-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Xtk6aHELGLIWO66gWSIRL7u/LJZZraX3nnzarzHbs7ZsEeN0lqBKPlHMV1J2xn+W ChJl4SbvyYnEQZmzdcJBMQ== 0000950118-94-000041.txt : 19940311 0000950118-94-000041.hdr.sgml : 19940311 ACCESSION NUMBER: 0000950118-94-000041 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JEFFERSON BANKSHARES INC CENTRAL INDEX KEY: 0000311100 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 541104491 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-09101 FILM NUMBER: 94515322 BUSINESS ADDRESS: STREET 1: 123 E MAIN ST STREET 2: P O BOX 711 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22902 BUSINESS PHONE: 8049721100 10-K 1 JEFFERSON BANKSHARES 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (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, 1993 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act Of 1934 (No Fee Required) Commission File Number 0-9101 JEFFERSON BANKSHARES, INC. Incorporated in the IRS No. 54-1104491 State of Virginia 123 East Main Street Charlottesville, Virginia 22902 Telephone (804) 972-1100 No securities are registered pursuant to Section 12(b) of the Act. Securities registered pursuant to Section 12(g) of the Act: Common Stock, 2.50 Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) As of January 31, 1994, 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 $281,270,720. As of January 31, 1994, Jefferson Bankshares, Inc. had issued and outstanding 14,611,466 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, 1993 referred to in Parts I, II and IV are incorporated by reference into Parts I, II and IV. The portions of the Proxy Statement for the Corporation's Annual Meeting of Shareholders to be held on April 26, 1994 referred to in Part III are incorporated by reference into Part III. Part I Item 1. Business Incorporated herein by reference is the information appearing under the heading "Business of Jefferson Bankshares" on page 4 of the 1993 Annual Report to Shareholders ("1993 Annual Report"). Also incorporated herein by reference is the information on pages 7 through 10 of the 1993 Annual Report as to the distribution of the Corporation's assets, liabilities and shareholders' equity; pages 15 and 16 of the 1993 Annual Report as to the Corporation's investment portfolio; pages 12 through 15 of the 1993 Annual Report as to the Corporation's loan loss experience; pages 11 through 15 of the 1993 Annual Report as to the Corporation's loan portfolio; pages 16 and 17 of the 1993 Annual Report as to the Corporation's deposits; page 19 of the 1993 Annual Report as to the Corporation's return on equity and assets; and page 17 of the 1993 Annual Report as to the Corporation's short-term borrowings. Item 2. Properties Incorporated herein by reference is the information appearing under the heading "Business of Jefferson Bankshares" on page 4 of the 1993 Annual Report and the discussion of premises and equipment in Note 7 (entitled "Premises and Equipment") to the financial statements in the 1993 Annual Report. Item 3. Legal Proceedings There are no legal proceedings against the Corporation that would have a material adverse effect on the Corporation or its 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 and, except for Hovey S. Dabney who had an employment contract extending until January 1, 1994, 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. Hovey S. Dabney, 70, is Chairman of the Board of Directors and, until January 1, 1994, was also Chief Executive Officer. O. Kenton McCartney, 50, is President and Chief Executive Officer. Prior to January 1, 1994, Mr. McCartney was President and Chief Operating Officer. Robert H. Campbell, Jr., 59, is Senior Vice President and Treasurer. Allen T. Nelson, Jr., 44, is Senior Vice President and Chief Financial Officer. Mr. Nelson joined the Corporation on December 6, 1993. Prior to that date, Mr. Nelson was Senior Vice President and Controller of Dominion Bankshares, Inc. from February, 1992 until joining the Corporation. Prior to February, 1992 he served as Finance Executive Officer with C&S/Sovran Corporation. Walter A. Pace, Jr., 61, is Senior Vice President. Donald W. Fulton, Jr., 47, is Vice President-Investor Relations. William M. Watson, Jr., 39, is Vice President and Secretary. Mr. Watson joined the Corporation on May 13, 1991. Prior to that date, he was an attorney with McGuire, Woods, Battle & Boothe. Part II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters Incorporated herein by reference is the information on page 18 under the heading "Capital Resources" and in the table captioned "Common Stock Performance and Dividends" on page 19 of the 1993 Annual Report. Incorporated herein by reference is the discussion of restrictions on the payment of cash dividends in Note 8 (entitled "Long Term Debt") to the financial statements in the 1993 Annual Report. Item 6. Selected Financial Data Incorporation herein by reference in the information in the table captioned "Selected Financial Data" on page 5 of the 1993 Annual report. Item 7. Management's Discussion and Analysis and Results of Operations and Financial Condition Incorporated herein by reference is the information appearing under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 5 through 20 of the 1993 Annual Report, except for the information in the tables captioned "Selected Financial Data," "Summary of Financial Results by Quarter," and "Common Stock Performance and Dividends" on pages 5, 6 and 19, respectively, of the 1993 Annual Report. Item 8. Financial Statements and Supplementary Data Incorporated herein by reference is the information appearing under the heading "Independent Auditors' Report," Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Changes in Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements," on pages 21 through 34 of the 1993 Annual Report. Incorporated by reference is the information in the table captioned "Summary of Financial Results by Quarter" on page 6 of the 1993 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 4 through 6 of the Corporation's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders. The information concerning the Corporation's executive officers is incorporated by reference to Part I hereof entitled "Executive Officers of Jefferson Bankshares." Item 11. Executive Compensation The information required by this item is incorporated by reference to the sections entitled "Compensation of Executive Officers and Directors" on pages 6 through 15 of the Corporation's definitive Proxy Statement for the 1994 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 1994 Annual Meeting of Shareholders. Item 13. Certain Relationships The information required by this item is incorporated by reference to the section entitled "Loans to Officers and Directors" on page 15 of the corporation's definitive Proxy Statement for the 1994 Annual Meeting of Shareholders. Part IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements. The following Consolidated Financial Statements of Jefferson Bankshares, Inc. and subsidiaries and the Independent Auditors' Report are incorporated by reference to pages 21 through 34 of the 1993 Annual Report: Independent Auditors' Report. Consolidated Balance Sheets at December 31, 1993 and December 31, 1992. Consolidated Statements of Income for the years ended December 31, 1993, December 31, 1992 and December 31, 1991. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, December 31, 1992, and December 31, 1991. Consolidated Statements of Cash Flows for the years ended December 31, 1993, December 31, 1992 and December 31, 1991. Notes to Consolidated Financial Statements. 2. Exhibits. The exhibits listed on the accompanying Index to Exhibits immediately following the signature page are filed as part of, or incorporated by reference into, this report. (b) Reports on Form 8-K The Corporation did not file any reports on Form 8-K for the last fiscal quarter covered by this report. Except for the information referred to in Items 1, 2, 5, 6, 7, 8 and 14(a)(1) hereof, the 1993 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 10, 1994 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 10, 1994 O. Kenton McCartney President, Chief Executive Officer and Director March 10, 1994 Allen T. Nelson, Jr. Senior Vice President and Chief Financial Officer March 10, 1994 Hovey S. Dabney Chairman of the Board March 10, 1994 John T. Casteen, III* Director March 10, 1994 Hunter Faulconer* Director March 10, 1994 Lawrence S. Eagleburger* Director March 10, 1994 Fred L. Glaize, III* Director March 10, 1994 Henry H. Harrell* Director March 10, 1994 Alex J. Kay, Jr.* Director March 10, 1994 J. A. Kessler, Jr.* Director March 10, 1994 W. A. Rinehart, III* Director March 10, 1994 Gilbert M Rosenthal* Director March 10, 1994 Alson H. Smith, Jr.* Director March 10, 1994 Lee C. Tait* Director March 10, 1994 H. A. Williamson, Jr.* Director *By: William M. Watson, Jr. Attorney-in-Fact EXHIBIT INDEX Exhibit No. Exhibit 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 incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1991. 4. Instruments defining the rights of security holders including indentures: (a) Articles of Incorporation of Jefferson Bankshares', incorporated by reference to Jefferson Bankshares' 1984 Annual Report on Form 10-K. (b) Articles of Amendment to Articles of Incorporation dated May 7, 1987, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1987. (c) Articles of Amendment to Articles of Incorporation dated March 23, 1993, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1993. (d) Term Loan Agreement dated as of February 1, 1984, between Jefferson Bankshares and Wachovia Bank and Trust Company, N.A., incorporated by reference to Jefferson Bankshares' quarterly report on Form 10-Q for the quarter ended March 31, 1984. (e) Amendments dated September 8, 1988 and September 21, 1989, to the Term Loan Agreement between Jefferson Bankshares and Wachovia Bank and Trust Company, N.A., incorporated by reference to Jefferson Bankshares' quarterly report on Form 10-Q for the quarter ended March 31, 1991. (f) Amendment dated December 20, 1990, to the Term Loan Agreement between Jefferson Bankshares and Wachovia Bank and Trust Company, N.A., incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1990. 10. Material Contracts: (a) Senior Officers Supplemental Pension Plan, incorporated by reference to Jefferson Bankshares' 1982 Annual Report on Form 10-K. (b) Amended and Restated Employment Agreement dated August 26, 1987, with Hovey S. Dabney, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended September 30, 1987. (c) Amendment dated September 26, 1989 to the Amendment and Restated Employment Agreement with Hovey S. Dabney, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended September 30, 1989. (d) Amendment dated September 26, 1990 to the Amended and Restated Employment Agreement with Hovey S. Dabney, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended September 30, 1990. (e) Deferred Compensation Agreement dated December 18, 1979 with Hovey S. Dabney, incorporated by reference to Jefferson Bankshares' 1984 Annual Report on Form 10-K. (f) Amendment dated September 26, 1989 to the Deferred Compensation Agreement with Hovey S. Dabney, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended September 30, 1989. (g) Incentive Stock Plan, incorporated by reference to Jefferson Bankshares' report on Form 10-Q for the quarter ended June 30, 1985. (h) Amendment dated April 28, 1992 to the Incentive Stock Plan, incorporated by reference to Exhibit 10(f) to Form S-4 of Jefferson Bankshares, Inc., File No. 33-47929. (i) Amended and Restated Deferred Compensation Plan for Directors, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1985. (j) Split Dollar Life Insurance Plan, incorporated by reference to Jefferson Bankshares' Annual Report on Form 10-K for 1984. *(k) Executive Severance Agreement dated October 25, A 1993 between Jefferson Bankshares and O. Kenton McCartney is filed herewith. *(l) Executive Severance Agreement dated October 25, B 1993 between Jefferson Bankshares and Robert H. Campbell, Jr. is filed herewith. *(m) Amended and Restated Split Dollar Life Insurance C Agreement dated October 29, 1993 between Jefferson Bankshares and Hovey S. Dabney is filed herewith. *(n) Amended and Restated Split Dollar Life Insurance D Agreement dated October 29, 1993 between Jefferson Bankshares and Robert H. Campbell, Jr. is filed herewith. *(o) Amended and Restated Split Dollar Life Insurance E Agreement dated October 29, 1993 between Jefferson Bankshares and O. Kenton McCartney filed herewith. 13. Annual Report to Security Holders, Form 10-Q or F Quarterly Report to Security Holders 21. Subsidiaries of the Registrant G 23. Consents of Experts and Counsel H Consent of KPMG Peat Marwick to incorporation by reference of auditors' reports into Jefferson Bankshare's Registration Statement Form S-3 is filed herewith. 24. Powers of Attorney I * Management contract or compensatory plan or arrangement of the Corporation required to be filed as an exhibit. EX-10 2 EXHIBIT 10(K) A EXECUTIVE SEVERANCE AGREEMENT AGREEMENT between Jefferson Bankshares, Inc., a Virginia corporation ("Jefferson"), and O. Kenton McCartney (the "Executive"), WITNESSETH: WHEREAS, the Board of Directors of Jefferson (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control of Jefferson or to effect a business combination, it is in the best interest of Jefferson and its present and future shareholders that the business of Jefferson be continued with a minimum of disruption, and that such objective will be achieved if key management employees of Jefferson and its subsidiaries are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during such period; and WHEREAS, Jefferson believes the giving of such assurances by Jefferson will (a) secure the continued services of both its key operational and management executives in the performance of both their regular duties and such extra duties as may be required of them during such period of uncertainty, (b) be able to rely on such executives to manage the affairs of Jefferson and its subsidiaries during any such period with less concern for their personal risks, and (c) have the ability to attract new key executives as needed; and WHEREAS, the Executive Compensation Committee (the "Committee") of the Board has recommended, and the Board has approved, entering into severance agreements with key management executives of Jefferson and its subsidiaries in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of Jefferson or one of its subsidiaries; NOW, THEREFORE, Jefferson and Executive agree as follows: 1. Change of Control. When used in this Agreement, the term "Change of Control" means: (a) The acquisition, other than from Jefferson, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 20% or more of either the then outstanding shares of common stock of Jefferson or the combined voting power of the then outstanding voting securities of Jefferson entitled to vote generally in the election of directors, but excluding for this purpose, any such acquisition by Jefferson or any of its subsidiaries, or any employee benefit plan (or related trust) of Jefferson or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the common stock and voting securities of Jefferson immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding shares of common stock of Jefferson or the combined voting power of the then outstanding voting securities of Jefferson entitled to vote generally in the election of directors, as the case may be; or (b) Individuals who, as of the date hereof, constitute the Board (as of the date hereof of "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election or nomination for election by Jefferson's shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of Jefferson (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934); or (c) Approval by the shareholders of Jefferson of a reorganization, merger or consolidation, in each case, with respect to which the individuals and entities who were the respective beneficial owners of the common stock and voting securities of Jefferson immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or a complete liquidation or dissolution of Jefferson or of its sale or other disposition of all or substantially all of the assets of Jefferson. 2. Employment. Jefferson and Executive hereby agree that, if Executive is in the employ of Jefferson on the date on which a Change of Control occurs (the "Change of Control Date") Jefferson will continue to employ Executive and Executive will remain in the employ of Jefferson, for the period commencing on the Change of Control Date and ending on the second anniversary of such date (the "Employment Period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the Change of Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change of Control Date. Employment by a subsidiary of Jefferson shall be considered employment by Jefferson. 3. Compensation and Benefits. During the Employment Period, Jefferson (or the subsidiary employing Executive, as the case may be) will (a) continue to pay the Executive a salary and compensation related benefits at not less than the level applicable to Executive on the Change of Control Date, (b) continue bonus plans in effect on the Change of Control Date and continue to pay the Executive bonuses in amounts not less than those paid during the 12-month period preceding the Change of Control Date, and (c) continue employee benefit programs as to Executive at levels in effect on the Change of Control Date (but subject to such reductions as may be required to maintain such plans in compliance with applicable federal law and regulations applicable to employee benefit programs). 4. Termination of Employment. (a) If during the Employment Period (i) Executive's employment is terminated by Jefferson (or a subsidiary of Jefferson), (ii) there is a material reduction in Executive's compensation or benefits, or a material change in Executive's status, working conditions or management responsibilities, or (iii) Executive is required to change his place of employment, and Executive voluntarily terminates his or her employment within 60 days of any such event, or the last in a series of events, then Executive shall be entitled to receive, subject to the provisions of (c) and (d) below, a lump sum payment equal to 299% of Executive's "base amount" as determined under (b) below. Payment shall be subject to and net of all applicable federal and state withholding taxes and shall be paid to the Executive within 30 business days after his termination of employment. If Executive terminates his employment prior to the Change of Control Date or during the Employment Period, and the events described in (i), (ii) or (iii) have not occurred, his rights under this Agreement shall terminate. (b) The Executive's "base amount" for purposes of this paragraph shall be his base salary. If Executive has not been employed for a 12- month period, his "base amount" shall be his annualized base salary at the rate then in effect. Bonuses (including the value of vested awards under Jefferson Incentive Stock Plan) paid or taxable to Executive during the 12-month period preceding his termination of employment pursuant to paragraph (a), shall be included in the Executive's "base amount" to the extent the Board has specifically authorized such inclusion. As of the date of the execution of this Agreement, the Board has not authorized the inclusion of bonuses in Executive's "base amount." (c) The amount payable to Executive under (a) shall be reduced to the extent necessary so that the amounts payable to Executive under this Agreement, when added to (i) any amounts he becomes entitled to receive under any other compensation arrangement maintained by Jefferson (or a subsidiary) which become payable upon or as a result of the exercise by Executive of rights which are contingent on a Change of Control, and (ii) the value of rights that arise or are accelerated as a result of a Change of Control event described in paragraph (a) (such as, for example, the accelerated right to exercise stock options, stock appreciation rights, or redeem stock units), but only to the extent the value of such payments or rights described in (i) and (ii) would be considered a "parachute payment" under Internal Revenue Code 280G and regulations thereunder, do not equal or exceed 300% or the then permissible percentage of the Executive's "base amount" (as computed in accordance with Internal Revenue Code provisions and regulations), whichever is less, for determining whether Executive has received an excess parachute payment. (d) If at the time the events occur as described in (a)(i), (ii) or (iii) entitling Executive to the payment provided for in paragraph (a) there also exists an employment agreement or other compensatory arrangement between Executive and Jefferson (or a subsidiary of Jefferson) pursuant to which Executive becomes entitled to receive, as a result of a Change of Control, a payment (or series of payments), the payment provided for in (a) shall be reduced (but not below zero) by the payment (or present discontinued value of a series of payments) under such employment agreement or other compensatory arrangement. (e) In determining the present discounted value of a series of payments to be taken into account under this Section 4, the interest rate shall be equal to 120% of the applicable federal rate determined under Internal Revenue Code 1274(d), compounded semi-annually, on the date this Agreement was executed. The applicable federal short-term, mid-term and long-term rates on the date this Agreement was executed were 4.39%, 5.93% and 6.91%, respectively. (f) If Executive becomes entitled to a payment under this Agreement, Jefferson shall compute the proper amount. In applying the limitations of Internal Revenue Code 280G, and regulations and rulings thereunder, Jefferson shall apply the applicable provision in good faith using the interpretation that is most likely to avoid the imposition of the excise tax on Executive and ensure the deductibility of payments by Jefferson. 5. Indemnification. If litigation shall be brought to enforce or interpret any provision of this Agreement, or if Executive shall have to institute litigation brought in good faith to enforce any of his rights under the Agreement, Jefferson shall indemnify Executive for his reasonable attorney's fees and disbursements incurred in any such litigation. 6. Confidentiality. Executive recognizes that he has or will have access to and may participate in the origination of non-public confidential information and will owe a fiduciary duty with respect to such information to Jefferson. Confidential information includes, but is not limited to, trade secrets, supplier information, pricing information, internal corporate planning, Jefferson secrets, methods of marketing, methods of branch selection and operation, ideas and plans for development, historical financial data and forecasts, long range plans and strategies, and any other data or information of or concerning Jefferson that is not generally known to the public or in the industry in which Jefferson is engaged. Executive agrees that from the date of this Agreement and throughout the Employment Period he will, except as specifically authorized by Jefferson in writing, maintain in strict confidence and will not use or disclose, other than disclosure made in the ordinary course of business or to other employees of Jefferson, any confidential information belonging to Jefferson. If Executive shall breach the terms of Section 6, all of his rights under this Agreement shall terminate. 7. Governing Law. This Agreement shall be construed according to the laws of the Commonwealth of Virginia. 8. Amendment. This Agreement may not be amended except by the written agreement of the parties hereto. 9. Binding Effect. This Agreement shall be binding on Jefferson, its successors, and assigns. Should there be a consolidation or merger of Jefferson with or into another corporation, or a purchase of all or substantially all of the assets of Jefferson by another entity, the surviving or acquiring corporation will succeed to the rights and obligations of Jefferson under this Agreement. 10. Entire Contract. This Agreement constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, express or implied with respect to the subject matter of this Agreement. 11. Term. This Agreement shall be effective from the date of its execution by Jefferson and for twenty-four (24) months thereafter, and shall continue in effect from year to year thereafter unless Jefferson shall notify Executive in writing 30 days in advance of an anniversary of its execution that the Agreement shall terminate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement dated as of the 25th day of October, 1993. JEFFERSON BANKSHARES, INC. By: /s/ Hovey S. Dabney Executive: /s/ O. Kenton McCartney EX-10 3 EXHIBIT 10(L) B EXECUTIVE SEVERANCE AGREEMENT AGREEMENT between Jefferson Bankshares, Inc., a Virginia corporation ("Jefferson"), and Robert H. Campbell, Jr. (the "Executive"), WITNESSETH: WHEREAS, the Board of Directors of Jefferson (the "Board") believes that, in the event of a threat or occurrence of a bid to acquire or change control of Jefferson or to effect a business combination, it is in the best interest of Jefferson and its present and future shareholders that the business of Jefferson be continued with a minimum of disruption, and that such objective will be achieved if key management employees of Jefferson and its subsidiaries are given assurances of employment security so they will not be distracted by personal uncertainties and risks created during such period; and WHEREAS, Jefferson believes the giving of such assurances by Jefferson will (a) secure the continued services of both its key operational and management executives in the performance of both their regular duties and such extra duties as may be required of them during such period of uncertainty, (b) be able to rely on such executives to manage the affairs of Jefferson and its subsidiaries during any such period with less concern for their personal risks, and (c) have the ability to attract new key executives as needed; and WHEREAS, the Executive Compensation Committee (the "Committee") of the Board has recommended, and the Board has approved, entering into severance agreements with key management executives of Jefferson and its subsidiaries in order to achieve the foregoing objectives; and WHEREAS, Executive is a key management executive of Jefferson or one of its subsidiaries; NOW, THEREFORE, Jefferson and Executive agree as follows: 1. Change of Control. When used in this Agreement, the term "Change of Control" means: (a) The acquisition, other than from Jefferson, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 as amended, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 20% or more of either the then outstanding shares of common stock of Jefferson or the combined voting power of the then outstanding voting securities of Jefferson entitled to vote generally in the election of directors, but excluding for this purpose, any such acquisition by Jefferson or any of its subsidiaries, or any employee benefit plan (or related trust) of Jefferson or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by the individuals and entities who were the beneficial owners, respectively, of the common stock and voting securities of Jefferson immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding shares of common stock of Jefferson or the combined voting power of the then outstanding voting securities of Jefferson entitled to vote generally in the election of directors, as the case may be; or (b) Individuals who, as of the date hereof, constitute the Board (as of the date hereof of "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election or nomination for election by Jefferson's shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of Jefferson (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934); or (c) Approval by the shareholders of Jefferson of a reorganization, merger or consolidation, in each case, with respect to which the individuals and entities who were the respective beneficial owners of the common stock and voting securities of Jefferson immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or a complete liquidation or dissolution of Jefferson or of its sale or other disposition of all or substantially all of the assets of Jefferson. 2. Employment. Jefferson and Executive hereby agree that, if Executive is in the employ of Jefferson on the date on which a Change of Control occurs (the "Change of Control Date") Jefferson will continue to employ Executive and Executive will remain in the employ of Jefferson, for the period commencing on the Change of Control Date and ending on the second anniversary of such date (the "Employment Period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the Change of Control Date, which services shall be performed at the location where the Executive was employed immediately prior to the Change of Control Date. Employment by a subsidiary of Jefferson shall be considered employment by Jefferson. 3. Compensation and Benefits. During the Employment Period, Jefferson (or the subsidiary employing Executive, as the case may be) will (a) continue to pay the Executive a salary and compensation related benefits at not less than the level applicable to Executive on the Change of Control Date, (b) continue bonus plans in effect on the Change of Control Date and continue to pay the Executive bonuses in amounts not less than those paid during the 12-month period preceding the Change of Control Date, and (c) continue employee benefit programs as to Executive at levels in effect on the Change of Control Date (but subject to such reductions as may be required to maintain such plans in compliance with applicable federal law and regulations applicable to employee benefit programs). 4. Termination of Employment. (a) If during the Employment Period (i) Executive's employment is terminated by Jefferson (or a subsidiary of Jefferson), (ii) there is a material reduction in Executive's compensation or benefits, or a material change in Executive's status, working conditions or management responsibilities, or (iii) Executive is required to change his place of employment, and Executive voluntarily terminates his or her employment within 60 days of any such event, or the last in a series of events, then Executive shall be entitled to receive, subject to the provisions of (c) and (d) below, a lump sum payment equal to 299% of Executive's "base amount" as determined under (b) below. Payment shall be subject to and net of all applicable federal and state withholding taxes and shall be paid to the Executive within 30 business days after his termination of employment. If Executive terminates his employment prior to the Change of Control Date or during the Employment Period, and the events described in (i), (ii) or (iii) have not occurred, his rights under this Agreement shall terminate. (b) The Executive's "base amount" for purposes of this paragraph shall be his base salary. If Executive has not been employed for a 12- month period, his "base amount" shall be his annualized base salary at the rate then in effect. Bonuses (including the value of vested awards under Jefferson Incentive Stock Plan) paid or taxable to Executive during the 12-month period preceding his termination of employment pursuant to paragraph (a), shall be included in the Executive's "base amount" to the extent the Board has specifically authorized such inclusion. As of the date of the execution of this Agreement, the Board has not authorized the inclusion of bonuses in Executive's "base amount." (c) The amount payable to Executive under (a) shall be reduced to the extent necessary so that the amounts payable to Executive under this Agreement, when added to (i) any amounts he becomes entitled to receive under any other compensation arrangement maintained by Jefferson (or a subsidiary) which become payable upon or as a result of the exercise by Executive of rights which are contingent on a Change of Control, and (ii) the value of rights that arise or are accelerated as a result of a Change of Control event described in paragraph (a) (such as, for example, the accelerated right to exercise stock options, stock appreciation rights, or redeem stock units), but only to the extent the value of such payments or rights described in (i) and (ii) would be considered a "parachute payment" under Internal Revenue Code 280G and regulations thereunder, do not equal or exceed 300% or the then permissible percentage of the Executive's "base amount" (as computed in accordance with Internal Revenue Code provisions and regulations), whichever is less, for determining whether Executive has received an excess parachute payment. (d) If at the time the events occur as described in (a)(i), (ii) or (iii) entitling Executive to the payment provided for in paragraph (a) there also exists an employment agreement or other compensatory arrangement between Executive and Jefferson (or a subsidiary of Jefferson) pursuant to which Executive becomes entitled to receive, as a result of a Change of Control, a payment (or series of payments), the payment provided for in (a) shall be reduced (but not below zero) by the payment (or present discontinued value of a series of payments) under such employment agreement or other compensatory arrangement. (e) In determining the present discounted value of a series of payments to be taken into account under this Section 4, the interest rate shall be equal to 120% of the applicable federal rate determined under Internal Revenue Code 1274(d), compounded semi-annually, on the date this Agreement was executed. The applicable federal short-term, mid-term and long-term rates on the date this Agreement was executed were 4.39%, 5.93% and 6.91%, respectively. (f) If Executive becomes entitled to a payment under this Agreement, Jefferson shall compute the proper amount. In applying the limitations of Internal Revenue Code 280G, and regulations and rulings thereunder, Jefferson shall apply the applicable provision in good faith using the interpretation that is most likely to avoid the imposition of the excise tax on Executive and ensure the deductibility of payments by Jefferson. 5. Indemnification. If litigation shall be brought to enforce or interpret any provision of this Agreement, or if Executive shall have to institute litigation brought in good faith to enforce any of his rights under the Agreement, Jefferson shall indemnify Executive for his reasonable attorney's fees and disbursements incurred in any such litigation. 6. Confidentiality. Executive recognizes that he has or will have access to and may participate in the origination of non-public confidential information and will owe a fiduciary duty with respect to such information to Jefferson. Confidential information includes, but is not limited to, trade secrets, supplier information, pricing information, internal corporate planning, Jefferson secrets, methods of marketing, methods of branch selection and operation, ideas and plans for development, historical financial data and forecasts, long range plans and strategies, and any other data or information of or concerning Jefferson that is not generally known to the public or in the industry in which Jefferson is engaged. Executive agrees that from the date of this Agreement and throughout the Employment Period he will, except as specifically authorized by Jefferson in writing, maintain in strict confidence and will not use or disclose, other than disclosure made in the ordinary course of business or to other employees of Jefferson, any confidential information belonging to Jefferson. If Executive shall breach the terms of Section 6, all of his rights under this Agreement shall terminate. 7. Governing Law. This Agreement shall be construed according to the laws of the Commonwealth of Virginia. 8. Amendment. This Agreement may not be amended except by the written agreement of the parties hereto. 9. Binding Effect. This Agreement shall be binding on Jefferson, its successors, and assigns. Should there be a consolidation or merger of Jefferson with or into another corporation, or a purchase of all or substantially all of the assets of Jefferson by another entity, the surviving or acquiring corporation will succeed to the rights and obligations of Jefferson under this Agreement. 10. Entire Contract. This Agreement constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, express or implied with respect to the subject matter of this Agreement. 11. Term. This Agreement shall be effective from the date of its execution by Jefferson and for twenty-four (24) months thereafter, and shall continue in effect from year to year thereafter unless Jefferson shall notify Executive in writing 30 days in advance of an anniversary of its execution that the Agreement shall terminate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement dated as of the 25th day of October, 1993. JEFFERSON BANKSHARES, INC. By: /s/ Hovey S. Dabney Executive: /s/ Robert H. Campbell, Jr. EX-10 4 EXHIBIT 10(M) C JEFFERSON BANKSHARES, INC. EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT Hovey S. Dabney [As Amended and Restated Effective October 29, 1993] This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made this 29th day of October, 1993, between JEFFERSON BANKSHARES, INC., a Virginia corporation (the "Company") and HOVEY S. DABNEY, an executive employed by the Company or one of its subsidiary corporations (the "Executive"), and supersedes any prior Executive Split Dollar Life Insurance Agreement between the Company and Executive. A. The Company has adopted a Split Dollar Life Insurance Plan (the "Plan") to provide certain executive employees with additional life insurance protection under split dollar life insurance policies. B. The Company has selected Executive to receive additional life insurance protection under the Plan and Executive has elected to receive such protection. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. Where indicated by initial capital letters, the following terms shall have the following meanings: (a) Agreement: The Executive Split Dollar Life Insurance Agreement (including Schedules and attachments) entered into between the Company and Executive pursuant to the Plan. (b) Beneficiary: The person or persons designated in writing by Executive to receive the Executive Death Benefit. (c) Cause: Cause means, but is not limited to, a determination by the Company that Executive may have been guilty of criminal conduct (regardless of whether proven or admitted), gross negligence or willful misconduct in the performance of Executive's duties or otherwise, or has engaged in conduct which, if generally known, would bring discredit to or give rise to adverse publicity to the Company. (d) Company Cost: The total premiums paid to the Insurer with respect to the Policy (including premiums paid on any antecedent policy), exclusive of ratings, plus, when applicable, Withholding Taxes advanced by the Company determined under Section 9, less all amounts received from Executive for the Policy and less the amount of any outstanding Policy loan. (e) Disability: The Executive's inability to perform the duties of his job because of accident or illness, as determined by the Company. Executive will be deemed disabled, if, by reason of accident or illness, Executive becomes entitled to benefits under the Company's long-term disability program. In the event of Disability this Agreement shall remain in effect as though Executive continued in active employment by the Company until Executive becomes entitled to receive retirement benefits under the Company's Pension Plan. (f) Executive Death Benefit: The level of life insurance to which the Executive is entitled pursuant to the Plan. (g) Executive's Premium: The annual cost of term life insurance protection on the life of Executive as measured by the PS-58 rate (or substitute table) published from time to time by the Internal Revenue Service, prorated for a partial year as appropriate. (h) Insurer: Any insurance company issuing a life insurance contract on Executive's life. (i) Plan: The Jefferson Bankshares, Inc. Executive Split Dollar Life Insurance Plan. (j) Policy: One or more life insurance contracts (including paid up additional insurance) issued on the life of Executive pursuant to the Plan. The Policy number, face amount, and Executive Death Benefit are listed on Exhibit A. (k) Retirement: Termination of employment (except for Cause) at or after attainment of age 65 or, with the consent of the Company, age 55 and completion of 15 years of service with the Company or a subsidiary of the Company. (l) Roll-Out: Division of the Policy into two separate policies, one to be retained by the Company and the other to be retained by Executive. (m) Roll-Out Date: The later of the first policy anniversary on which: (i) The Company can obtain from the Insurer a policy with a cash surrender value equal to the Company Cost, and (ii) The Executive can receive a policy with a death benefit equal to the Executive Death Benefit, with no outlays required to sustain the Executive Death Benefit based upon the then current dividend schedule, and with no policy loans. (n) Termination Date: The date determined by reference to Section 11(b). (o) Withholding Taxes: The amount of state and federal income taxes required by law to be withheld by the Company from Executive with respect to bonuses paid or imputed to Executive to cover Executive's Premiums. 2. Application for Insurance. The Company and Executive will apply to the Insurer for a Policy or one or more Policies with initial coverage at least equal to the amount of insurance to which the Executive is entitled under the Plan. The Company and executive agree to take any action necessary to cause the Insurer to issue the Policy (including paid-up additional insurance on the Policy). Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. The rights of the Company and Executive under the Policy shall be subject to the terms of this Agreement. 3. Amount of Insurance. Executive shall have coverage specified as the Executive Death Benefit in the Plan. If Executive is not then insurable at standard rates, the additional premium shall be paid by the Company. 4. Ownership. The Company and Executive shall jointly own the Policy, and they shall jointly exercise all ownership rights granted to the owner by the terms of the Policy except as otherwise provided in this Agreement. The Company shall keep possession of the Policy, but the Policy shall be available to Executive during normal business hours for such purposes as are consistent with the terms of this Agreement. 5. Dividend Option. All dividends declared by the Insurer on the Policy shall be applied to purchase additional paid up life insurance on the life of Executive until such option is changed by mutual agreement of the Company and Executive. 6. Payment of Premiums. (a) The Company agrees to remit the total amount of each annual Policy premium on or before the due date of such premium, or within the grace period provided, if any. (b) At least thirty (30) days prior to the due date of each annual Policy premium, the Company shall notify the Executive of the amount of Executive's Premium to be paid by Executive to the Company as a premium payment. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and Executive will promptly upon demand reimburse the Company for all Withholding Taxes due with respect to such bonus. 7. Death Benefits. (a) Upon Executive's death, the Company and Executive's personal representative will promptly take the appropriate action to obtain the death benefits provided under the Policy, and (i) the Company shall be entitled to receive the excess of the total Policy proceeds over the Executive Death Benefit. The receipt by the Company of the excess over the Executive Death Benefit shall constitute satisfaction of Executive's obligation to the Company under this Agreement; and (ii) the Beneficiary shall be entitled to receive the Executive Death Benefit, which shall be paid in accordance with the terms of the designation and settlement option elected by Executive. (b) If at the time the Executive Death Benefit becomes payable because of Executive's death, there is no effective Beneficiary designation, the Executive Death Benefit shall be paid in accordance with the terms of the Policy. 8. Policy Loans. (a) Executive agrees that the Company, without the further consent of Executive, has the right to (i) obtain loans secured by the Policy from the Insurer or from others, and (ii) assign the Policy as security for the repayment of such loans. The amount of such loans together with interest thereon shall at no time exceed the Company Cost with respect to the Policy securing such loan. The principal amount of the loan and all interest charges with respect to any Policy loan shall be the sole obligation of and shall be paid by the Company. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. (b) If the Policy is assigned or encumbered in any way, including a Policy loan, on the date of the Executive's death or the date of the separation of the Policy into two policies pursuant to Section 12, the Company shall secure a release or discharge of the assignment or encumbrance to ensure the prompt payment of death proceeds under the Policy to the Executive's beneficiary or beneficiaries or the separation of the Policy, as the case might be. 9. Retirement or Disability. (a) If Executive becomes Disabled or his Retirement occurs before his Roll-Out Date, this Agreement and the Policy shall continue in effect until the occurrence of the Roll-Out Date. (b) During the period between the date of Executive's Disability or Retirement and the Roll-Out Date, Executive shall continue to pay Executive's Premium to the Company and the Company shall continue to pay the balance of the premiums due on the Policy. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and the Executive will upon demand reimburse the Company for all Executive's Withholding Taxes. (d) The Company will advise Executive annually of the amount of Withholding Taxes due with respect to such bonus. Within 60 days following the date of his Disability or Retirement (to the extent not already paid), and within 60 days following each succeeding annual premium due date, Executive shall pay to the Company the amount of the Executive's Withholding Taxes due the Company for the Policy year or balance of the Policy year. (e) Executive may irrevocably elect to have the Company advance Executive's Withholding Taxes, in which case the Company shall be entitled to receive from Executive on the Roll-Out Date, and Executive agrees to pay Company, an amount equal to the Executive's Withholding Taxes advanced by the Company, plus simple interest at an annual rate of 6% on the Withholding Taxes, directly by cash payment, or as a deduction from the cash values of Executive's Policy. The election permitted under this paragraph shall be made in a writing filed by Executive with the Company within 60 days after the date of Executive's Retirement or Disability, or as to succeeding Policy years, within 60 days after the Policy premium due date. 10. Termination of Employment. (a) If Executive's termination of employment occurs before his Roll-Out Date for reasons other than death, Retirement, Disability or termination by the Company for Cause, this Agreement and Executive's entire interest in his share of the Policy shall terminate and be forfeited as of the date of his termination of employment unless Executive timely makes the election hereinafter provided in subparagraph (b). If Executive makes such election, Sections 12(a) and (b) shall apply. (b) This Agreement and the Policy will continue in effect until the Policy anniversary next following the date of his termination of employment if Executive elects in writing to continue the Policy in effect and pays to the Company within 30 days of his termination date in a lump sum the amount of Executive's Premium for the balance of the Policy year. (c) If Executive makes the election as provided in subparagraph (b), the Company shall continue to pay the balance of the premiums due, if any, on the Policy with respect to the balance of the Policy year. (d) If Executive's death occurs before the 30-day election period has expired and Executive has not made the election as provided in subparagraph (b), Executive will be deemed to have died while still an employee and his rights under this Agreement and the Policy will be governed by Section 7. 11. Amendment and Termination of Agreement. (a) This Agreement may not be amended, altered, or modified except in writing and signed by the Company and the Executive. (b) This Agreement shall terminate upon the first to occur of any of the following events, each of which is a "Termination Date": (i) the Roll-Out Date; (ii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has not made the election permitted under Section 10(b), the date of his termination of employment (unless Committee determines that Executive shall be treated as an active employee after a termination of employment); (iii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has made the election permitted under Section 10(b), the Policy anniversary next following the date of Executive's termination of employment; (iv) cessation of the Company's business or the bankruptcy, receivership or dissolution of the Company, unless the Company's business is continued by a successor corporation or business entity; (v) termination of the Agreement as of a Policy anniversary date by Executive during employment upon written notice to the Company; or (vi) termination of Executive's employment by the Company for Cause. 12. Disposition of the Policy. (a) If the Termination Date is the Roll-Out Date, Executive shall retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated. The Company shall have the unqualified right to receive from the cash surrender value of the Policy an amount in cash equal to the Company Cost or, alternatively, a policy from the Insurer that has a cash surrender value equal to the Company Cost, at the election of the Company. (b) Except as provided in Sections 10(a) and 12(c), if the Termination Date is not the Roll-Out Date, Executive and the Company shall each retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated in the following manner: (i) Executive shall, subject to the other provisions of this Section 12(b), retain an insurance policy with a death benefit equal to the then Executive Death Benefit together with the attendant cash surrender value; and (ii) the Company shall have the unqualified right to receive an insurance policy having a death benefit equal to the difference between the Executive Death Benefit and the death benefit provided by the Policy together with the remaining cash surrender value of the Policy. If on the Termination Date the cash surrender value of the insurance policy to be issued to the Company pursuant to (ii) is less than the Company Cost, Executive shall elect in writing to (x) pay the Company in cash an amount equal to the difference between the cash surrender value of the Company's insurance policy and the Company Cost; (y) accept an insurance policy with a reduced death benefit that has a cash surrender value reduced and allocated to the Company to the extent of the difference described in (i); or (z) surrender to the Company his ownership rights to the Policy, but retaining the right to receive from the Company cash in an amount equal to any excess cash surrender value over the Company Cost. Executive's election shall be made and filed with, and any cash required by Executive's election paid to, the Company on or before the Termination Date. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to implement the provisions of this subparagraph. If Executive fails to make an election by the Termination Date, Executive shall be deemed to have elected to surrender the Policy as provided in clause (z). An example of the application of Section 12(b) is attached as Exhibit B. (c) If Executive's employment is terminated for Cause (as determined by the Committee), Executive agrees that his rights under this Agreement and the Policy (and the rights of Executive's Beneficiary) shall terminate and be forfeited. Executive further agrees to execute such documents as may be necessary to evidence Executive's waiver and transfer of Executive's rights in the Policy to the Company. Executive authorizes the Company to execute the Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. 13. Termination of the Plan. Notwithstanding anything contained in this Agreement to the contrary, a termination of the Plan will not adversely affect the rights of Executive under this Agreement and, unless otherwise agreed by Executive and the Company, this Agreement will continue as though the Plan were still in effect. 14. Company's Rights to Set-Off Under the Policy. If, upon termination of employment, Executive is indebted to the Company or a subsidiary of the Company for any reason (other than for a personal or commercial loan from the Company or a subsidiary of the Company), the Company shall have the right to recover such indebtedness from the cash value of the Policy in addition to any other amounts to which the Company may be entitled pursuant to this Agreement. 15. Miscellaneous. (a) This Agreement shall not affect any rights the Executive may otherwise have under the pension, profit sharing or other employee benefit plan (except group term life insurance) established by the Company. (b) This Agreement shall be binding on and inure to the benefit of both the Company, its successors and assigns, and the Executive, his Beneficiary, assigns and his personal representative. The Agreement shall be interpreted in accordance with the laws of the Commonwealth of Virginia. (c) Except as permitted by law or pursuant to Section 15(f) or by the Company's written consent, any benefits to which the Executive or Executive's Beneficiary may become entitled under this Agreement shall not be subject to anticipation, alienation, sale, transfer, assignment, or pledge. The Company shall not be liable for, or subject to, the debts, contracts, liabilities, or torts of any person entitled benefit under this Agreement. (d) This Agreement shall not confer upon the Executive any legal or equitable right against the Company except as expressly provided in this Agreement, the Plan and the Policy. (e) Neither this Agreement, the Plan nor the Policy shall constitute an inducement or consideration for the employment of the Executive and shall not give the Executive any right to be retained in the employ of the Company. The Company hereby retains the right to discharge the Executive at any time, with or without Cause. (f) The Executive's interest under this Agreement, the Plan and the Policy, may be assigned by the Executive upon written notice to the Company. (g) If a provision of this Agreement is not valid or enforceable, that fact in no way affects the validity or enforceability of any other provision. (h) Whenever any words are used in this Agreement in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings used in this Agreement are inserted for convenience or reference, are not part of this Agreement and are not to be considered in the construction of this Agreement. (i) All notices provided for or permitted to be given under any of the provisions of this Agreement will be in writing and will be deemed to have been duly given or served and delivered personally or by overnight courier, telecopied or deposited in the U.S. Mail by Registered or Certified Mail, return receipt requested, postage prepaid and addressed as follows: If to the Company: Jefferson Bankshares, Inc. P. O. Box 711 Charlottesville, Virginia 22902 Attention: Chief Executive Officer If to the Executive: Hovey S. Dabney 2117 Morris Road Charlottesville, Virginia 22903 or to such other person or address as may be given in writing by either party to the other in accordance with this paragraph. In consideration of the foregoing, the Company and the Executive have executed this Agreement in duplicate as of the day and year first written above. JEFFERSON BANKSHARES, INC. By: /s/ William M. Watson, Jr. /s/ Hovey S. Dabney Exhibit A Specification of Certain Terms of the Policy Hovey S. Dabney Policy Number: 6913280 Face Amount: $560,000 Executive Death Benefit: $520,000 Exhibit B Page 1 Example of the Application of Section 12(b) Section 12(b) provides that in the event the Policy is separated on a date other than the Roll-Out Date, Executive and the Company will each receive a policy that contains a portion of the death benefits and cash values in the Policy. Because separation of the Policy is occurring before the Roll-Out Date, Executive and the Company cannot each receive the benefits that they would receive if the separation were to occur at the Roll-Out Date. Section 12(b) provides a mechanism for determining the amounts that Executive and the Company will receive. Examples of the application of Section 12(b) are set forth below: 1. Assume (i) that Executive is a male, age 45 with no ratings; (ii) the Policy was issued in 1989; (iii) that the policy year is from November 1 through October 31; (iv) that the face amount of the Policy at the date of issue was $115,000; (v) that the Executive Death Benefit is $100,000; (vi) that Executive voluntarily leaves employment with the Company on January 1, 1994 (i.e., during policy year 5) and makes the necessary election and payments required by Section 10 to continue the Policy until October 31, 1994 (i.e., the end of the then current policy year); (vii) that the dividend rate for the Policy has remained unchanged from the date of issuance; and (viii) that on October 31, 1994, the Company Cost is $11,303, the total death benefit of the Policy is $122,357 (of which $115,000 is the face amount of the original Policy and $7,357 is the amount of paid-up additions), the cash surrender value of the Policy is $6,789 (of which $4,636 is allocated to the original Policy and $2,153 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1994. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $4,031 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the fifth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $22,357 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1994 ($122,357)) and with guaranteed cash surrender values in the amount of $2,758 (i.e., the difference between the total cash value of the Policy on October 31, 1994 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,545 less than the Company Cost (i.e., $11,303-$2,758). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance Exhibit B Page 2 policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $4,031 ($8,545) Company $ 22,357 $2,758 $8,545 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company or elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $0 Company $122,357 $6,789 $0 2. Assume the same facts in the first example except (i) that the Executive voluntarily leaves employment with the Company on January 1, 1998 (i.e., during policy year 9) and makes the necessary election and payments required by Section 10 to continue Exhibit B Page 3 the Policy until October 31, 1998 (i.e., the end of the then current policy year); and (ii) that on October 31, 1998, the Company Cost is $19,124, the total death benefit of the Policy is $140,200 (of which $115,000 is the face amount of the original Policy and $25,200 is the amount of paid-up additions), the cash surrender value of the Policy is $22,042 (of which $13,458 is allocated to the original Policy and $8,584 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1998. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $11,703 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the ninth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $40,200 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1998 ($140,200)) and with guaranteed cash surrender values in the amount of $10,339 (i.e., the difference between the total cash value of the Policy on October 31, 1998 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,785 less than the Company Cost (i.e., $19,124-10,339). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. Exhibit B Page 4 If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $11,703 ($8,785) Company $ 40,200 $10,339 $8,785 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 25,000 $ 2,918 $0 Company $115,200 $19,124 $0 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $2,918 Company $140,200 $22,042 ($2,918) EX-10 5 EXHIBIT 10(N) D JEFFERSON BANKSHARES, INC. EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT Robert H. Campbell, Jr. [As Amended and Restated Effective October 29, 1993] This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made this day of October 29, 1993, between JEFFERSON BANKSHARES, INC., a Virginia corporation (the "Company") and ROBERT H. CAMPBELL, JR., an executive employed by the Company or one of its subsidiary corporations (the "Executive"), and supersedes any prior Executive Split Dollar Life Insurance Agreement between the Company and Executive. A. The Company has adopted a Split Dollar Life Insurance Plan (the "Plan") to provide certain executive employees with additional life insurance protection under split dollar life insurance policies. B. The Company has selected Executive to receive additional life insurance protection under the Plan and Executive has elected to receive such protection. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. Where indicated by initial capital letters, the following terms shall have the following meanings: (a) Agreement: The Executive Split Dollar Life Insurance Agreement (including Schedules and attachments) entered into between the Company and Executive pursuant to the Plan. (b) Beneficiary: The person or persons designated in writing by Executive to receive the Executive Death Benefit. (c) Cause: Cause means, but is not limited to, a determination by the Company that Executive may have been guilty of criminal conduct (regardless of whether proven or admitted), gross negligence or willful misconduct in the performance of Executive's duties or otherwise, or has engaged in conduct which, if generally known, would bring discredit to or give rise to adverse publicity to the Company. (d) Company Cost: The total premiums paid to the Insurer with respect to the Policy (including premiums paid on any antecedent policy), exclusive of ratings, plus, when applicable, Withholding Taxes advanced by the Company determined under Section 9, less all amounts received from Executive for the Policy and less the amount of any outstanding Policy loan. (e) Disability: The Executive's inability to perform the duties of his job because of accident or illness, as determined by the Company. Executive will be deemed disabled, if, by reason of accident or illness, Executive becomes entitled to benefits under the Company's long-term disability program. In the event of Disability this Agreement shall remain in effect as though Executive continued in active employment by the Company until Executive becomes entitled to receive retirement benefits under the Company's Pension Plan. (f) Executive Death Benefit: The level of life insurance to which the Executive is entitled pursuant to the Plan. (g) Executive's Premium: The annual cost of term life insurance protection on the life of Executive as measured by the PS-58 rate (or substitute table) published from time to time by the Internal Revenue Service, prorated for a partial year as appropriate. (h) Insurer: Any insurance company issuing a life insurance contract on Executive's life. (i) Plan: The Jefferson Bankshares, Inc. Executive Split Dollar Life Insurance Plan. (j) Policy: One or more life insurance contracts (including paid up additional insurance) issued on the life of Executive pursuant to the Plan. The Policy number, face amount, and Executive Death Benefit are listed on Exhibit A. (k) Retirement: Termination of employment (except for Cause) at or after attainment of age 65 or, with the consent of the Company, age 55 and completion of 15 years of service with the Company or a subsidiary of the Company. (l) Roll-Out: Division of the Policy into two separate policies, one to be retained by the Company and the other to be retained by Executive. (m) Roll-Out Date: The later of the first policy anniversary on which: (i) The Company can obtain from the Insurer a policy with a cash surrender value equal to the Company Cost, and (ii) The Executive can receive a policy with a death benefit equal to the Executive Death Benefit, with no outlays required to sustain the Executive Death Benefit based upon the then current dividend schedule, and with no policy loans. (n) Termination Date: The date determined by reference to Section 11(b). (o) Withholding Taxes: The amount of state and federal income taxes required by law to be withheld by the Company from Executive with respect to bonuses paid or imputed to Executive to cover Executive's Premiums. 2. Application for Insurance. The Company and Executive will apply to the Insurer for a Policy or one or more Policies with initial coverage at least equal to the amount of insurance to which the Executive is entitled under the Plan. The Company and executive agree to take any action necessary to cause the Insurer to issue the Policy (including paid-up additional insurance on the Policy). Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. The rights of the Company and Executive under the Policy shall be subject to the terms of this Agreement. 3. Amount of Insurance. Executive shall have coverage specified as the Executive Death Benefit in the Plan. If Executive is not then insurable at standard rates, the additional premium shall be paid by the Company. 4. Ownership. The Company and Executive shall jointly own the Policy, and they shall jointly exercise all ownership rights granted to the owner by the terms of the Policy except as otherwise provided in this Agreement. The Company shall keep possession of the Policy, but the Policy shall be available to Executive during normal business hours for such purposes as are consistent with the terms of this Agreement. 5. Dividend Option. All dividends declared by the Insurer on the Policy shall be applied to purchase additional paid up life insurance on the life of Executive until such option is changed by mutual agreement of the Company and Executive. 6. Payment of Premiums. (a) The Company agrees to remit the total amount of each annual Policy premium on or before the due date of such premium, or within the grace period provided, if any. (b) At least thirty (30) days prior to the due date of each annual Policy premium, the Company shall notify the Executive of the amount of Executive's Premium to be paid by Executive to the Company as a premium payment. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and Executive will promptly upon demand reimburse the Company for all Withholding Taxes due with respect to such bonus. 7. Death Benefits. (a) Upon Executive's death, the Company and Executive's personal representative will promptly take the appropriate action to obtain the death benefits provided under the Policy, and (i) the Company shall be entitled to receive the excess of the total Policy proceeds over the Executive Death Benefit. The receipt by the Company of the excess over the Executive Death Benefit shall constitute satisfaction of Executive's obligation to the Company under this Agreement; and (ii) the Beneficiary shall be entitled to receive the Executive Death Benefit, which shall be paid in accordance with the terms of the designation and settlement option elected by Executive. (b) If at the time the Executive Death Benefit becomes payable because of Executive's death, there is no effective Beneficiary designation, the Executive Death Benefit shall be paid in accordance with the terms of the Policy. 8. Policy Loans. (a) Executive agrees that the Company, without the further consent of Executive, has the right to (i) obtain loans secured by the Policy from the Insurer or from others, and (ii) assign the Policy as security for the repayment of such loans. The amount of such loans together with interest thereon shall at no time exceed the Company Cost with respect to the Policy securing such loan. The principal amount of the loan and all interest charges with respect to any Policy loan shall be the sole obligation of and shall be paid by the Company. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. (b) If the Policy is assigned or encumbered in any way, including a Policy loan, on the date of the Executive's death or the date of the separation of the Policy into two policies pursuant to Section 12, the Company shall secure a release or discharge of the assignment or encumbrance to ensure the prompt payment of death proceeds under the Policy to the Executive's beneficiary or beneficiaries or the separation of the Policy, as the case might be. 9. Retirement or Disability. (a) If Executive becomes Disabled or his Retirement occurs before his Roll-Out Date, this Agreement and the Policy shall continue in effect until the occurrence of the Roll-Out Date. (b) During the period between the date of Executive's Disability or Retirement and the Roll-Out Date, Executive shall continue to pay Executive's Premium to the Company and the Company shall continue to pay the balance of the premiums due on the Policy. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and the Executive will upon demand reimburse the Company for all Executive's Withholding Taxes. (d) The Company will advise Executive annually of the amount of Withholding Taxes due with respect to such bonus. Within 60 days following the date of his Disability or Retirement (to the extent not already paid), and within 60 days following each succeeding annual premium due date, Executive shall pay to the Company the amount of the Executive's Withholding Taxes due the Company for the Policy year or balance of the Policy year. (e) Executive may irrevocably elect to have the Company advance Executive's Withholding Taxes, in which case the Company shall be entitled to receive from Executive on the Roll-Out Date, and Executive agrees to pay Company, an amount equal to the Executive's Withholding Taxes advanced by the Company, plus simple interest at an annual rate of 6% on the Withholding Taxes, directly by cash payment, or as a deduction from the cash values of Executive's Policy. The election permitted under this paragraph shall be made in a writing filed by Executive with the Company within 60 days after the date of Executive's Retirement or Disability, or as to succeeding Policy years, within 60 days after the Policy premium due date. 10.Termination of Employment. (a) If Executive's termination of employment occurs before his Roll-Out Date for reasons other than death, Retirement, Disability or termination by the Company for Cause, this Agreement and Executive's entire interest in his share of the Policy shall terminate and be forfeited as of the date of his termination of employment unless Executive timely makes the election hereinafter provided in subparagraph (b). If Executive makes such election, Sections 12(a) and (b) shall apply. (b) This Agreement and the Policy will continue in effect until the Policy anniversary next following the date of his termination of employment if Executive elects in writing to continue the Policy in effect and pays to the Company within 30 days of his termination date in a lump sum the amount of Executive's Premium for the balance of the Policy year. (c) If Executive makes the election as provided in subparagraph (b), the Company shall continue to pay the balance of the premiums due, if any, on the Policy with respect to the balance of the Policy year. (d) If Executive's death occurs before the 30-day election period has expired and Executive has not made the election as provided in subparagraph (b), Executive will be deemed to have died while still an employee and his rights under this Agreement and the Policy will be governed by Section 7. 11.Amendment and Termination of Agreement. (a) This Agreement may not be amended, altered, or modified except in writing and signed by the Company and the Executive. (b) This Agreement shall terminate upon the first to occur of any of the following events, each of which is a "Termination Date": (i) the Roll-Out Date; (ii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has not made the election permitted under Section 10(b), the date of his termination of employment (unless Committee determines that Executive shall be treated as an active employee after a termination of employment); (iii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has made the election permitted under Section 10(b), the Policy anniversary next following the date of Executive's termination of employment; (iv) cessation of the Company's business or the bankruptcy, receivership or dissolution of the Company, unless the Company's business is continued by a successor corporation or business entity; (v) termination of the Agreement as of a Policy anniversary date by Executive during employment upon written notice to the Company; or (vi) termination of Executive's employment by the Company for Cause. 12.Disposition of the Policy. (a) If the Termination Date is the Roll-Out Date, Executive shall retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated. The Company shall have the unqualified right to receive from the cash surrender value of the Policy an amount in cash equal to the Company Cost or, alternatively, a policy from the Insurer that has a cash surrender value equal to the Company Cost, at the election of the Company. (b) Except as provided in Sections 10(a) and 12(c), if the Termination Date is not the Roll-Out Date, Executive and the Company shall each retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated in the following manner: (i) Executive shall, subject to the other provisions of this Section 12(b), retain an insurance policy with a death benefit equal to the then Executive Death Benefit together with the attendant cash surrender value; and (ii) the Company shall have the unqualified right to receive an insurance policy having a death benefit equal to the difference between the Executive Death Benefit and the death benefit provided by the Policy together with the remaining cash surrender value of the Policy. If on the Termination Date the cash surrender value of the insurance policy to be issued to the Company pursuant to (ii) is less than the Company Cost, Executive shall elect in writing to (x) pay the Company in cash an amount equal to the difference between the cash surrender value of the Company's insurance policy and the Company Cost; (y) accept an insurance policy with a reduced death benefit that has a cash surrender value reduced and allocated to the Company to the extent of the difference described in (i); or (z) surrender to the Company his ownership rights to the Policy, but retaining the right to receive from the Company cash in an amount equal to any excess cash surrender value over the Company Cost. Executive's election shall be made and filed with, and any cash required by Executive's election paid to, the Company on or before the Termination Date. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to implement the provisions of this subparagraph. If Executive fails to make an election by the Termination Date, Executive shall be deemed to have elected to surrender the Policy as provided in clause (z). An example of the application of Section 12(b) is attached as Exhibit B. (c) If Executive's employment is terminated for Cause (as determined by the Committee), Executive agrees that his rights under this Agreement and the Policy (and the rights of Executive's Beneficiary) shall terminate and be forfeited. Executive further agrees to execute such documents as may be necessary to evidence Executive's waiver and transfer of Executive's rights in the Policy to the Company. Executive authorizes the Company to execute the Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. 13.Termination of the Plan. Notwithstanding anything contained in this Agreement to the contrary, a termination of the Plan will not adversely affect the rights of Executive under this Agreement and, unless otherwise agreed by Executive and the Company, this Agreement will continue as though the Plan were still in effect. 14.Company's Rights to Set-Off Under the Policy. If, upon termination of employment, Executive is indebted to the Company or a subsidiary of the Company for any reason (other than for a personal or commercial loan from the Company or a subsidiary of the Company), the Company shall have the right to recover such indebtedness from the cash value of the Policy in addition to any other amounts to which the Company may be entitled pursuant to this Agreement. 15.Miscellaneous. (a) This Agreement shall not affect any rights the Executive may otherwise have under the pension, profit sharing or other employee benefit plan (except group term life insurance) established by the Company. (b) This Agreement shall be binding on and inure to the benefit of both the Company, its successors and assigns, and the Executive, his Beneficiary, assigns and his personal representative. The Agreement shall be interpreted in accordance with the laws of the Commonwealth of Virginia. (c) Except as permitted by law or pursuant to Section 15(f) or by the Company's written consent, any benefits to which the Executive or Executive's Beneficiary may become entitled under this Agreement shall not be subject to anticipation, alienation, sale, transfer, assignment, or pledge. The Company shall not be liable for, or subject to, the debts, contracts, liabilities, or torts of any person entitled benefit under this Agreement. (d) This Agreement shall not confer upon the Executive any legal or equitable right against the Company except as expressly provided in this Agreement, the Plan and the Policy. (e) Neither this Agreement, the Plan nor the Policy shall constitute an inducement or consideration for the employment of the Executive and shall not give the Executive any right to be retained in the employ of the Company. The Company hereby retains the right to discharge the Executive at any time, with or without Cause. (f) The Executive's interest under this Agreement, the Plan and the Policy, may be assigned by the Executive upon written notice to the Company. (g) If a provision of this Agreement is not valid or enforceable, that fact in no way affects the validity or enforceability of any other provision. (h) Whenever any words are used in this Agreement in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings used in this Agreement are inserted for convenience or reference, are not part of this Agreement and are not to be considered in the construction of this Agreement. (i) All notices provided for or permitted to be given under any of the provisions of this Agreement will be in writing and will be deemed to have been duly given or served and delivered personally or by overnight courier, telecopied or deposited in the U.S. Mail by Registered or Certified Mail, return receipt requested, postage prepaid and addressed as follows: If to the Company: Jefferson Bankshares, Inc. P. O. Box 711 Charlottesville, Virginia 22902 Attention: Chief Executive Officer If to the Executive: Robert H. Campbell, Jr. 230 Rivanwood Drive Charlottesville, Virginia 22901 or to such other person or address as may be given in writing by either party to the other in accordance with this paragraph. In consideration of the foregoing, the Company and the Executive have executed this Agreement in duplicate as of the day and year first written above. JEFFERSON BANKSHARES, INC. By: /s/ Hovey S. Dabney /s/ Robert H. Campbell, Jr. Exhibit A Specification of Certain Terms of the Policy Robert H. Campbell, Jr. Policy Number: 6913008 Face Amount: $ 80,000 Executive Death Benefit: $ 70,000 Policy Number: 7711258 Face Amount: $150,000 Executive Death Benefit: $135,000 Exhibit B Page 1 Example of the Application of Section 12(b) Section 12(b) provides that in the event the Policy is separated on a date other than the Roll-Out Date, Executive and the Company will each receive a policy that contains a portion of the death benefits and cash values in the Policy. Because separation of the Policy is occurring before the Roll-Out Date, Executive and the Company cannot each receive the benefits that they would receive if the separation were to occur at the Roll-Out Date. Section 12(b) provides a mechanism for determining the amounts that Executive and the Company will receive. Examples of the application of Section 12(b) are set forth below: 1. Assume (i) that Executive is a male, age 45 with no ratings; (ii) the Policy was issued in 1989; (iii) that the policy year is from November 1 through October 31; (iv) that the face amount of the Policy at the date of issue was $115,000; (v) that the Executive Death Benefit is $100,000; (vi) that Executive voluntarily leaves employment with the Company on January 1, 1994 (i.e., during policy year 5) and makes the necessary election and payments required by Section 10 to continue the Policy until October 31, 1994 (i.e., the end of the then current policy year); (vii) that the dividend rate for the Policy has remained unchanged from the date of issuance; and (viii) that on October 31, 1994, the Company Cost is $11,303, the total death benefit of the Policy is $122,357 (of which $115,000 is the face amount of the original Policy and $7,357 is the amount of paid-up additions), the cash surrender value of the Policy is $6,789 (of which $4,636 is allocated to the original Policy and $2,153 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1994. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $4,031 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the fifth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $22,357 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1994 ($122,357)) and with guaranteed cash surrender values in the amount of $2,758 (i.e., the difference between the total cash value of the Policy on October 31, 1994 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,545 less than the Company Cost (i.e., $11,303-$2,758). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance Exhibit B Page 2 policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $4,031 ($8,545) Company $ 22,357 $2,758 $8,545 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company or elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $0 Company $122,357 $6,789 $0 2. Assume the same facts in the first example except (i) that the Executive voluntarily leaves employment with the Company on January 1, 1998 (i.e., during policy year 9) and makes the necessary election and payments required by Section 10 to continue Exhibit B Page 3 the Policy until October 31, 1998 (i.e., the end of the then current policy year); and (ii) that on October 31, 1998, the Company Cost is $19,124, the total death benefit of the Policy is $140,200 (of which $115,000 is the face amount of the original Policy and $25,200 is the amount of paid-up additions), the cash surrender value of the Policy is $22,042 (of which $13,458 is allocated to the original Policy and $8,584 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1998. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $11,703 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the ninth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $40,200 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1998 ($140,200)) and with guaranteed cash surrender values in the amount of $10,339 (i.e., the difference between the total cash value of the Policy on October 31, 1998 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,785 less than the Company Cost (i.e., $19,124-10,339). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. Exhibit B Page 4 If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $11,703 ($8,785) Company $ 40,200 $10,339 $8,785 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 25,000 $ 2,918 $0 Company $115,200 $19,124 $0 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $2,918 Company $140,200 $22,042 ($2,918) EX-10 6 EXHIBIT 10(O) E JEFFERSON BANKSHARES, INC. EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT O. Kenton McCartney [As Amended and Restated Effective October 29, 1993] This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made this day of October 29, 1993, between JEFFERSON BANKSHARES, INC., a Virginia corporation (the "Company") and O. KENTON MCCARTNEY, an executive employed by the Company or one of its subsidiary corporations (the "Executive"), and supersedes any prior Executive Split Dollar Life Insurance Agreement between the Company and Executive. A. The Company has adopted a Split Dollar Life Insurance Plan (the "Plan") to provide certain executive employees with additional life insurance protection under split dollar life insurance policies. B. The Company has selected Executive to receive additional life insurance protection under the Plan and Executive has elected to receive such protection. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Definitions. Where indicated by initial capital letters, the following terms shall have the following meanings: (a) Agreement: The Executive Split Dollar Life Insurance Agreement (including Schedules and attachments) entered into between the Company and Executive pursuant to the Plan. (b) Beneficiary: The person or persons designated in writing by Executive to receive the Executive Death Benefit. (c) Cause: Cause means, but is not limited to, a determination by the Company that Executive may have been guilty of criminal conduct (regardless of whether proven or admitted), gross negligence or willful misconduct in the performance of Executive's duties or otherwise, or has engaged in conduct which, if generally known, would bring discredit to or give rise to adverse publicity to the Company. (d) Company Cost: The total premiums paid to the Insurer with respect to the Policy (including premiums paid on any antecedent policy), exclusive of ratings, plus, when applicable, Withholding Taxes advanced by the Company determined under Section 9, less all amounts received from Executive for the Policy and less the amount of any outstanding Policy loan. (e) Disability: The Executive's inability to perform the duties of his job because of accident or illness, as determined by the Company. Executive will be deemed disabled, if, by reason of accident or illness, Executive becomes entitled to benefits under the Company's long-term disability program. In the event of Disability this Agreement shall remain in effect as though Executive continued in active employment by the Company until Executive becomes entitled to receive retirement benefits under the Company's Pension Plan. (f) Executive Death Benefit: The level of life insurance to which the Executive is entitled pursuant to the Plan. (g) Executive's Premium: The annual cost of term life insurance protection on the life of Executive as measured by the PS-58 rate (or substitute table) published from time to time by the Internal Revenue Service, prorated for a partial year as appropriate. (h) Insurer: Any insurance company issuing a life insurance contract on Executive's life. (i) Plan: The Jefferson Bankshares, Inc. Executive Split Dollar Life Insurance Plan. (j) Policy: One or more life insurance contracts (including paid up additional insurance) issued on the life of Executive pursuant to the Plan. The Policy number, face amount, and Executive Death Benefit are listed on Exhibit A. (k) Retirement: Termination of employment (except for Cause) at or after attainment of age 65 or, with the consent of the Company, age 55 and completion of 15 years of service with the Company or a subsidiary of the Company. (l) Roll-Out: Division of the Policy into two separate policies, one to be retained by the Company and the other to be retained by Executive. (m) Roll-Out Date: The later of the first policy anniversary on which: (i) The Company can obtain from the Insurer a policy with a cash surrender value equal to the Company Cost, and (ii) The Executive can receive a policy with a death benefit equal to the Executive Death Benefit, with no outlays required to sustain the Executive Death Benefit based upon the then current dividend schedule, and with no policy loans. (n) Termination Date: The date determined by reference to Section 11(b). (o) Withholding Taxes: The amount of state and federal income taxes required by law to be withheld by the Company from Executive with respect to bonuses paid or imputed to Executive to cover Executive's Premiums. 2. Application for Insurance. The Company and Executive will apply to the Insurer for a Policy or one or more Policies with initial coverage at least equal to the amount of insurance to which the Executive is entitled under the Plan. The Company and executive agree to take any action necessary to cause the Insurer to issue the Policy (including paid-up additional insurance on the Policy). Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. The rights of the Company and Executive under the Policy shall be subject to the terms of this Agreement. 3. Amount of Insurance. Executive shall have coverage specified as the Executive Death Benefit in the Plan. If Executive is not then insurable at standard rates, the additional premium shall be paid by the Company. 4. Ownership. The Company and Executive shall jointly own the Policy, and they shall jointly exercise all ownership rights granted to the owner by the terms of the Policy except as otherwise provided in this Agreement. The Company shall keep possession of the Policy, but the Policy shall be available to Executive during normal business hours for such purposes as are consistent with the terms of this Agreement. 5. Dividend Option. All dividends declared by the Insurer on the Policy shall be applied to purchase additional paid up life insurance on the life of Executive until such option is changed by mutual agreement of the Company and Executive. 6. Payment of Premiums. (a) The Company agrees to remit the total amount of each annual Policy premium on or before the due date of such premium, or within the grace period provided, if any. (b) At least thirty (30) days prior to the due date of each annual Policy premium, the Company shall notify the Executive of the amount of Executive's Premium to be paid by Executive to the Company as a premium payment. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and Executive will promptly upon demand reimburse the Company for all Withholding Taxes due with respect to such bonus. 7. Death Benefits. (a) Upon Executive's death, the Company and Executive's personal representative will promptly take the appropriate action to obtain the death benefits provided under the Policy, and (i) the Company shall be entitled to receive the excess of the total Policy proceeds over the Executive Death Benefit. The receipt by the Company of the excess over the Executive Death Benefit shall constitute satisfaction of Executive's obligation to the Company under this Agreement; and (ii) the Beneficiary shall be entitled to receive the Executive Death Benefit, which shall be paid in accordance with the terms of the designation and settlement option elected by Executive. (b) If at the time the Executive Death Benefit becomes payable because of Executive's death, there is no effective Beneficiary designation, the Executive Death Benefit shall be paid in accordance with the terms of the Policy. 8. Policy Loans. (a) Executive agrees that the Company, without the further consent of Executive, has the right to (i) obtain loans secured by the Policy from the Insurer or from others, and (ii) assign the Policy as security for the repayment of such loans. The amount of such loans together with interest thereon shall at no time exceed the Company Cost with respect to the Policy securing such loan. The principal amount of the loan and all interest charges with respect to any Policy loan shall be the sole obligation of and shall be paid by the Company. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. (b) If the Policy is assigned or encumbered in any way, including a Policy loan, on the date of the Executive's death or the date of the separation of the Policy into two policies pursuant to Section 12, the Company shall secure a release or discharge of the assignment or encumbrance to ensure the prompt payment of death proceeds under the Policy to the Executive's beneficiary or beneficiaries or the separation of the Policy, as the case might be. 9. Retirement or Disability. (a) If Executive becomes Disabled or his Retirement occurs before his Roll-Out Date, this Agreement and the Policy shall continue in effect until the occurrence of the Roll-Out Date. (b) During the period between the date of Executive's Disability or Retirement and the Roll-Out Date, Executive shall continue to pay Executive's Premium to the Company and the Company shall continue to pay the balance of the premiums due on the Policy. (c) The Company will pay not less often than annually the amounts due under paragraph (b) as a bonus to the Executive, and the Executive will upon demand reimburse the Company for all Executive's Withholding Taxes. (d) The Company will advise Executive annually of the amount of Withholding Taxes due with respect to such bonus. Within 60 days following the date of his Disability or Retirement (to the extent not already paid), and within 60 days following each succeeding annual premium due date, Executive shall pay to the Company the amount of the Executive's Withholding Taxes due the Company for the Policy year or balance of the Policy year. (e) Executive may irrevocably elect to have the Company advance Executive's Withholding Taxes, in which case the Company shall be entitled to receive from Executive on the Roll-Out Date, and Executive agrees to pay Company, an amount equal to the Executive's Withholding Taxes advanced by the Company, plus simple interest at an annual rate of 6% on the Withholding Taxes, directly by cash payment, or as a deduction from the cash values of Executive's Policy. The election permitted under this paragraph shall be made in a writing filed by Executive with the Company within 60 days after the date of Executive's Retirement or Disability, or as to succeeding Policy years, within 60 days after the Policy premium due date. 10.Termination of Employment. (a) If Executive's termination of employment occurs before his Roll-Out Date for reasons other than death, Retirement, Disability or termination by the Company for Cause, this Agreement and Executive's entire interest in his share of the Policy shall terminate and be forfeited as of the date of his termination of employment unless Executive timely makes the election hereinafter provided in subparagraph (b). If Executive makes such election, Sections 12(a) and (b) shall apply. (b) This Agreement and the Policy will continue in effect until the Policy anniversary next following the date of his termination of employment if Executive elects in writing to continue the Policy in effect and pays to the Company within 30 days of his termination date in a lump sum the amount of Executive's Premium for the balance of the Policy year. (c) If Executive makes the election as provided in subparagraph (b), the Company shall continue to pay the balance of the premiums due, if any, on the Policy with respect to the balance of the Policy year. (d) If Executive's death occurs before the 30-day election period has expired and Executive has not made the election as provided in subparagraph (b), Executive will be deemed to have died while still an employee and his rights under this Agreement and the Policy will be governed by Section 7. 11.Amendment and Termination of Agreement. (a) This Agreement may not be amended, altered, or modified except in writing and signed by the Company and the Executive. (b) This Agreement shall terminate upon the first to occur of any of the following events, each of which is a "Termination Date": (i) the Roll-Out Date; (ii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has not made the election permitted under Section 10(b), the date of his termination of employment (unless Committee determines that Executive shall be treated as an active employee after a termination of employment); (iii) in the case of an Executive whose employment terminates for reasons other than death, Disability, Retirement or termination of employment for Cause, who has made the election permitted under Section 10(b), the Policy anniversary next following the date of Executive's termination of employment; (iv) cessation of the Company's business or the bankruptcy, receivership or dissolution of the Company, unless the Company's business is continued by a successor corporation or business entity; (v) termination of the Agreement as of a Policy anniversary date by Executive during employment upon written notice to the Company; or (vi) termination of Executive's employment by the Company for Cause. 12.Disposition of the Policy. (a) If the Termination Date is the Roll-Out Date, Executive shall retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated. The Company shall have the unqualified right to receive from the cash surrender value of the Policy an amount in cash equal to the Company Cost or, alternatively, a policy from the Insurer that has a cash surrender value equal to the Company Cost, at the election of the Company. (b) Except as provided in Sections 10(a) and 12(c), if the Termination Date is not the Roll-Out Date, Executive and the Company shall each retain exclusive ownership of the portion of the Policy remaining after the interests of the Company and Executive in the Policy have been separated in the following manner: (i) Executive shall, subject to the other provisions of this Section 12(b), retain an insurance policy with a death benefit equal to the then Executive Death Benefit together with the attendant cash surrender value; and (ii) the Company shall have the unqualified right to receive an insurance policy having a death benefit equal to the difference between the Executive Death Benefit and the death benefit provided by the Policy together with the remaining cash surrender value of the Policy. If on the Termination Date the cash surrender value of the insurance policy to be issued to the Company pursuant to (ii) is less than the Company Cost, Executive shall elect in writing to (x) pay the Company in cash an amount equal to the difference between the cash surrender value of the Company's insurance policy and the Company Cost; (y) accept an insurance policy with a reduced death benefit that has a cash surrender value reduced and allocated to the Company to the extent of the difference described in (i); or (z) surrender to the Company his ownership rights to the Policy, but retaining the right to receive from the Company cash in an amount equal to any excess cash surrender value over the Company Cost. Executive's election shall be made and filed with, and any cash required by Executive's election paid to, the Company on or before the Termination Date. Executive authorizes the Company to execute for Executive as his attorney-in-fact such documents as may be necessary to implement the provisions of this subparagraph. If Executive fails to make an election by the Termination Date, Executive shall be deemed to have elected to surrender the Policy as provided in clause (z). An example of the application of Section 12(b) is attached as Exhibit B. (c) If Executive's employment is terminated for Cause (as determined by the Committee), Executive agrees that his rights under this Agreement and the Policy (and the rights of Executive's Beneficiary) shall terminate and be forfeited. Executive further agrees to execute such documents as may be necessary to evidence Executive's waiver and transfer of Executive's rights in the Policy to the Company. Executive authorizes the Company to execute the Executive as his attorney-in-fact such documents as may be necessary to comply with this paragraph. 13.Termination of the Plan. Notwithstanding anything contained in this Agreement to the contrary, a termination of the Plan will not adversely affect the rights of Executive under this Agreement and, unless otherwise agreed by Executive and the Company, this Agreement will continue as though the Plan were still in effect. 14.Company's Rights to Set-Off Under the Policy. If, upon termination of employment, Executive is indebted to the Company or a subsidiary of the Company for any reason (other than for a personal or commercial loan from the Company or a subsidiary of the Company), the Company shall have the right to recover such indebtedness from the cash value of the Policy in addition to any other amounts to which the Company may be entitled pursuant to this Agreement. 15.Miscellaneous. (a) This Agreement shall not affect any rights the Executive may otherwise have under the pension, profit sharing or other employee benefit plan (except group term life insurance) established by the Company. (b) This Agreement shall be binding on and inure to the benefit of both the Company, its successors and assigns, and the Executive, his Beneficiary, assigns and his personal representative. The Agreement shall be interpreted in accordance with the laws of the Commonwealth of Virginia. (c) Except as permitted by law or pursuant to Section 15(f) or by the Company's written consent, any benefits to which the Executive or Executive's Beneficiary may become entitled under this Agreement shall not be subject to anticipation, alienation, sale, transfer, assignment, or pledge. The Company shall not be liable for, or subject to, the debts, contracts, liabilities, or torts of any person entitled benefit under this Agreement. (d) This Agreement shall not confer upon the Executive any legal or equitable right against the Company except as expressly provided in this Agreement, the Plan and the Policy. (e) Neither this Agreement, the Plan nor the Policy shall constitute an inducement or consideration for the employment of the Executive and shall not give the Executive any right to be retained in the employ of the Company. The Company hereby retains the right to discharge the Executive at any time, with or without Cause. (f) The Executive's interest under this Agreement, the Plan and the Policy, may be assigned by the Executive upon written notice to the Company. (g) If a provision of this Agreement is not valid or enforceable, that fact in no way affects the validity or enforceability of any other provision. (h) Whenever any words are used in this Agreement in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. Headings used in this Agreement are inserted for convenience or reference, are not part of this Agreement and are not to be considered in the construction of this Agreement. (i) All notices provided for or permitted to be given under any of the provisions of this Agreement will be in writing and will be deemed to have been duly given or served and delivered personally or by overnight courier, telecopied or deposited in the U.S. Mail by Registered or Certified Mail, return receipt requested, postage prepaid and addressed as follows: If to the Company: Jefferson Bankshares, Inc. P. O. Box 711 Charlottesville, Virginia 22902 Attention: Chief Executive Officer If to the Executive: O. Kenton McCartney 2021 Spottswood Road Charlottesville, Virginia 22901 or to such other person or address as may be given in writing by either party to the other in accordance with this paragraph. In consideration of the foregoing, the Company and the Executive have executed this Agreement in duplicate as of the day and year first written above. JEFFERSON BANKSHARES, INC. By: /s/ Hovey S. Dabney /s/ O. Kenton McCartney Exhibit A Specification of Certain Terms of the Policy O. Kenton McCartney Policy Number: 6913222 Face Amount: $242,000 Executive Death Benefit: $220,000 Policy Number: 7710332 Face Amount: $95,000 Executive Death Benefit: $81,000 Exhibit B Page 1 Example of the Application of Section 12(b) Section 12(b) provides that in the event the Policy is separated on a date other than the Roll-Out Date, Executive and the Company will each receive a policy that contains a portion of the death benefits and cash values in the Policy. Because separation of the Policy is occurring before the Roll-Out Date, Executive and the Company cannot each receive the benefits that they would receive if the separation were to occur at the Roll-Out Date. Section 12(b) provides a mechanism for determining the amounts that Executive and the Company will receive. Examples of the application of Section 12(b) are set forth below: 1. Assume (i) that Executive is a male, age 45 with no ratings; (ii) the Policy was issued in 1989; (iii) that the policy year is from November 1 through October 31; (iv) that the face amount of the Policy at the date of issue was $115,000; (v) that the Executive Death Benefit is $100,000; (vi) that Executive voluntarily leaves employment with the Company on January 1, 1994 (i.e., during policy year 5) and makes the necessary election and payments required by Section 10 to continue the Policy until October 31, 1994 (i.e., the end of the then current policy year); (vii) that the dividend rate for the Policy has remained unchanged from the date of issuance; and (viii) that on October 31, 1994, the Company Cost is $11,303, the total death benefit of the Policy is $122,357 (of which $115,000 is the face amount of the original Policy and $7,357 is the amount of paid-up additions), the cash surrender value of the Policy is $6,789 (of which $4,636 is allocated to the original Policy and $2,153 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1994. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $4,031 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the fifth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $22,357 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1994 ($122,357)) and with guaranteed cash surrender values in the amount of $2,758 (i.e., the difference between the total cash value of the Policy on October 31, 1994 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,545 less than the Company Cost (i.e., $11,303-$2,758). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance Exhibit B Page 2 policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $4,031 ($8,545) Company $ 22,357 $2,758 $8,545 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company or elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $0 Company $122,357 $6,789 $0 2. Assume the same facts in the first example except (i) that the Executive voluntarily leaves employment with the Company on January 1, 1998 (i.e., during policy year 9) and makes the necessary election and payments required by Section 10 to continue Exhibit B Page 3 the Policy until October 31, 1998 (i.e., the end of the then current policy year); and (ii) that on October 31, 1998, the Company Cost is $19,124, the total death benefit of the Policy is $140,200 (of which $115,000 is the face amount of the original Policy and $25,200 is the amount of paid-up additions), the cash surrender value of the Policy is $22,042 (of which $13,458 is allocated to the original Policy and $8,584 of which is allocated to the paid-up additions). Based on the foregoing facts, the Policy would be divided into a policy for the Executive and the Company as of October 31, 1998. Pursuant to Section 12(b)(i), Executive will receive a policy with a death benefit of $100,000 together with attendant cash values of approximately $11,703 (i.e., the amount of the guaranteed cash surrender value that a whole life policy in the amount of $100,000 would have at the end of the ninth policy year). Pursuant to Section 12(b)(ii), the Company will receive a policy with a death benefit of $40,200 (i.e., the difference between the Executive Death Benefit ($100,000) and the total death benefit of the Policy on October 31, 1998 ($140,200)) and with guaranteed cash surrender values in the amount of $10,339 (i.e., the difference between the total cash value of the Policy on October 31, 1998 and the amount of cash allocated to Executive). The amount of cash in the Company's policy is $8,785 less than the Company Cost (i.e., $19,124-10,339). Pursuant to Section 12(b), Executive is required, on or before the Termination Date to (i) pay this difference to the Company, (ii) accept an insurance policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, or (iii) surrender Executive's policy to the Company and receive from the Company cash in the amount equal to the excess, if any, of any cash surrender value over the Company Cost. If Executive elects to pay the difference to the Company, Executive may pay this difference in a number of ways including, for example, Executive's own cash or a loan against the policy. If Executive does not make the necessary election and, if Executive has elected to pay cash to the Company, make the necessary payment on or before the Termination Date, Executive will be deemed to have elected to surrender Executive's policy to the Company and receive cash in excess of the Company Cost. Exhibit B Page 4 If Executive elects to pay the difference to the Company from Executive's own cash, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $100,000 $11,703 ($8,785) Company $ 40,200 $10,339 $8,785 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects to accept a policy with a reduced death benefit and shift the reduction in the death benefit and attendant cash values to the Company, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 25,000 $ 2,918 $0 Company $115,200 $19,124 $0 Following the separation, Executive would have to continue to make the required premium payments on the policy retained by Executive. If Executive elects (or is deemed to have elected) to surrender Executive's policy to the Company and receive from the Company cash in an amount equal to the excess, if any, of the cash surrender value over the Company Cost, Executive and the Company will have received the following: Death Cash Benefit Value Cash Executive $ 0 $ 0 $2,918 Company $140,200 $22,042 ($2,918) EX-13 7 EXHIBIT 13 F Business of Jefferson Bankshares Jefferson Bankshares, Inc. is a bank holding company registered under the provisions of the Bank Holding Company Act of 1956, as amended. Jefferson Bankshares was incorporated under the laws of Virginia on March 22, 1979, and became an active bank holding company on December 31, 1979, through the consolidation of NB Corporation and Southern Bankshares. The Corporation owns or controls one subsidiary bank, Jefferson National Bank, Charlottesville, Virginia, and four nonbank subsidiaries. Within the last five years Jefferson Bankshares merged its subsidiary bank, Jefferson National Bank/Tidewater into Jefferson National Bank; acquired two offices of NCNB Virginia with approximately $17 million in deposits and $9 million in loans; acquired Chesapeake Bank Corporation with 12 offices and approximately $124 million in total assets; and acquired Peoples Bank of Front Royal with two offices and approximately $60 million in total assets. In addition, Jefferson Data Services, Inc., which furnished computer services to the bank, was merged into Jefferson Bankshares, and the computer operations were transferred to Jefferson National Bank. During 1993, Jefferson Bankshares acquired the People's Bank of Virginia Beach (PBVB), a community bank with approximately $14 million in assets, $13 million in deposits and one office in Virginia Beach, Virginia. The transaction with PBVB was completed on February 11, 1993 with the merger of PBVB into Jefferson National Bank. Jefferson Bankshares regularly seeks reasonable opportunities to expand its asset base and trade area and related business endeavors. The Corporation provides advisory and technical assistance to its subsidiaries in the areas of services, operations, audit, planning and budgeting, and corporate activities and administration. Funds are provided to Jefferson Bankshares by dividends and management fees from its subsidiaries and short- term and long-term borrowings from nonaffiliates. Jefferson Bankshares, Inc. is regulated by the Board of Governors of the Federal Reserve System and is subject to the requirements of the Bank Holding Company Act of 1956, as amended, and Virginia laws regarding financial institution holding companies administered by the Bureau of Financial Institutions of the State Corporation Commission of Virginia. Jefferson National Bank is subject to supervision by the Office of the Comptroller of the Currency. The bank is affected by various federal and Virginia laws and regulations of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation. The various laws and regulations administered by the regulatory agencies affect corporate practices, expansion of business, and provision of services. Also, monetary and fiscal policies of the United States directly affect bank loans and deposits and thus may affect Jefferson Bankshares' earnings. The future impact of these policies and of the continuing regulatory changes in the financial services industry cannot be predicted. On December 31, 1993, Jefferson Bankshares and its affiliates had 1,100 full- time and 121 part-time employees. Management believes that employee relations are good. As of September 30, 1993, Jefferson Bankshares had 2.9 percent of total bank deposits in Virginia. Six other bank holding companies had bank subsidiaries in Virginia with more deposits than Jefferson Bankshares. The Corporation's bank provides retail and commercial banking and trust services and has 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, the bank competes with other financial institutions, including larger bank holding companies, money market mutual funds, and other companies which extend credit. Jefferson Properties, Inc., which owns properties used or held for future use, primarily by the Corporation's bank, derived 80 percent of its income from Jefferson Bankshares and its subsidiaries in 1993. Charter Insurance Managers, Inc. and Grace Insurance Agency, Incorporated, a subsidiary of Jefferson National Bank, are currently inactive. Jefferson Financial, Inc. offers limited financial and investment advisory services. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Management's discussion and analysis are intended to aid the reader in understanding and evaluating the consolidated results of operations and the financial condition of Jefferson Bankshares. 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. Following the close of business on February 11, 1993, People's Bank of Virginia Beach merged with Jefferson National Bank in a transaction that was accounted for as a purchase. Accordingly, accounts and transactions for People's Bank are included in the Corporation's consolidated financial statements for the period following the merger date. The effects of the transaction were not material. On March 23, 1993, the board of directors declared a 2-for-1 stock split, which was distributed April 30, 1993. Accordingly, the average number of shares outstanding and per share amounts for net income, dividends declared, and book value have been restated for all periods presented to give effect to the split. Results of Operations Net income in 1993 rose to a record $23.8 million surpassing by 14 percent the record set in 1992 of $20.9 million. Net income per share in 1993 also reached a new high of $1.64, or 6 percent above $1.54 in 1992. The lower growth rate in net income per share was attributable to an increase in average shares outstanding, principally as the result of shares issued in the People's Bank merger and a previous merger in December 1992. Net income in 1991 was $15.9 million, or $1.18 per share. An analysis of the factors that influenced net income in 1993, 1992, and 1991 is presented in the sections that follow. Table 1, Selected Financial Data, provides a summary of the results of operations for the last five years and certain information regarding the Corporation's financial condition during those periods. Selected Financial Data Table 1 (Dollars in thousands except per share data) Years Ended December 31 1993 1992 1991 1990 1989 Results of Operations Interest income $ 125,205 $ 126,053 $ 134,574 $ 138,680 $ 137,171 Interest expense 46,442 55,098 73,190 80,015 78,170 Net interest income 78,763 70,955 61,384 58,665 59,001 Provision for loan losses 750 3,600 3,600 2,884 2,313 Net interest income after provision for loan losses 78,013 67,355 57,784 55,781 56,688 Non-interest income 16,930 16,165 14,505 13,652 11,684 Non-interest expense 59,822 53,502 50,345 48,161 45,080 Income before income taxes 35,121 30,018 21,944 21,272 23,292 Provision for income tax expense 11,303 9,078 6,069 6,107 6,377 Net Income $ 23,818 $ 20,940 $ 15,875 $ 15,165 $ 16,915 Per Share Data Net income $ 1.64 $ 1.54 $ 1.18 $ 1.10 $ 1.22 Dividends declared .62 .53 .50 .50 .50 Book value at year-end 13.15 12.11 11.08 10.39 9.75 Average number of shares outstanding 14,559,277 13,573,776 13,422,918 13,762,994 13,874,002 Financial Condition-Average Balances Total earning assets $ 1,654,644 $ 1,529,741 $ 1,431,110 $ 1,377,005 $ 1,333,197 Total assets 1,808,258 1,672,006 1,572,022 1,520,593 1,472,766 Total deposits 1,594,594 1,485,054 1,389,588 1,333,269 1,293,445 Long-term debt 1,632 2,763 4,177 5,590 7,390 Shareholders' equity 185,905 157,401 144,383 138,938 130,618
Profitability as measured by the return on average assets reached a new annual high in 1993. At 1.32 percent in 1993, it exceeded the 1992 record of 1.25 percent. In 1991, this measure of profitability was 1.01 percent. Another significant measure of profitability, the return on average shareholders' equity, declined in 1993 to 12.81 percent from 13.30 percent in 1992. In 1991, this ratio was 11.00 percent. The decrease in 1993 compared with 1992 resulted from a higher equity base in the 1993 period. Shares issued in the two mergers contributed to the 1993 average equity increase. Table 2, Summary of Financial Results by Quarter, presents a quarterly summary of earnings components for each of the last two years. In 1992, net interest income rose steadily as the effects of lower interest rates helped to widen the net interest margin throughout the year. After peaking in the first quarter of 1993, the net interest margin began to narrow as the lower rates had a greater impact on interest income than on interest expense. In 1993, the Corporation significantly lowered its quarterly provision for loan losses compared with the 1992 level and then, in the second half of 1993, discontinued the provision. The reasons for these actions are discussed later in the analysis. Factors affecting non-interest income and non-interest expense are also discussed elsewhere. Summary of Financial Results By Quarter Table 2 (Dollars in thousands except per share data) 1993 1992 Three Months Ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 Interest income $30,912 $31,293 $31,380 $31,620 $31,216 $31,393 $31,734 $31,710 Interest expense 11,243 11,501 11,708 11,990 12,212 13,244 14,385 15,257 Net interest income 19,669 19,792 19,672 19,630 19,004 18,149 17,349 16,453 Provision for loan losses - - 375 375 900 900 900 900 Non-interest income 4,401 4,426 4,255 3,848 4,204 3,889 4,141 3,931 Non-interest expense 15,512 15,066 14,822 14,422 13,470 13,425 13,284 13,323 Income before income taxes 8,558 9,152 8,730 8,681 8,838 7,713 7,306 6,161 Income tax expense 2,730 3,014 2,800 2,759 2,749 2,343 2,183 1,803 Net Income $ 5,828 $ 6,138 $ 5,930 $ 5,922 $ 6,089 $ 5,370 $ 5,123 $ 4,358 Net Income Per Common Share $ 0.40 $ 0.42 $ 0.41 $ 0.41 $ 0.44 $ 0.40 $ 0.38 $ 0.32
Net Interest Income Net interest income is the difference between interest income and interest expense and represents the Corporation's gross profit margin. For comparative purposes, the income from tax-exempt securities and loans is adjusted to a tax- equivalent basis. This adjustment, based on statutory federal corporate tax rates of 35 percent in 1993 and 34 percent in 1992 and 1991, causes tax-exempt income and resultant yields to be presented on a basis comparable with income and yields from fully taxable earning assets. The net interest margin represents tax-equivalent net interest income divided by average earning assets. It reflects the average effective rate earned by the Corporation on its average earning assets. Net interest income and the net interest margin are influenced by fluctuations in market rates and changes in both the volume and mix of average earning assets and the liabilities that fund those assets. Table 3 presents average balances, related interest income and expense, and average yield/cost data for each of the last three years. Table 4 reflects changes in interest income and interest expense resulting from changes in average volume and changes due to rates. Consolidated Average Balances/Net Interest Income/Rates* Table 3 Tax-equivalent basis (Dollars in millions) 1993 1992 1991 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 $ 971.1 $ 78.4 8.07% $ 882.6 $ 77.5 8.78% $ 860.7 $ 89.3 10.38% Investment securities: U.S. Treasury 200.1 14.2 7.07 197.5 14.8 7.51 133.7 10.9 8.14 U.S. Government agencies 237.9 17.7 7.46 225.4 18.0 8.00 227.2 18.9 8.29 States and political subdivisions 35.2 2.9 8.18 37.8 3.5 9.33 47.3 4.4 9.37 Corporate debt securities 177.1 12.0 6.80 161.8 12.6 7.77 133.3 11.5 8.64 Other securities 7.1 0.6 7.99 4.6 0.4 8.16 2.0 0.1 6.54 -------- ------ ---- -------- ----- ---- -------- ------ ----- Total investment securities 657.4 47.4 7.21 627.1 49.3 7.86 543.5 45.8 8.42 Money market investments 26.1 1.0 3.87 20.0 1.1 5.47 26.9 1.9 7.10 -------- ------ ---- -------- ----- ---- -------- ------ ----- Total Earning Assets 1,654.6 126.8 7.66 1,529.7 27.9 8.36 1,431.1 137.0 9.57 -------- ------ ---- -------- ----- ---- -------- ------ ----- Allowance for loan losses (13.1) (11.4) (10.1) Cash and due from banks 75.2 69.7 69.8 Premises and equipment 48.2 48.1 47.0 Other assets 43.4 35.9 34.2 -------- ------ ---- -------- ----- ---- -------- ------ ----- Total Assets $1,808.3 $1,672.0 $1,572.0 -------- ------ ---- -------- ----- ---- -------- ------ ----- Liabilities and Shareholders' Equity Time and savings deposits: Interest-checking accounts $ 267.2 $ 7.0 2.63% $ 221.9 $ 7.0 3.17% $ 188.8 $ 8.0 4.25% Regular savings 165.2 4.8 2.89 136.6 4.5 3.26 126.7 5.5 4.33 Money market deposit accounts 343.7 9.8 2.84 303.4 10.9 3.60 219.5 11.3 5.17 Certificates of deposit $100,000 and over 66.1 2.7 4.03 69.3 3.1 4.44 88.7 5.6 6.35 Other time deposits 527.6 21.7 4.11 557.5 29.1 5.22 585.0 41.6 7.10 -------- ------ ---- -------- ----- ---- -------- ------ ----- Total time and savings deposits 1,369.8 46.0 3.35 1,288.7 54.6 4.24 1,208.7 72.0 5.96 -------- ------ ---- -------- ----- ---- -------- ------ ----- Short-term borrowings 15.2 0.4 2.83 15.2 0.3 2.26 21.3 0.9 3.97 Long-term debt 1.6 0.1 5.23 2.8 0.2 5.78 4.2 0.3 7.54 -------- ------ ---- -------- ----- ---- -------- ------ ----- Total Interest-bearing Liabilities 1,386.6 46.5 3.35 1,306.7 55.1 4.22 1,234.2 73.2 5.93 -------- ------ ---- -------- ----- ---- -------- ------ ----- Demand deposits 224.8 196.3 180.9 Other liabilities 11.0 11.6 12.5 -------- ------ ---- -------- ----- ---- -------- ------ ----- Total liabilities 1,622.4 1,514.6 1,427.6 Shareholders' equity 185.9 157.4 144.4 -------- ------ ---- -------- ----- ---- -------- ------ ----- Total Liabilities and Shareholders' Equity $1,808.3 $1,672.0 $1,572.0 -------- ------ ---- -------- ----- ---- -------- ------ ----- Net Interest Income $ 80.3 $ 72.8 $ 63.8 Average Interest Rate Spread Interest Expense 4.31% 4.14% 3.64% as a Percent of Average Earning Assets 2.80% 3.60% 5.11% Net Interest Margin 4.86% 4.76% 4.46% -------- ------ ---- -------- ----- ---- -------- ------ ----- *Fully taxable equivalent income is calculated by dividing actual tax-exempt income by a factor which increases interest income to an amount that would need to be received if such income were taxable at the Federal tax rate of 35% in 1993 and 34% in 1992 and 1991. Loan interest income includes fees of $2,468,000 in 1993; $2,301,000 in 1992; and $1,952,000 in 1991. Loans include non- accrual loan balances and interest accrued, if any.
Tax-equivalent net interest income increased 10 percent in 1993 to $80.3 million from $72.8 million in 1992. This increase occurred as the net interest margin widened to 4.86 percent in 1993 from 4.76 percent in 1992. Once again, in 1993 as in 1992, the impact of assets and liabilities repricing at lower rates was greater on interest expense than on interest income. In 1993, tax- equivalent interest income was $126.8 million, or 1 percent below $127.9 million in 1992. Although average earning assets increased 8 percent in 1993 to $1.655 billion, the yield decreased 70 basis points to 7.66 percent. Interest expense, however, was 16 percent lower in 1993 at $46.5 million as the cost of average interest-bearing liabilities dropped 87 basis points to 3.35 percent. Analysis of Changes in Net Interest Income* Table 4 Tax-equivalent basis (in thousands) Year 1993 over 1992 Year 1992 over 1991 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 $7,439 $(6,533) $906 $2,228 $(14,052) $(11,824) Investment securities: U.S. Treasury, Government agencies, and other 2,489 (3,791) (1,302) 7,174 (2,748) 4,426 States and political subdivisions (233) (415) (648) (881) (19) (900) Money market investments 286 (368) (82) (430) (386) (816) ------ ------- ------ ----- -------- -------- Total Interest Income 9,981 (11,107) (1,126) 8,091 (17,205) (9,114) ------ ------- ------ ----- -------- -------- Interest Expense Time and savings deposits: Interest-checking accounts 1,303 (1,311) (8) 1,260 (2,250) (990) Regular savings 867 (541) 326 407 (1,430) (1,023) Money market deposit accounts 1,332 (2,493) (1,161) 3,605 (4,027) (422) Certificates of deposit $100,000 and over (139) (277) (416) (1,074) (1,479) (2,553) Other time deposits (1,410) (6,001) (7,411) (1,825) (10,617) (12,442) Short-term borrowings 0 87 87 (204) (303) (507) Long-term debt (60) (14) (74) (92) (63) (155) ------ ------- ------ ------ -------- -------- Total Interest Expense 1,893 (10,550) (8,657) 2,077 (20,169) (18,092) ------ ------- ------ ------ -------- -------- Change in Net Interest Income $8,088 $ (557) $7,531 $6,014 $ 2,964 $ 8,978 ------ ------- ------ ------ -------- -------- *The change in interest due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.
Also contributing modestly to the increase in net interest income and the net interest margin was a change in the mix of average earning assets and in the Corporation's funding sources. Loans, which produce higher yields than other earning assets increased to 59 percent of total average earning assets in 1993 from 58 percent in 1992. Also, interest-bearing liabilities as a percent of average earning assets decreased to 84 percent in 1993 from 85 percent in 1992 as the result of growth in non-interest bearing funding sources. Although the net interest margin widened in 1993 compared with 1992, this measure was on a downward trend after peaking at 4.96 percent in the first quarter of 1993. By the fourth quarter of 1993, the net interest margin was 4.74 percent. The decrease resulted as the volume of assets repricing at lower rates began to exceed the volume of repricing liabilities. Changes in the net interest margin in 1994 will be influenced by changes in interest rates and by changes in the mix and volume of average earning assets. Loan demand and growth of the loan portfolio should play a big role. Comparing 1992 with 1991, the disproportionately larger effects of lower interest rates on interest expense relative to interest income was more pronounced than the 1993 effects. Tax-equivalent net interest income increased 14 percent in 1992 to $72.8 million compared with $63.8 million in 1991. The net interest margin rose 30 basis points to 4.76 in 1992 from 4.46 percent in 1991. Earning assets were affected less by declining rates than interest- bearing liabilities, in part, because the investment securities portfolio, which represented 41 percent of average earning assets in 1992, was less sensitive to interest rate changes than other categories of earning assets or interest-bearing liabilities. Provision for Loan Losses The provision for loan losses is the amount charged to expense each year that is intended to maintain an allowance, or reserve, for loan losses in the future. The adequacy of the allowance and, consequently, the provision for loan losses is dependent on a variety of factors including the 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 1993, the Corporation reduced its provision for loan losses significantly to $750 thousand from $3.6 million in both 1992 and 1991. No provision for loan losses was recorded in the second half of 1993 following a determination that the allowance for loan losses was adequate without further additions. The determination was made in consideration of improving trends in loan loss experience, non-performing assets, and general economic conditions. The decision also considered estimated risks in the loan portfolio, expectations for loan growth, and other relevant factors. A discussion of the adequacy of the allowance for loan losses is contained in a subsequent section dealing with the Corporation's financial condition and specifically about the loan portfolio. Although trends for credit quality factors, such as loan losses and non- performing assets, continue to improve, it is likely that the Corporation will resume modest provisions for loan losses in 1994. The principal factor for the resumption is expected growth in the loan portfolio as the result of continued improvement in economic conditions. Non-interest Income Non-interest income includes service charges and other fee related income from services rendered by the Corporation. In addition, non-interest income includes gains and losses realized from the sale of fixed assets, sales and calls of investment securities, and sales of mortgage loans. Non-interest Income Table 5 (in thousands) Years Ended December 31 1993 1992 1991 1990 1989 Trust income $4,037 $3,765 $3,466 $3,367 $2,968 Service charges on deposit accounts 8,350 8,225 7,934 7,285 6,081 Credit insurance income 206 248 298 340 399 Investment securities gains, net 88 50 64 7 37 Mortgage loan sales income 1,932 1,528 597 368 266 Other income 2,317 2,349 2,146 2,285 1,933 ------- ------- ------- ------- ------- Total Non-interest Income $16,930 $16,165 $14,505 $13,652 $11,684 ------- ------- ------- ------- -------
Non-interest income increased 5 percent in 1993 to $16.9 million from $16.2 million in 1992. The increase in non-interest income was led by trust income, which increased 7 percent to $4.0 million, and mortgage loan sales income, which increased 26 percent to $1.9 million. Both sources of income increased on the strength of higher volumes of business. In the case of mortgage loan sales income, a continuation from 1992 of low mortgage loan rates led to increased loan refinance activity in 1993. The refinance activity was greater than expected in 1993 and may diminish in 1994. Additional emphasis will be placed on originating mortgages from home sales to replace a portion of the refinance activity. Non-interest income increased 11 percent in 1992 to $16.2 million from $14.5 million in 1991. As in 1993, this increase was led by trust income and mortgage loan sales income. Trust fees increased 9 percent to $3.8 million, and mortgage loan sales income more than doubled in 1992 to $1.5 million from $597 thousand in 1991. Also contributing to the 1992 increase in non-interest income were deposit account fees, which rose 4 percent compared with 1991. Non-interest Expense Non-interest expense represents the overhead expenses of the Corporation. The Corporation actively monitors all categories of non-interest expense in an attempt to improve productivity and earnings performance. Non-interest Expense Table 6 (Dollars in thousands) Years Ended December 31 1993 1992 1991 1990 1989 Salaries and employee benefits $33,803 $30,795 $29,927 $28,809 $27,299 Occupancy expense, net 4,556 4,449 4,224 4,261 3,870 Equipment expense 5,616 5,027 4,267 4,200 3,687 F.D.I.C. assessments 3,549 3,272 2,838 1,566 1,049 Office supplies 1,068 1,031 1,024 1,134 1,350 Postage 1,160 1,121 1,189 1,078 1,059 Telephone expense 1,412 1,281 1,285 1,310 1,226 Other expense 8,658 6,526 5,591 5,803 5,540 ------- ------- ------- ------- ------- Total Non-interest Expense $59,822 $53,502 $50,345 $48,161 $45,080 ------- ------- ------- ------- ------- Operating Efficiency Ratio* 61.5% 60.1% 64.3% 64.1% 60.9% ------- ------- ------- ------- ------- *Total non-interest expense as a percent of net interest income (tax-equivalent basis) and total non-interest income. In 1993, non-interest expense increased an unusually high 12 percent to $59.8 million. The added expenses in all categories from two mergers accounted for as purchases contributed to the above normal increase in non-interest expense. Personnel expense and other expense led the increase in non-interest expense, increasing 10 percent and 32 percent, respectively. The single largest increase in other expense was writedowns on foreclosed properties, which rose to $1.1 million in 1993 from $393 thousand in 1992. Comparing 1993 with 1992, contributions and acquisition related expenses rose $427 thousand and $246 thousand, respectively. Also increasing by large percentage amounts and contributing to the increase in non-interest expense were equipment expense, which increased 12 percent, and telephone expense which rose 10 percent. Contributing less significantly to the 1993 increase in non-interest expense were occupancy expense, office supplies, and postage, each of which increased less than 4 percent over the respective 1992 amounts. In 1992, non-interest expense totaled $53.5 million, or 6 percent above the 1991 total of $50.3 million. The largest dollar increase in 1992 over 1991 was personnel expense, which was up only 3 percent over the 1991 total. Larger percentage increases were recorded in 1992 in equipment expense, up 18 percent, F.D.I.C. assessments, up 15 percent, and other expense, up 17 percent. Income Taxes The provision for income tax expense was $11.3 million in 1993 and $9.1 million in 1992. In 1991, income tax expense was $6.1 million. The provision for income taxes was affected in 1993 by higher operating earnings, an increase in the federal corporate income tax rate to 35 percent, and a change in the accounting method for deferred income taxes. The change in accounting methods resulted from the implementation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which is described in Notes 1 (F) and 6 of the Notes to Consolidated Financial Statements. The cumulative effect of this change was immaterial and was included in the provision for income taxes. Higher income tax expense in 1992 compared with 1991 was attributable principally to higher operating earnings. Financial Condition The Corporation's financial condition is measured in terms of its asset and liability composition, asset quality, capital resources, and liquidity. Deposit growth, which is the Corporation's principal funding source, was influenced in 1993 by a comparatively low interest rate environment and by depositors who shifted funds into investments with more attractive yields than deposits. The lower rates and generally improving economic trends led to improvements in asset quality, with reductions recorded both in net loan losses and non- performing assets. The improving economy, however, produced little in the way of a positive trend in loan growth. These and other factors affecting the Corporation's financial condition are discussed in more detail in the sections that follow. Assets On December 31, 1993, total assets amounted to $1.886 billion, or 5 percent above the year earlier total of $1.795 billion. Average total assets increased 8 percent to $1.808 billion from the 1992 average of $1.672 billion. The higher growth rate in average assets principally reflected the effects of assets acquired in the December 1992 merger of The Peoples Bank of Front Royal. Loan Portfolio Table 7 (Dollars in thousands) Book Value December 31 1993 1992 1991 1990 1989 Loan Classification: Commercial, financial, and agricultural $385,137 39.0% $366,282 38.6% $302,713 34.9% $325,831 37.6% $350,090 37.5% Real estate-construction 95,412 9.7 104,546 11.0 80,429 9.3 87,654 10.1 126,993 13.6 Real estate-mortgage 280,390 28.4 266,093 28.0 258,479 29.8 242,032 28.0 238,311 25.5 Instalment 226,344 22.9 212,946 22.4 225,605 26.0 210,146 24.3 218,706 23.4 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total Loans $987,283 100.0% $949,867 100.0% $867,226 100.0% $865,663 100.0% $934,100 100.0% -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Loan Portfolio Loans, net of unearned income increased 4 percent to $987 million on December 31, 1993, from $949 million one year earlier. Average loans, net of unearned income, which also were influenced by the December 1992 merger, increased 10 percent to $971 million in 1993 from $883 million in 1992. Loan growth in 1993 was relatively balanced with no single category providing a dominant lead. The largest segment of the loan portfolio, commercial loans, increased 5 percent to $385 million at year-end 1993 from $366 million one year earlier. Mortgage lending rose to $280 million at year-end 1993 from $266 million at year-end 1992, also a 5 percent increase. The consumer instalment portion of the loan portfolio totaled $226 million on December 31, 1993, 6 percent higher than $213 million one year earlier. Real estate construction loans decreased from the year-end 1992 total of $105 million to $95 million on December 31, 1993. Remaining Maturities of Selected Loans Table 8 (in thousands) Commercial, Financial, and Real Estate- December 31, 1993 Agricultural Construction Within 1 year $102,905 $34,361 -------- ------- Variable Rate: 1 to 5 years 92,357 14,449 After 5 years 81,961 23,381 -------- ------- Total 174,318 37,830 -------- ------- Fixed Rate: 1 to 5 years 66,102 14,116 After 5 years 41,812 9,105 -------- ------- Total 107,914 23,221 -------- ------- Total Maturities $385,137 $95,412 -------- ------- A number of economic factors in conjunction with loan activity late in 1993 suggest that loan growth in 1994 should be more vibrant than it was in 1993. Although interest rates are above the floors they reached in 1993, they remain at reasonable levels for borrowers. New home construction is increasing as are home sales. Auto sales were up sharply in 1993, and the forecast is for continued strength. The economy is creating new jobs and beginning to absorb some of the unemployment that was created in the recession and the business restructuring of prior years. Importantly, reports suggest that borrowers are showing signs of a willingness to incur new debt after a period of reluctance. These factors, while positive, did not result in a clearly defined trend of loan growth in 1993, but do represent the necessary elements for growth in 1994. On December 31, 1993, 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, however, loan collateral is predominately real estate related. Adjustments in the real estate markets have led in some cases to lower collateral values, and in 1993 writedowns with respect to foreclosed properties totaled $1.1 million. The Corporation carefully monitors its exposure to risk from construction and development loans, commercial real estate loans, and residential lending. The Corporation does not engage in foreign lending activities. Consequently, the loan portfolio is not exposed to risk from foreign credits. With respect to credit quality, the Corporation's past performance has been a source of financial strength. Net loan losses in 1993 of $836 thousand were a relatively insignificant .09 percent of average loans, net of unearned income. This ratio was .24 percent and .29 percent in 1992 and 1991, respectively. In each of the last five years, the Corporation's loan loss ratios compared very favorably with peer group averages. For bank holding companies with total assets between $1 billion and $3 billion, loan loss ratios in the years 1989 through 1992 have ranged from .70 percent to 1.04 percent of average loans. Based on statistical information for the first nine months of 1993, the peer group average is expected to be approximately .50 percent in 1993. Summary of Loan Loss Experience Table 9 (Dollars in thousands) Years Ended December 31 1993 1992 1991 1990 1989 Allowance at Beginning of Year $ 12,698 $ 10,655 $ 9,536 $ 9,278 $ 8,361 Loan Losses: Commercial, financial, and agricultural 514 723 998 1,361 482 Real estate-construction - 90 100 303 - Real estate-mortgage 58 51 535 80 40 Instalment 628 1,592 1,125 1,207 1,114 -------- -------- ------- ------- ------ Total Loan Losses 1,200 2,456 2,758 2,951 1,636 -------- -------- ------- ------- ------ Recoveries: Commercial, financial, and agricultural 58 29 53 7 5 Real estate-construction 6 47 - 111 - Real estate-mortgage 38 9 - 7 - Instalment 262 263 224 200 235 -------- -------- ------- ------- ------ Total Recoveries 364 348 277 325 240 -------- -------- ------- ------- ------ Net Loan Losses 836 2,108 2,481 2,626 1,396 Increase from Acquisitions 123 551 - - - Provision Charged to Expense 750 3,600 3,600 2,884 2,313 -------- -------- ------- ------- ------- Allowance at End of Year $ 12,735 $ 12,698 $ 10,655 $ 9,536 $9,278 -------- -------- ------- ------- ------ Loans, Net of Unearned Income: Outstanding at year-end $986,973 $949,027 $866,882 $864,832 $932,238 Average 971,065 882,582 860,665 910,649 894,163 Ratios: Net loan losses to average loans 0.09% 0.24% 0.29% 0.29% 0.16% Allowance to year-end loans 1.29% 1.34% 1.23% 1.10% 1.00% Allowance to net loan losses 15.23X 6.02X 4.30X 3.63X 6.65X Provision to net loan losses .90X 1.71X 1.45X 1.10X 1.66X Provision to average loans 0.08% 0.41% 0.42% 0.32% 0.26% Recoveries to loan losses 30.33% 14.17% 10.04% 11.01% 14.67%
Continued positive economic conditions and an assessment of the loan portfolio and problem assets suggest that loan losses in 1994 should not be materially greater than those in 1993. At such relatively low levels of loan losses as were experienced in 1993, however, a minor dollar fluctuation in losses could represent a large percentage increase. Loan loss expectations for 1994 are influenced by economic forecasts of continued growth and moderate interest rates. Financial circumstances of individual borrowers also will affect loan loss results. Unforeseen changes, either in economic conditions or borrowers' financial conditions, could also impact actual loan losses in 1994. The Corporation will maintain and follow its policies and practices intended 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, 1993, totaled $13.7 million, or 1.4 percent of loans, net of unearned income. At December 31, 1992, the total was $13.1 million, also 1.4 percent of loans, net of unearned income. Foreclosed properties at December 31, 1993, were $8.8 million compared with the year earlier total of $11.7 million. Foreclosed properties are reported net of write-downs at the lower of cost or current appraised market value. At December 31, 1993, total risk elements represented 2.3 percent of loans, net of unearned income plus foreclosed properties and 1.2 percent of total assets. These ratios at the end of 1992 were 2.6 percent and 1.4 percent, respectively. At year-end 1993, the Corporation identified an additional $4.2 million as potential problem loans. These loans pose some uncertainty over the borrowers' ability to comply with loan repayment terms. Risk Elements Table 10 (Dollars in thousands) Book Value December 31 1993 1992 1991 1990 1989 Loans: Non-accrual $ 8,514 $ 9,765 $ 11,996 $ 4,650 $ 2,988 Troubled debt restructurings - - - - - Past due principal and/or interest for 90 days or more 5,140 3,343 3,915 3,191 7,153 ------- ------- ------- ------- ------- Total $13,654 $13,108 $15,911 $ 7,841 $10,141 ------- ------- ------- ------- ------- As a Percent of: Loans, net of unearned income 1.38% 1.38% 1.84% 0.91% 1.09% Total assets 0.72% 0.73% 0.98% 0.51% 0.66% Allowance for loan losses 107.22% 103.23% 49.33% 82.23% 109.30% Foreclosed Properties $ 8,811 $ 11,704 $ 9,018 $ 6,469 $ 2,011 ------- ------- ------- ------- ------- Total Risk Elements $22,465 $24,812 $24,929 $14,310 $12,152 ------- ------- ------- ------- ------- As a Percent of: Loans, net of unearned income plus foreclosed properties 2.26% 2.58% 2.85% 1.64% 1.30% Total assets 1.19% 1.38% 1.53% 0.93% 0.80% ------- ------- ------- ------- ------- For the years ended December 31, 1993, 1992, and 1991, gross interest income in the amount of $831,000, $753,000 and $1,018,000, respectively, would have been recorded on loans reported as non-accrual if the loans had been current in accordance with their original terms and conditions. The amount of interest income on those loans that was included in net income amounted to $746,000, $89,000 and $611,000 in 1993, 1992, and 1991, respectively. The Corporation has identified additional loans with potential problems totaling $4,179,000 at December 31, 1993. Investment securities also may pose credit risks. On December 31, 1993, all investment securities were performing according to terms. With regards to the non-accrual loans identified in Table 10, the amounts classified in this category represent loan balances on which the accrual of interest has been discontinued. The year-end 1993 total includes 44 loans. The largest exposure to a single borrower is $2.8 million, which consists of 3 separate loans. Only 7 other loans have balances greater than $200,000. 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 scrutinize each individual loan situation of any appreciable magnitude and its potential for collection prior to classifying any loan as non-accrual. Included in the $8.8 million total of foreclosed properties at December 31, 1993, were 38 parcels of real estate. The highest carrying value of a single property was $1.9 million. Only 6 other parcels included in foreclosed properties at year-end 1993 had carrying values above $400 thousand. The Corporation maintains a general allowance for loan losses and does not allocate its allowance for loan losses to individual categories for management purposes. Table 11 shows an allocation among loan categories based upon an analysis of the portfolio's composition, historical loan loss experience, and other relevant factors. In determining the adequacy for loan losses, management considers the size and composition of the loan portfolio, historical loss experience, economic conditions, the value and adequacy of collateral and guarantors, and the current level of the allowance. In addition, consideration is given to potential losses associated with non-accrual loans, and loans that are deemed to be potential problems. Allowance for Loan Losses Table 11 (Dollars in thousands) 1993 1992 1991 1990 December 31 Amount Percent Amount Percent Amount Percent Amount Percent Allowance for Loan Losses: Commercial, financial, and agricultural $ 4,936 38.8% $ 5,093 40.1% $ 3,750 35.2% $4,921 51.6% Real estate-construction 1,254 9.9 1,583 12.5 1,400 13.1 696 7.3 Real estate-mortgage 640 5.0 896 7.1 1,050 9.9 267 2.8 Instalment 5,597 43.9 4,708 37.1 3,600 33.8 3,652 38.3 Unallocated 308 2.4 418 3.2 855 8.0 - - ------- ----- ------- ----- -------- ----- ------ ----- Total Allowance for Loan Losses $12,735 100.0% $12,698 100.0% $ 10,655 100.0% $9,536 100.0%
Based on the factors enumerated above, in the third quarter of 1993, management determined that the allowance for loan losses was adequate without further addition. Thus, in the second half of 1993, no additional provision for loan losses was charged to expense. At December 31, 1993, the allowance for loan losses was $12.7 million or 1.29 percent of loans, net of unearned income. A year earlier the allowance was also $12.7 million, or 1.34 percent of loans, net of unearned income. At its year-end 1993 level, the allowance for loan losses exceeded the sum of net loan losses over the previous seven years. At that level, management believed that the allowance was adequate, subject to unforeseen economic changes or unexpected regulatory developments. Investment Securities Investment securities represent the second largest component of earning assets. On December 31, 1993, investment securities totaled $704 million, 7 percent higher than the 1992 year-end total of $656 million. At year-end 1993, investment securities represented 37 percent of total assets, which was the same level as year-end 1992. Increases in the investment securities portfolio in both 1993 and 1992 were made in the absence of adequate loan demand. Investment Portfolio Table 12 Tax-equivalent basis (Dollars in thousands) U.S. Gov't./Agency State/Municipal Other Total Weighted Weighted Weighted Weighted Book Average Book Average Book Average Book Market Average December 31, 1993 Value Yield Value Yield Value Yield Value Value Yield Maturities: Within 1 year $ 87,992 8.07% $12,164 6.72% $ 56,591 6.91% $156,747 $159,943 7.54% After 1 year, but within 5 years 391,717 6.56 14,503 9.03 132,520 5.94 538,740 556,081 6.48 After 5 years, but within 10 years - - 2,226 7.75 1,255 7.73 3,481 3,764 8.40 After 10 years - - 1,436 8.52 3,914 6.87 5,350 5,544 7.36 -------- ---- ------- ---- -------- ---- -------- -------- ---- Total $479,709 6.84% $30,329 7.98% $194,280 6.25% $704,318 $725,332 6.73% -------- ---- ------- ---- -------- ---- -------- -------- ---- December 31, 1992 $440,725 7.53% $42,918 8.78% $172,146 7.34% $655,789 $679,142 7.56% December 31, 1991 $390,677 8.07% $42,988 9.33% $156,910 8.01% $590,575 $616,658 8.14%
Growth in the securities portfolio in 1993 was led by U.S. Government Agency securities and corporate debt securities. Government Agencies increased 21 percent, or $47 million over the year-end 1992 total. Corporate debt securities were up 12 percent at year-end 1993, or $20 million above the December 31, 1992 total. U.S. Treasury securities and securities issued by states and political subdivisions decreased at year-end 1993 compared with the year earlier totals. Contrary to the 1993 pattern, the largest portion of the investment portfolio's growth in 1992 occurred in U.S. Treasury securities, which increased $44 million, or 26 percent. Also contributing to the portfolio's 1992 growth were corporate debt securities, which increased $11 million, or 7 percent. U. S. Government Agency securities increased $7 million, and securities issued by states and political subdivisions were level with the year earlier total. On December 31, 1993, the weighted average yield of the investment securities portfolio was 6.73 percent compared with 7.56 percent on December 31, 1992. Throughout 1993, maturing investment securities were reinvested in securities with then current and lower yields. Thus, the portfolio's yield will continue to fall until current interest rates rise to equal or exceed rates on maturing investments. On December 31, 1993, the market value of the investment securities portfolio was 103.0 percent of its book value compared with 103.6 percent on December 31, 1992. At year-end 1993, the portfolio had $21 million in net unrealized gains. Gross amounts of appreciation and depreciation for each category of investment securities are included in Note 3 of the Notes to Consolidated Financial Statements. Quality ratings of the Corporation's corporate debt securities appear in Table 13. At December 31, 1993, the Corporation held no concentration of 10 percent or greater of its shareholders' equity in securities of any single issuer. Corporate Debt by Quality Rating Table 13 (Dollars in thousands) Book December 31, 1993 Value Percent Moody's Rating Aaa $ 12,996 7.0% Aa1 4,500 2.4 Aa2 6,002 3.2 Aa3 5,190 2.8 A1 36,641 19.6 A2 84,960 45.5 A3 26,937 14.5 NR 9,361 5.0 -------- ----- Total $186,587 100.0% -------- ----- Investment securities are purchased with the intent to hold them until maturity and are accounted for at amortized cost. Sales from the portfolio are inconsequential and may occur as the result of unforeseen conditions such as deterioration in an issuer's credit standing. Also, certain securities which are acquired in mergers, may be sold if they are inconsistent with the Corporation's portfolio objectives. Money Market Investments Short-term money market investments totaled million at year-end 1993 compared with $26 million one year earlier. In 1993, short-term investments averaged $26 million compared with $20 million in 1992. Liabilities The Corporation relies almost exclusively on core deposits to fund its earning assets. Deposits Total deposits on December 31, 1993, were $1.626 billion, or 2 percent above the year earlier total of $1.595 billion. Deposit growth in 1993 was affected by comparatively low interest rates and the consequent movement of funds out of deposit accounts and into alternative investments. In addition to moving funds out of deposit accounts, depositors continued to shift funds to more liquid, transaction-type accounts. Non-interest bearing demand deposits increased 7 percent to $247 million on December 31, 1993, from $232 million one year earlier. Average balances for these accounts increased at a stronger rate of 15 percent to $225 million in 1993. In this case, average balances reflect the effects of the December 1992 merger as well as a deposit trend that was building during the years of 1992 and 1993. In addition, lower rate interest-checking and regular savings accounts increased 12 percent and 17 percent, respectively, in year-end comparisons between 1993 and 1992. In a contrary fashion, money market deposit accounts at year-end 1993 were below the year earlier level. Consumer certificates of deposit showed mixed results based on varying maturities. The overall trend however, was a 5 percent decrease to $515 million at year-end 1993 from the year earlier total of $544 million. In contrast with the downward trend in consumer certificates, five-year certificates of deposit, which the Corporation first began issuing late in the first quarter of 1993, generated $14 million in deposits. Balances held in certificates of deposit of $100,000 and over decreased to $64 million at year-end 1993 from the year earlier total of $69 million. Overall, total interest-bearing deposits increased one percent to $1.379 billion on December 31, 1993. Certificates of Deposit $100,000 and Over Table 14 (in thousands) December 31, 1993 Balance Remaining Maturities: Within 3 months $37,915 3 to 6 months 8,688 6 to 12 months 6,739 After 12 months 11,065 ------- Total $64,407 ------- In 1992, deposit trends were very similar to those in 1993. Deposit growth was concentrated in non-interest bearing demand deposits and interest-bearing transaction accounts. The effects of lower interest rates on consumer certificates were more pronounced in 1992 as these balances, exclusive of merger related additions, fell 14 percent in 1992. Debt Short-term borrowings totaled $54 million on December 31, 1993, compared with $11 million at year-end 1992. The increase in 1993 reflected borrowings to satisfy normal reserve requirements. Total short-term borrowings averaged $15 million in both 1993 and 1992. Table 15 summarizes the Corporation's position with respect to federal funds purchased and securities sold under agreements to repurchase. Short-term Borrowings Table 15 (Dollars in thousands) 1993 1992 1991 Interest Interest Interest Balance Rate Balance Rate Balance Rate Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Outstanding at year-end $53,832 2.79% $10,634 1.58% $16,842 1.97% Average outstanding for the year 14,876 1.94 14,663 1.98 20,708 3.74 Maximum outstanding at any month-end 53,832 - 23,924 - 28,339
Long-term debt totaled $1 million at year-end 1993 and $2 million one year earlier. Additional information concerning long-term debt is contained in Note 8 of the Notes to Consolidated Financial Statements. Capital Resources Total shareholders' equity on December 31, 1993, of $192 million was 10 percent above $175 million at year-end 1992. Shareholders' equity averaged $186 million in 1993, 18 percent above the 1992 average of $157 million. Average shareholders' equity as a percent of average total assets was 10.3 percent in 1993 and 9.4 percent in 1992. Both ratios are above peer and industry averages. The Federal Reserve mandates minimum capital requirements for bank holding companies. In 1990, the Federal Reserve adopted a risk based capital measure to determine capital adequacy. Under this system all balance sheet assets are assigned a certain risk category with a prescribed weight. Off-balance sheet items, such as loan commitments and letters of credit, are also classified by risk with duly assigned weights. The sum of the balance sheet and off-balance sheet amounts multiplied by their respective risk weight factors must then meet a required minimum capital test. Tier 1 Capital is defined as shareholders' equity minus certain intangible assets. Tier 2 Capital includes a certain amount of the allowance for loan losses. At December 31, 1993, the minimum Tier 1 Capital ratio was 4 percent and the minimum Total Capital ratio was 8 percent. The Corporation's Tier 1 ratio of 15.14 percent and its Total Capital ratio of 16.18 percent were well in excess of minimum requirements. The Federal Reserve also utilizes a Tier 1 leverage ratio in conjunction with its risk based capital standard. This ratio measures Tier 1 Capital as a percent of total average assets less intangible assets. The minimum leverage ratio is 3 percent. At December 31, 1993, the Corporation's Tier 1 leverage ratio was 10.01 percent. The Comptroller of the Currency has adopted similar requirements that affect the Corporation's bank subsidiary. The bank also exceeds all minimum requirements. Risk-Based Capital Table 16 (in thousands) December 31 1993 1992 1991 Tier 1 Capital: Common shareholders' equity $ 191,650 $ 175,006 $ 149,225 Less intangible assets (6,115) (5,987) (1,681) ----------- ----------- ---------- Total Tier 1 capital 185,535 169,019 147,544 ----------- ----------- ---------- Tier 2 Capital: Allowable allowance for loan losses 12,735 12,698 10,655 ----------- ----------- ---------- Total Tier 2 capital 12,735 12,698 10,655 ----------- ----------- ---------- Total Capital $ 198,270 $ 181,717 $ 158,199 ----------- ----------- ---------- Risk-weighted assets $1,225,157 $1,187,255 $1,130,951 Tangible quarterly average assets 1,837,826 1,711,174 1,606,493 Risk-based Capital Ratios: Tier 1 capital 15.14% 14.24% 13.05% Total capital 16.18% 15.31% 13.99% Tier 1 leverage 10.01% 9.88% 9.18% Following the close of business on February 11, 1993, People's Bank of Virginia Beach merged into Jefferson National Bank. People's Bank's shareholders were entitled to receive .1333 share of the Corporation's common stock or $4 in cash for each People's Bank share. The Corporation issued 34,608 shares of its common stock and paid $562 thousand in cash in the transaction. The merger was accounted for as a purchase. On January 11, 1994, the Corporation announced a merger plan with Bank of Loudoun. Under the terms of the agreement, the Corporation would exchange one share of its common stock for each share of Bank of Loudoun common stock. At year-end 1993, Bank of Loudoun had approximately 502 thousand shares outstanding. If completed, the merger is expected to be accounted for as a pooling of interests. On December 31, 1993, Bank of Loudoun had total assets of $57 million and shareholders' equity of approximately $5 million. From time to time, the Corporation purchases shares of its own common stock directly from shareholders and from brokers and dealers. In 1993, the Corporation purchased 53,618 shares at a cost of $1.1 million. In 1992, the Corporation purchased only 1,107 shares at a cost of $29 thousand. The volume of share repurchases in any year is determined by the financial advantages to the Corporation. Purchases are made in accordance with applicable securities laws, regulations, and internal policy considerations. Selected Capital and Dividend Data Table 17 Years Ended December 31 1993 1992 1991 1990 1989 Per Share Data: Number of shares outstanding at year-end 14,578,957 7,225,854 6,736,223 6,742,931 6,954,031 Average number of shares outstanding* 14,559,277 13,573,776 13,422,918 13,762,994 13,874,002 Book value at year-end* $13.15 $12.11 $11.08 $10.39 $9.75 Net income* 1.64 1.54 1.18 1.10 1.22 Dividends declared* .62 .53 .50 .50 .50 Dividends Declared as a Percent of Net Income 37.8% 34.3% 42.2% 45.5% 41.0% Shareholders' Equity (Average) as a Percent of Average: Loans-net of unearned income 19.1 17.8 16.8 15.3 14.6 Total assets 10.3 9.4 9.2 9.1 8.9 Total deposits 11.7 10.6 10.4 10.4 10.1 Internal Capital Generation: Return on Average Assets 1.32 1.25 1.01 1.00 1.15 Multiplied by Average Assets to Average Equity 9.7 10.6 10.9 10.9 11.3 ---- ---- ---- ---- ---- Return on Average Equity 12.8 13.3 11.0 10.9 13.0 Multiplied by Earnings Retained 62.2 65.7 57.8 54.5 59.0 ---- ---- ---- ---- ---- Internal Capital Generation Rate 8.0% 8.7% 6.4% 6.0% 7.7% ---- ---- ---- ---- ---- *Adjusted to reflect a 2-for-1 stock split distributed April 30, 1993
The Corporation's common stock is traded in the over-the-counter market and is quoted on NASDAQ's (National Association of Securities Dealers Automated Quotation System) National Market System under the trading symbol JBNK. Table 18 presents the market prices and dividends of the Corporation's common stock for each quarter in 1993 and 1992. Quarterly dividends were increased twice in 1993 and once in 1992. On December 31, 1993, the book value of a share of common stock was $13.15, 9 percent higher than $12.11 on December 31, 1992. Common Stock Performance and Dividends Table 18 Common Stock Price 1993 1992 Dividends Per Share High Low High Low 1993 1992 First Quarter $21.00 $16.63 $13.50 $12.38 $.15 $.125 Second Quarter 21.00 18.00 15.25 12.00 .15 .135 Third Quarter 23.00 20.00 15.00 13.25 .15 .135 Fourth Quarter 21.00 18.75 17.75 14.13 .17 .135 ------ ------ ------ ------ ---- ----- Years Ended December 31 $23.00 $16.63 $17.75 $12.00 $.62 $.530 ------ ------ ------ ------ ---- ----- Jefferson Bankshares common stock is traded in the over-the-counter market and is quoted in the National Market System of the National Association of Securities Dealers Automated Quotation System where Jefferson Bankshares' symbol is JBNK. Dividend restrictions are discussed in Notes 8 and 13 of the Notes to Consolidated Financial Statements. On January 31, 1994, there were approximately 8,145 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. A related concern of liquidity management is interest rate sensitivity. Changes in interest rates may affect both funding requirements, as well as the relative liquidity of certain assets. As such, the Corporation has acted to structure its asset portfolio to match more closely the maturities and repricing patterns of its liabilities. Loan pricing policies have been structured to emphasize adjustable rate loans, both in the commercial and instalment lending areas. Also, the average maturity of the investment securities portfolio is of a relatively short duration. On December 31, 1993, approximately $762 million, or 45 percent of total earning assets, was due to mature or reprice within the next year. Table 19 demonstrates the relationship between interest sensitive assets and interest sensitive liabilities on December 31, 1993. Interest Sensitivity Analysis* Table 19 (in thousands) Over 3 Over 6 Over 1 Months Months Total Year and 3 Months Through Through Within Not or Less 6 Months 12 Months 1 Year Classified Total December 31, 1993 Earning Assets Loans-net $ 454,932 $ 32,310 $113,569 $600,811 $386,162 $ 986,973 Investment securities 15,574 47,776 93,397 156,747 547,571 704,318 Money market investments - 4,805 - 4,805 - 4,805 --------- --------- -------- -------- -------- ---------- Total Earning Assets 470,506 84,891 206,966 762,363 933,733 1,696,096 --------- --------- -------- -------- -------- ---------- Interest-bearing Liabilities Money market deposit accounts 334,583 - - 334,583 - 334,583 Certificates of deposit $100,000 and over 37,915 8,688 6,739 53,342 11,065 64,407 All other time deposits 202,325 100,601 87,263 390,189 590,014 980,203 Short-term borrowings 54,098 - - 54,098 - 54,098 Long-term debt 1,213 - - 1,213 - 1,213 --------- --------- -------- -------- -------- ---------- Total Interest-bearing Liabilities 630,134 109,289 94,002 833,425 601,079 1,434,504 --------- --------- -------- -------- -------- ---------- Net Non-interest- bearing Liabilities - - - - 261,592 261,592 --------- --------- -------- -------- -------- ---------- Interest Sensitivity Gap Asset Sensitive (Liability Sensitive) $(159,628) $ (24,398) $112,964 $ (71,062) $ 71,062 $ - --------- --------- -------- ---------- -------- ------- Cumulative Gap $(159,628) $(184,026) $(71,062) $ (71,062) $ - $ - --------- --------- -------- ---------- -------- ------- *Remaining maturity if fixed rate; earliest possible repricing interval if floating rate
Accounting Rule Changes In February 1992, the Financial Accounting Standards Board issued Statement No. 109, Accounting for Income Taxes. Statement No. 109, which was effective for years beginning after December 15, 1992, changes the method of accounting for income taxes from the deferred method to the asset and liability method. The Corporation adopted this statement prospectively in 1993 and has included the cumulative effect of this change in accounting principle in the provision for income taxes in the 1993 consolidated statement of income. The effect of the change was immaterial. In November 1992, Statement of Financial Accounting Standards No. 112, Employers' Accounting for Post Employment Benefits, was issued. This statement applies to post employment benefits provided to former or inactive employees after employment but before retirement, except for benefits covered under other rules. The statement is effective for years beginning after December 15, 1993. The effects of this statement on the Corporation's consolidated financial statements are not expected to be material. In May 1993, Statement No. 114, Accounting by Creditors for the Impairment of a Loan, was issued. This statement requires impaired loans to be measured at the present value of expected future cash flows discounted at the loan's effective interest rate. The impairment amount would be the excess of the recorded investment in the loan over the resulting present value amount. Under certain circumstances, collateral value may be substituted for discounted expected future cash flows. This Statement is effective for years beginning after December 15, 1994. The Corporation has not yet determined what effect this statement will have on its consolidated financial statements. In May 1993, Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, was issued. Statement 115 addressed the accounting for investments in certain equity and all debt securities. Under this Statement, investments will be classified into three categories: Held-to-Maturity Securities; Trading Securities; and Available-for-Sale Securities. The Statement is effective for years beginning after December 15, 1993. The Corporation will adopt this Statement in the first quarter of 1994. Although the Corporation has the intent and ability to hold its investment securities until maturity, certain securities will be placed in the category Available-for-Sale for potential liquidity and regulatory purposes. In accordance with Statement 115, these securities will be reported at fair value in the Corporation's consolidated financial statements, and the unrealized gains and losses will be excluded from earnings and reported as a separate component of shareholders' equity net of tax effects. If such classification had been made at December 31, 1993, securities with a book value of approximately $200 million would have been classified as Available-for-Sale. At that date the fair value of those securities exceeded their book value by $8 million. Such adjustment, net of tax effects, would have increased shareholders' equity approximately $5 million. Independent Auditors' Report Certified Public Accountants Suite 1900 1021 East Cary Street Richmond, Virginia 23219 The Board of Directors Jefferson Bankshares, Inc.: We have audited the consolidated balance sheets of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1993 and 1992, 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, 1993. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferson Bankshares, Inc. and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Notes 1(F) and 6 to the consolidated financial statements, in 1993, the Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." KPMG Peat Marwick January 18, 1994 Consolidated Balance Sheets (Dollars in thousands) December 31 1993 1992 Assets Cash and due from banks (Note 11) $ 111,493 $ 82,071 Federal funds sold and other money market investments 4,805 25,934 Investment securities (Note 3): U.S. Treasury 203,400 211,727 U.S. Government agencies 276,309 228,998 States and political subdivisions 30,329 42,918 Corporate debt securities 186,587 166,407 Other securities 7,693 5,739 ---------- ---------- Total investment securities (market value of $725,332 in 1993 and $679,142 in 1992) 704,318 655,789 ---------- ---------- Loans (Note 4) 987,283 949,867 Less: Unearned income (310) (840) Allowance for loan losses (Note 5) (12,735) (12,698) ---------- ---------- Net loans 974,238 936,329 ---------- ---------- Premises and equipment, net (Note 7) 47,756 48,368 Other assets 42,894 46,822 ---------- ---------- Total Assets $1,885,504 $1,795,313 ---------- ---------- Liabilities Deposits: Demand $ 247,107 $ 231,759 Interest-checking 286,525 255,260 Regular savings 178,504 152,008 Money market deposit accounts 334,583 342,390 Certificates of deposit $100,000 and over 64,407 69,252 Other time deposits 515,174 544,241 ---------- ---------- Total deposits 1,626,300 1,594,910 Federal funds purchased and securities sold under agreements to repurchase 53,832 10,634 Other short-term borrowings 266 271 Other liabilities 12,243 12,361 Long-term debt (Note 8) 1,213 2,131 ---------- ---------- Total Liabilities 1,693,854 1,620,307 ---------- ---------- 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 in 1993 and 16,000,000 shares in 1992; issued and outstanding 14,578,957 shares in 1993 and 7,225,854 shares in 1992 36,447 18,065 Capital surplus 40,215 37,626 Retained earnings 114,988 119,315 ---------- ---------- Total Shareholders' Equity (Notes 2, 8, 9, 10, 13, and 14) 191,650 175,006 ---------- ---------- Commitments and contingent liabilities (Notes 7, 11, and 14) Total Liabilities and Shareholders' Equity $1,885,504 $1,795,313 ---------- ---------- See accompanying notes to consolidated financial statements Consolidated Statements of Income (in thousands except per share data) Years Ended December 31 1993 1992 1991 Interest Income Interest and fees on loans $77,816 $76,823 $88,361 Income on investment securities: U.S. Treasury 14,143 14,828 10,886 U.S. Government agencies 17,742 18,022 18,831 States and political subdivisions (tax-exempt) 1,886 2,343 2,938 Corporate debt securities 12,038 12,568 11,517 Other securities 565 371 128 Other interest income 1,015 1,098 1,913 -------- -------- -------- Total Interest Income 125,205 126,053 134,574 -------- -------- -------- Interest Expense Interest-checking 7,020 7,028 8,018 Regular savings 4,780 4,454 5,478 Money market deposit accounts 9,764 10,925 11,346 Certificates of deposit $100,000 and over 2,662 3,078 5,630 Other time deposits 21,701 29,111 41,553 Short-term borrowings 429 342 850 Long-term debt 86 160 315 -------- -------- -------- Total Interest Expense 46,442 55,098 73,190 -------- -------- -------- Net Interest Income 78,763 70,955 61,384 Provision for loan losses (Note 5) 750 3,600 3,600 -------- -------- -------- Net Interest Income After Provision for Loan Losses 78,013 67,355 57,784 -------- -------- -------- Non-interest Income Trust income 4,037 3,765 3,466 Service charges on deposit accounts 8,350 8,225 7,934 Investment securities gains, net (Note 3) 88 50 64 Mortgage loan sales income 1,932 1,528 597 Other income 2,523 2,597 2,444 -------- -------- -------- Total Non-interest Income 16,930 16,165 14,505 -------- -------- -------- Non-interest Expense Salaries and employee benefits (Note 10) 33,803 30,795 29,927 Occupancy expense, net 4,556 4,449 4,224 Equipment expense 5,616 5,027 4,267 F.D.I.C. assessments 3,549 3,272 2,838 Other expense 12,298 9,959 9,089 -------- -------- -------- Total Non-interest Expense 59,822 53,502 50,345 -------- -------- -------- Income Before Income Taxes 35,121 30,018 21,944 Provision for income tax expense (Note 6) 11,303 9,078 6,069 -------- -------- -------- Net Income $23,818 $20,940 $15,875 -------- -------- -------- Net Income Per Common Share (Note 9) $ 1.64 $ 1.54 $ 1.18 -------- -------- -------- See accompanying notes to consolidated financial statements Consolidated Statements of Changes in Shareholders' Equity (Dollars in thousands except per share data) Common Stock Capital Retained Shares Amount Surplus Earnings Total Balance December 31, 1990 6,742,931 $16,857 $25,345 $ 97,924 $140,126 Net income, 1991 15,875 15,875 Cash dividends declared ($.50 per share) (6,708) (6,708) Acquisition of common stock (84,038) (210) (1,390) (1,600) Issuance of common stock for dividend reinvestment plan 53,292 134 968 1,102 Issuance of common stock for incentive stock plan (Note 10) 9,873 25 180 205 Issuance of common stock for stock options (Note 10) 14,165 35 190 225 --------- ------- ------- --------- -------- Balance December 31, 1991 6,736,223 16,841 26,683 105,701 149,225 Net income, 1992 20,940 20,940 Cash dividends declared ($.53 per share) (7,299) (7,299) Acquisition of common stock (1,107) (2) (27) (29) Issuance of common stock for dividend reinvestment plan 44,133 110 1,048 1,158 Issuance of common stock for incentive stock plan (Note 10) 3,370 8 75 83 Issuance of common stock for stock options 11,065 27 149 176 Issuance of common stock for acquisition of The Peoples Bank of Front Royal (Note 2) 432,240 1,081 9,673 10,754 Cash paid in lieu of fractional shares (Note 2) (70) (2) (2) --------- ------- ------- --------- -------- Balance December 31, 1992 7,225,854 18,065 37,626 119,315 175,006 Net income, 1993 23,818 23,818 Cash dividends declared ($.62 per share) (9,034) (9,034) Acquisition of common stock (53,618) (134) (934) (1,068) Two-for-one stock split 7,270,990 18,177 (18,177) - Issuance of common stock for dividend reinvestment plan 85,755 214 1,625 1,839 Issuance of common stock for incentive stock plan (Note 10) 15,607 39 216 255 Issuance of common stock for acquisition of People's Bank of Virginia Beach (Note 2) 34,608 87 756 843 Cash paid in lieu of fractional shares (Note 2) (239) (1) (8) (9) ---------- ------- ------- --------- -------- Balance December 31, 1993 14,578,957 $36,447 $40,215 $114,988 $191,650 ---------- ------- ------- --------- -------- See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows (in thousands) Years Ended December 31 1993 1992 1991 Cash Flows from Operating Activities: Net income $ 23,818 $ 20,940 $15,875 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,677 4,812 4,169 Accretion and amortization 4,163 2,780 1,249 Provision for loan losses 750 3,600 3,600 (Increase) decrease in deferred tax benefit 684 (760) (929) Investment securities gains, net (88) (50) (64) (Gain) loss on sales of premises and equipment, net 25 (72) (44) Decrease (increase) in interest receivable 581 (238) (1,318) Increase (decrease) in taxes payable (925) 7 974 Decrease in interest payable (521) (2,329) (1,057) Other, net 849 (5,328) 583 -------- -------- -------- Total adjustments 11,195 2,422 7,163 -------- -------- -------- Net Cash Provided by Operating Activities 35,013 23,362 23,038 -------- -------- -------- Cash Flows from Investing Activities: Proceeds from maturities of investment securities 157,932 147,211 100,210 Proceeds from sales and calls of investment securities (Note 3) 13,211 14,607 6,546 Purchases of investment securities (220,401) (216,794) (217,269) Net increase in loans (32,111) (46,617) (7,764) Business combinations, net of cash 1,212 6,596 - Proceeds from sales of premises and equipment 44 170 106 Proceeds from sales of foreclosed properties 3,145 2,485 1,756 Purchases of premises and equipment (3,545) (4,106) (5,312) -------- -------- -------- Net Cash Used in Investing Activities (80,513) (96,448) (121,727) -------- -------- -------- Cash Flows from Financing Activities: Net increase in deposits 18,999 96,942 87,856 Net increase (decrease) in short-term borrowings 43,193 (8,701) (2,141) Repayment of long-term debt (918) (1,417) (1,416) Proceeds from issuance of common stock 2,094 1,417 1,532 Payments to acquire common stock (1,068) (29) (1,600) Dividends paid (8,507) (7,032) (6,710) -------- -------- -------- Net Cash Provided by Financing Activities 53,793 81,180 77,521 -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 8,293 8,094 (21,168) Cash and Cash Equivalents at Beginning of Year 108,005 99,911 121,079 -------- -------- -------- Cash and Cash Equivalents at End of Year $116,298 $108,005 $ 99,911 Supplemental Disclosures of Cash Flow Information: Cash payments for: Interest $ 46,937 $ 57,156 $ 74,278 -------- -------- -------- Income taxes 12,195 9,071 6,024 Non-cash investing and financing activities: Loan balances transferred to foreclosed properties $ 1,254 $ 3,975 $ 3,720 Issuance of common stock for acquisitions 834 10,752 - -------- -------- -------- See accompanying notes to consolidated financial statements Jefferson Bankshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements Years ended December 31, 1993, 1992, and 1991 1 Summary of Significant Accounting Policies The accounting and reporting policies of the Corporation conform to generally accepted accounting principles and to general practice within the banking industry. The more significant policies are summarized below. (a) Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to current presentations. (b) Investment Securities Investment securities are stated at cost, adjusted for amortization of premiums and accretion of discounts, computed by the level yield method. The Corporation has the intent and the ability to hold these securities for the foreseeable future. Gains or losses on investment securities are recognized upon realization at the time of sale on an identified certificate basis and are shown separately in the consolidated statements of income. (c) Loans Interest on some instalment loans and certain second mortgage loans is accrued by a method that approximates the level yield method. Interest on all other loans is accrued based upon the principal amounts outstanding. The accrual of interest on loans is discontinued when the collection of principal or interest is legally barred or considered highly unlikely. After a loan is classified non- accrual, interest income is recognized only to the extent payments are received. The Corporation's subsidiary bank is in substantial compliance with regulatory policy that requires accrual of interest to be discontinued when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. (d) Allowance for Loan Losses The Corporation follows the allowance method in providing for loan losses. Accordingly, all loan losses are charged to the allowance for loan losses, and all recoveries are credited to it. Estimates of possible future losses involve the exercise of management's judgment and assumptions with respect to future conditions. The principal factors considered by management in determining the adequacy of the allowance are growth and composition of the loan portfolio, historical loss experience, economic conditions, the value and adequacy of collateral, and the current level of the allowance. (e) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization charges are computed principally by the straight-line method based upon the estimated useful lives of the assets, except for leasehold improvements which are amortized over the lives of the respective leases or the estimated useful lives of the improvements, whichever is shorter. The costs of major renovations and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. (f) Income Taxes In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109"). Statement 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date. Effective January 1, 1993, the Corporation adopted Statement 109 and has included the cumulative effect of the change in the method of accounting for income taxes in the provision for income taxes in the 1993 consolidated statement of income. Pursuant to the deferred method under APB Opinion 11, which was applied in 1992 and prior years, certain items of income and expense were recognized in one year for income tax purposes and in other years for financial reporting purposes. Provisions for deferred taxes were made in recognition of these timing differences. (g) 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. (h) 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. (i) Pension Plan The Corporation has a non-contributory, trusteed defined benefit pension plan covering salaried employees and some hourly employees meeting certain age and service requirements. The Corporation computes the net periodic pension cost of the plan in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." The net periodic pension cost consists of the following components: service cost (benefits earned during the year), interest costs on the projected benefit obligation, actual return on plan assets, and the net amount resulting from the amortization and deferral of certain items over 15 years. No contributions were made to the plan in 1991, 1992, or 1993. (j) Trust Division Securities and other property held by the Trust Division in a fiduciary or agency capacity are not assets of the Corporation and are not included in the accompanying consolidated financial statements. (k) Statements of Cash Flows Cash and cash equivalents include cash and due from banks and federal funds sold and other money market investments. 2 Business Combinations On December 17, 1992, The Peoples Bank of Front Royal (PBFR) merged with Jefferson National Bank. The Corporation issued 432,170 shares of its common stock in the merger. In lieu of fractional shares, the Corporation paid $34.75 per share in cash. PBFR shareholders who exercised an option to receive $100 in cash for each PBFR share were paid a total of $1,695,900. The merger was accounted for as a purchase, and, accordingly, all of the accounts and transactions related to PBFR are included in the financial statements for the period after December 17, 1992. The Corporation recorded $4.5 million in goodwill, which is being amortized on a straight-line basis over 15 years. Following the close of business on February 11, 1993, People's Bank of Virginia Beach (PBVB) merged with Jefferson National Bank. The Corporation issued 34,369 shares of its common stock and paid $562,000 in cash in the transaction. In addition, $9,000 was paid in cash in settlement of fractional shares. The merger was accounted for as a purchase, and, accordingly, accounts and transactions for PBVB are included in the Corporation's consolidated financial statements subsequent to the merger date. On February 11, 1993, PBVB had $13 million in total assets, $7 million in loans, and $12 million in deposits. The transaction resulted in goodwill of $639 thousand, which is being amortized over 15 years using the straight-line method. 3 Investment Securities The book values, approximate market values, and gross unrealized gains and losses of investment securities are as follows: (in thousands) Gross Gross Estimated Book Unrealized Unrealized Market December 31, 1993 Value Gains Losses Value U.S. Treasury $203,400 $8,032 $229 $211,203 U.S. Government agencies 276,309 9,304 457 285,156 States and political subdivisions 30,329 682 - 31,011 Corporate debt securities 186,587 3,536 175 189,948 Mortgage-backed securities - - - - Other securities 7,693 321 - 8,014 -------- ------- ---- -------- Total $704,318 $21,875 $861 $725,332 -------- ------- ---- -------- December 31, 1992 U.S. Treasury $211,727 $8,138 $569 $219,296 U.S. Government agencies 224,467 10,533 93 234,907 States and political subdivisions 42,918 655 68 43,505 Corporate debt securities 166,407 4,526 209 170,724 Mortgage-backed securities 4,531 121 - 4,652 Other securities 5,739 319 - 6,058 -------- ------- ---- -------- Total $655,789 $24,292 $939 $679,142 -------- ------- ---- --------
The book values and approximate market values by contractual maturities are shown in Table 12, Investment Portfolio, in Management's Discussion and Analysis (MD&A). Sales and calls of investment securities produced the following results: (in thousands) Years ended December 31 1993 1992 1991 Proceeds from: Sales $7,411 $ - $3,032 Calls 5,800 14,607 3,514 ------ ------- ------ Gross gains $ 224 $ 50 $ 64 Gross losses 136 - - ------ ------- ------ Net gains $ 88 $ 50 $ 64 ------ ------- ------ Investment securities having carrying values of $74,713,000 at December 31, 1993, and $78,850,000 at December 31, 1992, were pledged to secure deposits and for other purposes required by law. 4 Loans The composition of the loan portfolio by loan classifications as of December 31, 1993 and 1992, appears in Table 7, Loan Portfolio, in MD&A. Information on risk elements in the loan portfolio for 1993 and 1992 appears in Table 10, Risk Elements, in MD&A. Loans to directors and executive officers of the Corporation and its significant subsidiaries, loans to companies in which they have a significant interest, and loans to members of their immediate families are made on substantially the same terms as those prevailing at the time for other loan customers. Excluding loans aggregating less than $60,000 to any such person, his or her interests, and immediate family members, the balances of such loans outstanding were $23,518,000 and $16,074,000 at December 31, 1993 and 1992, respectively. The changes in the balances from year-end 1992 to 1993 resulted from additions during 1993 of $22,740,000 and collections amounting to $15,296,000. 5 Allowance for Loan Losses A summary of the transactions in the allowance for loan losses for the years ended December 31, 1993, 1992, and 1991, appears in Table 9, Summary of Loan Loss Experience, in MD&A. 6 Income Taxes The Corporation and its subsidiaries file consolidated federal and state income tax returns. As discussed in Note 1 (F), effective January 1, 1993, the Corporation adopted Statement 109. As provided by Statement 109, the Corporation has elected to adopt this statement prospectively and has recorded the cumulative effect of such adoption in its 1993 provision for income taxes. The result of applying statement 109 was immaterial. Prior years' financial statements have not been restated to apply the provisions of Statement 109. The current and deferred income tax expense (benefit) provisions are as follows: (in thousands) 1993 1992 1991 Current: Federal $11,660 $9,570 $6,632 State 34 16 10 ------- ------ ------ 11,694 9,586 6,642 Deferred (391) (508) (573) ------- ------ ------ $11,303 $9,078 $6,069 ------- ------ ------ The provision for income tax expense is different from the amount computed by applying the statutory corporate federal income tax rate of 35 percent in 1993 and 34 percent in 1992 and 1991 to income before income taxes. The reasons for this difference are as follows: (Dollars in thousands) % of Income 1993 Amount Before Taxes Provision for income tax expense at statutory rate (35%) $12,293 35.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (979) (2.8) Other, net (11) - ------- ---- Provision for income tax expense $11,303 32.2% ------- ---- 1992 Provision for income tax expense at statutory rate (34%) $10,206 34.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (1,150) (3.8) Other, net 22 - ------- ---- Provision for income tax expense $9,078 30.2% ------- ---- 1991 Provision for income tax expense at statutory rate (34%) $7,461 34.0% Increase (reduction) in income taxes resulting from: Tax-exempt interest (1,498) (6.8) Other, net 106 .5 ------- ---- Provision for income tax expense $6,069 27.7% ------- ---- The significant components of deferred income tax benefit for the year ended December 31, 1993 are as follows: (in thousands) 1993 Deferred tax benefit (exclusive of the effects of other components listed below) $(263) Adjustments to deferred tax assets and liabilities for enacted changes in tax rates and laws (128) ---- $(391) ----- For the years ended December 31, 1992, and 1991, deferred income tax benefits of $508,000 and $573,000, respectively, resulted from timing differences in the recognition of income and expense for income tax and financial reporting purposes. The sources and tax effects of those timing differences are presented below: (in thousands) 1992 1991 Provision for loan losses $(572) $(429) Other, net 64 (144) ----- ----- $(508) $(573) ----- ----- The effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 are as follows: (in thousands) 1993 Deferred tax assets: Provision for loan losses $4,457 Deferred compensation 1,260 Other 1,456 ------ Total gross deferred tax asset 7,173 ------ Deferred tax liabilities: Premises and equipment, principally due to differences in depreciation 2,424 Other 830 ------ Total gross deferred tax liability 3,254 ------ Net deferred tax asset $3,919 ------ At December 31, 1993, the Corporation has net operating loss carryforwards obtained from previous business combinations for federal income tax purposes of approximately $474,000 which are available to offset future federal taxable income, if any, through 2003. The Corporation has not recognized a valuation allowance for the gross deferred tax asset recorded in the accompanying 1993 consolidated balance sheet since it is not dependent on future earnings to recover its deferred tax asset. 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, 1993 and 1992, are summarized as follows: (Dollars in thousands) Estimated Useful Lives (Years) 1993 1992 Land - $10,565 $10,571 Buildings 30-50 40,575 39,164 Leasehold improvements 5-40 4,277 4,242 Furniture and equipment 3-12 41,955 38,985 ------- ------- 97,372 92,962 Less accumulated depreciation and amortization 49,616 44,594 ------- ------- $47,756 $48,368 ------- ------- Depreciation and amortization of premises and equipment aggregated $5,191,000 in 1993, $4,664,000 in 1992, and $4,006,000 in 1991. At December 31, 1993, the Corporation leased 24 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. The terms of these leases expire at various dates from 1994 through 2051. Supplementary office space and equipment are leased on a short-term basis. Rent expense charged to operations under operating lease agreements totaled $906,000 in 1993, $786,000 in 1992, and $755,000 in 1991. The following is a schedule by years of future minimum rental payments, net of subleases, required under non-cancelable operating leases that have initial or remaining terms in excess of one year as of December 31, 1993: (in thousands) Minimum Years ending December 31: Payments 1994 $569 1995 479 1996 398 1997 371 1998 318 Later years 1,787 ------ $3,922 ------ 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, 1993. Most of the leases provide that the Corporation pay taxes, maintenance, insurance, and certain other operating expenses of the leased assets. The leased property recorded under capital leases and the related lease payment commitments are not material. 8 Long-term Debt Long-term debt as of December 31, 1993 and 1992, consists of the following: (in thousands) 1993 1992 Variable rate term loan payable through November 1, 1994 $900 $1,800 Other long-term debt 313 331 ------ ------ $1,213 $2,131 ------ ------ The interest rate on the variable rate term loan is determined periodically during the year by formulas based on certain money market rates and is subject to certain minimum interest rates as specified in the term loan agreement. The interest rates on the term loan at December 31, 1993 and 1992, were 4.51% and 4.63%, respectively. Principal on the term loan is due in quarterly instalments of $225,000 ending November 1, 1994. The term loan agreement limits cash dividends paid by the Corporation to 100% of current year's net income less any required principal payments on indebtedness. The agreement also has a minimum tangible capital requirement at the end of 1984 ($77 million) with subsequent required increases in capital, on a cumulative basis, of the greater of either $4 million per year or 40% of cumulative consolidated net income. The increase in tangible capital since December 31, 1984, exceeded the minimum requirement by $50 million. 9 Common Stock and Earnings Per Share At December 31, 1993, 134,219 shares were reserved for use in the Corporation's dividend reinvestment plan. The daily average common shares outstanding used in computing earnings per share were 14,559,277 in 1993, 13,573,776 in 1992, and 13,422,918 in 1991. On March 23, 1993, the board of directors declared a 2-for-1 stock split, which was distributed April 30, 1993. Accordingly, the average number of shares outstanding and per share amounts for net income, dividends declared, and book value have been restated for all periods presented to give effect to the split. 10 Employee Benefit Plans The Corporation has a non-contributory, trusteed defined benefit pension plan covering salaried employees and some hourly employees meeting certain age and service requirements. Benefits are based upon years of service and average compensation for the five highest paid years during the last 10 years of service, integrated with the Social Security tax base. Contributions are made to the plan, up to the amount deductible for federal income tax purposes, based upon the amount actuarially determined to be necessary for meeting plan obligations. Contributions are intended to provide not only for benefits attributed to service to date, but also for benefits expected to be earned in the future. Plan assets consist principally of marketable stocks and corporate and U.S. government debt obligations. The following table sets forth the plan's funded status and amounts recognized in the Corporation's consolidated balance sheets as of December 31: (in thousands) 1993 1992 Accumulated benefit obligation (includes vested benefits of $17,788 for 1993 and $15,541 for 1992) $(19,064) $(15,798) -------- -------- Projected benefit obligation for service rendered to date $(24,205) $(20,183) Plan assets at fair value 28,307 26,444 -------- -------- Plan assets in excess of projected benefit obligation (funded status) 4,102 6,261 Unrecognized net gain (2,753) (5,016) Unrecognized prior service cost 132 159 Unrecognized net asset being amortized over 15 years (1,264) (1,445) -------- -------- Prepaid (accrued) pension cost included in other liabilities $217 $(41) -------- -------- Net pension benefit for 1993, 1992, and 1991 includes the following components: (in thousands) 1993 1992 1991 Service cost-benefits earned during the year $872 $797 $697 Interest cost on projected benefit obligation 1,576 1,473 1,346 Actual return on plan assets (2,751) (2,571) (4,618) Net amortization and deferral 45 32 2,517 ----- ----- ----- Net pension benefit for the year $(258) $(269) $(58) ----- ----- ----- The assumed discount rate and expected rate of return were 8.5% and 9.0%, respectively, for 1991. The assumed discount rate was 8.0% and the expected rate of return was 9.0% for 1993 and 1992. The weighted average rate of increase in future compensation was assumed to be 6% in 1991, 5.5% in 1992 and 5.25% in 1993. The Corporation has a defined contribution profitsharing plan covering salaried employees and some hourly employees. Subject to certain limitations, the Corporation contributes to the plan 5.25% of its consolidated net income before taxes, adjusted as provided by the plan. The Corporation also has an incentive stock plan under which awards of units consisting of hypothetical shares of the Corporation's common stock may be made to senior officers and key employees. The plan became effective May 1, 1985, and will terminate May 1, 1995. The Corporation has reserved 345,108 shares of common stock for this plan. As of December 31, 1993, 237,066 units had been awarded, of which 75,846 had vested. The remaining nonvested units will vest over five years beginning May 1, 1995. The cost of the plan, based upon the market value of the Corporation's common stock times the number of units awarded, is accrued as salaries and employee benefits expense over the various vesting periods. The costs (benefits) of these major employee benefit plans included in expense are as follows: (in thousands) 1993 1992 1991 Pension $(258) $(269) $(58) Profit sharing 2,019 1,849 1,411 Incentive stock 526 243 601 ------ ------ ------ $2,287 $1,823 $1,954 ------ ------ ------ 11 Commitments, Contingent Liabilities, Off-balance Sheet Risks, and Other Matters The Corporation is a party to financial instruments which properly are not reflected in the consolidated financial statements. These include commitments to extend credit and letters of credit. These instruments involve elements of credit and interest rate risk. Nonperformance or default by the other party to loan commitments or standby letters of credit could result in a financial loss to the Corporation equal to the amount of the loan commitments and standby letters of credit. The same credit and collateral policies are used by the Corporation in issuing these financial instruments as are used for on balance sheet instruments. Commitments to extend credit are agreements to lend to a customer under a set of specified terms and conditions. Commitments generally have fixed expiration dates or termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Loan commitments may be secured or unsecured. In the case of secured commitments, collateral varies but may include commercial or residential properties; business assets such as inventory, equipment, or accounts receivable; securities; or other business or personal assets or guarantees. At December 31, 1993, commitments to extend credit totaled $165,517,000. 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, 1993, commitments outstanding under standby letters of credit totaled $20,058,000. The investment securities portfolio includes U.S. Treasury and U.S. Government agency securities which may, on occasions, be loaned to securities dealers designated as "Primary Government Dealers" by the Federal Reserve System. Such loans of securities are secured by U.S. Treasury securities, U.S. Government agency securities, or cash with a market value exceeding 102% of the market value of securities lent. The loaned investment securities continue to be reported in the consolidated financial statements, and the loan transaction is not reflected therein. In the event loans are secured by cash, the pledged cash is reported as an asset in the Corporation's consolidated balance sheet and an offsetting liability is reported as short-term borrowings. All such loans are callable in one business day. Such transactions may involve credit and interest rate risk. At December 31, 1993, securities loaned totaled $46,259,000. 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, 1993 and 1992, the aggregate amounts of daily average required balances were approximately $45,526,000 and $39,441,000, respectively. The bank originates mortgage loans that are sold in the secondary market. In connection with such activities, the Corporation maintains fidelity bond and errors and ommissions insurance in the amount of $10,000,000 which is in excess of required amounts. 12 Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (a) Cash and Due from Banks The carrying amount is a reasonable estimate of fair value. (b) Money Market Investments For short-term instruments, the carrying amount is a reasonable estimate of fair value. For instruments that mature in over 90 days, such as fixed-rate certificates of deposit, the fair value is estimated based on the discounted cash flow of contractual cash flows using interest rates currently offered for deposits of similar maturities. (c) Investment Securities Fair values of investment securities are based on quoted market prices or dealer quotes. In the absence of quoted market prices or dealer quotes, fair value is estimated using quoted market prices for similar securities, adjusted for differences between the quoted securities and the securities being valued. (d) Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by loan type (such as construction, mortgage, commercial, financial, and agricultural, and consumer), interest rate terms (such as fixed or adjustable), and estimated credit risk. For certain loans, such as some residential mortgage loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of performing loans is estimated by discounting the future cash flows through the estimated maturities using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimate of maturity is based on historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. Fair value for significant non-performing loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. (e) Deposits The fair value of demand deposits, interest-checking accounts, regular savings accounts, and money market deposit accounts is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit and certain other deposits is estimated based on the discounted value of the contractual cash flows using the interest rates currently offered for deposits of similar remaining maturities. (f) Short-term Borrowings The carrying values of federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings are reasonable estimates of fair value. (g) Long-term Debt Interest rates on long-term debt are variable and, consequently, the carrying amount is a reasonable estimate of fair value. (h) Off-balance Sheet Financial Instruments The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The carrying amount is a reasonable estimate of the fair value of securities loaned. At December 31, 1993, the carrying amounts and fair values of loan commitments, stand-by letters of credit, and securities loaned were immaterial. (i) Limitations Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument or groups of such instruments. Because these estimates are subjective in nature and involve uncertainties and matters of discretionary judgment, they cannot be determined with precision. Changes in assumptions could affect the estimates significantly. Fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, premises and equipment, and goodwill. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The estimated fair values of the Corporation's financial instruments are as follows: (in thousands) Estimated Book Fair December 31, 1993 Value Value Financial assets: Cash and due from banks $111,493 $111,493 Federal funds sold and other money market investments 4,805 4,879 Investment securities 704,318 725,332 Loans, net 974,238 991,171 Financial liabilities: Demand deposits and interest-bearing transaction accounts 1,046,719 1,046,719 Certificates of deposits 579,581 583,736 Short-term borrowings 54,098 54,098 Long-term debt 1,213 1,213 December 31, 1992 Financial assets: Cash and due from banks $ 82,071 $ 82,071 Federal funds sold and other money market investments 25,934 26,177 Investment securities 655,789 679,142 Loans, net 936,329 958,944 Financial liabilities: Demand deposits and interest-bearing transaction accounts 981,417 981,417 Certificates of deposits 613,493 618,977 Short-term borrowings 10,905 10,905 Long-term debt 2,131 2,131 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. Certain of the subsidiaries provide the Parent Company with computer and other services for which the Parent Company is charged fees by the respective subsidiaries. The primary source of funds for the dividends paid by the Parent Company is dividends received from its subsidiaries. The payment of such dividends by the subsidiary bank and the ability of the bank to loan or advance funds to the Parent Company are subject to certain statutory limitations. On December 31, 1993, 20 percent of consolidated shareholders' equity was not so restricted. The Parent Company guarantees certain leases for its subsidiaries. Condensed financial information for the Parent Company follows: Condensed Balance Sheets Jefferson Bankshares, Inc. (Parent Company) (in thousands) December 31 1993 1992 Assets Cash $ 503 $ 1,274 Money market investments at bank subsidiary 3,700 2,600 Dividends receivable from subsidiaries 2,720 2,200 Investments in subsidiaries at equity: Bank 182,993 167,324 Bank-related 4,715 4,623 -------- -------- 187,708 171,947 Other assets 3,034 2,805 -------- -------- Total Assets $197,665 $180,826 -------- -------- Liabilities and Shareholders' Equity Long-term debt $ 900 $ 1,800 Other liabilities 5,115 4,020 -------- -------- Total Liabilities 6,015 5,820 -------- -------- Shareholders' equity Common stock 36,447 18,065 Capital surplus 40,215 37,626 Retained earnings 114,988 119,315 -------- -------- Total Shareholders' Equity 191,650 175,006 -------- -------- Total Liabilities and Shareholders' Equity $197,665 $180,826 -------- -------- Condensed Statements of Income Jefferson Bankshares, Inc. (Parent Company) (in thousands) Years Ended December 31 1993 1992 1991 Income Dividends from bank subsidiary $ 9,920 $ 8,440 $ 8,960 Interest and fees from subsidiaries 2,690 2,374 3,353 Other income 100 50 75 ------- ------- ------- Total Income 12,710 10,864 12,388 ------- ------- ------- Expense Interest expense 66 139 296 Salaries and employee benefits 2,040 1,725 2,134 Merger and acquisition expense 27 121 36 Other expense 955 408 977 ------- ------- ------- Total Expense 3,088 2,393 3,443 ------- ------- ------- Income before income taxes and equity in undistributed net income of subsidiaries 9,622 8,471 8,945 Income tax benefit (expense) (13) 14 17 ------- ------- ------- Income before equity in undistributed net income of subsidiaries 9,609 8,485 8,962 Equity in undistributed net income of subsidiaries 14,209 12,455 6,913 ------- ------- ------- Net Income $23,818 $20,940 $15,875 ------- ------- ------- Condensed Statements of Cash Flows Jefferson Bankshares, Inc. (Parent Company) (in thousands) Years Ended December 31 1993 1992 1991 Cash Flows from Operating Activities: Net income $ 23,818 $ 20,940 $ 15,875 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36 36 51 (Increase) decrease in dividends receivable (520) (120) 160 Increase in taxes payable 319 31 129 (Increase) decrease in deferred tax benefit 83 (43) (41) Equity in undistributed net income of subsidiaries (14,209) (12,455) (6,913) Other, net (258) (68) (129) -------- -------- -------- Total adjustments (14,549) (12,619) (6,743) -------- -------- -------- Net Cash Provided by Operating Activities 9,269 8,321 9,132 -------- -------- -------- Cash Flows from Investing Activities- Business combinations, net of cash (593) (1,750) - -------- -------- -------- Net Cash Used in Investing Activities (593) (1,750) - -------- -------- -------- Cash Flows from Financing Activities: Net increase in short-term borrowings 34 32 34 Repayment of long-term debt (900) (1,400) (1,400) Proceeds from issuance of common stock 2,094 1,417 1,532 Payments to acquire common stock (1,068) (29) (1,600) Dividends paid (8,507) (7,032) (6,710) -------- -------- -------- Net Cash Used in Financing Activities (8,347) (7,012) (8,144) -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 329 (441) 988 Cash and Cash Equivalents at Beginning of Year 3,874 4,315 3,327 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 4,203 $ 3,874 $ 4,315 -------- -------- -------- 14 Subsequent Event (unaudited) On January 11, 1994, the Corporation entered into an agreement in principle with Bank of Loudoun (BOL) under which Bank of Loudoun would merge into Jefferson National Bank. The agreement provides for BOL shareholders to receive one share of the Corporation's common stock for each share of BOL's approximately 502,000 outstanding shares. The merger is subject to approval by BOL shareholders and regulatory authorities. It is expected that the merger would be accounted for as a pooling of interests. On December 31, 1993 BOL had total assets of $57 million and shareholders' equity of approximately $5 million. EX-21 8 EXHIBIT 21 G SUBSIDIARIES OF JEFFERSON BANKSHARES, INC. December 31, 1993 Jurisdiction in Names Which Organized Direct Indirect Jefferson National Bank U.S. Grace Insurance Agency, Incorporated Virginia Charter Insurance Managers, Inc. Virginia Jefferson Financial, Inc. Virginia Jefferson Properties, Inc. Virginia EX-23 9 EXHIBIT 23 H CONSENT OF INDEPENDENT AUDITORS The Board of Directors Jefferson Bankshares, Inc.: We consent to incorporation by reference in Registration Statement No. 33-34945 on Form S-3 of Jefferson Bankshares, Inc. of our report dated January 18, 1994 relating to the consolidated financial statements of Jefferson Bankshares, Inc. and subsidiaries as of December 31, 1993 and 1992 and each of the years in the three-year period ended December 31, 1993. KPMG Peat Marwick Richmond, Viriginia March 10, 1994 EX-24 10 EXHIBIT 24 I INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 John T. Casteen, III (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 Hunter Faulconer (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: February 10, 1994 Fred L. Glaize, III (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: February 10, 1994 Henry H. Harrell (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 Alex J. Kay, Jr. (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 J. A. Kessler, Jr. (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 W. A. Rinehart, III (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 Gilbert M. Rosenthal (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 Alson H. Smith, Jr. (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 Lee C. Tait (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 H. A. Williamson, Jr. (SEAL) INDIVIDUAL POWER OF ATTORNEY FORM 10-K KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Director 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, 1993, and any amendment which such attorney- or attorneys-in-fact may deem appropriate or necessary. DATE: January 25, 1994 Lawrence S. Eagleburger (SEAL) -----END PRIVACY-ENHANCED MESSAGE-----