FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended ......... June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from .......... to ..........
Commission file 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, Philadelphia, PA
(Address of principal executive offices)
19103
(Zip Code)
215-861-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Number of Shares of Common Stock Outstanding at June 30, 1999: 10,583,209
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Balance Sheet
UNAUDITED
June 30, December 31,
1999 1998
(in thousands)
<S> <C> <C>
Assets:
Cash and cash equivalents:
Cash and due from banks ..................................... $ 52,207 $ 54,599
Federal funds sold .......................................... 79,100 --
----------- -----------
131,307 54,599
Investment securities available for sale ........................ 313,281 301,366
Investment securities held to maturity .......................... 675 677
Mortgages held for sale ......................................... 19,951 14,600
Loans, net ...................................................... 1,326,746 1,202,932
Premises and equipment, net ..................................... 24,114 24,085
Accrued interest receivable ..................................... 15,043 15,929
Other real estate owned ......................................... 2,343 3,114
Goodwill ........................................................ 3,870 4,059
Other assets .................................................... 20,054 15,745
----------- -----------
Total assets ................................................ $ 1,857,384 $ 1,637,106
=========== ===========
Liabilities and shareholders' equity:
Deposits:
Demand (non-interest bearing) ............................... $ 222,976 $ 207,881
Savings and money market .................................... 492,007 465,984
Time deposits ............................................... 516,323 477,057
Time deposits, $100,000 and over ............................ 153,117 125,358
----------- -----------
1,384,423 1,276,280
Securities sold under repurchase agreements ..................... 57,064 39,635
FHLB advances - short term ...................................... 148,000 55,000
FHLB advances - long term ....................................... 54,175 54,182
Subordinated notes and debentures ............................... 31,920 32,000
Company-obligated mandatorily redeemable preferred securities of
the Company's subsidiary trust, holding solely $25.3 million
aggregate principal amount of 9.25% junior subordinated
deferrable interest debentures due 2027 of the Company ........ 25,300 25,300
Accrued interest payable ........................................ 17,687 15,444
Other liabilities ............................................... 6,893 7,587
----------- -----------
Total liabilities ........................................... 1,725,462 1,505,428
----------- -----------
Shareholders' equity:
Common Stock - authorized, 20,000,000 shares of $1 par value;
issued and outstanding 10,583,209 and 10,486,620 shares,
respectively .............................................. 10,583 10,487
Additional paid-in capital .................................. 98,177 97,308
Retained earnings ........................................... 26,961 21,933
Accumulated other comprehensive income ...................... (3,799) 1,950
----------- -----------
Total shareholders' equity .................................. 131,922 131,678
----------- -----------
Total liabilities and shareholders' equity .................. $ 1,857,384 $ 1,637,106
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statements of Income
UNAUDITED
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans including fees ...................... $ 52,816 $ 47,155 $ 27,161 $ 24,045
Investment securities ..................... 9,095 11,225 4,670 5,467
Federal funds sold ........................ 544 1,310 306 643
-------- -------- -------- --------
62,455 59,690 32,137 30,155
-------- -------- -------- --------
Interest expense:
Time deposits, $100,000 and over .......... 3,307 3,006 1,783 1,531
Other deposits ............................ 19,906 18,826 9,954 9,754
FHLB advances ............................. 4,114 4,669 2,215 2,281
Subordinated notes and debentures ......... 1,431 1,540 714 770
Trust preferred securities ................ 1,170 1,170 585 585
Securities sold under repurchase agreements 1,159 1,342 594 630
-------- -------- -------- --------
31,087 30,553 15,845 15,551
-------- -------- -------- --------
Net interest income .................... 31,368 29,137 16,292 14,604
Provision for credit losses .................... 2,985 3,513 1,530 2,547
-------- -------- -------- --------
Net interest income after provision
for credit losses ..................... 28,383 25,624 14,762 12,057
-------- -------- -------- --------
Non-interest income:
Service fees on deposit accounts .......... 2,062 1,697 1,126 819
Gain on sales of residential mortgages and
capitalized mortgage servicing rights ... 1,575 1,689 874 953
Gain on sale of mortgage servicing ........ 625 625
Gain on sales of investment securities .... 712 306 63
Mortgage servicing fees ................... 594 582 281 286
Merchant credit card deposit fees ......... 1,570 1,062 875 575
Credit card fee income .................... 287 311 132 154
Other ..................................... 1,284 1,102 702 555
-------- -------- -------- --------
8,084 7,374 3,990 4,030
-------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits ............ 12,411 12,666 6,238 6,813
Occupancy expense ......................... 2,258 2,222 1,125 1,095
Depreciation .............................. 1,415 1,236 750 659
FDIC expense .............................. 71 68 36 35
Data processing expense ................... 694 602 308 317
Legal ..................................... 519 1,121 216 794
Stationery, printing and supplies ......... 590 599 294 292
Shares tax ................................ 560 583 265 355
Advertising ............................... 571 783 329 417
Other real estate owned maintenance expense 130 29 37 18
Loss on sale and write-downs of other
real estate owned ........................ 5 29 6 (2)
Amortization of intangibles ............... 659 433 349 160
Credit card origination expense ........... 276 425 136 224
Credit card processing expense ............ 452 425 220 228
Merchant card expense ..................... 1,399 834 795 444
Other ..................................... 4,174 5,512 2,256 3,754
-------- -------- -------- --------
26,184 27,567 13,360 15,603
-------- -------- -------- --------
Income before income taxes ..................... 10,283 5,431 5,392 484
Income taxes ................................... 2,152 1,798 1,155 100
-------- -------- -------- --------
Net income ............................. $ 8,131 $ 3,633 $ 4,237 $ 384
======== ======== ======== ========
Per share data:
Average number of common shares (basic) ........ 10,517 10,232 10,540 10,269
Average number of common shares (diluted) ...... 11,010 11,095 11,091 11,157
Net income per common share (basic) ............ $ 0.77 $ 0.36 $ 0.40 $ 0.04
Net income per common share (diluted) .......... $ 0.74 $ 0.33 $ 0.38 $ 0.03
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 .......... $ 10,487 $ 97,308 $ 21,933 $ 1,950 $ 131,678
Net income ............................ -- -- 8,131 -- $ 8,131 8,131
Issuance of common stock for
dividend reinvestment plan ........... 10 216 -- -- -- 226
Warrants exercised .................... 86 653 -- -- -- 739
Cash dividends on common stock ........ -- -- (3,103) -- -- (3,103)
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (5,749) (5,749) (5,749)
--------- --------- --------- --------- --------- ---------
Comprehensive income .................. -- -- -- -- $ 2,382 --
=========
Balance at June 30, 1999 .............. $ 10,583 $ 98,177 $ 26,961 $ (3,799) $ 131,922
========= ========= ========= ========== =========
<FN>
Disclosure of reclassification amount:
Unrealized holding losses arising during period .................. $(5,286)
Less: reclassification adjustment for gains included in net income 463
-------
Net unrealized losses on securities .............................. $(5,749)
=======
</FN>
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 ............. $ 10,512 $ 97,563 $ 24,359 $ 555 $ 132,989
Net income ............................ -- -- 4,237 -- $ 4,237 4,237
Issuance of common stock for
dividend reinvestment plan ........... 3 68 -- -- -- 71
Warrants exercised .................... 68 546 -- -- -- 614
Cash dividends on common stock ........ -- -- (1,635) -- -- (1,635)
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (4,354) (4,354) (4,354)
---------
Comprehensive income .................. -- -- -- -- $ (117)
--------- --------- --------- --------- ========= ---------
Balance at June 30, 1999 .............. $ 10,583 $ 98,177 $ 26,961 $ (3,799) $ 131,922
========= ========= ========= ========= =========
<FN>
Disclosure of reclassification amount:
Unrealized holding losses arising during period .................. $(4,354)
Less: reclassification adjustment for gains included in net income --
-------
Net unrealized loss on securities ................................ $(4,354)
=======
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statement of Changes in Shareholders' Equity
UNAUDITED
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .......... $ 6,094 $ 95,150 $ 19,308 $ 1,254 $ 121,806
Net income ............................ -- -- 3,633 -- $ 3,633 3,633
Issuance of common stock for
dividend reinvestment plan ........... 2 77 -- -- -- 79
Warrants exercised .................... 74 1,121 -- -- -- 1,195
Cash dividends on common stock ........ -- -- (1,897) -- -- (1,897)
Stock split ........................... 4,147 -- (4,147) -- -- --
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- (419) (419) (419)
--------- --------- --------- --------- --------- ---------
Comprehensive income .................. -- -- -- -- $ 3,214 --
=========
Balance at June 30, 1998 .............. $ 10,317 $ 96,348 $ 16,897 $ 835 $ 124,397
========= ========= ========= ========= =========
<FN>
Disclosure of reclassification amount:
Unrealized holding losses arising during period .................. $(221)
Less: reclassification adjustment for gains included in net income 198
-----
Net unrealized losses on securities .............................. $(419)
=====
</FN>
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Common Additional Retained comprehensive Comprehensive
Stock paid-in-capital earnings income income Total
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 ............. $ 6,150 $ 95,835 $ 21,606 $ 835 $ 124,426
Net income ............................ -- -- 384 -- $ 384 384
Issuance of common stock for
dividend reinvestment plan ........... -- -- -- -- -- --
Warrants exercised .................... 20 513 -- -- -- 533
Cash dividends on common stock ........ -- -- (946) -- -- (946)
Stock split ........................... 4,147 -- (4,147) -- -- --
Other comprehensive income, net of
reclassification adjustments and taxes -- -- -- -- -- --
---------
Comprehensive income .................. -- -- -- -- $ 384
--------- --------- --------- --------- ========= ---------
Balance at June 30, 1998 .............. $ 10,317 $ 96,348 $ 16,897 $ 835 $ 124,397
========= ========= ========= ========= =========
<FN>
Disclosure of reclassification amount:
Unrealized holding gains arising during period ................... $ 41
Less: reclassification adjustment for gains included in net income 41
----
Net unrealized loss on securities ................................ $--
====
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
JeffBanks, Inc.
Consolidated Statements of Cash Flows
UNAUDITED
Six Months Ended June 30,
1999 1998
(in thousands)
<S> <C> <C>
Operating activities:
Net income ......................................................... $ 8,131 $ 3,633
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization ...................................... 2,732 1,905
Provision for credit losses ........................................ 2,985 3,513
Gain on sales of investment securities ............................. (712) (306)
Gain on sales of assets ............................................ -- (22)
Mortgage loans originated for sale ................................. (107,119) (102,903)
Mortgage loan sales ................................................ 101,768 96,915
Increase in interest receivable .................................... 886 (777)
(Decrease) increase in interest payable ............................ 2,243 (2,303)
(Increase) decrease in other assets ................................ (1,684) 726
(Decrease) increase in other liabilities ........................... (694) 1,529
--------- ---------
Net cash provided by operating activities ....................... 8,536 1,910
--------- ---------
Investing activities:
Proceeds from sales of investment securities available for sale .... 19,271 146,852
Proceeds from maturities of investment securities available for sale 41,722 54,637
Purchase of investment securities available for sale ............... (81,696) (176,307)
Proceeds from sales of other real estate owned ..................... 1,690 948
Net increase in loans .............................................. (127,718) (133,652)
Purchase of premises and equipment ................................. (1,444) (3,657)
--------- ---------
Net cash used in investing activities ........................... (148,175) (111,179)
--------- ---------
Financing activities:
Net increase in deposits ........................................... 108,143 204,364
Net increase (decrease) in repurchase agreements ................... 17,429 (27,731)
Net proceeds from issuance of common stock ......................... 965 1,275
Net increase (decrease) in FHLB advances ........................... 92,993 (41,866)
Net decrease in subordinated notes and debentures .................. (80) --
Dividends paid on common stock ..................................... (3,103) (1,897)
--------- ---------
Net cash provided by financing activities ....................... 216,347 134,145
--------- ---------
Net increase in cash and cash equivalents ............................... 76,708 24,876
Cash and cash equivalents at beginning of year .......................... 54,599 147,945
--------- ---------
Cash and cash equivalents at end of period .............................. $ 131,307 $ 172,821
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Note 1 - Allowance for Credit Losses:
Six months ended June 30,
1999 1998
(in thousands)
Balance, beginning of period .. $ 12,407 $ 14,136
Provision charged to operations 2,985 3,513
Loans charged off ............. (3,875) (4,292)
Recoveries .................... 686 694
-------- --------
Balance, end of period ........ $ 12,203 $ 14,051
======== ========
The balances of impaired loans were $10,469,000 and $11,250,000
respectively, at June 30, 1999 and 1998. The allowance for credit losses
associated with impaired loans was $2,735,000 and $1,867,000 respectively, at
those dates. Total cash collected on impaired loans during the first six months
of 1999 and 1998, respectively, was $1,561,000 and $1,575,000 all of which was
credited to the principal balance outstanding on such loans. Interest which
would have been accrued on impaired loans during those respective periods was
$409,000 and $440,000. No related interest income was recognized during the
period.
Note 2 - Investment Securities:
The carrying value and approximate market value of investment securities
were as follows:
June 30, 1999
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
(in thousands)
Available for Sale:
U.S. treasury securities ...... $ 6,339 $ 23 $ -- $ 6,362
Federal agency obligations .... 19,078 32 224 18,886
Mortgage backed securities .... 188,009 41 3,902 184,148
State and municipal obligations 62,138 478 2,174 60,442
Other securities .............. 43,561 75 193 43,443
-------- -------- -------- --------
Total ......................... $319,125 $ 649 $ 6,493 $313,281
======== ======== ======== ========
Held to Maturity:
State and municipal obligations 675 12 -- 687
-------- -------- -------- --------
Total ......................... $ 675 $ 12 $ -- $ 687
======== ======== ======== ========
December 31, 1998
Gross Gross
Amortized unrealized unrealized Approximate
cost gains losses fair value
(in thousands)
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 ......................... $298,441 $ 3,696 $ 771 $301,366
======== ======== ======== ========
Held to Maturity:
State and municipal obligations 677 22 -- 699
-------- -------- -------- --------
Total ......................... $ 677 $ 22 $ -- $ 699
======== ======== ======== ========
Note 3:
The unaudited interim financial statements furnished reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature, except as discussed in these notes.
Note 4:
Certain amounts in the financial statements presented for prior periods
have been reclassified to conform with the current period presentation.
Note 5:
Subsequent to SFAS No. 133, the FASB issued SFAS No. 137, which amended the
effective date of SFAS No. 133 to be all fiscal quarters of all fiscal years
beginning after June 15, 2000. Based on the Company's minimal use of derivatives
at the current time, management does not anticipate the adoption of SFAS No. 133
to have a significant impact on the earnings or financial position of the
Company. However, the impact of adopting SFAS No. 133 will depend on the nature
and purpose of the derivative instruments in use by the Company at that time.
Note 6:
On June 29, 1999, the Company announced that it had entered into a merger
agreement with Hudson United Bancorp. ("Hudson"), pursuant to which it would be
acquired by that institution. Consummation of the merger is conditional upon
required regulatory and shareholder approvals. Under terms of the pending
merger, each share of the Company's common stock would be converted into .95 of
a share of Hudson's common stock.
On August 14, 1998, the Company completed a merger with Pioneer Mortgage,
Inc. ("Pioneer") accounted for as a pooling of interests, which accordingly
required restatement of financial statements. The changes reflecting such
restatement were not material. Pioneer was a mortgage company which operates
within the Company's southern New Jersey market with seven mortgage loan
originators.
On July 31, 1998, the Company completed a merger with Regent Bancshares
Corp. and Regent National Bank ("Regent") accounted for as a pooling of
interests, which accordingly required restatement of financial statements. Under
terms of the merger, each share of common stock was as of that date converted to
.505 shares of the Company's common stock, resulting in the issuance of
1,721,960 shares of the Company's common stock. Each option to acquire Regent
common stock would be converted into an option to acquire .505 of a share of the
Company's common stock, which would result in the issuance of up to 184,830
shares of the Company's common stock if all outstanding Regent options are
converted.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters discussed in this Form 10Q that are forward looking statements
relate to future events or the future financial performance of JeffBanks, Inc.
(the "Company") and are based on current management expectations that involve
risks and uncertainties. These statements can be identified by the use of
forward-looking terminology including "may," "believe," will," "expect,"
"anticipate," "estimate," "continue," or similar words . These statements are
only predictions and actual events or performance may differ materially from the
events or performance expressed in any of these forward-looking statements. The
Company undertakes no obligations to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report.
Results of Operations
Net income. Net income for the Company amounted to $8.1 million for the six
months ended June 30, 1999 as compared to $3.6 million for the six months ended
June 30, 1998, an increase of approximately 125%. The principal factors
reflected in the increase are discussed in form 10k for 1998 and reflected the
restatement of financial information for the Regent acquisition. Restatement was
required by pooling of interests accounting treatment.
Net Interest Income and Average Balances. Net interest income was $31.4 million
for the first six months of 1999, compared to $29.1 million for the first six
months of 1998, an increase of $2.3 million or 8%. Yields on interest earning
assets, on a tax equivalent basis, decreased to 8.13% for the first six months
of 1999 from 8.34% in the prior year period, a difference of .21 %. The decrease
reflected lower loan and investment yields, as a result of the impact of the
.75% reduction in the prime rate during the fourth quarter of 1998 and other
decreases in market rates. The cost of interest bearing liabilities decreased to
4.64% for the first six months of 1999 from 4.91% in the prior year period, a
difference of .27%. The net interest margin on the Company's interest earning
assets increased to 4.24% in 1999 as compared to 4.13% in the comparable prior
year period, a difference of .11%. That increase reflected disproportionate
growth in average non-interest earning demand deposits.
Average balances for non-interest bearing demand deposits increased to
$201.4 million in 1999 compared to $156.8 million in 1998, an increase of $44.6
million or 28%. Average balances for savings, money market and interest checking
increased to $452.4 million in 1999 compared to $442.5 million in the comparable
1998 period, an increase of $9.9 million or 2%.
In the first six months of 1999, average interest earning assets totaled
$1.600 billion, an increase of $145 million or 10% over the 1998 comparable
period. Reflected in that net increase was a $239.1 million or 23% increase in
average loans to $1.278 billion. The increase reflects the full period effect of
loans totaling $99.2 million made to an employee stock ownership plan in the
second and third quarters of 1998. The loans were made to reduce the Company's
exposure to lower interest rate environments.
Non-Interest Income. Total non-interest income for the first six months of 1999
was $8.1 million compared to $7.4 million for the first six months of 1998, an
increase of $700,000 or 9%. Service fees on deposit accounts increased to $2.1
million for the first six months of 1999, an increase of $365,000 over the
comparable prior year period. The increase reflected attempts to collect service
charges from existing customers which had been previously waived. Gain on sales
of securities increased to $712,000 for the first six months of 1999, an
increase of $406,000 over 1998. The majority of the sales in 1999 were municipal
securities which were replaced with securities with longer term protection
against being called for redemption. Increases in merchant credit card fees were
offset by increases in related merchant card expense shown under non-interest
expense.
Non-Interest Expense. Total non-interest expense for the first six months of
1999 was $26.2 million, compared to $27.6 million for the comparable prior year
period, a decrease of $1.4 million or 5%. Salaries and employee benefits
amounted to $12.4 million in the first six months of 1999 compared to $12.7
million for the first six months of 1998, a decrease of $300,000 or 2%. The
decrease between the periods reflected the savings resulting from the
consolidation of Regent.
Depreciation expense increased to $1.4 million for the first six months of
1999, an increase of $179,000 or 14% from the comparable 1998 period. The
increase reflected the implementation of a new check imaging system to eliminate
the mailing of cancelled checks to customers and increase the efficiency of
backroom operations.
Data processing expense increased to $694,000 in 1999, an increase of
$92,000 or 15% over the prior year. The increase reflected increases in
transaction volume and additional support for the check imaging system.
Legal expense decreased to $519,000 for the first six months of 1999, a
decrease of $602,000 or 54% from the prior year. Legal expense in 1998 reflected
approximately $500,000 incurred by Regent including legal fees relating to
litigation to resolve various loans.
Advertising expense decreased to $571,000 for the first six months of 1999,
a decrease of $212,000 or 27% from the prior year. Expenditures in 1998 were
increased to promote various bank services and locations to reach customers who
might be displaced as a result of in-market bank mergers, and to pursue other
strategies. Expenditures were reduced after the mergers were completed.
Amortization of intangibles increased to $659,000 for the first six months
of 1999, an increase of $226,000 or 34% from the prior year. The increase
reflected anticipated prepayments on the mortgage servicing portfolio.
Merchant card expense increases in 1999 as compared to 1998 were
significantly offset by increases in related merchant credit card deposit fees
shown under non-interest income, as a result of relatively modest margins
between fee income and expense, characteristic of that industry. However, the
Company derives additional benefit from related deposit balances.
Income Taxes. The effective tax rate of 21% for the first six months of
1999 reflected the tax exempt status of one half of the interest on $99.2
million of ESOP loans and substantially all of the interest on state and
municipal obligations.
<PAGE>
Liquidity and Capital Resources.
The major sources of funding for the Company's investing activities have
historically been cash inflows resulting from increases in deposits. Such
increases have been utilized primarily to fund net increases in loans. FHLB
advances have also been utilized as an alternative funding source, when relative
interest costs were less than those for deposits. Funds not needed for
operations are invested primarily in daily federal funds sold and securities.
Net increases in loans were $127.7 million for the first six months of 1999
as compared to net increases of $133.7 million for the comparable 1998 period.
Cash outflows required for mortgage loans originated for sale amounted to $107.1
million for the first six months of 1999 compared to $102.9 million for the
first six months of 1998. The decrease in comprehensive income for the first six
months of 1999 resulted from increases in market interest rates which resulted
in decreases in the market value of investment securities. The majority of
$146.9 million of 1998 securities sales resulted from the then current Regent
management's efforts to restructure substantially all of its securities
portfolio. Rationales for the restructuring reflected regulatory input and
requirements. After the Company acquired Regent, the regulatory rationale was
largely eliminated, as was additional securities restructuring. The Company and
its subsidiaries have maintained their status as "well capitalized" under
applicable regulatory guidelines. The following table sets forth the regulatory
capital ratios of the Company and its wholly-owned banking subsidiaries,
Jefferson Bank (Jefferson PA) and Jefferson Bank of New Jersey (Jefferson NJ) at
June 30, 1999.
<TABLE>
<CAPTION>
Tier 1 Capital to Tier 1 Capital to Total Capital to
Average Risk-Weighted Risk-Weighted
Assets Ratio Assets Ratio Assets Ratio
June 30, December 31, June 30, December 31, June 30, December 31,
1999 1998 1999 1998 1999 1998
Entity:
<S> <C> <C> <C> <C> <C> <C>
JBI .......................... 9.16% 9.11% 10.74% 11.86% 13.54% 15.24%
Jefferson PA ................. 7.66% 7.53% 9.35% 9.70% 12.30% 13.03%
Jefferson NJ ................. 6.36% 6.58% 9.52% 9.30% 13.46% 13.21%
"Well capitalized" institution
(under FDIC Regulations) . 5.00% 5.00% 6.00% 6.00% 10.00% 10.00%
</TABLE>
<PAGE>
Asset and Liability Management.
The following table summarizes estimated repricing intervals for interest
earning assets and interest bearing liabilities as of June 30, 1999 and the
difference or "gap" between them on an actual and cumulative basis for the
periods indicated. The following table reflects prepayment and repricing
estimates which may be modified significantly by management and independent
advisors.
<TABLE>
<CAPTION>
Within Four to
Three Twelve One to Two Three to Five Over Five
Months Months Years Years Years
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities:
Federal funds sold ............... $ 79,100
Available for sale:
Taxable investment securities ... 28,506 $ 33,234 $ 36,084 $ 85,096 $ 69,919
Non-taxable investment securities 250 115 -- -- 60,077
Held to maturity:
Non-taxable investment securities -- 255 -- 195 225
Mortgages held for sale ............ 19,951 -- -- -- --
Loans net of unearned discount ..... 387,814 353,204 148,273 284,669 164,989
--------- --------- --------- --------- ---------
Total interest earning assets ......... 515,621 386,808 184,357 369,960 295,210
--------- --------- --------- --------- ---------
Interest bearing liabilities:
Savings and money market deposits .. 65,039 -- 146,155 280,813 --
Time deposits ...................... 268,131 371,083 20,613 8,914 699
Securities sold under repurchase
agreements ...................... 57,064 -- -- -- --
FHLB advances ...................... 202,175 -- -- -- --
Subordinated notes and debentures .. -- -- -- 9,000 22,920
Preferred securities ............... -- -- -- -- 25,300
--------- --------- --------- --------- ---------
Total interest bearing liabilities .... 592,409 371,083 166,768 298,727 48,919
--------- --------- --------- --------- ---------
Gap ................................... $ (76,788) $ 15,725 $ 17,589 $ 71,233 $ 246,291
========= ========= ========= ========= =========
Cumulative gap ........................ $ (76,788) $ (61,063) $ (43,474) $ 27,759 $ 274,050
========= ========= ========= ========= =========
Gap to assets ratio ................... -4% 1% 1% 4% 13%
Cumulative gap to assets ratio ........ -4% -3% -2% 1% 15%
</TABLE>
<PAGE>
Loan Portfolio.
The following table summarizes the loan portfolio of the Company by loan
category and amount at June 30, 1999 and corresponds to appropriate regulatory
definitions. Loans with a principal amount in excess of 2% of the Company's
equity capital are generally considered to be large loans. By this standard,
large loans were those exceeding $2.6 million at June 30, 1999. Large loans as a
percentage of total loans at that date were 17%.
Book Value
(in thousands)
Loans secured by real estate:
Construction and land development ....................... $ 103,612
Secured by 1-4 family residential properties ............ 222,393
Secured by multifamily (5 or more) residential properties 57,236
Secured by non-farm non-residential properties .......... 333,042
Commercial and industrial loans:
To U.S. addresses (domicile) ............................ 236,539
Loans to individuals for household, family and other personal
expenditures (consumer):
Credit cards and related plans .......................... 22,312
Other (primarily indirect automobile loans).............. 351,641
Tax exempt industrial development obligations ................ 3,134
All other loans .............................................. 3,686
Lease financing receivables, net of unearned income .......... 25,305
----------
Total ................................................... $1,358,900
==========
<PAGE>
Non-Performing Loans. The following table presents the principal amounts of non
accrual and renegotiated loans (1) at June 30, 1999 in addition to a schedule
presenting loans contractually past due 90 days or more as to interest or
principal still accruing interest. At June 30, 1999 the ratio of the allowance
for credit losses to total loans amounted to .90%. On an annualized basis, the
ratio of net charge-offs to average loans was .50% for the six month period
ended June 30, 1999
<TABLE>
<CAPTION>
June 30, December 31,
------------------- ---------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis ...... $10,469 $11,250 $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) .................. 10,469 11,250 12,369 9,857 15,106 16,695 15,292
------- ------- ------- ------- ------- ------- -------
Other real estate owned ......................... 2,343 1,987 3,114 2,265 4,237 4,260 6,093
Non-performing insurance premium
financing receivables .......................... -- -- -- -- -- 4,778 --
------- ------- ------- ------- ------- ------- -------
Total non-performing assets (1) ................. $12,812 $13,237 $15,483 $12,122 $19,343 $25,733 $21,385
======= ======= ======= ======= ======= ======= =======
Non-performing loans/total loans (1) ............ 0.77% 0.99% 1.01% 0.98% 1.65% 1.86% 2.13%
Non-performing assets/total loans and
non-performing assets (1) ................... 0.94% 1.16% 1.26% 1.20% 2.11% 2.85% 2.95%
Loans past due 90 days or more as to interest
or principal payments still accruing interest
and not included in non-accrual loans ....... $ 6,293 $ 6,556 $ 7,107 $ 5,460 $ 5,455 $ 7,992 $ 6,584
======= ======= ======= ======= ======= ======= =======
</TABLE>
Non-accrual loans(1) decreased to $10.5 million at June 30, 1999 compared
to $12.4 million at December 31, 1998. The decrease reflected approximately $1.2
million of additions, $529,000 of charge-offs, $1.6 million of payments,
$875,000 of transfers to other real estate and $123,000 of returns to accrual
status.
Other real estate owned amounted to $2.3 million at June 30, 1999 compared
to $3.1 million at December 31, 1998. Activity in the six months ended June 30,
1999 reflected $1.0 million of additions, sales and other receipts of $1.7
million and $79,000 of charge-offs.
Interest on Non-Accrual Loans(1). If interest on non-accrual loans had been
accrued, such income would have been $409,000 and $440,000, respectively for the
first six months of 1999 and 1998.
Provision for Credit Losses. The provision for credit losses for the first
six months of 1999 was $3.0 million compared to $3.5 million in the first six
months of 1998. The 1998 provision reflected a $1.5 million increase relating to
the Regent loan portfolio to increase the reserve to levels determined by an
analysis applying estimated loss ratios to the various loan categories.
- -----------------------------------------
(1) Excluding loans past due 90 days or more still accruing interest.
<PAGE>
Summary of Credit Loss Experience. The following table summarizes the credit
loss experience of JBI for the periods shown.
<TABLE>
<CAPTION>
June 30, December 31,
------------------ ---------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance in the allowance for credit losses at
beginning of period ..................... $12,407 $14,136 $14,136 $16,794 $21,492 $10,700 $ 8,189
------- ------- ------- ------- ------- ------- -------
Loans charged-off:
Commercial .............................. 152 439 908 2,254 2,510 2,817 1,336
Construction ............................ -- 213 213 -- 473 -- 190
Real estate mortgage .................... 631 1,828 2,944 4,254 4,724 1,716 2,123
Credit card ............................. 1,486 954 2,714 835 160 16 --
IPF ..................................... -- -- -- -- 8,967 -- --
Installment and lease financing ......... 1,606 858 2,059 1,362 522 435 272
------- ------- ------- ------- ------- ------- -------
Total ................................ 3,875 4,292 8,838 8,705 17,356 4,984 3,921
------- ------- ------- ------- ------- ------- -------
Recoveries:
Commercial .............................. 54 296 403 216 109 266 393
Construction ............................ -- -- -- -- -- -- --
Real estate mortgage .................... 396 236 337 1,276 901 439 196
Credit card ............................. 28 29 49 9 -- -- --
IPF ..................................... -- -- 47 757 1,482 -- --
Installment and lease financing ......... 208 133 310 89 51 59 28
------- ------- ------- ------- ------- ------- -------
Total ................................ 686 694 1,146 2,347 2,543 764 617
------- ------- ------- ------- ------- ------- -------
Net charge-offs ............................. 3,189 3,598 7,692 6,358 14,813 4,220 3,304
Acquisitions ................................ -- -- -- -- -- 6,121 3,098
Provision charged to operations ............. 2,985 3,513 5,963 3,700 10,115 8,891 2,717
------- ------- ------- ------- ------- ------- -------
Balance in allowance for credit losses at end
of period ............................... $12,203 $14,051 $12,407 $14,136 $16,794 $21,492 $10,700
======= ======= ======= ======= ======= ======= =======
Net charge-offs/average loans ............... 0.50% 0.69% 0.71% 0.67% 1.63% 0.53% 0.51%
</TABLE>
Increased installment and lease financing charge-offs reflected the
significant growth in consumer installment loans.
<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 believes that Fiserv is on schedule, based upon infromation from
that company. Management does not expect that the costs of bringing the
Company's systems into Y2K compliance will 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 Federal Reserve Bank and other
regulatory agencies, both federal and state, all purport to be in compliance or
on schedule with Y2K issues. Vendors are substantially fungible and alternative
sources for any with Y2K problems can be utilized. For depositors the Company
has provided public forums to discuss Y2K issues, however, the Company does not
anticipate any significant Y2K issues with its deposit base. With regard to
borrowers, each loan made since June 1, 1998 has been evaluated as to its Y2K
issues. Loan officers are in the process of determining any special exposures.
Based upon its knowledge of its portfolio, no significant special exposures are
known. The Company's allowance for credit losses will reflect any potential Y2K
related losses. The Company replaced hardware and software through prior
expenditures and did not accelerate any replacement periods. All labor costs
were incurred using existing staff. Outside vendors are being utilized during
the testing phase of the Company's plan. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
Refer to 10-K.
Part II. Other Information
Item 6. Reports on Form 8-K
1. Form 8-K filed July 29, 1999 Item (5) Other events: Second quarter 1999
earnings release.
<PAGE>
SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
JEFFBANKS, INC.
(Registrant)
Dated: August 11, 1999 By /s/ Betsy Cohen
-------------------------
Betsy Cohen
Chairperson of the Board
(Chief Executive Officer)
Dated: August 11, 1999 By /s/ Martin F. Egan
------------------------------------------
Martin F. Egan
Vice President & Controller
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 50087
<INT-BEARING-DEPOSITS> 2120
<FED-FUNDS-SOLD> 79100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 313281
<INVESTMENTS-CARRYING> 675
<INVESTMENTS-MARKET> 687
<LOANS> 1358900
<ALLOWANCE> 12203
<TOTAL-ASSETS> 1857384
<DEPOSITS> 1384423
<SHORT-TERM> 205064
<LIABILITIES-OTHER> 24580
<LONG-TERM> 111395
0
0
<COMMON> 10583
<OTHER-SE> 121339
<TOTAL-LIABILITIES-AND-EQUITY> 1857384
<INTEREST-LOAN> 52816
<INTEREST-INVEST> 9095
<INTEREST-OTHER> 544
<INTEREST-TOTAL> 62455
<INTEREST-DEPOSIT> 23213
<INTEREST-EXPENSE> 31087
<INTEREST-INCOME-NET> 31368
<LOAN-LOSSES> 2985
<SECURITIES-GAINS> 712
<EXPENSE-OTHER> 26184
<INCOME-PRETAX> 10283
<INCOME-PRE-EXTRAORDINARY> 8131
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8131
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 4.24
<LOANS-NON> 10469
<LOANS-PAST> 6293
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12407
<CHARGE-OFFS> 3875
<RECOVERIES> 686
<ALLOWANCE-CLOSE> 12203
<ALLOWANCE-DOMESTIC> 12203
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
