1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------
Commission File Number 00-50347
JEFFERSON BANCSHARES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 45-0508261
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
120 EVANS AVENUE, MORRISTOWN, TENNESSEE 37814
(Address of principal executive offices) (Zip code)
(423) 586-8421
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No /_/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No /_/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
At May 10, 2005, the registrant had 7,566,564 shares of common stock,
$0.01 par value per share, outstanding.
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INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition - Unaudited
Nine months ended March 31, 2005 and year ended June 30, 2004.................................. 3
Consolidated Statements of Earnings - Unaudited
Three and nine months ended March 31, 2005 and 2004............................................ 4
Consolidated Statements of Changes in Stockholders' Equity - Unaudited
Nine months ended March 31, 2005 and year ended June 30, 2004.................................. 5
Consolidated Statements of Cash Flows - Unaudited
Nine months ended March 31, 2005 and 2004...................................................... 6
Notes to Consolidated Financial Statements - Unaudited......................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 28
Item 4. Controls and Procedures........................................................................ 28
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................... 29
Item 3. Defaults Upon Senior Securities................................................................ 30
Item 4. Submission of Matters to a Vote of Security Holders............................................ 30
Item 5. Other Information.............................................................................. 30
Item 6. Exhibits ...................................................................................... 30
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JEFFERSON BANCSHARES, INC.
Consolidated Statements of Condition
March 31, 2005 and June 30, 2004
(Dollars in Thousands)
MARCH 31, JUNE 30,
2005 2004
------------------ ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,680 $ 3,803
Interest-earning deposits 8,224 2,608
Investment securities classified as available for sale, net 70,078 95,005
Federal Home Loan Bank stock 1,632 1,580
Bank owned life insurance 5,233 5,080
Loans receivable, net 194,943 186,601
Premises and equipment, net 5,180 5,120
Foreclosed real estate, net 1,143 552
Accrued interest receivable:
Investments 426 870
Loans receivable 1,024 956
Deferred tax asset 2,206 2,502
Other assets 731 797
------------------ ------------------
Total Assets $ 294,500 $ 305,474
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 196,641 $ 204,933
Federal Home Loan Bank advances 12,000 6,000
Other liabilities 901 1,084
Accrued income taxes - 74
------------------ ------------------
Total liabilities 209,542 212,091
------------------ ------------------
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 30,000,000 shares
authorized; 7,566,564 shares issued and outstanding 84 84
Additional paid-in capital 71,662 71,496
Unearned ESOP shares (5,941) (6,265)
Unearned compensation (3,342) (3,488)
Accumulated other comprehensive income (572) (793)
Retained earnings 34,015 32,349
Treasury stock (10,948) -
------------------ ------------------
Total stockholders' equity 84,958 93,383
------------------ ------------------
Total liabilities and stockholders' equity $ 294,500 $ 305,474
================== ==================
See accompanying notes to financial statements
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JEFFERSON BANCSHARES, INC.
Consolidated Statements of Earnings (Unaudited)
(Dollars in Thousands, Except Net Earnings Per Share)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
2005 2004 2005 2004
---- ---- ---- ----
Interest income:
Interest on loans receivable $ 3,330 $ 3,182 $ 9,655 $ 9,625
Interest on investment securities 594 788 1,938 2,428
Other interest 76 26 193 148
------------ ------------ ------------ ------------
Total interest income 4,000 3,996 11,786 12,201
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits 1,064 1,105 3,080 3,648
Advances from FHLB 101 25 292 75
------------ ------------ ------------ ------------
Total interest expense 1,165 1,130 3,372 3,723
------------ ------------ ------------ ------------
NET INTEREST INCOME 2,835 2,866 8,414 8,478
Provision for loan losses - - - -
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 2,835 2,866 8,414 8,478
------------ ------------ ------------ ------------
NONINTEREST INCOME:
Dividends from investments 20 26 46 48
Mortgage origination income 40 - 40 -
Service charges and fees 132 154 416 473
Gain on sale of fixed assets - - - 1
Gain (loss) on sale of investment securities, net - - (43) 22
Gain on sale of foreclosed real estate, net 38 11 71 76
BOLI increase in cash value 45 27 153 27
Other 52 47 106 104
------------ ------------ ------------ ------------
Total noninterest income 327 265 789 751
------------ ------------ ------------ ------------
NONINTEREST EXPENSE:
Compensation and benefits 1,070 900 2,914 2,370
Occupancy expense 89 64 241 189
Equipment and data processing expense 273 280 710 722
SAIF deposit insurance premium 7 8 22 29
REO expense 26 26 58 156
Advertising 47 29 140 151
Contribution to Jefferson Federal Charitable Foundation - - - 4,000
Other 403 363 994 1,115
------------ ------------ ------------ ------------
Total noninterest expense 1,915 1,670 5,079 8,732
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 1,247 1,461 4,124 497
------------ ------------ ------------ ------------
INCOME TAXES:
Current 389 440 1,339 1,218
Deferred (4) (12) 89 (1,129)
------------ ------------ ------------ ------------
Total income taxes 385 428 1,428 89
------------ ------------ ------------ ------------
NET EARNINGS (LOSS) $ 862 $ 1,033 $ 2,696 $ 408
============ ============ ============ ============
NET EARNINGS (LOSS) PER SHARE, BASIC $ 0.12 $ 0.13 $ 0.36 $ 0.05
============ ============ ============ ============
NET EARNINGS (LOSS) PER SHARE, DILUTED $ 0.12 $ 0.13 $ 0.36 $ 0.05
============ ============ ============ ============
See accompanying notes to financial statements
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JEFFERSON BANCSHARES, INC.
Consolidated Statements of Changes in Stockholders' Equity
Year Ended June 30, 2004
and Nine Months Ended March 31, 2005 (Unaudited)
(Dollars in Thousands)
UNALLOCATED ACCUMULATED
ADDITIONAL COMMON OTHER TOTAL
COMMON PAID-IN STOCK IN UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL ESOP COMPENSATION INCOME EARNINGS STOCK EQUITY
---------- ------------ ------------ ------------- ------------ --------- --------- -------------
Balance at June 30, 2003 $ 1,876 $ 1,167 $ - $ - $ 898 $ 32,684 $ - $ 36,625
Comprehensive income:
Net earnings - - - - - 1,387 - 1,387
Change in net unrealized
gain (loss) on securities
available for sale, net
of taxes of $1,043 - - - - (1,691) - - (1,691)
-----------
Total comprehensive income - - - - - - - (304)
Dividends - - - - - (1,733) - (1,733)
Merger of MHC into Jefferson
Bancshares - 100 - - - 11 - 111
Proceeds of stock conversion, net 66 64,406 - - - - - 64,472
Conversion of shares held under
MHC structure (1,876) 1,876 - - - - - -
Shares issued in exchange for
shares held under MHC structure 14 (14) - - - - - -
Contribution of stock to the
Jefferson Federal Charitable
Foundation 4 3,746 - - - - - 3,750
Common stock acquired by employee
stock ownership plan - - (6,701) - - - - (6,701)
Shares committed to be released by
the employee stock ownership plan - 154 436 - - - - 590
Stock options exercised - 33 - - - - - 33
Tax benefit from exercise of
nonqualifying stock options - 28 - - - - - 28
Stock grants under the 2004
Stock Incentive Plan - - - (3,527) - - - (3,527)
Earned portion of stock grants - - - 220 - - - 220
Purchase of stock for the
2004 Stock Incentive Plan - - - (181) - - - (181)
---------- ---------- ---------- ----------- --------- --------- --------- -----------
Balance at June 30, 2004 84 71,496 (6,265) (3,488) (793) 32,349 - 93,383
-----------
Comprehensive income:
Net earnings - - - - - 952 - 952
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes of $629 - - - - 1,014 - - 1,014
-----------
Total comprehensive income - - - - - - - 1,966
Dividends - - - - - (404) - (404)
Shares committed to be released
by the employee stock
ownership plan - 30 108 - - - - 138
Earned portion of stock grants - - - 110 - - - 110
Purchase of stock for the 2004
Stock Incentive Plan - - - (184) - - - (184)
Purchase of common stock
(313,176 shares) - - - - - - (4,125) (4,125)
---------- ---------- ---------- ----------- --------- --------- --------- -----------
Balance at September 30, 2004 84 71,526 (6,157) (3,562) 221 32,897 (4,125) 90,884
Comprehensive income:
Net earnings - - - - - 882 - 882
Change in net unrealized
gain (loss) on securities
available for sale, net
of taxes of $(154) - - - - (248) - - (248)
-----------
Total comprehensive income - - - - - - - 634
Dividends - - - - - (391) - (391)
Dividends used for ESOP payment - - - - - 143 - 143
Shares committed to be released
by the employee stock
ownership plan - 34 108 - - - - 142
Stock options exercised - 44 - - - - - 44
Tax benefit from exercise of
nonqualifying stock options - 25 - - - - - 25
Earned portion of stock grants - - - 110 - - - 110
Purchase of common stock
(260,020 shares) - - - - - - (3,441) (3,441)
---------- ---------- ---------- ----------- --------- --------- --------- -----------
Balance at December 31, 2004 84 71,629 (6,049) (3,452) (27) 33,531 (7,566) 88,150
Comprehensive income:
Net earnings - - - - - 862 - 862
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes of $(337) - - - - (545) - - (545)
-----------
Total comprehensive income - - - - - - - 317
Dividends - - - - - (378) - (378)
Dividends used for ESOP payment - - - - - - - -
Shares committed to be released by
the employee stock ownership plan - 33 108 - - - - 141
Stock options exercised - - - - - - - -
Tax benefit from exercise of
nonqualifying stock options - - - - - - - -
Earned portion of stock grants - - - 110 - - - 110
Purchase of common stock
(260,020 shares) - - - - - - (3,382) (3,382)
---------- ---------- ---------- ----------- --------- --------- --------- -----------
Balance at March 31, 2005 $ 84 $ 71,662 $(5,941) $ (3,342) $ (572) $34,015 $(10,948) $ 84,958
========== ========== ========== =========== ========= ========= ========= ===========
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JEFFERSON BANCSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
NINE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net earnings $ 2,696 $ 408
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities
Stock contributed to the Jefferson Federal Charitable Foundation - 3,750
Allocated ESOP shares 422 455
Depreciation and amortization expense 196 205
Amortization of premiums (discounts), net on investment securities 11 (1)
Gain on sale of fixed assets - 1
Gain (loss) on sale of investment securities and mortgage-backed securities, net 43 (22)
FHLB stock dividends (52) (47)
Amortization of deferred loan fees, net (97) (126)
Loss (gain) on foreclosed real estate, net (70) (76)
Increase in cash value of life insurance (153) (27)
Earned portion of MRDP 330 110
Decrease (increase) in:
Accrued interest receivable 376 370
Other assets 66 647
Deferred tax asset 296 (1,328)
Increase (decrease) in other liabilities and accrued income taxes 117 (417)
----------- -----------
Net cash provided by (used for) operating activities 4,181 3,902
----------- -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Loan originations, net of principal collections (9,333) (5,393)
Investment securities classified as available for sale:
Purchased - (74,479)
Proceeds from sale 20,378 24,914
Proceeds from maturity 1,700 21,500
Return of principal on mortgage-backed securities 3,152 5,373
Purchase of bank owned life insurance - (5,000)
Purchase of premises and equipment (255) (1,144)
Sale of fixed assets - 1
Proceeds from sale of (additions to) foreclosed real estate, net 430 520
----------- -----------
Net cash provided by (used for) investing activities 16,072 (33,708)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (8,292) (115,116)
Proceeds from stock conversion, net - 57,771
Merger of MHC into Jefferson Bancshares - 111
Proceeds from advances from FHLB 15,000 3,500
Repayment of FHLB advances (9,000) (1,500)
Purchase of company stock for the 2004 Stock Based Incentive Plan (14) (3,527)
Purchase of treasury stock (10,948) -
Cash dividend paid on common stock (1,550) (776)
Proceeds from exercise of stock options 44 34
----------- -----------
Net cash provided by (used for) financing activities (14,760) (59,503)
----------- -----------
Net increase (decrease) in cash, cash equivalents and interest-earning deposits 5,493 (89,309)
Cash, cash equivalents and interest-earning deposits at beginning of period 6,411 96,543
----------- -----------
Cash, cash equivalents and interest-earning deposits at end of period $ 11,904 $ 7,234
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest on deposits $ 3,080 $ 3,648
Interest on FHLB advances $ 292 $ 75
Income taxes $ 1,390 $ 1,642
Real estate acquired in settlement of loans $ 1,282 $ 1,471
See accompanying notes to financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements include
the accounts of Jefferson Bancshares, Inc. (the "Company" or "Jefferson
Bancshares") and its wholly-owned subsidiary, Jefferson Federal Bank
(the "Bank" or "Jefferson Federal"). The unaudited financial statements
of Jefferson Bancshares, Inc. were prepared with generally accepted
accounting principles and with instructions for Form 10-Q and,
therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations and cash
flows. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments, which are normal and
recurring in nature, necessary for fair presentation of the interim
financial statements. The results of operations for the period ended
March 31, 2005 are not necessarily indicative of the results which may
be expected for the entire fiscal year. These unaudited consolidated
financial statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended June 30, 2004.
(2) CORPORATE REORGANIZATION AND STOCK OFFERING
-------------------------------------------
On March 4, 2003, the Boards of Directors of Jefferson Bancshares, MHC
(the "MHC") and the Bank adopted a Plan of Conversion to convert the
MHC from mutual to stock form and to complete a related stock offering
in which shares of common stock representing the MHC's ownership
interest in the Bank would be sold to investors (the "Conversion").
The Plan of Conversion was approved by the stockholders and depositors
of the Bank on June 25, 2003. The reorganization and stock offering
were completed on July 1, 2003. As of that date, the Company sold
6,612,500 shares of common stock for $10.00 per share. After taking
into consideration estimated related expenses of approximately $1.6
million, net proceeds from the stock offering amounted to approximately
$64.5 million. An additional 1,388,485 shares were issued to existing
stockholders, based on an exchange rate of 4.2661 shares of Company
common stock for each existing share of Bank common stock, and 375,000
shares were issued to the Jefferson Federal Charitable Foundation,
resulting in the total issuance of 8,375,985 shares. Cash was paid in
lieu of fractional shares.
Upon completion of the Conversion and stock offering, the MHC ceased to
exist and its net assets of $111,000 were transferred to the Bank.
The Conversion was accounted for as a change in corporate form with no
subsequent change in the historical basis of the Company's assets,
liabilities and equity.
(3) LIMITATION ON CAPITAL DISTRIBUTIONS
-----------------------------------
Office of Thrift Supervision regulations impose limitations upon all
capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to
shareholders of another institution in a cash-out merger. Under the
regulations, an application to and the prior approval of the Office of
Thrift Supervision is required prior to any capital distribution if the
institution does not meet the criteria for "expedited treatment" of
applications under Office of Thrift Supervision regulations (I.E.,
generally, examination ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that
year plus the amount of retained net income for the preceding two
years, the
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institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or
agreement with, or condition imposed by, the Office of Thrift
Supervision. If an application is not required, the institution must
still provide prior notice to the Office of Thrift Supervision of the
capital distribution if, like Jefferson Federal, it is a subsidiary of
a holding company. In addition, the Office of Thrift Supervision could
prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the Office of Thrift
Supervision determined that such distribution would constitute an
unsafe or unsound practice. In the event Jefferson Federal's capital
falls below its regulatory requirements or the Office of Thrift
Supervision notifies it that it is in need of more than normal
supervision, Jefferson Federal's ability to make capital distributions
could be restricted. Jefferson Federal also may not make a capital
distribution if the distribution would reduce its regulatory capital
below the amount needed for the liquidation account established in
connection with the Conversion described in Note 2.
(4) EARNINGS PER COMMON SHARE
-------------------------
Earnings per common share and diluted earnings per common share have
been computed on the basis of dividing net earnings by the
weighted-average number of shares of common stock outstanding. The
following table illustrates the number of weighted-average shares of
common stock used in each corresponding earnings per common share
calculation:
WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES
OUTSTANDING FOR THE OUTSTANDING FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- -------------------------------
Shares used for: 2005 2004 2005 2004
-------------- -------------- -------------- --------------
Basic Earnings Per Share 7,171,692 7,737,418 7,443,856 7,718,515
Diluted Earnings Per Share 7,188,557 7,784,096 7,462,315 7,765,484
(5) STATEMENTS OF CASH FLOWS
------------------------
Dividends declared but not paid have been recorded in other
liabilities; however, their non-effect on cash and operations dictates
their exclusion from the cash flows until actually paid.
(6) ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
------------------------------------------------
Impairment of loans having recorded investment of $120,000 at March 31,
2005 and an average investment of $160,000 during the nine-month period
ended March 31, 2005 has been recognized in conformity with the
Financial Accounting Standards Board ("FASB") Statement No. 118. The
total allowance for loan losses related to these loans was $47,000 at
March 31, 2005. Other nonaccrual loans at March 31, 2005 were
approximately $342,000. For the nine months ended March 31, 2005, gross
income which would have been recognized had impaired and nonaccrual
loans been current in accordance with their original terms, amounted to
approximately $21,000. The amount of interest income from impaired and
non-accrual loans included in the Company's interest income for the
nine months ended March 31, 2005 was approximately $17,000. There was
no interest income from impaired loans included in net income for the
three months ended March 31, 2005.
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The following table summarizes the activity in the allowance for loan
losses for the nine months ended March 31, 2005:
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
----------------------------
Balance at June 30, 2004 $ 2,479
Provision for loan losses -
Charge-offs $ (393)
Recoveries 252
-----------
Net (charge-offs)/recoveries (141)
----------
Balance at March 31, 2005 $ 2,338
==========
(7) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
-------------------------------------------------
Jefferson Bancshares is a party to financial instruments with
off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments generally
include commitments to originate mortgage loans. These instruments
involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the balance sheet. The Company's
maximum exposure to credit loss in the event of nonperformance by the
borrower is represented by the contractual amount and related accrued
interest receivable of those instruments. The Company minimizes this
risk by evaluating each borrower's creditworthiness on a case-by-case
basis. Collateral held by the Company consists of a first or second
mortgage on the borrower's property. The amount of collateral obtained
is based upon an appraisal of the property.
The estimated fair values of the Company's financial instruments are as
follows:
MARCH 31, 2005 JUNE 30, 2004
---------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(Dollars in Thousands)
Financial assets:
Cash and due from banks and
interest-earning deposits
with banks $ 11,904 $ 11,904 $ 6,411 $ 6,411
Available-for-sale securities 70,078 70,078 95,005 95,005
Federal Home Loan Bank stock 1,632 1,632 1,580 1,580
Loans receivable 194,943 194,204 186,601 189,153
Accrued interest receivable 1,450 1,450 1,826 1,826
Financial liabilities:
Deposits (196,641) (196,337) (204,933) (205,248)
FHLB advances (12,000) (12,071) (6,000) (6,115)
Off-balance sheet assets (liabilities):
Commitments to extend credit - (954) - (5,123)
Unused standby letters of credit - (570) - (141)
Unused lines of credit - (10,306) - (6,735)
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(8) RECAPTURE OF TAX BAD DEBT RESERVES
----------------------------------
Current federal income tax law provides for the elimination of the
preferential tax bad debt deduction for thrift institutions and the
recapture of tax bad debt reserves in excess of the base year reserves
(pre-1988 reserves). The excess tax bad debt reserves is required to be
recaptured to income ratably over a six-year period unless a thrift
institution meets the "residential loan requirement" test and suspends
the recapture for up to two years. For Jefferson Bancshares, this tax
accounting change was effective for the year ending June 30, 1997.
Because deferred taxes have been recorded for such excess tax bad debt
reserves, this legislation has not had a material effect on the
Company's statement of condition or results of operation; however, it
has resulted in an outflow of cash. The six-year recapture period began
with the fiscal year ending June 30, 1999. The total amount of excess
tax bad debt reserves recaptured during the six-year period amounted to
$622,000 and resulted in additional federal income taxes of $211,000.
(9) STOCK INCENTIVE PLANS
---------------------
Under the Bank's 1995 Stock Option Plan and the 1995 Management
Recognition and Development Plan ("MRP"), the Company issued a combined
total of 179,176 shares to officers, employees and non-employee
directors. Both plans vested pro-rata over a five-year period, with the
Stock Option Plan having an expiration date of April 1, 2007. As of
March 31, 2005, there were 51,258 options outstanding and no remaining
shares available for grant under the 1995 Stock Option Plan. During the
nine-month period, 9,599 options were exercised.
On January 8, 2004, the Company adopted the 2004 Stock Incentive Plan
which authorized the granting of 698,750 options and 279,500 restricted
stock awards to employees and non-employee directors. As of March 31,
2005, there were 401,778 options and 160,711 restricted stock awards
granted under this plan which will vest pro-rata over a five-year
period. The 2004 plan has an expiration date of January 30, 2014.
The table below summarizes the status of the Company's stock option
plans as of March 31, 2005.
NINE MONTHS ENDED
MARCH 31, 2005
--------------
Weighted-
average
Shares exercise price
------------ ---------------
Outstanding at beginning of period 462,635 $12.44
Granted during the nine-month period - -
Options exercised 9,599 $ 4.64
Outstanding at March 31, 2005 453,036 $12.60
Options exercisable at March 31, 2005 131,619 $ 9.95
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The following information applies to options outstanding at March 31,
2005:
Number outstanding 453,036
Range of exercise prices $3.52 - $13.69
Weighted-average exercise price $12.60
Weighted-average remaining contractual life 8.06 years
Number of options remaining for future issuance 296,972
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of Jefferson Bancshares. The information contained in this
section should be read in conjunction with the financial statements and
accompanying notes. For further information, refer to the financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the year
ended June 30, 2004.
GENERAL
- -------
Jefferson Bancshares, Inc. (also referred to as the "Company" or "Jefferson
Bancshares") was organized as a Tennessee corporation at the direction of
Jefferson Federal Bank, formerly known as Jefferson Federal Savings and Loan
Association of Morristown (referred to as the "Bank" or "Jefferson Federal"), in
March 2003 to become the holding company for Jefferson Federal upon the
completion of its "second-step" mutual-to-stock conversion (the "Conversion") of
Jefferson Bancshares, M.H.C. (the "MHC"). The Conversion was completed on July
1, 2003. As part of the Conversion, the MHC merged into Jefferson Federal
thereby ceasing to exist and Jefferson Federal Savings and Loan Association of
Morristown changed its name to "Jefferson Federal Bank." The Company sold
6,612,500 shares of its common stock at a price of $10.00 per share to
depositors of the Bank in a subscription offering raising approximately $64.5
million in net proceeds. The Company also exchanged approximately 1,389,000
shares of its common stock for all the outstanding shares of the Bank's common
stock (other than shares held by the MHC), representing an exchange ratio of
4.2661 for each share of Jefferson Federal outstanding. In addition, the Bank
established the Jefferson Federal Charitable Foundation, which was funded with
$250,000 and 375,000 shares of Company common stock.
The Company has no significant assets, other than all of the outstanding shares
of the Bank and the portion of the net proceeds it retained from the Conversion,
and no significant liabilities. Management of the Company and the Bank are
substantially similar and the Company neither owns nor leases any property, but
instead uses the premises, equipment and furniture of the Bank. Accordingly, the
information set forth in this report, including the consolidated financial
statements and related financial data, relates primarily to the Bank.
Jefferson Federal is a community oriented financial institution offering
traditional financial services to its local communities. The Bank is engaged
primarily in the business of attracting deposits from the general public using
such funds to originate loans secured by first mortgages on owner-occupied,
one-to four- family residential properties, as well as to originate commercial
real estate and multi-family mortgage loans, construction loans, consumer loans,
commercial non-real estate loans and make other investments permitted by
applicable laws and regulations.
11
12
The Bank's savings accounts are insured up to the applicable legal limits by the
Federal Deposit Insurance Corporation ("FDIC") through the Savings Association
Insurance Fund ("SAIF"). Jefferson Federal Bank is a member of the Federal Home
Loan Bank ("FHLB") System.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
- --------------------------------------------------------------
This Quarterly Report may contain forward-looking statements within the meaning
of the federal securities laws. These statements are not historical facts, but
rather are statements based on Jefferson Bancshares' current expectations
regarding its business strategies and their intended results and its future
performance. Forward-looking statements are preceded by terms such as "expects,"
"believes," "anticipates," "intends" and similar expressions.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. These factors include, but are not limited
to, general economic conditions, changes in the interest rate environment,
legislative or regulatory changes that may adversely affect our business,
changes in accounting policies and practices, changes in competition and demand
for financial services, adverse changes in the securities markets and changes in
the quality or composition of the Company's loan or investment portfolios. These
factors should be considered in evaluating the forward-looking statements and
undue reliance should not be placed on such statements. Jefferson Bancshares
assumes no obligation to update any forward-looking statements.
12
13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
NET INCOME
- ----------
Net income was $862,000, or $0.12 per diluted share, for the quarter ended March
31, 2005 compared to net income of $1.0 million, or $0.13 per diluted share, for
the comparable period in 2004. Net income for the three-month period in 2005
reflects an increase in noninterest expense related to the January 1, 2005
opening of the lending office in Knoxville, Tennessee. The most significant item
contributing to the overall increase in noninterest expense was compensation
expense, which increased $170,000 for the quarter ended March 31, 2005 compared
to the same period in 2004. For the nine months ended March 31, 2005, net income
was $2.7 million, or $0.36 per diluted share, compared to net earnings of
$408,000, or $0.05 per diluted share, for the nine months ended March 31, 2004.
Net income for the nine-month period in 2004 reflects the nonrecurring expense
associated with the $4.0 million contribution to the Jefferson Federal
Charitable Foundation which was formed in connection with the Company's
conversion and was funded with $250,000 and 375,000 shares of Jefferson
Bancshares common stock. This stock and cash contribution was recorded as an
expense of $4.0 million, or approximately $2.5 million after taxes. Annualized
return on average assets was 1.16% and 1.18% for the three and nine months ended
March 31, 2005, respectively, compared with 1.33% and 0.17% for the comparable
periods in 2004. Annualized return on average equity was 3.98% and 4.01% for the
three and nine months ended March 31, 2005, respectively, compared with 4.35%
and 0.57% for the comparable periods in 2004.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
(Dollars in thousands, (Dollars in thousands,
except per share data) except per share data)
Net earnings $ 862 $1,033 $2,696 $ 408
Net earnings per share, basic $0.12 $ 0.13 $ 0.36 $0.05
Net earnings per share, diluted $0.12 $ 0.13 $ 0.36 $0.05
Return on average assets (annualized) 1.16% 1.33% 1.18% 0.17%
Return on average equity (annualized) 3.98% 4.35% 4.01% 0.57%
NET INTEREST INCOME
- -------------------
Net interest income before loan loss provision decreased $31,000, or 1.1%, to
$2.8 million for the three months ended March 31, 2005 compared to the same
period in 2004. The decline in net interest income is primarily attributable to
an increase in interest expense. Interest expense increased $35,000 as a result
of a $76,000 increase in the cost of borrowed funds partially offset by a
decrease in interest paid on deposits. The net interest margin increased 15
basis points to 4.02% for the three months ended March 31, 2005. The interest
rate spread was 3.36% and 3.20% for the quarters ended March 31, 2005 and 2004,
respectively. The increase in the interest rate spread reflects an increase in
the average yield on interest-earning assets partially offset by an increase in
the average rate paid on interest-bearing liabilities. The average yield on
interest-earning assets increased 29 basis points to 5.68% while the average
rate paid on interest-bearing liabilities increased 12 basis points to 2.31%.
13
14
The following table summarizes changes in interest income and expense for the
three-month periods ended March 31, 2005 and 2004:
THREE MONTHS
ENDED
MARCH 31,
------------------------------
2005 2004 $ CHANGE % CHANGE
------------- -------------- ------------- --------------
(Dollars in thousands)
INTEREST INCOME:
Loans $ 3,330 $ 3,182 $ 148 4.7%
Investment securities 594 788 (194) (24.6%)
Interest-earning deposits 58 10 48 480.0%
FHLB stock 18 16 2 12.5%
------------- -------------- -------------
Total interest income 4,000 3,996 4 0.1%
INTEREST EXPENSE:
Deposits 1,064 1,105 (41) (3.7%)
Borrowings 101 25 76 304.0%
------------- -------------- -------------
Total interest expense 1,165 1,130 35 3.1%
------------- -------------- -------------
Net interest income $ 2,835 $ 2,866 $ (31) (1.1%)
============= ============== =============
For the nine months ended March 31, 2005, net interest income decreased $64,000
to $8.4 million. The decline in net interest income is primarily attributable to
a decrease in the volume of investment securities partially offset by a decline
in the average rate paid on interest-bearing deposits. The net interest margin
and interest rate spread was 3.88% and 3.25%, respectively, for the nine months
ended March 31, 2005 compared to 3.73% and 3.02% for the comparable period in
2004.
The following table summarizes changes in interest income and expense for the
nine-month periods ended March 31, 2005 and 2004:
NINE MONTHS
ENDED
MARCH 31,
------------------------------
2005 2004 $ CHANGE % CHANGE
------------- -------------- ------------- --------------
(Dollars in thousands)
INTEREST INCOME:
Loans $ 9,655 $ 9,625 $ 30 0.3%
Investment securities 1,938 2,428 (490) (20.2%)
Interest-earning deposits 141 102 39 38.2%
FHLB stock 52 46 6 13.0%
------------- -------------- -------------
Total interest income 11,786 12,201 (415) (3.4%)
INTEREST EXPENSE:
Deposits 3,080 3,648 (568) (15.6%)
Borrowings 292 75 217 289.3%
------------- -------------- -------------
Total interest expense 3,372 3,723 (351) (9.4%)
------------- -------------- -------------
Net interest income $ 8,414 $ 8,478 $ (64) (0.8%)
============= ============== =============
14
15
The following table summarizes average balances and average yields and costs:
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------------------------- ----------------------------------------------
2005 2004 2005 2004
---------------------- ---------------------- ---------------------- ----------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE COST BALANCE COST BALANCE COST
------------ -------- ------------ -------- ----------- --------- ----------- ---------
(Dollars in thousands) (Dollars in thousands)
Loans $ 197,923 6.73% $ 189,904 6.70% $ 198,856 6.47% $ 184,874 6.94%
Investment securities 70,887 3.35% 97,187 3.24% 77,778 3.32% 106,979 3.03%
Interest-earning deposits 11,392 2.04% 7,924 0.50% 10,996 1.71% 9,673 1.41%
FHLB stock 1,625 4.43% 1,559 4.11% 1,608 4.31% 1,544 3.97%
Deposits 189,527 2.25% 203,783 2.17% 194,344 2.11% 209,419 2.32%
Borrowings 12,000 3.37% 2,667 3.75% 11,889 3.27% 2,222 4.56%
The following table sets forth the effects of changing rates and volumes on our
net interest income. The rate column shows the effects attributable to changes
in rate (changes in rate multiplied by prior volume). The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by
prior rate). The net column represents the sum of the prior columns. For
purposes of this table, changes attributable to changes in both rate and volume
that cannot be segregated have been allocated proportionately based on the
changes due to rate and the changes due to volume.
THREE MONTHS NINE MONTHS
2005 COMPARED TO 2004 2005 COMPARED TO 2004
----------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------- -----------------------
VOLUME RATE NET VOLUME RATE NET
---------- ----------- ---------- ---------- ----------- ----------
(In Thousands) (In Thousands)
Interest income:
Loans receivable $ 138 $ 10 $ 148 $ 706 $ (676) $ 30
Investment securities (222) 28 (194) (718) 228 (490)
Other 10 40 50 18 27 45
---------- ----------- ---------- ---------- ----------- ----------
Total interest-earning assets (74) 78 4 6 (421) (415)
---------- ----------- ---------- ---------- ----------- ----------
Interest expense:
Deposits (82) 41 (41) (252) (315) (567)
Borrowings 79 (3) 76 242 (26) 216
---------- ----------- ---------- ---------- ----------- ----------
Total interest-bearing liabilities (3) 38 35 (10) (341) (351)
---------- ----------- ---------- ---------- ----------- ----------
Net change in interest income $ (71) $ 40 $ (31) $ 16 $ (80) $ (64)
========== =========== ========== ========== =========== ==========
Total interest income remained steady at $4.0 million for the three months ended
March 31, 2005 and decreased $415,000, or 3.4%, to $11.8 million for the nine
months ended March 31, 2005. Interest income for both the three- and nine-month
period in 2005 reflects a decrease in income from investment securities. The
decrease in income from investment securities was primarily the result of a
decrease in the average balance of investment securities more than offsetting an
increase in the average yield. The decline in investment securities was due to
the deployment of conversion proceeds primarily into stock repurchases and other
higher yielding assets. Interest on loans increased for the three months ended
March 31, 2005 due to an increase in the average balance of loans combined with
15
16
a slight increase in the average yield. For the nine-month period ended March
31, 2005, interest on loans increased due to an increase in the average balance
of loans more than offsetting a reduction in the average yield. The increase in
the average balance of loans is the result of growth in the commercial loan
portfolio. Most of the commercial loans that have been originated have been tied
to prime and will reprice quickly as interest rates change. Interest on deposits
increased for both the three- and nine-month period due to our increased
liquidity for future loan demand. Interest on deposits was $58,000 and $141,000
for the three- and nine- month period ended March 31, 2005, respectively,
compared to $10,000 and $102,000 for the comparable periods in 2004. Dividends
on Federal Home Loan Bank ("FHLB") stock were $18,000 and $52,000 for the three-
and nine- month periods ended March 31, 2005, respectively, and $16,000 and
$46,000 for the comparable periods in 2004. FHLB dividends are paid with
additional shares of FHLB stock.
Interest expense on interest-bearing liabilities increased for the three-month
period ended March 31, 2005 due to an increase in interest paid on advances more
than offsetting a decrease in interest paid on deposits. Interest expense on
FHLB advances was $101,000 for the three months ended March 31, 2005 compared to
$25,000 for the comparable period in 2004 due to a higher average balance.
Interest expense on deposits decreased $41,000, or 3.7%, to $1.1 million for the
three-month period ended March 31, 2005 due to a decrease in the average balance
of deposits more than offsetting an increase in the average rate paid. The
average rate paid on deposits increased 8 basis points to 2.25% for the
three-month period in 2004 due to higher rates paid on money market accounts.
The increase in the rate paid on money market accounts reflects an increase in
short-term interest rates.
Interest expense on interest-bearing liabilities decreased $351,000, or 9.4%, to
$3.4 million for the nine months ended March 31, 2005 due primarily to a
decrease in both the average balance and average rate paid on deposits. Interest
expense on deposits decreased $568,000, or 15.6%, to $3.1 million for the
nine-month period ended March 31, 2005 compared to $3.6 million for the
comparable period in 2004. The average balance of deposits decreased $15.1
million to $194.3 million due to a decline in the average balance of
certificates of deposit and the average rate paid decreased 21 basis points to
2.11% for the nine months ended March 31, 2005. The decline in the average rate
paid on deposits reflects lower repricing of certificates of deposit during the
period more than offsetting higher rates paid on money market accounts. Interest
expense on FHLB advances was $292,000 for the nine months ended March 31, 2005
compared to $75,000 for the comparable period in 2004. This increase was
primarily attributable to a higher average balance during the current nine-month
period.
PROVISION FOR LOAN LOSSES
- -------------------------
We review the level of the loan loss allowance on a monthly basis and establish
the provision for loan losses based on the volume and types of lending,
delinquency levels, loss experience, the amount of classified loans, economic
conditions and other factors related to the collectibility of the loan
portfolio. Net charge-offs amounted to $50,000 and $141,000 for the three- and
nine-month periods ended March 31, 2005 compared to $58,000 and $317,000 for the
comparable periods in 2004. There were no additions to the allowance for loan
losses during either period. Nonperforming loans totaled $296,000 at March 31,
2005 compared to $1.2 million for the comparable period in 2004.
16
17
NONINTEREST INCOME
- ------------------
Noninterest income increased $62,000, or 23.4%, to $327,000 for the three months
ended March 31, 2005 as a result of an increase in mortgage origination fee
income, an increase in net gain on foreclosed real estate, and an increase in
the cash surrender value of bank owned life insurance more than offsetting a
decrease in service charges and fees. Mortgage origination fee income increased
due to the initiation of secondary market operations.
The following table summarizes the dollar amounts for each category of
noninterest income, and the dollar and percent changes for the three months
ended March 31, 2005 compared to the same period in 2004.
THREE MONTHS ENDED
MARCH 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- ------------ ------------
(Dollars in thousands)
Dividends from investments $ 20 $ 26 $ (6) (23.1%)
Mortgage origination fees 40 - 40 NM
Service charges and fees 132 154 (22) (14.3%)
Gain on sale of fixed assets - - - NM
Gain (loss) on sale of investments - - - NM
Gain on sale of foreclosed property 38 11 27 245.5%
BOLI increase in cash value 45 27 18 66.7%
Other 52 47 5 10.6%
----------- ----------- ------------
Total noninterest income $ 327 $ 265 $ 62 23.4%
=========== =========== ============
Noninterest income increased $38,000, or 5.1%, to $789,000 for the nine months
ended March 31, 2005 as a result of an increase in mortgage origination fee
income and an increase in the cash surrender value of bank owned life insurance
more than offsetting a decline in service charges and fees and a loss on sale of
investment securities.
The following table summarizes the dollar amounts for each category of
noninterest income, and the dollar and percent changes for the nine months ended
March 31, 2005 compared to the same period in 2004.
NINE MONTHS ENDED
MARCH 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- ------------ ------------
(Dollars in thousands)
Dividends from investments $ 46 $ 48 $ (2) (4.2%)
Mortgage origination fees 40 - 40 NM
Service charges and fees 416 473 (57) (12.1%)
Gain on sale of fixed assets - 1 (1) (100.0%)
Gain (loss) on sale of investments (43) 22 (65) (295.5%)
Gain on sale of foreclosed property 71 76 (5) (6.6%)
BOLI increase in cash value 153 27 126 466.7%
Other 106 104 2 1.9%
----------- ----------- ------------
Total noninterest income $ 789 $ 751 $ 38 5.1%
=========== =========== ============
17
18
NONINTEREST EXPENSE
- -------------------
Noninterest expense totaled $1.9 million for the three months ended March 31,
2005 as compared to $1.7 million for the comparable period in 2004 primarily due
to an increase in compensation expense. Compensation expense increased $170,000,
or 18.9%, to $1.1 million for the current three-month period. This increase is
primarily due to staff additions for the lending office in Knoxville, Tennessee
which opened on January 1, 2005.
The following table summarizes the dollar amounts for each category of
noninterest expense, and the dollar and percent changes for the three months
ended March 31, 2005 compared to the same period in 2004.
THREE MONTHS ENDED
MARCH 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- ----------- -----------
(Dollars in thousands)
Compensation and benefits $ 1,070 $ 900 $ 170 18.9%
Occupancy 89 64 25 39.1%
Equipment and data processing 273 280 (7) (2.5%)
SAIF Deposit insurance premiums 7 8 (1) (12.5%)
REO expense 26 26 - 0.0%
Advertising 47 29 18 62.1%
Other 403 363 40 11.0%
----------- ----------- -----------
Total noninterest expense $ 1,915 $ 1,670 $ 245 14.7%
=========== =========== ===========
Noninterest expense totaled $5.1 million for the nine months ended March 31,
2005 compared to $8.7 million for the comparable period in 2004. The $3.7
million decrease was primarily attributable to the nonrecurring expense
associated with the $4.0 million contribution to the Jefferson Federal
Charitable Foundation during the nine months ended March 31, 2004. Compensation
expense increased $544,000, or 23.0%, to $2.9 million for the 2005 nine-month
period due to staff additions for the lending office that opened in Knoxville,
Tennessee on January 1, 2005 combined with normal salary increases and expenses
related to the Stock Incentive Plan.
18
19
The following table summarizes the dollar amounts for each category of
noninterest expense, and the dollar and percent changes for the nine months
ended March 31, 2005 compared to the same period in 2004.
NINE MONTHS ENDED
MARCH 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- ----------- -----------
(Dollars in thousands)
Compensation and benefits $ 2,914 $ 2,370 $ 544 23.0%
Occupancy 241 189 52 27.5%
Equipment and data processing 710 722 (12) (1.7%)
SAIF Deposit insurance premiums 22 29 (7) (24.1%)
REO expense 58 156 (98) (62.8%)
Advertising 140 151 (11) (7.3%)
Contribution to Jefferson Federal Charitable Foundation - 4,000 (4,000) (100.0%)
Other 994 1,115 (121) (10.9%)
----------- ----------- -----------
Total noninterest expense $ 5,079 $ 8,732 $ (3,653) (41.8%)
=========== =========== ===========
INCOME TAXES
- ------------
Income tax expense for the three months ended March 31, 2005 was $385,000
compared to $428,000 for the same period in 2004. Income tax expense for the
nine months ended March 31, 2005 was $1.4 million compared to $89,000 for the
same period in 2004. The income tax expense for the nine-period in 2004 reflects
the contribution of cash and common stock to the Jefferson Federal Charitable
Foundation. The contribution to the Foundation was tax deductible, subject to a
limitation based on 10% of the Company's annual taxable income. Any unused
portion of the deduction may be carried forward for five years following the
year in which the contribution is made.
FINANCIAL CONDITION
ASSETS
- ------
At March 31, 2005, total assets were $294.5 million, a decrease of $11.0
million, or 3.6%, compared to $305.5 million at June 30, 2004. The decrease in
assets was primarily attributable to a decline in investment securities.
Proceeds from sales and maturities of investment securities and repayments of
mortgage-backed securities were utilized to fund stock repurchases and to fund
growth in the loan portfolio.
CASH, CASH EQUIVALENTS AND INTEREST-EARNING DEPOSITS
- ----------------------------------------------------
Cash and cash equivalents were $3.7 million at March 31, 2005 compared to $3.8
million at June 30, 2004. Interest-earning deposits increased $5.6 million to
$8.2 million at March 31, 2005, which reflects our decision to increase
liquidity for future loan demand.
19
20
INVESTMENTS
- -----------
Our investment portfolio consists primarily of Federal agency securities with
maturities of seven years or less, municipal securities and mortgage-backed
securities with stated final maturities of thirty years or less. Investment
securities decreased $24.9 million, or 26.2%, to $70.1 million due primarily to
sales of investment securities during the 2005 nine-month period. Proceeds from
the sale of investment securities were used to fund stock repurchases and to
fund growth in the loan portfolio. Investment securities classified as
available-for-sale are carried at fair market value and reflect an unrealized
loss of $926,000, or $572,000 net of taxes.
The following table sets forth the carrying values of our investment securities
portfolio at the dates indicated. All of our investment securities are
classified as available-for-sale.
AT MARCH 31, 2005
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency $ 58,528 $ 93 $ (1,063) $ 57,558
Municipals 3,214 3 (67) 3,150
Mortgage-backed 9,262 108 - 9,370
------------ ------------ ----------- ------------
Total securities available-
for-sale $ 71,004 $ 204 $ (1,130) $ 70,078
============ ============ =========== ============
Weighted-average rate 3.33%
============
Federal Home Loan Bank of
Cincinnati stock $ 1,632 $ - $ - $ 1,632
============ ============ =========== ============
Weighted-average rate 4.50%
============
AT JUNE 30, 2004
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency $ 80,443 $ 205 $ (1,375) $ 79,273
Municipals 3,425 1 (112) 3,314
Mortgage-backed 12,422 78 (82) 12,418
------------ ------------ ----------- ------------
Total securities available-
for-sale $ 96,290 $ 284 $ (1,569) $ 95,005
============ ============ =========== ============
Weighted-average rate 3.22%
============
Federal Home Loan Bank of
Cincinnati stock $ 1,580 $ - $ - $ 1,580
============ ============ =========== ============
Weighted-average rate 4.00%
============
20
21
LOANS
- -----
Net loans increased $8.3 million, or 4.5%, to $194.9 million at March 31, 2005.
Our primary lending activity is the origination of loans secured by real estate.
We originate real estate loans secured by one- to four-family homes, commercial
real estate, multi-family real estate and land. We also originate construction
loans and home equity loans. Total real estate loans totaled $167.1 million, or
84.6% of gross loans at March 31, 2005 compared to $170.9 million, or 90.2% of
gross loans, at June 30, 2004.
Commercial business loans increased $11.5 million, or 91.4%, to $24.2 million at
March 31, 2005 due to our continued emphasis on this type of lending. Commercial
business loans were 12.2% of gross loans at March 31, 2005 compared to 6.7% of
gross loans at June 30, 2004. Most of the commercial business loans that we have
originated have been tied to prime and will reprice quickly as interest rates
change.
We originate a variety of consumer loans, including loans secured by
automobiles, mobile homes and deposit accounts at Jefferson Federal. Consumer
loans increased $433,000, or 7.4%, to $6.3 million at March 31, 2005 due to an
emphasis on automobile loans during the three-month period ended March 31, 2005.
21
22
Loans receivable, net are summarized as follows:
AT AT
MARCH 31, JUNE 30,
2005 2004
------------------------- -------------------------
PERCENT PERCENT $ %
AMOUNT OF PORTFOLIO AMOUNT OF PORTFOLIO CHANGE CHANGE
------------ ------------ ------------ ------------ ----------- ----------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 81,908 41.5% $ 84,784 44.8% $ (2,876) (3.4%)
Multi-family 8,651 4.4% 9,213 4.9% (562) (6.1%)
Construction 5,011 2.5% 3,001 1.6% 2,010 67.0%
Commercial 53,301 27.0% 59,993 31.7% (6,692) (11.2%)
Land 14,310 7.2% 10,760 5.7% 3,550 33.0%
Home equity line of credit 3,880 2.0% 3,143 1.7% 737 23.4%
------------ ------------ ------------ ------------ -----------
Total real estate loans 167,061 84.6% 170,894 90.2% (3,833) (2.2%)
------------ ------------ ------------ ------------ -----------
Commercial business loans 24,187 12.2% 12,640 6.7% 11,547 91.4%
------------ ------------ ------------ ------------ -----------
Consumer Loans:
Loans secured by deposit accounts 1,146 0.6% 1,084 0.6% 62 5.7%
Other consumer loans 1,623 0.8% 2,038 1.1% (415) (20.4%)
Loans secured by automobiles 3,108 1.6% 2,200 1.2% 908 41.3%
Mobile home loans 409 0.2% 531 0.3% (122) (23.0)
------------ ------------ ------------ ------------ -----------
Total non-real estate loans 6,286 3.2% 5,853 3.1% 433 7.4%
------------ ------------ ------------ ------------ -----------
Total commercial business
and consumer loans 30,473 15.4% 18,493 9.8% 11,980 64.8%
------------ ------------ ------------ ------------ -----------
Total gross loans 197,534 100.0% 189,387 100.0% 8,147 4.3%
Less:
Deferred loan fees, net (253) (306) 53 (17.3%)
Unearned discount on loans - (1) 1 (100.0%)
Allowance for losses (2,338) (2,479) 141 (5.7%)
------------ ------------ -----------
Loans receivable, net $ 194,943 $ 186,601 $ 8,342 4.5%
============ ============ ===========
LOAN LOSS ALLOWANCE
- -------------------
The allowance for loan losses is a valuation allowance for probable losses
inherent in the loan portfolio. We evaluate the need to establish reserves
against losses on loans on a monthly basis. When additional reserves are
necessary, a provision for loan losses is charged to earnings. In connection
with assessing the allowance, we consider the level of classified loans,
delinquency levels and loss experience. In addition, we assess the allowance
using factors that cannot be associated with specific credit or loan categories.
These factors include our subjective evaluation of local and national economic
and business conditions, portfolio concentration and changes in the character
and size of the loan portfolio. The allowance methodology appropriately reflects
a margin for the imprecision necessarily inherent in estimates of expected
credit losses.
22
23
The Office of Thrift Supervision, as an integral part of its examination
process, periodically reviews our allowance for loan losses. The Office of
Thrift Supervision may require us to make additional provisions for loan losses
based on judgments different from ours.
Due to net charge-offs, the allowance for loan losses decreased $141,000 to $2.3
million at March 31, 2005. There were no additions to the allowance for loan
losses during the three-month period ended March 31, 2005. Our allowance for
loan losses represented 1.18% of total gross loans at March 31, 2005 compared to
1.31% of total gross loans at June 30, 2004.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ------------ ------------ -----------
(Dollars in thousands) (Dollars in thousands)
Balance at beginning of period $ 2,388 $ 2,582 $ 2,479 $ 2,841
Provision for loan losses - - - -
Recoveries 66 44 252 219
Charge-offs (116) (102) (393) (536)
----------- ------------ ------------ -----------
Net charge-offs (50) (58) (141) (317)
----------- ------------ ------------ -----------
Allowance at end of period $ 2,338 $ 2,524 $ 2,338 $ 2,524
=========== ============ ============ ===========
Net charge-offs to average outstanding
loans during the period, annualized 0.10% 0.12% 0.09% 0.23%
NONPERFORMING ASSETS
- --------------------
We consider repossessed assets and nonaccrual loans to be nonperforming assets.
Loans are reviewed on a monthly basis and are generally placed on nonaccrual
status when the loan becomes more than 90 days delinquent. Nonperforming assets
were $1.5 million at March 31, 2005 compared to $1.6 million at June 30, 2004.
Nonperforming loans were $342,000 and $1.1 million at March 31, 2005 and June
30, 2004, respectively. Foreclosed real estate increased $591,000 to $1.1
million at March 31, 2005. The increase in foreclosed property is primarily
attributable to one borrowing relationship and includes foreclosed property
totaling $912,000. Foreclosed real estate is initially recorded at the lower of
the amount of the loan or the fair value, less estimated selling costs. Any
writedown to fair value is charged to the allowance for loan losses. Any
subsequent writedown of foreclosed real estate is charged against earnings.
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MARCH 31, JUNE 30,
2005 2004
--------------- ----------------
(Dollars in thousands)
Nonaccruing loans:
Real estate $ 296 $ 1,047
Commercial business 46 15
Consumer - 21
--------------- ----------------
Total nonaccrual loans 342 1,083
Real estate owned 1,143 552
Other repossessed assets - -
--------------- ----------------
Total nonperforming assets $ 1,485 $ 1,635
=============== ================
Total nonperforming assets to total assets 0.50% 0.54%
Total nonperforming loans to total loans 0.18% 0.58%
Allowance for loan losses to total nonperforming loans 683.63% 228.90%
BANK OWNED LIFE INSURANCE
- -------------------------
We hold bank owned life insurance ("BOLI") to help offset the cost of employee
benefit plans. BOLI provides earnings from accumulated cash value growth and
provides tax advantages inherent in a life insurance contract. The cash
surrender value of the BOLI at March 31, 2005 was $5.2 million.
DEPOSITS
- --------
Total deposits decreased $8.3 million to $196.6 million at March 31, 2005, due
primarily to a $12.9 million decrease in certificates of deposit, partially
offset by increases in NOW, money market and non-interest bearing accounts. The
continuing decline in the average balance of certificates of deposit reflects
our emphasis on attracting lower cost deposits.
MARCH 31, JUNE 30,
2005 2004 $ CHANGE % CHANGE
--------------- --------------- ------------- ------------
(Dollars in thousands)
Certificates of deposit $ 126,030 $ 138,976 $ (12,946) (9.3%)
Savings accounts 13,268 13,849 (581) (4.2%)
Money market accounts 32,042 28,930 3,112 10.8%
NOW accounts 16,293 15,220 1,073 7.0%
Non-interest bearing accounts 9,008 7,958 1,050 13.2%
--------------- --------------- -------------
$ 196,641 $ 204,933 $ (8,292) (4.0%)
=============== =============== =============
ADVANCES AND OTHER LIABILITIES
- ------------------------------
FHLB advances increased $6.0 million to $12.0 million at March 31, 2005. During
the nine-month period ended March 31, 2005, FHLB advances were utilized as a
funding source for supporting loan growth.
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STOCKHOLDERS' EQUITY
- --------------------
Stockholders' equity decreased $8.4 million, or 9.0%, to $85.0 million at March
31, 2005. Retained earnings increased $1.7 million to $34.0 million at March 31,
2005 due to net earnings of $2.7 million partially offset by the payment of
dividends to shareholders in the amount of $1.2 million. Unrealized gains and
losses, net of taxes, in the available-for-sale investment portfolio are
reflected as an adjustment to stockholders' equity. At March 31, 2005, the
adjustment to stockholders' equity was an unrealized loss of $572,000 compared
to a net unrealized loss of $793,000 at June 30, 2004. During the nine-month
period ended March 31, 2005, a Stock Repurchase Program was announced under
which up to 838,552 shares, or 10%, of the Company's outstanding common stock
may be repurchased. During the nine-month period ended March 31, 2005, there
were 828,552 shares of treasury stock purchased at a cost of $10.9 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is the ability to meet current and future financial obligations of a
short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of investment securities and borrowings from
the Federal Home Loan Bank of Cincinnati. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
We regularly adjust our investments in liquid assets based on our assessment of
expected loan demand, expected deposit flows, yields available on
interest-earning deposits and securities, and the objectives of our
asset/liability management program. Excess liquid assets are invested generally
in interest-earning deposits and short- and intermediate-term U.S. Government
agency obligations.
Our most liquid assets are cash and cash equivalents and interest-earning
assets. The levels of these assets are dependent on our operating, financing,
lending and investing activities during any given period. At March 31, 2005,
cash and cash equivalents totaled $3.7 million and interest-earning deposits
totaled $8.2 million. Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $70.1 million at March 31, 2005. In
addition, at March 31, 2005, we had arranged the ability to borrow a total of
approximately $66.2 million from the Federal Home Loan Bank of Cincinnati. On
that date, we had advances outstanding of $12.0 million.
At March 31, 2005, we had approximately $954,000 in loan commitments, consisting
of $576,000 in commitments to originate residential loans and $378,000 to
originate commercial loans. In addition to commitments to originate loans, we
had $3.9 million in loans-in-process, $570,000 in unused standby letters of
credit and approximately $10.3 million in unused lines of credit. We had $88.3
million in certificates of deposit due within one year and $70.6 million in
other deposits without specific maturities at March 31, 2005. We believe, based
on past experience, that a significant portion of those deposits will remain
with us. We have the ability to attract and retain deposits by adjusting the
interest rates offered.
Our primary investing activities are the origination of loans and the purchase
of investment securities. During the nine-month period ended March 31, 2005,
loan originations, net of principal collections, were $9.3 million offset by the
redemption, prepayment and sale of securities in the amount of $25.2 million.
During the period, financing activities consisted primarily of activity in
deposit accounts and
25
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Federal Home Loan Bank advances. We experienced a net decrease in total deposits
of $8.3 million during the nine-month period ended March 31, 2005 due primarily
to a decline in certificates of deposit. The decline in certificates of deposit
reflects our emphasis on attracting lower cost deposits. Deposit flows are
affected by the overall level of interest rates and products offered by us and
our local competitors and other factors. Occasionally, we offer promotional
rates on certain deposit products in order to attract deposits. In the
nine-month period ended March 31, 2005, Federal Home Loan Bank advances
increased $6.0 million to $12.0 million.
At March 31, 2005, the average liquidity ratio was 32.29% compared to 37.04% at
March 31, 2004. The capital from the Conversion has significantly increased our
liquidity and capital resources. Over time, we expect the initial level of
liquidity after the Conversion will continue to be reduced as net proceeds from
the stock offering are used for future lending and operational growth and
expansion activities.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
In the normal course of operations, we engage in a variety of financial
transactions that, in accordance with generally accepted accounting principles,
are not recorded in our financial statements. These transactions involve, to
varying degrees, elements of credit, interest rate and liquidity risk. Such
transactions are used primarily to manage customers' requests for funding and
take the form of loan commitments, unused lines of credit, amounts due
mortgagors on construction loans, amounts due on commercial loans and commercial
letters of credit.
For the three months ended March 31, 2005, we engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.
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CAPITAL COMPLIANCE
- ------------------
The following table presents our capital position relative to our regulatory
capital requirements at March 31, 2005 and June 30, 2004:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
AT MARCH 31, 2005
Total Capital
(To Risk Weighted Assets) $ 67,140 38.1% $ 14,090 > 8.0% $ 17,613 > 10.0%
--- ---
Core Capital
(To Tangible Assets) 64,952 23.1% 11,244 > 4.0% 14,055 > 5.0%
--- ---
Tangible Capital
(To Tangible Assets) 64,952 23.1% 4,216 > 1.5% N/A
---
Tier 1 Capital
(To Risk Weighted Assets) 64,952 36.9% N/A 10,568 > 6.0%
---
AT JUNE 30, 2004
Total Capital
(To Risk Weighted Assets) 64,731 38.8% 13,352 > 8.0% 16,690 > 10.0%
--- ---
Core Capital
(To Tangible Assets) 62,640 22.2% 11,280 > 4.0% 14,101 > 5.0%
--- ---
Tangible Capital
(To Tangible Assets) 62,640 22.2% 4,230 > 1.5% N/A
---
Tier 1 Capital
(To Risk Weighted Assets) 62,640 37.5% N/A 10,014 > 6.0%
---
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies, as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see Item 7A in the Company's Annual Report on
Form 10-K for the year ended June 30, 2004. Management, as part of its regular
practices, performs periodic reviews of the impact of interest rate changes upon
net interest income and the market value of the Company's portfolio equity.
Based on, among other factors, such reviews, management believes that there have
been no material changes in the market risk of the Company's asset and liability
position since June 30, 2004. As a result of the funds raised in the Company's
stock offering and management's strategy of investing the funds from the
offering and excess funds from operations in short-term investments with minimal
extension risk, the Company is now more asset sensitive and is likely to
experience an increase in net interest income in a rising interest rate
environment.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive officer
and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon their evaluation, the principal executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company's disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended March 31, 2005 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Jefferson Bancshares is not a party to any pending legal proceedings.
Periodically, there have been various claims and lawsuits involving Jefferson
Federal, such as claims to enforce liens, condemnation proceedings on properties
in which Jefferson Federal holds security interests, claims involving the making
and servicing of real property loans and other issues incident to Jefferson
Federal's business. Jefferson Federal is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchase Program
(d)
MAXIMUM NUMBER
(c) (OR APPROXIMATE
TOTAL NUMBER OF DOLLAR VALUE)
(a) (b) SHARES (OR UNITS) OF SHARES (OR
TOTAL NUMBER AVERAGE PURCHASED AS UNITS) THAT MAY
OF SHARES PRICE PAID PART OF PUBLICLY YET BE PURCHASED
(OR UNITS) PER SHARE ANNOUNCED PLANS UNDER THE PLANS
Period PURCHASED (OR UNIT) OR PROGAMS OR PROGRAMS
--------------- ----------- -------------------- ---------------------
Month #1
January 1, 2005 - - - 265,356 (1)
through
January 31, 2005
Month #2
February 1, 2005 142,538 $13.15 142,538 122,818 (1)
through
February 28, 2005
Month #3
March 1, 2005 112,818 $13.36 112,818 10,000 (1)
through
March 31, 2005
Total 255,356 $13.24 255,356 10,000
- -----------------------------------------
(1) On July 30, 2004, the Company announced a Stock Repurchase Program under
which the Company may repurchase up to an aggregate of 838,552 shares, or
10%, of the Company's common stock.
29
30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) certification of the principal
executive officer
31.2. Rule 13a-14(a)/15d-14(a) certification of the principal
financial officer
32.1 Section 1350 certification
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31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERSON BANCSHARES, INC.
May 10, 2005 /s/ Anderson L. Smith
-------------------------------------
Anderson L. Smith
President and Chief Executive Officer
May 10, 2005 /s/ Jane P. Hutton
-------------------------------------
Jane P. Hutton
Chief Financial Officer, Treasurer
and Secretary