Business of Jefferson Bankshares
Jefferson Bankshares is a bank holding company registered under the provisions
of the Bank Holding Company Act of 1956, as amended. Jefferson was incorporated
under the laws of Virginia on March 22, 1979, and became an active bank holding
company on December 31, 1979, through the consolidation of NB Corporation and
Southern Bankshares.
The Corporation owns or controls one subsidiary bank, Jefferson National Bank,
Charlottesville, Virginia, and four non-bank subsidiaries.
Within the last five years Jefferson Bankshares merged its subsidiary bank,
Jefferson National Bank/Tidewater into Jefferson National Bank; acquired Peoples
Bank of Front Royal with two offices and approximately $60 million in total
assets; and acquired the Peoples Bank of Virginia Beach with one office and
approximately $14 million in assets. In addition, Jefferson Data Services, Inc.,
which furnished computer services to the bank, was merged into Jefferson
Bankshares, and the computer operations were transferred to Jefferson National
Bank.
During 1994, Jefferson National Bank purchased the deposit liabilities and
banking offices of Liberty Federal Savings Bank from the Resolution Trust
Corporation. The transaction was completed on March 25, 1994, at which time
Liberty had two banking offices in Warrenton, Virginia and total deposits of
approximately $24 million. Also during 1994, Jefferson Bankshares acquired the
Bank of Loudoun, a community bank with $53 million in assets, $48 million in
deposits and one office in Leesburg, Virginia. The transaction with the Bank of
Loudoun was completed on August 18, 1994 with the merger of Bank of Loudoun into
Jefferson National Bank.
Jefferson Bankshares regularly seeks reasonable opportunities to expand its
asset base and trade area and related business endeavors.
The Corporation provides advisory and technical assistance to its subsidiaries
in the areas of services, operations, audit, planning and budgeting, and
corporate activities and administration. Funds are provided to Jefferson
Bankshares by dividends and management fees from its subsidiaries and short-term
and long-term borrowings from nonaffiliates.
Jefferson Bankshares, Inc. is regulated by the Board of Governors of the
Federal Reserve System and is subject to the requirements of the Bank Holding
Company Act of 1956, as amended, and Virginia laws regarding financial
institution holding companies administered by the Bureau of Financial
Institutions of the State Corporation Commission of Virginia. Jefferson National
Bank is subject to supervision by the Office of the Comptroller of the Currency.
The bank is affected by various federal and Virginia laws and regulations of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, and the Federal Deposit Insurance Corporation. The various laws and
regulations administered by the regulatory agencies affect corporate practices,
expansion of business, and provisions of services. Also, monetary and fiscal
policies of the United States directly affect bank loans and deposits and thus
may affect Jefferson Bankshares' earnings. The future impact of these policies
and of the continuing regulatory changes in the financial services industry
cannot be predicted.
On December 31, 1994, Jefferson Bankshares and its affiliates had 1,146
full-time and 138 part-time employees. Management believes that employee
relations are good.
As of September 30, 1994, Jefferson Bankshares had 2.9 percent of total bank
deposits in Virginia. Six other bank holding companies had bank subsidiaries in
Virginia with more deposits than Jefferson Bankshares.
The Corporation's bank subsidiary provides retail and commercial banking and
trust services and has 97 locations in Virginia from the City of Virginia Beach
in the East to Augusta County in the West and Frederick County in the North.
Jefferson National Bank pays competitive rates on deposits and other
interest-bearing liabilities, constantly reviews current and potential services,
and periodically provides staff training and sales programs. Throughout its
trade areas, the bank competes with other financial institutions, including
larger bank holding companies, money market mutual funds, and other companies
which extend credit.
Jefferson Properties, Inc., which owns properties used or held for future use
primarily by the Corporation's bank subsidiary, derived 87 percent of its income
from Jefferson Bankshares and its subsidiaries in 1994. Charter Insurance
Managers, Inc. and Grace Insurance Agency, Incorporated, a subsidiary of
Jefferson National Bank, are currently inactive. Jefferson Financial, Inc.
offers limited financial and investment advisory services.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
INTRODUCTION
Management's discussion and analysis are intended to aid the reader in
understanding and evaluating the consolidated results of operations and the
consolidated financial condition of Jefferson Bankshares, Inc. and subsidiaries
(the "Corporation"). The analysis attempts to identify trends and material
changes that occurred during the reporting periods. The discussion should be
read in conjunction with the Consolidated Financial Statements, their related
notes, and the statistical information associated with the discussion.
On March 25, 1994, Jefferson National Bank, the Corporation's bank subsidiary,
purchased the deposit liabilities of Liberty Federal Savings Bank (Liberty) from
the Resolution Trust Corporation. The transaction was accounted for as a
purchase, and, accordingly, accounts and transactions for Liberty are included
in the Corporation's consolidated financial statements subsequent to the
acquisition date. Liberty had two banking offices in Warrenton, Virginia and
total deposits of approximately $24 million.
On August 18, 1994, the Corporation completed a merger with Bank of Loudoun
(Loudoun) in Leesburg, Virginia. At the time of the merger, Loudoun had one
banking office with total assets of $53 million, total deposits of $48 million,
total loans of $35 million, and shareholders' equity of $5 million. The merger
was accounted for as a pooling of interests, and, accordingly, consolidated
financial data for all periods prior to the merger have been restated to include
the accounts and transactions of Loudoun.
Selected Financial Data - Table 1
(Dollars in thousands except per share data)
Years Ended December 31 1994 1993 1992 1991 1990
RESULTS OF OPERATIONS
Interest income $ 129,496 $ 128,922 $ 129,072 $ 137,257 $ 140,830
Interest expense 45,393 47,820 56,505 74,578 81,086
Net interest income 84,103 81,102 72,567 62,679 59,744
Provision for loan losses 1,600 1,911 4,195 3,742 2,925
Net interest income after provision for loan losses 82,503 79,191 68,372 58,937 56,819
Non-interest income 17,910 17,245 16,655 14,707 13,770
Non-interest expense 66,423 61,668 54,965 51,638 49,290
Income before income taxes 33,990 34,768 30,062 22,006 21,299
Provision for income tax expense 11,390 11,183 9,018 6,079 6,111
NET INCOME $ 22,600 $ 23,585 $ 21,044 $ 15,927 $ 15,188
PER SHARE DATA
Net income $ 1.49 $ 1.57 $ 1.50 $ 1.14 $ 1.06
Dividends declared .68 .62 .53 .50 .50
Book value at year-end 13.62 13.03 12.04 11.07 10.16
Average number of shares outstanding 15,148,400 15,060,873 14,075,372 13,924,342 14,263,928
FINANCIAL CONDITION
AVERAGE BALANCES
Total earning assets $ 1,755,541 $ 1,704,161 $ 1,565,022 $ 1,458,722 $ 1,397,747
Total assets 1,920,981 1,860,129 1,712,565 1,601,376 1,542,895
Total deposits 1,688,580 1,641,165 1,520,111 1,413,692 1,350,418
Long-term debt 491 1,632 2,763 4,177 5,590
Shareholders' equity 204,585 191,060 162,365 149,267 143,780
Summary of Financial Results by Quarter - Table 2
(Dollars in thousands except per share data)
1994 1993
Three Months Ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
Interest income $ 33,707 $ 32,754 $ 32,084 $ 30,951 $ 31,898 $ 32,267 $ 32,332 $ 32,425
Interest expense 11,899 11,311 11,104 11,079 11,600 11,840 12,054 12,326
Net interest income 21,808 21,443 20,980 19,872 20,298 20,427 20,278 20,099
Provision for loan losses 375 375 375 475 853 130 488 440
Non-interest income 4,103 3,921 5,652 4,234 4,502 4,470 4,342 3,931
Non-interest expense 16,855 16,485 17,142 15,941 16,068 15,523 15,242 14,835
Income before income taxes 8,681 8,504 9,115 7,690 7,879 9,244 8,890 8,755
Income tax expense 2,906 2,892 3,033 2,559 2,475 3,048 2,875 2,785
Net Income $ 5,775 $ 5,612 $ 6,082 $ 5,131 $ 5,404 $ 6,196 $ 6,015 $ 5,970
Net Income Per Common Share $ 0.38 $ 0.37 $ 0.40 $ 0.34 $ 0.36 $ 0.41 $ 0.40 $ 0.40
RESULTS OF OPERATIONS
Net income was $22.6 million in 1994, or 4 percent below the record high net
income in 1993 of $23.6 million. Net income per share was $1.49 in 1994 compared
with $1.57 in 1993. Net income in 1992 was $21.0 million, or $1.50 per share. An
analysis of the factors that affected net income in 1994, 1993, and 1992 is
presented in the sections that follow. Table 1 provides a summary of the results
of operations for the last five years and certain information regarding the
Corporation's consolidated financial condition during those periods.
Profitability as measured by the return on average assets was strong at 1.18
percent in 1994. The 1994 performance followed even stronger returns on average
assets of 1.27 percent in 1993 and 1.23 percent in 1992. Another significant
measure of profitability, the return on average shareholders' equity ,
declined in 1994 to 11.05 percent from 12.34 percent in 1993 and 12.96 percent
in 1992. Equity growth in 1994 and 1993 contributed to the decline in the
returns for both years. The 1994 decline was attributable also to the decrease
in net income.
Table 2 presents a quarterly summary of earnings components for the last two
years. In 1993, the net interest margin began to narrow as a decline in interest
rates began to have a greater impact on interest income than on interest
expense. In the fourth quarter of 1993, net income was reduced as the result of
an increased provision for loan losses and certain non-recurring expenses
recorded during the period. The increased provision for loan losses was recorded
by Loudoun to conform its methodology for determining the adequacy of its
allowance for loan losses to that of the Corporation. In the first quarter of
1994, net income was adversely affected by continued narrowing of the net
interest margin and by a decrease in non-interest income compared with the prior
quarter. This decrease was attributable principally to reduced income from
mortgage loan sales. In the second quarter of 1994, net income was impacted by
an increase in the net interest margin, investment securities gains of $1.2
million, and non-recurring expenses of $653 thousand. The remaining two quarters
in 1994 benefited from continued expansion of the net interest margin. In the
fourth quarter of 1994, non-interest expense rose, principally as the result of
a non-recurring charge related to an adjustment of prior years' bank franchise
tax assessments.
NET INTEREST INCOME
Net interest income is the difference between interest income and interest
expense and represents the Corporation's gross profit margin. For comparative
purposes, the income from tax-exempt securities and loans is adjusted to a
tax-equivalent basis. This adjustment, based on statutory federal corporate tax
rates of 35 percent in 1994 and 1993 and 34 percent in 1992, causes tax-exempt
income and resultant yields to be presented on a basis comparable with income
and yields from fully taxable earning assets.
The net interest margin represents tax-equivalent net interest income
divided by average earning assets. It reflects the average effective rate earned
by the Corporation on its average earning assets. Net interest income and the
net interest margin are influenced by fluctuations in market rates and changes
in both the volume and mix of average earning assets and the liabilities that
fund those assets.
Table 3 presents average balances, related interest income and expense, and
average yield/cost data for each of the last three years. Table 4 reflects
changes in interest income and interest expense resulting from changes in
average volume and changes due to rates.
Tax-equivalent net interest income increased 3 percent in 1994 to $85.4
million from $82.7 million in 1993. Although the net interest margin was
relatively stable at 4.87 percent in 1994 compared with 4.85 percent in 1993,
rising interest rates widened the margin as the year progressed. Yields on
earning assets rose as market interest rates moved upward in 1994. Liability
costs were affected less by the rise in rates. Through most of 1994, deposit
rates remained at previously low levels as liquidity in the banking system and
modest asset growth forestalled competitive pressures. In the fourth quarter
of 1994, however, deposit rates began to more closely reflect market interest
rates. The delayed rise in deposit rates still had less effect in the final
quarter of 1994 than rising yields on earning assets. The net interest margin in
1995 will be influenced by interest rate movements and their impact on asset
yields and liability costs.
Consolidated Average Balances/Net Interest Income/Rates*
Tax-equivalent basis (Dollars in millions) - Table 3
1994 1993 1992
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
ASSETS
Loans-net of unearned income $1,047.2 $ 85.0 8.12% $1,006.3 $81.5 8.10% $ 908.4 $ 79.9 8.80%
Investment securities:
Available for sale:
U.S. Treasury 176.7 11.5 6.51 - - - - - -
U.S. Government agencies 1.8 0.1 4.10 - - - - - -
Mortgage-backed securities 0.3 - - - - - - - -
Held to maturity:
U.S. Treasury 1.4 - - 202.3 14.3 7.05 200.1 15.0 7.50
U.S. Government agencies 265.2 17.8 6.72 243.8 18.0 7.40 229.2 18.2 7.94
States and political
subdivisions 26.7 2.1 7.82 35.3 2.9 8.18 37.9 3.5 9.23
Corporate debt securities 203.1 12.5 6.17 177.9 12.0 6.77 162.6 12.7 7.81
Other securities 7.8 0.6 7.68 7.3 0.6 7.90 5.1 0.4 7.84
Total investment securities 683.0 44.6 6.54 666.6 47.8 7.17 634.9 49.8 7.84
Money market investments 25.3 1.2 4.54 31.3 1.2 3.74 24.8 1.2 4.84
TOTAL EARNING ASSETS 1,755.5 130.8 7.45 1,704.2 130.5 7.66 1,568.1 130.9 8.35
Allowance for loan losses (13.7) (13.7) (11.8)
Cash and due from banks 85.5 77.3 71.4
Premises and equipment 50.4 48.6 48.5
Other assets 43.3 43.7 36.3
TOTAL ASSETS $1,921.0 $1,860.1 $1,712.5
LIABILITIES AND SHAREHOLDERS'
EQUITY
Time and savings deposits:
Interest-checking accounts $ 299.8 $ 6.8 2.27% $ 272.3 $ 7.2 2.64% $ 225.4 $ 7.1 3.15%
Regular savings 200.2 5.4 2.68 170.2 4.9 2.90 138.9 4.6 3.31
Money market deposit accounts 345.9 9.7 2.81 357.0 10.2 2.85 313.6 11.3 3.60
Certificates of deposit
$100,000 and over 71.2 2.8 3.99 70.6 2.8 4.04 72.9 3.3 4.53
Other time deposits 522.6 20.2 3.87 538.2 22.2 4.67 567.8 29.7 5.23
Total time and savings deposits 1,439.7 44.9 3.12 1,408.3 47.3 3.36 1,318.6 56.0 4.25
Short-term borrowings 14.9 0.4 2.96 15.1 0.4 2.83 15.2 0.3 2.26
Long-term debt 0.5 0.1 5.65 1.6 0.1 5.23 2.8 0.2 5.78
TOTAL INTEREST-BEARING
LIABILITIES 1,455.1 45.4 3.12 1,425.0 47.8 3.36 1,336.6 56.5 4.23
Demand deposits 248.9 232.9 201.7
Other liabilities 12.4 11.1 11.8
Total liabilities 1,716.4 1,669.0 1,550.1
Shareholders' equity before
unrealized losses 204.8 191.1 162.4
Unrealized losses on securities
available for sale, net (0.2) - -
Total shareholders' equity 204.6 191.1 162.4
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,921.0 $1,860.1 $1,712.5
NET INTEREST INCOME $85.4 $82.7 $ 74.4
AVERAGE INTEREST RATE SPREAD 4.33% 4.30% 4.12%
INTEREST EXPENSE AS A PERCENT
OF AVERAGE EARNING ASSETS 2.59% 2.81% 3.60%
NET INTEREST MARGIN 4.87% 4.85% 4.74%
*Fully taxable equivalent income is calculated by dividing actual tax-exempt
income by a factor which increases interest income to an amount that would need
to be received if such income were taxable at the Federal tax rate of 35% in
1994 and 1993 and 34% in 1992. Loan interest income includes fees of $2,831,000
in 1994; $2,633,000 in 1993; and $2,382,000 in 1992. Loans include non-accrual
loan balances and interest accrued, if any.
Other factors affecting the net interest margin in 1994 were a 3 percent
increase in average earning assets and a change in the mix of those assets. Loan
growth, which was slow in the first half of the year, accelerated in the second
half of 1994. Average loans as a percent of average earning assets increased to
60 percent in 1994 from 59 percent in 1993. At year-end 1994, however, loans
represented 63 percent of total earning assets. Loan growth and earning asset
growth also should be favorable factors in the 1995 net interest margin.
Comparing 1993 with 1992, tax-equivalent net interest income increased 11
percent as the net interest margin widened to 4.85 percent in 1993 from 4.74
percent in 1992. In contrast with 1994, interest rates were on a downward trend
in 1993. The lower rates in 1993 compared with 1992 had a greater impact on
interest expense compared with interest income. Also contributing modestly to
the increase in net interest income and the net interest margin was a change in
the mix of average earning assets and in the Corporation's funding sources.
Average loans increased to 59 percent of average earning assets in 1993 from 58
percent in 1992. Also, average interest-bearing liabilities as a percent of
average earning assets decreased to 84 percent in 1993 from 85 percent in 1992.
Analysis of Changes in Net Interest Income* - Table 4
Tax-Equivalent Basis (Dollars in Thousands)
Year 1994 over 1993 Year 1993 over 1992
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Net Net
Average Increase Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
INTEREST INCOME
Loans-net of unearned income $ 3,313 $ 201 $ 3,514 $ 8,150 $(6,496) $1,654
Investment securities:
Available for sale:
U.S. Treasury 11,508 - 11,508 - - -
U.S. Government agencies 74 - 74 - - -
Held to maturity:
U.S. Treasury (7,109) (7,151) (14,260) 162 (948) (786)
U.S. Government agencies 1,509 (1,732) (223) 1,176 (1,371) (195)
States and political
subdivisions (653) (122) (775) (231) (411) (642)
Other 1,656 (1,142) 514 1,333 (1,730) (397)
Money market investments (243) 226 (17) 356 (423) (67)
TOTAL INTEREST INCOME 10,055 (9,720) 335 10,946 (11,379) (433)
INTEREST EXPENSE
Time and savings deposits:
Interest-checking accounts 682 (1,069) (387) 1,341 (1,311) 30
Regular savings 821 (395) 426 927 (546) 381
Money market deposit accounts (971) (1,140) (2,111) (872) (6,978) (7,850)
Certificates of deposit
$100,000 and over 26 (34) (8) (112) (308) (420)
Other time deposits 45 (348) (303) 356 (1,192) (836)
Short-term borrowings (6) 19 13 - 87 87
Long-term debt (64) 6 (58) (60) (14) (74)
TOTAL INTEREST EXPENSE 533 (2,961) (2,428) 1,580 (10,262) (8,682)
CHANGE IN NET INTEREST INCOME $ 9,522 $(6,759) $ 2,763 $ 9,366 $ (1,117) $ 8,249
*The change in interest that cannot be separated between rate and volume has
been allocated to each variance proportionately.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount charged to expense each year
that is intended to maintain an allowance, or reserve, for loan losses in the
future. The adequacy of the allowance and, consequently, the provision for loan
losses is dependent on a variety of factors including size, growth, and
composition of the loan portfolio, historical and expected loan loss experience,
and an analysis of the quality of the loan portfolio and general economic
conditions.
In 1994, the Corporation lowered its provision for loan losses to $1.6
million from $1.9 million in 1993. In 1992, the provision for loan losses was
$4.2 million. The lower provision in 1994 compared with 1993 reflected improved
economic conditions and a declining trend in non-performing assets. The
significant reduction in the loan loss provision in 1993 compared with 1992 was
attributable to improving trends in loan loss experience, non-performing assets,
and general economic conditions. It also was lowered in view of the level of the
allowance relative to the loan portfolio, an evaluation of risks in the
portfolio, and expectations for loan growth.
Changes in economic conditions and expectations resulting from higher
interest rates will have an effect on the provision for loan losses in 1995.
Loan portfolio growth and risks contained in the portfolio also will affect the
provision. Based upon these factors, it is likely that the provision for loan
losses will be increased in 1995.
NON-INTEREST INCOME
Non-interest income includes service charges and other related income from
services rendered by the Corporation. In addition, non-interest income includes
gains and losses realized from the sale of fixed assets, sales and calls of
investment securities, and sales of mortgage loans.
Non-interest income increased 4 percent in 1994 to $17.9 million from $17.2
million in 1993. Non-interest income was boosted in 1994 by investment
securities gains totaling $1.2 million, or $1.1 million above the 1993 amount.
More than offsetting this increase however was a decrease in income related to
mortgage loan sales, which declined $1.3 million in 1994 to $681 thousand from
$1.9 million in 1993. In other categories of non-interest income, trust income
decreased 2 percent to $3.9 million, deposit account fees increased 3 percent to
$8.7 million, and other income rose 30 percent to $3.3 million in 1994 compared
with $2.5 million in 1993. The rise in other income was attributable to a
variety of sources including asset sales, automated teller machine fees, and
safe deposit box rent.
Non-interest income increased 4 percent in 1993 to $17.2 million compared
with $16.7 million in 1992. The increase was led by trust income, which
increased 7 percent to $4.0 million, and mortgage loan sales income, which
increased 26 percent to $1.9 million. Both sources of income increased due to
higher volumes of business.
Non-Interest Income - Table 5
(in thousands)
Years Ended December 31 1994 1993 1992 1991 1990
Trust income $ 3,944 $ 4,037 $ 3,765 $ 3,466 $ 3,367
Service charges on
deposit accounts 8,702 8,475 8,326 8,136 7,403
Credit insurance income 165 208 255 298 340
Investment securities
gains, net 1,166 88 298 64 7
Mortgage loan sales
income 681 1,932 1,528 597 368
Other Income 3,252 2,505 2,483 2,146 2,285
TOTAL NON-INTEREST INCOME $17,910 $17,245 $16,655 $14,707 $13,770
NON-INTEREST EXPENSE
Non-interest expense represents the overhead expenses of the Corporation.
The Corporation monitors all categories of noninterest expense in an attempt to
improve productivity and earnings performance.
Non-interest expense increased 8 percent in 1994 to $66.4 million from $61.7
million in 1993. Contributing to the increase was personnel expense, which was 8
percent higher in 1994 at $37.3 million. Personnel expense rose as the result of
normal wage increases and related benefit expenses and from an increase in the
number of employees. Occupancy expense increased 7 percent in 1994, and
equipment expense was 4 percent higher compared with the 1993 amount. Expense
for office supplies in 1994 was level with the 1993 amount, and postage expense
decreased 2 percent. Telephone expense, however, increased 25 percent in 1994
compared with 1993 as the result of enhancing our communications capabilities.
Other expense in 1994 increased 12 percent. Leading contributors to this
increase were legal and professional fees, amortization of intangible assets
associated with acquisitions, and certain non-recurring expenses.
In 1993, non-interest expense increased 12 percent to $61.7 million from
$55.0 million in 1992. Growth in all expense categories in 1993 was affected by
two acquisitions accounted for as purchases. Personnel expense and other expense
led the increase in non-interest expense increasing $3.2 million and $2.2
million, respectively. Contributing to the increase in other expense were
writedowns on foreclosed properties, contributions, and acquisition related
expenses. Also increasing by large percentage amounts and contributing to the
increase in non-interest expense were equipment expense, which rose 12 percent
and F.D.I.C. assessments and telephone expense, both of which increased 10
percent.
In 1995, F.D.I.C. assessments may be lowered significantly. The Bank
Insurance Fund is expected to reach its Congressionally mandated level of
coverage in 1995. As a result, the F.D.I.C. may lower its assessments for
deposit insurance. In 1994, Jefferson National Bank paid assessments at the rate
of $.23 per $100 of deposits totaling $3.8 million. Any decline in assessments
would lower non-interest expense in 1995.
Non-Interest Expense - Table 6
(Dollars in thousands)
Years Ended December 31 1994 1993 1992 1991 1990
Salaries and employee
benefits $37,261 $34,651 $31,439 $30,486 $29,320
Occupancy expense, net 5,063 4,740 4,653 4,427 4,425
Equipment expense 5,965 5,722 5,125 4,356 4,287
F.D.I.C. assessments 3,790 3,645 3,327 2,838 1,566
Office supplies 1,108 1,115 1,051 1,024 1,134
Postage 1,160 1,187 1,143 1,189 1,078
Telephone expense 1,775 1,425 1,292 1,285 1,310
Other expense 10,301 9,183 6,935 6,033 6,170
TOTAL NON-INTEREST EXPENSE $66,423 $61,668 $54,965 $51,638 $49,290
OPERATING EFFICIENCY
RATIO* 64.3% 61.8% 60.4% 64.6% 64.4%
*Total non-interest expense as a percent of net interest income (tax-equivalent
basis) and total non-interest income.
INCOME TAXES
The provision for income taxes was $11.4 million in 1994 and $11.2 million
in 1993. A reduction in operating earnings in 1994 was offset by a lower amount
of tax-exempt income and other factors.
The provision for income tax expense in 1993 was $11.2 million compared
with $9.0 million in 1992. The increase was affected by higher operating
earnings in 1993, an increase in the corporate federal income tax rate to 35
percent in 1993 from 34 percent in 1992, and a change in the accounting method
for deferred income taxes.
FINANCIAL CONDITION
The Corporation's financial condition is measured in terms of its asset and
liability composition, asset quality, capital resources, and liquidity. Although
total assets at year-end 1994 were slightly below the year earlier level, and
interest rates rose throughout the year, loan growth strengthened as the year
progressed. Deposits, which are the Corporation's primary funding source, grew
only modestly as such funds were attracted by alternative market investment
opportunities and competitive deposit interest rate pricing. Throughout 1994, as
in prior years, capital levels were strong and liquidity measures were most
adequate.
The Corporation is not engaged in investment strategies involving
derivative financial instruments. Asset and liability management is conducted
without the use of forward-based contracts, options, swap agreements, or other
synthetic financial instruments derived from the value of an underlying asset,
reference rate, or index. Off-balance sheet risks such as commitments to extend
credit, letters of credit, and other items are discussed in Note 11 in the Notes
to Consolidated Financial Statements.
ASSETS
On December 31, 1994, total assets were $1.926 billion. A year earlier
total assets were $1.942 billion. Average total assets increased 3 percent in
1994 to $1.921 billion from $1.860 billion in 1993.
LOAN PORTFOLIO. Loans, net of unearned income grew 8 percent to $1.102
billion on December 31, 1994 compared with $1.023 billion one year earlier.
Average loans, net of unearned income increased 4 percent in 1994 to $1.047
billion from $1.006 billion in 1993. The lower growth rate in average loans
compared with period end loans was indicative of stronger loan growth in the
second half of 1994.
Loan Portfolio - Table 7
(Dollars in thousands)
December 31 1994 1993 1992 1991 1990
LOAN CLASSIFICATION:
Commercial, financial,
and agricultural $ 407,152 36.9% $ 408,349 39.9% $388,314 39.6% $316,129 35.5% $334,047 37.9%
Real estate-construction 107,629 9.8 97,832 9.6 105,611 10.8 80,997 9.1 87,793 10.0
Real estate-mortgage 366,983 33.3 285,384 27.9 270,307 27.5 263,644 29.6 246,732 28.0
Instalment 219,872 20.0 231,656 22.6 216,388 22.1 229,404 25.8 213,161 24.1
TOTAL LOANS $1,101,636 100.0% $1,023,221 100.0% $980,620 $100.0 $890,174 100.0% $881,733 100.0%
Loan growth patterns in 1994 showed mixed results. Commercial loans, which
is the largest segment of the portfolio, was $407 million at year-end 1994,
comparable with 1993. Construction lending was up 10 percent to $108 million.
Mortgage loans rose 29 percent to $367 million on December 31, 1994. The
increase in mortgage loans was attributable, principally, to adjustable rate
mortgages, which regained popularity as interest rates rose throughout the year.
Instalment loans decreased 5 percent to $220 million on December 31, 1994. In
spite of this decline, indirect instalment loans increased 38 percent to $80
million at year-end 1994 from the year earlier total of $58 million. Indirect
loans are loans to individuals to finance certain goods or services, principally
automobiles, which are originated through dealers or other vendors. Prior to
1994, indirect lending activities were concentrated primarily in one geographic
area. The scope of this lending was expanded in 1994 and will continue to expand
in the future to reach the Corporation's entire market.
The strong loan growth in the second half of 1994 occurred in a rising
interest rate environment. If interest rates continue to rise in 1995, they
could have a dampening effect on loan demand. The Corporation will attempt to
offset the effect of higher interest rates by further expanding indirect
instalment lending, continuing to pursue the market for adjustable rate
mortgages, and adding credit card receivables to its loan categories.
Proprietary VISA and Master Card products were issued to bank customers
beginning in December 1994. Loans generated from these cards are expected to
represent a valuable addition to the Corporation's loan portfolio in 1995.
On December 31, 1994, the Corporation had no concentration of loans in any
one industry in excess of 10 percent of its loan portfolio. Because of the
nature of the Corporation's market, loan collateral is predominantly real estate
related. Thus, periodic weakness in real estate markets may have an adverse
effect on collateral values and could lead to writedowns and losses. The
Corporation carefully monitors its exposure to risk from construction and
development loans, commercial real estate loans, and residential lending.
The Corporation does not engage in foreign lending activities.
Consequently, the loan portfolio is not exposed to risk from foreign credits.
Remaining Maturities of Selected Loans - Table 8
(in thousands)
Commercial,
Financial, and Real Estate-
December 31, 1994 Agricultural Construction
WITHIN 1 YEAR $ 95,556 $ 31,358
VARIABLE RATE:
1 to 5 years 99,218 14,916
After 5 years 84,818 29,598
TOTAL 184,036 44,514
FIXED RATE:
1 to 5 years 98,200 17,938
After 5 years 29,360 13,819
TOTAL 127,560 31,757
TOTAL MATURITIES $407,152 $107,629
With respect to credit quality, the Corporation's past performance has been
a source of financial strength. Net loan losses in 1994 were $1.7 million, or
only .16 percent of average loans, net of unearned income. In 1993 net loan
losses were lower at $1.2 million, or .12 percent of average loans, net of
unearned income. In each of the last five years, the Corporation's loan loss
ratios compared very favorably with peer group averages. For bank holding
companies with total assets between $1 billion and $3 billion, loan loss ratios
in the years 1991 through 1993 have ranged from .54 percent to .89 percent of
average loans. By comparison, the Corporation's ratios for that period have
ranged from a low of .12 percent to a high of .28 percent. Based on statistical
information for the first nine months of the year, the peer group average is
expected to be approximately .24 percent in 1994.
Summary of Loan Loss Experience - Table 9
(Dollars in thousands)
Years Ended December 31 1994 1993 1992 1991 1990
ALLOWANCE AT BEGINNING OF YEAR $ 13,864 $ 13,057 $10,894 $ 9,647 $ 9,395
LOAN LOSSES:
Commercial, financial, and agricultural 994 789 920 1,015 1,408
Real estate-construction 150 - 90 100 303
Real estate-mortgage 187 140 343 535 80
Instalment 1,054 696 1,607 1,125 1,207
TOTAL LOAN LOSSES 2,385 1,625 2,960 2,775 2,998
RECOVERIES:
Commercial, financial, and agricultural 67 59 58 53 7
Real estate-construction 4 6 47 - 111
Real estate-mortgage 75 72 9 - 7
Installment 529 261 263 228 200
TOTAL RECOVERIES 675 398 377 281 325
NET LOAN LOSSES 1,710 1,227 2,583 2,494 2,673
INCREASE FROM ACQUISITIONS - 123 551 - -
PROVISION CHARGED TO EXPENSE 1,600 1,911 4,195 3,741 2,925
ALLOWANCE AT END OF YEAR $ 13,754 $ 13,864 $ 13,057 $ 10,894 $ 9,647
LOANS, NET OF UNEARNED INCOME:
Outstanding at year-end $1,101,500 $1,022,911 $979,365 $889,540 $880,761
Average 1,047,206 1,006,262 908,397 879,236 923,352
RATIOS:
Net loan losses to average loans 0.16% 0.12% 0.28% 0.28% 0.29%
Allowance to year-end loans 1.25% 1.36% 1.33% 1.22% 1.10%
Allowance to net loan losses 8.04X 11.30X 5.05X 4.37X 3.61X
Provision to net loan losses 0.94X 1.56X 1.62X 1.50X 1.09X
Provision to average loans 0.15% 0.19% 0.46% 0.43% 0.32%
Recoveries to loan losses 28.30% 24.49% 12.74% 10.13% 10.84%
Loan loss expectations for 1995 are influenced by a still strong economy
with low levels of unemployment and positive activity in local economies. Higher
interest rates compared with prior years and prospects for further increases,
however, are likely to influence economic activity in 1995 and could pose
problems for some borrowers. Based on an assessment of the loan portfolio, and
in light of expected economic conditions, loan losses in 1995 are not expected
to be materially greater than those in 1994. Unforeseen changes in economic
conditions or in borrowers' financial conditions could impact actual loan losses
in 1995. The Corporation will continue its efforts to minimize future credit
losses.
Risk Elements - Table 10
(Dollars in thousands)
Book Value December 31 1994 1993 1992 1991 1990
LOANS:
Non-accrual $ 6,996 $ 9,174 $10,448 $12,773 $5,079
Troubled debt restructurings - - - - -
Past due principal and/or
interest for 90 days or more 2,713 5,453 3,545 3,915 3,191
TOTAL $ 9,709 $14,627 $13,993 $16,688 $8,270
AS A PERCENT OF:
Loans, net of unearned income .88% 1.43% 1.43% 1.88% 0.94%
Total assets .50% 0.75% 0.76% 1.00 0.53%
Allowance for loan losses 70.59% 105.50% 107.17% 153.19% 85.73%
FORECLOSED PROPERTIES $ 5,919 $ 8,831 $11,770 $ 9,018 $ 6,469
TOTAL RISK ELEMENTS $15,628 $23,458 $25,763 $25,706 $14,739
AS A PERCENT OF:
Loans, net of unearned income
plus foreclosed properties 1.41% 2.27% 2.60% 2.86% 1.66%
Total assets .81% 1.21% 1.40% 1.54% 0.94%
For the years ended December 31, 1994, 1993, and 1992, gross interest income in
the amount of $462,600, $863,000 and $798,000, respectively, would have been
recorded on loans reported as non-accrual if the loans had been current in
accordance with their original terms and conditions. The amount of interest
income on those loans that was included in net income amounted to $66,000,
$754,000 and $104,000 in 1994, 1993, and 1992, respectively. At December 31,
1994, the Corporation identified additional loans totaling $5,420,000 that pose
some uncertainty over the borrowers' ability to comply with loan repayment
terms. Investment securities also may pose credit risks. On December 31, 1994,
all investment securities were performing according to terms.
Risk elements associated with the loan portfolio are presented in Table 10.
Excluding foreclosed properties, identified risk elements on December 31, 1994
totaled $9.7 million, or .9 percent of loans, net of unearned income. At
December 31, 1993, the total was $14.6 million, or 1.4 percent of loans, net of
unearned income. Foreclosed properties at December 31, 1994, were $5.9 million
compared with the year earlier total of $8.8 million. Foreclosed properties are
reported net of writedowns at the lower of cost or estimated net realizable
value. At December 31, 1994, total risk elements represented 1.4 percent of
loans, net of unearned income plus foreclosed properties and .8 percent of total
assets. These ratios at the end of 1993 were 2.3 percent and 1.2 percent,
respectively. At year-end 1994, the Corporation identified an additional $5.4
million of loans that pose some uncertainty over the borrowers' ability to
comply with loan repayment terms.
With regard to the non-accrual loans identified in Table 10, the amounts
classified in this category represent loan balances on which the accrual of
interest has been discontinued. The year-end 1994 total included 37 loans. The
largest exposure to a single borrower was $2.4 million. Only 4 other loans had
balances greater than $200 thousand. Loans are placed in a non-accrual status
when collection of principal or interest is legally barred or when management
determines that collection of interest cannot be assured in light of the
financial condition of the borrower and the circumstances surrounding the loan.
The Corporation's subsidiary bank is in substantial compliance with regulatory
policy that requires accrual of interest to be discontinued when principal or
interest is past due for 90 days or more unless the loan is well secured and in
the process of collection. Because of the historical experience of net loan
losses, the ratio of risk elements to loans outstanding, and the overall quality
of the loan portfolio, management has been able to evaluate each individual loan
situation of any appreciable magnitude and its potential for collection prior to
classifying any loan as non-accrual.
Included in the $5.9 million total of foreclosed properties at December 31,
1994 were 29 parcels of real estate. The highest carrying value of a single
property was $962 thousand. Only 3 other parcels included in foreclosed
properties at year-end 1994 had carrying values above $400 thousand.
The Corporation maintains a general allowance for loan losses and does not
allocate its allowance for loan losses to individual categories for management
purposes. Table 11 shows an allocation among loan categories based upon an
analysis of the portfolio's composition, historical loan loss experience, and
other relevant factors. In determining the adequacy for loan losses, management
considers the size and composition of the loan portfolio, historical loss
experience, economic conditions, the value and adequacy of collateral and
guarantors, and the current level of the allowance. In addition, consideration
is given to potential losses associated with non-accrual loans and loans that
are deemed to be potential problems.
At December 31, 1994, the allowance for loan losses was $13.8 million, or
1.25 percent of loans, net of unearned income. A year earlier, the allowance was
$13.9 million, or 1.36 percent of loans, net of unearned income. At its year-end
1994 level, the allowance for loan losses exceeded the sum of net loan losses
over the previous seven years. At that level, management believed that the
allowance was adequate, subject to unforeseen economic changes or unexpected
regulatory developments.
Allowance for Loan Losses - Table 11
(Dollars in thousands)
1994 1993 1992 1991 1990
December 31 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
ALLOWANCE FOR LOAN LOSSES:
Commercial, financial,
and agricultural $ 8,447 61.4% $ 6,499 46.9% $ 6,958 53.3% $6,618 60.7% $5,032 52.2%
Real estate-construction 156 1.1 687 5.0 753 5.8 742 6.8 696 7.2
Real estate-mortgage 514 3.7 385 2.8 437 3.3 468 4.3 267 2.8
Instalment 2,227 16.2 3,598 26.0 2,558 19.6 1,782 16.4 3,652 37.8
Unallocated 2,410 17.6 2,695 19.3 2,351 18.0 1,284 11.8 - -
Total Allowance
for Loan Losses $13,754 100.0% $13,864 100.0% $13,057 100.0% $10,894 100.0% $9,647 100.0%
INVESTMENT SECURITIES. Investment securities represent the second largest
component of earning assets. At the beginning of 1994 and in accordance with
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, certain securities in the investment
portfolio were classified as Available for Sale, while the remainder of the
portfolio was classified as Held to Maturity. Available for Sale securities are
reported at fair value in the Corporation's consolidated financial statements.
Unrealized gains and losses on these securities are reported as a separate
component of shareholders' equity , net of tax effects, and are excluded from
earnings until realized. Held to Maturity securities are reported at amortized
cost. The Corporation has no trading securities.
Investment Securities - Table 12
(Dollars in thousands)
DECEMBER 31, 1994
AVAILABLE FOR SALE: After 1 but After 5 but
Within Within Within After
1 Year 5 Years 10 Years 10 Years Total
U.S. Treasury Securities:
Amortized Cost $ 40,876 $131,896 $ - $ - $172,772
Fair Value 40,925 126,314 - - 167,239
Yield 7.19% 6.12% - - 6.37%
U.S. Government Agencies:
Amortized Cost $ - $ 2,744 $ - $ - $ 2,744
Fair Value - 2,661 - - 2,661
Yield - 4.40% - - 4.40%
Mortgage-backed Securities:
Amortized Cost $ - $ - $ 500 $ 477 $ 977
Fair Value - - 466 449 915
Yield - - 5.13% 4.80% 4.97%
Total Investment Securities-
Available for Sale:
Amortized Cost $ 40,876 $134,640 $ 500 $ 477 $176,493
Fair Value 40,925 128,975 466 449 170,815
Yield 7.19% 6.09% 5.13% 5.84% 6.33%
HELD TO MATURITY:
U.S. Government Agencies:
Amortized Cost $ 50,197 $183,703 $ - $ - $233,900
Fair Value 50,342 175,568 - - 225,910
Yield 7.84% 6.28% - - 6.61%
State and Political
Subdivision Securities:
Amortized Cost $ 6,376 $ 14,812 $ 2,299 $2,831 $ 26,318
Fair Value 6,409 14,815 2,299 2,623 26,146
Yield 9.23% 7.15% 8.67% 8.29% 7.91%
Corporate Debt Securities:
Amortized Cost $ 65,958 $139,476 $ - $ - $205,434
Fair Value 65,786 135,157 - - 200,943
Yield 6.78% 6.04% - - 6.28%
Other Securities:
Amortized Cost $ - $ - $ - $2,081 $ 2,081
Fair Value - - - 2,081 2,081
Yield - - - 6.00% 6.00%
Total Investment Securities-
Held to Maturity:
Amortized Cost $122,531 $337,991 $ 2,299 $4,912 $467,733
Fair Value 122,537 325,540 2,299 4,704 455,080
Yield 7.34% 6.21% 8.67% 8.29% 6.54%
At December 31, 1994, the book value of all investment securities was
$639 million, or 11 percent below the year earlier total of $717 million. The
decrease in the portfolio resulted from using funds from maturing securities to
fund loan growth. With the exception of corporate debt securities, which
increased in 1994 over 1993, all categories of securities decreased in 1994.
On December 31, 1994, the weighted average yield of the Held to Maturity
portfolio was 6.54 percent. The weighted average yield of the Available for Sale
portfolio was 6.33 percent. The market value of securities Held to Maturity was
97.3 percent of its book value at year-end 1994 compared with 102.9 percent on
December 31, 1993. The Available for Sale portfolio at year-end 1994 had a net
unrealized loss of $5.7 million. Additional information regarding investment
securities can be found in Table 12 and in Note 3 of the Notes to Consolidated
Financial Statements. Quality ratings of the Corporation's corporate debt
securities appear in Table 13. With the exception of securities issued by the
U.S. government, the Corporation held no concentration of 10 percent or greater
of its shareholders' equity in securities of any single issuer at December 31,
1994.
Corporate Debt by Quality Rating - Table 13
(Dollars in thousands)
Book
December 31, 1994 Value Percent
MOODY'S RATING
Aaa $ 12,095 5.9%
Aa1 9,430 4.6
Aa2 9,982 4.9
Aa3 7,659 3.7
A1 57,876 28.2
A2 86,129 41.9
A3 19,100 9.3
NR 3,163 1.5
Total $205,434 100.0%
MONEY MARKET INVESTMENTS. At year-end 1994, the Corporation had no
short-term money market investments. One year earlier, the total was $10
million. In 1994, these instruments averaged $25 million compared with $31
million in 1993. The use of short-term investments was curtailed in 1994 as the
result of loan growth.
LIABILITIES
The Corporation relies almost exclusively on core deposits to fund its
earning assets. An increased use of borrowings to increase balance sheet
leverage was under consideration at year-end as a means to enhance earnings
levels.
DEPOSITS. Total deposits on December 31, 1994 were $1.689 billion compared
with the year earlier total of $1.677 billion. Average total deposits in 1994 of
$1.689 billion were 3 percent above the 1993 average of $1.641 billion. Weak
deposit growth in 1994 was attributable to a continuation of deposit funds
moving into alternative investments and to interest rate pricing competition for
deposits, particularly late in the year.
Non-interest bearing demand deposits were 6 percent higher at year-end
1994 at $271 million compared with $256 million at year-end 1993.
Interest-bearing deposits, however, decreased slightly in 1994 to $1.417
billion at year-end from $1.421 billion one year earlier. Although the growth
pattern in interest-bearing deposits was similar in 1994 and 1993, percentage
changes were less in 1994. Interest-checking accounts increased 1 percent and
regular savings accounts increased 6 percent in 1994. Money market deposit
accounts decreased 3 percent in both 1994 and 1993. Other time deposits,
principally consumer certificates of deposit, decreased 2 percent in 1994.
Balances in certificates of deposit of $100 thousand and over increased 5
percent to $73 million in 1994 after decreasing 6 percent in 1993.
Certificates of Deposit $100,000 and Over - Table 14
(in thousands)
December 31, 1994 Amount
REMAINING MATURITIES:
Within 3 months $37,626
3 to 6 months 10,287
6 to 12 months 9,614
After 12 months 14,984
Total $72,511
DEBT. Short-term borrowings totaled $16 million on December 31, 1994
compared with the year earlier total of $54 million. Total short-term borrowings
averaged $15 million in both 1994 and 1993. Table 15 summarizes the
Corporation's position with respect to federal funds purchased and securities
sold under agreements to repurchase.
Long-term debt, which totaled $1 million at year-end 1993, was reduced to
$19 thousand by year-end 1994. Note 8 in the Notes to Consolidated Financial
Statements contains additional information regarding long-term debt.
Short-Term Borrowings - Table 15
(Dollars in thousands)
1994 1993 1992
Interest Interest Interest
Balance Rate Balance Rate Balance Rate
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE
Outstanding at year-end $16,479 3.69% $53,832 2.79% $10,634 1.58%
Average outstanding for the year 14,845 3.21 14,876 1.94 14,663 1.98
Maximum outstanding at any month-end 42,501 - 53,832 - 23,924 -
CAPITAL RESOURCES
Total shareholders' equity of $207 million at year-end 1994 was 5 percent
above the year earlier total of $196 million. Shareholders' equity averaged
$205 million in 1994, 7 percent above the 1993 average of $191 million. Average
shareholders' equity as a percent of average total assets was 10.7 percent in
1994 and 10.3 percent in 1993.
The Federal Reserve mandates minimum capital requirements for bank holding
companies. In 1990, the Federal Reserve adopted a risk based capital measure to
determine capital adequacy. Under this system all balance sheet assets are
assigned a certain risk category with a prescribed weight. Off-balance sheet
items, such as loan commitments and letters of credit, also are classified by
risk with duly assigned weights. The sum of the balance sheet and off balance
sheet amounts multiplied by their respective risk weight factors must then meet
a required minimum capital test. Tier 1 Capital is defined as shareholders'
equity minus certain intangible assets. Tier 2 Capital includes a certain
amount of the allowance for loan losses. At December 31, 1994, the minimum Total
Capital ratio (Tier 1 plus Tier 2) required was 8 percent. The Corporation's
Tier 1 ratio of 15.13 percent and its Total Capital ratio of 16.16 percent were
well in excess of minimum requirements. The Federal Reserve also utilizes a Tier
1 leverage ratio in conjunction with its risk based capital standard. This ratio
measures Tier 1 Capital as a percent of total average assets less intangible
assets. The minimum leverage ratio is 3 percent. At December 31, 1994, the
Corporation's Tier 1 leverage ratio was 10.59 percent. The Comptroller of the
Currency has adopted similar requirements that affect the Corporation's bank
subsidiary. The bank also exceeds all minimum requirements.
RISK-BASED CAPITAL - Table 16
(IN THOUSANDS)
December 31 1994 1993 1992
TIER 1 CAPITAL:
Shareholders' equity * $ 210,244 $ 196,434 $ 180,023
Less intangible assets 7,471 6,115 5,987
Total Tier 1 capital 202,773 190,319 174,036
TIER 2 CAPITAL:
Allowable allowance for loan losses 13,754 13,864 13,057
Total Tier 2 capital 13,754 13,864 13,057
TOTAL CAPITAL $ 216,527 $ 204,183 $ 187,093
Risk-weighted assets $1,340,091 $1,281,028 $1,234,309
Tangible quarterly average assets 1,914,722 1,892,496 1,758,477
RISK-BASED CAPITAL RATIOS:
Tier 1 capital 15.13% 14.86% 14.10%
Total capital 16.16% 15.94% 15.16%
Tier 1 leverage 10.59% 10.06% 9.90%
* Exclusive of unrealized losses on securities available for sale as
prescribed by regulatory guidelines.
On August 18, 1994, Bank of Loudoun merged into Jefferson National Bank.
Bank of Loudoun shareholders were entitled to receive one share of the
Corporation's common stock in exchange for each Bank of Loudoun share. The
Corporation issued 538,881 shares of its common stock in the merger, which was
accounted for as a pooling of interests.
From time to time, the Corporation purchases shares of its own common stock
from shareholders and from brokers and dealers. In 1994, the Corporation
purchased 72,500 shares at a cost of $1.4 million. In 1993, the Corporation
purchased 53,618 shares at a cost of $1.1 million. The volume of share
repurchases is determined by the financial advantages to the Corporation.
Purchases are made in accordance with applicable securities laws, regulations,
and internal policy considerations.
SELECTED CAPITAL AND DIVIDEND DATA- Table 17
Years Ended December 31 1994 1993 1992 1991 1990
PER SHARE DATA:
Number of shares outstanding at year-end 15,170,250 15,080,553 7,476,652 6,986,996 6,993,539
Average number of shares outstanding 15,148,400 15,060,873 14,075,372 13,924,342 14,263,928
Book value at year-end $13.62 $13.03 $12.04 $11.07 $10.16
Net income 1.49 1.57 1.50 1.14 1.06
Dividends declared .68 .62 .53 .50 .50
DIVIDENDS DECLARED AS A PERCENT OF NET INCOME 45.6% 39.5% 35.3% 43.9% 47.2%
SHAREHOLDERS' EQUITY (AVERAGE) AS A
PERCENT OF AVERAGE:
Loans-net of unearned income 19.5% 19.0% 17.9% 17.0% 15.6%
Total assets 10.7 10.3 9.5 9.3 9.3
Total deposits 12.1 11.6 10.7 10.6 10.6
INTERNAL CAPITAL GENERATION:
RETURN ON AVERAGE ASSETS 1.18 1.27 1.23 .99 .98
Multiplied by
AVERAGE ASSETS TO AVERAGE EQUITY 9.4 9.7 10.5 10.7 10.7
Return on Average Equity 11.1 12.3 13.0 10.7 10.6
Multiplied by
EARNINGS RETAINED 54.4 60.5 64.7 56.1 52.8
INTERNAL CAPITAL GENERATION RATE 6.0% 7.5% 8.4% 6.0% 5.6%
The Corporation's common stock is traded in the National Market System of
the NASDAQ Stock Market under the trading symbol JBNK. Table 18 presents the
market prices and dividends of the Corporation's stock for each quarter in 1994
and 1993. On December 31, 1994, the book value of a share of common stock was
$13.62, or 5 percent higher than $13.03 on December 31, 1993.
COMMON STOCK PERFORMANCE AND DIVIDENDS - Table 18
1994 1993 Dividends Declared
High Low High Low 1994 1993
First Quarter $22.75 $18.50 $21.00 $16.63 $.17 $.15
Second Quarter 23.13 18.50 21.00 18.00 .17 .15
Third Quarter 23.25 20.75 23.00 20.00 .17 .15
Fourth Quarter 21.13 17.13 $21.00 $18.75 .17 .17
Years Ended December 31 $23.25 $17.13 $23.00 $16.63 $.68 $.62
Jefferson Bankshares common stock is traded in the National Market Systems of
the Nasdaq Stock Market in which Jefferson Bankshares' symbol is JBNK. Dividend
restrictions and other matters are discussed in Notes 9 and 13 of the Notes to
Consolidated Financial Statements. On January 25, 1995, there were approximately
8,604 shareholders of record.
LIQUIDITY
Liquidity in a banking company measures the ability to provide funds for
customers' demands for loans and deposit withdrawals without impairing
profitability. To meet these needs, the Corporation maintains cash reserves and
readily marketable investments in addition to funds provided from loan
repayments and maturing securities. Funds also can be obtained through
increasing deposits or short-term borrowings and through the banks borrowing
privileges at the Federal Reserve.
A related concern of liquidity management is interest rate sensitivity.
Changes in interest rates may affect both funding requirements, as well as the
relative liquidity of certain assets. As such, the Corporation has acted to
structure its asset portfolio to match more closely the maturities and repricing
patterns of its liabilities. Loan pricing policies have been structured to
emphasize adjustable rate loans, both in the commercial and instalment lending
areas. Also, the average maturity of the investment securities portfolio is of a
relatively short duration. On December 31, 1994, approximately $823 million, or
47 percent of total earning assets was due to mature or reprice within the next
year. Table 19 demonstrates the relationship between interest sensitive assets
and interest sensitive liabilities on December 31, 1994.
INTEREST SENSITIVITY ANALYSIS* - Table 19
(IN THOUSANDS)
Over 3 Over 6 Over 1
Months Months Total Year and
3 Months Through Through Within Not
December 31, 1994 or Less 6 Months 12 Months 1 Year Classified Total
EARNING ASSETS
Loans-net $ 491,990 $ 27,873 $ 137,300 $ 657,163 $ 444,337 $1,101,500
Investment securities:
Available for sale 14,485 15,079 13,315 42,879 127,936 170,815
Held to maturity 45,965 18,861 57,719 122,545 345,188 467,733
TOTAL EARNING ASSETS 552,440 61,813 208,334 822,587 917,461 1,740,048
INTEREST-BEARING LIABILITIES
Money market deposit accounts 336,860 - - 336,860 - 336,860
Certificates of deposit $100,000 and over 37,626 10,287 9,614 57,527 14,984 72,511
All other time deposits 198,356 93,410 88,028 379,794 628,260 1,008,054
Short-term borrowings 16,479 - - 16,479 - 16,479
Long-term debt 19 - - 19 - 19
TOTAL INTEREST-BEARING LIABILITIES 589,340 103,697 97,642 790,679 643,244 1,433,923
NET NON-INTEREST-BEARING LIABILITIES - - - - 306,125 306,125
INTEREST SENSITIVITY GAP
ASSET SENSITIVE (LIABILITY SENSITIVE) $ (36,900) $ (41,884) $ 110,692 $ 31,908 $ (31,908) $ -
CUMULATIVE GAP $ (36,900) $ (78,784) $ 31,908 $ 31,908 $ - $ -
* Remaining maturity if fixed rate; earliest possible repricing interval
if floating rate
ACCOUNTING RULE CHANGES
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Statement which was effective for years beginning after December
15, 1993, addresses the accounting for investments in certain equity and all
debt securities. Under this Statement, investments are to be classified into
three categories: Held to Maturity Securities; Trading Securities; and Available
for Sale Securities.
The Corporation adopted this Statement in the first quarter of 1994.
Although the Corporation has the intent and ability to hold its investment
securities until maturity, certain securities were placed in the category
Available for Sale for potential liquidity purposes. In accordance with
Statement 115, these securities are reported at fair value in the Corporation's
consolidated financial statements, and the net unrealized gains and losses have
been excluded from earnings and reported as a separate component of
shareholders' equity net of tax effects. At the beginning of 1994, the
adjustment, net of tax effects, was $5.1 million of unrealized gains. As
interest rates rose throughout the year, the fair value of the Available for
Sale securities decreased and resulted in an unrealized loss, net of tax
effects, of $3.7 million as of December 31, 1994.
In February 1992, the FASB issued Statement No. 109, Accounting for Income
Taxes, Statement No. 109, which was effective for years beginning after December
15, 1992, changed the method of accounting for income taxes from the deferred
method to the asset and liability method. The Corporation adopted this statement
prospectively in 1993 and included the cumulative effect of this change in
accounting principle in the provision for income taxes in the 1993 consolidated
statement of income. The effect of the change was immaterial. For further
discussion, see Notes 1(G) and 6 in the Notes to Consolidated Financial
Statements.
In December 1991, the FASB issued Statement No. 107, Disclosures About Fair
Value of Financial Instruments. The required disclosures are included in Note 12
in the Notes to Consolidated Financial Statements.
In October 1994, the FASB issued Statement No. 118, Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures, which amended
Statement No. 114, Accounting by Creditors for Impairment of a Loan. Statement
118 requires impaired loans to be measured at the present value of expected
future cash flows discounted at the loans effective interest rate. The
impairment amount would be the excess of the recorded investment in the loan
over the resulting present value amount. Under certain circumstances, collateral
value may be substituted for discounted expected future cash flows. Statement
118 is effective for years beginning after December 15, 1994. The Corporation
will adopt this Statement prospectively in the first quarter of 1995. The
effects of this Statement on the Corporation's consolidated financial statements
are not expected to be material.
INDEPENDENT AUDITORS' REPORT
Certified Public Accountants
Suite 1900
1021 East Cary Street
Richmond, Virginia 23219
The Board of Directors
Jefferson Bankshares, Inc.:
We have audited the consolidated balance sheets of Jefferson Bankshares, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jefferson
Bankshares, Inc. and subsidiaries at December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 1(B) and 3 to the consolidated financial statements, in
1994, the Corporation adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. As discussed
in Notes 1(G) and 6 to the consolidated financial statements, in 1993, the
Corporation adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES.
January 17, 1995
Jefferson Bankshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31 1994 1993
ASSETS
Cash and due from banks (Note 11) $ 100,809 $ 114,677
Federal funds sold and other money
market investments - 10,212
Investment securities (Note 3):
Available for sale (cost of $176,493) 170,815 -
Held to maturity (market value on December
31 of $455,080 in 1994 and $737,688 in 1993) 467,733 716,617
Loans (Note 4) 1,101,636 1,023,221
Less: Unearned income (136) (310)
Allowance for loan losses (Note 5) (13,754) (13,864)
Net loans 1,087,746 1,009,047
Premises and equipment, net (Note 7) 51,185 48,171
Other assets 47,662 43,237
TOTAL ASSETS $ 1,925,950 $ 1,941,961
LIABILITIES
Deposits (Notes 2 and 3):
Demand $ 271,447 $ 256,321
Interest checking 298,471 294,686
Regular savings 196,524 184,631
Money market deposit accounts 336,860 346,864
Certificates of deposit $100,000 and over 72,511 68,904
Other time deposits 513,059 525,948
Total deposits 1,688,872 1,677,354
Federal funds purchased and securities
sold under agreements to repurchase 16,479 53,832
Other short-term borrowings - 265
Other liabilities 14,027 12,863
Long-term debt (Note 8) 19 1,213
TOTAL LIABILITIES 1,719,397 1,745,527
SHAREHOLDERS' EQUITY
Preferred stock of $10.00 par value.
Authorized 1,000,000 shares; issued none - -
Common stock of $2.50 par value.
Authorized 32,000,000 shares;
issued and outstanding 15,170,250 shares
in 1994 and 15,080,553 shares in 1993 37,926 37,701
Capital surplus 46,332 43,977
Retained earnings 125,986 114,756
Unrealized losses on securities available
for sale, net (Note 3) (3,691) -
TOTAL SHAREHOLDERS' EQUITY
(Notes 2, 9, 10, and 13) 206,553 196,434
Commitments and contingent liabilities
(Notes 7, 11, and 14)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,925,950 $ 1,941,961
See accompanying notes to consolidated financial statements
Jefferson Bankshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
Years Ended December 31 1994 1993 1992
INTEREST INCOME
Interest and fees on loans $ 84,427 $ 80,941 $ 79,174
Income on investment securities:
Available for sale 11,582 - -
Held to maturity 32,335 46,811 48,652
Other interest income 1,152 1,170 1,246
TOTAL INTEREST INCOME 129,496 128,922 129,072
INTEREST EXPENSE
Interest-checking 6,799 7,186 7,156
Regular savings 5,368 4,942 4,545
Money market deposit accounts 9,706 10,184 11,338
Certificates of deposit
$100,000 and over 2,842 2,850 3,270
Other time deposits 20,208 22,144 29,678
Short-term borrowings 441 429 358
Long-term debt 29 85 160
TOTAL INTEREST EXPENSE 45,393 47,820 56,505
NET INTEREST INCOME 84,103 81,102 72,567
Provision for loan losses (Note 5) 1,600 1,911 4,195
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 82,503 79,191 68,372
NON-INTEREST INCOME
Trust income 3,944 4,037 3,765
Service charges on deposit accounts 8,702 8,475 8,326
Investment securities gains, net (Note 3) 1,166 88 298
Mortgage loan sales income 681 1,932 1,528
Other income 3,417 2,713 2,738
TOTAL NON-INTEREST INCOME 17,910 17,245 16,655
NON-INTEREST EXPENSE
Salaries and employee benefits (Note 10) 37,261 34,651 31,439
Occupancy expense, net 5,063 4,740 4,653
Equipment expense 5,965 5,722 5,125
F.D.I.C. assessments 3,790 3,645 3,327
Other expense 14,344 12,910 10,421
TOTAL NON-INTEREST EXPENSE 66,423 61,668 54,965
INCOME BEFORE INCOME TAXES 33,990 34,768 30,062
Provision for income tax expense (Note 6) 11,390 11,183 9,018
NET INCOME $ 22,600 $ 23,585 $ 21,044
NET INCOME PER COMMON SHARE (Note 9) $ 1.49 $ 1.57 $ 1.50
See accompanying notes to consolidated financial statements
Jefferson Bankshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Common Stock Unrealized Gains
Capital Retained (Losses) on Securities
Shares Amount Surplus Earnings Available for Sale, Net Total
BALANCE DECEMBER 31, 1991 6,986,996 $ 17,844 $ 30,445 $105,849 $ $154,138
Net income, 1992 21,044 21,044
Cash dividends declared ($.53 per share) (7,299) (7,299)
Acquisition of common stock (1,107) (2) (27) (29)
Issuance of common stock for
dividend reinvestment plan 44,133 110 1,048 1,158
Issuance of common stock for
incentive stock plan (Note 10) 3,370 8 75 83
Issuance of common stock for
stock options 11,090 27 149 176
Issuance of common stock for
acquisition of The People's Bank of
Front Royal (Note 2) 432,240 1,081 9,673 10,754
Cash paid in lieu of fractional
shares (Note 2) (70) (2) (2)
BALANCE DECEMBER 31, 1992 7,476,652 19,068 41,388 119,567 180,023
Net income, 1993 23,585 23,585
Cash dividends declared
($.62 per share) (9,034) (9,034)
Acquisition of common stock (53,618) (134) (934) (1,068)
Two-for-one stock split 7,521,788 18,428 (18,428) -
Issuance of common stock for
dividend reinvestment plan 85,755 214 1,625 1,839
Issuance of common stock for
incentive stock plan (Note 10) 15,607 39 216 255
Issuance of common stock for
acquisition of People's Bank
of Virginia Beach (Note 2) 34,608 87 756 843
Cash paid in lieu of fractional
shares (Note 2) (239) (1) (8) (9)
BALANCE DECEMBER 31, 1993 15,080,553 37,701 43,977 114,756 196,434
Adjustment to beginning balance
for change in accounting
principle, net (Note 3) 5,072 5,072
Net income, 1994 22,600 22,600
Cash dividends declared
($.68 per share) (10,135) (10,135)
Acquisition of common stock (72,500) (181) (1,235) (1,416)
Issuance of common stock for
dividend reinvestment
plan (Note 10) 124,912 313 2,075 2,388
Issuance of common stock for
stock options (Note 10) 37,285 93 280 373
Change in unrealized gains
(losses) on securities available
for sale, net (Note 3) (8,763) (8,763)
BALANCE DECEMBER 31, 1994 15,170,250 $ 37,926 $ 46,332 $125,986 $(3,691) $206,553
See accompanying notes to consolidated financial statements
Jefferson Bankshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31 1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,600 $ 23,585 $ 21,044
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,975 5,752 4,890
Accretion and amortization 5,187 4,163 2,788
Provision for loan losses 1,600 1,911 4,195
(Increase) decrease in deferred tax benefit (3,069) 430 (800)
Investment securities gains, net (1,166) (88) (298)
(Gains) losses on sales of premises and equipment, net (173) 25 (72)
(Increase) decrease in interest receivable (376) 581 (238)
Increase (decrease) in taxes payable 106 (925) 7
Increase (decrease) in interest payable 91 (521) (2,329)
Other, net 2,656 858 (5,575)
Total adjustments 10,831 12,186 2,568
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,431 35,771 23,612
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
held to maturity 153,889 159,657 147,211
Proceeds from sales and calls of investment securities
held to maturity (Note 3) 4,838 13,211 21,041
Purchases of investment securities held to maturity (118,746) (225,118) (225,067)
Proceeds from maturities of securities available for sale 19,450 - -
Proceeds from sales of securities available for sale
(Note 3) 44,346 - -
Purchases of securities available for sale (35,407) - -
Net increase in loans (81,602) (37,112) (54,489)
Business combinations, net of cash (Note 2) 21,130 1,212 6,596
Proceeds from sales of premises and equipment 208 44 170
Proceeds from sales of foreclosed properties 2,732 3,145 2,485
Purchases of premises and equipment (8,772) (3,635) (4,154)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,066 (88,596) (106,207)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (12,076) 28,299 109,701
Net increase (decrease) in short-term borrowings (37,618) 43,193 (8,701)
Repayment of long-term debt (1,194) (918) (1,417)
Proceeds from issuance of common stock 2,761 2,094 1,417
Payments to acquire common stock (1,416) (1,068) (29)
Dividends paid (10,034) (8,507) (7,032)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (59,577) 63,093 93,939
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,080) 10,268 11,344
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 124,889 114,621 103,277
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 100,809 $ 124,889 $ 114,621
See accompanying notes to consolidated financial statements
JEFFERSON BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
1 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practice within the
banking industry. The more significant policies are summarized below.
A PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries, all of which are wholly-owned. All
significant intercompany balances and transactions have been eliminated
in consolidation. Certain previously reported amounts have been reclassified
to conform to current presentations.
B INVESTMENT SECURITIES
As more fully discussed in Note 3, on January 1, 1994, the Corporation
adopted Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities (Statement 115). The
Statement requires certain investment securities to be reported in one of three
categories: Trading, Available for Sale, or Held to Maturity. Upon adoption of
this Statement, a portion of the investment portfolio was classified as
Available for Sale. In accordance with Statement 115, these securities are
reported in the Corporation's consolidated financial statements at fair value.
Unrealized gains and losses, net of the related tax effect, are excluded from
earnings and reported as a separate component of shareholders equity until
realized. Held to Maturity securities are recorded at amortized cost. The
Corporation has no trading account securities.
Amortization of premiums and accretion of discounts are computed by the
level yield method.
C LOANS
Interest on some instalment loans and certain second mortgage loans is
accrued by a method that approximates the level yield method. Interest on all
other loans is accrued based upon the principal amounts outstanding. The accrual
of interest on loans is discontinued when the collection of principal or
interest is legally barred or considered highly unlikely. After a loan is
classified non-accrual, interest income is recognized only to the extent
payments are received.
The Corporation's subsidiary bank is in substantial compliance with
regulatory policy that requires accrual of interest to be discontinued when
principal or interest is due and has remained unpaid for 90 days or more unless
the loan is both well secured and in the process of collection.
D ALLOWANCE FOR LOAN LOSSES
The Corporation follows the allowance method in providing for
loan losses. Accordingly, all loan losses are charged to the allowance
for loan losses, and all recoveries are credited to it.
Estimates of possible future losses involve the exercise of management's
judgment and assumptions with respect to future conditions.
The principal factors considered by management in determining the
adequacy of the allowance are growth and composition of the loan
portfolio, historical loss experience, economic conditions, the value
and adequacy of collateral, and the current level of the allowance.
E PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization charges are computed principally by
the straight-line method based upon the estimated useful lives of the assets,
except for leasehold improvements which are amortized over the lives of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. The costs of major renovations and betterments are capitalized,
while the costs of ordinary maintenance and repairs are expensed as incurred.
F GOODWILL AND OTHER INTANGIBLE
ASSETS
Goodwill is amortized using the straight line method over periods not
exceeding fifteen years.
Other acquired intangible assets, such as the value of purchased core
deposits, are amortized using the straight line method over the periods
benefited, not exceeding fifteen years.
G INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes
(Statement 109). Statement 109 required a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability method
of accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date.
Effective January 1, 1993, the Corporation adopted Statement 109 and has
included the cumulative effect of the change in the method of accounting for
income taxes in the provision for income taxes in the 1993 consolidated
statement of income. The cumulative effect of the change was immaterial.
Pursuant to the deferred method under APB Opinion 11, which
was applied in 1992 and prior years, certain items of income and
expense were recognized in one year for income tax purposes and in
other years for financial reporting purposes. Provisions for deferred
taxes were made in recognition of these timing differences.
H COMMON STOCK
Shares of its own common stock reacquired by the Corporation are cancelled
as a matter of state law and are accounted for as authorized but unissued
shares.
I EARNINGS PER COMMON SHARE
Earnings per common share amounts are calculated by dividing
net income by the daily average number of outstanding common
shares. Common share equivalents resulting from the incentive
stock plan and stock option plan are not used in the calculations
because their effect is not material.
J PENSION PLAN
The Corporation has a non-contributory, trusteed defined benefit pension
plan covering salaried employees and some hourly employees meeting certain age
and service requirements. The Corporation computes the net periodic pension cost
of the plan in accordance with Statement of Financial Accounting Standards No.
87, Employers' Accounting for Pensions. The net periodic pension cost consists
of the following components: service cost (benefits earned during the year),
interest costs on the projected benefit obligation, actual return on plan
assets, and the net amount resulting from the amortization and deferral of
certain items over 15 years. No contributions were made to the plan in 1994,
1993, or 1992.
K TRUST DIVISION
Securities and other property held by the Trust Division in a
fiduciary or agency capacity are not assets of the Corporation and
are not included in the accompanying consolidated financial
statements.
L STATEMENTS OF CASH FLOWS
Cash and cash equivalents include cash and due from banks and federal
funds sold and other money market investments. Supplemental disclosures of cash
flow information follows:
(IN THOUSANDS)
1994 1993 1992
Cash payments for:
Interest $45,302 $46,937 $57,156
Income taxes 11,748 12,345 9,102
Non-cash investing and
financing activities:
Loan balances transferred to
foreclosed properties $ 1,534 $ 1,254 $ 3,975
Issuance of common stock for
acquisitions - 834 10,752
2 BUSINESS COMBINATIONS
On August 18, 1994, Bank of Loudoun (Loudoun) merged into Jefferson
National Bank. The Corporation issued 538,881 shares of its common stock in
exchange for all of the outstanding shares of common stock of Loudoun. The
merger was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements have been restated to include the accounts and
transactions of Loudoun for all periods presented.
On March 25, 1994, Jefferson National Bank purchased the deposit
liabilities of Liberty Federal Savings Bank (Liberty) from the Resolution Trust
Corporation. Liberty had two banking offices in Warrenton, Virginia, and total
deposits of approximately $24 million. The transaction resulted in goodwill of
$2.0 million.
Following the close of business on February 11, 1993, People's
Bank of Virginia Beach (PBVB) merged with Jefferson National
Bank. The Corporation issued 34,369 shares of its common stock
and paid $562,000 in cash in the transaction. In addition, $9,000
was paid in cash in settlement of fractional shares. On February 11,
1993, PBVB had $13 million in total assets, $7 million in loans,
and $12 million in deposits. The transaction resulted in goodwill of
$639 thousand.
On December 17, 1992, The Peoples Bank of Front Royal (PBFR) merged with
Jefferson National Bank. The Corporation issued 432,170 shares of its common
stock in the merger. In lieu of fractional shares, the Corporation paid $34.75
per share in cash. PBFR shareholders who exercised an option to receive $100 in
cash for each PBFR share were paid a total of $1,695,900. The transaction
resulted in goodwill of $4.5 million.
The transactions with Liberty, PBVB and PBFR were accounted
for as purchases, and, accordingly, the accounts and transactions for
each entity are included in the Corporation's consolidated financial
statements subsequent to the respective merger dates.
3 INVESTMENT SECURITIES
As discussed in Note 1(B), on January 1, 1994, the Corporation adopted the
provisions of Statement 115. In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. As of January 1, 1994, the cumulative effect of adopting this
Statement was an increase in consolidated shareholders' equity of $5,072,000,
net of deferred taxes of $2,731,000 to reflect the net unrealized gains on
securities classified as Available for Sale that were previously classified as
Held to Maturity and carried at amortized cost. As of December 31, 1994, the
impact on consolidated shareholders' equity was a decrease of $3,691,000, net
of deferred taxes of $1,987,000.
Sales and calls of investment securities produced the following
results:
(IN THOUSANDS)
AVAILABLE
FOR SALE HELD TO MATURITY
Years ended December 31 1994 1993 1992
Proceeds from: Sales $44,346 $7,411 $ 6,434
Calls - 5,800 14,607
Gross gains $ 1,166 $ 224 $ 298
Gross losses - 136 -
Net gains $ 1,166 $ 88 $ 298
There were no sales of Held to Maturity securities in 1994. Proceeds
from calls of Held to Maturity securities were $4,838,000 in 1994.
Investment securities having carrying values of $82,906,000 at
December 31, 1994, and $79,128,000 at December 31, 1993, were
pledged to secure deposits and for other purposes required by law.
The book values, approximate fair values, and gross unrealized
gains and losses of investment securities are as follows:
(IN THOUSANDS)
1994
SECURITIES-AVAILABLE FOR SALE
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury $172,772 $94 $5,627 $167,239
U.S. Government
agencies 2,744 - 83 2,661
Mortgage-backed
securities 977 - 62 915
TOTAL $176,493 $94 $5,772 $170,815
SECURITIES-HELD TO MATURITY
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government
agencies $233,900 $391 $ 8,381 $225,910
States and political
subdivisions 26,318 221 393 26,146
Corporate debt
securities 205,434 220 4,711 200,943
Other securities 2,081 - - 2,081
TOTAL $467,733 $832 $13,485 $455,080
1993
SECURITIES-HELD TO MATURITY
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury $203,400 $ 8,032 $229 $211,203
U.S. Government
agencies 278,057 9,318 457 286,918
States and political
subdivisions 30,404 686 - 31,090
Corporate debt
securities 186,587 3,536 175 189,948
Mortgage-backed
securities 9,575 35 14 9,596
Other securities 8,594 339 - 8,933
TOTAL $716,617 $21,946 $875 $737,688
The book values and approximate fair values by contractual maturities are
shown in Table 12, Investment Portfolio, in Managements Discussion and Analysis
(MD&A).
4 LOANS
The composition of the loan portfolio by loan classification as of
December 31, 1994 and 1993, appears in Table 7, Loan Portfolio,
in MD&A. Information on risk elements in the loan portfolio for
1994 and 1993 appears in Table 10, Risk Elements, in MD&A.
Loans to directors and executive officers of the Corporation and its
significant subsidiaries, loans to companies in which they have a significant
interest, and loans to members of their immediate families are made on
substantially the same terms as those prevailing at the time for other loan
customers. Excluding loans aggregating less than $60,000 to any such person, his
or her interests, and immediate family members, the balances of such loans
outstanding were $20,853,000 and $23,671,000 at December 31, 1994 and 1993,
respectively. The changes in the balances from year-end 1993 to 1994 resulted
from additions during 1994 of $29,014,000 and collections amounting to
$31,832,000.
5 ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses for
the years ended December 31, 1994, 1993, and 1992, appears in
Table 9, Summary of Loan Loss Experience, in MD&A.
6 INCOME TAXES
The Corporation and its subsidiaries file consolidated federal and state
income tax returns. As discussed in Note 1 (G), effective January 1, 1993, the
Corporation adopted Statement 109. As provided by Statement 109, the Corporation
elected to adopt this statement prospectively and has recorded the cumulative
effect of such adoption in its 1993 provision for income taxes. The result of
applying Statement 109 was immaterial. Prior years' consolidated financial
statements have not been restated to apply the provisions of Statement 109.
The current and deferred income tax expense (benefit) provisions
are as follows:
(IN THOUSANDS)
1994 1993 1992
Current: Federal $11,619 $11,794 $9,557
State 6 34 16
11,625 11,828 9,573
Deferred (235) (645) (555)
$11,390 $11,183 $9,018
The provision for income tax expense is different from the
amount computed by applying the statutory corporate federal
income tax rate of 35 percent in 1994 and 1993 and 34 percent in
1992 to income before income taxes. The reasons for this difference
are as follows:
(IN THOUSANDS)
% of Income
1994 Amount Before Taxes
Provision for income tax expense
at statutory rate (35%) $11,897 35.0%
Increase (reduction) in income taxes
resulting from:
Tax-exempt interest (813) (2.4)
Other, net 306 .9
Provision for income tax expense $11,390 33.5%
1993
Provision for income tax expense
at statutory rate (35%) $12,169 35.0%
Increase (reduction) in income taxes
resulting from:
Tax-exempt interest (981) (2.8)
Other, net (5) -
Provision for income tax expense $11,183 32.2%
1992
Provision for income tax expense
at statutory rate (34%) $10,221 34.0%
Increase (reduction) in income taxes
resulting from:
Tax-exempt interest (1,150) (3.8)
Other, net (53) (.2)
Provision for income tax expense $ 9,018 30.0%
The significant components of the deferred income tax benefit for
the years ended December 31, 1994 and 1993 are as follows:
(IN THOUSANDS)
1994 1993
Deferred tax benefit (exclusive of the effects of
other components listed below) $(235) $(517)
Adjustments to deferred tax assets and liabilities
for enacted changes in tax rates and laws - (128)
$(235) $(645)
For the year ended December 31, 1992, the deferred income tax
benefit of $555,000, resulted principally from timing differences in
the recognition of the allowance for loan losses.
The effects of temporary differences that give rise to significant
portions of the deferred tax benefit and deferred tax liabilities at
December 31, 1994 and 1993 are as follows:
(IN THOUSANDS)
1994 1993
Deferred tax benefit:
Allowance for loan losses $ 4,759 $4,741
Deferred compensation 1,550 1,260
Investment securities available for sale 1,987 -
Other 2,716 1,492
Total gross deferred tax benefit 11,012 7,493
Deferred tax liabilities:
Premises and equipment, principally due to
differences in depreciation 2,333 2,450
Other 1,689 830
Total gross deferred tax liability 4,022 3,280
Net deferred tax benefit
(included in other assets) $ 6,990 $4,213
At December 31, 1994, the Corporation has net operating loss
carryforwards obtained from previous business combinations for
federal income tax purposes of approximately $440,000 which are
available to offset future federal taxable income, if any, through
2003. The Corporation has not recognized a valuation allowance for
the gross deferred tax benefit recorded in the accompanying 1994
and 1993 consolidated balance sheets since it is not dependent on
future earnings for recoverability.
7 PREMISES AND EQUIPMENT
The Corporation's principal executive offices are located at 123
East Main Street, Charlottesville, Virginia.
Premises and equipment at December 31, 1994 and 1993, are
summarized as follows:
(IN THOUSANDS)
Estimated
Useful Lives
(Years) 1994 1993
Land - $ 10,558 $10,565
Buildings 30-50 43,061 40,575
Leasehold improvements 5-40 4,312 4,345
Furniture and equipment 3-12 47,754 42,649
105,685 98,134
Less accumulated depreciation
and amortization 54,500 49,963
$ 51,185 $48,171
Depreciation and amortization of premises and equipment
aggregated $5,723,000 in 1994, $5,266,000in 1993, and
$4,742,000 in 1992.
At December 31, 1994, the Corporation leased 26 of its 97 banking offices
under operating lease agreements on terms ranging from 1 to 25 years generally
with renewal options up to 10 years. The terms of these leases expire at various
dates from 1995 through 2051. Supplementary office space and equipment are
leased on a short-term basis.
Rent expense charged to operations under operating lease
agreements totaled $1,081,000, $1,044,000, and $919,000 in
1994, 1993, and 1992, respectively. The following is a schedule
by years of future minimum rental payments, net of subleases,
required under non-cancelable operating leases that have initial or
remaining terms in excess of one year as of December 31, 1994:
(IN THOUSANDS)
Future
Minimum
Years ending December 31: Payments
1995 $ 851
1996 752
1997 710
1998 649
1999 456
Later years 1,822
$5,240
Management expects that in the normal course of business most leases will
be renewed or replaced by other leases. Therefore, it is anticipated that future
annual rental expense will not be less than the amount shown for the year ended
December 31, 1994. Most of the leases provide that the Corporation pay taxes,
maintenance, insurance, and certain other operating expenses of the
leased assets. Leased property recorded under capital leases and
the related lease payment commitments are not material.
8 LONG-TERM DEBT
As of December 31, 1994, long-term debt was $19,000. As of
December 31, 1993, the balance of $1,213,000 consisted of
$900,000 variable rate term loan payable through November 1,
1994 and other long term debt of $313,000.
9 COMMON STOCK AND EARNINGS PER SHARE
At December 31, 1994, 996,492 shares were reserved for use in the
Corporation's dividend reinvestment plan. The daily average common shares
outstanding used in computing earnings per share were 15,148,400 in 1994,
15,060,873 in 1993, and 14,075,372 in 1992.
On March 23, 1993, the board of directors declared a 2-for-1 stock split,
which was distributed April 30, 1993. Accordingly, the average number of shares
outstanding and per share amounts for net income, dividends declared, and book
value have been restated for all periods presented to give effect to the split.
10 EMPLOYEE BENEFIT PLANS
The Corporation has a non-contributory, trusteed defined benefit pension
plan covering salaried employees and some hourly employees meeting certain age
and service requirements. Benefits are based upon years of service and average
compensation for the five highest paid years during the last 10 years of
service, integrated with the Social Security tax base. Contributions are made to
the plan, up to the amount deductible for federal income tax purposes, based
upon the amount actuarially determined to be necessary for meeting plan
obligations. Contributions are intended to provide not only for benefits
attributed to service to date, but also for benefits expected to be earned in
the future. Plan assets consist principally of marketable stocks and corporate
and U.S. government debt obligations.
The following table sets forth the plans funded status and amounts recognized
in the Corporation's consolidated balance sheets as of December 31:
(IN THOUSANDS)
1994 1993
Accumulated benefit obligation
(includes vested benefits of $19,340 for
1994 and $17,788 for 1993) $(19,633) $(19,064)
Projected benefit obligation for
service rendered to date $(24,359) $(24,205)
Plan assets at fair value 28,556 28,307
Plan assets in excess of projected benefit
obligation (funded status) 4,197 4,102
Unrecognized net gain (3,057) (2,753)
Unrecognized prior service cost 106 132
Unrecognized net asset
being amortized over 15 years (1,084) (1,264)
Prepaid pension cost included
in other assets $ 162 $ 217
Net pension cost (benefit) for 1994, 1993, and 1992 includes the
following components:
(IN THOUSANDS)
1994 1993 1992
Service cost-benefits earned
during the year $ 1,061 $ 872 $ 797
Interest cost on projected
benefit obligation 1,714 1,576 1,473
Actual return on plan assets (1,256) (2,751) (2,571)
Net amortization and deferral (1,464) 45 32
Net pension cost (benefit) for the year $ 55 $ (258) $ (269)
The assumed discount rate was 7.25% and the expected rate of return was
9.25% for 1994. The assumed discount rate and expected rate of return were 8.0%
and 9.0%, respectively, for 1993 and 1992. The weighted average rate of
increase in future compensation was assumed to be 5.5% in 1992, and 5.25% in
1993 and 1994.
The Corporation has a defined contribution profit-sharing plan covering
salaried employees and some hourly employees. Subject to certain limitations,
the Corporation contributes to the plan 5.25% of its consolidated net income
before taxes, adjusted as provided by the plan.
The Corporation also has an incentive stock plan under which awards of
units consisting of hypothetical shares of the Corporation's common stock may be
made to senior officers and key employees. The plan became effective May 1,
1985, and the final awards were granted on May 31, 1994. The Corporation has
reserved 345,108 shares of common stock for this plan. As of December 31, 1994,
264,246 units had been awarded, of which 75,846 had vested. The remaining
nonvested units will vest over five years beginning May 1, 1995. The cost of the
plan, based upon the market value of the Corporation's common stock times the
number of units awarded, is accrued as salaries and employee benefits expense
over the various vesting periods.
In December 1994, the Corporation adopted the 1995 Long-Term Incentive Stock
Plan (the 1995 Plan). Subject to shareholder approval, on January 3, 1995 the
Corporation awarded 118,500 incentive stock options under the 1995 Plan. The
options, which were awarded at the then market price, are exercisable over a
five year period beginning January 1996. The Corporation has reserved 750,000
shares for the 1995 Plan. No awards were granted during 1994.
At its December 1994 board meeting, the Board of Directors of Jefferson
Bankshares, Inc. amended and restated the Deferred Compensation and Stock
Purchase Plan for Non-Employee Directors to provide participants the option of
investing in Jefferson Bankshares, Inc. common stock. The amendment is subject
to shareholder and regulatory approval, and the Corporation anticipates
registering 150,000 shares of common stock for this purpose in the second
quarter of 1995.
The costs (benefits) of these major employee benefit plans
included in salaries and employee benefits expense are summarized as follows:
(IN THOUSANDS)
1994 1993 1992
Pension $ 55 $ (258) $ (269)
Profit sharing 1,890 2,019 1,849
Incentive stock 698 526 243
$2,643 $2,287 $1,823
Effective November 1, 1994, the Corporation established an employee stock
purchase plan covering up to 250,000 shares of common stock. As of December 31,
1994, the Corporation has reserved 249,305 shares of common stock for this plan.
The plan is available to all salaried employees. Participating employees may
contribute through periodic payroll deductions, up to 25% of their compensation.
As of December 31, 1994, 352 employees or 31% of eligible employees participated
in the plan.
11 COMMITMENTS, CONTINGENT
LIABILITIES, OFF-BALANCE SHEET
RISKS, AND OTHER MATTERS
The Corporation is a party to financial instruments which properly are not
reflected in the consolidated financial statements. These include commitments to
extend credit and letters of credit. These instruments involve elements of
credit and interest rate risk. Nonperformance or default by the other party to
loan commitments or standby letters of credit could result in a financial loss
to the Corporation equal to the amount of the loan commitments and standby
letters of credit. The same credit and collateral policies are used by the
Corporation in issuing these financial instruments as are used for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer under a
set of specified terms and conditions. Commitments generally have fixed
expiration dates or termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Loan commitments may be secured or unsecured. In the case of
secured commitments, collateral varies but may include commercial or residential
properties; business assets such as inventory, equipment, or accounts
receivable; securities; or other business or personal assets or guarantees. At
December 31, 1994, commitments to extend credit totaled $202,766,000.
Standby letters of credit are conditional commitments issued by the
Corporation or its subsidiaries to guarantee the performance of a customer to a
third party. The terms and risk of loss involved in issuing standby letters of
credit are similar to those involved in issuing loan commitments and extending
credit. At December 31, 1994, commitments outstanding under standby letters of
credit approximated $25,454,000.
The investment securities portfolio includes U.S. Treasury and U.S.
Government agency securities which may, on occasions, be loaned to securities
dealers designated as "Primary Government Dealers" by the Federal Reserve
System. Such loans of securities are secured by U.S. Treasury securities, U.S.
Government agency securities, or cash with a market value exceeding 102% of the
market value of securities lent. The loaned investment securities continue to be
reported in the consolidated financial statements, and the loan transaction is
not reflected therein. In the event loans are secured by cash, the pledged cash
is reported as an asset in the Corporation's consolidated balance sheet and an
offsetting liability is reported as short-term borrowings. All such loans are
callable in one business day. Such transactions may involve credit and interest
rate risk. At December 31, 1994, securities loaned totaled $19,097,000.
Various litigation is pending against the Corporation and its
subsidiaries. After reviewing these suits with counsel, management believes that
their ultimate resolution will not materially affect the consolidated financial
statements.
As a member of the Federal Reserve System, the Corporation's subsidiary
bank is required to maintain certain average reserve balances. For the final
weekly reporting period in the years ended December 31, 1994 and 1993, the
aggregate amounts of daily average required balances were approximately
$47,407,000 and $45,526,000, respectively.
The bank originates mortgage loans that are sold in the secondary
market. In connection with such activities, the Corporation maintains fidelity
bond insurance in the amount of $15,000,000 and errors and omissions insurance
of $2,500,000, which are in excess of required amounts.
12 FAIR VALUE OF FINANCIAL
INSTRUMENTS
In accordance with the FASB's Statement No. 107, Disclosures
About Fair Value of Financial Instruments, the following methods
and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
A CASH AND DUE FROM BANKS
The carrying amount is a reasonable estimate of fair value.
B MONEY MARKET INVESTMENTS
For short-term instruments, the carrying amount is a reasonable
estimate of fair value. For instruments that mature in over 90 days,
such as fixed-rate certificates of deposit, the fair value is estimated
based on the discounted cash flow of contractual cash flows using
interest rates currently offered for deposits of similar maturities.
C INVESTMENT SECURITIES
Fair values of investment securities are based on quoted market
prices or dealer quotes. In the absence of quoted market prices or
dealer quotes, fair value is estimated using quoted market prices for
similar securities, adjusted for differences between the quoted securi-
ties and the securities being valued.
D LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by loan type (such as construction,
mortgage, commercial, financial and agricultural, and consumer), interest rate
terms (such as fixed or adjustable), and estimated credit risk. For certain
loans, such as some residential mortgage loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of performing
loans is estimated by discounting the future cash flows through the estimated
maturities using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
estimate of maturity is based on historical experience, with repayments for
each loan classification modified, as required, by an estimate of the effect of
current economic and lending conditions. Fair value for significant
non-performing loans is based on recent external appraisals. If appraisals are
not available, estimated cash flows are discounted using a rate commensurate
with the risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally determined using
available market information and specific borrower information.
E DEPOSITS
The fair value of demand deposits, interest-checking accounts,
regular savings accounts, and money market deposit accounts is the
amount payable on demand at the reporting date. The fair value of
fixed maturity certificates of deposit and certain other deposits is
estimated based on the discounted value of the contractual cash
flows using the interest rates currently offered for deposits of similar
remaining maturities.
F SHORT-TERM BORROWINGS
The carrying values of federal funds purchased and securities sold
under agreements to repurchase and other short-term borrowings
are reasonable estimates of fair value.
G LONG-TERM DEBT
Interest rates on long-term debt are variable and, consequently,
the carrying amount is a reasonable estimate of fair value.
H OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
The carrying amount is a reasonable estimate of the fair value of
securities loaned.
At December 31, 1994, the carrying amounts and fair values of
loan commitments, stand-by letters of credit, and securities loaned
were immaterial.
I LIMITATIONS
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the Corporation's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Corporation's entire holdings of a particular financial instrument or groups of
such instruments. Because these estimates are subjective in nature and involve
uncertainties and matters of discretionary judgment, they cannot be determined
with precision. Changes in assumptions could affect the estimates significantly.
Fair value estimates are based on existing on-and-off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
premises and equipment, and goodwill. In addition, tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
The estimated fair values of the Corporation's financial instruments are as
follows:
(IN THOUSANDS)
Amortized Fair
December 31, 1994 Cost Value
Financial assets:
Cash and due from banks $ 100,809 $ 100,809
Investment securities:
Available for sale 176,493 170,815
Held to maturity 467,733 455,080
Loans, net 1,087,746 1,096,689
Financial liabilities:
Demand deposits and interest-bearing
transaction accounts 1,103,302 1,103,302
Certificates of deposit 585,570 584,547
Short-term borrowings 16,497 16,497
Long-term debt 19 19
December 31, 1993
Financial assets:
Cash and due from banks $ 114,677 $ 114,677
Federal funds sold and other
money market investments 10,212 10,365
Investment securities-
Held to maturity 716,617 737,688
Loans, net 1,009,047 1,026,201
Financial liabilities:
Demand deposits and interest-bearing
transaction accounts 1,082,502 1,082,502
Certificates of deposit 594,852 599,016
Short-term borrowings 54,097 54,097
Long-term debt 1,213 1,213
13 PARENT COMPANY
The Parent Company, in the ordinary course of business, provides its
subsidiaries with certain centralized management services and staff support. The
cost of these services is allocated to each subsidiary based on analyses of the
services rendered. In addition, certain subsidiaries of Jefferson Bankshares,
Inc. have in the past borrowed funds from the Parent Company at rates
approximating the Parent Companys cost of borrowing.
Certain of the subsidiaries provide the Parent Company with
computer and other services for which the Parent Company is
charged fees by the respective subsidiaries.
The primary source of funds for the dividends paid by the Parent Company is
dividends received from its bank subsidiary. The payment of such dividends by
the subsidiary bank and the ability of the bank to loan or advance funds to the
Parent Company are subject to certain statutory limitations. On December 31,
1994, 21 percent of consolidated shareholders' equity was not so restricted.
The Parent Company guarantees certain leases for its subsidiaries.
Condensed financial information for the Parent Company follows:
Condensed Balance Sheets
JEFFERSON BANKSHARES, INC. (PARENT COMPANY)
(IN THOUSANDS)
December 31 1994 1993
ASSETS
Cash $ 14 $ 503
Money market investments at bank subsidiary 4,100 3,700
Dividends receivable from subsidiaries 2,560 2,720
Investments in subsidiaries at equity:
Bank 196,479 187,777
Bank-related 4,848 4,715
201,327 192,492
Other assets 3,314 3,034
TOTAL ASSETS $211,315 $202,449
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ - $ 900
Other liabilities 4,762 5,115
TOTAL LIABILITIES 4,762 6,015
Shareholders' equity
Common stock 37,926 37,701
Capital surplus 46,332 43,977
Retained earnings 125,986 114,756
Unrealized losses on securities available for
sale of Bank subsidiary, net (3,691) -
TOTAL SHAREHOLDERS' EQUITY 206,553 196,434
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $211,315 $202,449
Condensed Statements of Income
JEFFERSON BANKSHARES, INC. (PARENT COMPANY)
(IN THOUSANDS)
Years Ended December 31 1994 1993 1992
INCOME
Dividends from bank subsidiary $10,560 $9,920 $8,440
Interest and fees from subsidiaries 2,717 2,690 2,374
Other income 100 100 50
TOTAL INCOME 13,377 12,710 10,864
EXPENSE
Interest expense 17 59 131
Salaries and employee benefits 1,892 2,040 1,725
Merger and acquisition expense 150 27 121
Other expense 852 962 416
TOTAL EXPENSE 2,911 3,088 2,393
Income before income tax benefit (expense)
and equity in undistributed net
income of subsidiaries 10,466 9,622 8,471
Income tax benefit (expense) (19) (13) 14
Income before equity in undistributed net
income of subsidiaries 10,447 9,609 8,485
Equity in undistributed net income
of subsidiaries 12,153 13,976 12,559
NET INCOME $22,600 $23,585 $21,044
Condensed Statements of Cash Flows
JEFFERSON BANKSHARES, INC. (PARENT COMPANY)
(IN THOUSANDS)
Years Ended December 31 1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,600 $ 23,585 $ 21,044
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 36 36 36
(Increase) decrease in dividends receivable 160 (520) (120)
Increase (decrease) in taxes payable (13) 319 31
(Increase) decrease in deferred tax benefit (113) 83 (43)
Equity in undistributed net income
of subsidiaries (12,153) (13,976) (12,559)
Other, net (752) (258) (68)
Total adjustments (12,835) (14,316) (12,723)
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,765 9,269 8,321
CASH FLOWS FROM INVESTING ACTIVITIES-
Business combinations, net of cash - (593) (1,750)
NET CASH USED IN INVESTING ACTIVITIES - (593) (1,750)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings (265) 34 32
Repayment of long-term debt (900) (900) (1,400)
Proceeds from issuance of common stock 2,761 2,094 1,417
Payments to acquire common stock (1,416) (1,068) (29)
Dividends paid (10,034) (8,507) (7,032)
NET CASH USED IN FINANCING ACTIVITIES (9,854) (8,347) (7,012)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (89) 329 (441)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,203 3,874 4,315
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,114 $ 4,203 $ 3,874
14 SUBSEQUENT EVENT (UNAUDITED)
On February 3, 1995, Jefferson National Bank entered into an agreement to
acquire the deposit liabilities of the Waynesboro office of First Union National
Bank. The office, which had approximately $30 million in deposits at year-end
1994, will be merged with Jefferson National Bank. The acquisition, which is
expected to be completed in the second quarter of 1995, will be accounted for as
a purchase.