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 September 30, 2004
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 I.D. 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 checkmark 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 checkmark 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 November 9, 2004, the registrant had 7,984,417 shares of common
stock, $0.01 par value per share, outstanding.
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition - Unaudited
Three months ended September 30, 2004 and year ended June 30, 2004............................. 3
Consolidated Statements of Earnings - Unaudited
Three months ended September 30, 2004 and 2003................................................. 4
Consolidated Statements of Changes in Stockholders' Equity - Unaudited
Three months ended September 30, 2004 and year ended June 30, 2004............................. 5
Consolidated Statements of Cash Flows - Unaudited
Three months ended September 30, 2004 and 2003................................................. 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..................................... 26
Item 4. Controls and Procedures........................................................................ 26
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................... 27
Item 3. Defaults Upon Senior Securities................................................................ 28
Item 4. Submission of Matters to a Vote of Security Holders............................................ 28
Item 5. Other Information.............................................................................. 28
Item 6. Exhibits ...................................................................................... 28
SIGNATURES
2
JEFFERSON BANCSHARES, INC.
Consolidated Statements of Condition
September 30, 2004 and June 30, 2004
(Dollars in Thousands)
SEPTEMBER 30, JUNE 30,
2004 2004
------------------ -----------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,255 $ 3,803
Interest-earning deposits 13,261 2,608
Investment securities classified as available for sale, net 77,345 95,005
Federal Home Loan Bank stock 1,597 1,580
Bank owned life insurance 5,133 5,080
Loans receivable, net 198,316 186,601
Premises and equipment, net 5,085 5,120
Foreclosed real estate, net 503 552
Accrued interest receivable:
Investments 449 870
Loans receivable 1,008 956
Deferred tax asset 1,821 2,502
Other assets 675 797
----------------- ---------------
Total Assets $ 308,448 $ 305,474
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 204,235 $ 204,933
Federal Home Loan Bank advances 12,000 6,000
Other liabilities 852 1,084
Accrued income taxes 477 74
----------------- ---------------
Total liabilities 217,564 212,091
----------------- ---------------
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value; 30,000,000 shares
authorized; 8,072,341 shares issued and outstanding 84 84
Additional paid-in capital 71,526 71,496
Unearned ESOP shares (6,157) (6,265)
Unearned compensation (3,562) (3,488)
Accumulated other comprehensive income 221 (793)
Retained earnings 32,897 32,349
Treasury stock (4,125) -
----------------- ---------------
90,884 93,383
----------------- ---------------
Total liabilities and stockholders' equity $ 308,448 $ 305,474
================= ===============
See accompanying notes to financial statements
3
JEFFERSON BANCSHARES, INC.
Consolidated Statements of Earnings (Unaudited)
(Dollars in Thousands, Except Net Earnings Per Share)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2004 2003
---- ----
Interest income:
Interest on loans receivable $ 3,122 $ 3,296
Interest on investment securities 723 756
Other interest 43 90
----------- -----------
Total interest income 3,888 4,142
----------- -----------
INTEREST EXPENSE:
Deposits 1,008 1,304
Advances from FHLB 87 25
----------- -----------
Total interest expense 1,095 1,329
----------- -----------
NET INTEREST INCOME 2,793 2,813
Provision for loan losses - -
----------- -----------
Net interest income after
provision for loan losses 2,793 2,813
----------- -----------
NONINTEREST INCOME:
Dividends from investments 26 -
Service charges and fees 151 159
Gain (loss) on sale of investment securities, net (25) 22
Gain on sale of foreclosed real estate, net 28 26
BOLI increase in cash value 54 -
Other 30 27
----------- -----------
Total noninterest income 264 234
----------- -----------
NONINTEREST EXPENSE:
Compensation and benefits 939 756
Occupancy expense 73 61
Equipment and data processing expense 220 227
SAIF deposit insurance premium 8 9
REO Expense 20 53
Advertising 35 47
Contribution to Jefferson Federal Charitable Foundation - 4,000
Other 302 395
----------- -----------
Total noninterest expense 1,597 5,548
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,460 (2,501)
----------- -----------
INCOME TAXES:
Current 525 353
Deferred (17) (1,263)
----------- -----------
Total income taxes 508 (910)
----------- -----------
NET EARNINGS (LOSS) $ 952 $ (1,591)
=========== ===========
NET EARNINGS PER SHARE, BASIC $0.12 ($0.19)
===== =======
NET EARNINGS PER SHARE, DILUTED $0.12 ($0.19)
===== =======
See accompanying notes to financial statements
4
JEFFERSON BANCSHARES, INC.
Consolidated Statements of Changes in Stockholders' Equity
Year Ended June 30, 2004
and Three Months Ended September 30, 2004 (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
======== ======== ========== ========== ========== ======== =========== =========
5
JEFFERSON BANCSHARES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 952 $ (1,591)
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 138 146
Depreciation and amortization expense 59 73
Amortization of premiums (discounts), net on investment securities 4 14
Gain (loss) on sale of investment securities and mortgage-backed securities, net 25 (22)
FHLB stock dividends (17) (15)
Amortization of deferred loan fees, net (34) (47)
Loss (gain) on foreclosed real estate, net (28) (26)
Increase in cash value of life insurance (53) -
Earned portion of MRDP 110 -
Decrease (increase) in:
Accrued interest receivable 369 223
Other assets 122 889
Deferred tax asset 681 (1,726)
Increase (decrease) in other liabilities and accrued income taxes 522 (25)
----------- -----------
Net cash provided by (used for) operating activities 2,850 1,643
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net of principal collections (12,471) 2,681
Investment securities classified as available for sale:
Purchased - (57,158)
Proceeds from sale 16,396 6,676
Proceeds from maturity 1,500 10,500
Return of principal on mortgage-backed securities 1,377 2,504
Purchase of premises and equipment (24) (1,022)
Proceeds from sale of (additions to) foreclosed real estate, net 69 202
----------- -----------
Net cash provided by (used for) investing activities 6,847 (35,617)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (698) (104,629)
Proceeds from stock conversion, net - 57,771
Merger of MHC into Jefferson Bancshares - 111
Proceeds from advances from FHLB 15,000 -
Repayment of FHLB advances (9,000) -
Purchase of company stock for the 2004 Stock Based Incentive Plan (14) -
Purchase of treasury stock (4,125) -
Cash dividend paid on common stock (755) (106)
Proceeds from exercise of stock options - -
----------- -----------
Net cash provided by (used for) financing activities 408 (46,853)
----------- -----------
Net increase (decrease) in cash, cash equivalents and interest-earning deposits 10,105 (80,827)
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 $ 16,516 $ 15,716
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest on deposits $ 1,008 $ 1,304
Interest on FHLB advances 87 25
Income taxes 75 184
Real estate acquired in settlement of loans $ 118 $ 824
See accompanying notes to financial statements
6
(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
September 30, 2004 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
7
income for that year plus the amount of retained net income for the
preceding two years, the 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 Outstanding
For The Three Months Ended
September 30,
-------------------------------------
Shares used for: 2004 2003
---------------- -----------------
Basic Earnings Per Share 7,701,618 8,375,985
Diluted Earnings Per Share 7,717,483 8,424,818
(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 $331,000 at September
30, 2004 and an average investment of $331,000 during the three-month
period ended September 30, 2004 has been recognized in conformity with
FASB Statement No. 118. The total allowance for loan losses related to
these loans was $71,000 at September 30, 2004. Other nonaccrual loans
at September 30, 2004 were approximately $2.3 million. For the three
months ended September 30, 2004, gross income which would have been
recognized had impaired and nonaccrual loans been current in accordance
with their original terms, amounted to approximately $54,000. The
amount of interest income from impaired and non-accrual loans included
in the Company's interest income for the three months ended September
30, 2004 was approximately $15,000. The amount of interest income from
impaired loans included in net income for the three months ended
September 30, 2004 was approximately $2,000.
8
The following table summarizes the activity in the allowance for loan
losses for the three months ended September 30, 2004:
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
----------------------------
Balance at June 30, 2004 $ 2,479
Provision for loan losses -
Charge-offs $ (119)
Recoveries 112
-----------
Net (charge-offs)/recoveries (7)
-----------
Balance at September 30, 2004 $ 2,472
===========
(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.
9
The estimated fair values of the Company's financial instruments are as follows:
September 30, 2004 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 $ 16,516 $ 16,516 $ 6,411 $ 6,411
Available-for-sale securities 77,345 77,345 95,005 95,005
Federal Home Loan Bank stock 1,597 1,597 1,580 1,580
Loans receivable 198,316 199,552 186,601 189,153
Accrued interest receivable 1,457 1,457 1,826 1,826
Financial liabilities:
Deposits (204,235) (204,571) (204,933) (205,248)
FHLB advances (12,000) (12,153) (6,000) (6,115)
Off-balance sheet assets (liabilities):
Commitments to extend credit - (15,141) - (5,123)
Unused standby letters of credit - (192) - (141)
Unused lines of credit - (7,926) - (6,735)
(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
September 30, 2004, there were 60,857 options outstanding and no
remaining shares available for grant under the 1995 Stock Option Plan.
No options were exercised during the three-month period.
10
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 September
30, 2004, 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 September 30, 2004.
Three Months Ended
September 30, 2004
------------------
Weighted-
average
Shares exercise price
---------- --------------
Outstanding at beginning of period 462,635 $12.44
Granted during the three-month period - -
Options exercised - -
Outstanding at September 30, 2004 462,635 $12.44
Options exercisable at September 30, 2004 60,857 $ 4.16
The following information applies to options outstanding at September
30, 2004:
Number outstanding 462,635
Range of exercise prices $3.52 - $13.69
Weighted-average exercise price $12.44
Weighted-average remaining contractual life 8.4 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
11
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.
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, Inc.'s 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
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
NET EARNINGS
- ------------
Net earnings increased $2.5 million to $952,000 for the three months ended
September 30, 2004 compared to a net loss of $1.6 million for the comparable
period in 2003. The net loss for 2003 was the result of the nonrecurring expense
associated with the $4.0 million contribution to the Jefferson Federal
Charitable Foundation.
Three Months Ended
September 30,
-------------------------------
2004 2003
-------------- --------------
(Dollars in thousands,
except per share data)
Net earnings $ 952 ($1,591)
Net earnings per share, basic $0.12 ($0.19)
Net earnings per share, diluted $0.12 ($0.19)
Return on average assets (annualized) 1.22% NM
Return on average equity (annualized) 4.09% NM
NET INTEREST INCOME
- -------------------
Net interest income before loan loss provision decreased $20,000, or 0.7%, to
$2.8 million for the three months ended September 30, 2004 compared to the same
period in 2003. The decline in net interest income is primarily attributable to
the current low interest rate environment and to changes in the volume and
composition of interest-earning assets. The net interest margin increased 11
basis points to 3.78% for the three months ended September 30, 2004. The
interest rate spread was 3.17% and 2.94% for the quarters ended September 30,
2004 and 2003, respectively. The increase in the interest rate spread reflects a
decrease in the cost on interest-bearing liabilities more than offsetting a
decrease in the yield on interest-earning assets. The average rate paid on
interest-bearing liabilities decreased 38 basis points to 2.09%, while the
average yield on interest-earning assets decreased 15 basis points to 5.26%.
13
The following table summarizes changes in interest income and expense for the three-month period:
THREE MONTHS
ENDED
SEPTEMBER 30,
------------------------------
2004 2003 $ CHANGE % CHANGE
------------- -------------- ------------- --------------
(Dollars in thousands)
INTEREST INCOME:
Loans $ 3,122 $ 3,296 $ (174) (5.3%)
Investment securities 723 756 (33) (4.4%)
Interest-earning deposits 26 75 (49) (65.3%)
FHLB stock 17 15 2 13.3%
------------- -------------- -------------
Total interest income 3,888 4,142 (254) (6.1%)
INTEREST EXPENSE:
Deposits 1,008 1,304 (296) (22.7%)
Borrowings 87 25 62 248.0%
------------- -------------- -------------
Total interest expense 1,095 1,329 (234) (17.6%)
------------- -------------- -------------
Net interest income $ 2,793 $ 2,813 $ (20) (0.7%)
============= ============== =============
The following table summarizes average balances and average yields and costs:
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
2004 2003
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE COST
-------------- ----------- -------------- -----------
Dollars in thousands
Loans $ 198,974 6.28% $ 181,347 7.27%
Investment securities 87,319 3.31% 112,723 2.68%
Interest-earning deposits 8,046 1.29% 10,754 2.79%
FHLB stock 1,591 4.27% 1,528 3.93%
Deposits 198,382 2.03% 213,596 2.44%
Borrowings 11,667 2.98% 2,000 5.00%
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 change 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.
14
2004 Compared to 2003
------------------------------------------------
Increase (Decrease)
Due To
------------------------------
Volume Rate Net
------------- --------------- ---------------
(In Thousands)
Interest income:
Loans receivable $ 302 $ (476) $ (174)
Investment securities (190) 157 (33)
Other (15) (32) (47)
------------- --------------- ---------------
Total interest-earning assets 97 (351) (254)
------------- --------------- ---------------
Interest expense:
Deposits (88) (208) (296)
Borrowings 68 (6) 62
------------- --------------- ---------------
Total interest-bearing liabilities (20) (214) (234)
------------- --------------- ---------------
Net change in interest income $ 117 $ (137) $ (20)
============= =============== ===============
Total interest income decreased $254,000, or 6.1%, to $3.9 million for the three
months ended September 30, 2004. The decrease in interest income for the
three-month period was the result of a decrease in the average yield of
interest-earning assets combined with a decrease in the average balance of
interest-earning assets. Interest on loans decreased as a result of declining
rates offsetting an increase in the average balance. The average yield on loans
declined 99 basis points to 6.28% for the quarter ended September 30, 2004, as
we originated loans at lower interest rates due to the prevailing low interest
rate environment, and loans with variable rates repriced to lower rates.
Interest on investment securities decreased due to a decrease in the average
balance which more than offset an increase in the average yield. The average
balance of investments decreased due to the sale of investment securities during
the current three-month period. The average yield on investment securities
increased 63 basis points to 3.31% for the three-month period. Approximately 15%
of the investment portfolio is held in mortgage-backed securities ("MBSs"). A
significant portion of our mortgage-backed securities has adjustable rates and
has repriced downward in the current low interest rate environment. Dividends on
FHLB stock were $17,000 for the three months ended September 30, 2004 and
$15,000 for the comparable 2003 period. FHLB dividends are paid with additional
shares of FHLB stock.
Interest expense on deposits decreased $296,000, or 22.7%, to $1.0 million for
the three-month period ended September 30, 2004. The average rate paid on
deposits declined 41 basis points to 2.03% for the three-month period in 2004 as
compared to 2003 due to the general decline in interest rates and also to the
change in the composition of deposits. The decline in the average balance of
certificates of deposit more than offset increases in transaction accounts for
the three-month period ended September 30, 2004. The decline in certificates of
deposit resulted from our decision not to compete aggressively for higher
costing deposits. Interest expense on FHLB advances increased due primarily to
an increase in the average balance which more than offset a decrease in the
average rate paid.
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 level of subprime loans in the loan
portfolio, delinquency levels, loss experience, economic conditions and other
factors related to the collectibility of the loan portfolio. We use
15
Beacon credit scores to predict the likelihood that an existing borrower will
become a credit risk. We consider loans to borrowers with a Beacon credit score
below 600 to be "subprime." Net charge-offs were $7,000 for the three-month
period ended September 30, 2004 compared to $150,000 for the same period in
2003. There were no additions to the allowance for loan losses during either
period. Nonperforming loans increased $1.3 million to $2.3 million at September
30, 2004 due to a weakening condition with one commercial borrowing
relationship. This relationship is primarily comprised of commercial loans
totaling $936,000 and a personal real estate loan totaling $248,000. We believe
the collateral securing these loans is adequate.
NONINTEREST INCOME
- ------------------
Noninterest income increased $30,000, or 12.8%, to $264,000 for the three months
ended September 30, 2004 due to a combination of factors, including an increase
in the cash surrender value of life insurance and an increase in dividends from
investments more than offsetting a decrease in gain on sale of investments.
The following table summarizes the dollar amounts for each category of
noninterest income, and the dollar and percent changes for the three months
ended September 30, 2004 compared to the same period in 2003.
Three Months Ended
September 30,
------------------------- $ %
2004 2003 Change Change
----------- ----------- ------------ ------------
Dollars in thousands
Dividends from investments $ 26 $ - $ 26 NM
Service charges and fees 151 159 (8) (5.0%)
Gain (loss) on sale of investments (25) 22 (47) (213.6%)
Gain on sale of foreclosed property 28 26 2 7.7%
BOLI increase in cash value 54 - 54 NM
Other 30 27 3 11.1%
----------- ----------- ------------
Total noninterest income $ 264 $ 234 $ 30 12.8%
=========== =========== ============
NONINTEREST EXPENSE
- -------------------
Noninterest expense totaled $1.6 million for the three months ended September
30, 2004 as compared to $5.5 million for the comparable period in 2003.
Noninterest expense was higher for the three months ended September 30, 2003 due
to the $4.0 million contribution to the Jefferson Federal Charitable Foundation.
Compensation expense increased $183,000, or 24.2%, due to expenses related to
the Employee Stock Ownership Plan ("ESOP") and the Stock Incentive Plan.
Compensation expense is recognized for the ESOP in an amount equal to the fair
market value of shares committed to be released for allocation to participant
accounts. For the three-month period, compensation expense related to the ESOP
was $138,000 and expense related to the Stock Incentive Plan was $110,000.
16
The following table summarizes the dollar amounts for each category of
noninterest expense, and the dollar and percent changes for the three months
ended September 30, 2004 compared to the same period in 2003.
Three Months Ended
September 30,
------------------------- $ %
2004 2003 Change Change
----------- ----------- ----------- -----------
Dollars in thousands
Compensation and benefits $ 939 $ 756 $ 183 24.2%
Occupancy 73 61 12 19.7%
Equipment and data processing 220 227 (7) (3.1%)
SAIF Deposit insurance premiums 8 9 (1) (11.1%)
REO expense 20 53 (33) (62.3%)
Advertising 35 47 (12) (25.5%)
Contribution to Jefferson Federal Charitable Foundation - 4,000 (4,000) (100.0%)
Other 302 395 (93) (23.5%)
----------- ----------- -----------
Total noninterest expense $ 1,597 $ 5,548 $ (3,951) (71.2%)
=========== =========== ===========
INCOME TAXES
- ------------
Income tax expense for the three months ended September 30, 2004 was $508,000
compared to a tax benefit of $910,000 for the same period in 2003. The income
tax benefit for the three months ended September 30, 2003 was due to the $4.0
million 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
- ------
Total assets at September 30, 2004 were $308.4 million, an increase of $3.0
million, or 1.0%, from total assets of $305.5 million at June 30, 2004.
CASH, CASH EQUIVALENTS AND INTEREST-EARNING DEPOSITS
- ----------------------------------------------------
Cash and cash equivalents were $3.3 million at September 30, 2004 compared to
$3.8 million at June 30, 2004. Interest-earning deposits increased $10.7 million
to $13.3 million at September 30, 2004, which reflects our decision to increase
liquidity for future loan demand.
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 $17.7 million, or 18.6%, to $77.3 million due primarily to
sales of investment securities during the current quarter. Proceeds from the
sale of investment securities were used to fund growth in the loan portfolio and
to repurchase treasury shares. Investment securities classified as
available-for-sale are carried at fair market value and reflect an unrealized
gain of $358,000, or $221,000 net of taxes.
17
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 September 30, 2004:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- ------------
(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency $ 62,526 $ 314 $ (92) $ 62,748
Municipals 3,421 7 (24) 3,404
Mortgage-backed 11,040 157 (4) $ 11,193
------------ ------------ ----------- ------------
Total securities available-
for-sale $ 76,987 $ 478 $ (120) $ 77,345
============ ============ =========== ============
Weighted-average rate 3.28%
============
Federal Home Loan Bank of
Cincinnati stock $ 1,597 $ - $ - $ 1,597
============ ============ =========== ============
Weighted-average rate 4.25%
============
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%
============
LOANS
- -----
Net loans increased $11.7 million, or 6.3%, to $198.3 million at September 30,
2004. 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. Mortgage loans totaled $175.1
18
million, or 87.1%, of gross loans at September 30, 2004 compared to $170.9
million, or 90.2%, of gross loans at June 30, 2004. The $4.2 million, or 2.5%,
increase in real estate loans was primarily attributable to increases in land
loans and one-to four-family loans.
Commercial business loans increased $7.9 million, or 62.6%, to $20.5 million at
September 30, 2004. We intend to continue to emphasize this type of lending.
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 decreased $424,000, or 7.2%, to $5.4 million at September 30, 2004 due to
lower demand for these types of loans.
19
Loans receivable, net are summarized as follows:
At At
September 30, June 30,
2004 2004
------------------------- -------------------------
Percent Percent $ %
Amount of Portfolio Amount of Portfolio Change Change
------------ ------------ ------------ ------------ ----------- ----------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 86,133 42.8% $ 84,784 44.8% $ 1,349 1.6%
Multi-family 8,893 4.4% 9,213 4.9% (320) (3.5%)
Construction 2,658 1.3% 3,001 1.6% (343) (11.4%)
Commercial 60,733 30.2% 59,993 31.7% 740 1.2%
Land 13,093 6.5% 10,760 5.7% 2,333 21.7%
Home equity line of credit 3,592 1.8% 3,143 1.7% 449 14.3%
------------ ------------ ------------ ------------ -----------
Total real estate loans 175,102 87.1% 170,894 90.2% 4,208 2.5%
------------ ------------ ------------ ------------ -----------
Commercial business loans 20,547 10.2% 12,640 6.7% 7,907 62.6%
------------ ------------ ------------ ------------ -----------
Consumer Loans:
Loans secured by deposit accounts 1,195 0.6% 1,084 0.6% 111 10.2%
Other consumer loans 1,566 0.8% 2,038 1.1% (472) (23.2%)
Loans secured by automobiles 2,168 1.1% 2,200 1.2% (32) (1.5)
Mobile home loans 500 0.2% 531 0.3% (31) (5.8)
------------ ------------ ------------ ------------ -----------
Total non-real estate loans 5,429 2.7% 5,853 3.1% (424) (7.2)
------------ ------------ ------------ ------------ -----------
Total commercial business
and consumer loans 25,976 12.9% 18,493 9.8% 7,483 40.5%
------------ ------------ ------------ ------------ -----------
Subtotal 201,078 100.0% 189,387 100.0% 11,691 6.2%
Less:
Deferred loan fees, net (289) (306) 17 (5.6)
Unearned discount on loans (1) (1) - 0.0%
Allowance for losses (2,472) (2,479) 7 (0.3%)
------------ ------------ -----------
Loans receivable, net $ 198,316 $ 186,601 $ 11,715 6.3%
============ ============ ===========
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 subprime loans held in
the portfolio and delinquency levels and loss experience with respect to
subprime and prime loans. In addition, we
20
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.
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 $7,000 to $2.5
million at September 30, 2004. There were no additions to the allowance for loan
losses during the current three-month period. At September 30, 2004, our
allowance for loan losses represented 1.23% of total gross loans and 105.8% of
nonperforming loans, compared to 1.31% of total gross loans and 228.9% of
nonperforming loans at June 30, 2004.
Three Months Ended
September 30,
---------------------------
2004 2003
----------- ------------
Dollars in thousands
Balance at beginning of period $ 2,479 $ 2,841
Provision for loan losses - -
Recoveries 112 73
Charge-offs (119) (223)
----------- ------------
Net charge-offs (7) (150)
----------- ------------
Allowance at end of period $ 2,472 $ 2,691
=========== ============
Net charge-offs to average outstanding
loans during the period, annualized 0.01% 0.33%
NONPERFORMING ASSETS
- --------------------
We consider repossessed assets and nonaccrual loans to be nonperforming. 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
increased $1.2 million to $2.8 million at September 30, 2004 due to an increase
in nonaccrual loans. The increase in nonaccrual loans has resulted from a
weakening condition with one borrowing relationship. This relationship is
primarily comprised of commercial loans totaling $936,000 and a personal real
estate loan totaling $248,000. We believe the collateral securing these loans is
adequate. Foreclosed real estate decreased $49,000, or 8.9%, to $503,000 at
September 30, 2004. 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.
21
SEPTEMBER 30, JUNE 30,
2004 2004
--------------- ----------------
Dollars in thousands
Nonaccruing loans:
Real estate $ 2,280 $ 1,047
Commercial business 33 15
Consumer 23 21
--------------- ----------------
Total nonaccrual loans 2,336 1,083
Real estate owned 503 552
Other repossessed assets - -
--------------- ----------------
Total nonperforming assets $ 2,839 $ 1,635
=============== ================
Total nonperforming assets to total assets 0.92% 0.54%
Total nonperforming loans to total loans 1.18% 0.58%
Allowance for loan losses to total nonperforming loans 105.82% 228.90%
BANK OWNED LIFE INSURANCE
- -------------------------
We purchased 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 at September 30, 2004 was $5.1 million.
DEPOSITS
- --------
Total deposits decreased $698,000 to $204.2 million at September 30, 2004. The
continuing decline in the average balance of certificates of deposit reflects
our emphasis on attracting lower cost deposits.
September June
2004 2004 $ Change % Change
------------ ------------- ------------ ------------
Dollars in thousands
Certificates of deposit $ 136,626 $ 138,976 $ (2,350) (1.7%)
Savings accounts 13,338 13,849 (511) (3.7%)
Money market accounts 31,035 28,930 2,105 7.3%
NOW accounts 15,258 15,220 38 0.2%
Non-interest bearing accounts 7,978 7,958 20 0.3%
------------ ------------- ------------
$ 204,235 $ 204,933 $ (698) (0.3%)
============ ============= ============
ADVANCES AND OTHER LIABILITIES
- ------------------------------
FHLB advances increased $6.0 million to $12.0 million at September 30, 2004.
FHLB advances were utilized during the quarter as a funding source for growth in
the loan portfolio.
STOCKHOLDERS' EQUITY
- --------------------
Stockholders' equity decreased $2.5 million, or 2.7%, to $90.9 million at
September 30, 2004. Retained earnings increased $548,000 to $32.9 million at
September 30, 2004 due to net earnings of $952,000 partially offset by the
payment of dividends to shareholders. Unrealized gains and losses, net of taxes,
in the available-for-sale investment portfolio are reflected as an adjustment to
stockholders' equity. At September 30, 2004, the adjustment to
22
stockholders' equity was an unrealized gain of $221,000 compared to a net
unrealized loss of $793,000 at June 30, 2004. During the September 2004 quarter,
a Stock Repurchase Program was announced under which up to 838,552, or 10%, of
the Company's outstanding common stock may be repurchased. During the current
three-month period, 313,176 shares of treasury stock were purchased at a cost of
$4.1 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 September 30, 2004,
cash and cash equivalents totaled $3.3 million and interest-earning deposits
totaled $13.3 million. Securities classified as available-for-sale, which
provide additional sources of liquidity, totaled $77.3 million at September 30,
2004. In addition, at September 30, 2004, we had arranged the ability to borrow
a total of approximately $67.6 million from the Federal Home Loan Bank of
Cincinnati. On that date, we had advances outstanding of $12.0 million.
At September 30, 2004, we had approximately $4.1 million in loan commitments,
consisting of $1.7 million in commitments to originate residential loans and
$2.4 million to originate commercial loans. In addition to commitments to
originate loans, we had $11.0 million in loans-in-process, $192,000 in unused
standby letters of credit and approximately $7.9 million in unused lines of
credit. We had $102.9 million in certificates of deposit due within one year and
$67.6 million in other deposits without specific maturities at September 30,
2004. 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 three-month period ended September 30,
2004, loan originations, net of principal collections were $12.5 million offset
by the redemption, prepayment and sale of securities in the amount of $19.3
million. During the period, financing activities consist primarily of activity
in deposit accounts and Federal Home Loan Bank advances. We experienced a net
decrease in total deposits of $698,000 during the three-month period ended
September 30, 2004. 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 three-month period ended September 30, 2004, Federal
Home Loan Bank advances increased $6.0 million to $12.0 million.
23
At September 30, 2004, the average liquidity ratio was 33.58% compared to 45.04%
at September 30, 2003. 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 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 September 30, 2004, 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.
24
CAPITAL COMPLIANCE
The following table presents our capital position relative to our regulatory capital requirements at
September 30, 2004 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 September 30, 2004:
Total Capital
(To Risk Weighted Assets) $ 66,048 37.2% $ 14,200 > 8.0% $ 17,750 > 10.0%
--- ---
Core Capital
(To Tangible Assets) 63,827 22.1% 11,560 > 4.0% 14,450 > 5.0%
--- ---
Tangible Capital
(To Tangible Assets) 63,827 22.1% 4,335 > 1.5% N/A
---
Tier 1 Capital
(To Risk Weighted Assets) 63,827 36.0% N/A 10,650 > 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%
---
25
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 are
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 September 30, 2004
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
26
PART II
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
( 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
July 1, 2004 14,250 $12.96 14,250 - (1)
through
July 31, 2004
Month #2
August 1, 2004 55,000 $13.00 55,000 783,552 (2)
through
August 31, 2004
Month #3
September 1, 2004 258,176 $13.17 258,176 525,376 (2)
through
September 30, 2004
Total 327,426 $13.13 327,426 525,376
(1) On February 10, 2004, the Company announced that it had funded a trust
that would purchase up to 279,500 shares. The shares acquired by the trust
would be used to fund restricted stock awards under the Company's 2004
Stock-Based Incentive Plan.
(2) On July 30, 2004, the Company announced a Stock Repurchase Program under
which the Company may repurchase up to 838,552 shares, or 10%, of the
Company's common stock.
27
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
28
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.
November 9, 2004 /s/ Anderson L. Smith
-------------------------------------
Anderson L. Smith
President and Chief Executive Officer
November 9, 2004 /s/ Jane P. Hutton
--------------------------------------
Jane P. Hutton
Chief Financial Officer, Treasurer and
Secretary