MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis are intended to aid the reader in
understanding and evaluating the consolidated results of operation and financial
condition of Jefferson Bankshares, Inc. and Subsidiaries (the "Corporation").
The analysis attempts to identify trends and material changes that occurred
during the reporting periods. The discussion should be read in conjunction with
the Consolidated Financial Statements, their related notes and the statistical
information associated with the discussion.
In June 1995, Jefferson National Bank, the Corporation's banking
subsidiary, purchased $35 million in deposit liabilities from two other
financial institutions. Both transactions were accounted for as purchases, and,
accordingly, accounts and transactions related to these purchases are included
in the Corporation's Consolidated Financial Statements subsequent to the
acquisition dates.
RESULTS OF OPERATIONS
Net income in 1995 rose to a record $24.9 million, or 10 percent above
$22.6 million earned in 1994. Net income per share also increased 10
percent to a record $1.64 in 1995 compared with $1.49 in 1994. Net income
in 1993 was $23.6 million, or $1.57 per share. An analysis of the factors
that affected net income in 1995, 1994, and 1993 is presented in the sections
that follow. Table 1 provides a summary of the results of operations for the
last five years and certain information regarding the Corporation's consolidated
financial condition during those periods.
SELECTED FINANCIAL DATA TABLE 1
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Years Ended December 31 1995 1994 1993 1992 1991
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RESULTS OF OPERATIONS
Interest income $ 146,373 $ 129,496 $ 128,922 $ 129,072 $ 137,257
Interest expense 58,644 45,393 47,820 56,505 74,578
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Net interest income 87,729 84,103 81,102 72,567 62,679
Provision for loan losses 3,020 1,600 1,911 4,195 3,742
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Net interest income after provision for
loan losses 84,709 82,503 79,191 68,372 58,937
Non-interest income 19,019 17,910 17,245 16,655 14,707
Non-interest expense 66,580 66,423 61,668 54,965 51,638
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Income before income taxes 37,148 33,990 34,768 30,062 22,006
Provision for income tax expense 12,285 11,390 11,183 9,018 6,079
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NET INCOME $ 24,863 $ 22,600 $ 23,585 $ 21,044 $ 15,927
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PER SHARE DATA
Net income $ 1.64 $ 1.49 $ 1.57 $ 1.50 $ 1.14
Dividends declared .76 .68 .62 .53 .50
Dividends payout ratio 45.02% 44.40% 36.07% 33.42% 42.13%
Book value $ 14.92 $ 13.62 $ 13.03 $ 12.04 $ 11.07
Average number of shares outstanding 15,181,152 15,148,400 15,060,873 14,075,372 13,924,342
Number of shares outstanding at year-end 15,182,235 15,170,250 15,080,553 14,953,304 13,973,992
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SELECTED RATIOS
Return on average assets 1.25% 1.18% 1.27% 1.23% 0.99%
Return on average shareholders' equity 11.4 11.1 12.3 13.0 10.7
Shareholders' equity to total assets 11.0 10.7 10.1 9.8 9.3
Dividend payout ratio 45.0 44.4 36.1 33.4 42.1
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FINANCIAL CONDITION AT YEAR-END
Assets $ 2,051,188 $ 1,925,950 $ 1,941,961 $ 1,842,447 $ 1,664,555
Earning assets 1,878,599 1,740,048 1,749,740 1,675,448 1,517,267
Deposits 1,793,199 1,688,872 1,677,354 1,636,346 1,475,395
Long term debt 15 19 1,213 2,131 3,548
Shareholders' equity 226,540 206,553 196,434 180,023 154,138
SUMMARY OF FINANCIAL RESULTS BY QUARTER Table 2
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1995 1994
-------------------------------------------- --------------------------------------------
Three Months Ended DEC. 31 SEPT. 30 JUNE 30 MARCH 31 Dec. 31 Sept. 30 June 30 March 31
- -------------------------------------------------------------------------------------------------------------------------------
Interest income $ 37,709 $ 37,336 $ 36,808 $ 34,520 $ 33,707 $32,754 $ 32,084 $ 30,951
Interest expense 15,195 15,462 15,066 12,921 11,899 11,311 11,104 11,079
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 22,514 21,874 21,742 21,599 21,808 21,443 20,980 19,872
Provision for loan losses 1,580 480 480 480 375 375 375 475
Non-interest income 6,450 4,337 4,248 3,984 4,103 3,921 5,652 4,234
Non-interest expense 16,747 16,462 16,630 16,741 16,855 16,485 17,142 15,941
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Income before income taxes 10,637 9,269 8,880 8,362 8,681 8,504 9,115 7,690
Income tax expense 3,372 3,122 2,979 2,812 2,906 2,892 3,033 2,559
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NET INCOME $ 7,265 $ 6,147 $ 5,901 $ 5,550 $ 5,775 $ 5,612 $ 6,082 $ 5,131
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NET INCOME PER COMMON SHARE $ 0.48 $ 0.40 $ 0.39 $ 0.37 $ 0.38 $ 0.37 $ 0.40 $ 0.34
Higher income levels in 1995 lifted profitability ratios over 1994 ratios.
The return on average assets advanced to 1.25 percent in 1995 from 1.18 percent
in 1994. In 1993 this ratio was 1.27 percent. Another significant measure of
profitability, the return on average shareholders' equity, improved in 1995
to 11.43 percent from 11.05 percent in 1994. In 1993, this ratio was 12.34
percent.
Table 2 presents a quarterly summary of earnings components for the last two
years. In 1995, net income and net income per share increased each quarter and
reached record quarterly levels in the final quarter of the year. Rising net
interest income contributed to the positive quarterly earnings trend. Loan
growth was a key factor in the improvement in net interest income as the net
interest margin declined in the second and third quarters of 1995 before
rebounding in the fourth quarter.
Other factors influenced quarterly comparisons between 1995 and 1994. In
the second quarter of 1994, investment securities gains of $1.2 million and
non-recurring expenses of $653 thousand affected comparisons with the 1995
quarter. In the third quarter of 1995, the Corporation's F.D.I.C. assessments
were lowered, and it received a rebate on a portion of the second quarter
assessment. The result was a reduction of $1.0 million in third quarter expense
in 1995 compared with 1994. The premium reduction lowered expenses in the fourth
quarter of 1995 of $676 thousand. In addition, in the fourth quarter of 1995,
the Corporation recognized a gain of $1.9 million resulting from the
annuitization of certain pension liabilities. Partially offsetting the effects
of the F.D.I.C. assessments and the gain from the pension was an increase of
$1.2 million in the fourth quarter of 1995 in the provision for loan losses. The
increased provision for loan losses as well as the other factors that
influenced earnings noted above are more thoroughly discussed in subsequent
sections of this analysis.
NET INTEREST INCOME
Net interest income is the difference between interest income and interest
expense and represents the Corporation's gross profit margin. For comparative
purposes, the income from tax-exempt securities and loans is adjusted to a
tax-equivalent basis. This adjustment, based on the statutory federal corporate
tax rate of 35 percent, causes tax-exempt income and resultant yields to be
presented on a basis comparable with income and yields from fully taxable
earning assets.
The net interest margin represents tax-equivalent net interest income divided
by average earning assets. It reflects the average effective rate earned by
the Corporation on its average earning assets. Net interest income and the net
interest margin are influenced by fluctuations in market rates and
changes in both the volume and mix of average earning assets and the liabilities
that fund those assets.
Table 3 presents average balances, related interest income and expense, and
average yield/cost data for each of the last three years. Table 4 reflects
changes in interest income and interest expense resulting from changes in
average volume and changes due to rates.
Tax-equivalent net interest income increased 4 percent in 1995 to $89.0
million from $85.4 million in 1994. Although it fluctuated during the year, the
net interest margin of 4.88 percent in 1995 was nearly level with the 1994 net
interest margin of 4.87 percent. Both the yields on earning assets and the costs
of interest bearing liabilities rose in 1995 compared with 1994 as market rates
of interest were higher in 1995.
Net interest income and the net interest margin benefited in 1995 from a 4
percent increase in average earning assets and a change in the mix of those
assets. The loan portfolio experienced steady growth throughout 1995, and
average loans increased 11 percent during the year. Thus, average loans as a
percent of average earning assets increased to 64 percent in 1995 from 60
percent in 1994.
Influenced by interest rate trends, competitive factors, and a special
marketing promotion to attract and retain deposits, the cost of funds rose more
rapidly in 1995 than the yield on average earning assets. The cost of
interest-bearing liabilities rose 79 basis points in 1995 over 1994 as interest
expense increased 29 percent. By comparison, the yield on earning assets was 64
basis points higher in 1995 as tax-equivalent interest income increased only 13
percent. In addition to the factors noted above, average interest-bearing
liabilities increased only 3 percent in 1995, thus limiting the effect of higher
average rates.
CONSOLIDATED AVERAGE BALANCES/NET INTEREST INCOME/RATES* Table 3
TAX-EQUIVALENT BASIS (DOLLARS IN MILLIONS)
1995 1994 1993
-------------------------- ---------------------------- -----------------------------
INTEREST AVERAGE Interest Average Interest Average
AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/
BALANCE EXPENSE COST Balance Expense Cost Balance Expense Cost
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ASSETS
Loans--net of unearned income $1,164.3 $105.4 9.05% $1,047.2 $ 85.0 8.12% $1,006.3 $81.5 8.10%
Investment securities:
Available for sale:
U.S. Treasury 176.2 11.2 6.36 176.7 11.5 6.51 - - -
U.S. Government agencies 3.6 0.2 4.73 1.8 0.1 4.10 - - -
Mortgage-backed securities 1.0 0.1 4.97 0.3 - - - - -
Held to maturity:
U.S. Treasury 1.1 - - 1.4 - - 202.3 14.3 7.05
U.S. Government agencies 243.6 15.8 6.49 265.2 17.8 6.72 243.8 18.0 7.40
States and political subdivisions 20.1 1.6 8.07 26.7 2.1 7.82 35.3 2.9 8.18
Corporate debt securities 194.3 12.0 6.20 203.1 12.5 6.17 177.9 12.0 6.77
Other securities 8.4 0.6 7.28 7.8 0.6 7.68 7.3 0.6 7.90
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Total investment securities 648.3 41.5 6.42 683.0 44.6 6.54 666.6 47.8 7.17
Money market investments 11.5 0.7 5.95 25.3 1.2 4.54 31.3 1.2 3.74
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TOTAL EARNING ASSETS 1,824.1 147.6 8.09 1,755.5 130.8 7.45 1,704.2 130.5 7.66
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Allowance for loan losses (13.9) (13.7) (13.7)
Cash and due from banks 85.7 85.5 77.3
Premises and equipment 51.7 50.4 48.6
Other assets 44.3 43.3 43.7
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TOTAL ASSETS $1,991.9 $1,921.0 $1,860.1
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LIABILITIES AND SHAREHOLDERS' EQUITY
Time and savings deposits:
Interest-checking accounts $ 292.5 $ 6.6 2.25% $ 299.8 $ 6.8 2.27% $ 272.3 $ 7.2 2.64%
Regular savings 183.4 4.9 2.65 200.2 5.4 2.68 170.2 4.9 2.90
Money market deposit accounts 320.8 11.8 3.68 345.9 9.7 2.81 357.0 10.2 2.85
Certificates of deposit $100,000
and over 86.9 4.6 5.25 71.2 2.8 3.99 70.6 2.8 4.04
Other time deposits 591.0 29.5 5.01 522.6 20.2 3.87 538.2 22.2 4.67
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Total time and savings deposits 1,474.6 57.4 3.89 1,439.7 44.9 3.12 1,408.3 47.3 3.36
Short-term borrowings 24.9 1.2 4.90 14.9 0.4 2.96 15.1 0.4 2.83
Long-term debt - - - 0.5 0.1 5.65 1.6 0.1 5.23
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TOTAL INTEREST-BEARING
LIABILITIES 1,499.5 58.6 3.91 1,455.1 45.4 3.12 1,425.0 47.8 3.36
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Demand deposits 260.3 248.9 232.9
Other liabilities 14.7 12.4 11.1
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Total liabilities 1,774.5 1,716.4 1,669.0
Shareholders' equity before
unrealized losses 217.4 204.8 191.1
Unrealized losses on securities
available for sale, net - 0.2 -
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Total shareholders' equity 217.4 204.6 191.1
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,991.9 $1,921.0 $1,860.1
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NET INTEREST INCOME $89.0 $ 85.4 $ 82.7
AVERAGE INTEREST RATE SPREAD 4.18% 4.33% 4.30%
INTEREST EXPENSE AS A PERCENT
OF AVERAGE EARNING ASSETS 3.21% 2.59% 2.81%
NET INTEREST MARGIN 4.88% 4.87% 4.85%
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*Fully taxable equivalent income is calculated by dividing actual tax-exempt
income by a factor which increases interest income to an amount that would need
to be received if such income were taxable at the Federal tax rate of 35% in
1995, 1994 and 1993. Loan interest income includes fees of $2,921,000 in 1995;
$2,831,000 in 1994; and $2,633,000 in 1993. Loans include non-accrual loan
balances and interest accrued, if any.
As 1995 drew to a close, market interest rates showed signs of easing.
Changes in interest rates may result in fluctuations in the net interest margin
and net interest income. The level of growth in the loan portfolio and pricing
competition for deposits will be two key influences on net interest income in
1996.
Comparing 1994 with 1993, tax-equivalent net interest income increased 3
percent, and the net interest margin was relatively stable at 4.87 percent in
1994 compared with 4.85 percent in 1993. Rising interest rates in 1994 helped to
lift net interest income and contributed to the improvement in the net interest
margin. Other factors affecting the net interest margin in 1994 were a 3 percent
increase in average earning assets and a shift in the mix of those assets.
Average loans as a percent of average earning assets increased to 60 percent in
1994 compared with 59 percent in 1993.
ANALYSIS OF CHANGES IN NET INTEREST INCOME* Table 4
TAX-EQUIVALENT BASIS (DOLLARS IN THOUSANDS)
YEAR 1995 OVER 1994 YEAR 1994 OVER 1993
-------------------------------- ------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN Due to Change in
----------------------- -------------------
NET Net
AVERAGE INCREASE Average Increase
VOLUME RATE (DECREASE) Volume Rate (Decrease)
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INTEREST INCOME
Loans--net of unearned income $10,047 $ 10,289 $20,336 $ 3,313 $ 201 $ 3,514
Investment securities:
Available for sale:
U.S. Treasury (34) (273) (307) 11,508 - 11,508
U.S. Government agencies 85 13 98 74 - 74
Held to maturity:
U.S. Treasury - 66 66 (7,109) (7,151) (14,260)
U.S. Government agencies (1,348) (596) (1,944) 1,509 (1,732) (223)
States and political subdivisions (554) 66 (488) (653) (122) (775)
Other (495) 30 (465) 1,656 (1,142) 514
Money market investments (755) 286 (469) (243) 226 (17)
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TOTAL INTEREST INCOME 6,946 9,881 16,827 10,055 (9,720) 335
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INTEREST EXPENSE
Time and savings deposits:
Interest-checking accounts (151) (54) (205) 682 (1,069) (387)
Regular savings (445) (59) (504) 821 (395) 426
Money market deposit accounts (741) 2,851 2,110 (330) (148) (478)
Certificates of deposit $100,000 and over 709 1,015 1,724 26 (34) (8)
Other time deposits 2,847 6,528 9,375 (596) (1,340) (1,936)
Short-term borrowings 392 386 778 (6) 19 13
Long-term debt (28) 1 (27) (64) 6 (58)
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TOTAL INTEREST EXPENSE 2,583 10,668 13,251 533 (2,961) (2,428)
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CHANGE IN NET INTEREST INCOME $4,363 $ (787) $ 3,576 $ 9,522 $(6,759) $ 2,763
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*The change in interest that cannot be separated between rate and volume has
been allocated to each variance proportionately.
PROVISION FOR LOAN LOSSES
The provision for loan losses is the amount charged to expense each year that
is intended to maintain an adequate allowance, or reserve, for loan losses in
the future. The adequacy of the allowance and, consequently, the provision for
loan losses is dependent on a variety of factors including size, growth, and
composition of the loan portfolio, historical and expected loan loss experience,
and an analysis of the quality of the loan portfolio and general economic
conditions.
In 1995, the Corporation raised its provision for loan losses to $3.0 million
from $1.6 million in 1994. In 1993, the provision was $1.9 million. The higher
provision in 1995 compared with 1994 reflected 11 percent growth in the loan
portfolio, increased loan losses, and reports of rising consumer debt levels and
delinquencies. The lower provision in 1994 compared with 1993 reflected
improvement in economic conditions and a declining trend in non-performing
assets.
If loan growth is sustained at or near 1995 levels in 1996 and economic
conditions do not vary significantly from those at year-end 1995, the 1996
provision for loan losses may be near or above the 1995 amount. Trends that
develop in 1996 relating to the economy, actual loan losses, and the level of
non-performing assets will strongly influence the amount of the provision.
NON-INTEREST INCOME
Non-interest income includes service charges and other related income from
services rendered by the Corporation. In addition, non-interest income includes
gains and losses realized from the sale of fixed assets, sales and calls of
investment securities, sales of mortgage loans, and other income items.
Non-interest income increased 6 percent in 1995 to $19.0 million from $18.0
million in 1994. Influencing the comparison was $1.9 million in income
related to the annuitization of certain pension liabilities in 1995 and $1.2
million in income in 1994 from the sale of investment securities available for
sale. The 1995 annuitization of pension liabilities applied only to retirees of
the Corporation prior to a specified date. As the result of reducing the pension
plan liability, a proportionate amount of the excess in plan assets over plan
liabilities was recognized as income. Excluding the 1995 annuitization and the
1994 investment securities gains from the totals, non-interest income increased
2 percent in 1995. Contributing to this increase was a 14 percent increase in
trust income and a 5 percent increase in deposit account fees. Offsetting these
increases was a 60 percent reduction in income related to sales of mortgage
loans. This decrease was attributable to a lower volume of mortgage loan
refinancing and a reduction in the volume of fixed rate mortgage loan
originations. In a rising interest rate environment origination volume increased
in adjustable rate mortgages, which were added to the loan portfolio rather than
sold in the secondary market.
Non-interest income increased 4 percent in 1994 to $17.9 million compared
with $17.2 million in 1993. Non-interest income was boosted in 1994 by
securities available for sale gains of $1.2 million. More than offsetting this
increase, however, was a decrease in income from mortgage loan sales. The same
factors that influenced such income in 1995 were applicable to the 1994
decrease. In other categories of non-interest income, trust income decreased 2
percent to $3.9 million, deposit account fees increased 3 percent to $8.7
million, and other income rose 30 percent to $3.3 million in 1994 compared with
1993. The rise in other income was attributable to a variety of sources
including asset sales, automated teller machine fees, and safe deposit box rent.
NON-INTEREST INCOME Table 5
(IN THOUSANDS)
Years Ended December 31 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
Trust income $ 4,500 $ 3,944 $ 4,037 $ 3,765 $ 3,466
Service charges on deposit accounts 9,155 8,702 8,475 8,326 8,136
Credit insurance income 107 165 208 255 298
Investment securities gains (losses), net (103) 1,166 88 298 64
Mortgage loan sales income 275 681 1,932 1,528 597
Other income 5,085 3,252 2,505 2,483 2,146
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TOTAL NON-INTEREST INCOME $19,019 $17,910 $17,245 $16,655 $14,707
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NON-INTEREST EXPENSE
Non-interest expense represents the overhead expenses of the Corporation. The
Corporation monitors all categories of non-interest expense in an attempt to
improve productivity and earnings performance.
Non-interest expense in 1995 was nearly level with the 1994 amount. A
significant factor in this comparison was a reduction in F.D.I.C. insurance
assessments to $.04 per $100 of insured deposits in 1995 from $.23 in prior
years. The result was a decrease of $1.7 million in these assessments in 1995
compared with 1994. In addition, the initial assessment rate for 1996 was
reduced to zero, which will result in a further reduction of 1996 expense.
Excluding the difference in F.D.I.C. assessments, non-interest expense
increased 3 percent in 1995 over 1994. The largest factor in this increase was
personnel expense, which increased 5 percent in 1995 to $39.2 million. Occupancy
expense was $5.1 million in both 1995 and 1994. Equipment expense increased 2
percent to $6.1 million in 1995. Also increasing in 1995 were office supplies
expense, which rose 7 percent, postage expense, which was up 13 percent, and
telecommunications expense, which increased 2 percent. Partially offsetting the
increases noted above, other expense decreased 5 percent in 1995 compared with
1994. Contributing to this decrease were reductions in legal fees, marketing,
and expenses related to foreclosed properties.
Comparing 1994 with 1993, non-interest expense increased 8 percent to $66.4
million. Contributing to the increase was personnel expense, which was 8 percent
higher in 1994 at $37.3 million. Personnel expense rose as the result of normal
wage increases and related benefit expenses and from an increase in the number
of employees. Occupancy expense increased 7 percent in 1994, and equipment
expense was 4 percent higher compared with the 1993 amount. Expense for office
supplies in 1994 was level with the 1993 amount, and postage expense decreased 2
percent. Telecommunications expense, however, increased 25 percent in 1994
compared with 1993 as the result of enhancing our communications capabilities.
Other expense in 1994 increased 12 percent. Leading contributors to this
increase were legal and professional fees, amortization of intangible assets
associated with acquisitions, and certain non-recurring expenses.
NON-INTEREST EXPENSE Table 6
(DOLLARS IN THOUSANDS)
Years Ended December 31 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $39,222 $37,261 $34,651 $31,439 $30,486
Occupancy expense, net 5,063 5,063 4,740 4,653 4,427
Equipment expense 6,086 5,965 5,722 5,125 4,356
F.D.I.C. assessments 2,081 3,790 3,645 3,327 2,838
Office supplies 1,189 1,108 1,115 1,051 1,024
Postage 1,313 1,160 1,187 1,143 1,189
Telecommunications expense 1,817 1,775 1,425 1,292 1,285
Other expense 9,809 10,301 9,183 6,935 6,033
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TOTAL NON-INTEREST EXPENSE $66,580 $66,423 $61,668 $54,965 $51,638
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING EFFICIENCY RATIO* 61.6% 64.3% 61.7% 60.4% 64.6%
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*Total non-interest expense as a percent of net interest income (tax-equivalent
basis) and total non-interest income.
INCOME TAXES
The provision for income taxes was $12.3 million in 1995 and $11.4 million in
1994. Higher operating earnings were primarily responsible for the increase in
income taxes. In 1994, income taxes of $11.4 million were greater than the 1993
amount of $11.2 million in spite of a reduction in operating earnings. Lower
tax-exempt income and other factors affected the comparison.
FINANCIAL CONDITION
The Corporation's financial condition is measured in terms of its asset
and liability composition, asset quality, capital resources, and liquidity.
Improved economic conditions in 1995 led to stronger asset growth, and the
Corporation's total assets exceeded the $2 billion mark for the first time.
Leading the asset growth, the loan portfolio increased 11 percent in 1995.
Deposits, which are the Corporation's principal funding source, increased 6
percent in 1995. While the 1995 growth rate was stronger than the 1994 rate, it
still reflected a trend for funds to migrate from deposits into other
investment opportunities. Throughout 1995, as in prior years, capital levels
were strong and liquidity measures were more than adequate.
The Corporation is not engaged in investment strategies involving derivative
financial instruments. Asset and liability management is conducted without
the use of forward-based contracts, options, swap agreements, or other synthetic
financial instruments derived from the value of an underlying asset,
reference rate, or index. Off-balance sheet risks such as commitments to extend
credit, letters of credit, and other items are discussed in Note 10 of the Notes
to Consolidated Financial Statements.
ASSETS
On December 31, 1995, total assets were $2.051 billion, or 7 percent higher
than the year earlier total of $1.926 billion. Average total assets increased 4
percent in 1995 to $1.992 billion from $1.921 billion in 1994.
LOAN PORTFOLIO. Loans, net of unearned income grew 11 percent to $1.220
billion on December 31, 1995 from $1.102 billion one year earlier. Average
loans, net of unearned income also increased 11 percent in 1995 to $1.164
billion from $1.047 billion in 1994.
LOAN PORTFOLIO Table 7
(DOLLARS IN THOUSANDS)
December 31 1995 1994 1993 1992 1991
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LOAN CLASSIFICATION:
Commercial, financial, and agricultural $ 467,296 $ 407,152 $ 408,349 $388,314 $316,129
Real estate--construction 84,090 107,629 97,832 105,611 80,997
Real estate--mortgage 406,122 366,983 285,384 270,307 263,644
Instalment 262,985 219,872 231,656 216,388 229,404
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TOTAL LOANS $1,220,493 $1,101,636 $1,023,221 $980,620 $890,174
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Consumer, commercial, and mortgage loans contributed to the loan portfolio's
growth in 1995. Consumer lending was the strongest in the indirect portion of
the portfolio and in credit cards, which were a new addition to the portfolio in
1995. Indirect loans are loans to individuals to finance the purchase of certain
goods or services, principally automobiles, which are originated through dealers
or other vendors. The Corporation expanded the scope of this lending in 1994 and
1995 and will continue to do so in 1996. In December 1995, the Corporation began
processing loans in conjunction with an agreement with a nationwide insurance
company. This agreement, which relates to insurance agents in a significant
portion of Virginia, will be a source of additional loan volume in 1996. At
year-end 1995, indirect loans totaled $105 million, or 31 percent above the year
earlier total of $80 million. Credit card balances added $9 million to the loan
portfolio at year-end 1995. With marketing of credit cards restricted primarily
to our own customer base, the growth in these balances in 1995 was an important
addition to the loan portfolio.
Commercial loans, which is the largest segment of the portfolio, increased 15
percent in 1995. This increase was attributable to improved economic activity in
the various markets served by the Corporation and reflected continued success in
a market niche important to the Corporation.
Mortgage loans rose 11 percent to $406 million on December 31, 1995. This
increase was attributable principally to adjustable rate mortgages which were
popular in this rising interest rate environment.
REMAINING MATURITIES OF SELECTED LOANS Table 8
(IN THOUSANDS)
Commercial,
Financial, and Real Estate--
December 31, 1995 Agricultural Construction
- ---------------------------------------------------------------------
WITHIN 1 YEAR $119,372 $ 42,360
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VARIABLE RATE:
1 to 5 years 93,979 12,480
After 5 years 140,574 12,624
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TOTAL 234,553 25,104
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FIXED RATE:
1 to 5 years 85,632 11,725
After 5 years 27,739 4,901
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TOTAL 113,371 16,626
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TOTAL MATURITIES $467,296 $ 84,090
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Loan growth was strong throughout 1995. In spite of evidence that consumer
debt levels were high, loan volume showed continued strength as the year drew to
a close. A decline in interest rates near year-end should help to offset
potential weakening in loan demand. In addition, the portions of the loan
portfolio that had the strongest growth in 1995 were areas designated by the
Corporation for emphasis. Indirect lending is expected to continue its growth
from the addition of the insurance company arrangement and other dealers. Credit
card balances are still increasing as card issuance and usage grows. Lending to
small businesses is a niche market for the Corporation, and this segment of the
portfolio should continue to benefit from business borrowers that migrate away
from larger financial institutions. Although mortgage loan originations in 1996
may benefit from favorable interest rates and from continued pursuit of mortgage
loan business by the Corporation, the growth rate of this segment of the loan
portfolio may be less in 1996 than in 1995 if the market favors fixed rate
mortgages as opposed to adjustable rate mortgages. The Corporation, in its
efforts to control interest rate risk, generally sells in the secondary market
most of the fixed rate mortgages that it originates. While these sales generate
fee income, they do not add to the loan portfolio.
On December 31, 1995, the Corporation had no concentration of loans in any
one industry in excess of 10 percent of its loan portfolio. Because of the
nature of the Corporation's market, loan collateral is predominantly real estate
related. Thus, periodic weaknesses in real estate markets may have an adverse
effect on collateral values and could lead to writedowns and loan losses. The
Corporation carefully monitors its exposure to risk from construction and
development loans, commercial real estate loans, and residential lending. The
Corporation does not engage in foreign lending activities. Consequently, the
loan portfolio is not exposed to risk from foreign credits.
With respect to credit quality, the Corporation's past performance has been a
source of financial strength. Net loan losses in 1995 were $3.3 million, or .29
percent of average loans, net of unearned income. In 1994, net loan losses were
$1.7 million, or only .16 percent of average loans, net of unearned income. Loan
losses rose in 1995 principally as the result of writedowns on two large
credits.
Loan loss expectations for 1996 are influenced by positive economic
conditions, declining interest rates, and lower levels of problem assets
combined with some concern about the level of consumer debt. Thus, it is
expected that loan losses in 1996 would not be materially greater than those in
1995. However, unforeseen changes in borrowers' financial conditions could
impact actual loan losses in 1996. The Corporation will continue its efforts to
minimize future credit losses.
SUMMARY OF LOAN LOSS EXPERIENCE Table 9
(Dollars in thousands)
Years Ended December 31 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
$ 13,754 $ 13,864 $ 13,057 $ 10,894 $ 9,647
ALLOWANCE AT BEGINNING OF YEAR
LOAN LOSSES:
Commercial, financial, and agricultural 1,641 994 789 920 1,015
Real estate - construction 1,090 150 - 90 100
Real estate - mortgage 110 187 140 343 535
Instalment 1,274 1,054 696 1,607 1,125
- ----------------------------------------------------------------------------------------------------------------
TOTAL LOAN LOSSES 4,115 2,385 1,625 2,960 2,775
- ----------------------------------------------------------------------------------------------------------------
RECOVERIES:
Commercial, financial, and agricultural 169 67 59 58 53
Real estate - construction 2 4 6 47 -
Real estate - mortgage 38 75 72 9 -
Instalment 564 529 261 263 228
- ----------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 773 675 398 377 281
- ----------------------------------------------------------------------------------------------------------------
NET LOAN LOSSES 3,342 1,710 1,227 2,583 2,494
INCREASE FROM ACQUISITIONS - - 123 551 -
PROVISION CHARGED TO EXPENSE 3,020 1,600 1,911 4,195 3,741
- ----------------------------------------------------------------------------------------------------------------
ALLOWANCE AT END OF YEAR $ 13,432 $ 13,754 $ 13,864 $ 13,057 $ 10,894
- ----------------------------------------------------------------------------------------------------------------
LOANS, NET OF UNEARNED INCOME:
Outstanding at year-end $1,220,421 $1,101,500 $1,022,911 $ 979,365 $ 889,540
Average 1,164,324 1,047,206 1,006,262 908,397 879,236
RATIOS:
Net loan losses to average loans 0.29% 0.16% 0.12% 0.28% 0.28%
Allowance to year-end loans 1.10% 1.25% 1.36% 1.33% 1.22%
Allowance to net loan losses 4.02X 8.04X 11.30X 5.05X 4.37X
Provision to net loan losses 0.90X 0.94X 1.56X 1.62X 1.50X
Provision to average loans 0.26% 0.15% 0.19% 0.46% 0.43%
Recoveries to loan losses 18.78% 28.30% 24.49% 12.74% 10.13%
- ----------------------------------------------------------------------------------------------------------------
Risk elements associated with the loan portfolio are presented in Table 10.
Excluding foreclosed properties, identified risk elements on December 31, 1995
totaled $9.0 million, or .74 percent of loans, net of unearned income. At
December 31, 1994, the total was $9.7 million, or .88 percent of loans, net of
unearned income. Foreclosed properties at December 31, 1995, were $4.1 million
compared with the year earlier total of $5.9 million. Foreclosed properties are
reported net of writedowns at the lower of cost or estimated net realizable
value. At December 31, 1995, total risk elements represented 1.1 percent of
loans, net of unearned income plus foreclosed properties and .64 percent of
total assets. These ratios at the end of 1994 were 1.4 percent and .81 percent,
respectively. At year-end 1995, the Corporation identified an additional $2.4
million in loans that pose some uncertainty over the borrowers' ability to
comply with loan repayment terms.
With regard to the non-accrual loans identified in Table 10, the amounts
classified in this category represent loan balances on which the accrual of
interest has been discontinued. The largest exposure to a single borrower in
this group of loans at year-end 1995 was $1.2 million. Only 9 other loans had
balances greater than $200 thousand. Loans are placed in a non-accrual status
when collection of principal or interest is legally barred or when management
determines that collection of interest cannot be assured in light of the
financial condition of the borrower and the circumstances surrounding the loan.
The Corporation's subsidiary bank is in substantial compliance with regulatory
policy that requires accrual of interest to be discontinued when principal or
interest is past due for 90 days or more unless the loan is well secured and in
the process of collection. Because of the historical experience of net loan
losses, the ratio of risk elements to loans outstanding, and the overall quality
of the loan portfolio, management has been able to evaluate each individual loan
situation of any appreciable magnitude and its potential for collection prior to
classifying any loan as non-accrual.
Included in the $4.1 million total of foreclosed properties at December 31,
1995, were 16 parcels of real estate. The highest carrying value of a single
property was $906 thousand. Only 4 other parcels included in foreclosed
properties at year-end 1995 had carrying values above $200 thousand.
RISK ELEMENTS Table 10
(DOLLARS IN THOUSANDS)
Book Value December 31 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
LOANS:
Non-accrual $ 6,009 $ 6,996 $ 9,174 $10,448 $12,773
Troubled debt restructurings 250 - - - -
Past due principal and/or interest for 90 days or more 2,753 2,713 5,453 3,545 3,915
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 9,012 $ 9,709 $14,627 $13,993 $16,688
- ------------------------------------------------------------------------------------------------------------------------------
AS A PERCENT OF:
Loans, net of unearned income .74% .88% 1.43% 1.43% 1.88%
Total assets .44% .50% .75% .76% 1.00%
Allowance for loan losses 67.09% 70.59% 105.50% 107.17% 153.19%
FORECLOSED PROPERTIES $ 4,093 $ 5,919 $ 8,831 $11,770 $ 9,018
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RISK ELEMENTS $13,105 $15,628 $23,458 $25,763 $25,706
- ------------------------------------------------------------------------------------------------------------------------------
AS A PERCENT OF:
Loans, net of unearned income
plus foreclosed properties 1.07% 1.41% 2.27% 2.60% 2.86%
Total assets .64% .81% 1.21% 1.40% 1.54%
- ------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1995, 1994, and 1993, gross interest income in
the amount of $632,000, $462,000 and $863,000, respectively, would have been
recorded on loans reported as non-accrual if the loans had been current in
accordance with their original terms and conditions. The amount of interest
income on those loans that was included in net interest income amounted to
$49,000, $66,000 and $754,000 in 1995, 1994, and 1993, respectively. At December
31, 1995, the Corporation identified additional loans totaling $2,399,000 that
pose some uncertainty over the borrowers' ability to comply with the loan
repayment terms. Investment securities also may pose credit risks. On December
31, 1995, all investment securities were performing according to terms.
The Corporation maintains a general allowance for loan losses and does not
allocate its allowance for loan losses to individual categories for management
purposes. Table 11 shows an allocation among loan categories based upon an
analysis of the portfolio's composition, historical loan loss experience, and
other relevant factors. In determining the adequacy of the allowance for loan
losses, management considers the size and composition of the loan portfolio,
historical loss experience, economic conditions, the value and adequacy of
collateral and guarantors, and the current level of the allowance. In addition,
consideration is given to potential losses associated with non-accrual loans and
loans that are deemed potential problems.
At December 31, 1995, the allowance for loan losses was $13.4 million, or
1.10 percent of loans, net of unearned income. A year earlier, the allowance was
$13.8 million, or 1.25 percent of loans, net of unearned income. At its year-end
1995 level, the allowance for loan losses exceeded the sum of net loan losses
over the previous five years. At that level, management believes that the
allowance is adequate, subject to unforeseen economic changes or unexpected
regulatory developments.
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS) Table 11
December 31 1995 1994 1993
---------------------- ------------------------ ------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Commercial, financial, and agricultural $ 7,871 38.3% $ 8,447 36.9% $ 6,499 39.9%
Real estate--construction 137 6.9 156 9.8 687 9.6
Real estate--mortgage 732 33.3 514 33.3 385 27.9
Instalment 2,202 21.5 2,227 20.0 3,598 22.6
Unallocated 2,490 - 2,410 - 2,695 -
- --------------------------------------------------------------------------------------------------------------------
TOTAL ALLOWANCE FOR LOAN LOSSES $13,432 100.0% $13,754 100.0% $13,864 100.0%
- --------------------------------------------------------------------------------------------------------------------
1992 1991
---------------------- --------------------
Percent of Percent of
Loans to Loans to
Amount Total Loans Amount Total Loans
----------------------------------------------
ALLOWANCE FOR LOAN LOSSES:
Commercial, financial, and agricultural $ 6,958 39.6% $ 6,618 35.5%
Real estate--construction 753 10.8 742 9.1
Real estate--mortgage 437 27.5 468 29.6
Instalment 2,558 22.1 1,782 25.8
Unallocated 2,351 - 1,284 -
- -----------------------------------------------------------------------------------------
TOTAL ALLOWANCE FOR LOAN LOSSES $13,057 100.0% $10,894 100.0%
- -----------------------------------------------------------------------------------------
INVESTMENT SECURITIES. Investment securities represent the second largest
component of earning assets. In accordance with Statement of Financial
Accounting Standards No. 115, securities held in the investment portfolio are
classified as Held to Maturity or Available for Sale. The Corporation has no
Trading Securities. Held to Maturity Securities are reported at amortized cost
in the Corporation's consolidated financial statements. Available for Sale
securities are reported at fair value. Unrealized gains or losses on these
securities are reported as a separate component of shareholders' equity, net of
tax effects, and are excluded from earnings until realized.
INVESTMENT SECURITIES Table 12
(DOLLARS IN THOUSANDS)
December 31, 1995 After 1 but After 5 but
AVAILABLE FOR SALE: Within Within Within After
1 Year 5 Years 10 Years 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Amortized Cost $ 30,290 $150,188 $ - $ - $180,478
Fair Value 30,525 154,456 - - 184,981
Yield 6.54% 6.31% - - 6.35%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Amortized Cost $ 2,747 $ - $ - $ - $ 2,747
Fair Value 2,710 - - - 2,710
Yield 4.40% - - - 4.40%
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed Securities:
Amortized Cost $ - $ - $ 501 $ 477 $ 978
Fair Value - - 493 485 978
Yield - - 5.13% 4.80% 4.97%
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities--Available for Sale:
Amortized Cost $ 33,037 $150,188 $ 501 $ 477 $184,203
Fair Value 33,235 154,456 493 485 188,669
Yield 6.49% 6.31% 5.13% 4.80% 6.30%
- ------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY:
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Amortized Cost $ 972 $ - $ - $ - $ 972
Fair Value 995 - - - 995
Yield 5.50% - - - 5.50%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Amortized Cost $ 57,526 $186,851 $ - $ - $244,377
Fair Value 57,918 189,075 - - 246,993
Yield 7.35% 6.09% - - 6.39%
- ------------------------------------------------------------------------------------------------------------------------------
State and Political Subdivision Securities:
Amortized Cost $ 8,958 $ 10,402 $ 2,035 $ 2,407 $23,802
Fair Value 9,003 10,716 2,182 2,524 24,425
Yield 6.19% 7.19% 8.49% 8.32% 7.05%
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Debt Securities:
Amortized Cost $ 57,190 $123,130 $ - $ - $180,320
Fair Value 57,124 124,785 - - 181,909
Yield 5.34% 6.60% - - 6.19%
- ------------------------------------------------------------------------------------------------------------------------------
Other Securities:
Amortized Cost $ - $ - $ - $ 5,038 $ 5,038
Fair Value - - - 5,038 5,038
Yield - - - 6.00% 6.00%
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities--Held to Maturity:
Amortized Cost $124,646 $320,383 $ 2,035 $ 7,445 $454,509
Fair Value 125,040 324,576 2,182 7,562 459,360
Yield 6.32% 6.32% 8.49% 6.77% 6.33%
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995, the combined reported value of investment securities
was $643 million compared with the year earlier total of $639 million. Available
for Sale securities increased to $189 million on December 31, 1995 from $171
million at year-end 1994. Held to Maturity securities decreased to $455 million
on December 31, 1995 from the year earlier total of $468 million.
Approximately $10 million of the change in securities Available for Sale was
attributable to changes in market valuations of the securities. In 1995, the
fair value adjustment of the amortized cost of the securities reflected an
unrealized gain of $4.5 million. In 1994 this adjustment resulted in an
unrealized loss of $5.7 million. The unrealized gain in 1995 resulted from a
declining interest rate environment resulting in the securities held as
Available for Sale carrying yields higher than current market yields for
comparable securities. Conversely, at year-end 1994, market rates of interest
were higher than yields in the portfolio, thus reducing the fair value of the
securities Available for Sale. In the event the Corporation needs to sell
securities classified as Available for Sale, gains or losses on such sales would
be reflected in the Corporation's consolidated statement of income.
On December 31, 1995, the weighted average yield of the Held to Maturity
portfolio was 6.33 percent. The weighted average yield of Available for Sale
securities was 6.30 percent. The market value of securities Held to Maturity was
101.1 percent of its book value at year-end 1995 compared with 97.3 percent on
December 31, 1994. Additional information regarding investment securities can be
found in Table 12 and Note 3 of the Notes to Consolidated Financial Statements.
Quality ratings of the Corporation's corporate debt securities appear in Table
13. With the exception of securities issued by the U.S. Government, the
Corporation held no concentration of 10 percent or greater of its shareholders'
equity in securities of any single issuer at December 31, 1995.
CORPORATE DEBT BY QUALITY RATING Table 13
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------
Book
December 31, 1995 Value Percent
- --------------------------------------------------------------------------
MOODY'S RATING
Aaa $ 13,056 7.3%
Aa1 9,454 5.3
Aa2 9,988 5.5
Aa3 4,948 2.7
A1 75,520 41.9
A2 50,541 28.0
A3 5,658 3.1
BAA1 11,056 6.1
NR 99 .1
- --------------------------------------------------------------------------------
TOTAL $180,320 100.0%
- --------------------------------------------------------------------------------
Money Market Investments. At year-end 1995, the Corporation had $15 million in
short-term money market investments. One year earlier, the Corporation had no
short-term money market investments. In 1995 these instruments averaged $11
million compared with the 1994 average of $25 million. The average declined in
1995 as funds were used for loan growth.
Liabilities
The Corporation relies almost exclusively on core deposits to fund its
earning assets.
Deposits. Total deposits on December 31, 1995 were $1.793 billion, or 6
percent above the year earlier total of $1.689 billion. Average total deposits
in 1995 of $1.735 billion were 3 percent above the 1994 average of $1.689
billion. The stronger growth rate in the year-end balances compared with average
balances reflected stronger growth in the second half of 1995. However, deposit
totals continued to be affected in 1995 by the movement of funds into
alternative investment instruments.
Non-interest bearing demand deposits were 6 percent higher at December 31,
1995, at $287 million compared with the year-end 1994 total of $271 million.
Interest-bearing deposits also increased 6 percent to $1.506 billion at year-end
1995 from the year earlier total of $1.417 billion. Most of the growth in
interest-bearing deposits occurred in other time deposits, which are principally
consumer certificates of deposits less than $100 thousand. Total balances in
these accounts increased 18 percent in 1995 to $605 million. Contributing to
this increase was a special deposit promotion early in 1995 designed to attract
and retain deposits. Also contributing to the increase in interest-bearing
deposits were interest checking accounts, which increased 3 percent at year-end
1995 compared with the year earlier total. Regular savings accounts and money
market deposit accounts decreased 10 percent and 4 percent, respectively, in
comparisons between year-end 1995 and 1994. Customers moved funds from these
accounts to other deposits or investments bearing higher returns. Balances in
certificates of deposit of $100 thousand and over increased to $94 million at
year-end 1995 from the year earlier total of $73 million due in part to the
promotional interest rates offered in the second quarter.
CERTIFICATES OF DEPOSIT $100,000 AND OVER Table 14
(IN THOUSANDS)
December 31, 1995 Amount
- --------------------------------------------------------------------------------
REMAINING MATURITIES:
Within 3 months $53,292
3 to 6 months 12,220
6 to 12 months 9,867
After 12 months 18,341
- --------------------------------------------------------------------------------
TOTAL $93,720
- --------------------------------------------------------------------------------
Debt. Short-term borrowings totaled $16 million at year-end 1995 and 1994.
These borrowings include federal funds purchased, securities sold under
agreements to repurchase, and other borrowings. Total short-term borrowings
averaged $25 million in 1995 and $15 million in 1994. Table 15 summarizes the
Corporation's position with respect to federal funds purchased and securities
sold under agreements to repurchase. Long-term debt totaled $15 thousand at
year-end 1995 compared with the year earlier total of $19 thousand.
SHORT-TERM BORROWINGS Table 15
(DOLLARS IN THOUSANDS)
1995 1994 1993
------------------- ------------------- -----------------
Interest Interest Interest
Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER AGREEMENTS TO REPURCHASE
Outstanding at year-end $16,118 3.13% $16,479 3.69% $53,832 2.79%
Average outstanding for the year 18,568 4.57 14,845 3.21 14,876 1.94
Maximum outstanding at any month-end 46,878 - 42,501 - 53,832 -
- ------------------------------------------------------------------------------------------------------------------------------
Capital Resources
Total shareholders' equity of $227 million at year-end was 10 percent above the
year earlier total of $207 million. Shareholders' equity averaged $217 million
in 1995, 6 percent above the 1994 average of $205 million. Average shareholders'
equity as a percent of average total assets was 10.9 percent in 1995 and 10.7
percent in 1994.
The Federal Reserve mandates minimum capital requirements for bank holding
companies. The Federal Reserve applied a risk based capital measure to determine
capital adequacy. Under this system all balance sheet assets are assigned a
certain risk category with a prescribed weight. Off-balance sheet items, such as
loan commitments and letters of credit, also are classified by risk with duly
assigned weights. The sum of the balance sheet and off-balance sheet amounts
multiplied by their respective risk weight factors must then meet a required
minimum capital test. Tier I Capital is defined as shareholders' equity minus
certain intangible assets. Tier 2 Capital includes a certain amount of the
allowance for loan losses. At December 31, 1995, the minimum Tier I ratio was 4
percent and the minimum required Total Capital (Tier 1 plus Tier 2) ratio was 8
percent. The Corporation's Tier 1 ratio of 15.30 percent and its Total Capital
Ratio of 16.26 percent were well in excess of minimum requirements. The Federal
Reserve also utilizes a Tier 1 leverage ratio in conjunction with its risk based
capital standard. This ratio measures Tier 1 Capital as a percent of total
average assets less intangible assets. The minimum leverage ratio is 3 percent.
At December 31, 1995, the Corporation's Tier 1 leverage ratio was 10.59 percent.
The Comptroller of the Currency has adopted similar requirements that affect the
Corporation's bank subsidiary. The bank subsidiary also exceeds all minimum
requirements.
RISK-BASED CAPITAL Table 16
(IN THOUSANDS)
December 31 1995 1994 1993
- -------------------------------------------------------------------------------
TIER 1 CAPITAL:
Shareholders' equity * $ 223,637 $ 210,244 $ 196,434
Less intangible assets 9,046 7,471 6,115
- --------------------------------------------------------------------------------
Total Tier 1 capital 214,591 202,773 190,319
- --------------------------------------------------------------------------------
TIER 2 CAPITAL:
Allowable allowance for loan losses 13,432 13,754 13,864
- --------------------------------------------------------------------------------
Total Tier 2 capital 13,432 13,754 13,864
- --------------------------------------------------------------------------------
TOTAL CAPITAL $ 228,023 $ 216,527 $ 204,183
Risk-weighted assets $1,402,735 $1,340,091 $1,281,028
Tangible quarterly average assets 2,026,619 1,914,722 1,892,496
RISK-BASED CAPITAL RATIOS:
Tier 1 capital 15.30% 15.13% 14.86%
Total capital 16.26% 16.16% 15.94%
Tier 1 leverage 10.59% 10.59% 10.06%
* Exclusive of net unrealized gains and losses on securities available for sale,
as prescribed by regulatory guidelines.
From time to time, the Corporation purchases shares of its own common stock from
shareholders and from brokers and dealers. In 1995, the Corporation purchased
67,048 shares at a cost of $1.4 million. In 1994, the Corporation purchased
72,500 shares at a cost of $1.4 million. The volume of share repurchases is
determined by the financial advantage to the Corporation. Purchases are made in
accordance with applicable securities laws, regulations, and internal policy
considerations.
The Corporation's common stock is traded in the National Market System of the
NASDAQ Stock Market under the trading symbol JBNK. Table 17 presents the market
prices and dividends of the Corporation's common stock for each quarter in 1995
and 1994. On December 31, 1995, the book value of a share of common stock was
$14.92, or 10 percent higher than $13.62 on December 31, 1994.
COMMON STOCK PERFORMANCE AND DIVIDENDS Table 17
Common Stock Price
----------------------------------------------
1995 1994 Dividends Declared
----------------- ------------------ ------------------
High Low High Low 1995 1994
- --------------------------------------------------------------------------------------------------------------------
First Quarter $20.75 $19.13 $22.75 $18.50 $.19 $.17
Second Quarter 22.13 19.13 23.13 18.50 .19 .17
Third Quarter 23.50 21.00 23.25 20.75 .19 .17
Fourth Quarter 23.50 20.13 21.13 17.13 .19 .17
- --------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 $23.50 $19.13 $23.25 $17.13 $.76 $.68
- --------------------------------------------------------------------------------------------------------------------
Jefferson Bankshares' common stock is traded in the National Market System of
the Nasdaq Stock Market in which Jefferson Bankshares' symbol is JBNK. Dividend
restrictions and other matters are discussed in Notes 9 and 12 of the Notes to
Consolidated Financial Statements. On January 13, 1996, there were approximately
8,631 shareholders of record.
Liquidity
Liquidity in a banking company measures the ability to provide funds for
customers' demands for loans and deposit withdrawals without impairing
profitability. To meet these needs, the Corportaion maintains cash reserves and
readily marketable investments in addition to funds provided from loan
repayments and maturing securities. Funds also can be obtained through
increasing deposits or short-term borrowings and through the bank's borrowing
privileges as the Federal Reserve.
A related concern of liquidity management is interest rate sensitivity.
Changes in interest rates may affect both funding requirements as well as the
relative liquidity of certain assets. Prudent balance sheet management requires
continual protection against any unanticipated or significant changes in the
level of market interest rates. Stable levels of net interest income should be
maintained in a changing environment by ensuring that interest rate risk is kept
at an acceptable level. Accordingly, the Corporation has developed guidelines
that stipulate that annual net interest income should not be reduced by more
than 10 percent as the result of a sudden 200 basis point upward or downward
movement in interest rates.
Management uses a variety of interst sensitivity, or "gap", reports to
summarize the Corporation's ability to reprice its interest-sensitive assets and
liabilities over various time intervals. As asset-sensitive, or positive, gap
implies that assets will reprice faster than liabilities. In an increasing
interest rate environment, net interest income would be positively affected.
Conversely, a liability-sensitive, or negative gap implies that liabilities will
reprice faster than assets and, thus, that net interest income would be
positively affected by decreasing interest rates. As shown in Table 18, at
December 31, 1995 Jefferson Bankshares was positively gapped $58.7 million over
the next twelve months. This amount was well within the approved exposure limits
of interest sensitive assets to interest sensitive liabilities of 1.25 to 1 and
.75 to 1.
In addition to gap analysis, management also uses simulation modeling to
forecast future balance sheet movements using various interest rate scenarios.
By studying the effects on net interest income of rising, falling, and
most-likely interest rate scenarios, the Corporation can position itself to take
advantage of anticipated interest rate movements. It also can protect itself
better against any unexpected interest rate movements by fully understanding the
dynamic nature of its balance sheet components.
INTEREST SENSITIVITY ANALYSIS* Table 18
(IN THOUSANDS)
Over 3 Over 6 Over 1
Months Months Total Year and
3 Months Through Through Within Not
December 31, 1995 or Less 6 Months 12 Months 1 Year Classified Total
- ----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Loans--net $542,316 $ 30,955 $163,240 $736,511 $483,910 $1,220,421
Investment securities:
Available for sale 8,182 - 25,053 33,235 155,434 188,669
Held to maturity 29,780 38,939 55,927 124,646 329,863 454,509
Money market investments 15,000 - - 15,000 - 15,000
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 595,278 69,894 244,220 909,392 969,207 1,878,599
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Money market deposit accounts 322,889 - - 322,889 - 322,889
Certificates of deposit $100,000 and over 53,292 12,220 9,867 75,379 18,341 93,720
All other time deposits 252,194 98,024 86,063 436,281 652,820 1,089,101
Short-term borrowings 16,118 - - 16,118 - 16,118
Long-term debt 15 - - 15 - 15
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 644,508 110,244 95,930 850,682 671,161 1,521,843
- ----------------------------------------------------------------------------------------------------------------------------------
NET NON-INTEREST-BEARING LIABILITIES - - - - 356,756 356,756
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY GAP
ASSET SENSITIVE (LIABILITY SENSITIVE) $(49,230) $(40,350) $148,290 $ 58,710 $(58,710) $ -
- ----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE GAP $(49,230) $(89,580) $ 58,710 $ 58,710 $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------------
* Remaining maturity if fixed rate; earliest possible repricing interval if
floating rate.
Jefferson Bankshares uses traditional, on-balance sheet means for limiting
interest rate risk. Through aggressive pricing and/or marketing strategies, the
Corporation is able to emphasize fixed or variable rate assets and liabilities
to position the balance sheet in accordance with management's strategies and
tolerance for interest rate risk.
Accounting Rule Changes
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Statement, which was effective
for years beginning after December 15, 1993, addresses the accounting for
investments in certain equity and all debt securities. Under this Statement,
investments are to be classified into three categories: Held to Maturity;
Trading Securities; and Available for Sale Securities.
The Corporation adopted this Statement in the first quarter of 1994.
Although the Corporation has the intent and ability to hold its investment
securities until maturity, certain securities were placed in the category
Available for Sale for potential liquidity purposes. In accordance with SFAS
115, these securities are reported at fair value in the Corporation's
Consolidated Financial Statements, and the net unrealized gains and losses have
been excluded from earnings and reported as a separate component of
shareholders' equity, net of tax effects. At the beginning of 1994, the
adjustment, net of tax effects, was $5.1 million of unrealized gains. As
interest rates rose throughout 1994, the fair value of the Available for Sale
securities decreased and resulted in an unrealized loss, net of tax effects, of
$3.7 million as of December 31, 1994. The declining interest rate environment in
1995 caused the Available for Sale securities to reflect an unrealized gain,
net of tax effects, of $2.9 million as of December 31, 1995.
On January 1, 1995, the Corporation adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosure. The
Statement requires impaired loans to be measured at the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral. Management's evaluation of the adequacy of the
allowance is based on a review of the Corporation's historical loss experience,
known and inherent risks in the loan portfolio, charge-offs, and the level and
trend of interest rates. In reviewing the effects of implementing this
Statement, management deemed the allowance for loan losses to be adequate, and
no additional provision results from the implementation of the Statement.
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amounts. SFAS 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt SFAS 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of adoption will be material.
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights, which requires capitalization of the cost of mortgage servicing rights.
The Corporation does not service loans that are applicable under this Statement
and, accordingly, this Statement will have no impact on the Corporation.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a new fair value method of accounting for
stock-based compensation arrangements with employees. The Statement does not
require an entity to adopt the new method. As discussed in Note 9 of the Notes
to Consolidated Financial Statements, the Corporation has two incentive stock
option plans covered by the provisions of this Statement. The Corporation will
elect not to adopt the new method of accounting and will continue to follow the
provisions of APB Opinion No. 25.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31 1995 1994
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (Note 10) $ 88,028 $ 100,809
Federal funds sold and other money market investments 15,000 -
Investment securities (Note 3):
Available for sale (cost of $184,203 in 1995 and $176,493 in 1994)) 188,669 170,815
Held to maturity (fair value of $459,360 in 1995
and $455,080 in 1994) 454,509 467,733
Loans (Note 4) 1,220,493 1,101,636
Less: Unearned income (72) (136)
Allowance for loan losses (Note 5) (13,432) (13,754)
- -------------------------------------------------------------------------------------------------------------------
Net loans 1,206,989 1,087,746
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Note 7) 52,310 51,185
Other assets 45,683 47,662
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,051,188 $1,925,950
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits (Notes 2 and 3):
Demand $ 287,489 $ 271,447
Interest checking 306,753 298,471
Regular savings 177,217 196,524
Money market deposit accounts 322,889 336,860
Certificates of deposit $100,000 and over 93,720 72,511
Other time deposits 605,131 513,059
- -------------------------------------------------------------------------------------------------------------------
Total deposits 1,793,199 1,688,872
Federal funds purchased and securities
sold under agreements to repurchase 16,118 16,479
Other liabilities 15,316 14,027
Long-term debt 15 19
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,824,648 1,719,397
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock of $10.00 par value. Authorized
1,000,000 shares; issued none - -
Common stock of $2.50 par value. Authorized 32,000,000 shares;
issued and outstanding 15,182,235 shares
in 1995 and 15,170,250 shares in 1994 37,956 37,926
Capital surplus 47,623 46,332
Retained earnings 138,058 125,986
Unrealized gains (losses) on securities available for sale, net (Note 3) 2,903 (3,691)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (Notes 2, 8, 9, and 12) 226,540 206,553
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 7 and 10)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,051,188 $1,925,950
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
Years Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 104,607 $ 84,427 $ 80,941
Income on investment securities:
Available for sale 11,374 11,582 -
Held to maturity 29,709 32,335 46,811
Other interest income 683 1,152 1,170
- -------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 146,373 129,496 128,922
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-checking 6,594 6,799 7,186
Regular savings 4,864 5,368 4,942
Money market deposit accounts 11,816 9,706 10,184
Certificates of deposit $100,000 and over 4,566 2,842 2,850
Other time deposits 29,583 20,208 22,144
Short-term borrowings 1,220 441 429
Long-term debt 1 29 85
- -------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 58,644 45,393 47,820
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 87,729 84,103 81,102
Provision for loan losses (Note 5) 3,020 1,600 1,911
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 84,709 82,503 79,191
- -------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust income 4,500 3,944 4,037
Service charges on deposit accounts 9,155 8,702 8,475
Investment securities gains (losses), net (Note 3) (103) 1,166 88
Mortgage loan sales income 275 681 1,932
Other income (Note 9) 5,192 3,417 2,713
- -------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 19,019 17,910 17,245
- -------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits (Note 9) 39,222 37,261 34,651
Occupancy expense, net 5,063 5,063 4,740
Equipment expense 6,086 5,965 5,722
F.D.I.C. assessments 2,081 3,790 3,645
Other expense 14,128 14,344 12,910
- -------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 66,580 66,423 61,668
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 37,148 33,990 34,768
Provision for income tax expense (Note 6) 12,285 11,390 11,183
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 24,863 $ 22,600 $ 23,585
- -------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (Note 8) $ 1.64 $ 1.49 $ 1.57
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Common Stock
------------ Unrealized Gains
Capital Retained (Losses) on Securities
Shares Amount Surplus Earnings Available for Sale, Net Total
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1992 7,476,652 $19,068 $41,388 $119,567 $ $180,023
Net income, 1993 23,585 23,585
Cash dividends declared ($.62 per share) (9,034) (9,034)
Acquisition of common stock (53,618) (134) (934) (1,068)
Two-for-one stock split 7,521,788 18,428 (18,428) -
Issuance of common stock for
dividend reinvestment plan 85,755 214 1,625 1,839
Issuance of common stock for
incentive stock plan (Note 9) 15,607 39 216 255
Issuance of common stock for acquisition of
People's Bank of Virginia Beach (Note 2) 34,608 87 756 843
Cash paid in lieu of fractional shares (Note 2) (239) (1) (8) (9)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993 15,080,553 37,701 43,977 114,756 196,434
Adjustment to beginning balance for change in
accounting principle, net (Note 3) 5,072 5,072
Net income, 1994 22,600 22,600
Cash dividends declared ($.68 per share) (10,135) (10,135)
Acquisition of common stock (72,500) (181) (1,235) (1,416)
Issuance of common stock for
dividend reinvestment plan 124,912 313 2,075 2,388
Issuance of common stock for
stock options (Note 9) 37,285 93 280 373
Change in unrealized gains (losses)
on securities available for sale, net (Note 3) (8,763) (8,763)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 15,170,250 37,926 46,332 125,986 (3,691) 206,553
Net income, 1995 24,863 24,863
Cash dividends declared ($.76 per share) (11,536) (11,536)
Acquisition of common stock (67,048) (168) (1,255) (1,423)
Issuance of common stock for
dividend reinvestment plan 7,256 18 131 149
Issuance of common stock for
incentive stock plan (Note 9) 27,820 70 315 385
Issuance of common stock under the
Deferred Compensation and Stock
Purchase Plan for Non-Employee
Directors (Note 8) 43,957 110 845 955
Change in unrealized gains (losses)
on securities available for sale, net (Note 3) 6,594 6,594
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 15,182,235 $37,956 $47,623 $138,058 $2,903 $226,540
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,863 $ 22,600 $ 23,585
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,490 5,975 5,752
Accretion and amortization 4,145 5,187 4,163
Provision for loan losses 3,020 1,600 1,911
(Increase) decrease in deferred tax benefit (166) (3,069) 430
Investment securities (gains) losses, net (Note 3) 103 (1,166) (88)
(Gains) losses on sales of premises and equipment, net (247) (173) 25
(Increase) decrease in interest receivable (537) (376) 581
Increase (decrease) in taxes payable (306) 106 (925)
Increase (decrease) in interest payable 1,418 91 (521)
(Increase) decrease in loans held for resale, net (1,921) 6,149 527
Other, net (146) 2,656 858
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 11,853 16,980 12,713
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,716 39,580 36,298
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 123,904 153,889 159,657
Proceeds from sales and calls of investment securities held to maturity (Note 3) 148 4,838 13,211
Purchases of investment securities held to maturity (114,127) (118,746) (225,118)
Proceeds from maturities of securities available for sale 37,700 19,450 -
Proceeds from sales of securities available for sale (Note 3) 11,347 44,346 -
Purchases of securities available for sale (57,707) (35,407) -
Net increase in loans (121,504) (87,751) (37,639)
Business combinations, net of cash (Note 2) 31,369 21,130 1,212
Proceeds from sales of premises and equipment 1,003 208 44
Proceeds from sales of foreclosed properties 2,694 2,732 3,145
Purchases of premises and equipment (7,647) (8,772) (3,635)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (92,820) (4,083) (89,123)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 69,815 (12,076) 28,299
Net increase (decrease) in short-term borrowings (361) (37,618) 43,193
Repayment of long-term debt (4) (1,194) (918)
Proceeds from issuance of common stock 1,489 2,761 2,094
Payments to acquire common stock (1,423) (1,416) (1,068)
Dividends paid (11,193) (10,034) (8,507)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 58,323 (59,577) 63,093
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,219 (24,080) 10,268
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 100,809 124,889 114,621
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 103,028 $ 100,809 $ 124,889
- ---------------------------------------------------------------------------------------------------------------------------
See acccompanying notes to financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jefferson Bankshares, Inc. ("the Corporation") is the bank holding company
for its subsidiary, Jefferson National Bank, and is headquartered in
Charlottesville, Virginia. Through its subsidiary bank, the Corporation delivers
financial services with a network of 97 offices covering many of the principal
markets of Virginia. The accounting and reporting policies of the Corporation
conform to generally accepted accounting principles and to general practice
within the banking industry.
A PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to current
presentations.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B INVESTMENT SECURITIES
As more fully discussed in Note 3, on January 1, 1994, the Corporation
adopted Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities (Statement 115). The Statement
requires certain investment securities to be reported in one of three
categories: Trading, Available for Sale, or Held to Maturity. Upon adoption of
this Statement, a portion of the investment portfolio was classified as
Available for Sale. In accordance with Statement 115, these securities are
reported in the Corporation's consolidated financial statements at fair value.
Unrealized gains and losses, net of the related tax effect, are excluded from
earnings and reported as a separate component of shareholders' equity until
realized. Held to Maturity securities are recorded at amortized cost.
The Corporation has no trading account securities.
Amortization of premiums and accretion of discounts are computed by the level
yield method.
C LOANS
On January 1, 1995, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118. Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure. The Statement requires impaired loans to be measured
at the present value of expected future cash flows discounted at the loan's
effective interest rate, except that all collateral-dependent loans are measured
for impairment based on the fair value of the collateral.
Interest on some instalment loans and certain second mortgage loans is
accrued by a method that approximates the level yield method. Interest on all
other loans is accrued based upon the principal amounts outstanding. The accrual
of interest on loans is discontinued when the collection of principal or
interest is legally barred or considered highly unlikely. After a loan is
classified non-accrual, interest income is recognized only to the extent
payments are received.
The Corporation's subsidiary bank is in compliance with regulatory policy
that requires accrual of interest to be discontinued when principal or interest
is due and has remained unpaid for 90 days or more unless the loan is both well
secured and in the process of collection.
D ALLOWANCE FOR LOAN LOSSES
The Corporation follows the allowance method in providing for loan losses.
Accordingly, all loan losses are charged to the allowance for loan losses and
all recoveries are credited to it.
Estimates of possible future losses involve the exercise of management's
judgment and assumptions with respect to future conditions. Management utilizes
these estimates and assumptions in conformity with generally accepted accounting
principles, and actual results could differ from these estimates. The principal
factors considered by management in determining the adequacy of the allowance
are size and composition of the loan portfolio, historical loss experience,
economic conditions, the value and adequacy of collateral, guarantors, and the
current level of the allowance.
E PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization charges are computed principally by
the straight-line method based upon the estimated useful lives of the assets,
except for leasehold improvements which are amortized over the lives of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. The costs of major renovations and betterments are capitalized,
while the costs of ordinary maintenance and repairs are expensed as incurred.
F FORECLOSED PROPERTIES
Foreclosed properties, classified in "Other assets" in the accompanying
consolidated balance sheets, consist primarily of real estate held for resale
which was acquired through foreclosure on loans secured by real estate.
Foreclosed properties are carried at the lower of cost or appraised market value
less estimated disposal costs. Writedowns to market value at the date of
foreclosure are charged to the allowance for loan losses. Subsequent declines in
market value are charged to expense. Management utilizes estimates and
assumptions in conformity with generally accepted accounting principles.
G GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is amortized using the straight line method over fifteen years.
Other acquired intangible assets, such as the value of purchased core deposits,
are amortized using the straight line method over the periods benefited, not
exceeding fifteen years.
H INCOME TAXES
The Corporation accounts for income taxes using the asset and liability
method of accounting for income taxes as prescribed by Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). Under
the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the year
that includes the enactment date.
I COMMON STOCK
Shares of its own common stock reacquired by the Corporation are cancelled as
a matter of state law and are accounted for as authorized but unissued shares.
J EARNINGS PER COMMON SHARE
Earnings per common share amounts are calculated by dividing net income by
the daily average number of outstanding common shares. Common share equivalents
resulting from the incentive stock plan and stock option plan are not used in
the calculations because their effect is not material.
K PENSION PLAN
The Corporation has a non-contributory, trusteed defined benefit pension plan
covering salaried employees and some hourly employees meeting certain age and
service requirements. The Corporation computes the net periodic pension cost of
the plan in accordance with Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions. The net periodic pension cost consists of
the following components: service cost (benefits earned during the year),
interest costs on the projected benefit obligation, actual return on plan
assets, and the net amount resulting from the amortization and deferral of
certain items over 15 years. Due to its fully funded status, no contributions
were made to the plan in 1995, 1994, or 1993.
L TRUST DIVISION
Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Corporation and, therefore, are not
included in the accompanying consolidated financial statements.
M STATEMENTS OF CASH FLOWS
Cash and cash equivalents include cash and due from banks and federal funds
sold and other money market investments. Supplemental disclosures of cash flow
information follows:
(IN THOUSANDS)
1995 1994 1993
Cash payments for:
Interest $57,226 $45,302 $46,937
Income taxes 12,591 11,748 12,345
Non-cash investing and
financing activities:
Loan balances transferred to
foreclosed properties $ 1,269 $ 1,534 $ 1,254
Issuance of common stock for
acquisitions - - 834
2 BUSINESS COMBINATIONS
In June 1995, Jefferson National Bank acquired the deposits associated with
the Waynesboro office of First Union National Bank and the downtown Richmond
office of Virginia First Savings Bank. Approximately $35 million in deposit
accounts were transferred to Jefferson in these two transactions. The
transactions resulted in goodwill of $2.4 million.
On August 18, 1994, Bank of Loudoun (Loudoun) merged into Jefferson National
Bank. The Corporation issued 538,881 shares of its common stock in exchange for
all of the outstanding shares of common stock of Loudoun. The merger was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements have been restated to include the accounts and transactions of
Loudoun for all periods presented.
On March 25, 1994, Jefferson National Bank purchased the deposit liabilities
of Liberty Federal Savings Bank (Liberty) from the Resolution Trust Corporation.
Liberty had two banking offices in Warrenton, Virginia, and total deposits of
approximately $24 million. The transaction resulted in goodwill of $2.0 million.
Following the close of business on February 11, 1993, People's Bank of
Virginia Beach (PBVB) merged with Jefferson National Bank. The Corporation
issued 34,369 shares of its common stock and paid $562,000 in cash in the
transaction. In addition, $9,000 was paid in cash in settlement of fractional
shares. On February 11, 1993, PBVB had $13 million in total assets, $7 million
in loans, and $12 million in deposits. The transaction resulted in goodwill of
$639 thousand.
The transactions with First Union, Virginia First, Liberty and PBVB were
accounted for as purchases, and, accordingly, the accounts and transactions for
each entity are included in the Corporation's consolidated financial statements
subsequent to the respective merger dates.
3 INVESTMENT SECURITIES
As discussed in Note 1(B), on January 1, 1994, the Corporation adopted the
provisions of Statement 115. In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. As of January 1, 1994, the cumulative effect of adopting this
Statement was an increase in consolidated shareholders' equity of $5,072,000,
net of deferred taxes of $2,731,000 to reflect the net unrealized gains on
securities classified as Available for Sale that were previously classified as
Held to Maturity and carried at amortized cost. As of December 31, 1994, the
impact on consolidated shareholders' equity was a decrease of $3,691,000, net of
deferred taxes of $1,987,000. As of December 31, 1995, the fair value in excess
of the amortized cost of securities available for sale resulted in an unrealized
gain of $4,466,000. The impact on consolidated shareholders' equity was an
increase of $2,903,000, net of deferred taxes of $1,563,000.
Sales and calls of investment securities produced the following results:
- --------------------------------------------------------------------------------
(IN THOUSANDS)
AVAILABLE HELD TO
FOR SALE MATURITY
-------------------- -------------
Years ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
Proceeds from: Sales $ 11,347 $ 44,346 $ 7,411
Calls - - 5,800
- --------------------------------------------------------------------------------
Gross gains $ - $ 1,166 $ 224
Gross losses 103 - 136
- --------------------------------------------------------------------------------
Net gains (losses) $ (103) $ 1,166 $ 88
- --------------------------------------------------------------------------------
There were no sales of Held to Maturity securities in 1995 or 1994. Proceeds
from calls of Held to Maturity securities were $148,000 in 1995 and $4,838,000
in 1994.
Investment securities having carrying values of $109,729,000 at December 31,
1995, and $82,906,000 at December 31, 1994, were pledged to secure deposits and
for other purposes required by law.
The book values, approximate fair values, and gross unrealized gains and
losses of investment securities are as follows:
- -------------------------------------------------------------------
(IN THOUSANDS)
December 31 1995
- --------------------------------------------------------------------
SECURITIES - AVAILABLE FOR SALE
- --------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury $180,478 $ 4,794 $ 291 $184,981
U.S. Government
agencies 2,747 - 37 2,710
Mortgage-backed
securities 978 7 7 978
- --------------------------------------------------------------------
TOTAL $184,203 $ 4,801 $ 335 $188,669
- --------------------------------------------------------------------
- --------------------------------------------------------------------
SECURITIES - HELD TO MATURITY
- --------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury $ 972 $ 23 $ - $ 995
U.S. Government
agencies 244,377 3,574 958 246,993
States and political
subdivisions 23,802 632 9 24,425
Corporate debt
securities 180,320 1,864 275 181,909
Other securities 5,038 - - 5,038
- --------------------------------------------------------------------
TOTAL $454,509 $ 6,093 $1,242 $459,360
- --------------------------------------------------------------------
- -------------------------------------------------------------------
(IN THOUSANDS)
December 31 1994
- --------------------------------------------------------------------
SECURITIES - AVAILABLE FOR SALE
- --------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury $172,772 $ 94 $5,627 $167,239
U.S. Government
agencies 2,744 - 83 2,661
Mortgage-backed
securities 977 - 62 915
- --------------------------------------------------------------------
TOTAL $176,493 $ 94 $5,772 $170,815
- --------------------------------------------------------------------
- --------------------------------------------------------------------
SECURITIES - HELD TO MATURITY
- --------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government
agencies $233,900 $ 391 $ 8,381 $225,910
States and political
subdivisions 26,318 221 393 26,146
Corporate debt
securities 205,434 220 4,711 200,943
Other securities 2,081 - - 2,081
- --------------------------------------------------------------------
TOTAL $467,733 $ 832 $13,485 $455,080
- --------------------------------------------------------------------
The book values and approximate fair values by contractual maturities
are shown in Table 12, Investment Securities, in Management's Discussion and
Analysis (MD&A).
4 LOANS
The composition of the loan portfolio by loan classification as of December
31, 1995 and 1994, appears in Table 7, Loan Portfolio, in MD&A. Information on
risk elements in the loan portfolio for 1995 and 1994 appears in Table 10, Risk
Elements, in MD&A.
Loans to directors and executive officers of the Corporation and its
significant subsidiaries, loans to companies in which they have a significant
interest, and loans to members of their immediate families are made on
substantially the same terms as those prevailing at the time for other loan
customers. Excluding loans aggregating less than $60,000 to any such person, his
or her interests, and immediate family members, the balances of such loans
outstanding were $20,850,000 and $20,853,000 at December 31, 1995 and 1994,
respectively. The changes in the balances from year-end 1994 to 1995 resulted
from additions during 1995 of $39,350,000 and collections amounting to
$39,353,000.
5 ALLOWANCE FOR LOAN LOSSES
A summary of the transactions in the allowance for loan losses for the years
ended December 31, 1995, 1994, and 1993, appears in Table 9, Summary of Loan
Loss Experience, in MD&A.
6 INCOME TAXES
As discussed in Note 1 (H), effective January 1, 1993, the Corporation
adopted Statement 109. As provided by Statement 109, the Corporation elected to
adopt this statement prospectively and has recorded the cumulative effect of
such adoption in its 1993 provision for income taxes. The result of applying
Statement 109 was immaterial.
The current and deferred income tax expense (benefit) provisions are as
follows:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
1995 1994 1993
- -----------------------------------------------------------------------------
Current: Federal $12,085 $11,619 $11,794
State 28 6 34
- -----------------------------------------------------------------------------
12,113 11,625 11,828
Deferred 172 (235) (645)
- -----------------------------------------------------------------------------
$12,285 $11,390 $11,183
- -----------------------------------------------------------------------------
The provision for income tax expense is different from the amount computed by
applying the statutory corporate Federal income tax rate of 35 percent for the
following reasons:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
% of Income
1995 Amount Before Income Taxes
- -----------------------------------------------------------------------------
Provision for income tax expense
at statutory rate $13,002 35.0%
Increase (reduction) in income taxes
resulting from:
Tax-exempt interest (872) (2.3)
Other, net 155 .4
- -----------------------------------------------------------------------------
Provision for income tax expense $12,285 33.1%
- -----------------------------------------------------------------------------
1994
- -----------------------------------------------------------------------------
Provision for income tax expense
at statutory rate $11,897 35.0%
Increase (reduction) in income taxes
resulting from:
Tax-exempt interest (813) (2.4)
Other, net 306 .9
- -----------------------------------------------------------------------------
Provision for income tax expense $11,390 33.5%
- -----------------------------------------------------------------------------
1993
- -----------------------------------------------------------------------------
Provision for income tax expense
at statutory rate $12,169 35.0%
Reduction in income taxes
resulting from:
Tax-exempt interest (981) (2.8)
Other, net (5) -
- -----------------------------------------------------------------------------
Provision for income tax expense $11,183 32.2%
- -----------------------------------------------------------------------------
The effects of temporary differences that give rise to significant portions
of the deferred tax benefit and deferred tax liabilities at December 31, 1995
and 1994 are as follows:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
1995 1994
- -----------------------------------------------------------------------------
Deferred tax benefit:
Allowance for loan losses $4,701 $4,759
Deferred compensation 672 1,550
Unrealized losses on investment
securities available for sale - 1,987
Other real estate owned 837 289
Other 2,626 2,427
- -----------------------------------------------------------------------------
Total gross deferred tax benefit 8,836 11,012
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment, principally due to
differences in depreciation 1,872 2,333
Unrealized gains on investment
securities available for sale 1,563 -
Prepaid pension costs 669 19
Other 1,068 1,670
- -----------------------------------------------------------------------------
Total gross deferred tax liability 5,172 4,022
- -----------------------------------------------------------------------------
Net deferred tax benefit
(included in other assets) $3,664 $6,990
- -----------------------------------------------------------------------------
The Corporation and its subsidiaries file consolidated Federal and state
income tax returns. At December 31, 1995, the Corporation has net operating loss
carryforwards obtained from previous business combinations for Federal income
tax purposes of approximately $1.4 million which are available to offset future
Federal taxable income, if any, through 2008. The Corporation has not recognized
a valuation allowance for the gross deferred tax benefit recorded in the
accompanying 1995 and 1994 consolidated balance sheets since it is not dependent
on future earnings for recoverability.
7 PREMISES AND EQUIPMENT
The Corporation's principal executive offices are located at 123 East Main
Street, Charlottesville, Virginia.
Premises and equipment at December 31, 1995 and 1994, are summarized as
follows:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
Estimated
Useful Lives
(Years) 1995 1994
- -----------------------------------------------------------------------------
Land - $ 10,209 $ 10,558
Buildings 30-50 47,764 43,061
Leasehold improvements 5-40 4,629 4,312
Furniture and equipment 3-12 47,953 47,754
- -----------------------------------------------------------------------------
110,555 105,685
Less accumulated depreciation
and amortization 58,245 54,500
- -----------------------------------------------------------------------------
$ 52,310 $ 51,185
- -----------------------------------------------------------------------------
Depreciation and amortization of premises and equipment aggregated $5,766,000
in 1995, $5,723,000 in 1994, and $5,266,000 in 1993.
At December 31, 1995, the Corporation leased 27 of its 97 banking offices
under operating lease agreements on terms ranging from 1 to 25 years generally
with renewal options up to 10 years. Supplementary office space and equipment
are leased on a short-term basis.
Rent expense charged to operations under operating lease agreements totaled
$1,133,000, $1,081,000, and $1,044,000 in 1995, 1994, and 1993, respectively.
The following is a schedule by year of future minimum rental payments, net of
subleases, required under non-cancelable operating leases that have initial or
remaining terms in excess of one year as of December 31, 1995:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
Future
Minimum
Years ending December 31: Payments
- -----------------------------------------------------------------------------
1996 $ 931
1997 803
1998 738
1999 496
2000 354
Later years 1,578
- -----------------------------------------------------------------------------
$4,900
- -----------------------------------------------------------------------------
Management expects that in the normal course of business most leases will be
renewed or replaced by other leases. Therefore, it is anticipated that future
annual rental expense will not be less than the amount shown for the year ended
December 31, 1995. Most of the leases provide that the Corporation pay taxes,
maintenance, insurance, and certain other operating expenses of the leased
assets. Leased property recorded under capital leases and the related lease
payment commitments are not material.
8 COMMON STOCK AND EARNINGS PER SHARE
The daily average common shares outstanding used in computing earnings per
share were 15,181,152 in 1995, 15,148,400 in 1994, and 15,060,873 in 1993. On
March 23, 1993, the board of directors declared a 2-for-1 stock split, which was
distributed April 30, 1993. Accordingly, the average number of shares
outstanding and per share amounts for net income, dividends declared, and book
value have been restated for all periods presented to give effect to the split.
At December 31, 1995, 886,263 shares were reserved for use in the
Corporation's dividend reinvestment plan. At its December 1994 board meeting,
the Board of Directors of Jefferson Bankshares, Inc. amended and restated the
Deferred Compensation and Stock Purchase Plan for Non-Employee Directors to
provide participants the option of investing in Jefferson Bankshares, Inc.
common stock. The Corporation has reserved 106,043 shares of common stock as of
December 31, 1995 for this purpose. During 1995, 43,957 shares were issued at
prices of $21.125-$23.25 per share and held in a trust until they become
exercisable. The shares are exercisable at the time the director is no longer a
member of the board.
9 EMPLOYEE BENEFIT PLANS
The Corporation has a non-contributory, trusteed defined benefit pension plan
covering salaried employees and some hourly employees meeting certain age and
service requirements. Benefits are based upon years of service and average
compensation for the five highest paid years during the last 10 years of
service, integrated with the Social Security tax base. Contributions are made to
the plan, up to the amount deductible for Federal income tax purposes, based
upon the amount actuarially determined to be necessary for meeting plan
obligations. Contributions are intended to provide not only for benefits
attributed to service to date, but also for benefits expected to be earned in
the future. Plan assets consist principally of marketable stocks and corporate
and U.S. government debt obligations.
In the fourth quarter of 1995, the Corporation recognized a gain of $1.9
million included in other non-interest income related to the annuitization of
certain pension liabilities valued at $8.7 million. The following table sets
forth the plan's funded status and amounts recognized in the Corporation's
consolidated balance sheets as of December 31:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
1995 1994
- -----------------------------------------------------------------------------
Accumulated benefit obligation
(includes vested benefits of $13,121 for
1995 and $19,340 for 1994) $(14,068) $(19,633)
- -----------------------------------------------------------------------------
Projected benefit obligation for
service rendered to date $(18,430) $(24,359)
Plan assets at fair value 24,069 28,556
- -----------------------------------------------------------------------------
Plan assets in excess of projected benefit
obligation (funded status) 5,639 4,197
Unrecognized net gain (3,196) (3,057)
Unrecognized prior service cost 79 106
Unrecognized net asset
being amortized over 15 years (613) (1,084)
- -----------------------------------------------------------------------------
Prepaid pension cost (included
in other assets) $ 1,909 $ 162
- -----------------------------------------------------------------------------
Net pension cost (benefit) for 1995, 1994, and 1993 includes the following
components:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
1995 1994 1993
- -----------------------------------------------------------------------------
Service cost-benefits earned
during the year $ 1,068 $ 1,061 $ 872
Interest cost on projected
benefit obligation 1,902 1,714 1,576
Actual return on plan assets (2,605) (1,256) (2,751)
Net amortization and deferral (252) (1,464) 45
- -----------------------------------------------------------------------------
Net pension cost (benefit) for the year $ 113 $ 55 $ (258)
- -----------------------------------------------------------------------------
The assumed discount rate was 7.75% and 7.25% and the expected rate of return
was 9.00% and 9.25% for 1995 and 1994, respectively. The assumed discount rate
and expected rate of return were 8.0% and 9.0%, respectively, for 1993. The
weighted average rate of increase in future compensation was assumed to be 4.00%
in 1995 and 5.25% in 1993 and 1994.
The Corporation has a defined contribution profit-sharing plan covering
salaried employees and some hourly employees. Subject to certain limitations,
the Corporation contributes to the plan 5.25% of its consolidated net income
before taxes, adjusted as provided by the plan.
The Corporation also has an incentive stock plan under which awards of units
consisting of hypothetical shares of the Corporation's common stock may be made
to senior officers and key employees. The plan became effective May 1, 1985, and
the final awards were granted on May 31, 1994. The Corporation awarded 264,246
units under this plan of which 128,086 units had vested as of December 31, 1995.
The remaining units will vest over the next four years. In 1995, the Corporation
issued 27,820 shares of common stock under this plan. The cost of the plan,
based upon the market value of the Corporation's common stock times the number
of units awarded, is accrued as salaries and employee benefits expense over the
various vesting periods.
The costs (benefits) of these major employee benefit plans included in
salaries and employee benefits expense are summarized as follows:
- -----------------------------------------------------------------------------
(IN THOUSANDS)
1995 1994 1993
- -----------------------------------------------------------------------------
Pension $ 113 $ 55 $ (258)
Profit sharing 2,114 1,890 2,019
Incentive stock 536 698 526
- -----------------------------------------------------------------------------
$2,763 $2,643 $2,287
- -----------------------------------------------------------------------------
In December 1994, the Corporation adopted the 1995 Long-Term Incentive Stock
Plan (the 1995 Plan). On January 3, 1995 the Corporation awarded 118,500
incentive stock options under the 1995 Plan at $19.9375 per share. The options,
which were awarded at the then market price, are exercisable over a five year
period beginning January 1996. The Corporation has reserved 750,000 shares for
the 1995 Plan.
Effective November 1, 1994, the Corporation established an employee stock
purchase plan covering up to 250,000 shares of common stock. As of December 31,
1995, the Corporation has reserved 238,327 shares of common stock for this plan.
The plan is available to all salaried employees. Participating employees may
contribute through periodic payroll deductions, up to 25% of their compensation.
10 COMMITMENTS, CONTINGENT LIABILITIES,
OFF-BALANCE SHEET RISKS, AND OTHER MATTERS
The Corporation is a party to financial instruments which properly are
not reflected in the consolidated financial statements. These include
commitments to extend credit and letters of credit. These instruments
involve elements of credit and interest rate risk. Nonperformance or
default by the other party to loan commitments or standby letters of credit
could result in a financial loss to the Corporation equal to the amount of the
loan commitments and standby letters of credit. The same credit and
collateral policies are used by the Corporation in issuing these financial
instruments as are used for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer under a set
of specified terms and conditions. Commitments generally have fixed expiration
dates or termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Loan
commitments may be secured or unsecured. In the case of secured commitments,
collateral varies but may include commercial or residential properties; business
assets such as inventory, equipment, or accounts receivable; securities; or
other business or personal assets or guarantees. At December 31, 1995,
commitments to extend credit totaled $249,845,000.
Standby letters of credit are conditional commitments issued by the
Corporation or its subsidiaries to guarantee the performance of a customer to a
third party. The terms and risk of loss involved in issuing standby letters of
credit are similar to those involved in issuing loan commitments and extending
credit. At December 31, 1995, commitments outstanding under standby letters of
credit approximated $24,535,000.
The investment securities portfolio includes U.S. Treasury and U.S.
Government agency securities which may, on occasions, be loaned to securities
dealers designated as "Primary Government Dealers" by the Federal Reserve
System. Such loans of securities are secured by U.S. Treasury securities, U.S.
Government agency securities, or cash with a market value exceeding 102% of the
market value of securities lent. The loaned investment securities continue to be
reported in the consolidated financial statements, and the loan transaction is
not reflected therein. In the event loans are secured by cash, the pledged cash
is reported as an asset in the Corporation's consolidated balance sheet and an
offsetting liability is reported as short-term borrowings. All such loans are
callable in one business day. Such transactions may involve credit and interest
rate risk. At December 31, 1995, securities loaned totaled $6,341,000.
Various litigation is pending against the Corporation and its subsidiaries.
After reviewing these suits with counsel, management believes that their
ultimate resolution will not materially affect the consolidated financial
statements.
As a member of the Federal Reserve System, the Corporation's subsidiary bank
is required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 1995 and 1994, the aggregate
amounts of daily average required balances were approximately $49,969,000 and
$47,407,000, respectively.
The bank originates mortgage loans that are sold in the secondary market. In
connection with such activities, the Corporation maintains fidelity bond
insurance in the amount of $15,000,000 and errors and omissions insurance of
$2,500,000, which are in excess of required amounts.
11 FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the FASB's Statement No. 107, Disclosures About Fair Value
of Financial Instruments, the following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
A CASH AND DUE FROM BANKS
The carrying amount is a reasonable estimate of fair value.
B MONEY MARKET INVESTMENTS
For short-term instruments, the carrying amount is a reasonable estimate of
fair value. For instruments that mature in over 90 days, such as fixed-rate
certificates of deposit, the fair value is estimated based on the discounted
cash flow of contractual cash flows using interest rates currently offered for
deposits of similar maturities.
C INVESTMENT SECURITIES
Fair values of investment securities are based on quoted market prices or
dealer quotes. In the absence of quoted market prices or dealer quotes, fair
value is estimated using quoted market prices for similar securities, adjusted
for differences between the quoted securities and the securities being valued.
D LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by loan type (such as construction,
mortgage, commercial, financial and agricultural, and consumer), interest rate
terms (such as fixed or adjustable), and estimated credit risk. For certain
loans, such as some residential mortgage loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of performing
loans is estimated by discounting the future cash flows through the estimated
maturities using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
estimate of maturity is based on historical experience, with repayments for each
loan classification modified, as required, by an estimate of the effect of
current economic and lending conditions. Fair value for significant
non-performing loans is based on recent external appraisals. If appraisals are
not available, estimated cash flows are discounted using a rate commensurate
with the risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally determined using
available market information and specific borrower information.
E DEPOSITS
The fair value of demand deposits, interest-checking accounts, regular
savings accounts, and money market deposit accounts is the amount payable on
demand at the reporting date. The fair value of fixed maturity certificates of
deposit and certain other deposits is estimated based on the discounted value of
the contractual cash flows using the interest rates currently offered for
deposits of similar remaining maturities.
F SHORT-TERM BORROWINGS
The carrying values of federal funds purchased and securities sold under
agreements to repurchase and other short-term borrowings are reasonable
estimates of fair value.
G LONG-TERM DEBT
Interest rates on long-term debt are variable and, consequently, the carrying
amount is a reasonable estimate of fair value.
H OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
The carrying amount is a reasonable estimate of the fair value of securities
loaned.
At December 31, 1995, the carrying amounts and fair values of loan
commitments, stand-by letters of credit, and securities loaned were immaterial.
I LIMITATIONS
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the Corporation's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Corporation's entire holdings of a particular financial instrument or groups of
such instruments. Because these estimates are subjective in nature and involve
uncertainties and matters of discretionary judgment, they cannot be determined
with precision. Changes in assumptions could affect the estimates significantly.
Fair value estimates are based on existing on-and-off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax liabilities,
premises and equipment, and goodwill. In addition, tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
The estimated fair values of the Corporation's financial instruments are as
follows:
- --------------------------------------------------------------------------------
(IN THOUSANDS)
DECEMBER 31, 1995 December 31, 1994
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
- --------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 88,028 $ 88,028 $ 100,809 $ 100,809
Federal funds sold and other
money market investments 15,000 15,000 - -
Investment securities:
Available for sale 184,203 188,669 176,493 170,815
Held to maturity 454,509 459,360 467,733 455,080
Loans, net 1,206,989 1,231,503 1,087,746 1,096,689
Financial liabilities:
Demand deposits and interest-
bearing transaction accounts 1,094,348 1,094,348 1,103,302 1,103,302
Certificates of deposit 698,851 701,979 585,570 584,547
Short-term borrowings 16,118 16,118 16,479 16,479
Long-term debt 15 15 19 19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12 PARENT COMPANY
The Parent Company, in the ordinary course of business, provides its
subsidiaries with certain centralized management services and staff support. The
cost of these services is allocated to each subsidiary based on analyses of the
services rendered. In addition, certain subsidiaries of Jefferson Bankshares,
Inc. have in the past borrowed funds from the Parent Company at rates
approximating the Parent Company's cost of borrowing. In addition, the Parent
Company guarantees certain leases for its subsidiaries.
The primary source of funds for the dividends paid by the Parent Company is
dividends received from its subsidiaries. The payment of such dividends by the
subsidiary bank and other nonbank subsidiaries and the ability of the subsidiary
bank to loan or advance funds to the Parent Company are subject to certain
statutory limitations. On December 31, 1995, 16 percent of consolidated
shareholders' equity was not so restricted.
Condensed financial information for the Parent Company follows:
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
JEFFERSON BANKSHARES, INC. (PARENT COMPANY)
(IN THOUSANDS)
December 31 1995 1994
- --------------------------------------------------------------------------------
ASSETS
Cash $ 492 $ 14
Money market investments at bank subsidiary 3,609 4,100
Investment securities--
Held to maturity (fair value of $5,092) 4,987 -
Dividends receivable from subsidiaries 4,200 2,560
Investments in subsidiaries at equity:
Bank 210,953 196,479
Bank-related 4,011 4,848
- --------------------------------------------------------------------------------
214,964 201,327
Other assets 4,303 3,314
- --------------------------------------------------------------------------------
TOTAL ASSETS $232,555 $211,315
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities $ 6,015 $ 4,762
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 6,015 4,762
- --------------------------------------------------------------------------------
Shareholders' equity
Common stock 37,956 37,926
Capital surplus 47,623 46,332
Retained earnings 138,058 125,986
Unrealized gains (losses) on securities
available for sale of Bank subsidiary, net 2,903 (3,691)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 226,540 206,553
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $232,555 $211,315
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
JEFFERSON BANKSHARES, INC. (PARENT COMPANY)
(IN THOUSANDS)
Years Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries $17,400 $10,560 $9,920
Interest and fees from subsidiaries 2,897 2,717 2,690
Income on investment securities held to
maturity 192 - -
Other income 100 100 100
- --------------------------------------------------------------------------------
TOTAL INCOME 20,589 13,377 12,710
- --------------------------------------------------------------------------------
EXPENSE
Interest expense - 17 59
Salaries and employee benefits 1,849 1,892 2,040
Merger and acquisition expense 88 150 27
Other expense 732 852 962
- --------------------------------------------------------------------------------
TOTAL EXPENSE 2,669 2,911 3,088
- --------------------------------------------------------------------------------
Income before income tax expense and
equity in undistributed net income
of subsidiaries 17,920 10,466 9,622
Income tax expense 100 19 13
- --------------------------------------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 17,820 10,447 9,609
Equity in undistributed net income
of subsidiaries 7,043 12,153 13,976
- --------------------------------------------------------------------------------
NET INCOME $24,863 $22,600 $23,585
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Condensed Statements of Cash Flows
JEFFERSON BANKSHARES, INC. (PARENT COMPANY)
(IN THOUSANDS)
Years Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $24,863 $22,600 $23,585
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 36 36 36
(Increase) decrease in dividends
receivable (1,640) 160 (520)
Increase (decrease) in taxes payable 407 (13) 319
(Increase) decrease in deferred tax
benefit (103) (113) 83
Equity in undistributed net income
of subsidiaries (7,043) (12,153) (13,976)
Other, net (416) (752) (258)
- --------------------------------------------------------------------------------
Total adjustments (8,759) (12,835) (14,316)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 16,104 9,765 9,269
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
held to maturity (6,944) - -
Proceeds from maturities of investment
securities held to maturity 1,954 - -
Business combinations, net of cash - - (593)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,990) - (593)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings - (265) 34
Repayment of long-term debt - (900) (900)
Proceeds from issuance of common stock 1,489 2,761 2,094
Payments to acquire common stock (1,423) (1,416) (1,068)
Dividends paid (11,193) (10,034) (8,507)
- --------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (11,127) (9,854) (8,347)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (13) (89) 329
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 4,114 4,203 3,874
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,101 $ 4,114 $4,203
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Certified Public Accountants
Suite 1900
1021 East Cary Street
Richmond, Virginia 23219
The Board of Directors
Jefferson Bankshares, Inc.:
We have audited the consolidated balance sheets of Jefferson Bankshares, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jefferson
Bankshares, Inc. and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Notes 1(B) and 3 to the consolidated financial statements, in
1994, the Corporation adopted the provisions of the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
January 16, 1996