............................ $ 302,043 $ 302,065 $365,183 $ 365,200
Loans, including mortgages held for sale ......... 1,217,532 1,224,244 992,008 1,008,045
</TABLE>
The net loan portfolio at December 31, 1998 and 1997 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.
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
$602,415,000 and $508,139,000 mature or reprice within one year of December 31,
1998 and 1997, respectively; therefore, the recorded book value of such
deposits approximates its fair value.
The recorded book balance of subordinated debentures of $32,000,000 and
$34,750,000 at December 31, 1998 and 1997, respectively, had an approximate
fair value of $32,062,000 and $33,625,000, respectively.
The recorded book balance of the guaranteed beneficial interest in the
Company's Trust preferred debt of $25,300,000 at December 31, 1998 and 1997 had
an approximate fair value of $25,416,000 and $23,782,000, respectively.
The fair values of the FHLB advances totalling $109,182,000 and
$203,511,000 are estimated to approximate their recorded book balances at
December 31, 1998 and 1997, respectively.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totalled approximately
$398,409,000 and $364,434,000 at December 31, 1998 and 1997, respectively, and
primarily comprise unfunded loan commitments which are generally priced at
market at the time of funding.
<PAGE>
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>
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
Commitments to extend credit ...................................... $370,514 $351,810
Standby letters of credit and financial guarantees written ........ 27,895 12,624
</TABLE>
54
<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)
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,
1998 and 1997 varies up to 100%.
The Banks grant loans primarily to customers in Philadelphia and its
immediately adjacent suburban Pennsylvania counties which include Chester,
Delaware and Montgomery and southern New Jersey which includes Camden and
Burlington counties. Although the Banks have diversified loan portfolios, a
large portion of their loans are secured by commercial or residential real
property. The Banks do not generally engage in non-recourse lending and
typically will require the principals of any commercial borrower to obligate
themselves personally on the loan. Although the Banks have diversified loan
portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector. 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.
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 Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1998, that the Banks meet all capital adequacy
requirements to which they are subject.
55
<PAGE>
JeffBanks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 17 -- REGULATORY MATTERS -- (Continued)
As of December 31, 1998, 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, Tier 1 risk-based and Tier 1 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, 1998 and 1997, 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> <C>
As of December 31, 1998
Total capital
(to risk-weighted assets)
Company ................. $191,903 15.24% $100,708 8.00% $125,885 N/A
JBPA .................... 152,864 13.03 93,832 8.00 117,290 10.00%
JBNJ .................... 11,928 13.21 7,223 8.00 9,029 10.00
Tier I capital
(to risk-weighted assets)
Company ................. 149,296 11.86 50,354 4.00 75,531 N/A
JBPA .................... 113,784 9.70 46,916 4.00 70,374 6.00
JBNJ .................... 8,401 9.30 3,612 4.00 5,417 6.00
Tier I capital
(to average assets)
Company ................. 149,296 9.11 65,531 4.00 81,914 N/A
JBPA .................... 113,784 7.53 60,424 4.00 75,530 5.00
JBNJ .................... 8,401 6.58 5,107 4.00 6,384 5.00
</TABLE>
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------- ----------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total capital
(to risk-weighted assets)
Company ................. $182,012 17.12% $85,061 8.00% $106,326 N/A
JBPA .................... 143,596 14.87 77,244 8.00 96,555 10.00%
JBNJ .................... 10,754 13.57 6,338 8.00 7,922 10.00
Tier I capital
(to risk-weighted assets)
Company ................. 136,864 12.87 42,530 4.00 63,796 N/A
JBPA .................... 102,565 10.62 38,622 4.00 57,933 6.00
JBNJ .................... 7,311 9.23 3,169 4.00 4,753 6.00
Tier I capital
(to average assets)
Company ................. 136,864 9.41 58,203 4.00 72,754 N/A
JBPA .................... 102,565 7.59 54,052 4.00 67,565 5.00
JBNJ .................... 7,311 7.04 4,151 4.00 5,189 5.00
</TABLE>
56
<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,
-----------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Assets
Cash .................................................................... $ 873 $ 920
Equity investment in subsidiaries ....................................... 155,625 148,116
Investment in Banks' subordinated notes ................................. 23,000 23,000
Investment in securities available for sale ............................. 600 904
Accrued interest receivable ............................................. 485 510
Premises and equipment, net ............................................. 85 129
Other assets ............................................................ -- 34
-------- --------
$180,668 $173,613
======== ========
Liabilities and shareholders' equity
Subordinated notes ...................................................... $ 23,000 $ 25,750
Minority interest in consolidated subsidiary ............................ 25,300 25,300
Accrued interest payable ................................................ 485 503
Other liabilities ....................................................... 205 254
-------- --------
48,990 51,807
-------- --------
Shareholders' equity
Common stock ............................................................ 10,487 6,094
Additional paid-in capital .............................................. 97,308 95,150
Retained earnings ....................................................... 21,933 19,308
Net unrealized gain on investment securities available for sale ......... 1,950 1,254
-------- --------
131,678 121,806
-------- --------
$180,668 $173,613
======== ========
</TABLE>
57
<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,
-------------------------------------
1998 1997 1996
----------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from the Banks ................................................ $ 4,553 $ 3,602 $2,356
Dividends from Non-banks ................................................ 2,119 2,119 --
Interest income from the Banks .......................................... 2,234 2,013 1,542
Interest income from investment securities .............................. 12 40 9
Gain on sales of investment securities .................................. 67 -- --
Management service fees from the Banks .................................. 2,953 2,752 3,061
------- ------- ------
Total income ............................................................ 11,938 10,526 6,968
------- ------- ------
Expenses
Interest on subordinated notes .......................................... 2,340 2,227 1,762
Interest on preferred securities ........................................ 2,119 2,119 --
Salaries and employee benefits .......................................... 1,133 1,053 1,189
Occupancy expense ....................................................... 143 57 55
Depreciation ............................................................ 42 48 49
Data processing expense ................................................. 779 691 930
Advertising ............................................................. 324 326 453
Insurance ............................................................... 410 316 345
Other ................................................................... 227 63 86
------- ------- ------
Total expenses .......................................................... 7,517 6,900 4,869
------- ------- ------
Income before income taxes and equity in undistributed net income ....... 4,421 3,626 2,099
Provision for income taxes ............................................... (45) 79 --
Equity in undistributed net income ...................................... 6,966 9,784 2,981
------- ------- ------
Income before dividend on preferred stocks ............................ 11,432 13,331 5,080
Preferred stock dividend ................................................. -- (467) (142)
------- ------- ------
Net income ............................................................ $11,432 $12,864 $4,938
======= ======= ======
</TABLE>
58
<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,
---------------------------------------
1998 1997 1996
---------- ------------ -----------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income .............................................................. $ 11,432 $ 13,331 $ 5,080
Adjustments to reconcile net income to net cash provided by
operating activities ..................................................
Depreciation and amortization ......................................... 42 48 49
Gain on sales of investment securities ................................ (67) -- ---
Equity in undistributed net income .................................... (6,966) (9,784) (2,981)
Increase in other liabilities ......................................... 87 (81) 169
Decrease in other assets .............................................. 59 18 62
-------- --------- ---------
Net cash provided by operating activities .......................... 4,587 3,532 2,379
-------- --------- ---------
Investing activities
Proceeds from the sale of investment securities available for sale ...... 872 -- --
Investments in subsidiaries ............................................. -- (25,300) (23,000)
Purchases of investment securities available for sale ................... (500) (699) 96
-------- --------- ---------
Net cash provided by (used in) investing activities ................ 372 (25,999) (22,904)
-------- --------- ---------
Financing activities
Proceeds from issuance of preferred stock ............................... -- 106 --
Redemption of preferred stock ........................................... -- (143) --
(Redemption) issuance of subordinated debentures ........................ (2,750) -- 23,000
Purchase of common stock for benefit plans .............................. (341) -- --
Proceeds from issuance of preferred securities .......................... -- 25,300 --
Dividends paid on common stock .......................................... (4,660) (3,383) (2,441)
Proceeds from issuance of common stock .................................. 2,745 794 438
-------- --------- ---------
Net cash used in financing activities .............................. (5,006) 22,674 20,997
-------- --------- ---------
Net (decrease) increase in cash .......................................... (47) 207 472
Cash at beginning of year ................................................ 920 713 241
-------- --------- ---------
Cash at end of year ...................................................... $ 873 $ 920 $ 713
======== ========= =========
</TABLE>
59
<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>
1998
- ----
Interest income ................................. $ 31,028 $ 32,776 $ 30,154 $ 29,535
Interest expense ................................ 16,198 16,969 15,551 15,002
Net interest income ............................. 14,830 15,807 14,603 14,533
Provision for credit losses ..................... 1,310 1,140 2,547 966
Gain on sale of securities ...................... 583 262 64 243
Other operating income .......................... 3,806 3,189 3,967 3,101
Other operating expenses ........................ 12,699 13,330 15,600 11,964
Income before income taxes ...................... 5,210 4,788 487 4,947
Net income ...................................... 4,119 3,678 386 3,249
Per share data ..................................
Net income per common share - basic ........... $ 0.39 $ 0.36 $ 0.04 $ 0.32
Net income per common share - diluted ......... $ 0.39 $ 0.33 $ 0.03 $ 0.29
1997
- ----
Interest income ................................. 28,943 28,536 26,882 26,259
Interest expense ................................ 14,820 14,531 13,419 12,882
Net interest income ............................. 14,123 14,005 13,463 13,377
Provision for credit losses ..................... 960 945 1,170 625
Gain on sale of securities ...................... 185 183 147 --
Other operating income .......................... 3,369 3,105 2,907 3,307
Other operating expenses ........................ 11,179 11,351 11,831 12,209
Income before income taxes ...................... 5,538 4,997 3,516 3,850
Net income ...................................... 4,182 3,353 2,920 2,409
Per share data ..................................
Net income per common share - basic ........... $ 0.42 $ 0.34 $ 0.30 $ 0.27
Net income per common share - diluted ......... $ 0.39 $ 0.32 $ 0.28 $ 0.26
</TABLE>
60
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We have issued our report dated January 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, 1998. We hereby consent to the incorporation by reference of
said report in the Registration Statements of JeffBanks, Inc. on Forms 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 Forms S-8 (File No. 33-80654 and File
No. 33-80656, effective June 23, 1994).
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 54,599
<INT-BEARING-DEPOSITS> 3,717
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 301,366
<INVESTMENTS-CARRYING> 677
<INVESTMENTS-MARKET> 699
<LOANS> 1,229,939
<ALLOWANCE> 12,407
<TOTAL-ASSETS> 1,637,106
<DEPOSITS> 1,276,280
<SHORT-TERM> 94,635
<LIABILITIES-OTHER> 23,031
<LONG-TERM> 111,482
0
0
<COMMON> 10,487
<OTHER-SE> 121,191
<TOTAL-LIABILITIES-AND-EQUITY> 1,637,106
<INTEREST-LOAN> 99,924
<INTEREST-INVEST> 21,025
<INTEREST-OTHER> 2,544
<INTEREST-TOTAL> 123,493
<INTEREST-DEPOSIT> 48,858
<INTEREST-EXPENSE> 63,720
<INTEREST-INCOME-NET> 59,773
<LOAN-LOSSES> 5,963
<SECURITIES-GAINS> 1,152
<EXPENSE-OTHER> 53,593
<INCOME-PRETAX> 15,432
<INCOME-PRE-EXTRAORDINARY> 11,432
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,432
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.04
<YIELD-ACTUAL> 4.18
<LOANS-NON> 12,369
<LOANS-PAST> 7,107
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,136
<CHARGE-OFFS> 8,838
<RECOVERIES> 1,146
<ALLOWANCE-CLOSE> 12,407
<ALLOWANCE-DOMESTIC> 12,407
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
