10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act Of 1934 (Fee Required) For the fiscal year ended December 31, 1994 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act Of 1934 (No Fee Required) Commission File Number 0-9101 JEFFERSON BANKSHARES, INC. Incorporated in the IRS No. 54-1104491 State of Virginia 123 East Main Street Charlottesville, Virginia 22902 Telephone (804) 972-1100 No securities are registered pursuant to Section 12(b) of the Act. Securities registered pursuant to Section 12(g) of the Act: Common Stock, 2.50 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required 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 disclosures of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [X] As of January 31, 1995, the aggregate market value, based upon the last sale price for that day, of the voting stock held by nonaffiliates of Jefferson Bankshares, Inc. was $291,484,222. As of January 31, 1995, Jefferson Bankshares, Inc. had issued and outstanding 15,170,250 shares of the 32,000,000 authorized shares of its $2.50 par value common stock. DOCUMENTS INCORPORATED BY REFERENCE The portions of the Annual Report to Shareholders for the year ended December 31, 1994 referred to in Parts I, II and IV are incorporated by reference into Parts I, II and IV. The portions of the Proxy Statement for the Corporation's Annual Meeting of Shareholders to be held on April 25, 1995 referred to in Part III are incorporated by reference into Part III. Part I Item 1. Business Incorporated herein by reference is the information appearing under the heading "Business of Jefferson Bankshares" on page 4 of the 1994 Annual Report to Shareholders ("1994 Annual Report"). Also incorporated herein by reference is the information on pages 7 and 9 of the 1994 Annual Report as to the distribution of the Corporation's assets, liabilities and shareholders' equity and interest rates and interest differential; pages 15 and 16 of the 1994 Annual Report as to the Corporation's investment portfolio; pages 11 through 15 of the 1994 Annual Report as to the Corporation's loan portfolio (including the Corporation's loan loss experience); pages 16 and 17 of the 1994 Annual Report as to the Corporation's deposits; page 19 of the 1994 Annual Report as to the Corporation's return on equity and assets; and page 17 of the 1994 Annual Report as to the Corporation's short-term borrowings. Item 2. Properties Incorporated herein by reference is the information appearing under the heading "Business of Jefferson Bankshares" on page 4 of the 1994 Annual Report and the discussion of premises and equipment in Note 7 (entitled "Premises and Equipment") to the consolidated financial statements in the 1994 Annual Report. Item 3. Legal Proceedings There are no legal proceedings against the Corporation that would have a material adverse effect on the Corporation or its consolidated financial condition. Item 4. Submission of Matters to a Vote of Security Holders None Executive Officers of Jefferson Bankshares The executive officers of the Corporation are set forth below. All officers are elected annually to serve at the discretion of the Board of Directors. Except as otherwise noted below, each of the executive officers has worked with the Corporation or its affiliates for at least five years. O. Kenton McCartney, 51, is President and Chief Executive Officer. Robert H. Campbell, Jr., 60, is Senior Vice President and Treasurer. Allen T. Nelson, Jr., 45, is Senior Vice President and Chief Financial Officer. Mr. Nelson joined the Corporation on December 6, 1993. Prior to that date, Mr. Nelson was Senior Vice President and Controller of Dominion Bankshares, Inc. from February, 1992 until joining the Corporation. Prior to February, 1992 he served as Finance Executive Officer with C&S/Sovran Corporation. Walter A. Pace, Jr., 62, is Senior Vice President. Donald W. Fulton, Jr., 48, is Vice President-Investor Relations. William M. Watson, Jr., 40, is General Counsel and Secretary. Mr. Watson joined the Corporation on May 13, 1991. Prior to that date, he was an attorney with McGuire, Woods, Battle & Boothe. Part II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters Incorporated herein by reference is the information on page 17 under the heading "Capital Resources" and in the table captioned "Common Stock Performance and Dividends" on page 19 of the 1994 Annual Report. Item 6. Selected Financial Data Incorporated herein by reference is the information in the table captioned "Selected Financial Data" on page 5 of the 1994 Annual Report. Item 7. Management's Discussion and Analysis and Results of Operations and Financial Condition Incorporated herein by reference is the information appearing under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 5 through 20 of the 1994 Annual Report, except for the information in the tables captioned "Selected Financial Data," "Summary of Financial Results by Quarter," and "Common Stock Performance and Dividends" on pages 5, 6 and 19, respectively, of the 1994 Annual Report. Item 8. Financial Statements and Supplementary Data Incorporated herein by reference is the information appearing under the heading "Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Changes in Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements," on pages 21 through 34 of the 1994 Annual Report. Incorporated by reference is the information in the table captioned "Summary of Financial Results by Quarter" on page 6 of the 1994 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Part III Item 10. Directors and Executive Officers of Registrant The information concerning the Corporation's directors is incorporated by reference to the section entitled "Nominations for Directors" on pages 3 through 5 of the Corporation's definitive Proxy Statement for the 1995 Annual Meeting of Shareholders. The information concerning the Corporation's executive officers is incorporated by reference to Part I hereof entitled "Executive Officers of Jefferson Bankshares." Item 11. Executive Compensation The information required by this item is incorporated by reference to the sections entitled "Compensation of Executive Officers and Directors" on pages 6 through 13 of the Corporation's definitive Proxy Statement for the 1995 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference to the sections entitled "Principal Beneficial Owners" and "Shares Beneficially Owned by Directors and Executive Officers" on pages 2 and 3 of the Corporation's definitive Proxy Statement for the 1995 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated by reference to the section entitled "Loans to Officers and Directors" on page 13 of the Corporation's definitive Proxy Statement for the 1995 Annual Meeting of Shareholders. Part IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements. The following Consolidated Financial Statements of Jefferson Bankshares, Inc. and subsidiaries and the Independent Auditors' Report are incorporated by reference to pages 21 through 34 of the 1994 Annual Report: Independent Auditors' Report. Consolidated Balance Sheets at December 31, 1994 and December 31, 1993. Consolidated Statements of Income for the years ended December 31, 1994, December 31, 1993 and December 31, 1992. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, December 31, 1993, and December 31, 1992. Consolidated Statements of Cash Flows for the years ended December 31, 1994, December 31, 1993 and December 31, 1992. Notes to Consolidated Financial Statements. 2. Exhibits. The exhibits listed on the accompanying Index to Exhibits immediately following the signature page are filed as part of, or incorporated by reference into, this report. (b) Reports on Form 8-K On October 20, 1994, the Corporation filed a Form 8-K/A dated October 20, 1994, that amended the description of the Corporation's Common Stock appearing in the Corporation's Form 8-K dated January 4, 1980. Except for the information referred to in Items 1, 2, 5, 6, 7, 8 and 14(a)(1) hereof, the 1994 Annual Report will not be deemed to be filed pursuant to the Securities Exchange Act of 1934. SIGNATURES Pursuant to the requirements of Section 13 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. DATE: March 27, 1995 JEFFERSON BANKSHARES, INC. By: O. Kenton McCartney President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DATE SIGNATURE CAPACITY March 27, 1995 O. Kenton McCartney President, Chief Executive Officer and Director March 27, 1995 Allen T. Nelson, Jr. Senior Vice President and Chief Financial Officer March 27, 1995 Hovey S. Dabney Chairman of the Board March 27, 1995 John T. Casteen, III* Director March 27, 1995 Lawrence S. Eagleburger* Director March 27, 1995 Hunter Faulconer* Director March 27, 1995 Fred L. Glaize, III* Director March 27, 1995 Henry H. Harrell* Director March 27, 1995 Alex J. Kay, Jr.* Director March 27, 1995 J. A. Kessler, Jr.* Director March 27, 1995 W. A. Rinehart, III* Director March 27, 1995 Gilbert M Rosenthal* Director March 27, 1995 Alson H. Smith, Jr.* Director March 27, 1995 Lee C. Tait* Director March 27, 1995 H. A. Williamson, Jr.* Director *By: William M. Watson, Jr. Attorney-in-Fact EXHIBIT INDEX Exhibit No. Page 3. Articles of Incorporation and Bylaws: (a) Articles of Incorporation incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1984. (b) Articles of Amendment to Articles of Incorporation dated May 7, 1987, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1987. (c) Articles of Amendment to Articles of Incorporation dated March 23, 1993, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1993. (d) Amendment to Article III and Article IV, Section 5, of the Bylaws and the Amended and Restated Bylaws dated January 24, 1995, are filed herewith. 4. Instruments defining the rights of security holders including indentures: (a) Articles of Incorporation of Jefferson Bankshares', incorporated by reference to Jefferson Bankshares' 1984 Annual Report on Form 10-K. (b) Articles of Amendment to Articles of Incorporation dated May 7, 1987, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1987. (c) Articles of Amendment to Articles of Incorporation dated March 23, 1993, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1993. 10. Material Contracts: (a) Senior Officers Supplemental Pension Plan, incorporated by reference to Jefferson Bankshares' 1982 Annual Report on Form 10-K. (b) Incentive Stock Plan, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1985. (c) Amendment dated April 28, 1992 to the Incentive Stock Plan, incorporated by reference to Exhibit 10(f) to Form S-4 of Jefferson Bankshares, Inc., File No. 33-47929. (d) Split Dollar Life Insurance Plan, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1984. * (e) Executive Severance Agreement dated October 25, 1993 between Jefferson Bankshares and O. Kenton McCartney, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1993. * (f) Executive Severance Agreement dated October 25, 1993 between Jefferson Bankshares and Robert H. Campbell, Jr., incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1993. * (g) Executive Severance Agreement dated December 6, 1993 between Jefferson Bankshares, Inc. and Allen T. Nelson, Jr., is filed herewith. * (h) Amended and Restated Split Dollar Life Insurance Agreement dated October 29, 1993 between Jefferson Bankshares and Robert H. Campbell, Jr., incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1993. * (i) Amended and Restated Split Dollar Life Insurance Agreement dated October 29, 1993 between Jefferson Bankshares and O. Kenton McCartney, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1993. * (j) Split Dollar Life Insurance Agreement dated January 6, 1994 between Jefferson Bankshares, Inc. and Allen T. Nelson, Jr., is filed herewith. 13. Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders 21. Subsidiaries of the Registrant 23. Consents of Experts and Counsel Consent of KPMG Peat Marwick LLP to incorporation by reference of auditors' reports into Jefferson Bankshares' Registration Statements on Form S-3 and Form S-8 is filed herewith. 24. Powers of Attorney 27. Financial Data Schedule * Management contract or compensatory plan or arrangement of the Corporation required to be filed as an exhibit EX-3 2 EXHIBIT 3(D)-BYLAWS RESOLUTIONS REGARDING THE AMENDMENT AND RESTATEMENT OF BYLAWS OF THE CORPORATION RESOLVED, that Article III of the Bylaws of the Corporation is amended by changing the references to "fifty days" to "seventy days" and Article IV, Section 5, of the Bylaws is amended by changing the references to "fifty days" to "sixty days". RESOLVED, that, after giving effect to the amendments set forth in the preceding resolution, the Bylaws of the Corporation will be restated in the form of the Amended and Restated Bylaws presented to this Board. RESOLVED, that the Secretary of the Corporation is directed to file a copy of the Amended and Restated Bylaws in the form presented to this Board with the minute book of the Corporation. AMENDED AND RESTATED BYLAWS OF JEFFERSON BANKSHARES, INC. ARTICLE I - CORPORATE SEAL The corporate seal of the Corporation shall be circular and shall have inscribed thereon, within and around the circumference, "JEFFERSON BANKSHARES, INC." In the center shall be the word "SEAL." ARTICLE II - FISCAL YEAR The fiscal year of the Corporation shall be the calendar year. ARTICLE III - CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors of this Corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, seventy days. In lieu of closing the stock transfer books the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not more than seventy days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this article, such determination shall apply to any adjournment thereof. ARTICLE IV - MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings - Meetings of stockholders may be held at such place, either within or without the Commonwealth of Virginia, as may be provided in the notice of the meeting. Section 2. Annual Meeting - The annual meeting of stockholders shall be held on the fourth Tuesday in April of each year. Section 3. Substitute Annual Meetings - If in the judgment of the Chairman of the Board of Directors (the "Chairman"), or the Board of Directors, because of the unavailability of necessary information, or for other sufficient reason, an annual meeting of stockholders should not be held on the day designated in these Bylaws, a substitute annual meeting may be called in accordance with the provisions of Section 4 of this Article. Any meeting so called shall be designated and treated for all purposes as the annual meeting. Section 4. Special Meetings - Special meetings of the stockholders may be called by the Chairman, the President, the Board of Directors or the holders of not less than one-tenth of all the shares entitled to vote at the meeting. Section 5. Notice of Meetings - Written notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting (except as a different time is specified in these Bylaws or by law) either personally or by mail, by or at the direction of the Chairman, the President, the Secretary, or the officer or persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. Notice of a stockholders' meeting to act on (i) an amendment of the Articles of Incorporation; (ii) a reduction of stated capital; (iii) a plan of merger, consolidation or exchange; or (iv) the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all the property or assets of the Corporation if not made in the usual and regular course of its business, shall be given, in the manner provided above, not less than twenty-five nor more than sixty days before the date of the meeting. Any such notice shall be accompanied by (a) a copy of the proposed amendment; (b) a copy of the proposed plan of reduction or merger, consolidation or exchange; or (c) shall state that a purpose or one of the purposes of the meeting is to consider a proposed sale, lease, exchange, mortgage, pledge or other disposition of property and assets of the Corporation other than in the usual and regular course of its business. Section 6. Quorum; Required Vote - A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. Treasury shares shall not be counted to establish a quorum. If a quorum is present the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, except to the extent (i) that the vote of a greater number or voting by classes is required by law or the Articles of Incorporation; (ii) that in elections of directors the provisions of Article V, Section 3 of these Bylaws shall apply; and (iii) that a vote is required on any of the matters set forth in the second paragraph of Section 5 of this Article IV of these Bylaws, in which event the affirmative vote of more than two-thirds of the shares entitled to vote thereon shall be the act of the stockholders. Less than a quorum may adjourn. Section 7. Shares Entitled to Vote; Proxies - Each outstanding share of common stock shall be entitled to vote on each matter submitted to a vote at a meeting of stockholders. Treasury shares shall not be entitled to any vote. Shares of other classes of stock, if any, shall be entitled to such vote as may be provided in the Articles of Incorporation. A stockholder may vote either in person or by proxy executed by the stockholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from its date, unless otherwise provided in the proxy. Section 8. Waiver of Notice - Notwithstanding any other provisions of law, the Articles of Incorporation, or these Bylaws, whenever notice of any meeting for any purpose is required to be given to any stockholder, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be the equivalent to the giving of such notice. A stockholder who attends a meeting shall be deemed to have had timely and proper notice of the meeting unless he attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE V - DIRECTORS Section 1. General Powers - The business and affairs of the Corporation shall be managed by the Board of Directors subject to any requirement of stockholder action contained in the law of the state in which the Corporation was organized or in the articles of incorporation. Section 2. Number, Term and Qualification - The number of directors of the Corporation shall be not less than five nor more than twenty-five. These numbers may be increased or decreased from time to time by amendment to these Bylaws in the manner provided by law. No decrease in number shall have the effect of shortening the term of any incumbent director. The number of directors to be elected by stockholders, within the range established by these Bylaws, at the next meeting at which directors are to be elected shall be established by resolution of the Board of Directors, and such number shall be deemed to be the number of directors fixed by these Bylaws; provided that (i) in the event a vacancy on the Board of Directors occurs which the Board of Directors declines to fill, the number of remaining incumbent directors shall be deemed to be the number of directors fixed by these Bylaws; and (ii) the Board of Directors shall have the right during the period between meetings of the stockholders at which directors are elected to increase the number of directors formerly elected by the stockholders until the maximum number set forth in these Bylaws is reached, and the number of directors as so increased shall be deemed to be the number of directors fixed by these Bylaws. In the absence of a resolution of the Board of Directors setting the number of directors to be elected at a meeting of stockholders held for that purpose, the number of directors to be elected at such meeting shall be the number last elected by the stockholders. Each director shall hold office until his death, resignation, retirement, or removal or until his successor is elected. Any person who is elected a Director for the first time after December 31, 1981, or who is again elected a Director after such date without having continuously been a Director since such date will be under age 70 at the time of such election. Any Director who has not continuously been a Director since before January 1, 1982, will not be reelected once he becomes age 70. Section 3. Election of Directors - Nominations for election to the Board of Directors may be made by the Board of Directors or by any holder of any shares of the capital stock of the Corporation entitled to vote for the election of directors. Nominations other than those made by or on behalf of the management of the Corporation will be made in writing delivered or mailed to the president of the Corporation not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors. However, if notice of the meeting is mailed to shareholders less than 21 days before the date set for the meeting, the nomination must be mailed or delivered not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. The notice concerning the nomination must contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the Corporation that will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder. Nominations not made in accordance herewith may be disregarded by the chairman of the meeting at his discretion, and upon his instructions the vote tellers will disregard all votes cast for each such nominee. At each meeting of the stockholders for the election of directors at which a quorum is present, the persons receiving the greatest number of votes will be the directors. If the election of directors is not held on the day designated for any annual meeting or at any subsequent session of such meeting, the Directors will cause the election to be held at a special meeting of the stockholders as soon thereafter as may be convenient. Section 4. Removal - At a meeting called expressly for that purpose any director may be removed, with or without cause, by a vote of stockholders holding a majority of the shares entitled to vote at an election of the directors. If any directors are so removed, new directors may be elected at the same meeting. Section 5. Vacancies - Any vacancy occurring in the Board of Directors, including a vacancy resulting from an increase by not more than two in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. Section 6. Compensation - The Board of Directors may fix the compensation of directors for their services as such and may provide for the payment of all expenses incurred by directors in attending regular and special meetings of the Board of Directors. ARTICLE VI - DIRECTORS MEETINGS Section 1. Regular Meetings - Regular meetings of the Board of Directors shall be held annually, immediately following each annual meeting of stockholders, for the purpose of electing officers and carrying on such other business as may properly come before such meeting, and, if necessary, immediately following each special meeting of stockholders to consider and act upon any matter which may properly come before such meeting. Any such meeting shall be held at the place where the stockholders meeting was held. The Board of Directors may also adopt a schedule of additional meetings which shall be considered regular meetings, and such meetings shall be held at the time and place, within or without the Commonwealth of Virginia, as the Chairman or, in his absence, the President shall designate. Section 2. Special Meetings - Special meetings of the Board of Directors shall be held on the call of the Chairman, the President or any three members of the Board of Directors at the principal office of the Corporation or at such other place as the Chairman or, in his absence, the President, shall designate. Section 3. Telephone Meetings - The Board of Directors may participate in a meeting by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. When such a meeting is conducted by means of conference telephone or similar communications equipment, a written record shall be made of the action taken at such meeting. Section 4. Notice of Meetings - No notice need be given of regular meetings of the Board of Directors. Notice of special meetings of the Board of Directors will be given either (i) by mail or telegram sent at least 24 hours before the time of the meeting or (ii) by telephone or in person at least 6 hours before the time of the meeting. Such notice will include the time and purpose of the meeting and the place at which or the means by which the meeting will be held. Notice given by mail or telegram will be deemed to be given when sent, whereas notice given by telephone or in person will be deemed to be given only when actually given to the person to be notified. Section 5. Quorum; Required Vote - A majority of the directors shall constitute a quorum for the transaction of business by the Board of Directors. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the act of a greater number is required by law or these Bylaws. Section 6. Waiver of Notice - Notwithstanding any other provisions of law, the Articles of Incorporation or these Bylaws, whenever notice of any meeting for any purpose is required to be given to any director a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be the equivalent to the giving of such notice. A director who attends a meeting shall be deemed to have had timely and proper notice of the meeting unless he attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Section 7. Actions by Directors without Meeting - Any action required to be taken at a meeting of the directors, or any action which may be taken at a meeting of the directors, may be taken without a meeting if a consent in writing, setting forth the action, shall be signed either before or after such action by all of the directors. Such consent shall have the same force and effect as a unanimous vote. ARTICLE VII - COMMITTEES OF DIRECTORS Section 1. Executive Committee - The Board of Directors, by resolution adopted by a majority of the number of directors fixed by these Bylaws, may designate four or more directors to constitute an executive committee. A majority of the members of the executive committee shall constitute a quorum. The executive committee shall meet on the call of any of its members. Notice of any such meeting shall be given by mail, telephone, telegraph or other means by the close of business on the day before such meeting is to be held. The executive committee shall have and may exercise all of the authority of the Board of Directors except to approve (i) an amendment of the Articles of Incorporation; (ii) a plan of merger or consolidation; (iii) a plan of exchange under which the Corporation would be acquired; (iv) the sale, lease or exchange, or the mortgage or pledge for a consideration other than money, of all, or substantially all, the property and assets of the Corporation otherwise than in the usual and regular course of its business; (v) the voluntary dissolution of the Corporation; (vi) revocation of voluntary dissolution proceedings; (vii) any employee benefit plan involving the issuance of common stock; or (viii) the compensation paid to a member of the executive committee. Section 2. Audit Committee - The Board of Directors shall appoint an audit committee consisting of not less than three directors, none of whom shall be officers, which committee shall regularly review the adequacy of internal financial controls, review with the Corporation's independent public accountants the annual audit and other financial statements, and recommend the selection of the Corporation's independent public accountants. Section 3. Other Committees - The Board of Directors may designate such other committees with limited authority as it may deem advisable. Section 4. Telephone Meetings - Committees may participate in meetings by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. When such a meeting is conducted by means of a conference telephone or similar communications equipment, a written record shall be made of the action taken at such meeting. Section 5. Actions by Committees without Meetings - Any action which may be taken at a committee meeting, may be taken without a meeting if a consent in writing, setting forth the action, shall be signed either before or after such action by all of the members of the committee. Such consent shall have the same force and effect as a unanimous vote. Section 6. Committee Rules - Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may adopt, amend and repeal rules for the conduct of its business. In the absence of direction by the Board of Directors or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee. Except to the extent that these Bylaws contain provisions to the contrary, in other respects each committee shall conduct its business in the same manner as the Board of Directors is required to conduct its business. ARTICLE VIII - OFFICERS Section 1. Officers - The officers of the Corporation shall be a Chairman, a President, a Secretary, and a Treasurer, and in the discretion of the Board of Directors, one or more Vice Presidents and other officers and assistant officers as may be deemed necessary or advisable to carry on the business of the Corporation. The Chairman and the President shall be members of the Board of Directors. Any two offices may be combined in the same person except the offices of President and Secretary. Section 2. Election, Term - Officers shall be elected at the annual meeting of the Board of Directors immediately following the annual meeting of stockholders, and may be elected at such other time or times as the Board of Directors shall determine. They shall hold office, unless removed, until the next annual meeting of the Board of Directors or until their successors are elected. Any officer may resign at any time upon written notice to the Chairman, the President, or the Board of Directors. Such resignation shall take effect at the time specified therein and, unless otherwise specified therein, no acceptance of such resignation shall be necessary to make it effective. Section 3. Removal of Officers - Any officer may be removed, with or without cause, at any time by the Board of Directors at any duly called meeting. Section 4. Duties of the Chairman - The Chairman shall preside at all meetings of the Board of Directors and shareholders. He shall be an ex- officio member of all committees of the Corporation and shall perform such duties as may, from time to time, be assigned to him by the Board of Directors. Section 5. Duties of the President - The President shall have general charge and supervision of the business of the Corporation and, in the absence of the Chairman, shall preside at all meetings of the Board of Directors and shareholders. He shall be an ex-officio member of all committees of the Corporation and shall perform such duties as may, from time to time, be assigned to him by the Board of Directors. Section 6. Duties of Vice Presidents - The Vice Presidents shall perform such duties as may, from time to time, be assigned to them by the Chairman, the President or the Board of Directors. Section 7. Duties of the Secretary - The Secretary shall have the duty to see that a record of the proceedings of each meeting of the stockholders and the board of directors is properly recorded and the notices of all such meetings are duly given in accordance with the provisions of these Bylaws or as required by law; he shall be custodian of the records of the Corporation; he may affix the corporate seal to any document the execution of which, on behalf of the Corporation, is duly authorized, and when so affixed may attest the same; and, in general, he shall perform all duties incident to the office of secretary of a Corporation, and such other duties as, from time to time, may be assigned to him by the Chairman, the President or the Board of Directors. Section 8. Duties of the Treasurer - The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by or under authority of the Board of Directors; if required by the Board of Directors, he shall give a bond for the faithful discharge of his duties, with such surety or sureties as the Board of Directors may determine; he shall keep or cause to be kept full and accurate records of all receipts and disbursements in books of the Corporation and shall render to the President and to the Board, whenever requested, an account of the financial condition of the Corporation; and, in general, he shall perform all the duties incident to the office of treasurer of a corporation, and such other duties as may be assigned to him by the Chairman, the President or the Board of Directors. Section 9. Duties of other Officers - The other officers, if any, of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in a resolution of the Board of Directors creating the offices to which they have been elected and, to the extent that such powers and duties are not so stated, they shall have such powers and duties as generally pertain to their respective offices, subject to the control of the Chairman, the President or the Board of Directors. Section 10. Voting Securities of other Corporations - Any one of the Chairman, the President, the Secretary or the Treasurer shall have power to act for and vote on behalf of the Corporation at all meetings of the stockholders of any corporation in which this Corporation holds stock, or in connection with any consent of stockholders in lieu of any such meeting. Section 11. Bonds - The Board of Directors may by resolution require that any or all officers, agents and employees of the Corporation give bond to the Corporation, with sufficient sureties, conditioned upon the faithful performance of the duties of their respective offices or positions. ARTICLE IX - CERTIFICATES OF STOCK Section 1. Form and Issuance - Certificates of stock shall be in such form as may be approved by the Board of Directors, and shall be signed by the President or any Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and may (but need not) be sealed with the seal of the Corporation or a facsimile thereof. Any such signature may be a facsimile, engraved or printed, if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. In case any such officer who has signed or whose facsimile signature has been placed upon any such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue. Section 2. Lost, stolen or destroyed Stock Certificates; Issuance of new Certificates - The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 3. Transfer - The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issue, registration and transfer of certificates of stock and may appoint transfer agents or clerks and registrars thereof. Unless otherwise provided, transfers of shares of stock by the Corporation shall be made upon its books by surrender of the certificates for the shares transferred accompanied by an assignment in writing by the holder and may be accomplished either by the holder in person or by a duly authorized attorney-in-fact. ARTICLE X - AMENDMENTS Section 1. New Bylaws and Alterations - These Bylaws may be amended or repealed and new bylaws may be made at any regular or special meeting of the Board of Directors by the vote of a majority thereof. However, bylaws made by the Board of Directors may be repealed or changed and new bylaws may be made by the stockholders and the stockholders may prescribe that any bylaw made by them shall not be altered, amended, or repealed by the directors. EX-10 3 EXHIBIT 10(G)-EXECUTIVE SEVERENCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT AGREEMENT between Jefferson Bankshares, Inc., a Virginia corporation ("Jefferson"), and Allen T. Nelson, Jr. (the "Executive"), WITNESSETH: WHEREAS, the Board of Directors of Jefferson (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control of Jefferson or to effect a business combination, it is in the best interest of Jefferson and its present and future shareholders that the business of Jefferson be continued with a minimum of disruption, and that such objective will be achieved if key management employees of Jefferson and its subsidiaries are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during such period; and WHEREAS, Jefferson believes the giving of such assurances by Jefferson will (a) secure the continued services of both its key operational and management executives in the performance of both their regular duties and such extra duties as may be required of them during such period of uncertainty, (b) be able to rely on such executives to manage the affairs of Jefferson and its subsidiaries during any such period with less concern for their personal risks, and (c) have the ability to attract new key executives as needed; and WHEREAS, the Executive Compensation Committee (the "Committee") of the Board has recommended, and the Board has approved, entering into severance agreements with key management executives of Jefferson and its subsidiaries in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of Jefferson or one of its subsidiaries; NOW, THEREFORE, Jefferson and Executive agree as follows: 1. Change of Control. When used in this Agreement, the term "Change of Control" means: (a) The acquisition, other than from Jefferson, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 20% or more of either the then outstanding shares of common stock of Jefferson or the combined voting power of the then outstanding voting securities of Jefferson entitled to vote generally in the election of directors, but excluding for this purpose, any such acquisition by Jefferson or any of its subsidiaries, or any employee benefit plan (or related trust) of Jefferson or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the common stock and voting securities of Jefferson immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding shares of common stock of Jefferson or the combined voting power of the then outstanding voting securities of Jefferson entitled to vote generally in the election of directors, as the case may be; or (b) Individuals who, as of the date hereof, constitute the Board (as of the date hereof of "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election or nomination for election by Jefferson's shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of Jefferson (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934); or (c) Approval by the shareholders of Jefferson of a reorganization, merger or consolidation, in each case, with respect to which the individuals and entities who were the respective beneficial owners of the common stock and voting securities of Jefferson immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or a complete liquidation or dissolution of Jefferson or of its sale or other disposition of all or substantially all of the assets of Jefferson. 2. Employment. Jefferson and Executive hereby agree that, if Executive is in the employ of Jefferson on the date on which a Change of Control occurs (the "Change of Control Date") Jefferson will continue to employ Executive and Executive will remain in the employ of Jefferson, for the period commencing on the Change of Control Date and ending on the second anniversary of such date (the "Employment Period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the Change of Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change of Control Date. Employment by a subsidiary of Jefferson shall be considered employment by Jefferson. 3. Compensation and Benefits. During the Employment Period, Jefferson (or the subsidiary employing Executive, as the case may be) will (a) continue to pay the Executive a salary and compensation related benefits at not less than the level applicable to Executive on the Change of Control Date, (b) continue bonus plans in effect on the Change of Control Date and continue to pay the Executive bonuses in amounts not less in amount than those paid during the 12-month period preceding the Change of Control Date, and (c) continue employee benefit programs as to Executive at levels in effect on the Change of Control Date (but subject to such reductions as may be required to maintain such plans in compliance with applicable federal law and regulations applicable to employee benefit programs). 4. Termination of Employment. (a) If during the Employment Period (i) Executive's employment is terminated by Jefferson (or a subsidiary of Jefferson), (ii) there is a material reduction in Executive's compensation or benefits, or a material change in Executive's status, working conditions or management responsibilities, or (iii) Executive is required to change his place of employment, and Executive voluntarily terminates his or her employment within 60 days of any such event, or the last in a series of events, then Executive shall be entitled to receive, subject to the provisions of (c) and (d) below, a lump sum payment equal to 200% of Executive's "base amount" as determined under (b) below. Payment shall be subject to and net of all applicable federal and state withholding taxes and shall be paid to the Executive within 30 business days after his termination of employment. If Executive terminates his employment prior to the Change of Control Date or during the Employment Period, and the events described in (i), (ii) or (iii) have not occurred, his rights under this Agreement shall terminate. (b) The Executive's "base amount" for purposes of this paragraph shall be his base salary. If Executive has not been employed for a 12-month period, his "base amount" shall be his annualized base salary at the rate then in effect. Bonuses (including the value of vested awards under Jefferson's Incentive Stock Plan) paid or taxable to Executive during the 12-month period preceding his termination of employment pursuant to paragraph (a), shall be included in the Executive's "base amount" to the extent the Board has specifically authorized such inclusion. As of the date of the execution of this Agreement, the Board has not authorized the inclusion of bonuses in Executive's "base amount." (c) The amount payable to Executive under (a) shall be reduced to the extent necessary so that the amounts payable to Executive under this Agreement, when added to (i) any amounts he becomes entitled to receive under any other compensations arrangement maintained by Jefferson (or a subsidiary) which become payable upon or as a result of the exercise by Executive of rights which are contingent on a Change of Control, and (ii) the value of rights that arise or are accelerated as a result of a Change of Control event described in paragraph (a) (such as, for example, the accelerated right to exercise stock options, stock appreciation rights, or redeem stock units), but only to the extent the value of such payments or rights described in (i) and (ii) would be considered a "parachute payment" under Internal Revenue Code Section 280G and regulations thereunder, do not equal or exceed 300% or the then permissible percentage of the Executive's "base amount" (as computed in accordance with Internal Revenue Code provisions and regulations), whichever is less, for determining whether Executive has received an excess parachute payment. (d) If at the time the events occur described in (a)(i), (ii) or (iii) entitling Executive to the payment provided for in paragraph (a) there also exists an employment agreement or other compensatory arrangement between Executive and Jefferson (or a subsidiary of Jefferson) pursuant to which Executive becomes entitled to receive, as a result of a Change of Control, a payment (or series of payments), the payment provided for in (a) shall be reduced (but not below zero) by the payment (or present discontinued value of a series of payments) under such employment agreement or other compensatory arrangement. (e) In determining the present discounted value of a series of payments to be taken into account under this Section 4, the interest rate shall be equal to 120% of the applicable federal rate determined under Internal Revenue Code Section 1274(d), compounded semi-annually, on the date this Agreement was executed. The applicable federal short- term, mid-term and long-term rates on the date this Agreement was executed were 4.55%, 6.01% and 7.16%, respectively. (f) If Executive becomes entitled to a payment under this Agreement, Jefferson shall compute the proper amount. In applying the limitations of Internal Revenue Code Section 280G, and regulations and rulings thereunder, Jefferson shall apply the applicable provision in good faith using the interpretation that is most likely to avoid the imposition of the excise tax on Executive and ensure the deductibility of payments by Jefferson. 5. Indemnification. If litigation shall be brought to enforce or interpret any provision of this Agreement, or if Executive shall have to institute litigation brought in good faith to enforce any of his rights under the Agreement, Jefferson shall indemnify Executive for his reasonable attorney's fees and disbursements incurred in any such litigation. 6. Confidentiality. Executive recognizes that he has or will have access to and may participate in the origination of non-public confidential information and will owe a fiduciary duty with respect to such information to Jefferson. Confidential information includes, but is not limited to, trade secrets, supplier information, pricing information, internal corporate planning, Jefferson secrets, methods of marketing, methods of branch selection and operation, ideas and plans for development, historical financial data and forecasts, long range plans and strategies, and any other data or information of or concerning Jefferson that is not generally known to the public or in the industry in which Jefferson is engaged. Executive agrees that from the date of this Agreement and throughout the Employment Period he will, except as specifically authorized by Jefferson in writing, maintain in strict confidence and will not use or disclose, other than disclosure made in the ordinary course of business or to other employees of Jefferson, any confidential information belonging to Jefferson. If Executive shall breach the terms of Section 6, all of his rights under this Agreement shall terminate. 7. Governing Law. This Agreement shall be construed according to the laws of the Commonwealth of Virginia. 8. Amendment. This Agreement may not be amended except by the written agreement of the parties hereto. 9. Binding Effect. This Agreement shall be binding on Jefferson, its successors, and assigns. Should there be a consolidation or merger of Jefferson with or into another corporation, or a purchase of all or substantially all of the assets of Jefferson by another entity, the surviving or acquiring corporation will succeed to the rights and obligations of Jefferson under this Agreement. 10. Entire Contract. This Agreement constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, express or implied with respect to the subject matter of this Agreement. 11. Term. This Agreement shall be effective from the date of its execution by Jefferson and for twenty-four (24) months thereafter, and shall continue in effect from year to year thereafter unless Jefferson shall notify Executive in writing 30 days in advance of an anniversary of its execution that the Agreement shall terminate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement dated as of the 6th day of December, 1993. JEFFERSON BANKSHARES, INC. By /s/ Hovey S. Dabney Executive: /s/ Allen T. Nelson, Jr. EX-10 4 EXHIBIT 10(J)-EXEC. SPLIT DOLLAR LIFE INS. JEFFERSON BANKSHARES, INC. EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made this 6th day of January, 1994, between JEFFERSON BANKSHARES, INC., a Virginia corporation (the "Company") and ALLEN T. NELSON, JR., an executive employed by the Company or one of its subsidiary corporations (the "Executive"), and supersedes any prior Executive Split Dollar Life Insurance Agreement between the Company and Executive. A. The Company has adopted a Split Dollar Life Insurance Plan (the "Plan") to provide certain executive employees with additional life insurance protection under split dollar life insurance policies. B. The Company has selected Executive to receive additional life insurance protection under the Plan and Executive has elected to receive such protection. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. Where indicated by initial capital letters, the following terms shall have the following meanings: (a) Agreement: The Executive Split Dollar Life Insurance Agreement (including Schedules and attachments) entered into between the Company and Executive pursuant to the Plan. (b) Beneficiary: The person or persons designated in writing by Executive to receive the Executive Death Benefit. (c) Cause: Cause means, but is not limited to, a determination by the Company that Executive may have been guilty of criminal conduct (regardless of whether proven or admitted), gross negligence or willful misconduct in the performance of Executive's duties or otherwise, or has engaged in conduct which, if generally known, would bring discredit to or give rise to adverse publicity to the Company. (d) Company Cost: The total premiums paid to the Insurer with respect to the Policy (including premiums paid on any antecedent policy), exclusive of ratings, plus, when applicable, Withholding Taxes advanced by the Company determined under Section 9, less all amounts received from Executive for the Policy and less the amount of any outstanding Policy loan. (e) Disability: The Executive's inability to perform the duties of his job because of accident or illness, as determined by the Company. Executive will be deemed disabled, if, by reason of accident or illness, Executive becomes entitled to benefits under the Company's long-term disability program. In the event of Disability this Agreement shall remain in effect as though Executive continued in active employment by the Company until Executive becomes entitled to receive retirement benefits under the Company's Pension Plan. (f) Executive Death Benefit: The level of life insurance to which the Executive is entitled pursuant to the Plan. (g) Executive's Premium: The annual cost of term life insurance protection on the life of Executive as measured by the PS-58 rate (or substitute table) published from time to time by the Internal Revenue Service, prorated for a partial year as appropriate. (h) Insurer: Any insurance company issuing a life insurance contract on Executive's life. (i) Plan: The Jefferson Bankshares, Inc. Executive Split Dollar Life Insurance Plan. (j) Policy: One or more life insurance contracts (including paid up additional insurance) issued on the life of Executive pursuant to the Plan. The Policy number, face amount, and Executive Death Benefit are listed on Exhibit A. (k) Retirement: Termination of employment (except for Cause) at or after attainment of age 65 or, with the consent of the Company, age 55 and completion of 15 years of service with the Company or a subsidiary of the Company. (l) Roll-Out: Division of the Policy into two separate policies, one to be retained by the Company and the other to be retained by Executive. (m) Roll-Out Date: The later of the first policy anniversary on which: (i) The Company can obtain from the Insurer a policy with a cash surrender value equal to the Company Cost, and (ii) The Executive can receive a policy with a death benefit equal to the Executive Death Benefit, with no outlays required to sustain the Executive Death Benefit based upon the then current dividend schedule, and with no policy loans. (n) Termination Date: The date determined by reference to Section 11(b). (o) Withholding Taxes: The amount of state and federal income taxes required by law to be withheld by the Company from Executive with respect to bonuses paid or imputed to Executive to cover Executive's Premiums. 2. Application for Insurance. The Company and Executive will apply to the Insurer for a Policy or one or more Policies with initial coverage at least equal to the amount of insurance to which the Executive is entitled under the Plan. The Company and executive agree to take any action necessary to cause the Insurer to issue the Policy (including paid- up additional insurance on the Policy). Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. The rights of the Company and Executive under the Policy shall be subject to the terms of this Agreement. 3. Amount of Insurance. Executive shall have coverage specified as the Executive Death Benefit in the Plan. If Executive is not then insurable at standard rates, the additional premium shall be paid by the Company. 4. Ownership. The Company and Executive shall jointly own the Policy, and they shall jointly exercise all ownership rights granted to the owner by the terms of the Policy except as otherwise provided in this Agreement. The Company shall keep possession of the Policy, but the Policy shall be available to Executive during normal business hours for such purposes as are consistent with the terms of this Agreement. 5. Dividend Option. All dividends declared by the Insurer on the Policy shall be applied to purchase additional paid up life insurance on the life of Executive until such option is changed by mutual agreement of the Company and Executive. 6. Payment of Premiums. (a) The Company agrees to remit the total amount of each annual Policy premium on or before the due date of such premium, or within the grace period provided, if any. (b) At least thirty (30) days prior to the due date of each annual Policy premium, the Company shall notify the Executive of the amount of Executive's Premium to be paid by Executive to the Company as a premium payment. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and Executive will promptly upon demand reimburse the Company for all Withholding Taxes due with respect to such bonus. 7. Death Benefits. (a) Upon Executive's death, the Company and Executive's personal representative will promptly take the appropriate action to obtain the death benefits provided under the Policy, and (i) the Company shall be entitled to receive the excess of the total Policy proceeds over the Executive Death Benefit. The receipt by the Company of the excess over the Executive Death Benefit shall constitute satisfaction of Executive's obligation to the Company under this Agreement; and (ii) the Beneficiary shall be entitled to receive the Executive Death Benefit, which shall be paid in accordance with the terms of the designation and settlement option elected by Executive. (b) If at the time the Executive Death Benefit becomes payable because of Executive's death, there is no effective Beneficiary designation, the Executive Death Benefit shall be paid in accordance with the terms of the Policy. 8. Policy Loans. (a) Executive agrees that the Company, without the further consent of Executive, has the right to (i) obtain loans secured by the Policy from the Insurer or from others, and (ii) assign the Policy as security for the repayment of such loans. The amount of such loans together with interest thereon shall at no time exceed the Company Cost with respect to the Policy securing such loan. The principal amount of the loan and all interest charges with respect to any Policy loan shall be the sole obligation of and shall be paid by the Company. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. (b) If the Policy is assigned or encumbered in any way, including a Policy loan, on the date of the Executive's death or the date of the separation of the Policy into two policies pursuant to Section 12, the Company shall secure a release or discharge of the assignment or encumbrance to ensure the prompt payment of death proceeds under the Policy to the Executive's beneficiary or beneficiaries or the separation of the Policy, as the case might be. 9. Retirement or Disability. (a) If Executive becomes Disabled or his Retirement occurs before his Roll-Out Date, this Agreement and the Policy shall continue in effect until the occurrence of the Roll-Out Date. (b) During the period between the date of Executive's Disability or Retirement and the Roll-Out Date, Executive shall continue to pay Executive's Premium to the Company and the Company shall continue to pay the balance of the premiums due on the Policy. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and the Executive will upon demand reimburse the Company for all Executive's Withholding Taxes. (d) The Company will advise Executive annually of the amount of Withholding Taxes due with respect to such bonus. Within 60 days following the date of his Disability or Retirement (to the extent not already paid), and within 60 days following each succeeding annual premium due date, Executive shall pay to the Company the amount of the Executive's Withholding Taxes due the Company for the Policy year or balance of the Policy year. (e) Executive may irrevocably elect to have the Company advance Executive's Withholding Taxes, in which case the Company shall be entitled to receive from Executive on the Roll-Out Date, and Executive agrees to pay Company, an amount equal to the Executive's Withholding Taxes advanced by the Company, plus simple interest at an annual rate of 6% on the Withholding Taxes, directly by cash payment, or as a deduction from the cash values of Executive's Policy. The election permitted under this paragraph shall be made in a writing filed by Executive with the Company within 60 days after the date of Executive's Retirement or Disability, or as to succeeding Policy years, within 60 days after the Policy premium due date. 10. Termination of Employment. (a) If Executive's termination of employment occurs before his Roll-Out Date for reasons other than death, Retirement, Disability or termination by the Company for Cause, this Agreement and Executive's entire interest in his share of the Policy shall terminate and be forfeited as of the date of his termination of employment unless Executive timely makes the election hereinafter provided in subparagraph (b). If Executive makes such election, Sections 12(a) and (b) shall apply. (b) This Agreement and the Policy will continue in effect until the Policy anniversary next following the date of his termination of employment if Executive elects in writing to continue the Policy in effect and pays to the Company within 30 days of his termination date in a lump sum the amount of Executive's Premium for the balance of the Policy year. (c) If Executive makes the election as provided in subparagraph (b), the Company shall continue to pay the balance of the premiums due, if any, on the Policy with respect to the balance of the Policy year. (d) If Executive's death occurs before the 30-day election period has expired and Executive has not made the election as provided in subparagraph (b), Executive will be deemed to have died while still an employee and his rights under this Agreement and the Policy will be governed by Section 7. 11. Amendment and Termination of Agreement. (a) This Agreement may not be amended, altered, or modified except in writing and signed by the Company and the Executive. (b) This Agreement shall terminate upon the first to occur of any of the following events, each of which is a "Termination Date": (i) the Roll-Out Date; (ii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has not made the election permitted under Section 10(b), the date of his termination of employment (unless Committee determines that Executive shall be treated as an active employee after a termination of employment); (iii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has made the election permitted under Section 10(b), the Policy anniversary next following the date of Executive's termination of employment; (iv) cessation of the Company's business or the bankruptcy, receivership or dissolution of the Company, unless the Company's business is continued by a successor corporation or business entity; (v) termination of the Agreement as of a Policy anniversary date by Executive during employment upon written notice to the Company; or (vi) termination of Executive's employment by the Company for Cause. 12. Disposition of the Policy. (a) If the Termination Date is the Roll-Out Date, Executive shall retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated. The Company shall have the unqualified right to receive from the cash surrender value of the Policy an amount in cash equal to the Company Cost or, alternatively, a policy from the Insurer that has a cash surrender value equal to the Company Cost, at the election of the Company. (b) Except as provided in Sections 10(a) and 12(c), if the Termination Date is not the Roll-Out Date, Executive and the Company shall each retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated in the following manner: (i) Executive shall, subject to the other provisions of this Section 12(b), retain an insurance policy with a death benefit equal to the then Executive Death Benefit together with the attendant cash surrender value; and (ii) the Company shall have the unqualified right to receive an insurance policy having a death benefit equal to the difference between the Executive Death Benefit and the death benefit provided by the Policy together with the remaining cash surrender value of the Policy. If on the Termination Date the cash surrender value of the insurance policy to be issued to the Company pursuant to (ii) is less than the Company Cost, Executive shall elect in writing to (x) pay the Company in cash an amount equal to the difference between the cash surrender value of the Company's insurance policy and the Company Cost; (y) accept an insurance policy with a reduced death benefit that has a cash surrender value reduced and allocated to the Company to the extent of the difference described in (i); or (z) surrender to the Company his ownership rights to the Policy, but retaining the right to receive from the Company cash in an amount equal to any excess cash surrender value over the Company Cost. Executive's election shall be made and filed with, and any cash required by Executive's election paid to, the Company on or before the Termination Date. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to implement the provisions of this subparagraph. If Executive fails to make an election by the Termination Date, Executive shall be deemed to have elected to surrender the Policy as provided in clause (z). An example of the application of Section 12(b) is attached as Exhibit B. (c) If Executive's employment is terminated for Cause (as determined by the Committee), Executive agrees that his rights under this Agreement and the Policy (and the rights of Executive's Beneficiary) shall terminate and be forfeited. Executive further agrees to execute such documents as may be necessary to evidence Executive's waiver and transfer of Executive's rights in the Policy to the Company. Executive authorizes the Company to execute the Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. 13. Termination of the Plan. Notwithstanding anything contained in this Agreement to the contrary, a termination of the Plan will not adversely affect the rights of Executive under this Agreement and, unless otherwise agreed by Executive and the Company, this Agreement will continue as though the Plan were still in effect. 14. Company's Rights to Set-Off Under the Policy. If, upon termination of employment, Executive is indebted to the Company or a subsidiary of the Company for any reason (other than for a personal or commercial loan from the Company or a subsidiary of the Company), the Company shall have the right to recover such indebtedness from the cash value of the Policy in addition to any other amounts to which the Company may be entitled pursuant to this Agreement. 15. Miscellaneous. (a) This Agreement shall not affect any rights the Executive may otherwise have under the pension, profit sharing or other employee benefit plan (except group term life insurance) established by the Company. (b) This Agreement shall be binding on and inure to the benefit of both the Company, its successors and assigns, and the Executive, his Beneficiary, assigns and his personal representative. The Agreement shall be interpreted in accordance with the laws of the Commonwealth of Virginia. (c) Except as permitted by law or pursuant to Section 15(f) or by the Company's written consent, any benefits to which the Executive or Executive's Beneficiary may become entitled under this Agreement shall not be subject to anticipation, alienation, sale, transfer, assignment, or pledge. The Company shall not be liable for, or subject to, the debts, contracts, liabilities, or torts of any person entitled benefit under this Agreement. (d) This Agreement shall not confer upon the Executive any legal or equitable right against the Company except as expressly provided in this Agreement, the Plan and the Policy. (e) Neither this Agreement, the Plan nor the Policy shall constitute an inducement or consideration for the employment of the Executive and shall not give the Executive any right to be retained in the employ of the Company. The Company hereby retains the right to discharge the Executive at any time, with or without Cause. (f) The Executive's interest under this Agreement, the Plan and the Policy, may be assigned by the Executive upon written notice to the Company. (g) If a provision of this Agreement is not valid or enforceable, that fact in no way affects the validity or enforceability of any other provision. (h) Whenever any words are used in this Agreement in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings used in this Agreement are inserted for convenience or reference, are not part of this Agreement and are not to be considered in the construction of this Agreement. (i) All notices provided for or permitted to be given under any of the provisions of this Agreement will be in writing and will be deemed to have been duly given or served and delivered personally or by overnight courier, telecopied or deposited in the U.S. Mail by Registered or Certified Mail, return receipt requested, postage prepaid and addressed as follows: If to the Company: Jefferson Bankshares, Inc. P. O. Box 711 Charlottesville, Virginia 22902 Attention: Chief Executive Officer If to the Executive: Allen T. Nelson, Jr. 6700 Hidden Woods Roanoke, Virginia 24018 or to such other person or address as may be given in writing by either party to the other in accordance with this paragraph. In consideration of the foregoing, the Company and the Executive have executed this Agreement in duplicate, all as of the day and year first written above. JEFFERSON BANKSHARES, INC. By: /s/ O. Kenton McCartney /s/ Allen T. Nelson, Jr. Exhibit A Specification of Certain Terms of the Policy Policy Number: 7 244 105 Face Amount: $139,000 Executive Death Benefit: $135,000 Policy Number: 9 608 275 Face Amount: $205,000 Executive Death Benefit: $175,000 Exhibit B Example of the Application of Section 12(b) Section 12(b) provides that in the event the Policy is separated on a date other than the Roll-Out Date, Executive and the Company will each receive a policy that contains a portion of the death benefits and cash values in the Policy. Because separation of the Policy is occurring before the Roll-Out Date, Executive and the Company cannot each receive the benefits that they would receive if the separation were to occur at the Roll-Out Date. Section 12(b) provides a mechanism for determining the amounts that Executive and the Company will receive. Examples of the application of Section 12(b) are set forth below: 1. Assume (i) that Executive is a male, age 45 with no ratings; (ii) the Policy was issued in 1989; (iii) that the policy year is from November 1 through October 31; (iv) that the face amount of the Policy at the date of issue was $115,000; (v) that the Executive Death Benefit is $100,000; (vi) that Executive voluntarily leaves employment with the Company on January 1, 1994 (i.e., during policy year 5) and makes the necessary election and payments required by Section 10 to continue the Policy until October 31, 1994 (i.e., the end of the then current policy year); (vii) that the dividend rate for the Policy has remained unchanged from the date of issuance; and (viii) that on October 31, 1994, the Company Cost is $11,303, the total death benefit of the Policy is $122,357 (of which $115,000 is the face amount of the original Policy and $7,357 is the amount of paid-up additions), the cash surrender value of the Policy is $6,789 (of which $4,636 is allocated to the original Policy and $2,153 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1994. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $4,031 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the fifth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $22,357 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1994 ($122,357)) and with guaranteed cash surrender values in the amount of $2,758 (i.e., the difference between the total cash value of the Policy on October 31, 1994 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,545 less than the Company Cost (i.e., $11,303-$2,758). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $4,031 ($8,545) Company $ 22,357 $2,758 $8,545 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company or elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $0 Company $122,357 $6,789 $0 2. Assume the same facts in the first example except (i) that the Executive voluntarily leaves employment with the Company on January 1, 1998 (i.e., during policy year 9) and makes the necessary election and payments required by Section 10 to continue the Policy until October 31, 1998 (i.e., the end of the then current policy year); and (ii) that on October 31, 1998, the Company Cost is $19,124, the total death benefit of the Policy is $140,200 (of which $115,000 is the face amount of the original Policy and $25,200 is the amount of paid-up additions), the cash surrender value of the Policy is $22,042 (of which $13,458 is allocated to the original Policy and $8,584 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1998. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $11,703 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the ninth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $40,200 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1998 ($140,200)) and with guaranteed cash surrender values in the amount of $10,339 (i.e., the difference between the total cash value of the Policy on October 31, 1998 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,785 less than the Company Cost (i.e., $19,124-10,339). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $11,703 ($8,785) Company $ 40,200 $10,339 $8,785 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 25,000 $ 2,918 $0 Company $115,200 $19,124 $0 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $2,918 Company $140,200 $22,042 ($2,918) EX-13 5 ANNUAL REPORT Business of Jefferson Bankshares Jefferson Bankshares is a bank holding company registered under the provisions of the Bank Holding Company Act of 1956, as amended. Jefferson was incorporated under the laws of Virginia on March 22, 1979, and became an active bank holding company on December 31, 1979, through the consolidation of NB Corporation and Southern Bankshares. The Corporation owns or controls one subsidiary bank, Jefferson National Bank, Charlottesville, Virginia, and four non-bank subsidiaries. Within the last five years Jefferson Bankshares merged its subsidiary bank, Jefferson National Bank/Tidewater into Jefferson National Bank; acquired Peoples Bank of Front Royal with two offices and approximately $60 million in total assets; and acquired the Peoples Bank of Virginia Beach with one office and approximately $14 million in assets. In addition, Jefferson Data Services, Inc., which furnished computer services to the bank, was merged into Jefferson Bankshares, and the computer operations were transferred to Jefferson National Bank. During 1994, Jefferson National Bank purchased the deposit liabilities and banking offices of Liberty Federal Savings Bank from the Resolution Trust Corporation. The transaction was completed on March 25, 1994, at which time Liberty had two banking offices in Warrenton, Virginia and total deposits of approximately $24 million. Also during 1994, Jefferson Bankshares acquired the Bank of Loudoun, a community bank with $53 million in assets, $48 million in deposits and one office in Leesburg, Virginia. The transaction with the Bank of Loudoun was completed on August 18, 1994 with the merger of Bank of Loudoun into Jefferson National Bank. Jefferson Bankshares regularly seeks reasonable opportunities to expand its asset base and trade area and related business endeavors. The Corporation provides advisory and technical assistance to its subsidiaries in the areas of services, operations, audit, planning and budgeting, and corporate activities and administration. Funds are provided to Jefferson Bankshares by dividends and management fees from its subsidiaries and short-term and long-term borrowings from nonaffiliates. Jefferson Bankshares, Inc. is regulated by the Board of Governors of the Federal Reserve System and is subject to the requirements of the Bank Holding Company Act of 1956, as amended, and Virginia laws regarding financial institution holding companies administered by the Bureau of Financial Institutions of the State Corporation Commission of Virginia. Jefferson National Bank is subject to supervision by the Office of the Comptroller of the Currency. The bank is affected by various federal and Virginia laws and regulations of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation. The various laws and regulations administered by the regulatory agencies affect corporate practices, expansion of business, and provisions of services. Also, monetary and fiscal policies of the United States directly affect bank loans and deposits and thus may affect Jefferson Bankshares' earnings. The future impact of these policies and of the continuing regulatory changes in the financial services industry cannot be predicted. On December 31, 1994, Jefferson Bankshares and its affiliates had 1,146 full-time and 138 part-time employees. Management believes that employee relations are good. As of September 30, 1994, Jefferson Bankshares had 2.9 percent of total bank deposits in Virginia. Six other bank holding companies had bank subsidiaries in Virginia with more deposits than Jefferson Bankshares. The Corporation's bank subsidiary provides retail and commercial banking and trust services and has 97 locations in Virginia from the City of Virginia Beach in the East to Augusta County in the West and Frederick County in the North. Jefferson National Bank pays competitive rates on deposits and other interest-bearing liabilities, constantly reviews current and potential services, and periodically provides staff training and sales programs. Throughout its trade areas, the bank competes with other financial institutions, including larger bank holding companies, money market mutual funds, and other companies which extend credit. Jefferson Properties, Inc., which owns properties used or held for future use primarily by the Corporation's bank subsidiary, derived 87 percent of its income from Jefferson Bankshares and its subsidiaries in 1994. Charter Insurance Managers, Inc. and Grace Insurance Agency, Incorporated, a subsidiary of Jefferson National Bank, are currently inactive. Jefferson Financial, Inc. offers limited financial and investment advisory services. Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION Management's discussion and analysis are intended to aid the reader in understanding and evaluating the consolidated results of operations and the consolidated financial condition of Jefferson Bankshares, Inc. and subsidiaries (the "Corporation"). The analysis attempts to identify trends and material changes that occurred during the reporting periods. The discussion should be read in conjunction with the Consolidated Financial Statements, their related notes, and the statistical information associated with the discussion. On March 25, 1994, Jefferson National Bank, the Corporation's bank subsidiary, purchased the deposit liabilities of Liberty Federal Savings Bank (Liberty) from the Resolution Trust Corporation. The transaction was accounted for as a purchase, and, accordingly, accounts and transactions for Liberty are included in the Corporation's consolidated financial statements subsequent to the acquisition date. Liberty had two banking offices in Warrenton, Virginia and total deposits of approximately $24 million. On August 18, 1994, the Corporation completed a merger with Bank of Loudoun (Loudoun) in Leesburg, Virginia. At the time of the merger, Loudoun had one banking office with total assets of $53 million, total deposits of $48 million, total loans of $35 million, and shareholders' equity of $5 million. The merger was accounted for as a pooling of interests, and, accordingly, consolidated financial data for all periods prior to the merger have been restated to include the accounts and transactions of Loudoun. Selected Financial Data - Table 1 (Dollars in thousands except per share data) Years Ended December 31 1994 1993 1992 1991 1990 RESULTS OF OPERATIONS Interest income $ 129,496 $ 128,922 $ 129,072 $ 137,257 $ 140,830 Interest expense 45,393 47,820 56,505 74,578 81,086 Net interest income 84,103 81,102 72,567 62,679 59,744 Provision for loan losses 1,600 1,911 4,195 3,742 2,925 Net interest income after provision for loan losses 82,503 79,191 68,372 58,937 56,819 Non-interest income 17,910 17,245 16,655 14,707 13,770 Non-interest expense 66,423 61,668 54,965 51,638 49,290 Income before income taxes 33,990 34,768 30,062 22,006 21,299 Provision for income tax expense 11,390 11,183 9,018 6,079 6,111 NET INCOME $ 22,600 $ 23,585 $ 21,044 $ 15,927 $ 15,188 PER SHARE DATA Net income $ 1.49 $ 1.57 $ 1.50 $ 1.14 $ 1.06 Dividends declared .68 .62 .53 .50 .50 Book value at year-end 13.62 13.03 12.04 11.07 10.16 Average number of shares outstanding 15,148,400 15,060,873 14,075,372 13,924,342 14,263,928 FINANCIAL CONDITION AVERAGE BALANCES Total earning assets $ 1,755,541 $ 1,704,161 $ 1,565,022 $ 1,458,722 $ 1,397,747 Total assets 1,920,981 1,860,129 1,712,565 1,601,376 1,542,895 Total deposits 1,688,580 1,641,165 1,520,111 1,413,692 1,350,418 Long-term debt 491 1,632 2,763 4,177 5,590 Shareholders' equity 204,585 191,060 162,365 149,267 143,780
Summary of Financial Results by Quarter - Table 2 (Dollars in thousands except per share data) 1994 1993 Three Months Ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 Interest income $ 33,707 $ 32,754 $ 32,084 $ 30,951 $ 31,898 $ 32,267 $ 32,332 $ 32,425 Interest expense 11,899 11,311 11,104 11,079 11,600 11,840 12,054 12,326 Net interest income 21,808 21,443 20,980 19,872 20,298 20,427 20,278 20,099 Provision for loan losses 375 375 375 475 853 130 488 440 Non-interest income 4,103 3,921 5,652 4,234 4,502 4,470 4,342 3,931 Non-interest expense 16,855 16,485 17,142 15,941 16,068 15,523 15,242 14,835 Income before income taxes 8,681 8,504 9,115 7,690 7,879 9,244 8,890 8,755 Income tax expense 2,906 2,892 3,033 2,559 2,475 3,048 2,875 2,785 Net Income $ 5,775 $ 5,612 $ 6,082 $ 5,131 $ 5,404 $ 6,196 $ 6,015 $ 5,970 Net Income Per Common Share $ 0.38 $ 0.37 $ 0.40 $ 0.34 $ 0.36 $ 0.41 $ 0.40 $ 0.40
RESULTS OF OPERATIONS Net income was $22.6 million in 1994, or 4 percent below the record high net income in 1993 of $23.6 million. Net income per share was $1.49 in 1994 compared with $1.57 in 1993. Net income in 1992 was $21.0 million, or $1.50 per share. An analysis of the factors that affected net income in 1994, 1993, and 1992 is presented in the sections that follow. Table 1 provides a summary of the results of operations for the last five years and certain information regarding the Corporation's consolidated financial condition during those periods. Profitability as measured by the return on average assets was strong at 1.18 percent in 1994. The 1994 performance followed even stronger returns on average assets of 1.27 percent in 1993 and 1.23 percent in 1992. Another significant measure of profitability, the return on average shareholders' equity , declined in 1994 to 11.05 percent from 12.34 percent in 1993 and 12.96 percent in 1992. Equity growth in 1994 and 1993 contributed to the decline in the returns for both years. The 1994 decline was attributable also to the decrease in net income. Table 2 presents a quarterly summary of earnings components for the last two years. In 1993, the net interest margin began to narrow as a decline in interest rates began to have a greater impact on interest income than on interest expense. In the fourth quarter of 1993, net income was reduced as the result of an increased provision for loan losses and certain non-recurring expenses recorded during the period. The increased provision for loan losses was recorded by Loudoun to conform its methodology for determining the adequacy of its allowance for loan losses to that of the Corporation. In the first quarter of 1994, net income was adversely affected by continued narrowing of the net interest margin and by a decrease in non-interest income compared with the prior quarter. This decrease was attributable principally to reduced income from mortgage loan sales. In the second quarter of 1994, net income was impacted by an increase in the net interest margin, investment securities gains of $1.2 million, and non-recurring expenses of $653 thousand. The remaining two quarters in 1994 benefited from continued expansion of the net interest margin. In the fourth quarter of 1994, non-interest expense rose, principally as the result of a non-recurring charge related to an adjustment of prior years' bank franchise tax assessments. NET INTEREST INCOME Net interest income is the difference between interest income and interest expense and represents the Corporation's gross profit margin. For comparative purposes, the income from tax-exempt securities and loans is adjusted to a tax-equivalent basis. This adjustment, based on statutory federal corporate tax rates of 35 percent in 1994 and 1993 and 34 percent in 1992, causes tax-exempt income and resultant yields to be presented on a basis comparable with income and yields from fully taxable earning assets. The net interest margin represents tax-equivalent net interest income divided by average earning assets. It reflects the average effective rate earned by the Corporation on its average earning assets. Net interest income and the net interest margin are influenced by fluctuations in market rates and changes in both the volume and mix of average earning assets and the liabilities that fund those assets. Table 3 presents average balances, related interest income and expense, and average yield/cost data for each of the last three years. Table 4 reflects changes in interest income and interest expense resulting from changes in average volume and changes due to rates. Tax-equivalent net interest income increased 3 percent in 1994 to $85.4 million from $82.7 million in 1993. Although the net interest margin was relatively stable at 4.87 percent in 1994 compared with 4.85 percent in 1993, rising interest rates widened the margin as the year progressed. Yields on earning assets rose as market interest rates moved upward in 1994. Liability costs were affected less by the rise in rates. Through most of 1994, deposit rates remained at previously low levels as liquidity in the banking system and modest asset growth forestalled competitive pressures. In the fourth quarter of 1994, however, deposit rates began to more closely reflect market interest rates. The delayed rise in deposit rates still had less effect in the final quarter of 1994 than rising yields on earning assets. The net interest margin in 1995 will be influenced by interest rate movements and their impact on asset yields and liability costs. Consolidated Average Balances/Net Interest Income/Rates* Tax-equivalent basis (Dollars in millions) - Table 3 1994 1993 1992 Interest Average Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Cost Balance Expense Cost Balance Expense Cost ASSETS Loans-net of unearned income $1,047.2 $ 85.0 8.12% $1,006.3 $81.5 8.10% $ 908.4 $ 79.9 8.80% Investment securities: Available for sale: U.S. Treasury 176.7 11.5 6.51 - - - - - - U.S. Government agencies 1.8 0.1 4.10 - - - - - - Mortgage-backed securities 0.3 - - - - - - - - Held to maturity: U.S. Treasury 1.4 - - 202.3 14.3 7.05 200.1 15.0 7.50 U.S. Government agencies 265.2 17.8 6.72 243.8 18.0 7.40 229.2 18.2 7.94 States and political subdivisions 26.7 2.1 7.82 35.3 2.9 8.18 37.9 3.5 9.23 Corporate debt securities 203.1 12.5 6.17 177.9 12.0 6.77 162.6 12.7 7.81 Other securities 7.8 0.6 7.68 7.3 0.6 7.90 5.1 0.4 7.84 Total investment securities 683.0 44.6 6.54 666.6 47.8 7.17 634.9 49.8 7.84 Money market investments 25.3 1.2 4.54 31.3 1.2 3.74 24.8 1.2 4.84 TOTAL EARNING ASSETS 1,755.5 130.8 7.45 1,704.2 130.5 7.66 1,568.1 130.9 8.35 Allowance for loan losses (13.7) (13.7) (11.8) Cash and due from banks 85.5 77.3 71.4 Premises and equipment 50.4 48.6 48.5 Other assets 43.3 43.7 36.3 TOTAL ASSETS $1,921.0 $1,860.1 $1,712.5 LIABILITIES AND SHAREHOLDERS' EQUITY Time and savings deposits: Interest-checking accounts $ 299.8 $ 6.8 2.27% $ 272.3 $ 7.2 2.64% $ 225.4 $ 7.1 3.15% Regular savings 200.2 5.4 2.68 170.2 4.9 2.90 138.9 4.6 3.31 Money market deposit accounts 345.9 9.7 2.81 357.0 10.2 2.85 313.6 11.3 3.60 Certificates of deposit $100,000 and over 71.2 2.8 3.99 70.6 2.8 4.04 72.9 3.3 4.53 Other time deposits 522.6 20.2 3.87 538.2 22.2 4.67 567.8 29.7 5.23 Total time and savings deposits 1,439.7 44.9 3.12 1,408.3 47.3 3.36 1,318.6 56.0 4.25 Short-term borrowings 14.9 0.4 2.96 15.1 0.4 2.83 15.2 0.3 2.26 Long-term debt 0.5 0.1 5.65 1.6 0.1 5.23 2.8 0.2 5.78 TOTAL INTEREST-BEARING LIABILITIES 1,455.1 45.4 3.12 1,425.0 47.8 3.36 1,336.6 56.5 4.23 Demand deposits 248.9 232.9 201.7 Other liabilities 12.4 11.1 11.8 Total liabilities 1,716.4 1,669.0 1,550.1 Shareholders' equity before unrealized losses 204.8 191.1 162.4 Unrealized losses on securities available for sale, net (0.2) - - Total shareholders' equity 204.6 191.1 162.4 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,921.0 $1,860.1 $1,712.5 NET INTEREST INCOME $85.4 $82.7 $ 74.4 AVERAGE INTEREST RATE SPREAD 4.33% 4.30% 4.12% INTEREST EXPENSE AS A PERCENT OF AVERAGE EARNING ASSETS 2.59% 2.81% 3.60% NET INTEREST MARGIN 4.87% 4.85% 4.74%
*Fully taxable equivalent income is calculated by dividing actual tax-exempt income by a factor which increases interest income to an amount that would need to be received if such income were taxable at the Federal tax rate of 35% in 1994 and 1993 and 34% in 1992. Loan interest income includes fees of $2,831,000 in 1994; $2,633,000 in 1993; and $2,382,000 in 1992. Loans include non-accrual loan balances and interest accrued, if any. Other factors affecting the net interest margin in 1994 were a 3 percent increase in average earning assets and a change in the mix of those assets. Loan growth, which was slow in the first half of the year, accelerated in the second half of 1994. Average loans as a percent of average earning assets increased to 60 percent in 1994 from 59 percent in 1993. At year-end 1994, however, loans represented 63 percent of total earning assets. Loan growth and earning asset growth also should be favorable factors in the 1995 net interest margin. Comparing 1993 with 1992, tax-equivalent net interest income increased 11 percent as the net interest margin widened to 4.85 percent in 1993 from 4.74 percent in 1992. In contrast with 1994, interest rates were on a downward trend in 1993. The lower rates in 1993 compared with 1992 had a greater impact on interest expense compared with interest income. Also contributing modestly to the increase in net interest income and the net interest margin was a change in the mix of average earning assets and in the Corporation's funding sources. Average loans increased to 59 percent of average earning assets in 1993 from 58 percent in 1992. Also, average interest-bearing liabilities as a percent of average earning assets decreased to 84 percent in 1993 from 85 percent in 1992. Analysis of Changes in Net Interest Income* - Table 4 Tax-Equivalent Basis (Dollars in Thousands) Year 1994 over 1993 Year 1993 over 1992 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in Net Net Average Increase Average Increase Volume Rate (Decrease) Volume Rate (Decrease) INTEREST INCOME Loans-net of unearned income $ 3,313 $ 201 $ 3,514 $ 8,150 $(6,496) $1,654 Investment securities: Available for sale: U.S. Treasury 11,508 - 11,508 - - - U.S. Government agencies 74 - 74 - - - Held to maturity: U.S. Treasury (7,109) (7,151) (14,260) 162 (948) (786) U.S. Government agencies 1,509 (1,732) (223) 1,176 (1,371) (195) States and political subdivisions (653) (122) (775) (231) (411) (642) Other 1,656 (1,142) 514 1,333 (1,730) (397) Money market investments (243) 226 (17) 356 (423) (67) TOTAL INTEREST INCOME 10,055 (9,720) 335 10,946 (11,379) (433) INTEREST EXPENSE Time and savings deposits: Interest-checking accounts 682 (1,069) (387) 1,341 (1,311) 30 Regular savings 821 (395) 426 927 (546) 381 Money market deposit accounts (971) (1,140) (2,111) (872) (6,978) (7,850) Certificates of deposit $100,000 and over 26 (34) (8) (112) (308) (420) Other time deposits 45 (348) (303) 356 (1,192) (836) Short-term borrowings (6) 19 13 - 87 87 Long-term debt (64) 6 (58) (60) (14) (74) TOTAL INTEREST EXPENSE 533 (2,961) (2,428) 1,580 (10,262) (8,682) CHANGE IN NET INTEREST INCOME $ 9,522 $(6,759) $ 2,763 $ 9,366 $ (1,117) $ 8,249
*The change in interest that cannot be separated between rate and volume has been allocated to each variance proportionately. PROVISION FOR LOAN LOSSES The provision for loan losses is the amount charged to expense each year that is intended to maintain an allowance, or reserve, for loan losses in the future. The adequacy of the allowance and, consequently, the provision for loan losses is dependent on a variety of factors including size, growth, and composition of the loan portfolio, historical and expected loan loss experience, and an analysis of the quality of the loan portfolio and general economic conditions. In 1994, the Corporation lowered its provision for loan losses to $1.6 million from $1.9 million in 1993. In 1992, the provision for loan losses was $4.2 million. The lower provision in 1994 compared with 1993 reflected improved economic conditions and a declining trend in non-performing assets. The significant reduction in the loan loss provision in 1993 compared with 1992 was attributable to improving trends in loan loss experience, non-performing assets, and general economic conditions. It also was lowered in view of the level of the allowance relative to the loan portfolio, an evaluation of risks in the portfolio, and expectations for loan growth. Changes in economic conditions and expectations resulting from higher interest rates will have an effect on the provision for loan losses in 1995. Loan portfolio growth and risks contained in the portfolio also will affect the provision. Based upon these factors, it is likely that the provision for loan losses will be increased in 1995. NON-INTEREST INCOME Non-interest income includes service charges and other related income from services rendered by the Corporation. In addition, non-interest income includes gains and losses realized from the sale of fixed assets, sales and calls of investment securities, and sales of mortgage loans. Non-interest income increased 4 percent in 1994 to $17.9 million from $17.2 million in 1993. Non-interest income was boosted in 1994 by investment securities gains totaling $1.2 million, or $1.1 million above the 1993 amount. More than offsetting this increase however was a decrease in income related to mortgage loan sales, which declined $1.3 million in 1994 to $681 thousand from $1.9 million in 1993. In other categories of non-interest income, trust income decreased 2 percent to $3.9 million, deposit account fees increased 3 percent to $8.7 million, and other income rose 30 percent to $3.3 million in 1994 compared with $2.5 million in 1993. The rise in other income was attributable to a variety of sources including asset sales, automated teller machine fees, and safe deposit box rent. Non-interest income increased 4 percent in 1993 to $17.2 million compared with $16.7 million in 1992. The increase was led by trust income, which increased 7 percent to $4.0 million, and mortgage loan sales income, which increased 26 percent to $1.9 million. Both sources of income increased due to higher volumes of business. Non-Interest Income - Table 5 (in thousands) Years Ended December 31 1994 1993 1992 1991 1990 Trust income $ 3,944 $ 4,037 $ 3,765 $ 3,466 $ 3,367 Service charges on deposit accounts 8,702 8,475 8,326 8,136 7,403 Credit insurance income 165 208 255 298 340 Investment securities gains, net 1,166 88 298 64 7 Mortgage loan sales income 681 1,932 1,528 597 368 Other Income 3,252 2,505 2,483 2,146 2,285 TOTAL NON-INTEREST INCOME $17,910 $17,245 $16,655 $14,707 $13,770 NON-INTEREST EXPENSE Non-interest expense represents the overhead expenses of the Corporation. The Corporation monitors all categories of noninterest expense in an attempt to improve productivity and earnings performance. Non-interest expense increased 8 percent in 1994 to $66.4 million from $61.7 million in 1993. Contributing to the increase was personnel expense, which was 8 percent higher in 1994 at $37.3 million. Personnel expense rose as the result of normal wage increases and related benefit expenses and from an increase in the number of employees. Occupancy expense increased 7 percent in 1994, and equipment expense was 4 percent higher compared with the 1993 amount. Expense for office supplies in 1994 was level with the 1993 amount, and postage expense decreased 2 percent. Telephone expense, however, increased 25 percent in 1994 compared with 1993 as the result of enhancing our communications capabilities. Other expense in 1994 increased 12 percent. Leading contributors to this increase were legal and professional fees, amortization of intangible assets associated with acquisitions, and certain non-recurring expenses. In 1993, non-interest expense increased 12 percent to $61.7 million from $55.0 million in 1992. Growth in all expense categories in 1993 was affected by two acquisitions accounted for as purchases. Personnel expense and other expense led the increase in non-interest expense increasing $3.2 million and $2.2 million, respectively. Contributing to the increase in other expense were writedowns on foreclosed properties, contributions, and acquisition related expenses. Also increasing by large percentage amounts and contributing to the increase in non-interest expense were equipment expense, which rose 12 percent and F.D.I.C. assessments and telephone expense, both of which increased 10 percent. In 1995, F.D.I.C. assessments may be lowered significantly. The Bank Insurance Fund is expected to reach its Congressionally mandated level of coverage in 1995. As a result, the F.D.I.C. may lower its assessments for deposit insurance. In 1994, Jefferson National Bank paid assessments at the rate of $.23 per $100 of deposits totaling $3.8 million. Any decline in assessments would lower non-interest expense in 1995. Non-Interest Expense - Table 6 (Dollars in thousands) Years Ended December 31 1994 1993 1992 1991 1990 Salaries and employee benefits $37,261 $34,651 $31,439 $30,486 $29,320 Occupancy expense, net 5,063 4,740 4,653 4,427 4,425 Equipment expense 5,965 5,722 5,125 4,356 4,287 F.D.I.C. assessments 3,790 3,645 3,327 2,838 1,566 Office supplies 1,108 1,115 1,051 1,024 1,134 Postage 1,160 1,187 1,143 1,189 1,078 Telephone expense 1,775 1,425 1,292 1,285 1,310 Other expense 10,301 9,183 6,935 6,033 6,170 TOTAL NON-INTEREST EXPENSE $66,423 $61,668 $54,965 $51,638 $49,290 OPERATING EFFICIENCY RATIO* 64.3% 61.8% 60.4% 64.6% 64.4% *Total non-interest expense as a percent of net interest income (tax-equivalent basis) and total non-interest income. INCOME TAXES The provision for income taxes was $11.4 million in 1994 and $11.2 million in 1993. A reduction in operating earnings in 1994 was offset by a lower amount of tax-exempt income and other factors. The provision for income tax expense in 1993 was $11.2 million compared with $9.0 million in 1992. The increase was affected by higher operating earnings in 1993, an increase in the corporate federal income tax rate to 35 percent in 1993 from 34 percent in 1992, and a change in the accounting method for deferred income taxes. FINANCIAL CONDITION The Corporation's financial condition is measured in terms of its asset and liability composition, asset quality, capital resources, and liquidity. Although total assets at year-end 1994 were slightly below the year earlier level, and interest rates rose throughout the year, loan growth strengthened as the year progressed. Deposits, which are the Corporation's primary funding source, grew only modestly as such funds were attracted by alternative market investment opportunities and competitive deposit interest rate pricing. Throughout 1994, as in prior years, capital levels were strong and liquidity measures were most adequate. The Corporation is not engaged in investment strategies involving derivative financial instruments. Asset and liability management is conducted without the use of forward-based contracts, options, swap agreements, or other synthetic financial instruments derived from the value of an underlying asset, reference rate, or index. Off-balance sheet risks such as commitments to extend credit, letters of credit, and other items are discussed in Note 11 in the Notes to Consolidated Financial Statements. ASSETS On December 31, 1994, total assets were $1.926 billion. A year earlier total assets were $1.942 billion. Average total assets increased 3 percent in 1994 to $1.921 billion from $1.860 billion in 1993. LOAN PORTFOLIO. Loans, net of unearned income grew 8 percent to $1.102 billion on December 31, 1994 compared with $1.023 billion one year earlier. Average loans, net of unearned income increased 4 percent in 1994 to $1.047 billion from $1.006 billion in 1993. The lower growth rate in average loans compared with period end loans was indicative of stronger loan growth in the second half of 1994. Loan Portfolio - Table 7 (Dollars in thousands) December 31 1994 1993 1992 1991 1990 LOAN CLASSIFICATION: Commercial, financial, and agricultural $ 407,152 36.9% $ 408,349 39.9% $388,314 39.6% $316,129 35.5% $334,047 37.9% Real estate-construction 107,629 9.8 97,832 9.6 105,611 10.8 80,997 9.1 87,793 10.0 Real estate-mortgage 366,983 33.3 285,384 27.9 270,307 27.5 263,644 29.6 246,732 28.0 Instalment 219,872 20.0 231,656 22.6 216,388 22.1 229,404 25.8 213,161 24.1 TOTAL LOANS $1,101,636 100.0% $1,023,221 100.0% $980,620 $100.0 $890,174 100.0% $881,733 100.0%
Loan growth patterns in 1994 showed mixed results. Commercial loans, which is the largest segment of the portfolio, was $407 million at year-end 1994, comparable with 1993. Construction lending was up 10 percent to $108 million. Mortgage loans rose 29 percent to $367 million on December 31, 1994. The increase in mortgage loans was attributable, principally, to adjustable rate mortgages, which regained popularity as interest rates rose throughout the year. Instalment loans decreased 5 percent to $220 million on December 31, 1994. In spite of this decline, indirect instalment loans increased 38 percent to $80 million at year-end 1994 from the year earlier total of $58 million. Indirect loans are loans to individuals to finance certain goods or services, principally automobiles, which are originated through dealers or other vendors. Prior to 1994, indirect lending activities were concentrated primarily in one geographic area. The scope of this lending was expanded in 1994 and will continue to expand in the future to reach the Corporation's entire market. The strong loan growth in the second half of 1994 occurred in a rising interest rate environment. If interest rates continue to rise in 1995, they could have a dampening effect on loan demand. The Corporation will attempt to offset the effect of higher interest rates by further expanding indirect instalment lending, continuing to pursue the market for adjustable rate mortgages, and adding credit card receivables to its loan categories. Proprietary VISA and Master Card products were issued to bank customers beginning in December 1994. Loans generated from these cards are expected to represent a valuable addition to the Corporation's loan portfolio in 1995. On December 31, 1994, the Corporation had no concentration of loans in any one industry in excess of 10 percent of its loan portfolio. Because of the nature of the Corporation's market, loan collateral is predominantly real estate related. Thus, periodic weakness in real estate markets may have an adverse effect on collateral values and could lead to writedowns and losses. The Corporation carefully monitors its exposure to risk from construction and development loans, commercial real estate loans, and residential lending. The Corporation does not engage in foreign lending activities. Consequently, the loan portfolio is not exposed to risk from foreign credits. Remaining Maturities of Selected Loans - Table 8 (in thousands) Commercial, Financial, and Real Estate- December 31, 1994 Agricultural Construction WITHIN 1 YEAR $ 95,556 $ 31,358 VARIABLE RATE: 1 to 5 years 99,218 14,916 After 5 years 84,818 29,598 TOTAL 184,036 44,514 FIXED RATE: 1 to 5 years 98,200 17,938 After 5 years 29,360 13,819 TOTAL 127,560 31,757 TOTAL MATURITIES $407,152 $107,629 With respect to credit quality, the Corporation's past performance has been a source of financial strength. Net loan losses in 1994 were $1.7 million, or only .16 percent of average loans, net of unearned income. In 1993 net loan losses were lower at $1.2 million, or .12 percent of average loans, net of unearned income. In each of the last five years, the Corporation's loan loss ratios compared very favorably with peer group averages. For bank holding companies with total assets between $1 billion and $3 billion, loan loss ratios in the years 1991 through 1993 have ranged from .54 percent to .89 percent of average loans. By comparison, the Corporation's ratios for that period have ranged from a low of .12 percent to a high of .28 percent. Based on statistical information for the first nine months of the year, the peer group average is expected to be approximately .24 percent in 1994. Summary of Loan Loss Experience - Table 9 (Dollars in thousands) Years Ended December 31 1994 1993 1992 1991 1990 ALLOWANCE AT BEGINNING OF YEAR $ 13,864 $ 13,057 $10,894 $ 9,647 $ 9,395 LOAN LOSSES: Commercial, financial, and agricultural 994 789 920 1,015 1,408 Real estate-construction 150 - 90 100 303 Real estate-mortgage 187 140 343 535 80 Instalment 1,054 696 1,607 1,125 1,207 TOTAL LOAN LOSSES 2,385 1,625 2,960 2,775 2,998 RECOVERIES: Commercial, financial, and agricultural 67 59 58 53 7 Real estate-construction 4 6 47 - 111 Real estate-mortgage 75 72 9 - 7 Installment 529 261 263 228 200 TOTAL RECOVERIES 675 398 377 281 325 NET LOAN LOSSES 1,710 1,227 2,583 2,494 2,673 INCREASE FROM ACQUISITIONS - 123 551 - - PROVISION CHARGED TO EXPENSE 1,600 1,911 4,195 3,741 2,925 ALLOWANCE AT END OF YEAR $ 13,754 $ 13,864 $ 13,057 $ 10,894 $ 9,647 LOANS, NET OF UNEARNED INCOME: Outstanding at year-end $1,101,500 $1,022,911 $979,365 $889,540 $880,761 Average 1,047,206 1,006,262 908,397 879,236 923,352 RATIOS: Net loan losses to average loans 0.16% 0.12% 0.28% 0.28% 0.29% Allowance to year-end loans 1.25% 1.36% 1.33% 1.22% 1.10% Allowance to net loan losses 8.04X 11.30X 5.05X 4.37X 3.61X Provision to net loan losses 0.94X 1.56X 1.62X 1.50X 1.09X Provision to average loans 0.15% 0.19% 0.46% 0.43% 0.32% Recoveries to loan losses 28.30% 24.49% 12.74% 10.13% 10.84%
Loan loss expectations for 1995 are influenced by a still strong economy with low levels of unemployment and positive activity in local economies. Higher interest rates compared with prior years and prospects for further increases, however, are likely to influence economic activity in 1995 and could pose problems for some borrowers. Based on an assessment of the loan portfolio, and in light of expected economic conditions, loan losses in 1995 are not expected to be materially greater than those in 1994. Unforeseen changes in economic conditions or in borrowers' financial conditions could impact actual loan losses in 1995. The Corporation will continue its efforts to minimize future credit losses. Risk Elements - Table 10 (Dollars in thousands) Book Value December 31 1994 1993 1992 1991 1990 LOANS: Non-accrual $ 6,996 $ 9,174 $10,448 $12,773 $5,079 Troubled debt restructurings - - - - - Past due principal and/or interest for 90 days or more 2,713 5,453 3,545 3,915 3,191 TOTAL $ 9,709 $14,627 $13,993 $16,688 $8,270 AS A PERCENT OF: Loans, net of unearned income .88% 1.43% 1.43% 1.88% 0.94% Total assets .50% 0.75% 0.76% 1.00 0.53% Allowance for loan losses 70.59% 105.50% 107.17% 153.19% 85.73% FORECLOSED PROPERTIES $ 5,919 $ 8,831 $11,770 $ 9,018 $ 6,469 TOTAL RISK ELEMENTS $15,628 $23,458 $25,763 $25,706 $14,739 AS A PERCENT OF: Loans, net of unearned income plus foreclosed properties 1.41% 2.27% 2.60% 2.86% 1.66% Total assets .81% 1.21% 1.40% 1.54% 0.94% For the years ended December 31, 1994, 1993, and 1992, gross interest income in the amount of $462,600, $863,000 and $798,000, respectively, would have been recorded on loans reported as non-accrual if the loans had been current in accordance with their original terms and conditions. The amount of interest income on those loans that was included in net income amounted to $66,000, $754,000 and $104,000 in 1994, 1993, and 1992, respectively. At December 31, 1994, the Corporation identified additional loans totaling $5,420,000 that pose some uncertainty over the borrowers' ability to comply with loan repayment terms. Investment securities also may pose credit risks. On December 31, 1994, all investment securities were performing according to terms. Risk elements associated with the loan portfolio are presented in Table 10. Excluding foreclosed properties, identified risk elements on December 31, 1994 totaled $9.7 million, or .9 percent of loans, net of unearned income. At December 31, 1993, the total was $14.6 million, or 1.4 percent of loans, net of unearned income. Foreclosed properties at December 31, 1994, were $5.9 million compared with the year earlier total of $8.8 million. Foreclosed properties are reported net of writedowns at the lower of cost or estimated net realizable value. At December 31, 1994, total risk elements represented 1.4 percent of loans, net of unearned income plus foreclosed properties and .8 percent of total assets. These ratios at the end of 1993 were 2.3 percent and 1.2 percent, respectively. At year-end 1994, the Corporation identified an additional $5.4 million of loans that pose some uncertainty over the borrowers' ability to comply with loan repayment terms. With regard to the non-accrual loans identified in Table 10, the amounts classified in this category represent loan balances on which the accrual of interest has been discontinued. The year-end 1994 total included 37 loans. The largest exposure to a single borrower was $2.4 million. Only 4 other loans had balances greater than $200 thousand. Loans are placed in a non-accrual status when collection of principal or interest is legally barred or when management determines that collection of interest cannot be assured in light of the financial condition of the borrower and the circumstances surrounding the loan. The Corporation's subsidiary bank is in substantial compliance with regulatory policy that requires accrual of interest to be discontinued when principal or interest is past due for 90 days or more unless the loan is well secured and in the process of collection. Because of the historical experience of net loan losses, the ratio of risk elements to loans outstanding, and the overall quality of the loan portfolio, management has been able to evaluate each individual loan situation of any appreciable magnitude and its potential for collection prior to classifying any loan as non-accrual. Included in the $5.9 million total of foreclosed properties at December 31, 1994 were 29 parcels of real estate. The highest carrying value of a single property was $962 thousand. Only 3 other parcels included in foreclosed properties at year-end 1994 had carrying values above $400 thousand. The Corporation maintains a general allowance for loan losses and does not allocate its allowance for loan losses to individual categories for management purposes. Table 11 shows an allocation among loan categories based upon an analysis of the portfolio's composition, historical loan loss experience, and other relevant factors. In determining the adequacy for loan losses, management considers the size and composition of the loan portfolio, historical loss experience, economic conditions, the value and adequacy of collateral and guarantors, and the current level of the allowance. In addition, consideration is given to potential losses associated with non-accrual loans and loans that are deemed to be potential problems. At December 31, 1994, the allowance for loan losses was $13.8 million, or 1.25 percent of loans, net of unearned income. A year earlier, the allowance was $13.9 million, or 1.36 percent of loans, net of unearned income. At its year-end 1994 level, the allowance for loan losses exceeded the sum of net loan losses over the previous seven years. At that level, management believed that the allowance was adequate, subject to unforeseen economic changes or unexpected regulatory developments. Allowance for Loan Losses - Table 11 (Dollars in thousands) 1994 1993 1992 1991 1990 December 31 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ALLOWANCE FOR LOAN LOSSES: Commercial, financial, and agricultural $ 8,447 61.4% $ 6,499 46.9% $ 6,958 53.3% $6,618 60.7% $5,032 52.2% Real estate-construction 156 1.1 687 5.0 753 5.8 742 6.8 696 7.2 Real estate-mortgage 514 3.7 385 2.8 437 3.3 468 4.3 267 2.8 Instalment 2,227 16.2 3,598 26.0 2,558 19.6 1,782 16.4 3,652 37.8 Unallocated 2,410 17.6 2,695 19.3 2,351 18.0 1,284 11.8 - - Total Allowance for Loan Losses $13,754 100.0% $13,864 100.0% $13,057 100.0% $10,894 100.0% $9,647 100.0%
INVESTMENT SECURITIES. Investment securities represent the second largest component of earning assets. At the beginning of 1994 and in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, certain securities in the investment portfolio were classified as Available for Sale, while the remainder of the portfolio was classified as Held to Maturity. Available for Sale securities are reported at fair value in the Corporation's consolidated financial statements. Unrealized gains and losses on these securities are reported as a separate component of shareholders' equity , net of tax effects, and are excluded from earnings until realized. Held to Maturity securities are reported at amortized cost. The Corporation has no trading securities. Investment Securities - Table 12 (Dollars in thousands) DECEMBER 31, 1994 AVAILABLE FOR SALE: After 1 but After 5 but Within Within Within After 1 Year 5 Years 10 Years 10 Years Total U.S. Treasury Securities: Amortized Cost $ 40,876 $131,896 $ - $ - $172,772 Fair Value 40,925 126,314 - - 167,239 Yield 7.19% 6.12% - - 6.37% U.S. Government Agencies: Amortized Cost $ - $ 2,744 $ - $ - $ 2,744 Fair Value - 2,661 - - 2,661 Yield - 4.40% - - 4.40% Mortgage-backed Securities: Amortized Cost $ - $ - $ 500 $ 477 $ 977 Fair Value - - 466 449 915 Yield - - 5.13% 4.80% 4.97% Total Investment Securities- Available for Sale: Amortized Cost $ 40,876 $134,640 $ 500 $ 477 $176,493 Fair Value 40,925 128,975 466 449 170,815 Yield 7.19% 6.09% 5.13% 5.84% 6.33% HELD TO MATURITY: U.S. Government Agencies: Amortized Cost $ 50,197 $183,703 $ - $ - $233,900 Fair Value 50,342 175,568 - - 225,910 Yield 7.84% 6.28% - - 6.61% State and Political Subdivision Securities: Amortized Cost $ 6,376 $ 14,812 $ 2,299 $2,831 $ 26,318 Fair Value 6,409 14,815 2,299 2,623 26,146 Yield 9.23% 7.15% 8.67% 8.29% 7.91% Corporate Debt Securities: Amortized Cost $ 65,958 $139,476 $ - $ - $205,434 Fair Value 65,786 135,157 - - 200,943 Yield 6.78% 6.04% - - 6.28% Other Securities: Amortized Cost $ - $ - $ - $2,081 $ 2,081 Fair Value - - - 2,081 2,081 Yield - - - 6.00% 6.00% Total Investment Securities- Held to Maturity: Amortized Cost $122,531 $337,991 $ 2,299 $4,912 $467,733 Fair Value 122,537 325,540 2,299 4,704 455,080 Yield 7.34% 6.21% 8.67% 8.29% 6.54%
At December 31, 1994, the book value of all investment securities was $639 million, or 11 percent below the year earlier total of $717 million. The decrease in the portfolio resulted from using funds from maturing securities to fund loan growth. With the exception of corporate debt securities, which increased in 1994 over 1993, all categories of securities decreased in 1994. On December 31, 1994, the weighted average yield of the Held to Maturity portfolio was 6.54 percent. The weighted average yield of the Available for Sale portfolio was 6.33 percent. The market value of securities Held to Maturity was 97.3 percent of its book value at year-end 1994 compared with 102.9 percent on December 31, 1993. The Available for Sale portfolio at year-end 1994 had a net unrealized loss of $5.7 million. Additional information regarding investment securities can be found in Table 12 and in Note 3 of the Notes to Consolidated Financial Statements. Quality ratings of the Corporation's corporate debt securities appear in Table 13. With the exception of securities issued by the U.S. government, the Corporation held no concentration of 10 percent or greater of its shareholders' equity in securities of any single issuer at December 31, 1994. Corporate Debt by Quality Rating - Table 13 (Dollars in thousands) Book December 31, 1994 Value Percent MOODY'S RATING Aaa $ 12,095 5.9% Aa1 9,430 4.6 Aa2 9,982 4.9 Aa3 7,659 3.7 A1 57,876 28.2 A2 86,129 41.9 A3 19,100 9.3 NR 3,163 1.5 Total $205,434 100.0% MONEY MARKET INVESTMENTS. At year-end 1994, the Corporation had no short-term money market investments. One year earlier, the total was $10 million. In 1994, these instruments averaged $25 million compared with $31 million in 1993. The use of short-term investments was curtailed in 1994 as the result of loan growth. LIABILITIES The Corporation relies almost exclusively on core deposits to fund its earning assets. An increased use of borrowings to increase balance sheet leverage was under consideration at year-end as a means to enhance earnings levels. DEPOSITS. Total deposits on December 31, 1994 were $1.689 billion compared with the year earlier total of $1.677 billion. Average total deposits in 1994 of $1.689 billion were 3 percent above the 1993 average of $1.641 billion. Weak deposit growth in 1994 was attributable to a continuation of deposit funds moving into alternative investments and to interest rate pricing competition for deposits, particularly late in the year. Non-interest bearing demand deposits were 6 percent higher at year-end 1994 at $271 million compared with $256 million at year-end 1993. Interest-bearing deposits, however, decreased slightly in 1994 to $1.417 billion at year-end from $1.421 billion one year earlier. Although the growth pattern in interest-bearing deposits was similar in 1994 and 1993, percentage changes were less in 1994. Interest-checking accounts increased 1 percent and regular savings accounts increased 6 percent in 1994. Money market deposit accounts decreased 3 percent in both 1994 and 1993. Other time deposits, principally consumer certificates of deposit, decreased 2 percent in 1994. Balances in certificates of deposit of $100 thousand and over increased 5 percent to $73 million in 1994 after decreasing 6 percent in 1993. Certificates of Deposit $100,000 and Over - Table 14 (in thousands) December 31, 1994 Amount REMAINING MATURITIES: Within 3 months $37,626 3 to 6 months 10,287 6 to 12 months 9,614 After 12 months 14,984 Total $72,511 DEBT. Short-term borrowings totaled $16 million on December 31, 1994 compared with the year earlier total of $54 million. Total short-term borrowings averaged $15 million in both 1994 and 1993. Table 15 summarizes the Corporation's position with respect to federal funds purchased and securities sold under agreements to repurchase. Long-term debt, which totaled $1 million at year-end 1993, was reduced to $19 thousand by year-end 1994. Note 8 in the Notes to Consolidated Financial Statements contains additional information regarding long-term debt. Short-Term Borrowings - Table 15 (Dollars in thousands) 1994 1993 1992 Interest Interest Interest Balance Rate Balance Rate Balance Rate FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Outstanding at year-end $16,479 3.69% $53,832 2.79% $10,634 1.58% Average outstanding for the year 14,845 3.21 14,876 1.94 14,663 1.98 Maximum outstanding at any month-end 42,501 - 53,832 - 23,924 -
CAPITAL RESOURCES Total shareholders' equity of $207 million at year-end 1994 was 5 percent above the year earlier total of $196 million. Shareholders' equity averaged $205 million in 1994, 7 percent above the 1993 average of $191 million. Average shareholders' equity as a percent of average total assets was 10.7 percent in 1994 and 10.3 percent in 1993. The Federal Reserve mandates minimum capital requirements for bank holding companies. In 1990, the Federal Reserve adopted a risk based capital measure to determine capital adequacy. Under this system all balance sheet assets are assigned a certain risk category with a prescribed weight. Off-balance sheet items, such as loan commitments and letters of credit, also are classified by risk with duly assigned weights. The sum of the balance sheet and off balance sheet amounts multiplied by their respective risk weight factors must then meet a required minimum capital test. Tier 1 Capital is defined as shareholders' equity minus certain intangible assets. Tier 2 Capital includes a certain amount of the allowance for loan losses. At December 31, 1994, the minimum Total Capital ratio (Tier 1 plus Tier 2) required was 8 percent. The Corporation's Tier 1 ratio of 15.13 percent and its Total Capital ratio of 16.16 percent were well in excess of minimum requirements. The Federal Reserve also utilizes a Tier 1 leverage ratio in conjunction with its risk based capital standard. This ratio measures Tier 1 Capital as a percent of total average assets less intangible assets. The minimum leverage ratio is 3 percent. At December 31, 1994, the Corporation's Tier 1 leverage ratio was 10.59 percent. The Comptroller of the Currency has adopted similar requirements that affect the Corporation's bank subsidiary. The bank also exceeds all minimum requirements. RISK-BASED CAPITAL - Table 16 (IN THOUSANDS) December 31 1994 1993 1992 TIER 1 CAPITAL: Shareholders' equity * $ 210,244 $ 196,434 $ 180,023 Less intangible assets 7,471 6,115 5,987 Total Tier 1 capital 202,773 190,319 174,036 TIER 2 CAPITAL: Allowable allowance for loan losses 13,754 13,864 13,057 Total Tier 2 capital 13,754 13,864 13,057 TOTAL CAPITAL $ 216,527 $ 204,183 $ 187,093 Risk-weighted assets $1,340,091 $1,281,028 $1,234,309 Tangible quarterly average assets 1,914,722 1,892,496 1,758,477 RISK-BASED CAPITAL RATIOS: Tier 1 capital 15.13% 14.86% 14.10% Total capital 16.16% 15.94% 15.16% Tier 1 leverage 10.59% 10.06% 9.90% * Exclusive of unrealized losses on securities available for sale as prescribed by regulatory guidelines. On August 18, 1994, Bank of Loudoun merged into Jefferson National Bank. Bank of Loudoun shareholders were entitled to receive one share of the Corporation's common stock in exchange for each Bank of Loudoun share. The Corporation issued 538,881 shares of its common stock in the merger, which was accounted for as a pooling of interests. From time to time, the Corporation purchases shares of its own common stock from shareholders and from brokers and dealers. In 1994, the Corporation purchased 72,500 shares at a cost of $1.4 million. In 1993, the Corporation purchased 53,618 shares at a cost of $1.1 million. The volume of share repurchases is determined by the financial advantages to the Corporation. Purchases are made in accordance with applicable securities laws, regulations, and internal policy considerations. SELECTED CAPITAL AND DIVIDEND DATA- Table 17 Years Ended December 31 1994 1993 1992 1991 1990 PER SHARE DATA: Number of shares outstanding at year-end 15,170,250 15,080,553 7,476,652 6,986,996 6,993,539 Average number of shares outstanding 15,148,400 15,060,873 14,075,372 13,924,342 14,263,928 Book value at year-end $13.62 $13.03 $12.04 $11.07 $10.16 Net income 1.49 1.57 1.50 1.14 1.06 Dividends declared .68 .62 .53 .50 .50 DIVIDENDS DECLARED AS A PERCENT OF NET INCOME 45.6% 39.5% 35.3% 43.9% 47.2% SHAREHOLDERS' EQUITY (AVERAGE) AS A PERCENT OF AVERAGE: Loans-net of unearned income 19.5% 19.0% 17.9% 17.0% 15.6% Total assets 10.7 10.3 9.5 9.3 9.3 Total deposits 12.1 11.6 10.7 10.6 10.6 INTERNAL CAPITAL GENERATION: RETURN ON AVERAGE ASSETS 1.18 1.27 1.23 .99 .98 Multiplied by AVERAGE ASSETS TO AVERAGE EQUITY 9.4 9.7 10.5 10.7 10.7 Return on Average Equity 11.1 12.3 13.0 10.7 10.6 Multiplied by EARNINGS RETAINED 54.4 60.5 64.7 56.1 52.8 INTERNAL CAPITAL GENERATION RATE 6.0% 7.5% 8.4% 6.0% 5.6%
The Corporation's common stock is traded in the National Market System of the NASDAQ Stock Market under the trading symbol JBNK. Table 18 presents the market prices and dividends of the Corporation's stock for each quarter in 1994 and 1993. On December 31, 1994, the book value of a share of common stock was $13.62, or 5 percent higher than $13.03 on December 31, 1993. COMMON STOCK PERFORMANCE AND DIVIDENDS - Table 18 1994 1993 Dividends Declared High Low High Low 1994 1993 First Quarter $22.75 $18.50 $21.00 $16.63 $.17 $.15 Second Quarter 23.13 18.50 21.00 18.00 .17 .15 Third Quarter 23.25 20.75 23.00 20.00 .17 .15 Fourth Quarter 21.13 17.13 $21.00 $18.75 .17 .17 Years Ended December 31 $23.25 $17.13 $23.00 $16.63 $.68 $.62 Jefferson Bankshares common stock is traded in the National Market Systems of the Nasdaq Stock Market in which Jefferson Bankshares' symbol is JBNK. Dividend restrictions and other matters are discussed in Notes 9 and 13 of the Notes to Consolidated Financial Statements. On January 25, 1995, there were approximately 8,604 shareholders of record. LIQUIDITY Liquidity in a banking company measures the ability to provide funds for customers' demands for loans and deposit withdrawals without impairing profitability. To meet these needs, the Corporation maintains cash reserves and readily marketable investments in addition to funds provided from loan repayments and maturing securities. Funds also can be obtained through increasing deposits or short-term borrowings and through the banks borrowing privileges at the Federal Reserve. A related concern of liquidity management is interest rate sensitivity. Changes in interest rates may affect both funding requirements, as well as the relative liquidity of certain assets. As such, the Corporation has acted to structure its asset portfolio to match more closely the maturities and repricing patterns of its liabilities. Loan pricing policies have been structured to emphasize adjustable rate loans, both in the commercial and instalment lending areas. Also, the average maturity of the investment securities portfolio is of a relatively short duration. On December 31, 1994, approximately $823 million, or 47 percent of total earning assets was due to mature or reprice within the next year. Table 19 demonstrates the relationship between interest sensitive assets and interest sensitive liabilities on December 31, 1994. INTEREST SENSITIVITY ANALYSIS* - Table 19 (IN THOUSANDS) Over 3 Over 6 Over 1 Months Months Total Year and 3 Months Through Through Within Not December 31, 1994 or Less 6 Months 12 Months 1 Year Classified Total EARNING ASSETS Loans-net $ 491,990 $ 27,873 $ 137,300 $ 657,163 $ 444,337 $1,101,500 Investment securities: Available for sale 14,485 15,079 13,315 42,879 127,936 170,815 Held to maturity 45,965 18,861 57,719 122,545 345,188 467,733 TOTAL EARNING ASSETS 552,440 61,813 208,334 822,587 917,461 1,740,048 INTEREST-BEARING LIABILITIES Money market deposit accounts 336,860 - - 336,860 - 336,860 Certificates of deposit $100,000 and over 37,626 10,287 9,614 57,527 14,984 72,511 All other time deposits 198,356 93,410 88,028 379,794 628,260 1,008,054 Short-term borrowings 16,479 - - 16,479 - 16,479 Long-term debt 19 - - 19 - 19 TOTAL INTEREST-BEARING LIABILITIES 589,340 103,697 97,642 790,679 643,244 1,433,923 NET NON-INTEREST-BEARING LIABILITIES - - - - 306,125 306,125 INTEREST SENSITIVITY GAP ASSET SENSITIVE (LIABILITY SENSITIVE) $ (36,900) $ (41,884) $ 110,692 $ 31,908 $ (31,908) $ - CUMULATIVE GAP $ (36,900) $ (78,784) $ 31,908 $ 31,908 $ - $ -
* Remaining maturity if fixed rate; earliest possible repricing interval if floating rate ACCOUNTING RULE CHANGES In May 1993, the Financial Accounting Standards Board (FASB) issued Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Statement which was effective for years beginning after December 15, 1993, addresses the accounting for investments in certain equity and all debt securities. Under this Statement, investments are to be classified into three categories: Held to Maturity Securities; Trading Securities; and Available for Sale Securities. The Corporation adopted this Statement in the first quarter of 1994. Although the Corporation has the intent and ability to hold its investment securities until maturity, certain securities were placed in the category Available for Sale for potential liquidity purposes. In accordance with Statement 115, these securities are reported at fair value in the Corporation's consolidated financial statements, and the net unrealized gains and losses have been excluded from earnings and reported as a separate component of shareholders' equity net of tax effects. At the beginning of 1994, the adjustment, net of tax effects, was $5.1 million of unrealized gains. As interest rates rose throughout the year, the fair value of the Available for Sale securities decreased and resulted in an unrealized loss, net of tax effects, of $3.7 million as of December 31, 1994. In February 1992, the FASB issued Statement No. 109, Accounting for Income Taxes, Statement No. 109, which was effective for years beginning after December 15, 1992, changed the method of accounting for income taxes from the deferred method to the asset and liability method. The Corporation adopted this statement prospectively in 1993 and included the cumulative effect of this change in accounting principle in the provision for income taxes in the 1993 consolidated statement of income. The effect of the change was immaterial. For further discussion, see Notes 1(G) and 6 in the Notes to Consolidated Financial Statements. In December 1991, the FASB issued Statement No. 107, Disclosures About Fair Value of Financial Instruments. The required disclosures are included in Note 12 in the Notes to Consolidated Financial Statements. In October 1994, the FASB issued Statement No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, which amended Statement No. 114, Accounting by Creditors for Impairment of a Loan. Statement 118 requires impaired loans to be measured at the present value of expected future cash flows discounted at the loans effective interest rate. The impairment amount would be the excess of the recorded investment in the loan over the resulting present value amount. Under certain circumstances, collateral value may be substituted for discounted expected future cash flows. Statement 118 is effective for years beginning after December 15, 1994. The Corporation will adopt this Statement prospectively in the first quarter of 1995. The effects of this Statement on the Corporation's consolidated financial statements are not expected to be material. INDEPENDENT AUDITORS' REPORT Certified Public Accountants Suite 1900 1021 East Cary Street Richmond, Virginia 23219 The Board of Directors Jefferson Bankshares, Inc.: We have audited the consolidated balance sheets of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferson Bankshares, Inc. and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes 1(B) and 3 to the consolidated financial statements, in 1994, the Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. As discussed in Notes 1(G) and 6 to the consolidated financial statements, in 1993, the Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. January 17, 1995 Jefferson Bankshares, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) December 31 1994 1993 ASSETS Cash and due from banks (Note 11) $ 100,809 $ 114,677 Federal funds sold and other money market investments - 10,212 Investment securities (Note 3): Available for sale (cost of $176,493) 170,815 - Held to maturity (market value on December 31 of $455,080 in 1994 and $737,688 in 1993) 467,733 716,617 Loans (Note 4) 1,101,636 1,023,221 Less: Unearned income (136) (310) Allowance for loan losses (Note 5) (13,754) (13,864) Net loans 1,087,746 1,009,047 Premises and equipment, net (Note 7) 51,185 48,171 Other assets 47,662 43,237 TOTAL ASSETS $ 1,925,950 $ 1,941,961 LIABILITIES Deposits (Notes 2 and 3): Demand $ 271,447 $ 256,321 Interest checking 298,471 294,686 Regular savings 196,524 184,631 Money market deposit accounts 336,860 346,864 Certificates of deposit $100,000 and over 72,511 68,904 Other time deposits 513,059 525,948 Total deposits 1,688,872 1,677,354 Federal funds purchased and securities sold under agreements to repurchase 16,479 53,832 Other short-term borrowings - 265 Other liabilities 14,027 12,863 Long-term debt (Note 8) 19 1,213 TOTAL LIABILITIES 1,719,397 1,745,527 SHAREHOLDERS' EQUITY Preferred stock of $10.00 par value. Authorized 1,000,000 shares; issued none - - Common stock of $2.50 par value. Authorized 32,000,000 shares; issued and outstanding 15,170,250 shares in 1994 and 15,080,553 shares in 1993 37,926 37,701 Capital surplus 46,332 43,977 Retained earnings 125,986 114,756 Unrealized losses on securities available for sale, net (Note 3) (3,691) - TOTAL SHAREHOLDERS' EQUITY (Notes 2, 9, 10, and 13) 206,553 196,434 Commitments and contingent liabilities (Notes 7, 11, and 14) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,925,950 $ 1,941,961
See accompanying notes to consolidated financial statements Jefferson Bankshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA) Years Ended December 31 1994 1993 1992 INTEREST INCOME Interest and fees on loans $ 84,427 $ 80,941 $ 79,174 Income on investment securities: Available for sale 11,582 - - Held to maturity 32,335 46,811 48,652 Other interest income 1,152 1,170 1,246 TOTAL INTEREST INCOME 129,496 128,922 129,072 INTEREST EXPENSE Interest-checking 6,799 7,186 7,156 Regular savings 5,368 4,942 4,545 Money market deposit accounts 9,706 10,184 11,338 Certificates of deposit $100,000 and over 2,842 2,850 3,270 Other time deposits 20,208 22,144 29,678 Short-term borrowings 441 429 358 Long-term debt 29 85 160 TOTAL INTEREST EXPENSE 45,393 47,820 56,505 NET INTEREST INCOME 84,103 81,102 72,567 Provision for loan losses (Note 5) 1,600 1,911 4,195 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 82,503 79,191 68,372 NON-INTEREST INCOME Trust income 3,944 4,037 3,765 Service charges on deposit accounts 8,702 8,475 8,326 Investment securities gains, net (Note 3) 1,166 88 298 Mortgage loan sales income 681 1,932 1,528 Other income 3,417 2,713 2,738 TOTAL NON-INTEREST INCOME 17,910 17,245 16,655 NON-INTEREST EXPENSE Salaries and employee benefits (Note 10) 37,261 34,651 31,439 Occupancy expense, net 5,063 4,740 4,653 Equipment expense 5,965 5,722 5,125 F.D.I.C. assessments 3,790 3,645 3,327 Other expense 14,344 12,910 10,421 TOTAL NON-INTEREST EXPENSE 66,423 61,668 54,965 INCOME BEFORE INCOME TAXES 33,990 34,768 30,062 Provision for income tax expense (Note 6) 11,390 11,183 9,018 NET INCOME $ 22,600 $ 23,585 $ 21,044 NET INCOME PER COMMON SHARE (Note 9) $ 1.49 $ 1.57 $ 1.50 See accompanying notes to consolidated financial statements Jefferson Bankshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Common Stock Unrealized Gains Capital Retained (Losses) on Securities Shares Amount Surplus Earnings Available for Sale, Net Total BALANCE DECEMBER 31, 1991 6,986,996 $ 17,844 $ 30,445 $105,849 $ $154,138 Net income, 1992 21,044 21,044 Cash dividends declared ($.53 per share) (7,299) (7,299) Acquisition of common stock (1,107) (2) (27) (29) Issuance of common stock for dividend reinvestment plan 44,133 110 1,048 1,158 Issuance of common stock for incentive stock plan (Note 10) 3,370 8 75 83 Issuance of common stock for stock options 11,090 27 149 176 Issuance of common stock for acquisition of The People's Bank of Front Royal (Note 2) 432,240 1,081 9,673 10,754 Cash paid in lieu of fractional shares (Note 2) (70) (2) (2) BALANCE DECEMBER 31, 1992 7,476,652 19,068 41,388 119,567 180,023 Net income, 1993 23,585 23,585 Cash dividends declared ($.62 per share) (9,034) (9,034) Acquisition of common stock (53,618) (134) (934) (1,068) Two-for-one stock split 7,521,788 18,428 (18,428) - Issuance of common stock for dividend reinvestment plan 85,755 214 1,625 1,839 Issuance of common stock for incentive stock plan (Note 10) 15,607 39 216 255 Issuance of common stock for acquisition of People's Bank of Virginia Beach (Note 2) 34,608 87 756 843 Cash paid in lieu of fractional shares (Note 2) (239) (1) (8) (9) BALANCE DECEMBER 31, 1993 15,080,553 37,701 43,977 114,756 196,434 Adjustment to beginning balance for change in accounting principle, net (Note 3) 5,072 5,072 Net income, 1994 22,600 22,600 Cash dividends declared ($.68 per share) (10,135) (10,135) Acquisition of common stock (72,500) (181) (1,235) (1,416) Issuance of common stock for dividend reinvestment plan (Note 10) 124,912 313 2,075 2,388 Issuance of common stock for stock options (Note 10) 37,285 93 280 373 Change in unrealized gains (losses) on securities available for sale, net (Note 3) (8,763) (8,763) BALANCE DECEMBER 31, 1994 15,170,250 $ 37,926 $ 46,332 $125,986 $(3,691) $206,553
See accompanying notes to consolidated financial statements Jefferson Bankshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years Ended December 31 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,600 $ 23,585 $ 21,044 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,975 5,752 4,890 Accretion and amortization 5,187 4,163 2,788 Provision for loan losses 1,600 1,911 4,195 (Increase) decrease in deferred tax benefit (3,069) 430 (800) Investment securities gains, net (1,166) (88) (298) (Gains) losses on sales of premises and equipment, net (173) 25 (72) (Increase) decrease in interest receivable (376) 581 (238) Increase (decrease) in taxes payable 106 (925) 7 Increase (decrease) in interest payable 91 (521) (2,329) Other, net 2,656 858 (5,575) Total adjustments 10,831 12,186 2,568 NET CASH PROVIDED BY OPERATING ACTIVITIES 33,431 35,771 23,612 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities held to maturity 153,889 159,657 147,211 Proceeds from sales and calls of investment securities held to maturity (Note 3) 4,838 13,211 21,041 Purchases of investment securities held to maturity (118,746) (225,118) (225,067) Proceeds from maturities of securities available for sale 19,450 - - Proceeds from sales of securities available for sale (Note 3) 44,346 - - Purchases of securities available for sale (35,407) - - Net increase in loans (81,602) (37,112) (54,489) Business combinations, net of cash (Note 2) 21,130 1,212 6,596 Proceeds from sales of premises and equipment 208 44 170 Proceeds from sales of foreclosed properties 2,732 3,145 2,485 Purchases of premises and equipment (8,772) (3,635) (4,154) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,066 (88,596) (106,207) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits (12,076) 28,299 109,701 Net increase (decrease) in short-term borrowings (37,618) 43,193 (8,701) Repayment of long-term debt (1,194) (918) (1,417) Proceeds from issuance of common stock 2,761 2,094 1,417 Payments to acquire common stock (1,416) (1,068) (29) Dividends paid (10,034) (8,507) (7,032) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (59,577) 63,093 93,939 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,080) 10,268 11,344 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 124,889 114,621 103,277 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 100,809 $ 124,889 $ 114,621
See accompanying notes to consolidated financial statements JEFFERSON BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practice within the banking industry. The more significant policies are summarized below. A PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Corporation and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to current presentations. B INVESTMENT SECURITIES As more fully discussed in Note 3, on January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (Statement 115). The Statement requires certain investment securities to be reported in one of three categories: Trading, Available for Sale, or Held to Maturity. Upon adoption of this Statement, a portion of the investment portfolio was classified as Available for Sale. In accordance with Statement 115, these securities are reported in the Corporation's consolidated financial statements at fair value. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and reported as a separate component of shareholders equity until realized. Held to Maturity securities are recorded at amortized cost. The Corporation has no trading account securities. Amortization of premiums and accretion of discounts are computed by the level yield method. C LOANS Interest on some instalment loans and certain second mortgage loans is accrued by a method that approximates the level yield method. Interest on all other loans is accrued based upon the principal amounts outstanding. The accrual of interest on loans is discontinued when the collection of principal or interest is legally barred or considered highly unlikely. After a loan is classified non-accrual, interest income is recognized only to the extent payments are received. The Corporation's subsidiary bank is in substantial compliance with regulatory policy that requires accrual of interest to be discontinued when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. D ALLOWANCE FOR LOAN LOSSES The Corporation follows the allowance method in providing for loan losses. Accordingly, all loan losses are charged to the allowance for loan losses, and all recoveries are credited to it. Estimates of possible future losses involve the exercise of management's judgment and assumptions with respect to future conditions. The principal factors considered by management in determining the adequacy of the allowance are growth and composition of the loan portfolio, historical loss experience, economic conditions, the value and adequacy of collateral, and the current level of the allowance. E PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization charges are computed principally by the straight-line method based upon the estimated useful lives of the assets, except for leasehold improvements which are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is shorter. The costs of major renovations and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. F GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is amortized using the straight line method over periods not exceeding fifteen years. Other acquired intangible assets, such as the value of purchased core deposits, are amortized using the straight line method over the periods benefited, not exceeding fifteen years. G INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). Statement 109 required a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date. Effective January 1, 1993, the Corporation adopted Statement 109 and has included the cumulative effect of the change in the method of accounting for income taxes in the provision for income taxes in the 1993 consolidated statement of income. The cumulative effect of the change was immaterial. Pursuant to the deferred method under APB Opinion 11, which was applied in 1992 and prior years, certain items of income and expense were recognized in one year for income tax purposes and in other years for financial reporting purposes. Provisions for deferred taxes were made in recognition of these timing differences. H COMMON STOCK Shares of its own common stock reacquired by the Corporation are cancelled as a matter of state law and are accounted for as authorized but unissued shares. I EARNINGS PER COMMON SHARE Earnings per common share amounts are calculated by dividing net income by the daily average number of outstanding common shares. Common share equivalents resulting from the incentive stock plan and stock option plan are not used in the calculations because their effect is not material. J PENSION PLAN The Corporation has a non-contributory, trusteed defined benefit pension plan covering salaried employees and some hourly employees meeting certain age and service requirements. The Corporation computes the net periodic pension cost of the plan in accordance with Statement of Financial Accounting Standards No. 87, Employers' Accounting for Pensions. The net periodic pension cost consists of the following components: service cost (benefits earned during the year), interest costs on the projected benefit obligation, actual return on plan assets, and the net amount resulting from the amortization and deferral of certain items over 15 years. No contributions were made to the plan in 1994, 1993, or 1992. K TRUST DIVISION Securities and other property held by the Trust Division in a fiduciary or agency capacity are not assets of the Corporation and are not included in the accompanying consolidated financial statements. L STATEMENTS OF CASH FLOWS Cash and cash equivalents include cash and due from banks and federal funds sold and other money market investments. Supplemental disclosures of cash flow information follows: (IN THOUSANDS) 1994 1993 1992 Cash payments for: Interest $45,302 $46,937 $57,156 Income taxes 11,748 12,345 9,102 Non-cash investing and financing activities: Loan balances transferred to foreclosed properties $ 1,534 $ 1,254 $ 3,975 Issuance of common stock for acquisitions - 834 10,752 2 BUSINESS COMBINATIONS On August 18, 1994, Bank of Loudoun (Loudoun) merged into Jefferson National Bank. The Corporation issued 538,881 shares of its common stock in exchange for all of the outstanding shares of common stock of Loudoun. The merger was accounted for as a pooling of interests. Accordingly, the consolidated financial statements have been restated to include the accounts and transactions of Loudoun for all periods presented. On March 25, 1994, Jefferson National Bank purchased the deposit liabilities of Liberty Federal Savings Bank (Liberty) from the Resolution Trust Corporation. Liberty had two banking offices in Warrenton, Virginia, and total deposits of approximately $24 million. The transaction resulted in goodwill of $2.0 million. Following the close of business on February 11, 1993, People's Bank of Virginia Beach (PBVB) merged with Jefferson National Bank. The Corporation issued 34,369 shares of its common stock and paid $562,000 in cash in the transaction. In addition, $9,000 was paid in cash in settlement of fractional shares. On February 11, 1993, PBVB had $13 million in total assets, $7 million in loans, and $12 million in deposits. The transaction resulted in goodwill of $639 thousand. On December 17, 1992, The Peoples Bank of Front Royal (PBFR) merged with Jefferson National Bank. The Corporation issued 432,170 shares of its common stock in the merger. In lieu of fractional shares, the Corporation paid $34.75 per share in cash. PBFR shareholders who exercised an option to receive $100 in cash for each PBFR share were paid a total of $1,695,900. The transaction resulted in goodwill of $4.5 million. The transactions with Liberty, PBVB and PBFR were accounted for as purchases, and, accordingly, the accounts and transactions for each entity are included in the Corporation's consolidated financial statements subsequent to the respective merger dates. 3 INVESTMENT SECURITIES As discussed in Note 1(B), on January 1, 1994, the Corporation adopted the provisions of Statement 115. In accordance with the Statement, prior period financial statements have not been restated to reflect the change in accounting principle. As of January 1, 1994, the cumulative effect of adopting this Statement was an increase in consolidated shareholders' equity of $5,072,000, net of deferred taxes of $2,731,000 to reflect the net unrealized gains on securities classified as Available for Sale that were previously classified as Held to Maturity and carried at amortized cost. As of December 31, 1994, the impact on consolidated shareholders' equity was a decrease of $3,691,000, net of deferred taxes of $1,987,000. Sales and calls of investment securities produced the following results: (IN THOUSANDS) AVAILABLE FOR SALE HELD TO MATURITY Years ended December 31 1994 1993 1992 Proceeds from: Sales $44,346 $7,411 $ 6,434 Calls - 5,800 14,607 Gross gains $ 1,166 $ 224 $ 298 Gross losses - 136 - Net gains $ 1,166 $ 88 $ 298 There were no sales of Held to Maturity securities in 1994. Proceeds from calls of Held to Maturity securities were $4,838,000 in 1994. Investment securities having carrying values of $82,906,000 at December 31, 1994, and $79,128,000 at December 31, 1993, were pledged to secure deposits and for other purposes required by law. The book values, approximate fair values, and gross unrealized gains and losses of investment securities are as follows: (IN THOUSANDS) 1994 SECURITIES-AVAILABLE FOR SALE Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury $172,772 $94 $5,627 $167,239 U.S. Government agencies 2,744 - 83 2,661 Mortgage-backed securities 977 - 62 915 TOTAL $176,493 $94 $5,772 $170,815 SECURITIES-HELD TO MATURITY Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government agencies $233,900 $391 $ 8,381 $225,910 States and political subdivisions 26,318 221 393 26,146 Corporate debt securities 205,434 220 4,711 200,943 Other securities 2,081 - - 2,081 TOTAL $467,733 $832 $13,485 $455,080 1993 SECURITIES-HELD TO MATURITY Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury $203,400 $ 8,032 $229 $211,203 U.S. Government agencies 278,057 9,318 457 286,918 States and political subdivisions 30,404 686 - 31,090 Corporate debt securities 186,587 3,536 175 189,948 Mortgage-backed securities 9,575 35 14 9,596 Other securities 8,594 339 - 8,933 TOTAL $716,617 $21,946 $875 $737,688 The book values and approximate fair values by contractual maturities are shown in Table 12, Investment Portfolio, in Managements Discussion and Analysis (MD&A). 4 LOANS The composition of the loan portfolio by loan classification as of December 31, 1994 and 1993, appears in Table 7, Loan Portfolio, in MD&A. Information on risk elements in the loan portfolio for 1994 and 1993 appears in Table 10, Risk Elements, in MD&A. Loans to directors and executive officers of the Corporation and its significant subsidiaries, loans to companies in which they have a significant interest, and loans to members of their immediate families are made on substantially the same terms as those prevailing at the time for other loan customers. Excluding loans aggregating less than $60,000 to any such person, his or her interests, and immediate family members, the balances of such loans outstanding were $20,853,000 and $23,671,000 at December 31, 1994 and 1993, respectively. The changes in the balances from year-end 1993 to 1994 resulted from additions during 1994 of $29,014,000 and collections amounting to $31,832,000. 5 ALLOWANCE FOR LOAN LOSSES A summary of the transactions in the allowance for loan losses for the years ended December 31, 1994, 1993, and 1992, appears in Table 9, Summary of Loan Loss Experience, in MD&A. 6 INCOME TAXES The Corporation and its subsidiaries file consolidated federal and state income tax returns. As discussed in Note 1 (G), effective January 1, 1993, the Corporation adopted Statement 109. As provided by Statement 109, the Corporation elected to adopt this statement prospectively and has recorded the cumulative effect of such adoption in its 1993 provision for income taxes. The result of applying Statement 109 was immaterial. Prior years' consolidated financial statements have not been restated to apply the provisions of Statement 109. The current and deferred income tax expense (benefit) provisions are as follows: (IN THOUSANDS) 1994 1993 1992 Current: Federal $11,619 $11,794 $9,557 State 6 34 16 11,625 11,828 9,573 Deferred (235) (645) (555) $11,390 $11,183 $9,018 The provision for income tax expense is different from the amount computed by applying the statutory corporate federal income tax rate of 35 percent in 1994 and 1993 and 34 percent in 1992 to income before income taxes. The reasons for this difference are as follows: (IN THOUSANDS) % of Income 1994 Amount Before Taxes Provision for income tax expense at statutory rate (35%) $11,897 35.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (813) (2.4) Other, net 306 .9 Provision for income tax expense $11,390 33.5% 1993 Provision for income tax expense at statutory rate (35%) $12,169 35.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (981) (2.8) Other, net (5) - Provision for income tax expense $11,183 32.2% 1992 Provision for income tax expense at statutory rate (34%) $10,221 34.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (1,150) (3.8) Other, net (53) (.2) Provision for income tax expense $ 9,018 30.0% The significant components of the deferred income tax benefit for the years ended December 31, 1994 and 1993 are as follows: (IN THOUSANDS) 1994 1993 Deferred tax benefit (exclusive of the effects of other components listed below) $(235) $(517) Adjustments to deferred tax assets and liabilities for enacted changes in tax rates and laws - (128) $(235) $(645) For the year ended December 31, 1992, the deferred income tax benefit of $555,000, resulted principally from timing differences in the recognition of the allowance for loan losses. The effects of temporary differences that give rise to significant portions of the deferred tax benefit and deferred tax liabilities at December 31, 1994 and 1993 are as follows: (IN THOUSANDS) 1994 1993 Deferred tax benefit: Allowance for loan losses $ 4,759 $4,741 Deferred compensation 1,550 1,260 Investment securities available for sale 1,987 - Other 2,716 1,492 Total gross deferred tax benefit 11,012 7,493 Deferred tax liabilities: Premises and equipment, principally due to differences in depreciation 2,333 2,450 Other 1,689 830 Total gross deferred tax liability 4,022 3,280 Net deferred tax benefit (included in other assets) $ 6,990 $4,213 At December 31, 1994, the Corporation has net operating loss carryforwards obtained from previous business combinations for federal income tax purposes of approximately $440,000 which are available to offset future federal taxable income, if any, through 2003. The Corporation has not recognized a valuation allowance for the gross deferred tax benefit recorded in the accompanying 1994 and 1993 consolidated balance sheets since it is not dependent on future earnings for recoverability. 7 PREMISES AND EQUIPMENT The Corporation's principal executive offices are located at 123 East Main Street, Charlottesville, Virginia. Premises and equipment at December 31, 1994 and 1993, are summarized as follows: (IN THOUSANDS) Estimated Useful Lives (Years) 1994 1993 Land - $ 10,558 $10,565 Buildings 30-50 43,061 40,575 Leasehold improvements 5-40 4,312 4,345 Furniture and equipment 3-12 47,754 42,649 105,685 98,134 Less accumulated depreciation and amortization 54,500 49,963 $ 51,185 $48,171 Depreciation and amortization of premises and equipment aggregated $5,723,000 in 1994, $5,266,000in 1993, and $4,742,000 in 1992. At December 31, 1994, the Corporation leased 26 of its 97 banking offices under operating lease agreements on terms ranging from 1 to 25 years generally with renewal options up to 10 years. The terms of these leases expire at various dates from 1995 through 2051. Supplementary office space and equipment are leased on a short-term basis. Rent expense charged to operations under operating lease agreements totaled $1,081,000, $1,044,000, and $919,000 in 1994, 1993, and 1992, respectively. The following is a schedule by years of future minimum rental payments, net of subleases, required under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 1994: (IN THOUSANDS) Future Minimum Years ending December 31: Payments 1995 $ 851 1996 752 1997 710 1998 649 1999 456 Later years 1,822 $5,240 Management expects that in the normal course of business most leases will be renewed or replaced by other leases. Therefore, it is anticipated that future annual rental expense will not be less than the amount shown for the year ended December 31, 1994. Most of the leases provide that the Corporation pay taxes, maintenance, insurance, and certain other operating expenses of the leased assets. Leased property recorded under capital leases and the related lease payment commitments are not material. 8 LONG-TERM DEBT As of December 31, 1994, long-term debt was $19,000. As of December 31, 1993, the balance of $1,213,000 consisted of $900,000 variable rate term loan payable through November 1, 1994 and other long term debt of $313,000. 9 COMMON STOCK AND EARNINGS PER SHARE At December 31, 1994, 996,492 shares were reserved for use in the Corporation's dividend reinvestment plan. The daily average common shares outstanding used in computing earnings per share were 15,148,400 in 1994, 15,060,873 in 1993, and 14,075,372 in 1992. On March 23, 1993, the board of directors declared a 2-for-1 stock split, which was distributed April 30, 1993. Accordingly, the average number of shares outstanding and per share amounts for net income, dividends declared, and book value have been restated for all periods presented to give effect to the split. 10 EMPLOYEE BENEFIT PLANS The Corporation has a non-contributory, trusteed defined benefit pension plan covering salaried employees and some hourly employees meeting certain age and service requirements. Benefits are based upon years of service and average compensation for the five highest paid years during the last 10 years of service, integrated with the Social Security tax base. Contributions are made to the plan, up to the amount deductible for federal income tax purposes, based upon the amount actuarially determined to be necessary for meeting plan obligations. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future. Plan assets consist principally of marketable stocks and corporate and U.S. government debt obligations. The following table sets forth the plans funded status and amounts recognized in the Corporation's consolidated balance sheets as of December 31: (IN THOUSANDS) 1994 1993 Accumulated benefit obligation (includes vested benefits of $19,340 for 1994 and $17,788 for 1993) $(19,633) $(19,064) Projected benefit obligation for service rendered to date $(24,359) $(24,205) Plan assets at fair value 28,556 28,307 Plan assets in excess of projected benefit obligation (funded status) 4,197 4,102 Unrecognized net gain (3,057) (2,753) Unrecognized prior service cost 106 132 Unrecognized net asset being amortized over 15 years (1,084) (1,264) Prepaid pension cost included in other assets $ 162 $ 217 Net pension cost (benefit) for 1994, 1993, and 1992 includes the following components: (IN THOUSANDS) 1994 1993 1992 Service cost-benefits earned during the year $ 1,061 $ 872 $ 797 Interest cost on projected benefit obligation 1,714 1,576 1,473 Actual return on plan assets (1,256) (2,751) (2,571) Net amortization and deferral (1,464) 45 32 Net pension cost (benefit) for the year $ 55 $ (258) $ (269) The assumed discount rate was 7.25% and the expected rate of return was 9.25% for 1994. The assumed discount rate and expected rate of return were 8.0% and 9.0%, respectively, for 1993 and 1992. The weighted average rate of increase in future compensation was assumed to be 5.5% in 1992, and 5.25% in 1993 and 1994. The Corporation has a defined contribution profit-sharing plan covering salaried employees and some hourly employees. Subject to certain limitations, the Corporation contributes to the plan 5.25% of its consolidated net income before taxes, adjusted as provided by the plan. The Corporation also has an incentive stock plan under which awards of units consisting of hypothetical shares of the Corporation's common stock may be made to senior officers and key employees. The plan became effective May 1, 1985, and the final awards were granted on May 31, 1994. The Corporation has reserved 345,108 shares of common stock for this plan. As of December 31, 1994, 264,246 units had been awarded, of which 75,846 had vested. The remaining nonvested units will vest over five years beginning May 1, 1995. The cost of the plan, based upon the market value of the Corporation's common stock times the number of units awarded, is accrued as salaries and employee benefits expense over the various vesting periods. In December 1994, the Corporation adopted the 1995 Long-Term Incentive Stock Plan (the 1995 Plan). Subject to shareholder approval, on January 3, 1995 the Corporation awarded 118,500 incentive stock options under the 1995 Plan. The options, which were awarded at the then market price, are exercisable over a five year period beginning January 1996. The Corporation has reserved 750,000 shares for the 1995 Plan. No awards were granted during 1994. At its December 1994 board meeting, the Board of Directors of Jefferson Bankshares, Inc. amended and restated the Deferred Compensation and Stock Purchase Plan for Non-Employee Directors to provide participants the option of investing in Jefferson Bankshares, Inc. common stock. The amendment is subject to shareholder and regulatory approval, and the Corporation anticipates registering 150,000 shares of common stock for this purpose in the second quarter of 1995. The costs (benefits) of these major employee benefit plans included in salaries and employee benefits expense are summarized as follows: (IN THOUSANDS) 1994 1993 1992 Pension $ 55 $ (258) $ (269) Profit sharing 1,890 2,019 1,849 Incentive stock 698 526 243 $2,643 $2,287 $1,823 Effective November 1, 1994, the Corporation established an employee stock purchase plan covering up to 250,000 shares of common stock. As of December 31, 1994, the Corporation has reserved 249,305 shares of common stock for this plan. The plan is available to all salaried employees. Participating employees may contribute through periodic payroll deductions, up to 25% of their compensation. As of December 31, 1994, 352 employees or 31% of eligible employees participated in the plan. 11 COMMITMENTS, CONTINGENT LIABILITIES, OFF-BALANCE SHEET RISKS, AND OTHER MATTERS The Corporation is a party to financial instruments which properly are not reflected in the consolidated financial statements. These include commitments to extend credit and letters of credit. These instruments involve elements of credit and interest rate risk. Nonperformance or default by the other party to loan commitments or standby letters of credit could result in a financial loss to the Corporation equal to the amount of the loan commitments and standby letters of credit. The same credit and collateral policies are used by the Corporation in issuing these financial instruments as are used for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer under a set of specified terms and conditions. Commitments generally have fixed expiration dates or 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. Loan commitments may be secured or unsecured. In the case of secured commitments, collateral varies but may include commercial or residential properties; business assets such as inventory, equipment, or accounts receivable; securities; or other business or personal assets or guarantees. At December 31, 1994, commitments to extend credit totaled $202,766,000. Standby letters of credit are conditional commitments issued by the Corporation or its subsidiaries to guarantee the performance of a customer to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. At December 31, 1994, commitments outstanding under standby letters of credit approximated $25,454,000. The investment securities portfolio includes U.S. Treasury and U.S. Government agency securities which may, on occasions, be loaned to securities dealers designated as "Primary Government Dealers" by the Federal Reserve System. Such loans of securities are secured by U.S. Treasury securities, U.S. Government agency securities, or cash with a market value exceeding 102% of the market value of securities lent. The loaned investment securities continue to be reported in the consolidated financial statements, and the loan transaction is not reflected therein. In the event loans are secured by cash, the pledged cash is reported as an asset in the Corporation's consolidated balance sheet and an offsetting liability is reported as short-term borrowings. All such loans are callable in one business day. Such transactions may involve credit and interest rate risk. At December 31, 1994, securities loaned totaled $19,097,000. Various litigation is pending against the Corporation and its subsidiaries. After reviewing these suits with counsel, management believes that their ultimate resolution will not materially affect the consolidated financial statements. As a member of the Federal Reserve System, the Corporation's subsidiary bank is required to maintain certain average reserve balances. For the final weekly reporting period in the years ended December 31, 1994 and 1993, the aggregate amounts of daily average required balances were approximately $47,407,000 and $45,526,000, respectively. The bank originates mortgage loans that are sold in the secondary market. In connection with such activities, the Corporation maintains fidelity bond insurance in the amount of $15,000,000 and errors and omissions insurance of $2,500,000, which are in excess of required amounts. 12 FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with the FASB's Statement No. 107, Disclosures About Fair Value of Financial Instruments, the following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: A CASH AND DUE FROM BANKS The carrying amount is a reasonable estimate of fair value. B MONEY MARKET INVESTMENTS For short-term instruments, the carrying amount is a reasonable estimate of fair value. For instruments that mature in over 90 days, such as fixed-rate certificates of deposit, the fair value is estimated based on the discounted cash flow of contractual cash flows using interest rates currently offered for deposits of similar maturities. C INVESTMENT SECURITIES Fair values of investment securities are based on quoted market prices or dealer quotes. In the absence of quoted market prices or dealer quotes, fair value is estimated using quoted market prices for similar securities, adjusted for differences between the quoted securi- ties and the securities being valued. D LOANS Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by loan type (such as construction, mortgage, commercial, financial and agricultural, and consumer), interest rate terms (such as fixed or adjustable), and estimated credit risk. For certain loans, such as some residential mortgage loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of performing loans is estimated by discounting the future cash flows through the estimated maturities using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimate of maturity is based on historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. E DEPOSITS The fair value of demand deposits, interest-checking accounts, regular savings accounts, and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit and certain other deposits is estimated based on the discounted value of the contractual cash flows using the interest rates currently offered for deposits of similar remaining maturities. F SHORT-TERM BORROWINGS The carrying values of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings are reasonable estimates of fair value. G LONG-TERM DEBT Interest rates on long-term debt are variable and, consequently, the carrying amount is a reasonable estimate of fair value. H OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The carrying amount is a reasonable estimate of the fair value of securities loaned. At December 31, 1994, the carrying amounts and fair values of loan commitments, stand-by letters of credit, and securities loaned were immaterial. I LIMITATIONS Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument or groups of such instruments. Because these estimates are subjective in nature and involve uncertainties and matters of discretionary judgment, they cannot be determined with precision. Changes in assumptions could affect the estimates significantly. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, premises and equipment, and goodwill. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The estimated fair values of the Corporation's financial instruments are as follows: (IN THOUSANDS) Amortized Fair December 31, 1994 Cost Value Financial assets: Cash and due from banks $ 100,809 $ 100,809 Investment securities: Available for sale 176,493 170,815 Held to maturity 467,733 455,080 Loans, net 1,087,746 1,096,689 Financial liabilities: Demand deposits and interest-bearing transaction accounts 1,103,302 1,103,302 Certificates of deposit 585,570 584,547 Short-term borrowings 16,497 16,497 Long-term debt 19 19 December 31, 1993 Financial assets: Cash and due from banks $ 114,677 $ 114,677 Federal funds sold and other money market investments 10,212 10,365 Investment securities- Held to maturity 716,617 737,688 Loans, net 1,009,047 1,026,201 Financial liabilities: Demand deposits and interest-bearing transaction accounts 1,082,502 1,082,502 Certificates of deposit 594,852 599,016 Short-term borrowings 54,097 54,097 Long-term debt 1,213 1,213 13 PARENT COMPANY The Parent Company, in the ordinary course of business, provides its subsidiaries with certain centralized management services and staff support. The cost of these services is allocated to each subsidiary based on analyses of the services rendered. In addition, certain subsidiaries of Jefferson Bankshares, Inc. have in the past borrowed funds from the Parent Company at rates approximating the Parent Companys cost of borrowing. Certain of the subsidiaries provide the Parent Company with computer and other services for which the Parent Company is charged fees by the respective subsidiaries. The primary source of funds for the dividends paid by the Parent Company is dividends received from its bank subsidiary. The payment of such dividends by the subsidiary bank and the ability of the bank to loan or advance funds to the Parent Company are subject to certain statutory limitations. On December 31, 1994, 21 percent of consolidated shareholders' equity was not so restricted. The Parent Company guarantees certain leases for its subsidiaries. Condensed financial information for the Parent Company follows: Condensed Balance Sheets JEFFERSON BANKSHARES, INC. (PARENT COMPANY) (IN THOUSANDS) December 31 1994 1993 ASSETS Cash $ 14 $ 503 Money market investments at bank subsidiary 4,100 3,700 Dividends receivable from subsidiaries 2,560 2,720 Investments in subsidiaries at equity: Bank 196,479 187,777 Bank-related 4,848 4,715 201,327 192,492 Other assets 3,314 3,034 TOTAL ASSETS $211,315 $202,449 LIABILITIES AND SHAREHOLDERS' EQUITY Long-term debt $ - $ 900 Other liabilities 4,762 5,115 TOTAL LIABILITIES 4,762 6,015 Shareholders' equity Common stock 37,926 37,701 Capital surplus 46,332 43,977 Retained earnings 125,986 114,756 Unrealized losses on securities available for sale of Bank subsidiary, net (3,691) - TOTAL SHAREHOLDERS' EQUITY 206,553 196,434 TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $211,315 $202,449 Condensed Statements of Income JEFFERSON BANKSHARES, INC. (PARENT COMPANY) (IN THOUSANDS) Years Ended December 31 1994 1993 1992 INCOME Dividends from bank subsidiary $10,560 $9,920 $8,440 Interest and fees from subsidiaries 2,717 2,690 2,374 Other income 100 100 50 TOTAL INCOME 13,377 12,710 10,864 EXPENSE Interest expense 17 59 131 Salaries and employee benefits 1,892 2,040 1,725 Merger and acquisition expense 150 27 121 Other expense 852 962 416 TOTAL EXPENSE 2,911 3,088 2,393 Income before income tax benefit (expense) and equity in undistributed net income of subsidiaries 10,466 9,622 8,471 Income tax benefit (expense) (19) (13) 14 Income before equity in undistributed net income of subsidiaries 10,447 9,609 8,485 Equity in undistributed net income of subsidiaries 12,153 13,976 12,559 NET INCOME $22,600 $23,585 $21,044 Condensed Statements of Cash Flows JEFFERSON BANKSHARES, INC. (PARENT COMPANY) (IN THOUSANDS) Years Ended December 31 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,600 $ 23,585 $ 21,044 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36 36 36 (Increase) decrease in dividends receivable 160 (520) (120) Increase (decrease) in taxes payable (13) 319 31 (Increase) decrease in deferred tax benefit (113) 83 (43) Equity in undistributed net income of subsidiaries (12,153) (13,976) (12,559) Other, net (752) (258) (68) Total adjustments (12,835) (14,316) (12,723) NET CASH PROVIDED BY OPERATING ACTIVITIES 9,765 9,269 8,321 CASH FLOWS FROM INVESTING ACTIVITIES- Business combinations, net of cash - (593) (1,750) NET CASH USED IN INVESTING ACTIVITIES - (593) (1,750) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings (265) 34 32 Repayment of long-term debt (900) (900) (1,400) Proceeds from issuance of common stock 2,761 2,094 1,417 Payments to acquire common stock (1,416) (1,068) (29) Dividends paid (10,034) (8,507) (7,032) NET CASH USED IN FINANCING ACTIVITIES (9,854) (8,347) (7,012) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (89) 329 (441) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,203 3,874 4,315 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,114 $ 4,203 $ 3,874 14 SUBSEQUENT EVENT (UNAUDITED) On February 3, 1995, Jefferson National Bank entered into an agreement to acquire the deposit liabilities of the Waynesboro office of First Union National Bank. The office, which had approximately $30 million in deposits at year-end 1994, will be merged with Jefferson National Bank. The acquisition, which is expected to be completed in the second quarter of 1995, will be accounted for as a purchase. EX-21 6 EXHIBIT 21-SUBSIDIARIES SUBSIDIARIES OF JEFFERSON BANKSHARES, INC. December 31, 1994 Jurisdiction in Names Which Organized Direct Indirect Jefferson National Bank U.S. Grace Insurance Agency, Incorporated Virginia Charter Insurance Managers, Inc. Virginia Jefferson Financial, Inc. Virginia Jefferson Properties, Inc. Virginia EX-23 7 EXHIBIT 23-CONSENT OF AUDITOR Consent of Independent Auditors The Board of Directors Jefferson Bankshares, Inc.: We consent to incorporation by reference in (1) Registration Statement No. 33-56025 on Form S-3, (2) Registration Statement No. 33-56121 on Form S-8, and (3) Registration Statement No. 33-57461 on Form S-8 of Jefferson Bankshares, Inc. of our report dated January 17, 1995 relating to the consolidated balance sheets of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 annual report on Form 10-K of Jefferson Bankshares, Inc. Our report refers to the adoption of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1994 and SFAS No. 109, Accounting for Income Taxes, in 1993. KPMG Peat Marwick LLP Richmond, Virginia March 27, 1995 EX-24 8 EXHIBIT 24-POWER OF ATTORNEY POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned Directors of Jefferson Bankshares, Inc., a Virginia corporation, hereby constitute and appoint O. Kenton McCartney, Allen T. Nelson, Jr. and William M. Watson, Jr., or any of them, with full power to each of them to act alone, our true and lawful attorneys-in-fact and agents, for us on our behalf and in our name, place and stead, to execute and file the Annual Report on Form 10-K for Jefferson Bankshares, Inc. for its fiscal year ended December 31, 1994, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. Dated: January 24, 1995 John T. Casteen, III (Seal) J. A. Kessler, Jr. (Seal) Lawrence S. Eagleburger (Seal) W. A. Rinehart, III (Seal) Hunter Faulconer (Seal) Gilbert M. Rosenthal (Seal) Fred L. Glaize, III (Seal) Alson H. Smith, Jr. (Seal) Henry H. Harrell (Seal) Lee C. Tait (Seal) Alex J. Kay, Jr. (Seal) H. A. Williamson, Jr. (Seal) EX-27 9 EXHIBIT 27-FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1994 DEC-31-1994 100,809 1,417,425 0 0 170,815 467,733 455,080 1,101,500 13,754 1,925,950 1,688,872 16,479 14,027 19 37,926 0 0 168,627 1,925,950 84,427 43,917 1,152 129,496 44,923 45,393 84,103 1,600 1,166 66,423 33,990 22,600 0 0 22,600 1.49 0 4.87 6,996 2,713 0 5,420 13,864 2,385 675 13,754 11,344 0 2,410