-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KMUweguycwuGOQIjsfTy40LXo4+pDlPODEPiyAc1TuJg8rWh1lhkYh7012nA9mZF l6cauFCaMmQiJYmf/G2hMw== 0000916641-96-000202.txt : 19960329 0000916641-96-000202.hdr.sgml : 19960329 ACCESSION NUMBER: 0000916641-96-000202 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JEFFERSON BANKSHARES INC CENTRAL INDEX KEY: 0000311100 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541104491 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09101 FILM NUMBER: 96539771 BUSINESS ADDRESS: STREET 1: 123 E MAIN ST STREET 2: P O BOX 711 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22902 BUSINESS PHONE: 8049721100 MAIL ADDRESS: STREET 1: 123 E MAIN ST STREET 2: P O BOX 711 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22902 10-K405 1 JEFFERSON BANKSHARES 10K405 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, 1995 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, 1996, 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 $307,973,843. As of January 31, 1996, Jefferson Bankshares, Inc. had issued and outstanding 15,172,549 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, 1995 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 23, 1996 referred to in Part III are incorporated by reference into Part III. PART I ITEM 1. BUSINESS 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 nonbank subsidiaries. Within the last five years Jefferson Bankshares acquired the Peoples Bank of Front Royal with two offices and approximately $60 million in total assets; acquired the People's Bank of Virginia Beach with one office and approximately $14 million in assets, and acquired the Bank of Loudoun with one office and approximately $53 million in total assets; and Jefferson National Bank purchased the deposit liabilities of approximately $24 million and banking offices of Liberty Federal Savings Bank from the Resolution Trust Corporation. 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. In June, 1995, Jefferson National Bank completed its acquisition of deposits associated with the Waynesboro office of First Union National Bank and the downtown Richmond office of Virginia First Savings Bank. Approximately $35 million in deposits accounts were transferred to Jefferson National Bank in these two transactions. 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, 1995, Jefferson Bankshares and its affiliates had 1,108 full-time and 125 part-time employees. Management believes that employee relations are good. As of September 30, 1995, 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 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 Jefferson National Bank, derived 91 percent of its income from Jefferson Bankshares and its subsidiaries in 1995. 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. Also incorporated herein by reference is the information on pages 10 and 12 of the 1995 Annual Report to Shareholders (the "1995 Annual Report")as to the distribution of the Corporation's assets, liabilities and shareholders' equity and interest rates and interest differential; pages 18 and 19 of the 1995 Annual Report as to the Corporation's investment portfolio; pages 14 through 18 of the 1995 Annual Report as to the Corporation's loan portfolio (including the Corporation's loan loss experience); page 20 of the 1995 Annual Report as to the Corporation's deposits; pages 8 and 9 of the 1995 Annual Report as to the Corporation's return on equity and assets; and page 20 of the 1995 Annual Report as to the Corporation's short-term borrowings. ITEM 2. PROPERTIES Incorporated herein by reference is the discussion of premises and equipment included in Part I, Item 1 hereof and in Note 7 (entitled "Premises and Equipment") to the consolidated financial statements in the 1995 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, 52, is President and Chief Executive Officer. Robert H. Campbell, Jr., 61, is Senior Vice President. Allen T. Nelson, Jr., 46, is Senior Vice President, Treasurer 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., 63, is Senior Vice President. Donald W. Fulton, Jr., 49, is Vice President-Investor Relations. William M. Watson, Jr., 41, 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 pages 20 and 21 under the heading "Capital Resources" and in the table captioned "Common Stock Performance and Dividends" on page 22 of the 1995 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference is the information in the table captioned "Selected Financial Data" on page 8 of the 1995 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 8 through 23 of the 1995 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 8, 9 and 22, respectively, of the 1995 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference is the information appearing under the headings "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Changes in Shareholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements," and "Independent Auditors' Report" on pages 24 through 37 of the 1995 Annual Report. Incorporated by reference is the information in the table captioned "Summary of Financial Results by Quarter" on page 9 of the 1995 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 6 of the Corporation's definitive Proxy Statement for the 1996 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 14 of the Corporation's definitive Proxy Statement for the 1996 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 1996 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 14 of the Corporation's definitive Proxy Statement for the 1996 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 24 through 37 of the 1995 Annual Report: Consolidated Balance Sheets at December 31, 1995 and December 31, 1994. Consolidated Statements of Income for the years ended December 31, 1995, December 31, 1994 and December 31, 1993. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, December 31, 1994, and December 31, 1993. Consolidated Statements of Cash Flows for the years ended December 31, 1995, December 31, 1994 and December 31, 1993. Notes to Consolidated Financial Statements. Independent Auditors' Report. 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 None Except for the information referred to in Items 1, 2, 5, 6, 7, 8 and 14(a)(1) hereof, the 1995 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 28, 1996 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 28, 1996 O. Kenton McCartney President, Chief Executive Officer and Director March 28, 1996 Allen T. Nelson, Jr. Senior Vice President, Treasurer and Chief Financial Officer March 28, 1996 Hovey S. Dabney Chairman of the Board March 28, 1996 John T. Casteen, III* Director March 28, 1996 Lawrence S. Eagleburger* Director March 28, 1996 Hunter Faulconer* Director March 28, 1996 Fred L. Glaize, III* Director March 28, 1996 Henry H. Harrell* Director March 28, 1996 Alex J. Kay, Jr.* Director March 28, 1996 J. A. Kessler, Jr.* Director March 28, 1996 W. A. Rinehart, III* Director March 28, 1996 Gilbert M Rosenthal* Director March 28, 1996 Alson H. Smith, Jr.* Director March 28, 1996 Lee C. Tait* Director March 28, 1996 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) Amended and Restated Bylaws dated January 24, 1995, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1994. 4. Instruments defining the rights of security holders including indentures: (a) Articles of Incorporation, 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) Split Dollar Life Insurance Plan, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1984. (c) 1995 Long Term Incentive Stock Plan, incorporated by reference to Exhibit 99(a) to Form S-8 of Jefferson Bankshares, File No. 33-60799. (d) Amendment dated June 27, 1995 to Long Term Incentive Stock Plan, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1995. (e) Deferred Compensation and Stock Purchase Plan for Non-Employee Directors, incorporated by reference to Exhibit 99(a) to Form S-8 of Jefferson Bankshares, File No. 33-57461. * (f) 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. * (g) 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. * (h) Executive Severance Agreement dated December 6, 1993 between Jefferson Bankshares, Inc. and Allen T. Nelson, Jr., incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1994. * (i) Executive Severance Agreement dated October 25, 12 1993 between Jefferson Bankshares and William M. Watson, Jr., is filed herewith. * (j) 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. * (k) Amendment dated February 15, 1995, to the 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' report on Form 10-Q for the quarter ended March 31, 1995. * (l) 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. * (m) Amendment dated as of May 19, 1994, to the Amended and Restated Split Dollar Life Insurance Agreement dated October 29, 1993 between Jefferson Bankshares and O. Kenton McCartney, incorporated by reference to Exhibit 10(p) to Form S-4 of Jefferson Bankshares, File No. 33-53727. * (n) Split Dollar Life Insurance Agreement dated January 6, 1995 between Jefferson Bankshares, Inc. and Allen T. Nelson, Jr., incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1994. * (o) Amended and Restated Split Dollar Life Insurance 17 Agreement dated October 29, 1993 between Jefferson Bankshares and William M. Watson, Jr. is filed herewith. 13. Annual Report to Security Holders, Form 10-Q or 31 Quarterly Report to Security Holders 21. Subsidiaries of the Registrant 71 23. Consents of Experts and Counsel 72 Consent of KPMG Peat Marwick LLP to incorporation by reference of auditors' report into Jefferson Bankshares' Registration Statements on Form S-3 and Form S-8 is filed herewith. 24. Power of Attorney 73 27. Financial Data Schedule 85 * Management contract or compensatory plan or arrangement of the Corporation required to be filed as an exhibit EX-10 2 EXHIBIT 10(I) EXECUTIVE SEVERANCE AGREEMENT AGREEMENT between Jefferson Bankshares, Inc., a Virginia corporation ("Jefferson"), and William M. Watson, 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 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 299% 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 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 compensation 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 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 as 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 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 4.39%, 5.93% and 6.91%, 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 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 20th day of October, 1993. JEFFERSON BANKSHARES, INC. By: /s/ HOVEY S. DABNEY Executive: /s/ WILLIAM M. WATSON, JR. EX-10 3 EXHIBIT 10(O) JEFFERSON BANKSHARES, INC. EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT WILLIAM M. WATSON, JR. [As Amended and Restated Effecitve October 29, 1993] This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made this day of October 29, 1993, between JEFFERSON BANKSHARES, INC., a Virginia corporation (the "Company") and WILLIAM M. WATSON, 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: William M. Watson, Jr. 105 Falcon Drive Charlottesville, Virginia 22901 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 as of the day and year first written above. JEFFERSON BANKSHARES, INC. By: /s/ HOVEY S. DABNEY /s/ WILLIAM M. WATSON, JR. Exhibit A Specification of Certain Terms of the Policy William M. Watson, Jr. Policy Number: 7558862 Face Amount: $270,000 Executive Death Benefit: $184,000 Exhibit B Page 1 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 Exhibit B Page 2 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 Exhibit B Page 3 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. Exhibit B Page 4 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 4 EXHIBIT 13 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 operation and 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. In June 1995, Jefferson National Bank, the Corporation's banking subsidiary, purchased $35 million in deposit liabilities from two other financial institutions. Both transactions were accounted for as purchases, and, accordingly, accounts and transactions related to these purchases are included in the Corporation's Consolidated Financial Statements subsequent to the acquisition dates. RESULTS OF OPERATIONS Net income in 1995 rose to a record $24.9 million, or 10 percent above $22.6 million earned in 1994. Net income per share also increased 10 percent to a record $1.64 in 1995 compared with $1.49 in 1994. Net income in 1993 was $23.6 million, or $1.57 per share. An analysis of the factors that affected net income in 1995, 1994, and 1993 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. SELECTED FINANCIAL DATA TABLE 1 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Years Ended December 31 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Interest income $ 146,373 $ 129,496 $ 128,922 $ 129,072 $ 137,257 Interest expense 58,644 45,393 47,820 56,505 74,578 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income 87,729 84,103 81,102 72,567 62,679 Provision for loan losses 3,020 1,600 1,911 4,195 3,742 - -------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 84,709 82,503 79,191 68,372 58,937 Non-interest income 19,019 17,910 17,245 16,655 14,707 Non-interest expense 66,580 66,423 61,668 54,965 51,638 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 37,148 33,990 34,768 30,062 22,006 Provision for income tax expense 12,285 11,390 11,183 9,018 6,079 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 24,863 $ 22,600 $ 23,585 $ 21,044 $ 15,927 - -------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net income $ 1.64 $ 1.49 $ 1.57 $ 1.50 $ 1.14 Dividends declared .76 .68 .62 .53 .50 Dividends payout ratio 45.02% 44.40% 36.07% 33.42% 42.13% Book value $ 14.92 $ 13.62 $ 13.03 $ 12.04 $ 11.07 Average number of shares outstanding 15,181,152 15,148,400 15,060,873 14,075,372 13,924,342 Number of shares outstanding at year-end 15,182,235 15,170,250 15,080,553 14,953,304 13,973,992 - -------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on average assets 1.25% 1.18% 1.27% 1.23% 0.99% Return on average shareholders' equity 11.4 11.1 12.3 13.0 10.7 Shareholders' equity to total assets 11.0 10.7 10.1 9.8 9.3 Dividend payout ratio 45.0 44.4 36.1 33.4 42.1 - -------------------------------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION AT YEAR-END Assets $ 2,051,188 $ 1,925,950 $ 1,941,961 $ 1,842,447 $ 1,664,555 Earning assets 1,878,599 1,740,048 1,749,740 1,675,448 1,517,267 Deposits 1,793,199 1,688,872 1,677,354 1,636,346 1,475,395 Long term debt 15 19 1,213 2,131 3,548 Shareholders' equity 226,540 206,553 196,434 180,023 154,138
SUMMARY OF FINANCIAL RESULTS BY QUARTER Table 2 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1995 1994 -------------------------------------------- -------------------------------------------- Three Months Ended DEC. 31 SEPT. 30 JUNE 30 MARCH 31 Dec. 31 Sept. 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------------------------------- Interest income $ 37,709 $ 37,336 $ 36,808 $ 34,520 $ 33,707 $32,754 $ 32,084 $ 30,951 Interest expense 15,195 15,462 15,066 12,921 11,899 11,311 11,104 11,079 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 22,514 21,874 21,742 21,599 21,808 21,443 20,980 19,872 Provision for loan losses 1,580 480 480 480 375 375 375 475 Non-interest income 6,450 4,337 4,248 3,984 4,103 3,921 5,652 4,234 Non-interest expense 16,747 16,462 16,630 16,741 16,855 16,485 17,142 15,941 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 10,637 9,269 8,880 8,362 8,681 8,504 9,115 7,690 Income tax expense 3,372 3,122 2,979 2,812 2,906 2,892 3,033 2,559 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 7,265 $ 6,147 $ 5,901 $ 5,550 $ 5,775 $ 5,612 $ 6,082 $ 5,131 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 0.48 $ 0.40 $ 0.39 $ 0.37 $ 0.38 $ 0.37 $ 0.40 $ 0.34
Higher income levels in 1995 lifted profitability ratios over 1994 ratios. The return on average assets advanced to 1.25 percent in 1995 from 1.18 percent in 1994. In 1993 this ratio was 1.27 percent. Another significant measure of profitability, the return on average shareholders' equity, improved in 1995 to 11.43 percent from 11.05 percent in 1994. In 1993, this ratio was 12.34 percent. Table 2 presents a quarterly summary of earnings components for the last two years. In 1995, net income and net income per share increased each quarter and reached record quarterly levels in the final quarter of the year. Rising net interest income contributed to the positive quarterly earnings trend. Loan growth was a key factor in the improvement in net interest income as the net interest margin declined in the second and third quarters of 1995 before rebounding in the fourth quarter. Other factors influenced quarterly comparisons between 1995 and 1994. In the second quarter of 1994, investment securities gains of $1.2 million and non-recurring expenses of $653 thousand affected comparisons with the 1995 quarter. In the third quarter of 1995, the Corporation's F.D.I.C. assessments were lowered, and it received a rebate on a portion of the second quarter assessment. The result was a reduction of $1.0 million in third quarter expense in 1995 compared with 1994. The premium reduction lowered expenses in the fourth quarter of 1995 of $676 thousand. In addition, in the fourth quarter of 1995, the Corporation recognized a gain of $1.9 million resulting from the annuitization of certain pension liabilities. Partially offsetting the effects of the F.D.I.C. assessments and the gain from the pension was an increase of $1.2 million in the fourth quarter of 1995 in the provision for loan losses. The increased provision for loan losses as well as the other factors that influenced earnings noted above are more thoroughly discussed in subsequent sections of this analysis. 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 the statutory federal corporate tax rate of 35 percent, 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 4 percent in 1995 to $89.0 million from $85.4 million in 1994. Although it fluctuated during the year, the net interest margin of 4.88 percent in 1995 was nearly level with the 1994 net interest margin of 4.87 percent. Both the yields on earning assets and the costs of interest bearing liabilities rose in 1995 compared with 1994 as market rates of interest were higher in 1995. Net interest income and the net interest margin benefited in 1995 from a 4 percent increase in average earning assets and a change in the mix of those assets. The loan portfolio experienced steady growth throughout 1995, and average loans increased 11 percent during the year. Thus, average loans as a percent of average earning assets increased to 64 percent in 1995 from 60 percent in 1994. Influenced by interest rate trends, competitive factors, and a special marketing promotion to attract and retain deposits, the cost of funds rose more rapidly in 1995 than the yield on average earning assets. The cost of interest-bearing liabilities rose 79 basis points in 1995 over 1994 as interest expense increased 29 percent. By comparison, the yield on earning assets was 64 basis points higher in 1995 as tax-equivalent interest income increased only 13 percent. In addition to the factors noted above, average interest-bearing liabilities increased only 3 percent in 1995, thus limiting the effect of higher average rates. CONSOLIDATED AVERAGE BALANCES/NET INTEREST INCOME/RATES* Table 3 TAX-EQUIVALENT BASIS (DOLLARS IN MILLIONS)
1995 1994 1993 -------------------------- ---------------------------- ----------------------------- 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 $1,164.3 $105.4 9.05% $1,047.2 $ 85.0 8.12% $1,006.3 $81.5 8.10% Investment securities: Available for sale: U.S. Treasury 176.2 11.2 6.36 176.7 11.5 6.51 - - - U.S. Government agencies 3.6 0.2 4.73 1.8 0.1 4.10 - - - Mortgage-backed securities 1.0 0.1 4.97 0.3 - - - - - Held to maturity: U.S. Treasury 1.1 - - 1.4 - - 202.3 14.3 7.05 U.S. Government agencies 243.6 15.8 6.49 265.2 17.8 6.72 243.8 18.0 7.40 States and political subdivisions 20.1 1.6 8.07 26.7 2.1 7.82 35.3 2.9 8.18 Corporate debt securities 194.3 12.0 6.20 203.1 12.5 6.17 177.9 12.0 6.77 Other securities 8.4 0.6 7.28 7.8 0.6 7.68 7.3 0.6 7.90 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 648.3 41.5 6.42 683.0 44.6 6.54 666.6 47.8 7.17 Money market investments 11.5 0.7 5.95 25.3 1.2 4.54 31.3 1.2 3.74 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 1,824.1 147.6 8.09 1,755.5 130.8 7.45 1,704.2 130.5 7.66 - -------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (13.9) (13.7) (13.7) Cash and due from banks 85.7 85.5 77.3 Premises and equipment 51.7 50.4 48.6 Other assets 44.3 43.3 43.7 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,991.9 $1,921.0 $1,860.1 - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Time and savings deposits: Interest-checking accounts $ 292.5 $ 6.6 2.25% $ 299.8 $ 6.8 2.27% $ 272.3 $ 7.2 2.64% Regular savings 183.4 4.9 2.65 200.2 5.4 2.68 170.2 4.9 2.90 Money market deposit accounts 320.8 11.8 3.68 345.9 9.7 2.81 357.0 10.2 2.85 Certificates of deposit $100,000 and over 86.9 4.6 5.25 71.2 2.8 3.99 70.6 2.8 4.04 Other time deposits 591.0 29.5 5.01 522.6 20.2 3.87 538.2 22.2 4.67 - -------------------------------------------------------------------------------------------------------------------------------- Total time and savings deposits 1,474.6 57.4 3.89 1,439.7 44.9 3.12 1,408.3 47.3 3.36 Short-term borrowings 24.9 1.2 4.90 14.9 0.4 2.96 15.1 0.4 2.83 Long-term debt - - - 0.5 0.1 5.65 1.6 0.1 5.23 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 1,499.5 58.6 3.91 1,455.1 45.4 3.12 1,425.0 47.8 3.36 - -------------------------------------------------------------------------------------------------------------------------------- Demand deposits 260.3 248.9 232.9 Other liabilities 14.7 12.4 11.1 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,774.5 1,716.4 1,669.0 Shareholders' equity before unrealized losses 217.4 204.8 191.1 Unrealized losses on securities available for sale, net - 0.2 - - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 217.4 204.6 191.1 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,991.9 $1,921.0 $1,860.1 - -------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $89.0 $ 85.4 $ 82.7 AVERAGE INTEREST RATE SPREAD 4.18% 4.33% 4.30% INTEREST EXPENSE AS A PERCENT OF AVERAGE EARNING ASSETS 3.21% 2.59% 2.81% NET INTEREST MARGIN 4.88% 4.87% 4.85% - --------------------------------------------------------------------------------------------------------------------------------
*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 1995, 1994 and 1993. Loan interest income includes fees of $2,921,000 in 1995; $2,831,000 in 1994; and $2,633,000 in 1993. Loans include non-accrual loan balances and interest accrued, if any. As 1995 drew to a close, market interest rates showed signs of easing. Changes in interest rates may result in fluctuations in the net interest margin and net interest income. The level of growth in the loan portfolio and pricing competition for deposits will be two key influences on net interest income in 1996. Comparing 1994 with 1993, tax-equivalent net interest income increased 3 percent, and the net interest margin was relatively stable at 4.87 percent in 1994 compared with 4.85 percent in 1993. Rising interest rates in 1994 helped to lift net interest income and contributed to the improvement in the net interest margin. Other factors affecting the net interest margin in 1994 were a 3 percent increase in average earning assets and a shift in the mix of those assets. Average loans as a percent of average earning assets increased to 60 percent in 1994 compared with 59 percent in 1993. ANALYSIS OF CHANGES IN NET INTEREST INCOME* Table 4 TAX-EQUIVALENT BASIS (DOLLARS IN THOUSANDS)
YEAR 1995 OVER 1994 YEAR 1994 OVER 1993 -------------------------------- ------------------------------ 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 $10,047 $ 10,289 $20,336 $ 3,313 $ 201 $ 3,514 Investment securities: Available for sale: U.S. Treasury (34) (273) (307) 11,508 - 11,508 U.S. Government agencies 85 13 98 74 - 74 Held to maturity: U.S. Treasury - 66 66 (7,109) (7,151) (14,260) U.S. Government agencies (1,348) (596) (1,944) 1,509 (1,732) (223) States and political subdivisions (554) 66 (488) (653) (122) (775) Other (495) 30 (465) 1,656 (1,142) 514 Money market investments (755) 286 (469) (243) 226 (17) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 6,946 9,881 16,827 10,055 (9,720) 335 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Time and savings deposits: Interest-checking accounts (151) (54) (205) 682 (1,069) (387) Regular savings (445) (59) (504) 821 (395) 426 Money market deposit accounts (741) 2,851 2,110 (330) (148) (478) Certificates of deposit $100,000 and over 709 1,015 1,724 26 (34) (8) Other time deposits 2,847 6,528 9,375 (596) (1,340) (1,936) Short-term borrowings 392 386 778 (6) 19 13 Long-term debt (28) 1 (27) (64) 6 (58) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 2,583 10,668 13,251 533 (2,961) (2,428) - -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN NET INTEREST INCOME $4,363 $ (787) $ 3,576 $ 9,522 $(6,759) $ 2,763 - --------------------------------------------------------------------------------------------------------------------------------
*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 adequate 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 1995, the Corporation raised its provision for loan losses to $3.0 million from $1.6 million in 1994. In 1993, the provision was $1.9 million. The higher provision in 1995 compared with 1994 reflected 11 percent growth in the loan portfolio, increased loan losses, and reports of rising consumer debt levels and delinquencies. The lower provision in 1994 compared with 1993 reflected improvement in economic conditions and a declining trend in non-performing assets. If loan growth is sustained at or near 1995 levels in 1996 and economic conditions do not vary significantly from those at year-end 1995, the 1996 provision for loan losses may be near or above the 1995 amount. Trends that develop in 1996 relating to the economy, actual loan losses, and the level of non-performing assets will strongly influence the amount of the provision. 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, sales of mortgage loans, and other income items. Non-interest income increased 6 percent in 1995 to $19.0 million from $18.0 million in 1994. Influencing the comparison was $1.9 million in income related to the annuitization of certain pension liabilities in 1995 and $1.2 million in income in 1994 from the sale of investment securities available for sale. The 1995 annuitization of pension liabilities applied only to retirees of the Corporation prior to a specified date. As the result of reducing the pension plan liability, a proportionate amount of the excess in plan assets over plan liabilities was recognized as income. Excluding the 1995 annuitization and the 1994 investment securities gains from the totals, non-interest income increased 2 percent in 1995. Contributing to this increase was a 14 percent increase in trust income and a 5 percent increase in deposit account fees. Offsetting these increases was a 60 percent reduction in income related to sales of mortgage loans. This decrease was attributable to a lower volume of mortgage loan refinancing and a reduction in the volume of fixed rate mortgage loan originations. In a rising interest rate environment origination volume increased in adjustable rate mortgages, which were added to the loan portfolio rather than sold in the secondary market. Non-interest income increased 4 percent in 1994 to $17.9 million compared with $17.2 million in 1993. Non-interest income was boosted in 1994 by securities available for sale gains of $1.2 million. More than offsetting this increase, however, was a decrease in income from mortgage loan sales. The same factors that influenced such income in 1995 were applicable to the 1994 decrease. 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 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 Table 5 (IN THOUSANDS)
Years Ended December 31 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------- Trust income $ 4,500 $ 3,944 $ 4,037 $ 3,765 $ 3,466 Service charges on deposit accounts 9,155 8,702 8,475 8,326 8,136 Credit insurance income 107 165 208 255 298 Investment securities gains (losses), net (103) 1,166 88 298 64 Mortgage loan sales income 275 681 1,932 1,528 597 Other income 5,085 3,252 2,505 2,483 2,146 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME $19,019 $17,910 $17,245 $16,655 $14,707 - -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE Non-interest expense represents the overhead expenses of the Corporation. The Corporation monitors all categories of non-interest expense in an attempt to improve productivity and earnings performance. Non-interest expense in 1995 was nearly level with the 1994 amount. A significant factor in this comparison was a reduction in F.D.I.C. insurance assessments to $.04 per $100 of insured deposits in 1995 from $.23 in prior years. The result was a decrease of $1.7 million in these assessments in 1995 compared with 1994. In addition, the initial assessment rate for 1996 was reduced to zero, which will result in a further reduction of 1996 expense. Excluding the difference in F.D.I.C. assessments, non-interest expense increased 3 percent in 1995 over 1994. The largest factor in this increase was personnel expense, which increased 5 percent in 1995 to $39.2 million. Occupancy expense was $5.1 million in both 1995 and 1994. Equipment expense increased 2 percent to $6.1 million in 1995. Also increasing in 1995 were office supplies expense, which rose 7 percent, postage expense, which was up 13 percent, and telecommunications expense, which increased 2 percent. Partially offsetting the increases noted above, other expense decreased 5 percent in 1995 compared with 1994. Contributing to this decrease were reductions in legal fees, marketing, and expenses related to foreclosed properties. Comparing 1994 with 1993, non-interest expense increased 8 percent to $66.4 million. 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. Telecommunications 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. NON-INTEREST EXPENSE Table 6 (DOLLARS IN THOUSANDS)
Years Ended December 31 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits $39,222 $37,261 $34,651 $31,439 $30,486 Occupancy expense, net 5,063 5,063 4,740 4,653 4,427 Equipment expense 6,086 5,965 5,722 5,125 4,356 F.D.I.C. assessments 2,081 3,790 3,645 3,327 2,838 Office supplies 1,189 1,108 1,115 1,051 1,024 Postage 1,313 1,160 1,187 1,143 1,189 Telecommunications expense 1,817 1,775 1,425 1,292 1,285 Other expense 9,809 10,301 9,183 6,935 6,033 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE $66,580 $66,423 $61,668 $54,965 $51,638 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING EFFICIENCY RATIO* 61.6% 64.3% 61.7% 60.4% 64.6% - -------------------------------------------------------------------------------------------------------------------------------
*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 $12.3 million in 1995 and $11.4 million in 1994. Higher operating earnings were primarily responsible for the increase in income taxes. In 1994, income taxes of $11.4 million were greater than the 1993 amount of $11.2 million in spite of a reduction in operating earnings. Lower tax-exempt income and other factors affected the comparison. FINANCIAL CONDITION The Corporation's financial condition is measured in terms of its asset and liability composition, asset quality, capital resources, and liquidity. Improved economic conditions in 1995 led to stronger asset growth, and the Corporation's total assets exceeded the $2 billion mark for the first time. Leading the asset growth, the loan portfolio increased 11 percent in 1995. Deposits, which are the Corporation's principal funding source, increased 6 percent in 1995. While the 1995 growth rate was stronger than the 1994 rate, it still reflected a trend for funds to migrate from deposits into other investment opportunities. Throughout 1995, as in prior years, capital levels were strong and liquidity measures were more than 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 10 of the Notes to Consolidated Financial Statements. ASSETS On December 31, 1995, total assets were $2.051 billion, or 7 percent higher than the year earlier total of $1.926 billion. Average total assets increased 4 percent in 1995 to $1.992 billion from $1.921 billion in 1994. LOAN PORTFOLIO. Loans, net of unearned income grew 11 percent to $1.220 billion on December 31, 1995 from $1.102 billion one year earlier. Average loans, net of unearned income also increased 11 percent in 1995 to $1.164 billion from $1.047 billion in 1994. LOAN PORTFOLIO Table 7 (DOLLARS IN THOUSANDS)
December 31 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- LOAN CLASSIFICATION: Commercial, financial, and agricultural $ 467,296 $ 407,152 $ 408,349 $388,314 $316,129 Real estate--construction 84,090 107,629 97,832 105,611 80,997 Real estate--mortgage 406,122 366,983 285,384 270,307 263,644 Instalment 262,985 219,872 231,656 216,388 229,404 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LOANS $1,220,493 $1,101,636 $1,023,221 $980,620 $890,174 - ----------------------------------------------------------------------------------------------------------------------------------
Consumer, commercial, and mortgage loans contributed to the loan portfolio's growth in 1995. Consumer lending was the strongest in the indirect portion of the portfolio and in credit cards, which were a new addition to the portfolio in 1995. Indirect loans are loans to individuals to finance the purchase of certain goods or services, principally automobiles, which are originated through dealers or other vendors. The Corporation expanded the scope of this lending in 1994 and 1995 and will continue to do so in 1996. In December 1995, the Corporation began processing loans in conjunction with an agreement with a nationwide insurance company. This agreement, which relates to insurance agents in a significant portion of Virginia, will be a source of additional loan volume in 1996. At year-end 1995, indirect loans totaled $105 million, or 31 percent above the year earlier total of $80 million. Credit card balances added $9 million to the loan portfolio at year-end 1995. With marketing of credit cards restricted primarily to our own customer base, the growth in these balances in 1995 was an important addition to the loan portfolio. Commercial loans, which is the largest segment of the portfolio, increased 15 percent in 1995. This increase was attributable to improved economic activity in the various markets served by the Corporation and reflected continued success in a market niche important to the Corporation. Mortgage loans rose 11 percent to $406 million on December 31, 1995. This increase was attributable principally to adjustable rate mortgages which were popular in this rising interest rate environment. REMAINING MATURITIES OF SELECTED LOANS Table 8 (IN THOUSANDS) Commercial, Financial, and Real Estate-- December 31, 1995 Agricultural Construction - --------------------------------------------------------------------- WITHIN 1 YEAR $119,372 $ 42,360 - --------------------------------------------------------------------- VARIABLE RATE: 1 to 5 years 93,979 12,480 After 5 years 140,574 12,624 - --------------------------------------------------------------------- TOTAL 234,553 25,104 - --------------------------------------------------------------------- FIXED RATE: 1 to 5 years 85,632 11,725 After 5 years 27,739 4,901 - --------------------------------------------------------------------- TOTAL 113,371 16,626 - --------------------------------------------------------------------- TOTAL MATURITIES $467,296 $ 84,090 - --------------------------------------------------------------------- Loan growth was strong throughout 1995. In spite of evidence that consumer debt levels were high, loan volume showed continued strength as the year drew to a close. A decline in interest rates near year-end should help to offset potential weakening in loan demand. In addition, the portions of the loan portfolio that had the strongest growth in 1995 were areas designated by the Corporation for emphasis. Indirect lending is expected to continue its growth from the addition of the insurance company arrangement and other dealers. Credit card balances are still increasing as card issuance and usage grows. Lending to small businesses is a niche market for the Corporation, and this segment of the portfolio should continue to benefit from business borrowers that migrate away from larger financial institutions. Although mortgage loan originations in 1996 may benefit from favorable interest rates and from continued pursuit of mortgage loan business by the Corporation, the growth rate of this segment of the loan portfolio may be less in 1996 than in 1995 if the market favors fixed rate mortgages as opposed to adjustable rate mortgages. The Corporation, in its efforts to control interest rate risk, generally sells in the secondary market most of the fixed rate mortgages that it originates. While these sales generate fee income, they do not add to the loan portfolio. On December 31, 1995, 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 weaknesses in real estate markets may have an adverse effect on collateral values and could lead to writedowns and loan 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. With respect to credit quality, the Corporation's past performance has been a source of financial strength. Net loan losses in 1995 were $3.3 million, or .29 percent of average loans, net of unearned income. In 1994, net loan losses were $1.7 million, or only .16 percent of average loans, net of unearned income. Loan losses rose in 1995 principally as the result of writedowns on two large credits. Loan loss expectations for 1996 are influenced by positive economic conditions, declining interest rates, and lower levels of problem assets combined with some concern about the level of consumer debt. Thus, it is expected that loan losses in 1996 would not be materially greater than those in 1995. However, unforeseen changes in borrowers' financial conditions could impact actual loan losses in 1996. The Corporation will continue its efforts to minimize future credit losses.
SUMMARY OF LOAN LOSS EXPERIENCE Table 9 (Dollars in thousands) Years Ended December 31 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------- $ 13,754 $ 13,864 $ 13,057 $ 10,894 $ 9,647 ALLOWANCE AT BEGINNING OF YEAR LOAN LOSSES: Commercial, financial, and agricultural 1,641 994 789 920 1,015 Real estate - construction 1,090 150 - 90 100 Real estate - mortgage 110 187 140 343 535 Instalment 1,274 1,054 696 1,607 1,125 - ---------------------------------------------------------------------------------------------------------------- TOTAL LOAN LOSSES 4,115 2,385 1,625 2,960 2,775 - ---------------------------------------------------------------------------------------------------------------- RECOVERIES: Commercial, financial, and agricultural 169 67 59 58 53 Real estate - construction 2 4 6 47 - Real estate - mortgage 38 75 72 9 - Instalment 564 529 261 263 228 - ---------------------------------------------------------------------------------------------------------------- TOTAL RECOVERIES 773 675 398 377 281 - ---------------------------------------------------------------------------------------------------------------- NET LOAN LOSSES 3,342 1,710 1,227 2,583 2,494 INCREASE FROM ACQUISITIONS - - 123 551 - PROVISION CHARGED TO EXPENSE 3,020 1,600 1,911 4,195 3,741 - ---------------------------------------------------------------------------------------------------------------- ALLOWANCE AT END OF YEAR $ 13,432 $ 13,754 $ 13,864 $ 13,057 $ 10,894 - ---------------------------------------------------------------------------------------------------------------- LOANS, NET OF UNEARNED INCOME: Outstanding at year-end $1,220,421 $1,101,500 $1,022,911 $ 979,365 $ 889,540 Average 1,164,324 1,047,206 1,006,262 908,397 879,236 RATIOS: Net loan losses to average loans 0.29% 0.16% 0.12% 0.28% 0.28% Allowance to year-end loans 1.10% 1.25% 1.36% 1.33% 1.22% Allowance to net loan losses 4.02X 8.04X 11.30X 5.05X 4.37X Provision to net loan losses 0.90X 0.94X 1.56X 1.62X 1.50X Provision to average loans 0.26% 0.15% 0.19% 0.46% 0.43% Recoveries to loan losses 18.78% 28.30% 24.49% 12.74% 10.13% - ----------------------------------------------------------------------------------------------------------------
Risk elements associated with the loan portfolio are presented in Table 10. Excluding foreclosed properties, identified risk elements on December 31, 1995 totaled $9.0 million, or .74 percent of loans, net of unearned income. At December 31, 1994, the total was $9.7 million, or .88 percent of loans, net of unearned income. Foreclosed properties at December 31, 1995, were $4.1 million compared with the year earlier total of $5.9 million. Foreclosed properties are reported net of writedowns at the lower of cost or estimated net realizable value. At December 31, 1995, total risk elements represented 1.1 percent of loans, net of unearned income plus foreclosed properties and .64 percent of total assets. These ratios at the end of 1994 were 1.4 percent and .81 percent, respectively. At year-end 1995, the Corporation identified an additional $2.4 million in 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 largest exposure to a single borrower in this group of loans at year-end 1995 was $1.2 million. Only 9 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 $4.1 million total of foreclosed properties at December 31, 1995, were 16 parcels of real estate. The highest carrying value of a single property was $906 thousand. Only 4 other parcels included in foreclosed properties at year-end 1995 had carrying values above $200 thousand.
RISK ELEMENTS Table 10 (DOLLARS IN THOUSANDS) Book Value December 31 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------ LOANS: Non-accrual $ 6,009 $ 6,996 $ 9,174 $10,448 $12,773 Troubled debt restructurings 250 - - - - Past due principal and/or interest for 90 days or more 2,753 2,713 5,453 3,545 3,915 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 9,012 $ 9,709 $14,627 $13,993 $16,688 - ------------------------------------------------------------------------------------------------------------------------------ AS A PERCENT OF: Loans, net of unearned income .74% .88% 1.43% 1.43% 1.88% Total assets .44% .50% .75% .76% 1.00% Allowance for loan losses 67.09% 70.59% 105.50% 107.17% 153.19% FORECLOSED PROPERTIES $ 4,093 $ 5,919 $ 8,831 $11,770 $ 9,018 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL RISK ELEMENTS $13,105 $15,628 $23,458 $25,763 $25,706 - ------------------------------------------------------------------------------------------------------------------------------ AS A PERCENT OF: Loans, net of unearned income plus foreclosed properties 1.07% 1.41% 2.27% 2.60% 2.86% Total assets .64% .81% 1.21% 1.40% 1.54% - ------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995, 1994, and 1993, gross interest income in the amount of $632,000, $462,000 and $863,000, 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 interest income amounted to $49,000, $66,000 and $754,000 in 1995, 1994, and 1993, respectively. At December 31, 1995, the Corporation identified additional loans totaling $2,399,000 that pose some uncertainty over the borrowers' ability to comply with the loan repayment terms. Investment securities also may pose credit risks. On December 31, 1995, all investment securities were performing according to terms. 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 of the allowance 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 potential problems. At December 31, 1995, the allowance for loan losses was $13.4 million, or 1.10 percent of loans, net of unearned income. A year earlier, the allowance was $13.8 million, or 1.25 percent of loans, net of unearned income. At its year-end 1995 level, the allowance for loan losses exceeded the sum of net loan losses over the previous five years. At that level, management believes that the allowance is adequate, subject to unforeseen economic changes or unexpected regulatory developments.
ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS) Table 11 December 31 1995 1994 1993 ---------------------- ------------------------ ------------------------ Percent of Percent of Percent of Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans - -------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES: Commercial, financial, and agricultural $ 7,871 38.3% $ 8,447 36.9% $ 6,499 39.9% Real estate--construction 137 6.9 156 9.8 687 9.6 Real estate--mortgage 732 33.3 514 33.3 385 27.9 Instalment 2,202 21.5 2,227 20.0 3,598 22.6 Unallocated 2,490 - 2,410 - 2,695 - - -------------------------------------------------------------------------------------------------------------------- TOTAL ALLOWANCE FOR LOAN LOSSES $13,432 100.0% $13,754 100.0% $13,864 100.0% - -------------------------------------------------------------------------------------------------------------------- 1992 1991 ---------------------- -------------------- Percent of Percent of Loans to Loans to Amount Total Loans Amount Total Loans ---------------------------------------------- ALLOWANCE FOR LOAN LOSSES: Commercial, financial, and agricultural $ 6,958 39.6% $ 6,618 35.5% Real estate--construction 753 10.8 742 9.1 Real estate--mortgage 437 27.5 468 29.6 Instalment 2,558 22.1 1,782 25.8 Unallocated 2,351 - 1,284 - - ----------------------------------------------------------------------------------------- TOTAL ALLOWANCE FOR LOAN LOSSES $13,057 100.0% $10,894 100.0% - -----------------------------------------------------------------------------------------
INVESTMENT SECURITIES. Investment securities represent the second largest component of earning assets. In accordance with Statement of Financial Accounting Standards No. 115, securities held in the investment portfolio are classified as Held to Maturity or Available for Sale. The Corporation has no Trading Securities. Held to Maturity Securities are reported at amortized cost in the Corporation's consolidated financial statements. Available for Sale securities are reported at fair value. Unrealized gains or losses on these securities are reported as a separate component of shareholders' equity, net of tax effects, and are excluded from earnings until realized.
INVESTMENT SECURITIES Table 12 (DOLLARS IN THOUSANDS) December 31, 1995 After 1 but After 5 but AVAILABLE FOR SALE: Within Within Within After 1 Year 5 Years 10 Years 10 Years Total - ------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury Securities: Amortized Cost $ 30,290 $150,188 $ - $ - $180,478 Fair Value 30,525 154,456 - - 184,981 Yield 6.54% 6.31% - - 6.35% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Government Agencies: Amortized Cost $ 2,747 $ - $ - $ - $ 2,747 Fair Value 2,710 - - - 2,710 Yield 4.40% - - - 4.40% - ------------------------------------------------------------------------------------------------------------------------------ Mortgage-backed Securities: Amortized Cost $ - $ - $ 501 $ 477 $ 978 Fair Value - - 493 485 978 Yield - - 5.13% 4.80% 4.97% - ------------------------------------------------------------------------------------------------------------------------------ Total Investment Securities--Available for Sale: Amortized Cost $ 33,037 $150,188 $ 501 $ 477 $184,203 Fair Value 33,235 154,456 493 485 188,669 Yield 6.49% 6.31% 5.13% 4.80% 6.30% - ------------------------------------------------------------------------------------------------------------------------------ HELD TO MATURITY: - ------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury Securities: Amortized Cost $ 972 $ - $ - $ - $ 972 Fair Value 995 - - - 995 Yield 5.50% - - - 5.50% - ------------------------------------------------------------------------------------------------------------------------------ U.S. Government Agencies: Amortized Cost $ 57,526 $186,851 $ - $ - $244,377 Fair Value 57,918 189,075 - - 246,993 Yield 7.35% 6.09% - - 6.39% - ------------------------------------------------------------------------------------------------------------------------------ State and Political Subdivision Securities: Amortized Cost $ 8,958 $ 10,402 $ 2,035 $ 2,407 $23,802 Fair Value 9,003 10,716 2,182 2,524 24,425 Yield 6.19% 7.19% 8.49% 8.32% 7.05% - ------------------------------------------------------------------------------------------------------------------------------ Corporate Debt Securities: Amortized Cost $ 57,190 $123,130 $ - $ - $180,320 Fair Value 57,124 124,785 - - 181,909 Yield 5.34% 6.60% - - 6.19% - ------------------------------------------------------------------------------------------------------------------------------ Other Securities: Amortized Cost $ - $ - $ - $ 5,038 $ 5,038 Fair Value - - - 5,038 5,038 Yield - - - 6.00% 6.00% - ------------------------------------------------------------------------------------------------------------------------------ Total Investment Securities--Held to Maturity: Amortized Cost $124,646 $320,383 $ 2,035 $ 7,445 $454,509 Fair Value 125,040 324,576 2,182 7,562 459,360 Yield 6.32% 6.32% 8.49% 6.77% 6.33% - ------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995, the combined reported value of investment securities was $643 million compared with the year earlier total of $639 million. Available for Sale securities increased to $189 million on December 31, 1995 from $171 million at year-end 1994. Held to Maturity securities decreased to $455 million on December 31, 1995 from the year earlier total of $468 million. Approximately $10 million of the change in securities Available for Sale was attributable to changes in market valuations of the securities. In 1995, the fair value adjustment of the amortized cost of the securities reflected an unrealized gain of $4.5 million. In 1994 this adjustment resulted in an unrealized loss of $5.7 million. The unrealized gain in 1995 resulted from a declining interest rate environment resulting in the securities held as Available for Sale carrying yields higher than current market yields for comparable securities. Conversely, at year-end 1994, market rates of interest were higher than yields in the portfolio, thus reducing the fair value of the securities Available for Sale. In the event the Corporation needs to sell securities classified as Available for Sale, gains or losses on such sales would be reflected in the Corporation's consolidated statement of income. On December 31, 1995, the weighted average yield of the Held to Maturity portfolio was 6.33 percent. The weighted average yield of Available for Sale securities was 6.30 percent. The market value of securities Held to Maturity was 101.1 percent of its book value at year-end 1995 compared with 97.3 percent on December 31, 1994. Additional information regarding investment securities can be found in Table 12 and 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, 1995. CORPORATE DEBT BY QUALITY RATING Table 13 (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------- Book December 31, 1995 Value Percent - -------------------------------------------------------------------------- MOODY'S RATING Aaa $ 13,056 7.3% Aa1 9,454 5.3 Aa2 9,988 5.5 Aa3 4,948 2.7 A1 75,520 41.9 A2 50,541 28.0 A3 5,658 3.1 BAA1 11,056 6.1 NR 99 .1 - -------------------------------------------------------------------------------- TOTAL $180,320 100.0% - -------------------------------------------------------------------------------- Money Market Investments. At year-end 1995, the Corporation had $15 million in short-term money market investments. One year earlier, the Corporation had no short-term money market investments. In 1995 these instruments averaged $11 million compared with the 1994 average of $25 million. The average declined in 1995 as funds were used for loan growth. Liabilities The Corporation relies almost exclusively on core deposits to fund its earning assets. Deposits. Total deposits on December 31, 1995 were $1.793 billion, or 6 percent above the year earlier total of $1.689 billion. Average total deposits in 1995 of $1.735 billion were 3 percent above the 1994 average of $1.689 billion. The stronger growth rate in the year-end balances compared with average balances reflected stronger growth in the second half of 1995. However, deposit totals continued to be affected in 1995 by the movement of funds into alternative investment instruments. Non-interest bearing demand deposits were 6 percent higher at December 31, 1995, at $287 million compared with the year-end 1994 total of $271 million. Interest-bearing deposits also increased 6 percent to $1.506 billion at year-end 1995 from the year earlier total of $1.417 billion. Most of the growth in interest-bearing deposits occurred in other time deposits, which are principally consumer certificates of deposits less than $100 thousand. Total balances in these accounts increased 18 percent in 1995 to $605 million. Contributing to this increase was a special deposit promotion early in 1995 designed to attract and retain deposits. Also contributing to the increase in interest-bearing deposits were interest checking accounts, which increased 3 percent at year-end 1995 compared with the year earlier total. Regular savings accounts and money market deposit accounts decreased 10 percent and 4 percent, respectively, in comparisons between year-end 1995 and 1994. Customers moved funds from these accounts to other deposits or investments bearing higher returns. Balances in certificates of deposit of $100 thousand and over increased to $94 million at year-end 1995 from the year earlier total of $73 million due in part to the promotional interest rates offered in the second quarter. CERTIFICATES OF DEPOSIT $100,000 AND OVER Table 14 (IN THOUSANDS) December 31, 1995 Amount - -------------------------------------------------------------------------------- REMAINING MATURITIES: Within 3 months $53,292 3 to 6 months 12,220 6 to 12 months 9,867 After 12 months 18,341 - -------------------------------------------------------------------------------- TOTAL $93,720 - -------------------------------------------------------------------------------- Debt. Short-term borrowings totaled $16 million at year-end 1995 and 1994. These borrowings include federal funds purchased, securities sold under agreements to repurchase, and other borrowings. Total short-term borrowings averaged $25 million in 1995 and $15 million in 1994. Table 15 summarizes the Corporation's position with respect to federal funds purchased and securities sold under agreements to repurchase. Long-term debt totaled $15 thousand at year-end 1995 compared with the year earlier total of $19 thousand.
SHORT-TERM BORROWINGS Table 15 (DOLLARS IN THOUSANDS) 1995 1994 1993 ------------------- ------------------- ----------------- Interest Interest Interest Balance Rate Balance Rate Balance Rate - ------------------------------------------------------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Outstanding at year-end $16,118 3.13% $16,479 3.69% $53,832 2.79% Average outstanding for the year 18,568 4.57 14,845 3.21 14,876 1.94 Maximum outstanding at any month-end 46,878 - 42,501 - 53,832 - - ------------------------------------------------------------------------------------------------------------------------------ Capital Resources Total shareholders' equity of $227 million at year-end was 10 percent above the year earlier total of $207 million. Shareholders' equity averaged $217 million in 1995, 6 percent above the 1994 average of $205 million. Average shareholders' equity as a percent of average total assets was 10.9 percent in 1995 and 10.7 percent in 1994. The Federal Reserve mandates minimum capital requirements for bank holding companies. The Federal Reserve applied 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 I 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, 1995, the minimum Tier I ratio was 4 percent and the minimum required Total Capital (Tier 1 plus Tier 2) ratio was 8 percent. The Corporation's Tier 1 ratio of 15.30 percent and its Total Capital Ratio of 16.26 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, 1995, 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 subsidiary also exceeds all minimum requirements. RISK-BASED CAPITAL Table 16 (IN THOUSANDS) December 31 1995 1994 1993 - ------------------------------------------------------------------------------- TIER 1 CAPITAL: Shareholders' equity * $ 223,637 $ 210,244 $ 196,434 Less intangible assets 9,046 7,471 6,115 - -------------------------------------------------------------------------------- Total Tier 1 capital 214,591 202,773 190,319 - -------------------------------------------------------------------------------- TIER 2 CAPITAL: Allowable allowance for loan losses 13,432 13,754 13,864 - -------------------------------------------------------------------------------- Total Tier 2 capital 13,432 13,754 13,864 - -------------------------------------------------------------------------------- TOTAL CAPITAL $ 228,023 $ 216,527 $ 204,183 Risk-weighted assets $1,402,735 $1,340,091 $1,281,028 Tangible quarterly average assets 2,026,619 1,914,722 1,892,496 RISK-BASED CAPITAL RATIOS: Tier 1 capital 15.30% 15.13% 14.86% Total capital 16.26% 16.16% 15.94% Tier 1 leverage 10.59% 10.59% 10.06% * Exclusive of net unrealized gains and losses on securities available for sale, as prescribed by regulatory guidelines. From time to time, the Corporation purchases shares of its own common stock from shareholders and from brokers and dealers. In 1995, the Corporation purchased 67,048 shares at a cost of $1.4 million. In 1994, the Corporation purchased 72,500 shares at a cost of $1.4 million. The volume of share repurchases is determined by the financial advantage to the Corporation. Purchases are made in accordance with applicable securities laws, regulations, and internal policy considerations. The Corporation's common stock is traded in the National Market System of the NASDAQ Stock Market under the trading symbol JBNK. Table 17 presents the market prices and dividends of the Corporation's common stock for each quarter in 1995 and 1994. On December 31, 1995, the book value of a share of common stock was $14.92, or 10 percent higher than $13.62 on December 31, 1994.
COMMON STOCK PERFORMANCE AND DIVIDENDS Table 17 Common Stock Price ---------------------------------------------- 1995 1994 Dividends Declared ----------------- ------------------ ------------------ High Low High Low 1995 1994 - -------------------------------------------------------------------------------------------------------------------- First Quarter $20.75 $19.13 $22.75 $18.50 $.19 $.17 Second Quarter 22.13 19.13 23.13 18.50 .19 .17 Third Quarter 23.50 21.00 23.25 20.75 .19 .17 Fourth Quarter 23.50 20.13 21.13 17.13 .19 .17 - -------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 $23.50 $19.13 $23.25 $17.13 $.76 $.68 - --------------------------------------------------------------------------------------------------------------------
Jefferson Bankshares' common stock is traded in the National Market System of the Nasdaq Stock Market in which Jefferson Bankshares' symbol is JBNK. Dividend restrictions and other matters are discussed in Notes 9 and 12 of the Notes to Consolidated Financial Statements. On January 13, 1996, there were approximately 8,631 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 Corportaion 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 bank's borrowing privileges as 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. Prudent balance sheet management requires continual protection against any unanticipated or significant changes in the level of market interest rates. Stable levels of net interest income should be maintained in a changing environment by ensuring that interest rate risk is kept at an acceptable level. Accordingly, the Corporation has developed guidelines that stipulate that annual net interest income should not be reduced by more than 10 percent as the result of a sudden 200 basis point upward or downward movement in interest rates. Management uses a variety of interst sensitivity, or "gap", reports to summarize the Corporation's ability to reprice its interest-sensitive assets and liabilities over various time intervals. As asset-sensitive, or positive, gap implies that assets will reprice faster than liabilities. In an increasing interest rate environment, net interest income would be positively affected. Conversely, a liability-sensitive, or negative gap implies that liabilities will reprice faster than assets and, thus, that net interest income would be positively affected by decreasing interest rates. As shown in Table 18, at December 31, 1995 Jefferson Bankshares was positively gapped $58.7 million over the next twelve months. This amount was well within the approved exposure limits of interest sensitive assets to interest sensitive liabilities of 1.25 to 1 and .75 to 1. In addition to gap analysis, management also uses simulation modeling to forecast future balance sheet movements using various interest rate scenarios. By studying the effects on net interest income of rising, falling, and most-likely interest rate scenarios, the Corporation can position itself to take advantage of anticipated interest rate movements. It also can protect itself better against any unexpected interest rate movements by fully understanding the dynamic nature of its balance sheet components.
INTEREST SENSITIVITY ANALYSIS* Table 18 (IN THOUSANDS) Over 3 Over 6 Over 1 Months Months Total Year and 3 Months Through Through Within Not December 31, 1995 or Less 6 Months 12 Months 1 Year Classified Total - ---------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Loans--net $542,316 $ 30,955 $163,240 $736,511 $483,910 $1,220,421 Investment securities: Available for sale 8,182 - 25,053 33,235 155,434 188,669 Held to maturity 29,780 38,939 55,927 124,646 329,863 454,509 Money market investments 15,000 - - 15,000 - 15,000 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 595,278 69,894 244,220 909,392 969,207 1,878,599 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Money market deposit accounts 322,889 - - 322,889 - 322,889 Certificates of deposit $100,000 and over 53,292 12,220 9,867 75,379 18,341 93,720 All other time deposits 252,194 98,024 86,063 436,281 652,820 1,089,101 Short-term borrowings 16,118 - - 16,118 - 16,118 Long-term debt 15 - - 15 - 15 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 644,508 110,244 95,930 850,682 671,161 1,521,843 - ---------------------------------------------------------------------------------------------------------------------------------- NET NON-INTEREST-BEARING LIABILITIES - - - - 356,756 356,756 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY GAP ASSET SENSITIVE (LIABILITY SENSITIVE) $(49,230) $(40,350) $148,290 $ 58,710 $(58,710) $ - - ---------------------------------------------------------------------------------------------------------------------------------- CUMULATIVE GAP $(49,230) $(89,580) $ 58,710 $ 58,710 $ - $ - - ----------------------------------------------------------------------------------------------------------------------------------
* Remaining maturity if fixed rate; earliest possible repricing interval if floating rate. Jefferson Bankshares uses traditional, on-balance sheet means for limiting interest rate risk. Through aggressive pricing and/or marketing strategies, the Corporation is able to emphasize fixed or variable rate assets and liabilities to position the balance sheet in accordance with management's strategies and tolerance for interest rate risk. Accounting Rule Changes In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 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; 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 SFAS 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 1994, 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. The declining interest rate environment in 1995 caused the Available for Sale securities to reflect an unrealized gain, net of tax effects, of $2.9 million as of December 31, 1995. On January 1, 1995, the Corporation adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure. The Statement requires impaired loans to be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Management's evaluation of the adequacy of the allowance is based on a review of the Corporation's historical loss experience, known and inherent risks in the loan portfolio, charge-offs, and the level and trend of interest rates. In reviewing the effects of implementing this Statement, management deemed the allowance for loan losses to be adequate, and no additional provision results from the implementation of the Statement. In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt SFAS 121 in the first quarter of 1996 and, based on current circumstances, does not believe the effect of adoption will be material. In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing Rights, which requires capitalization of the cost of mortgage servicing rights. The Corporation does not service loans that are applicable under this Statement and, accordingly, this Statement will have no impact on the Corporation. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which establishes a new fair value method of accounting for stock-based compensation arrangements with employees. The Statement does not require an entity to adopt the new method. As discussed in Note 9 of the Notes to Consolidated Financial Statements, the Corporation has two incentive stock option plans covered by the provisions of this Statement. The Corporation will elect not to adopt the new method of accounting and will continue to follow the provisions of APB Opinion No. 25.
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) December 31 1995 1994 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 10) $ 88,028 $ 100,809 Federal funds sold and other money market investments 15,000 - Investment securities (Note 3): Available for sale (cost of $184,203 in 1995 and $176,493 in 1994)) 188,669 170,815 Held to maturity (fair value of $459,360 in 1995 and $455,080 in 1994) 454,509 467,733 Loans (Note 4) 1,220,493 1,101,636 Less: Unearned income (72) (136) Allowance for loan losses (Note 5) (13,432) (13,754) - ------------------------------------------------------------------------------------------------------------------- Net loans 1,206,989 1,087,746 - ------------------------------------------------------------------------------------------------------------------- Premises and equipment, net (Note 7) 52,310 51,185 Other assets 45,683 47,662 - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 2,051,188 $1,925,950 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits (Notes 2 and 3): Demand $ 287,489 $ 271,447 Interest checking 306,753 298,471 Regular savings 177,217 196,524 Money market deposit accounts 322,889 336,860 Certificates of deposit $100,000 and over 93,720 72,511 Other time deposits 605,131 513,059 - ------------------------------------------------------------------------------------------------------------------- Total deposits 1,793,199 1,688,872 Federal funds purchased and securities sold under agreements to repurchase 16,118 16,479 Other liabilities 15,316 14,027 Long-term debt 15 19 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,824,648 1,719,397 - ------------------------------------------------------------------------------------------------------------------- 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 15,182,235 shares in 1995 and 15,170,250 shares in 1994 37,956 37,926 Capital surplus 47,623 46,332 Retained earnings 138,058 125,986 Unrealized gains (losses) on securities available for sale, net (Note 3) 2,903 (3,691) - ------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (Notes 2, 8, 9, and 12) 226,540 206,553 - ------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities (Notes 7 and 10) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,051,188 $1,925,950 - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA) Years Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 104,607 $ 84,427 $ 80,941 Income on investment securities: Available for sale 11,374 11,582 - Held to maturity 29,709 32,335 46,811 Other interest income 683 1,152 1,170 - ------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 146,373 129,496 128,922 - ------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-checking 6,594 6,799 7,186 Regular savings 4,864 5,368 4,942 Money market deposit accounts 11,816 9,706 10,184 Certificates of deposit $100,000 and over 4,566 2,842 2,850 Other time deposits 29,583 20,208 22,144 Short-term borrowings 1,220 441 429 Long-term debt 1 29 85 - ------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 58,644 45,393 47,820 - ------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 87,729 84,103 81,102 Provision for loan losses (Note 5) 3,020 1,600 1,911 - ------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 84,709 82,503 79,191 - ------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Trust income 4,500 3,944 4,037 Service charges on deposit accounts 9,155 8,702 8,475 Investment securities gains (losses), net (Note 3) (103) 1,166 88 Mortgage loan sales income 275 681 1,932 Other income (Note 9) 5,192 3,417 2,713 - ------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME 19,019 17,910 17,245 - ------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits (Note 9) 39,222 37,261 34,651 Occupancy expense, net 5,063 5,063 4,740 Equipment expense 6,086 5,965 5,722 F.D.I.C. assessments 2,081 3,790 3,645 Other expense 14,128 14,344 12,910 - ------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE 66,580 66,423 61,668 - ------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 37,148 33,990 34,768 Provision for income tax expense (Note 6) 12,285 11,390 11,183 - ------------------------------------------------------------------------------------------------------- NET INCOME $ 24,863 $ 22,600 $ 23,585 - ------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE (Note 8) $ 1.64 $ 1.49 $ 1.57 - -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
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, 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 9) 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 ($.68 per share) (10,135) (10,135) Acquisition of common stock (72,500) (181) (1,235) (1,416) Issuance of common stock for dividend reinvestment plan 124,912 313 2,075 2,388 Issuance of common stock for stock options (Note 9) 37,285 93 280 373 Change in unrealized gains (losses) on securities available for sale, net (Note 3) (8,763) (8,763) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1994 15,170,250 37,926 46,332 125,986 (3,691) 206,553 Net income, 1995 24,863 24,863 Cash dividends declared ($.76 per share) (11,536) (11,536) Acquisition of common stock (67,048) (168) (1,255) (1,423) Issuance of common stock for dividend reinvestment plan 7,256 18 131 149 Issuance of common stock for incentive stock plan (Note 9) 27,820 70 315 385 Issuance of common stock under the Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (Note 8) 43,957 110 845 955 Change in unrealized gains (losses) on securities available for sale, net (Note 3) 6,594 6,594 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 15,182,235 $37,956 $47,623 $138,058 $2,903 $226,540 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years Ended December 31 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24,863 $ 22,600 $ 23,585 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,490 5,975 5,752 Accretion and amortization 4,145 5,187 4,163 Provision for loan losses 3,020 1,600 1,911 (Increase) decrease in deferred tax benefit (166) (3,069) 430 Investment securities (gains) losses, net (Note 3) 103 (1,166) (88) (Gains) losses on sales of premises and equipment, net (247) (173) 25 (Increase) decrease in interest receivable (537) (376) 581 Increase (decrease) in taxes payable (306) 106 (925) Increase (decrease) in interest payable 1,418 91 (521) (Increase) decrease in loans held for resale, net (1,921) 6,149 527 Other, net (146) 2,656 858 - --------------------------------------------------------------------------------------------------------------------------- Total adjustments 11,853 16,980 12,713 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 36,716 39,580 36,298 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities held to maturity 123,904 153,889 159,657 Proceeds from sales and calls of investment securities held to maturity (Note 3) 148 4,838 13,211 Purchases of investment securities held to maturity (114,127) (118,746) (225,118) Proceeds from maturities of securities available for sale 37,700 19,450 - Proceeds from sales of securities available for sale (Note 3) 11,347 44,346 - Purchases of securities available for sale (57,707) (35,407) - Net increase in loans (121,504) (87,751) (37,639) Business combinations, net of cash (Note 2) 31,369 21,130 1,212 Proceeds from sales of premises and equipment 1,003 208 44 Proceeds from sales of foreclosed properties 2,694 2,732 3,145 Purchases of premises and equipment (7,647) (8,772) (3,635) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (92,820) (4,083) (89,123) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 69,815 (12,076) 28,299 Net increase (decrease) in short-term borrowings (361) (37,618) 43,193 Repayment of long-term debt (4) (1,194) (918) Proceeds from issuance of common stock 1,489 2,761 2,094 Payments to acquire common stock (1,423) (1,416) (1,068) Dividends paid (11,193) (10,034) (8,507) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 58,323 (59,577) 63,093 - --------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,219 (24,080) 10,268 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 100,809 124,889 114,621 - --------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 103,028 $ 100,809 $ 124,889 - ---------------------------------------------------------------------------------------------------------------------------
See acccompanying notes to financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Jefferson Bankshares, Inc. ("the Corporation") is the bank holding company for its subsidiary, Jefferson National Bank, and is headquartered in Charlottesville, Virginia. Through its subsidiary bank, the Corporation delivers financial services with a network of 97 offices covering many of the principal markets of Virginia. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practice within the banking industry. 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118. Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure. The Statement requires impaired loans to be measured at the present value of expected future cash flows discounted at the loan's effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. 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 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. Management utilizes these estimates and assumptions in conformity with generally accepted accounting principles, and actual results could differ from these estimates. The principal factors considered by management in determining the adequacy of the allowance are size and composition of the loan portfolio, historical loss experience, economic conditions, the value and adequacy of collateral, guarantors, 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 FORECLOSED PROPERTIES Foreclosed properties, classified in "Other assets" in the accompanying consolidated balance sheets, consist primarily of real estate held for resale which was acquired through foreclosure on loans secured by real estate. Foreclosed properties are carried at the lower of cost or appraised market value less estimated disposal costs. Writedowns to market value at the date of foreclosure are charged to the allowance for loan losses. Subsequent declines in market value are charged to expense. Management utilizes estimates and assumptions in conformity with generally accepted accounting principles. G GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is amortized using the straight line method over 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. H INCOME TAXES The Corporation accounts for income taxes using the asset and liability method of accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). 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. I 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. J 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. K 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. Due to its fully funded status, no contributions were made to the plan in 1995, 1994, or 1993. L TRUST DIVISION Securities and other property held by the Trust Division in a fiduciary or agency capacity are not assets of the Corporation and, therefore, are not included in the accompanying consolidated financial statements. M 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) 1995 1994 1993 Cash payments for: Interest $57,226 $45,302 $46,937 Income taxes 12,591 11,748 12,345 Non-cash investing and financing activities: Loan balances transferred to foreclosed properties $ 1,269 $ 1,534 $ 1,254 Issuance of common stock for acquisitions - - 834 2 BUSINESS COMBINATIONS In June 1995, Jefferson National Bank acquired the deposits associated with the Waynesboro office of First Union National Bank and the downtown Richmond office of Virginia First Savings Bank. Approximately $35 million in deposit accounts were transferred to Jefferson in these two transactions. The transactions resulted in goodwill of $2.4 million. 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. The transactions with First Union, Virginia First, Liberty and PBVB 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. As of December 31, 1995, the fair value in excess of the amortized cost of securities available for sale resulted in an unrealized gain of $4,466,000. The impact on consolidated shareholders' equity was an increase of $2,903,000, net of deferred taxes of $1,563,000. Sales and calls of investment securities produced the following results: - -------------------------------------------------------------------------------- (IN THOUSANDS) AVAILABLE HELD TO FOR SALE MATURITY -------------------- ------------- Years ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Proceeds from: Sales $ 11,347 $ 44,346 $ 7,411 Calls - - 5,800 - -------------------------------------------------------------------------------- Gross gains $ - $ 1,166 $ 224 Gross losses 103 - 136 - -------------------------------------------------------------------------------- Net gains (losses) $ (103) $ 1,166 $ 88 - -------------------------------------------------------------------------------- There were no sales of Held to Maturity securities in 1995 or 1994. Proceeds from calls of Held to Maturity securities were $148,000 in 1995 and $4,838,000 in 1994. Investment securities having carrying values of $109,729,000 at December 31, 1995, and $82,906,000 at December 31, 1994, 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) December 31 1995 - -------------------------------------------------------------------- SECURITIES - AVAILABLE FOR SALE - -------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury $180,478 $ 4,794 $ 291 $184,981 U.S. Government agencies 2,747 - 37 2,710 Mortgage-backed securities 978 7 7 978 - -------------------------------------------------------------------- TOTAL $184,203 $ 4,801 $ 335 $188,669 - -------------------------------------------------------------------- - -------------------------------------------------------------------- SECURITIES - HELD TO MATURITY - -------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury $ 972 $ 23 $ - $ 995 U.S. Government agencies 244,377 3,574 958 246,993 States and political subdivisions 23,802 632 9 24,425 Corporate debt securities 180,320 1,864 275 181,909 Other securities 5,038 - - 5,038 - -------------------------------------------------------------------- TOTAL $454,509 $ 6,093 $1,242 $459,360 - -------------------------------------------------------------------- - ------------------------------------------------------------------- (IN THOUSANDS) December 31 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 - -------------------------------------------------------------------- The book values and approximate fair values by contractual maturities are shown in Table 12, Investment Securities, in Management's Discussion and Analysis (MD&A). 4 LOANS The composition of the loan portfolio by loan classification as of December 31, 1995 and 1994, appears in Table 7, Loan Portfolio, in MD&A. Information on risk elements in the loan portfolio for 1995 and 1994 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 $20,850,000 and $20,853,000 at December 31, 1995 and 1994, respectively. The changes in the balances from year-end 1994 to 1995 resulted from additions during 1995 of $39,350,000 and collections amounting to $39,353,000. 5 ALLOWANCE FOR LOAN LOSSES A summary of the transactions in the allowance for loan losses for the years ended December 31, 1995, 1994, and 1993, appears in Table 9, Summary of Loan Loss Experience, in MD&A. 6 INCOME TAXES As discussed in Note 1 (H), 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. The current and deferred income tax expense (benefit) provisions are as follows: - ----------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------------- Current: Federal $12,085 $11,619 $11,794 State 28 6 34 - ----------------------------------------------------------------------------- 12,113 11,625 11,828 Deferred 172 (235) (645) - ----------------------------------------------------------------------------- $12,285 $11,390 $11,183 - ----------------------------------------------------------------------------- The provision for income tax expense is different from the amount computed by applying the statutory corporate Federal income tax rate of 35 percent for the following reasons: - ----------------------------------------------------------------------------- (IN THOUSANDS) % of Income 1995 Amount Before Income Taxes - ----------------------------------------------------------------------------- Provision for income tax expense at statutory rate $13,002 35.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (872) (2.3) Other, net 155 .4 - ----------------------------------------------------------------------------- Provision for income tax expense $12,285 33.1% - ----------------------------------------------------------------------------- 1994 - ----------------------------------------------------------------------------- Provision for income tax expense at statutory rate $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 $12,169 35.0% Reduction in income taxes resulting from: Tax-exempt interest (981) (2.8) Other, net (5) - - ----------------------------------------------------------------------------- Provision for income tax expense $11,183 32.2% - ----------------------------------------------------------------------------- The effects of temporary differences that give rise to significant portions of the deferred tax benefit and deferred tax liabilities at December 31, 1995 and 1994 are as follows: - ----------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - ----------------------------------------------------------------------------- Deferred tax benefit: Allowance for loan losses $4,701 $4,759 Deferred compensation 672 1,550 Unrealized losses on investment securities available for sale - 1,987 Other real estate owned 837 289 Other 2,626 2,427 - ----------------------------------------------------------------------------- Total gross deferred tax benefit 8,836 11,012 - ----------------------------------------------------------------------------- Deferred tax liabilities: Premises and equipment, principally due to differences in depreciation 1,872 2,333 Unrealized gains on investment securities available for sale 1,563 - Prepaid pension costs 669 19 Other 1,068 1,670 - ----------------------------------------------------------------------------- Total gross deferred tax liability 5,172 4,022 - ----------------------------------------------------------------------------- Net deferred tax benefit (included in other assets) $3,664 $6,990 - ----------------------------------------------------------------------------- The Corporation and its subsidiaries file consolidated Federal and state income tax returns. At December 31, 1995, the Corporation has net operating loss carryforwards obtained from previous business combinations for Federal income tax purposes of approximately $1.4 million which are available to offset future Federal taxable income, if any, through 2008. The Corporation has not recognized a valuation allowance for the gross deferred tax benefit recorded in the accompanying 1995 and 1994 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, 1995 and 1994, are summarized as follows: - ----------------------------------------------------------------------------- (IN THOUSANDS) Estimated Useful Lives (Years) 1995 1994 - ----------------------------------------------------------------------------- Land - $ 10,209 $ 10,558 Buildings 30-50 47,764 43,061 Leasehold improvements 5-40 4,629 4,312 Furniture and equipment 3-12 47,953 47,754 - ----------------------------------------------------------------------------- 110,555 105,685 Less accumulated depreciation and amortization 58,245 54,500 - ----------------------------------------------------------------------------- $ 52,310 $ 51,185 - ----------------------------------------------------------------------------- Depreciation and amortization of premises and equipment aggregated $5,766,000 in 1995, $5,723,000 in 1994, and $5,266,000 in 1993. At December 31, 1995, the Corporation leased 27 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. Supplementary office space and equipment are leased on a short-term basis. Rent expense charged to operations under operating lease agreements totaled $1,133,000, $1,081,000, and $1,044,000 in 1995, 1994, and 1993, respectively. The following is a schedule by year 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, 1995: - ----------------------------------------------------------------------------- (IN THOUSANDS) Future Minimum Years ending December 31: Payments - ----------------------------------------------------------------------------- 1996 $ 931 1997 803 1998 738 1999 496 2000 354 Later years 1,578 - ----------------------------------------------------------------------------- $4,900 - ----------------------------------------------------------------------------- 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, 1995. 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 COMMON STOCK AND EARNINGS PER SHARE The daily average common shares outstanding used in computing earnings per share were 15,181,152 in 1995, 15,148,400 in 1994, and 15,060,873 in 1993. 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. At December 31, 1995, 886,263 shares were reserved for use in the Corporation's dividend reinvestment plan. 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 Corporation has reserved 106,043 shares of common stock as of December 31, 1995 for this purpose. During 1995, 43,957 shares were issued at prices of $21.125-$23.25 per share and held in a trust until they become exercisable. The shares are exercisable at the time the director is no longer a member of the board. 9 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. In the fourth quarter of 1995, the Corporation recognized a gain of $1.9 million included in other non-interest income related to the annuitization of certain pension liabilities valued at $8.7 million. The following table sets forth the plan's funded status and amounts recognized in the Corporation's consolidated balance sheets as of December 31: - ----------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 - ----------------------------------------------------------------------------- Accumulated benefit obligation (includes vested benefits of $13,121 for 1995 and $19,340 for 1994) $(14,068) $(19,633) - ----------------------------------------------------------------------------- Projected benefit obligation for service rendered to date $(18,430) $(24,359) Plan assets at fair value 24,069 28,556 - ----------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation (funded status) 5,639 4,197 Unrecognized net gain (3,196) (3,057) Unrecognized prior service cost 79 106 Unrecognized net asset being amortized over 15 years (613) (1,084) - ----------------------------------------------------------------------------- Prepaid pension cost (included in other assets) $ 1,909 $ 162 - ----------------------------------------------------------------------------- Net pension cost (benefit) for 1995, 1994, and 1993 includes the following components: - ----------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------------- Service cost-benefits earned during the year $ 1,068 $ 1,061 $ 872 Interest cost on projected benefit obligation 1,902 1,714 1,576 Actual return on plan assets (2,605) (1,256) (2,751) Net amortization and deferral (252) (1,464) 45 - ----------------------------------------------------------------------------- Net pension cost (benefit) for the year $ 113 $ 55 $ (258) - ----------------------------------------------------------------------------- The assumed discount rate was 7.75% and 7.25% and the expected rate of return was 9.00% and 9.25% for 1995 and 1994, respectively. The assumed discount rate and expected rate of return were 8.0% and 9.0%, respectively, for 1993. The weighted average rate of increase in future compensation was assumed to be 4.00% in 1995 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 awarded 264,246 units under this plan of which 128,086 units had vested as of December 31, 1995. The remaining units will vest over the next four years. In 1995, the Corporation issued 27,820 shares of common stock under this plan. 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. The costs (benefits) of these major employee benefit plans included in salaries and employee benefits expense are summarized as follows: - ----------------------------------------------------------------------------- (IN THOUSANDS) 1995 1994 1993 - ----------------------------------------------------------------------------- Pension $ 113 $ 55 $ (258) Profit sharing 2,114 1,890 2,019 Incentive stock 536 698 526 - ----------------------------------------------------------------------------- $2,763 $2,643 $2,287 - ----------------------------------------------------------------------------- In December 1994, the Corporation adopted the 1995 Long-Term Incentive Stock Plan (the 1995 Plan). On January 3, 1995 the Corporation awarded 118,500 incentive stock options under the 1995 Plan at $19.9375 per share. 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. 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, 1995, the Corporation has reserved 238,327 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. 10 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, 1995, commitments to extend credit totaled $249,845,000. 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, 1995, commitments outstanding under standby letters of credit approximated $24,535,000. 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, 1995, securities loaned totaled $6,341,000. 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, 1995 and 1994, the aggregate amounts of daily average required balances were approximately $49,969,000 and $47,407,000, 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. 11 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 securities 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, 1995, 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) DECEMBER 31, 1995 December 31, 1994 AMORTIZED FAIR Amortized Fair COST VALUE Cost Value - -------------------------------------------------------------------------------- Financial assets: Cash and due from banks $ 88,028 $ 88,028 $ 100,809 $ 100,809 Federal funds sold and other money market investments 15,000 15,000 - - Investment securities: Available for sale 184,203 188,669 176,493 170,815 Held to maturity 454,509 459,360 467,733 455,080 Loans, net 1,206,989 1,231,503 1,087,746 1,096,689 Financial liabilities: Demand deposits and interest- bearing transaction accounts 1,094,348 1,094,348 1,103,302 1,103,302 Certificates of deposit 698,851 701,979 585,570 584,547 Short-term borrowings 16,118 16,118 16,479 16,479 Long-term debt 15 15 19 19 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 12 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 Company's cost of borrowing. In addition, the Parent Company guarantees certain leases for its subsidiaries. The primary source of funds for the dividends paid by the Parent Company is dividends received from its subsidiaries. The payment of such dividends by the subsidiary bank and other nonbank subsidiaries and the ability of the subsidiary bank to loan or advance funds to the Parent Company are subject to certain statutory limitations. On December 31, 1995, 16 percent of consolidated shareholders' equity was not so restricted. Condensed financial information for the Parent Company follows: - -------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS JEFFERSON BANKSHARES, INC. (PARENT COMPANY) (IN THOUSANDS) December 31 1995 1994 - -------------------------------------------------------------------------------- ASSETS Cash $ 492 $ 14 Money market investments at bank subsidiary 3,609 4,100 Investment securities-- Held to maturity (fair value of $5,092) 4,987 - Dividends receivable from subsidiaries 4,200 2,560 Investments in subsidiaries at equity: Bank 210,953 196,479 Bank-related 4,011 4,848 - -------------------------------------------------------------------------------- 214,964 201,327 Other assets 4,303 3,314 - -------------------------------------------------------------------------------- TOTAL ASSETS $232,555 $211,315 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Other Liabilities $ 6,015 $ 4,762 - -------------------------------------------------------------------------------- TOTAL LIABILITIES 6,015 4,762 - -------------------------------------------------------------------------------- Shareholders' equity Common stock 37,956 37,926 Capital surplus 47,623 46,332 Retained earnings 138,058 125,986 Unrealized gains (losses) on securities available for sale of Bank subsidiary, net 2,903 (3,691) - -------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 226,540 206,553 - -------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $232,555 $211,315 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- JEFFERSON BANKSHARES, INC. (PARENT COMPANY) (IN THOUSANDS) Years Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- INCOME Dividends from subsidiaries $17,400 $10,560 $9,920 Interest and fees from subsidiaries 2,897 2,717 2,690 Income on investment securities held to maturity 192 - - Other income 100 100 100 - -------------------------------------------------------------------------------- TOTAL INCOME 20,589 13,377 12,710 - -------------------------------------------------------------------------------- EXPENSE Interest expense - 17 59 Salaries and employee benefits 1,849 1,892 2,040 Merger and acquisition expense 88 150 27 Other expense 732 852 962 - -------------------------------------------------------------------------------- TOTAL EXPENSE 2,669 2,911 3,088 - -------------------------------------------------------------------------------- Income before income tax expense and equity in undistributed net income of subsidiaries 17,920 10,466 9,622 Income tax expense 100 19 13 - -------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 17,820 10,447 9,609 Equity in undistributed net income of subsidiaries 7,043 12,153 13,976 - -------------------------------------------------------------------------------- NET INCOME $24,863 $22,600 $23,585 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Condensed Statements of Cash Flows JEFFERSON BANKSHARES, INC. (PARENT COMPANY) (IN THOUSANDS) Years Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $24,863 $22,600 $23,585 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36 36 36 (Increase) decrease in dividends receivable (1,640) 160 (520) Increase (decrease) in taxes payable 407 (13) 319 (Increase) decrease in deferred tax benefit (103) (113) 83 Equity in undistributed net income of subsidiaries (7,043) (12,153) (13,976) Other, net (416) (752) (258) - -------------------------------------------------------------------------------- Total adjustments (8,759) (12,835) (14,316) - -------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 16,104 9,765 9,269 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities held to maturity (6,944) - - Proceeds from maturities of investment securities held to maturity 1,954 - - Business combinations, net of cash - - (593) - -------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (4,990) - (593) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings - (265) 34 Repayment of long-term debt - (900) (900) Proceeds from issuance of common stock 1,489 2,761 2,094 Payments to acquire common stock (1,423) (1,416) (1,068) Dividends paid (11,193) (10,034) (8,507) - -------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (11,127) (9,854) (8,347) - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13) (89) 329 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,114 4,203 3,874 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,101 $ 4,114 $4,203 - -------------------------------------------------------------------------------- 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, 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 Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. January 16, 1996 EX-21 5 EXHIBIT 21 SUBSIDIARIES OF JEFFERSON BANKSHARES, INC. DECEMBER 31, 1995 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 6 EXHIBIT 23 Consent of Independent Auditors The Board of Directors Jefferson Bankshares, Inc.: We consent to incorporation by reference in Registration Statement No. 33-56025 on Form S-3, Registration Statement No. 33-56121 on Form S-8, Registration Statement No. 33-60799 on Form S-8, and Registration Statement No. 33-57461 on Form S-8 of Jefferson Bankshares, Inc. of our report dated January 16, 1996 relating to the consolidated balance sheets of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1995 and 1994 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, 1995 which report is incorporated by reference in the December 31, 1995 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 No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1994. KPMG Peat Marwick LLP Richmond, Virginia March 28, 1996 EX-24 7 EXHIBIT 24 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, 1995, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. This Power-of-Attorney may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. John T. Casteen, III (Seal) February 16, 1996 Lawrence S. Eagleburger (Seal) February 12, 1996 Hunter Faulconer (Seal) February 10, 1996 Fred L. Glaize, III (Seal) February 12, 1996 Henry H. Harrell (Seal) February 9, 1996 Alex J. Kay, Jr. (Seal) February 12, 1996 J. A. Kessler, Jr. (Seal) February 28, 1996 W. A. Rinehart, III (Seal) February 12, 1996 Gilbert M. Rosenthal (Seal) February 12, 1996 Alson H. Smith, Jr. (Seal) February 12, 1996 Lee C. Tait (Seal) February 10, 1996 H. A. Williamson, Jr. (Seal) February 10, 1996 EX-27 8 EXHIBIT 27
9 0000311100 Jefferson Bankshares 1,000 Year Dec-31-1995 Dec-31-1995 88,028 1,505,710 15,000 0 188,669 454,509 459,360 1,220,421 13,432 2,051,188 1,793,199 16,118 15,316 15 37,956 0 0 188,584 2,051,188 104,607 41,083 683 146,373 57,423 58,644 87,729 3,020 (103) 66,580 37,148 24,863 0 0 24,863 1.64 0 4.88 6,009 2,753 250 2,399 13,754 4,115 773 13,432 10,942 0 2,490
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