-----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, N9dXE1mJ91hk+YubAWIIWnrqkkFxzUz56wjolMoXurvv7wrJI+C7iYk8AWGRvA1V kShEAjdz7QkW+ED18M59dA== 0000916641-97-000233.txt : 19970325 0000916641-97-000233.hdr.sgml : 19970325 ACCESSION NUMBER: 0000916641-97-000233 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-09101 FILM NUMBER: 97561661 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act Of 1934 (Fee Required) For the fiscal year ended December 31, 1996 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. [ ] As of January 31, 1997, 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 $377,685,378. As of January 31, 1997, Jefferson Bankshares, Inc. had issued and outstanding 13,957,588 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, 1996 referred to in Parts I, II and IV of this Form 10-K are incorporated by reference therein. The portions of the Proxy Statement for the Corporation's Annual Meeting of Shareholders to be held on April 22, 1997 referred to in Part III of this Form 10-K are incorporated by reference therein. Part I Item 1. Business Jefferson Bankshares, Inc. (the "Corporation") is a bank holding company registered under the provisions of the Bank Holding Company Act of 1956, as amended. The Corporation 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 the Corporation acquired Peoples Bank of Front Royal with two offices and approximately $60 million in total assets, the People's Bank of Virginia Beach with one office and approximately $14 million in assets, and the Bank of Loudoun with one office and approximately $53 million in total assets. Jefferson National Bank purchased approximately $35 million in deposits and selected assets associated with the Waynesboro Office of First Union National Bank and the downtown Richmond office of Virginia First Savings Bank. Jefferson National Bank also purchased deposit liabilities and selected other assets in the approximate amount of $24 million for the Warrenton office of Liberty Federal Savings Bank from the Resolution Trust Corporation. The Corporation regularly seeks reasonable opportunities to expand its asset base and trade area and related business endeavors. In November, 1996, the Corporation completed the repurchase of 1.24 million shares of its common stock at a price of $28 per share. The repurchase was handled as a modified dutch auction tender offer. The tender offer was conducted to utilize the Corporation's strong capital base more effectively and to increase shareholder value. Based on proforma financial models, the tender offer should have the effect of increasing net income per share and improving the return on average shareholders' equity. 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 the Corporation by dividends and management fees from its subsidiaries and short-term and long-term borrowings from nonaffiliates. The Corporation 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 and 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 the Corporation's earnings. The future impact of these policies and of the continuing regulatory changes in the financial services industry cannot be predicted. On December 31, 1996, the Corporation and its affiliates had 905 full-time and 123 part-time employees. Management believes that employee relations are good. As of June 30, 1996, the Corporation had approximately two percent of total deposits in Virginia. Six other bank holding companies had bank subsidiaries in Virginia with more deposits than the Corporation. Jefferson National Bank provides retail and commercial banking and trust services and, as of December 31, 1996, had 95 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, Jefferson National 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 94 percent of its income from Jefferson Bankshares and its subsidiaries in 1996. 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 12 and 13 of the 1996 Annual Report to Shareholders (the "1996 Annual Report") as to the distribution of the Corporation's assets, liabilities and shareholders' equity and interest rates and interest differential; pages 14 and 15 of the 1996 Annual Report as to the Corporation's non-interest income and non-interest expense; pages 19 and 20 of the 1996 Annual Report as to the Corporation's investment portfolio; pages 15 through 18 of the 1996 Annual Report as to the Corporation's loan portfolio (including the Corporation's loan loss experience); page 20 of the 1996 Annual Report as to the Corporation's deposits; page 11 of the 1996 Annual Report as to the Corporation's return on equity and assets; and page 21 of the 1996 Annual Report as to the Corporation's short-term borrowings. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 Statements included or incorporated by reference into the Corporation's Securities and Exchange Commission filings and shareholder communications may contain forward-looking statements that are subject to risks and uncertainties, including, but not limited to the impact of competitive products, product demand and market acceptance risks, fluctuations in operation results, delays in development of highly complex products, and other risks detailed from time to time in the Corporation's filings with the Securities and Exchange Commission. These risks could cause the Corporation's actual results for 1997 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Corporation. 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 1996 Annual Report. Jefferson National Bank is in the process of constructing a new operations center in Charlottesville, Virginia. The new facility will contain approximately 113,000 square feet of space and, excluding furniture, fixtures and equipment, will cost approximately $13 million. The new facility is expected to be ready for occupancy during the third quarter of 1997 and will enable Jefferson National Bank to consolidate various back-office functions into a single location. As a result of the new operations center, Jefferson National Bank has entered into a contract to sell its existing warehouse containing approximately 73,000 square feet of space in Charlottesville at a price of approximately $1.2 million. The transaction is expected to close during the fourth quarter of 1997. Also as a result of the new operations center, Jefferson National Bank will vacate its existing operations facility which contains approximately 41,000 square feet of space. Jefferson National Bank presently expects to renovate this facility and use it for future office space. 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, 53, is President and Chief Executive Officer. Robert H. Campbell, Jr., 62, is Senior Vice President. Allen T. Nelson, Jr., 47, is Senior Vice President, Treasurer and Chief Financial Officer. Mr. Nelson joined the Corporation on December 6, 1993. From February, 1992 until joining the Corporation, Mr. Nelson was Senior Vice President and Controller of Dominion Bankshares, Inc. Prior to February, 1992 he served as Finance Executive Officer with C&S/Sovran Corporation. Walter A. Pace, Jr., 64, is Senior Vice President. Donald W. Fulton, Jr., 50, is Vice President-Investor Relations. William M. Watson, Jr., 42, is General Counsel and Secretary. Part II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters Incorporated herein by reference is the information on page 21 of the 1996 Annual Report under the heading "Capital Resources" and in the table captioned "Common Stock Performance and Dividends" on page 22 of the 1996 Annual Report. Item 6. Selected Financial Data Incorporated herein by reference is the information in the table captioned "Selected Financial Data" on page 10 of the 1996 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 10 through 23 of the 1996 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 10, 11 and 22, respectively, of the 1996 Annual Report. Item 8. Financial Statements and Supplementary Data Incorporated herein by reference is the information appearing under the heading "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 38 of the 1996 Annual Report. Incorporated by reference is the information in the table captioned "Summary of Financial Results by Quarter" on page 11 of the 1996 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 1997 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." The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 by the Corporation's directors, executive officers and 10 percent shareholders is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" on page 3 of the Corporation's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders. 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 10 of the Corporation's definitive Proxy Statement for the 1997 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 1997 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 1997 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 38 of the 1996 Annual Report: Consolidated Balance Sheets at December 31, 1996 and December 31, 1995. Consolidated Statements of Income for the years ended December 31, 1996, December 31, 1995 and December 31, 1994. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, December 31, 1995, and December 31, 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and December 31, 1994. 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 1996 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 24, 1997 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 24, 1997 O. Kenton McCartney President, Chief Executive Officer and Director March 24, 1997 Allen T. Nelson, Jr. Senior Vice President, Treasurer and Chief Financial Officer March 24, 1997 Hovey S. Dabney Chairman of the Board March 24, 1997 John T. Casteen, III* Director March 24, 1997 Lawrence S. Eagleburger* Director March 24, 1997 Hunter Faulconer* Director March 24, 1997 Fred L. Glaize, III* Director March 24, 1997 Henry H. Harrell* Director March 24, 1997 Alex J. Kay, Jr.* Director March 24, 1997 J. A. Kessler, Jr.* Director March 24, 1997 W. A. Rinehart, III* Director March 24, 1997 Gilbert M Rosenthal* Director March 24, 1997 Alson H. Smith, Jr.* Director March 24, 1997 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. (e) Amendment dated September 25, 1996 to the Amended and Restated Bylaws, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended September 30, 1996. 4. Instruments defining the rights of security holders including indentures: (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. 10. Material Contracts: (a) Senior Officers Supplemental Pension Plan, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1982. (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) First Amendment dated January 28, 1997 to Deferred Compensation and Stock Purchase Plan for Non-Employee 13 Directors is filed herewith. * (g) 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. * (h) 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. * (i) 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. * (j) Executive Severance Agreement dated October 25, 1993 between Jefferson Bankshares and William M. Watson, Jr., incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1995. * (k) 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. * (l) 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. * (m) 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. * (n) 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. * (o) 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. * (p) Amended and Restated Split Dollar Life Insurance Agreement dated October 29, 1993 between Jefferson Bankshares and William M. Watson, Jr., incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1995. 13. Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders 15 21. Subsidiaries of the Registrant 55 23. Consents of Experts and Counsel 56 Consent of KPMG Peat Marwick LLP to incorporation by reference of auditors' reports into Jefferson Bankshares' Registration Statements on Form S-3 and Form S-8 is filed herewith. 24. Power of Attorney 57 27. Financial Data Schedule 58 99. Second Amendment dated January 28, 1997 to Employee Stock Purchase Plan is filed herewith. 60 *Management contract or compensatory plan or arrangement of the Corporation required to be filed as an exhibit. EX-10.F 2 DEFERRED COMPENSATION AND STOCK PURCHASE EXHIBIT 10(f) FIRST AMENDMENT TO THE JEFFERSON BANKSHARES, INC. DEFERRED COMPENSATION AND STOCK PURCHASE PLAN FOR NON-EMPLOYEE DIRECTORS The Jefferson Bankshares, Inc. Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (the "Plan"), as amended and restated as of December 13, 1994, is hereby further amended as follows: 1. The first sentence of Section 7 of the Plan is deleted and replaced with the following new sentences: If a Director has elected pursuant to Section 5 to defer Fees otherwise payable through the crediting of Shares, the Company shall either (a) cause such Shares to be credited to an account maintained in the name of the Trustee by the Agent to be held for the benefit of the electing Director, or (b) issue such Shares directly to itself as custodian and credit the Shares to an account for the electing Director to whom the Fees would be otherwise payable. Such account shall be referred to as the Director's "Share Fees Account." 2. Section 16 of the Plan is amended in its entirety to read as follows: 16. Share Certificates and Voting. (a) The Trustee or the Company shall hold for deferred payment to the Director all Shares purchased with cash dividends and other distributions paid or made with respect to the Shares. When Shares become distributable under the terms of the Plan to a Director, the Company shall not issue fractions of Shares. Whenever under the terms of the Plan a fractional Share would otherwise be required to be issued, the Director shall be paid in cash for such fractional Share based upon the Fair Market Value on, or as of a recent date prior to, the date of distribution. (b) The Trustee, or a co-fiduciary of the Company (within the meaning of applicable state law), shall exercise all voting, tender and similar rights with respect to Shares that are credited to a Director's Share Fees Account. Each Director shall be entitled to exercise all voting, tender and similar rights with respect to all other Shares purchased under the Plan. This Amendment is adopted as of January 28, 1997. JEFFERSON BANKSHARES, INC. /s/ O. Kenton McCartney President and CEO EX-13 3 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis are intended to aid the reader in understanding and evaluating the consolidated results of operations and the 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 November 1996, the Corporation completed a Modified Dutch Auction Tender Offer in which it repurchased 1.236 million shares of its common stock. The acquisition cost of $35 million decreased shareholders' equity and book value per share. According to proforma financial models, the reduction in shares outstanding and the lower equity should have the positive effects of increasing net income per share and the return on average shareholders' equity. Results of Operations Net income in 1996 rose to a record $27.8 million, which was 12 percent above the previous record of $24.9 million established in 1995. Net income per share also reached a new record at $1.86 in 1996, or a 13 percent increase over $1.64 in 1995. The higher increase in net income per share was attributable, in part, to the decrease in average shares outstanding as the result of the purchase of shares in the tender offer. 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 at the end of each of those periods. 1. SELECTED FINANCIAL DATA (Dollars in thousands except per share data)
- ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS Interest income $ 153,628 $ 146,373 $ 129,496 $ 128,922 $ 129,072 Interest expense 59,046 58,644 45,393 47,820 56,505 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 94,582 87,729 84,103 81,102 72,567 Provision for loan losses 3,480 3,020 1,600 1,911 4,195 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 91,102 84,709 82,503 79,191 68,372 Non-interest income 18,977 19,019 17,910 17,245 16,655 Non-interest expense 67,655 66,580 66,423 61,668 54,965 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 42,424 37,148 33,990 34,768 30,062 Provision for income tax expense 14,623 12,285 11,390 11,183 9,018 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 27,801 $ 24,863 $ 22,600 $ 23,585 $ 21,044 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net income $ 1.86 $ 1.64 $ 1.49 $ 1.57 $ 1.50 Dividends declared .88 .76 .68 .62 .53 Book value 14.66 14.92 13.62 13.03 12.04 Average number of shares outstanding 14,982,442 15,181,152 15,148,400 15,060,873 14,075,372 Number of shares outstanding at year-end 13,937,491 15,182,235 15,170,250 15,080,553 14,953,304 - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on average assets 1.34% 1.25% 1.18% 1.27% 1.23% Return on average shareholders' equity 12.20 11.43 11.05 12.34 12.96 Shareholders' equity to total assets 9.45 11.04 10.72 10.12 9.77 Dividend payout ratio 46.99 45.02 44.40 36.07 33.42 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION AT YEAR-END Assets $ 2,161,825 $ 2,051,188 $ 1,925,950 $ 1,941,961 $ 1,842,447 Earning assets 1,974,908 1,878,599 1,740,048 1,749,740 1,675,448 Deposits 1,891,109 1,793,199 1,688,872 1,677,354 1,636,346 Long-term debt - 15 19 1,213 2,131 Shareholders' equity 204,314 226,540 206,553 196,434 180,023 - -----------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF FINANCIAL RESULTS BY QUARTER (Dollars in thousands except per share data)
- --------------------------------------------------------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Three Months Ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 - --------------------------------------------------------------------------------------------------------------------- Interest income $ 39,818 $ 38,634 $ 37,840 $ 37,336 $ 37,709 $ 37,336 $ 36,808 $ 34,520 Interest expense 15,476 14,655 14,380 14,535 15,195 15,462 15,066 12,921 - --------------------------------------------------------------------------------------------------------------------- Net interest income 24,342 23,979 23,460 22,801 22,514 21,874 21,742 21,599 Provision for loan losses 960 900 840 780 1,580 480 480 480 Non-interest income 4,502 4,875 4,939 4,661 6,450 4,337 4,248 3,984 Non-interest expense 17,169 16,864 16,883 16,739 16,747 16,462 16,630 16,741 - --------------------------------------------------------------------------------------------------------------------- Income before income taxes 10,715 11,090 10,676 9,943 10,637 9,269 8,880 8,362 Income tax expense 3,669 3,848 3,698 3,408 3,372 3,122 2,979 2,812 - --------------------------------------------------------------------------------------------------------------------- NET INCOME $ 7,046 $ 7,242 $ 6,978 $ 6,535 $ 7,265 $ 6,147 $ 5,901 $ 5,550 - --------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ .49 $ .48 $ .46 $ .43 $ .48 $ .40 $ .39 $ .37 - ---------------------------------------------------------------------------------------------------------------------
Higher net income in 1996 raised profitability ratios over 1995 levels. The return on average assets increased to 1.34 percent in 1996 from 1.25 percent in 1995. In 1994, this ratio was 1.18 percent. Another measure of profitability, the return on average shareholders' equity, improved in 1996 to 12.20 percent from 11.43 percent in 1995. In 1994, this ratio was 11.05 percent. The 1996 ratio, in addition to being influenced by higher net income, also was affected positively by the reduction of equity from the tender offer. As the tender offer occurred in the fourth quarter of 1996, its effect on average shareholders' equity and, consequently, on the return on average shareholders' equity for the year ended December 31, 1996 was not significant. Table 2 presents a quarterly summary of earnings components for the last two years. In 1996, quarterly net income rose through the first three quarters, principally on the strength of increasing net interest income. In the fourth quarter of 1996, net income of $7.0 million was less than the $7.2 million recorded in the third quarter of 1996, but net income per share increased to $.49 in the fourth quarter compared with $.48 in the third quarter. Lower fourth quarter net income was attributable to a decrease in non-interest income and an increase in non-interest expense. In addition, funds used to purchase shares in the tender offer reduced earning assets and consequently lowered interest income. Net income per share increased, however, as the average number of shares outstanding decreased in the fourth quarter of 1996. In 1995, net income and net income per share increased in 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. Third and fourth quarter net income in 1995 benefited from an F.D.I.C. premium reduction and a premium rebate in the third quarter of 1995. 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 reduction in F.D.I.C. assessments and the gain from the pension liability was an increase of $1.2 million in the provision for loan losses. 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 resulting 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 7 percent in 1996 to $95.6 million from $89.0 million in 1995. Loan growth was an important factor in the increases in net interest income and in the net interest margin, which widened in 1996 to 5.00 percent from 4.88 percent in 1995. Average earning assets increased 5 percent in 1996, however average loans increased 10 percent. Thus, average loans increased to 67 percent of average earning assets in 1996 from 64 percent in 1995. This change in the mix of average earning assets helped stabilize the yield on average earning assets as interest rates in 1996 were generally somewhat below those in 1995. The yield on average earning assets was 8.08 percent in 1996 compared with 8.09 percent in 1995. In contrast, the average cost of interest-bearing liabilities declined to 3.82 percent in 1996 from 3.91 percent in 1995. These changes in volume, mix, and rates provided a 5 percent increase in tax-equivalent interest income and an increase of less than one percent in interest expense. 3. CONSOLIDATED AVERAGE BALANCES/NET INTEREST INCOME/RATES* Tax-equivalent basis (Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- 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 $1,286.4 $ 115.2 8.95% $1,164.3 $105.4 9.05% $1,047.2 $ 85.0 8.12% Investment securities: Available for sale: U.S. Treasury 188.6 11.8 6.23 176.2 11.2 6.36 176.7 11.5 6.51 U.S. Government agencies 2.6 0.1 4.64 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 0.1 - 5.01 1.1 - - 1.4 - - U.S. Government agencies 220.0 13.7 6.21 243.6 15.8 6.49 265.2 17.8 6.72 States and political subdivisions 14.6 1.1 7.88 20.1 1.6 8.07 26.7 2.1 7.82 Corporate debt securities 177.7 11.3 6.37 194.3 12.0 6.20 203.1 12.5 6.17 Other securities 10.9 0.8 7.03 8.4 0.6 7.28 7.8 0.6 7.68 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 614.5 38.8 6.31 648.3 41.5 6.42 683.0 44.6 6.54 Money market investments 13.4 0.7 5.30 11.5 0.7 5.95 25.3 1.2 4.54 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 1,914.3 154.7 8.08 1,824.1 147.6 8.09 1,755.5 130.8 7.45 - ----------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (14.1) (13.9) (13.7) Cash and due from banks 72.4 85.7 85.5 Premises and equipment 52.5 51.7 50.4 Other assets 45.5 44.3 43.3 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,070.6 $1,991.9 $1,921.0 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Time and savings deposits: Interest-checking accounts $ 300.6 $ 6.1 2.01% $ 292.5 $ 6.6 2.25% $ 299.8 $ 6.8 2.27% Regular savings 177.1 4.4 2.50 183.4 4.9 2.65 200.2 5.4 2.68 Money market deposit accounts 330.6 11.9 3.60 320.8 11.8 3.68 345.9 9.7 2.81 Certificates of deposit $100,000 and over 99.0 5.0 5.03 86.9 4.6 5.25 71.2 2.8 3.99 Other time deposits 610.0 30.4 4.98 591.0 29.5 5.01 522.6 20.2 3.87 - ----------------------------------------------------------------------------------------------------------------------------------- Total time and savings deposits 1,517.3 57.8 3.81 1,474.6 57.4 3.89 1,439.7 44.9 3.12 Short-term borrowings 27.6 1.3 4.70 24.9 1.2 4.90 14.9 0.4 2.96 Long-term debt - - - - - - 0.5 0.1 5.65 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 1,544.9 59.1 3.82 1,499.5 58.6 3.91 1,455.1 45.4 3.12 - ----------------------------------------------------------------------------------------------------------------------------------- Demand deposits 282.4 260.3 248.9 Other liabilities 15.5 14.7 12.4 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,842.8 1,774.5 1,716.4 Shareholders' equity before unrealized gains (losses) 226.5 217.4 204.8 Unrealized gains (losses) on securities available for sale, net 1.3 - (0.2) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 227.8 217.4 204.6 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,070.6 $1,991.9 $1,921.0 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $ 95.6 $ 89.0 $ 85.4 AVERAGE INTEREST RATE SPREAD 4.26% 4.18% 4.33% INTEREST EXPENSE AS A PERCENT OF AVERAGE EARNING ASSETS 3.08% 3.21% 2.59% NET INTEREST MARGIN 5.00% 4.88% 4.87% - -----------------------------------------------------------------------------------------------------------------------------------
* 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%. Loan interest income includes fees of $3,417,000 in 1996; $2,921,000 in 1995; and $2,831,000 in 1994. Loans include non-accrual loan balances and interest accrued, if any. Comparing 1995 with 1994, tax-equivalent net interest income increased 4 percent in 1995 to $89.0 million from $85.4 million in 1994. The net interest margin was stable in 1995 at 4.88 percent compared with 4.87 percent in 1994. 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. Average loans increased 11 percent in 1995 raising loans to 64 percent of average earning assets from 60 percent in 1994. 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 are 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 1996, the Corporation raised its provision for loan losses to $3.5 million from $3.0 million in 1995. In 1994, the provision was $1.6 million. The higher provision in 1996 compared with 1995 reflected 12 percent growth in the loan portfolio and concerns about consumer debt levels and related delinquencies. The increase in the provision for loan losses in 1995 compared with 1994 reflected the same factors that led to the increase in 1996, as well as a higher amount of loan losses in 1995 compared with 1994. Economic factors are expected to be a key influence on the provision for loan losses in 1997. The provision is likely to be increased commensurate with loan growth. In addition, it may be increased further if there is a rise in loan losses, delinquencies, or expectations of such increases. Trends that develop in 1997 relating to the economy, actual loan losses, and the level of non-performing assets will strongly influence the amount of the provision. 4. ANALYSIS OF CHANGES IN NET INTEREST INCOME*
Tax-equivalent basis (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Year 1996 over 1995 Year 1995 over 1994 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $10,974 $(1,172) $9,802 $10,047 $10,289 $20,336 Investment securities: Available for sale: U.S. Treasury 782 (231) 551 (34) (273) (307) U.S. Government agencies (48) (3) (51) 85 13 98 Held to maturity: U.S. Treasury (50) (10) (60) - 66 66 U.S. Government agencies (1,551) (664) (2,215) (1,348) (596) (1,944) States and political subdivisions (432) (37) (469) (554) 66 (488) Other (874) 301 (573) (495) 30 (465) Money market investments 105 (79) 26 (755) 286 (469) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME 8,906 (1,895) 7,011 6,946 9,881 16,827 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Time and savings deposits: Interest-checking accounts 179 (723) (544) (151) (54) (205) Regular savings (164) (268) (432) (445) (59) (504) Money market deposit accounts 358 (257) 101 (741) 2,851 2,110 Certificates of deposit $100,000 and over 612 (198) 414 709 1,015 1,724 Other time deposits 934 (144) 790 2,847 6,528 9,375 Short-term borrowings 126 (52) 74 392 386 778 Long-term debt - (1) (1) (28) 1 (27) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 2,045 (1,643) 402 2,583 10,668 13,251 - ------------------------------------------------------------------------------------------------------------------------------------ CHANGE IN NET INTEREST INCOME $ 6,861 $ (252) $6,609 $ 4,363 $ (787) $ 3,576 - ------------------------------------------------------------------------------------------------------------------------------------
*The change in interest that cannot be separated between rate and volume has been allocated to each variance proportionately. 5. NON-INTEREST INCOME
(in thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Trust income $ 4,380 $ 4,500 $ 3,944 $ 4,037 $ 3,765 Service charges on deposit accounts 9,970 9,155 8,702 8,475 8,326 Credit insurance income 79 107 165 208 255 Investment securities gains (losses), net 4 (103) 1,166 88 298 Mortgage loan sales income 614 275 681 1,932 1,528 Other income 3,930 5,085 3,252 2,505 2,483 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME $18,977 $19,019 $17,910 $17,245 $16,655 - ----------------------------------------------------------------------------------------------------------------------------------
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 totaled $19.0 million in both 1996 and 1995. The 1995 total included $1.9 million in income related to the annuitization of certain pension liabilities. Excluding this non-recurring income from the comparison, non-interest income was 11 percent higher in 1996 compared with 1995. Deposit account fees, which increased 9 percent, or $815 thousand, were the largest factor in the increase. This increase resulted primarily from higher return check fees. Revenues from the sales of investment products and services, which is included in other income, also added $549 thousand in 1996. In addition, income generated from the sale of mortgage loans in the secondary market more than doubled in 1996 to $614 thousand. The increase in this income was attributable to a greater volume of fixed rate mortgage loans originated in 1996. Also contributing to the increase in non-interest income were fees from credit card activities, which rose 38 percent in 1996 to $795 thousand. Fee income from credit cards rose as the card base increased and fee waivers expired on cards issued in 1995. Non-interest income increased 6 percent in 1995 to $19.0 million from $17.9 million in 1994. The comparison was influenced by a $1.9 million increase in income from the annuitization of certain pension liabilities in 1995 and by $1.2 million in income in 1994 from the sale of investment securities available for sale. Excluding these items of non-recurring income, non-interest income increased 2 percent in 1995 over 1994. Contributing to this increase were 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 from the sale of mortgage loans. This decrease resulted from a reduced volume of fixed rate mortgage loan originations. 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 1996 was 2 percent above the amount recorded in 1995. Salaries and employee benefits increased 5 percent in 1996 to $41.1 million. Salaries increased only 3 percent, but, consistent with the Corporation's plan to reward performance, employee benefits, commissions, incentives, and bonuses represented a larger portion of compensation in 1996. Occupancy expense increased 11 percent in 1996. A charge of $438 thousand recorded in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed Of, was responsible for a substantial portion of this increase. Equipment expense increased 5 percent, telecommunications expense 2 percent, and other expense 4 percent in 1996 over 1995. Partially offsetting the above expense increases was a significant reduction in F.D.I.C. insurance assessments in 1996, which resulted in a $2.0 million reduction in expense. The F.D.I.C. lowered its assessments for the Bank Insurance Fund to a flat administrative fee of $2 thousand in 1996. The additional expense recorded in 1996 was related to Savings Association Insurance Fund deposits. In 1996, Congress passed legislation requiring banks to pay a portion of the interest on Financing Corporation (FICO) bonds that were issued to provide funds to resolve the savings and loan crisis. Consequently, beginning in 1997, the Corporation will be obligated to pay an assessment for the FICO obligation, which is estimated to total approximately $250 thousand in 1997. In addition to the reduction in F.D.I.C. assessments in 1996, the Corporation reduced its office supplies expense 1 percent and its postage expense 6 percent. 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 of $1.7 million. The largest expense increase was salaries and employee benefits, which rose 5 percent in 1995. Occupancy expense was unchanged from 1994 to 1995. Other expenses that increased included equipment expense, office supplies expense, postage expense, and telecommunications expense. Partially offsetting these increases, other expense decreased 5 percent in 1995 compared with 1994. 6. NON-INTEREST EXPENSE
(Dollars in thousands) - ------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------- Salaries and employee benefits $41,090 $39,222 $37,261 $34,651 $31,439 Occupancy expense, net 5,644 5,063 5,063 4,740 4,653 Equipment expense 6,370 6,086 5,965 5,722 5,125 F.D.I.C. assessments 44 2,081 3,790 3,645 3,327 Office supplies 1,182 1,189 1,108 1,115 1,051 Postage 1,229 1,313 1,160 1,187 1,143 Telecommunications expense 1,855 1,817 1,775 1,425 1,292 Other expense 10,241 9,809 10,301 9,183 6,935 - ------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE $67,655 $66,580 $66,423 $61,668 $54,965 - ------------------------------------------------------------------------------------------- OPERATING EFFICIENCY RATIO* 59.0% 61.6% 64.3% 61.7% 60.4% - -------------------------------------------------------------------------------------------
*Total non-interest expense as a percent of net interest income (tax-equivalent basis) and total non-interest income. INCOME TAXES The provision for income taxes was $14.6 million in 1996 and $12.3 million in 1995. Higher operating earnings were principally responsible for the increase in income taxes. In 1994, income taxes were $11.4 million. FINANCIAL CONDITION The Corporation's financial condition is measured in terms of its asset and liability composition, asset quality, capital resources, and liquidity. The growth and composition of assets and liabilities in 1996 reflected generally favorable economic conditions and the continuation of trends from the previous year. While asset growth overall was moderate, loans continued to grow at a strong pace. On the liability side of the balance sheet, deposit growth continued to be influenced by record amounts of funds being invested in the securities markets. The Corporation's asset quality, which traditionally is strong relative to peer and industry standards, improved further in 1996. Similarly, liquidity measures remained fully adequate in 1996. With respect to its capital resources, in spite of the reduction of capital from the repurchase of shares of common stock in the tender offer, the Corporation remains well capitalized, which is the highest classification under regulatory standards. 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, and other items are discussed in Note 10 of the Notes to Consolidated Financial Statements. ASSETS On December 31, 1996, total assets were $2.162 billion, or 5 percent higher than the year earlier total of $2.051 billion. Average total assets increased 4 percent in 1996 to $2.071 billion from $1.992 billion in 1995. 7. LOAN PORTFOLIO
(in thousands) - ----------------------------------------------------------------------------------------------------------------------- December 31 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- LOAN CLASSIFICATION: Commercial, financial, and agricultural $ 492,727 $ 467,296 $ 407,152 $ 408,349 $388,314 Real estate - construction 104,192 84,090 107,629 97,832 105,611 Real estate - mortgage 413,526 406,122 366,983 285,384 270,307 Consumer 355,504 262,985 219,872 231,656 216,388 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LOANS $1,365,949 $1,220,493 $1,101,636 $1,023,221 $980,620 - -----------------------------------------------------------------------------------------------------------------------
Loan Portfolio. In 1996, loans continued on a growth pattern similar to that in 1995. Loans, net of unearned income increased 12 percent to $1.366 billion on December 31, 1996 from $1.220 billion one year earlier. Average loans, net of unearned income increased 10 percent in 1996 to $1.286 billion from $1.164 billion in 1995. All three major areas of the loan portfolio, consumer, commercial, and mortgage, contributed to the strong growth in 1996. Consumer lending led the growth with a 35 percent increase. The indirect instalment portion of the portfolio increased 79 percent to $188 million at year-end 1996 compared with $105 million one year earlier. A new relationship with a major insurance company was responsible for approximately $40 million of this increase. In addition, credit card balances increased to $16 million at year-end 1996 from $9 million one year earlier. Commercial lending, which is the largest segment of the portfolio, increased 5 percent in 1996 to $493 million. Favorable economic conditions in the various markets served by the Corporation and continued focus on this segment of the portfolio were factors in this growth. 8. REMAINING MATURITIES OF SELECTED LOANS (in thousands) - --------------------------------------------------------- Commercial, Financial, and Real Estate - December 31, 1996 Agricultural Construction - --------------------------------------------------------- WITHIN 1 YEAR $100,619 $ 49,539 - --------------------------------------------------------- VARIABLE RATE: 1 to 5 years 87,606 13,565 After 5 years 161,297 19,663 - --------------------------------------------------------- TOTAL 248,903 33,228 - --------------------------------------------------------- FIXED RATE: 1 to 5 years 111,956 15,001 After 5 years 31,249 6,424 - --------------------------------------------------------- TOTAL 143,205 21,425 - --------------------------------------------------------- TOTAL MATURITIES $492,727 $104,192 - --------------------------------------------------------- Construction lending also benefitted from a favorable economy. Loans in this category increased 24 percent in 1996 to $104 million. Mortgage loans increased 2 percent to $414 million on December 31, 1996. This increase was attributable principally to adjustable rate mortgages. On December 31, 1996, the Corporation had no concentration of loans in any one industry in excess of 10 percent of its loan portfolio. Because of the nature of the Corporation's market, loan collateral is predominantly real estate related. Thus, periodic weakness in real estate markets may have an adverse effect on collateral values and could lead to writedowns and 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. Credit quality is a consistent strength of the Corporation. One measure of that strength is a low level of loan losses. In 1996, net loan losses totaled $2.3 million, or only .18 percent of average loans, net of unearned income. In 1995, net loan losses were $3.3 million, or .29 percent of average loans, net of unearned income. Loan losses were higher in 1995 principally as the result of writedowns on two large credits. Loan loss expectations for 1997 are influenced by positive economic conditions, moderate interest rates, and lower levels of problem assets partially offset by some concern about the level of consumer debt. At year-end 1996, management was not aware of any conditions that would cause loan losses to be materially higher in 1997 than in 1996. However, adverse changes in the economic cycle and unforeseen changes in borrowers' financial conditions could impact loan losses in 1997. The Corporation will continue its efforts to minimize future credit losses. Risk elements associated with the loan portfolio are presented in Table 10. Excluding foreclosed properties, identified risk elements on December 31, 1996 totaled $7.6 million, or .56 percent of loans, net of unearned income. At December 31, 1995, the total was $9.0 million, or .74 percent of loans, net of unearned income. Foreclosed properties at December 31, 1996 were $2.0 million, or 52 percent less than the year earlier total of $4.1 million. Foreclosed properties are reported net of writedowns at the lower of cost or estimated net realizable value. At December 31, 1996, total risk elements represented .70 percent of loans, net of unearned income plus foreclosed properties and .44 percent of total assets. These ratios at the end of 1995 were 1.1 percent and .64 percent, respectively. At year-end 1996, the Corporation identified an additional $5.4 million in loans that pose some uncertainty over the borrowers' ability to comply with loan repayment terms. With respect 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 1996 was $878 thousand. Only 4 other non-accrual loans had balances greater than $200 thousand at year-end 1996. 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. 9. SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands) - -------------------------------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- ALLOWANCE AT BEGINNING OF YEAR $ 13,432 $ 13,754 $ 13,864 $ 13,057 $ 10,894 LOAN LOSSES: Commercial, financial, and agricultural 426 1,641 994 789 920 Real estate - construction 138 1,090 150 - 90 Real estate - mortgage 362 110 187 140 343 Consumer 2,015 1,274 1,054 696 1,607 - -------------------------------------------------------------------------------------------------------------------- TOTAL LOAN LOSSES 2,941 4,115 2,385 1,625 2,960 - -------------------------------------------------------------------------------------------------------------------- RECOVERIES: Commercial, financial, and agricultural 83 169 67 59 58 Real estate - construction - 2 4 6 47 Real estate - mortgage 34 38 75 72 9 Consumer 568 564 529 261 263 - -------------------------------------------------------------------------------------------------------------------- TOTAL RECOVERIES 685 773 675 398 377 - -------------------------------------------------------------------------------------------------------------------- NET LOAN LOSSES 2,256 3,342 1,710 1,227 2,583 INCREASE FROM ACQUISITIONS - - - 123 551 PROVISION CHARGED TO EXPENSE 3,480 3,020 1,600 1,911 4,195 - -------------------------------------------------------------------------------------------------------------------- ALLOWANCE AT END OF YEAR $ 14,656 $ 13,432 $ 13,754 $ 13,864 $ 13,057 - -------------------------------------------------------------------------------------------------------------------- LOANS - NET OF UNEARNED INCOME: Outstanding at year-end $1,365,854 $1,220,421 $1,101,500 $1,022,911 $979,365 Average 1,286,417 1,164,324 1,047,206 1,006,262 908,397 RATIOS: NET LOAN LOSSES TO AVERAGE LOANS 0.18% 0.29% 0.16% 0.12% 0.28% Allowance to year-end loans 1.07% 1.10% 1.25% 1.36% 1.33% Allowance to net loan losses 6.50X 4.02X 8.04X 11.30X 5.05X Provision to net loan losses 1.54X 0.90X 0.94X 1.56X 1.62X Provision to average loans 0.27% 0.26% 0.15% 0.19% 0.46% Recoveries to loan losses 23.29% 18.78% 28.30% 24.49% 12.74% - --------------------------------------------------------------------------------------------------------------------
Included in the $2.0 million total of foreclosed properties at December 31, 1996 were 10 parcels of real estate. The highest carrying value of a single property was $538 thousand. Only 3 other parcels included in foreclosed properties at year-end 1996 had carrying values above $200 thousand. The Corporation maintains a general allowance for loan losses and does not allocate its allowance for loan losses to individual categories for management purposes. Table 11 shows an allocation among loan categories based upon an analysis of the portfolio's composition, historical loan loss experience, and other relevant factors. In determining the adequacy 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, 1996, the allowance for loan losses was $14.7 million, or 1.07 percent of loans, net of unearned income. A year earlier, the allowance was $13.4 million, or 1.10 percent of loans, net of unearned income. At its year-end 1996 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. 10. RISK ELEMENTS
(Dollars in thousands) - -------------------------------------------------------------------------------------------------------------- Book Value December 31 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- LOANS: Non-accrual $4,608 $ 6,009 $ 6,996 $ 9,174 $10,448 Troubled debt restructurings 245 250 - - - Past due principal and/or interest for 90 days or more 2,790 2,753 2,713 5,453 3,545 - -------------------------------------------------------------------------------------------------------------- TOTAL $7,643 $ 9,012 $ 9,709 $14,627 $13,993 - -------------------------------------------------------------------------------------------------------------- AS A PERCENT OF: Loans - net of unearned income .56% .74% .88% 1.43% 1.43% Total assets .35% .44% .50% .75% .76% Allowance for loan losses 52.15% 67.09% 70.59% 105.50% 107.17% FORECLOSED PROPERTIES $1,957 $ 4,093 $ 5,919 $ 8,831 $11,770 - -------------------------------------------------------------------------------------------------------------- TOTAL RISK ELEMENTS $9,600 $13,105 $15,628 $23,458 $25,763 - -------------------------------------------------------------------------------------------------------------- AS A PERCENT OF: Loans - net of unearned income plus foreclosed properties .70% 1.07% 1.41% 2.27% 2.60% Total assets .44% .64% .81% 1.21% 1.40% - ---------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995, and 1994, gross interest income in the amount of $615,000, $632,000, and $462,000, 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 $79,000, $49,000 and $66,000 in 1996, 1995, and 1994, respectively. At December 31, 1996, the Corporation identified additional loans totaling $5,402,000 that pose some uncertainty over the borrowers' ability to comply with the loan repayment terms. Investment securities also may pose credit risks. At December 31, 1996, all investment securities were performing according to terms. 11. ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------------- December 31 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - ---------------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES: Commercial, financial, and agricultural $ 7,307 36.1% $ 7,871 38.3% $ 8,447 36.9% $ 6,499 39.9% $ 6,958 39.6% Real estate - construction 510 7.6 137 6.9 156 9.8 687 9.6 753 10.8 Real estate - mortgage 830 30.3 732 33.3 514 33.3 385 27.9 437 27.5 Consumer 3,297 26.0 2,202 21.5 2,227 20.0 3,598 22.6 2,558 22.1 Unallocated 2,712 - 2,490 - 2,410 - 2,695 - 2,351 - - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ALLOWANCE FOR LOAN LOSSES $14,656 100.0% $13,432 100.0% $13,754 100.0% $13,864 100.0% $13,057 100.0% - ----------------------------------------------------------------------------------------------------------------------------------
12. INVESTMENT SECURITIES Based on stated maturities (Dollars in thousands) - ------------------------------------------------------------------------------ Amortized Fair Tax-Equivalent December 31, 1996 Cost Value Yield - ------------------------------------------------------------------------------ AVAILABLE FOR SALE: U.S. Treasury Securities: Within one year $ 33,694 $ 33,717 5.60% One to five years 140,410 142,359 6.46 - ------------------------------------------------------------------------------ TOTAL U.S. TREASURY SECURITIES 174,104 176,076 6.29 - ---------------------------------------------------------------------------- U.S. Government Agencies: Within one year 2,000 1,997 4.18 - ------------------------------------------------------------------------------ TOTAL U.S. GOVERNMENT AGENCIES 2,000 1,997 4.18 - ---------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES - AVAILABLE FOR SALE 176,104 178,073 6.27 - ------------------------------------------------------------------------------ HELD TO MATURITY: U.S. Government Agencies: Within one year 45,955 46,106 6.02 One to five years 166,853 167,306 6.08 - ----------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCIES 212,808 213,412 6.07 - ---------------------------------------------------------------------------- State and Political Subdivision Securities: Within one year 1,914 1,905 5.97 One to five years 9,030 9,208 5.56 Five to ten years 1,641 1,719 8.19 After ten years 2,046 2,070 6.42 - ---------------------------------------------------------------------------- TOTAL STATE AND POLITICAL SUBDIVISION SECURITIES 14,631 14,902 6.03 - ---------------------------------------------------------------------------- Corporate Debt Securities: Within one year 83,167 83,612 6.55 One to five years 112,164 112,536 6.46 - ---------------------------------------------------------------------------- TOTAL CORPORATE DEBT SECURITIES 195,331 196,148 6.50 - ---------------------------------------------------------------------------- OTHER SECURITIES: After ten years 8,211 8,211 6.94 - ---------------------------------------------------------------------------- TOTAL OTHER SECURITIES 8,211 8,211 6.94 - ---------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES - HELD TO MATURITY $430,981 $432,673 6.28% - ---------------------------------------------------------------------------- Investment Securities. Investment securities represent the second largest component of earning assets. In accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, 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. At December 31, 1996, the combined reported value of investment securities was $609 million compared with the year earlier total of $643 million. Available for Sale securities decreased to $178 million at year-end 1996 from $189 million one year earlier. Held to Maturity securities decreased to $431 million on December 31, 1996 from the year earlier total of $455 million. 13. CORPORATE DEBT BY QUALITY RATING (Dollars in thousands) - ------------------------------------------------------------- Book December 31, 1996 Value Percent - ------------------------------------------------------------- MOODY'S RATING Aaa $ 16,642 8.5% Aa1 2,000 1.0 Aa2 14,612 7.5 Aa3 26,560 13.6 A1 58,387 29.9 A2 74,523 38.2 A3 2,506 1.3 Other/Not Rated 101 - - ------------------------------------------------------------- TOTAL $195,331 100.0% - ------------------------------------------------------------- At year-end 1996, the fair value adjustment of the amortized cost of securities Available for Sale was an unrealized gain of $2.0 million. At year-end 1995, this adjustment reflected an unrealized gain of $4.5 million. The unrealized gains in both 1996 and 1995 reflected higher yields on securities Available for Sale than on comparable investments at those period-ends. 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 in the period in which the sale occurs. At December 31, 1996, the weighted average yield of the Held to Maturity portfolio was 6.28 percent. The weighted average yield of Available for Sale securities was 6.27 percent. The market value of securities Held to Maturity was 100.4 percent of its book value at year-end 1996 compared with 101.1 percent on December 31, 1995. 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, 1996. Money Market Investments. At year-end 1996, the Corporation did not own any short-term money market investments. One year earlier, the Corporation had $15 million in these investments. Short-term money market investments averaged $13 million in 1996 compared with $11 million in 1995. LIABILITIES The Corporation relies almost exclusively on core deposits to fund its earning assets. Deposits. Total deposits on December 31, 1996 were $1.891 billion or 5 percent above the year earlier total of $1.793 billion. Average total deposits of $1.800 billion in 1996 were 4 percent above the 1995 average of $1.735 billion. Deposit growth in 1996 continued to be influenced by record inflows of funds into the securities markets. Deposit growth in 1996 was stronger in non-interest bearing demand deposits than in interest-bearing deposits. At December 31, 1996, demand deposits totaled $312 million, or 8 percent higher than the year earlier total of $287 million. The strongest growth within demand deposits in 1996 occurred in commercial accounts, which increased 13 percent. The growth in these accounts was related to the Corporation's growth in commercial lending. Interest-bearing deposits increased 5 percent to $1.579 billion at year-end 1996 from the year earlier total of $1.506 billion. Consistent with the 1995 growth pattern, other time deposits, which are principally consumer certificates of deposit less than $100 thousand, registered the greatest growth in 1996. Total balances in these accounts increased $39 million, or 6 percent, to $644 million at year-end 1996. Contributing to this increase was a special deposit promotion late in 1996. Also contributing to the increase in interest-bearing deposits were money market deposit accounts, which increased 5 percent at year-end 1996 compared with the year earlier total. Within this category, commercial money market accounts increased 14 percent in 1996 over the year-end 1995 total. Interest checking account balances increased 2 percent at year-end 1996, while savings account balances declined 2 percent from the year earlier balances. Balances in certificates of deposit $100 thousand and over increased to $110 million at year-end 1996 from the year earlier total of $94 million. Table 14 summarizes the remaining maturities of certificates of deposit $100 thousand and over. 14. CERTIFICATES OF DEPOSIT $100,000 AND OVER (in thousands) - ------------------------------------------------ December 31, 1996 Amount - ------------------------------------------------ REMAINING MATURITIES: Within 3 months $ 56,720 3 to 6 months 21,770 6 TO 12 MONTHS 18,892 After 12 months 12,878 - ------------------------------------------------ TOTAL $110,260 - ------------------------------------------------ Debt. Short-term borrowings totaled $50 million on December 31, 1996 compared with $16 million at year-end 1995. These borrowings include federal funds purchased, securities sold under agreements to repurchase, and other borrowings. Total short-term borrowings averaged $28 million in 1996 and $25 million in 1995. Table 15 summarizes the Corporation's position with respect to federal funds purchased and securities sold under agreements to repurchase. At year-end 1996, the Corporation did not have any long-term debt. 15. SHORT-TERM BORROWINGS
(Dollars in thousands) - --------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Interest Interest Interest Balance Rate Balance Rate Balance Rate - --------------------------------------------------------------------------------------------------------------------- FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Outstanding at year-end $50,066 6.08% $16,118 3.13% $16,479 3.69% Average outstanding for the year 23,781 4.55 18,568 4.57 14,845 3.21 Maximum outstanding at any month-end 56,060 - 46,878 - 42,501 - - ---------------------------------------------------------------------------------------------------------------------
CAPITAL RESOURCES In the fourth quarter of 1996, the Corporation completed a Modified Dutch Auction Tender Offer in which it repurchased a total of 1.236 million shares of its common stock. The repurchase had the effect of reducing shareholders' equity approximately $35 million. The tender offer was conducted to utilize the Corporation's strong capital base more effectively and to increase shareholder value. Based upon proforma financial models, the tender offer should have the effect of increasing net income per share and improving the return on average shareholders' equity. Because the repurchase amount exceeded the amount of earnings retained after dividend payments in 1996, shareholders' equity decreased to $204 million on December 31, 1996 from the year earlier total of $227 million. Shareholders' equity averaged 5 percent higher in 1996 at $228 million compared with $217 million in 1995. Average shareholders' equity as a percent of average assets was 11.0 percent in 1996 and 10.9 percent in 1995. Average shareholders' equity in 1996 was affected less than period-end shareholders' equity because the tender offer was completed near the middle of the fourth quarter. Federal banking law sets forth certain regulatory capital requirements that apply to the Corporation and its banking subsidiary. Within the framework established by the law, the Corporation and its banking subsidiary qualify for the classification "well capitalized", which is the highest regulatory classification. Additional information concerning regulatory capital requirements is contained in Note 11 of the Notes to the Consolidated Financial Statements. From time to time, the Corporation purchases shares of its own common stock from shareholders and from brokers and dealers. In 1996, the Corporation purchased 67,500 shares (in addition to shares purchased in the tender offer) at a cost of $1.5 million. In 1995, the Corporation purchased 67,048 shares at a cost of $1.4 million. The volume of share repurchases is determined in consideration of shares issued for various purposes and by the financial advantage to the Corporation. Purchases are made in accordance with applicable securities laws, regulations, and internal policy considerations. 16. RISK-BASED CAPITAL (Dollars in thousands) - --------------------------------------------------------------------------- December 31 1996 1995 1994 - --------------------------------------------------------------------------- TIER 1 CAPITAL: Shareholders' equity* $ 203,034 $ 223,637 $ 210,244 Less intangible assets 7,965 9,046 7,471 - --------------------------------------------------------------------------- TOTAL TIER 1 CAPITAL 195,069 214,591 202,773 - --------------------------------------------------------------------------- TIER 2 CAPITAL: Allowable allowance for loan losses 14,656 13,432 13,754 - --------------------------------------------------------------------------- TOTAL CAPITAL $ 209,725 $ 228,023 $ 216,527 - --------------------------------------------------------------------------- Risk-weighted assets $1,558,530 $1,402,735 $1,340,091 Tangible quarterly average assets 2,129,384 2,026,619 1,914,722 RISK-BASED CAPITAL RATIOS: Tier 1 capital 12.52% 15.30% 15.13% Total capital 13.46% 16.26% 16.16% Tier 1 leverage 9.16% 10.59% 10.59% - --------------------------------------------------------------------------- * Exclusive of net unrealized gains and losses on securities available for sale, as prescribed by regulatory guidelines. The Corporation's common stock is traded in the NASDAQ Stock Market's National Market System under the trading symbol JBNK. Table 17 presents the market prices and dividends of the Corporation's common stock for each quarter in 1996 and 1995. On December 31, 1996, the book value of a share of common stock was $14.66 compared with the year earlier book value of $14.92. The book value comparison between year-end 1996 and 1995 was affected by the repurchase of shares in the tender offer. 17. COMMON STOCK PERFORMANCE AND DIVIDENDS
- --------------------------------------------------------------------------------------------------------------- Common Stock Price - --------------------------------------------------------------------------------------------------------------- 1996 1995 Dividends Declared - --------------------------------------------------------------------------------------------------------------- High Low High Low 1996 1995 - --------------------------------------------------------------------------------------------------------------- First Quarter .......... $ 22.63 $ 20.00 $ 20.75 $ 19.13 $ .22 $ .19 Second Quarter ......... 22.50 20.63 22.13 19.13 .22 .19 Third Quarter .......... 27.75 21.50 23.50 21.00 .22 .19 Fourth Quarter ......... 29.50 26.75 23.50 20.13 .22 .19 - --------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 $ 29.50 $ 20.00 $ 23.50 $ 19.13 $ .88 $.76
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 8 and 13 of the Notes to Consolidated Financial Statements. On January 15, 1997, there were approximately 8,116 shareholders of record. LIQUIDITY Liquidity in a banking company measures the ability to provide funds for customers' demands for loans and deposit withdrawals without impairing profitability. To meet these needs, the Corporation maintains cash reserves and readily marketable investments in addition to funds provided from loan repayments and maturing securities. Funds also can be obtained through increasing deposits or short-term borrowings and through the bank's borrowing privileges at the Federal Reserve and through the Federal Home Loan Bank. In addition, the Corporation has a $15 million line of credit available. 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 interest sensitivity, or "gap", reports to summarize the Corporation's ability to reprice its interest-sensitive assets and liabilities over various time intervals. An 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, net interest income would be positively affected by decreasing interest rates. As shown in Table 18, at December 31, 1996, the Corporation had a negative gap of $65.0 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. The Corporation 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. 18. INTEREST SENSITIVITY ANALYSIS*
(in thousands) - --------------------------------------------------------------------------------------------------------------------------------- Over Over Over 3 Months 6 Months Total 1 Year 3 Months Through Through Within and Not December 31, 1996 or Less 6 Months 12 Months 1 Year Classified Total - --------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS: Loans - net of unearned income $ 539,024 $ 35,317 $ 177,212 $ 751,553 $ 614,301 $1,365,854 Investment securities: Available for Sale 7,314 - 28,400 35,714 142,359 178,073 Held to Maturity 27,509 33,626 69,901 131,036 299,945 430,981 Money market investments - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- TOTAL EARNING ASSETS 573,847 68,943 275,513 918,303 1,056,605 1,974,908 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Money market deposit accounts 339,770 - - 339,770 - 339,770 Certificates of deposit $100,000 and over 56,720 21,770 18,892 97,382 12,878 110,260 All other time deposits 250,976 123,879 121,266 496,121 633,141 1,129,262 Short-term borrowings 50,066 - - 50,066 - 50,066 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 697,532 145,649 140,158 983,339 646,019 1,629,358 - --------------------------------------------------------------------------------------------------------------------------------- NET NON-INTEREST-BEARING LIABILITIES - - - - 345,550 345,550 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST SENSITIVITY GAP ASSET SENSITIVE (LIABILITY SENSITIVE) $(123,685) $ (76,706) $ 135,355 $(65,036) $ 65,036 $ - - --------------------------------------------------------------------------------------------------------------------------------- CUMULATIVE GAP $(123,685) $(200,391) $(65,036) $(65,036) $ - $ - - ---------------------------------------------------------------------------------------------------------------------------------
* Remaining maturity if fixed rate; earliest possible repricing interval if floating rate. ACCOUNTING RULE CHANGES 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 Statements require 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. In reviewing the effects of implementing these Statements, management deemed the allowance for loan losses to be adequate, and no additional provision resulted from the implementation of the Statements. Effective January 1, 1996, the Corporation adopted 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. Upon adoption of this Statement, the Corporation recognized a loss of $438 thousand for the impairment of one of its properties. For years beginning after December 15, 1995, SFAS No. 122, Accounting for Mortgage Servicing Rights, 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 had no impact on the Corporation's consolidated financial statements. SFAS No. 123, Accounting for Stock-Based Compensation, establishes a new fair value method of accounting for stock-based compensation arrangements with employees that is effective for fiscal years beginning after December 15, 1995. Entities may either adopt the fair value method or elect to continue following the accounting treatment outlined in APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to continue following Opinion No. 25 are required to make proforma disclosures of net income and net income per share, as if the fair value based method had been adopted. The Corporation has elected to continue following Opinion No. 25 and, consequently, adoption of this Statement did not have an impact on the Corporation's results of operations. Required disclosures under SFAS No. 123 are contained in Note 9 of the Notes to Consolidated Financial Statements. SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which was issued in June 1996, provides accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, secured borrowing and collateral transactions, and the extinguishments of liabilities. The Statement is to be applied to transactions occurring after December 31, 1996. SFAS No. 125 is based on a financial-components approach that focuses on control. Under this approach, following a transfer of financial assets, an entity recognizes the assets it controls and liabilities it has incurred, and derecognizes financial assets for which control has been surrendered and financial liabilities that have been extinguished. In December 1996, SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, was issued. SFAS No. 127 postpones implementation of certain provisions of SFAS No. 125 until after December 31, 1997. The effect on the Corporation's consolidated financial statements of adopting these Statements is not expected to be material. [LOGO] Jefferson Bankshares, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data) - --------------------------------------------------------------------------------------------------------------------------- December 31 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (Note 10) $ 100,228 $ 88,028 Federal funds sold and other money market investments - 15,000 Investment securities (Note 3): Available for sale (cost of $176,104 in 1996 and $184,203 in 1995) 178,073 188,669 Held to maturity (fair value of $432,673 in 1996 and $459,360 in 1995) 430,981 454,509 Loans (Note 4) 1,365,949 1,220,493 Less: Unearned income (95) (72) Allowance for loan losses (Note 5) (14,656) (13,432) - --------------------------------------------------------------------------------------------------------------------------- Net loans 1,351,198 1,206,989 - --------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net (Note 7) 55,774 52,310 Other assets 45,571 45,683 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,161,825 $2,051,188 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits (Notes 2 and 3): Demand $ 311,817 $ 287,489 Interest checking 312,097 306,753 Regular savings 172,804 177,217 Money market deposit accounts 339,770 322,889 Certificates of deposit $100,000 and over 110,260 93,720 Other time deposits 644,361 605,131 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 1,891,109 1,793,199 Federal funds purchased and securities sold under agreements to repurchase 50,066 16,118 Other liabilities 16,336 15,316 Long-term debt - 15 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,957,511 1,824,648 - --------------------------------------------------------------------------------------------------------------------------- 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 13,937,491 shares in 1996 and 15,182,235 shares in 1995 34,844 37,956 Capital surplus 48,720 47,623 Retained earnings 119,470 138,058 Unrealized gains on securities available for sale, net (Note 3) 1,280 2,903 - --------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (Notes 2, 8, 9, 11, and 13) 204,314 226,540 - --------------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities (Notes 7 and 10) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,161,825 $2,051,188 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data) - --------------------------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $114,534 $104,607 $ 84,427 Income on investment securities: Available for sale 11,874 11,374 11,582 Held to maturity 26,511 29,709 32,335 Other interest income 709 683 1,152 - --------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 153,628 146,373 129,496 - --------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-checking 6,050 6,594 6,799 Regular savings 4,432 4,864 5,368 Money market deposit accounts 11,917 11,816 9,706 Certificates of deposit $100,000 and over 4,980 4,566 2,842 Other time deposits 30,373 29,583 20,208 Short-term borrowings 1,294 1,220 441 Long-term debt - 1 29 - --------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 59,046 58,644 45,393 - --------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 94,582 87,729 84,103 PROVISION FOR LOAN LOSSES (Note 5) 3,480 3,020 1,600 - --------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 91,102 84,709 82,503 - --------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Trust income 4,380 4,500 3,944 Service charges on deposit accounts 9,970 9,155 8,702 Investment securities gains (losses), net (Note 3) 4 (103) 1,166 Mortgage loan sales income 614 275 681 Other income (Note 9) 4,009 5,192 3,417 - --------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST INCOME 18,977 19,019 17,910 - --------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits (Note 9) 41,090 39,222 37,261 Occupancy expense, net 5,644 5,063 5,063 Equipment expense 6,370 6,086 5,965 Other expense 14,551 16,209 18,134 - --------------------------------------------------------------------------------------------------------------- TOTAL NON-INTEREST EXPENSE 67,655 66,580 66,423 - --------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 42,424 37,148 33,990 PROVISION FOR INCOME TAX EXPENSE (Note 6) 14,623 12,285 11,390 - --------------------------------------------------------------------------------------------------------------- NET INCOME $ 27,801 $ 24,863 $ 22,600 - --------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE (Notes 8 and 9) $ 1.86 $ 1.64 $ 1.49 - ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements [LOGO] Jefferson Bankshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data) - --------------------------------------------------------------------------------------------------------------------------- Unrealized Gains Common Stock Capital Retained (Losses) on Securities Shares Amount Surplus Earnings Available for Sale, Net Total - --------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1993 15,080,553 $37,701 $43,977 $114,756 $ - $196,434 Adjustment to beginning balance for change in accounting principle, net (Note 3) 5,072 5,072 Net income 22,600 22,600 Cash dividends declared ($.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 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 24,863 24,863 Cash dividends declared ($.76 per share) (11,536) (11,536) Acquisition of common stock (67,048) (168) (1,255) (1,423) Issuance of common stock for: Dividend reinvestment plan 7,256 18 131 149 Incentive stock plan (Note 9) 27,820 70 315 385 Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (Note 8) 43,957 110 845 955 Change in unrealized gains (losses) on securities available for sale, net (Note 3) 6,594 6,594 - --------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 15,182,235 37,956 47,623 138,058 2,903 226,540 Net income 27,801 27,801 Cash dividends declared ($.88 per share) (13,065) (13,065) Acquisition of common stock: Tender offer (1,235,690) (3,089) (32,013) (35,102) Other (67,500) (169) (1,311) (1,480) Issuance of common stock for: Dividend reinvestment plan 22,807 57 573 630 Incentive stock plan (Note 9) 23,729 59 272 331 Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (Note 8) 9,538 24 192 216 Employee Stock Purchase Plan (Note 8) 2,372 6 60 66 Change in unrealized gains (losses) on securities available for sale, net (Note 3) (1,623) (1,623) - --------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 13,937,491 $34,844 $48,720 $119,470 $1,280 $204,314 - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) - --------------------------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 27,801 $ 24,863 $ 22,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,881 6,490 5,975 Amortization and accretion 3,694 4,145 5,187 Provision for loan losses 3,480 3,020 1,600 Increase in deferred tax asset (920) (166) (3,069) Investment securities (gains) losses, net (Note 3) (4) 103 (1,166) Gains on sales of premises and equipment, net (67) (247) (173) (Increase) decrease in interest receivable 1,043 (537) (376) Increase (decrease) in taxes payable 87 (306) 106 Increase in interest payable 462 1,418 91 (Increase) decrease in loans held for resale, net 1,493 (1,921) 6,149 Other, net (1,419) (146) 2,656 - --------------------------------------------------------------------------------------------------------------- Total adjustments 14,730 11,853 16,980 - --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 42,531 36,716 39,580 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities held to maturity 123,912 123,904 153,889 Proceeds from calls of investment securities held to maturity (Note 3) 485 148 4,838 Purchases of investment securities held to maturity (103,765) (114,127) (118,746) Proceeds from maturities of securities available for sale 30,950 37,700 19,450 Proceeds from sales of securities available for sale (Note 3) 979 11,347 44,346 Purchases of securities available for sale (24,624) (57,707) (35,407) Net increase in loans (149,760) (121,504) (87,751) Business combinations, net of cash (Note 2) - 31,369 21,130 Proceeds from sales of premises and equipment 796 1,003 208 Proceeds from sales of foreclosed properties 2,296 2,694 2,732 Purchases of premises and equipment (10,281) (7,647) (8,772) - --------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (129,012) (92,820) (4,083) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 97,910 69,815 (12,076) Net increase (decrease) in short-term borrowings 33,948 (361) (37,618) Repayment of long-term debt (15) (4) (1,194) Proceeds from issuance of common stock 1,243 1,489 2,761 Payments to acquire common stock (36,582) (1,423) (1,416) Dividends paid (12,823) (11,193) (10,034) - --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 83,681 58,323 (59,577) - --------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,800) 2,219 (24,080) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 103,028 100,809 124,889 - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 100,228 $ 103,028 $ 100,809 - ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements Jefferson Bankshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1996, 1995, and 1994 NOTE 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 95 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: In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities are reported in one of three categories: Trading, Available for Sale, or Held to Maturity. Available for Sale 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 securities. Amortization of premiums and accretion of discounts are computed by the level yield method. Realized gains and losses are computed using the specific identification method. C. LOANS: 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 Statements require 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 as prescribed by SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 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. The Corporation and its subsidiaries file consolidated tax returns. Each subsidiary provides for income taxes based upon its contribution to income taxes (benefit) of the consolidated group. 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 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 1996, 1995, or 1994. 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. During the years ended December 31, 1996, 1995, and 1994, cash paid for interest was $58,584,000, $57,226,000, and $45,302,000, and cash paid for income taxes was $15,635,000, $12,591,000, and $11,748,000, respectively. During 1996, 1995, and 1994, other assets increased as a result of loan foreclosures in the amount of $555,000, $1,269,000, and $1,534,000, respectively, representing non-cash investing activities for purposes of the Consolidated Statements of Cash Flows. NOTE 2: BUSINESS COMBINATIONS In June 1995, Jefferson National Bank acquired the deposits associated with the Waynesboro office of First Union National Bank and a 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 were restated to include the accounts and transactions of Loudoun for all applicable periods. 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. The transactions with First Union, Virginia First, and Liberty 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. NOTE 3: INVESTMENT SECURITIES The Corporation adopted SFAS No. 115 on January 1, 1994. The effect of adopting SFAS No. 115 was an increase in consolidated shareholders' equity of $5,072,000 to reflect the net unrealized gains of securities classified as Available for Sale. The amortized cost, approximate fair values, and gross unrealized gains and losses of investment securities are as follows: (in thousands) - ------------------------------------------------------------------------------- December 31 1996 - ------------------------------------------------------------------------------- SECURITIES - AVAILABLE FOR SALE - ------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------- U.S. Treasury $174,104 $2,368 $ 396 $176,076 U.S. Government agencies 2,000 - 3 1,997 - ------------------------------------------------------------------------------- TOTAL $176,104 $2,368 $ 399 $178,073 - ------------------------------------------------------------------------------- SECURITIES - HELD TO MATURITY - ------------------------------------------------------------------------------- U.S. Government agencies $212,808 $1,451 $ 847 $213,412 States and political subdivisions 14,631 346 75 14,902 Corporate debt securities 195,331 1,185 368 196,148 Other securities 8,211 - - 8,211 - ------------------------------------------------------------------------------- TOTAL $430,981 $2,982 $1,290 $432,673 - ------------------------------------------------------------------------------- (in thousands) - -------------------------------------------------------------------------- December 31 1995 - -------------------------------------------------------------------------- SECURITIES - AVAILABLE FOR SALE - ------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------- Proceeds from sales of securities Available for Sale were $979,000 in 1996, $11,347,000 in 1995, and $44,346,000 in 1994. Gross gains of $8,000 and $1,166,000 were recorded in 1996 and 1994, respectively. Gross losses of $7,000 and $103,000 were recorded in 1996 and 1995, respectively. There were no sales of Held to Maturity securities in 1996, 1995, or 1994. Proceeds from calls of Held to Maturity securities were $485,000 in 1996, $148,000 in 1995, and $4,838,000 in 1994. Gross gains of $3,000 from calls of securities Held to Maturity were recorded in 1996. Investment securities having carrying values of $138,630,000 at December 31, 1996 and $109,729,000 at December 31, 1995 were pledged to secure deposits and for other purposes required by law. The amortized cost and approximate fair values of investment securities by contractual maturities at December 31, 1996 are shown in Table 12, Investment Securities, in Management's Discussion and Analysis (MD&A). NOTE 4: LOANS The composition of the loan portfolio by loan classification at December 31, 1996 and 1995 appears in Table 7, Loan Portfolio, in MD&A. Balances of non-accrual loans and loans meeting the criteria of troubled debt restructurings at December 31, 1996 and 1995 and the related income statement effects for the years ended December 31, 1996, 1995, and 1994 appear 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 $23,426,000 and $20,842,000 at December 31, 1996 and 1995, respectively. The changes in the balances from year-end 1995 to 1996 resulted from additions during 1996 of $36,323,000 and collections amounting to $33,739,000. NOTE 5: ALLOWANCE FOR LOAN LOSSES A summary of the transactions in the allowance for loan losses for the years ended December 31, 1996, 1995, and 1994 appears in Table 9, Summary of Loan Loss Experience, in MD&A. NOTE 6: INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1996, 1995, and 1994 are as follows: (in thousands) - ---------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------- Current: Federal $15,474 $12,085 $11,619 State 69 28 6 - ---------------------------------------------------------------- 15,543 12,113 11,625 Deferred (920) 172 (235) - ---------------------------------------------------------------- Income tax expense $14,623 $12,285 $11,390 - ---------------------------------------------------------------- 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: - ----------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------- Provision for income tax expense at statutory rate 35.0% 35.0% 35.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (1.6) (2.3) (2.4) Other, net 1.1 .4 .9 - ----------------------------------------------------------------- Income tax expense 34.5% 33.1% 33.5% - ----------------------------------------------------------------- The effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows: (in thousands) - ---------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $5,130 $4,701 Deferred compensation 577 672 Other real estate owned 871 837 Other 2,279 2,626 - ---------------------------------------------------------------- Total gross deferred tax assets 8,857 8,836 - ---------------------------------------------------------------- Deferred tax liabilities: Premises and equipment 1,514 1,872 Unrealized gains on investment securities available for sale 689 1,563 Prepaid pension costs 614 669 Other 582 1,068 - ---------------------------------------------------------------- Total gross deferred tax liabilities 3,399 5,172 - ---------------------------------------------------------------- Net deferred tax asset (included in other assets) $5,458 $3,664 - ---------------------------------------------------------------- At December 31, 1996, the Corporation has net operating loss carryforwards obtained from previous business combinations for federal income tax purposes of approximately $1.3 million which are available to offset future federal taxable income, if any, through 2007. The Corporation has not recognized a valuation allowance for the gross deferred tax asset recorded in the accompanying 1996 and 1995 consolidated balance sheets since it is not dependent on future earnings for recoverability. NOTE 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, 1996 and 1995 are summarized as follows: (in thousands) - ----------------------------------------------------------------- Estimated Useful Lives (Years) 1996 1995 - ----------------------------------------------------------------- Land - $ 11,283 $ 10,209 Buildings 30-50 49,418 47,764 Leasehold improvements 5-40 4,805 4,629 Furniture and equipment 3-12 53,245 47,953 - ----------------------------------------------------------------- 118,751 110,555 Less accumulated depreciation and amortization 62,977 58,245 - ----------------------------------------------------------------- Premises and equipment, net $ 55,774 $ 52,310 - ----------------------------------------------------------------- Depreciation and amortization of premises and equipment aggregated $5,712,000 in 1996, $5,766,000 in 1995, and $5,723,000 in 1994. At December 31, 1996, the Corporation leased 25 of its 95 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 $1,207,000, $1,133,000, and $1,081,000 in 1996, 1995, and 1994, respectively. The following is a schedule 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, 1996: (in thousands) - ------------------------------------------------------------- Future Minimum Payments - ------------------------------------------------------------- 1997 $ 931 1998 803 1999 738 2000 496 2001 354 Later years 1,538 - ------------------------------------------------------------- $4,860 - ------------------------------------------------------------- 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, 1996. 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. NOTE 8: COMMON STOCK AND EARNINGS PER SHARE The daily average common shares outstanding used in computing earnings per share were 14,982,442 in 1996, 15,181,152 in 1995, and 15,148,400 in 1994. In November 1996, the Corporation completed a Modified Dutch Auction Tender Offer in which it repurchased 1,235,690 shares of its common stock at $28 per share. The total purchase price, including associated transaction expenses, was $35,102,000, which was recorded in the Consolidated Financial Statements as a reduction in common stock at $2.50 par value and the remainder as a reduction in retained earnings. At December 31, 1996, 781,443 shares were reserved for use in the Corporation's dividend reinvestment plan, and 226,501 shares were reserved for the Corporation's employee stock purchase plan. At its December 1994 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 96,505 shares of common stock as of December 31, 1996 for this purpose. During 1996, 9,538 shares were issued at prices of $20.31-$29.31 per share. During 1995, 43,957 shares were issued at prices of $21.13 - $23.25 per share. The shares are exercisable at the time the director is no longer a member of the board. NOTE 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) - ------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------ Accumulated benefit obligation (includes vested benefits of $15,579 for 1996 and $13,121 for 1995) $(16,634) $(14,068) - ------------------------------------------------------------------ Projected benefit obligation for service rendered to date $(20,993) $(18,430) Plan assets at fair value 27,673 24,069 - ------------------------------------------------------------------ Plan assets in excess of projected benefit obligation (funded status) 6,680 5,639 Unrecognized net gain (4,487) (3,196) Unrecognized prior service cost 53 79 Unrecognized net asset being amortized over 15 years (491) (613) - ------------------------------------------------------------------ Prepaid pension cost (included in other assets) $ 1,755 $ 1,909 - ------------------------------------------------------------------ Net pension cost (benefit) for 1996, 1995, and 1994 includes the following components: (in thousands) - ----------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------- Service cost-benefits earned during the year $ 979 $ 1,068 $ 1,061 Interest cost on projected benefit obligation 1,408 1,902 1,714 Actual return on plan assets (3,965) (5,303) (1,256) Net amortization and deferral 1,732 2,446 (1,464) - ----------------------------------------------------------------- Net pension cost for the year $ 154 $ 113 $ 55 - ----------------------------------------------------------------- The assumed discount rate was 7.75% in both 1996 and 1995, and the expected rate of return was 9.50% and 9.00% for 1996 and 1995, respectively. The assumed discount rate and expected rate of return were 7.25% and 9.25%, respectively, for 1994. The weighted average rate of increase in future compensation was assumed to be 4.00% in 1996 and 1995 and 5.25% in 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 were 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 162,126 units had vested as of December 31, 1996. The remaining units will vest over the next three years. In 1996 and 1995, the Corporation issued 23,729 and 27,820 shares of common stock, respectively, 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 of these major employee benefit plans included in salaries and employee benefits expense are summarized as follows: (in thousands) - ---------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------- Pension $ 154 $ 113 $ 55 Profit sharing 2,464 2,114 1,890 Incentive stock 245 536 698 - ---------------------------------------------------------------- $2,863 $2,763 $2,643 - ---------------------------------------------------------------- The Corporation applies Accounting Principles Board Opinion 25 and related interpretations in accounting for stock-based compensation plans. Accordingly, no compensation cost has been recognized for the Corporation's stock options. Had compensation cost been determined based on the fair value at the grant dates consistent with the alternative method of SFAS No. 123, the Corporation's net income and net income per share would have been reduced to the proforma amounts indicated below. In accordance with the transition provisions of SFAS No. 123, the proforma amounts reflect stock options with grant dates subsequent to January 1, 1995. (Dollars in thousands except per share data) - ----------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------- Net income As reported $27,801 $24,863 Proforma 27,674 24,791 Net income per share As reported 1.86 1.64 Proforma 1.85 1.63 - ----------------------------------------------------------------- Under its 1995 Long-Term Incentive Stock Plan (the 1995 Plan), the Corporation may grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, or other stock unit awards to selected employees. The Corporation may grant a maximum of 750,000 shares of its common stock under the 1995 Plan with no more than 75,000 shares issued to any one participant during any calendar year. The exercise price of each stock option equals the market price of the Corporation's common stock on the date of grant. An option's maximum term is 10 years. The options become exercisable at the rate of 20% per year beginning one year from the date of grant. For the purpose of computing the proforma amounts indicated above, the fair value of each option on the date of grant is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: dividend yields of 3.1% and 3.8%; expected volatility of 21% and 25%; a risk free interest rate of 6.4%; and an expected option life of 7 years from the date of grant. The weighted average fair value of each option granted during 1996 and 1995 was $5.10 and $4.89, respectively. A summary of the status of the Corporation's stock option plan as of December 31 and changes during the years then ended is presented below: - -------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------- Outstanding, January 1 114,400 $19.938 - $ - Granted 86,600 20.313 114,400 19.938 Exercised - - - - Forfeited 4,000 20.313 - - - -------------------------------------------------------------------------- Outstanding, December 31 197,000 $20.100 114,400 $19.938 Options exercisable at year-end 22,880 $19.938 - $ - - -------------------------------------------------------------------------- At December 31, 1996, the Corporation had 197,000 stock options outstanding with a weighted average contractual life of 8.4 years. NOTE 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, 1996, commitments to extend credit totaled $295,415,000. 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, 1996, commitments outstanding under standby letters of credit approximated $30,331,000. 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. Such transactions may involve credit and interest rate risk. At December 31, 1996, securities loaned totaled $1,000,000. 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, 1996 and 1995, the aggregate amounts of daily average required balances were approximately $30,400,000 and $49,969,000, 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. NOTE 11: REGULATORY CAPITAL REQUIREMENTS The Corporation and its bank subsidiary are subject to certain regulatory capital requirements as set forth in Section 38 of the Federal Deposit Insurance Act. Regulations define five capital categories and specify certain minimum levels of capital required for each category. The framework for determining capital adequacy measures tangible capital (equity less certain intangible assets) relative to risk-weighted assets (assets classified by risk with duly assigned weights) and to average assets. These measures are quantified into ratios of Tier 1 and total capital to risk-weighted assets and Tier 1 capital to average assets (Tier 1 leverage ratio). Tier 1 Capital is defined as shareholders' equity minus certain intangible assets. Tier 2 capital includes a certain amount of the allowance for loan losses and is added to Tier 1 Capital to form total capital. Under this framework, an undercapitalized institution is subject to both mandatory and discretionary supervisory actions. An institution cannot pay dividends, make capital distributions, or pay management fees to affiliates if such payments cause the institution to become undercapitalized. In addition, there are numerous other restrictions, prohibitions, and required or discretionary regulatory actions that may be imposed if an institution is deemed undercapitalized. Management believes, at December 31, 1996, that the Corporation and the bank meet all capital adequacy requirements to which they are subject. The most recent notification from the Federal Reserve Bank for the Corporation and from the Comptroller of the Currency for the bank categorize each as "well capitalized." Management is not aware of any conditions or events that have changed either institution's category since that notification. Set forth below are the regulatory capital amounts and ratios for the Corporation and the bank.
(Dollars in thousands) - ------------------------------------------------------------------------------------- Minimum Requirements for: Actual Adequately Capitalized Well Capitalized Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------- December 31, 1996 - ------------------------------------------------------------------------------------- Tier 1 capital (to risk- weighted assets) Corporation $195,069 12.52% $ 62,341 4% $ 93,512 6% Bank 179,609 11.59 62,013 4 493,019 6 Total capital (to risk- weighted assets) Corporation 209,725 13.46 124,682 8 155,853 10 Bank 194,265 12.53 124,026 8 155,032 10 Tier 1 capital (to average assets) Corporation 195,069 9.16 85,175 4 106,469 5 Bank 179,609 8.80 81,394 4 101,743 5 - ------------------------------------------------------------------------------------- December 31, 1995 - ------------------------------------------------------------------------------------- Tier 1 capital (to risk- weighted assets) Corporation $214,591 15.30% $ 56,109 4% $ 84,164 6% Bank 199,776 14.33 55,783 4 69,729 6 Total capital (to risk- weighted assets) Corporation 228,023 16.26 112,219 8 140,274 10 Bank 213,208 15.29 111,566 8 139,458 10 Tier 1 capital (to average assets) Corporation 214,591 10.59 81,065 4 101,331 5 Bank 199,776 9.91 80,972 4 100,789 5 - -------------------------------------------------------------------------------------
NOTE 12: FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with SFAS 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. 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 standby 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, 1996, the carrying amounts and fair values of loan commitments, standby letters of credit, and securities loaned are immaterial. H. 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 assets and 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 carrying amounts and estimated fair values of the Corporation's financial instruments are as follows: (in thousands) - -------------------------------------------------------------------- Carrying Fair December 31, 1996 Amount Value - -------------------------------------------------------------------- Financial assets: Cash and due from banks $ 100,228 $ 100,228 Investment securities: Available for sale 178,073 178,073 Held to maturity 430,981 432,673 Loans, net 1,351,198 1,353,822 Financial liabilities: Demand deposits and interest-bearing transaction accounts 1,136,488 1,136,488 Certificates of deposit 754,621 759,900 Short-term borrowings 50,066 50,066 - -------------------------------------------------------------------- December 31, 1995 - -------------------------------------------------------------------- Financial assets: Cash and due from banks $ 88,028 $ 88,028 Federal funds sold and other money market investments 15,000 15,000 Investment securities: Available for sale 188,669 188,669 Held to maturity 454,509 459,360 Loans, net 1,206,989 1,231,503 Financial liabilities: Demand deposits and interest-bearing transaction accounts 1,094,348 1,094,348 Certificates of deposit 698,851 701,979 Short-term borrowings 16,118 16,118 Long-term debt 15 15 - -------------------------------------------------------------------- NOTE 13: PARENT COMPANY The Parent Company, in the ordinary course of business, provides its subsidiaries with certain centralized management services and staff support. The cost of these services is allocated to each subsidiary based on analyses of the services rendered. In addition, certain subsidiaries of Jefferson Bankshares, Inc. have in the past borrowed funds from the Parent Company at rates approximating the Parent 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, 1996, 2 percent of consolidated shareholders' equity was not so restricted. In addition, in 1996 the subsidiary bank received approval from the Comptroller of the Currency to exceed the statutory limits on dividend payments to the Parent Company in 1997 and 1998. The request was made in consideration of special dividends paid by the subsidiary bank to the Parent Company in 1996 to fund the tender offer. Condensed financial information for the Parent Company follows: Condensed Balance Sheets - ---------------------------------------------------------------- Jefferson Bankshares, Inc. (Parent Company) (in thousands) - ---------------------------------------------------------------- December 31 1996 1995 - ---------------------------------------------------------------- ASSETS Cash $ 1,246 $ 492 Money market investments at bank subsidiary 4,993 3,609 Investment securities--Held to maturity (fair value of $4,075 in 1996 and $5,092 in 1995) 4,012 4,987 Dividends receivable from subsidiaries 3,100 4,200 Investments in subsidiaries at equity: Bank 187,900 210,953 Bank-related 4,109 4,011 - ---------------------------------------------------------------- 192,009 214,964 Other assets 5,314 4,303 - ---------------------------------------------------------------- TOTAL ASSETS $210,674 $232,555 - ---------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Other Liabilities $ 6,360 $ 6,015 - ---------------------------------------------------------------- Shareholders' equity Common stock 34,844 37,956 Capital surplus 48,720 47,623 Retained earnings 119,470 138,058 Unrealized gains on securities available for sale of Bank subsidiary, net 1,280 2,903 - ---------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 204,314 226,540 - ---------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $210,674 $232,555 - ---------------------------------------------------------------- Condensed Statements of Income - --------------------------------------------------------------------- Jefferson Bankshares, Inc. (Parent Company) (in thousands) - --------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 - --------------------------------------------------------------------- INCOME Dividends from subsidiaries $ 48,180 $17,400 $10,560 Interest and fees from subsidiaries 3,178 2,897 2,717 Income on investment securities held to maturity 201 192 - Other income 205 100 100 - --------------------------------------------------------------------- TOTAL INCOME 51,764 20,589 13,377 - --------------------------------------------------------------------- EXPENSE Interest expense 23 - 17 Salaries and employee benefits 1,972 1,849 1,892 Merger and acquisition expense 45 88 150 Other expense 800 732 852 - --------------------------------------------------------------------- TOTAL EXPENSE 2,840 2,669 2,911 - --------------------------------------------------------------------- Income before income tax expense and equity in undistributed net income of subsidiaries 48,924 17,920 10,466 Income tax expense 305 100 19 - --------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 48,619 17,820 10,447 Equity in undistributed net income of subsidiaries (1) (20,818) 7,043 12,153 - --------------------------------------------------------------------- NET INCOME $ 27,801 $24,863 $22,600 - --------------------------------------------------------------------- (1) Amount in parentheses represents the excess of dividends declared over net income of subsidiaries. Condensed Statements of Cash Flows - ---------------------------------------------------------------------- Jefferson Bankshares, Inc. (Parent Company) (in thousands) - ---------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 - ---------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 27,801 $ 24,863 $ 22,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 40 36 36 (Increase) decrease in dividends receivable 1,100 (1,640) 160 Increase (decrease) in taxes payable 103 407 (13) Increase in deferred tax asset (77) (103) (113) Equity in undistributed net income of subsidiaries 20,818 (7,043) (12,153) Other, net (457) (416) (752) - ---------------------------------------------------------------------- Total adjustments 21,527 (8,759) (12,835) - ---------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 49,328 16,104 9,765 - ---------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment securities held to maturity - (6,944) - Proceeds from maturities of investment securities held to maturity 972 1,954 - - ---------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 972 (4,990) - - ---------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in short-term borrowings - - (265) Repayment of long-term debt - - (900) Proceeds from issuance of common stock 1,243 1,489 2,761 Payments to acquire common stock (36,582) (1,423) (1,416) Dividends paid (12,823) (11,193) (10,034) - ---------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (48,162) (11,127) (9,854) - ---------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,138 (13) (89) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,101 4,114 4,203 - ---------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,239 $ 4,101 $ 4,114 - ---------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT KPMG Peat Marwick LLP Certified Public Accountants 1021 East Cary Street Suite 1900 Richmond, Virginia 23219 The Board of Directors Jefferson Bankshares, Inc.: We have audited the accompanying consolidated balance sheets of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1996 and 1995 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, 1996. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP January 21, 1997 EX-21 4 SUBIDIARIES EXHIBIT 21 SUBSIDIARIES OF JEFFERSON BANKSHARES, INC. December 31, 1996 Jurisdiction in Names Which Organized ----- --------------- Direct Indirect Jefferson National Bank U.S. Grace Insurance Agency, Incorporated Virginia Charter Insurance Mangers, Inc. Virginia Jefferson Financial, Inc. Virginia Jefferson Properties, Inc. Virginia EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 KPMG Peat Marwick LLP Suite 1900 1021 East Cary Street Richmond, Virginia 23219 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 21, 1997 relating to the consolidated balance sheets of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1996 and 1995 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, 1996, which report is incorporated by reference in the December 31, 1996 annual report on Form 10-K of Jefferson Bankshares, Inc. KPMG Peat Marwick LLP Richmond, Virginia March 24, 1997 EX-24 6 POWER OF ATTORNEY 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, my true and lawful attorneys-in-fact and agents, for me on my behalf and in my 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, 1996, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. Dated: January 28, 1997 John T. Casteen, III (Seal) J. A. Kessler, Jr. (Seal) Lawrence S. Eagleburger (Seal) W. A. Rinehart, III (Seal) Hunter Faulconer (Seal) Gilbert M. Rosenthal (Seal) Fred L. Glaize, III (Seal) Alson H. Smith, Jr. (Seal) Henry H. Harrell (Seal) H. A. Williamson, Jr. (Seal) Alex J. Kay, Jr. (Seal) EX-27 7 ARTICLE 9 FDS FOR 10-K
9 1,000 YEAR DEC-31-1996 DEC-31-1996 100,228 1,579,292 0 0 178,073 430,981 432,673 1,365,854 14,656 2,161,825 1,891,109 50,066 16,336 0 0 0 34,844 169,470 2,161,825 114,534 38,385 709 153,628 57,752 59,046 94,582 3,480 4 67,655 42,424 27,801 0 0 27,801 1.86 1.86 5.00 4,608 2,790 245 5,402 13,432 2,941 685 14,656 11,944 0 2,712
EX-99 8 AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 99 SECOND AMENDMENT TO THE JEFFERSON BANKSHARES, INC. EMPLOYEE STOCK PURCHASE PLAN The Jefferson Bankshares, Inc. Employee Stock Purchase Plan (the "Plan"), as amended as of September 26, 1995, is hereby further amended as follows: 1. Section 3 of the Plan is amended by adding the following new sentence at the end thereof: The Plan shall be administered in a manner such that all Participating Employees have the same rights and privileges (as determined in accordance with Section 423(b)(5) of the Internal Revenue Code of 1986, as amended). 2. Section 4 of the Plan is amended by adding the following new sentence immediately after the first sentence thereof: Notwithstanding the foregoing, an employee who owns Common Stock or other stock of the Company, or stock of the Company's Parent or any Subsidiary, that possesses five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company, its Parent, or any Subsidiary, shall not be eligible to participate in the Plan. The preceding sentence shall be applied in a manner consistent with the provisions of Sections 423(b)(3) and 424 of the Internal Revenue Code of 1986, as amended. This Amendment is adopted as of January 28, 1997. JEFFERSON BANKSHARES, INC. /s/ O. Kenton McCartney President and CEO -----END PRIVACY-ENHANCED MESSAGE-----