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, 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes /_/ No /X/
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, 2005, the registrant had 7,118,823 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, 2005 and year ended June 30, 2005............................. 3
Consolidated Statements of Earnings - Unaudited
Three months ended September 30, 2005 and 2004................................................. 4
Consolidated Statements of Changes in Stockholders' Equity - Unaudited
Three months ended September 30, 2005 and 2004................................................. 5
Consolidated Statements of Cash Flows - Unaudited
Three months ended September 30, 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.................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 24
Item 4. Controls and Procedures........................................................................ 24
Part II. - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................... 25
Item 3. Defaults Upon Senior Securities................................................................ 26
Item 4. Submission of Matters to a Vote of Security Holders............................................ 26
Item 5. Other Information.............................................................................. 26
Item 6. Exhibits ...................................................................................... 26
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Condition
(Dollars in thousands)
SEPTEMBER 30, JUNE 30,
2005 2005
------------------ ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 5,094 $ 3,799
Interest-earning deposits 11,980 7,228
Investment securities classified as available for sale, net 47,452 53,366
Federal Home Loan Bank stock 1,672 1,652
Bank owned life insurance 5,338 5,285
Loans receivable, net of allowance for loan losses
of $2,281 and $2,293 215,040 208,438
Premises and equipment, net 7,763 7,073
Foreclosed real estate, net 259 914
Accrued interest receivable:
Investments 307 489
Loans receivable 1,193 1,059
Deferred tax asset 1,832 1,878
Other assets 2,261 3,860
------------------ ------------------
Total Assets $ 300,191 $ 295,041
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 9,011 $ 9,973
Interest-bearing 187,064 184,733
Federal Home Loan Bank advances 22,000 17,000
Other liabilities 1,049 1,307
Accrued income taxes 283 -
------------------ ------------------
Total liabilities 219,407 213,013
------------------ ------------------
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;
8,385,517 shares issued and 7,151,303 and 7,289,284 outstanding 84 84
Additional paid-in capital 71,792 71,694
Unearned ESOP shares (5,725) (5,833)
Unearned compensation (3,122) (3,232)
Accumulated other comprehensive income (255) (155)
Retained earnings 34,425 34,069
Treasury stock, at cost; 1,243,813 and 1,105,832 shares (16,415) (14,599)
------------------ ------------------
Total stockholders' equity 80,784 82,028
------------------ ------------------
Total liabilities and stockholders' equity $ 300,191 $ 295,041
================== ==================
See accompanying notes to financial statements
3
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Earnings (Unaudited)
(Dollars in Thousands, Except Net Earnings Per Share)
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
---- ----
INTEREST INCOME:
Interest on loans receivable $ 3,644 $ 3,122
Interest on investment securities 468 723
Other interest 82 43
-------------- -------------
Total interest income 4,194 3,888
-------------- -------------
INTEREST EXPENSE:
Deposits 1,201 1,008
Advances from FHLB 179 87
-------------- -------------
Total interest expense 1,380 1,095
-------------- -------------
NET INTEREST INCOME 2,814 2,793
Provision for loan losses - -
-------------- -------------
Net interest income after provision for loan losses 2,814 2,793
-------------- -------------
NONINTEREST INCOME:
Dividends from investments 17 26
Mortgage origination income 186 -
Service charges and fees 139 151
Gain on sale of foreclosed real estate, net 77 28
BOLI increase in cash value 53 54
Other 28 30
-------------- -------------
Total noninterest income 500 289
-------------- -------------
NONINTEREST EXPENSE:
Compensation and benefits 1,281 939
Occupancy expense 107 73
Equipment and data processing expense 240 220
Loss on sale of investment securities, net 44 25
SAIF deposit insurance premium 6 8
REO expense 26 20
Advertising 64 35
Other 351 302
-------------- -------------
Total noninterest expense 2,119 1,622
-------------- -------------
EARNINGS BEFORE INCOME TAXES 1,195 1,460
-------------- -------------
INCOME TAXES:
Current 302 525
Deferred 108 (17)
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Total income taxes 410 508
-------------- -------------
NET EARNINGS $ 785 $ 952
============== =============
NET EARNINGS PER SHARE, BASIC $ 0.12 $ 0.12
============= =============
NET EARNINGS PER SHARE, DILUTED $ 0.12 $ 0.12
============= =============
See accompanying notes to financial statements
4
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended September 30, 2005 and 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, 2005 $ 84 $ 71,694 $ (5,833) $(3,232) $ (155) $34,069 $ (14,599) $ 82,028
-----------
Comprehensive income:
Net earnings - - - - - 785 - 785
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes of $(62) - - - - (100) - - (100)
-----------
Total comprehensive income - - - - - - - 685
Dividends - - - - - (429) - (429)
Shares committed to be released by
the employee stock ownership plan - 32 108 - - - - 140
Stock options expensed - 66 - - - - - 66
Tax benefit from exercise of
nonqualifying stock options - - - - - - - -
Earned portion of stock grants - - - 110 - - - 110
Purchase of common stock
(137,981 shares) - - - - - - (1,816) (1,816)
--------- ----------- ----------- -------- -------- ------- ----------- -----------
Balance at September 30, 2005 $ 84 $ 71,792 $ (5,725) $(3,122) $ (255) $34,425 $ (16,415) $ 80,784
========= =========== =========== ======== ======== ======= =========== ===========
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. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 785 $ 952
Adjustments to reconcile net earnings to net cash provided by (used for)
operating activities
Allocated ESOP shares 140 138
Depreciation and amortization expense 64 59
Amortization of premiums (discounts), net on investment securities 8 4
(Gain) loss on sale of investment securities and mortgage-backed securities, net 60 25
(Gain) on sale of equity investments (16) -
FHLB stock dividends (20) (17)
Amortization of deferred loan fees, net (29) (34)
Loss (gain) on sale of foreclosed real estate, net (77) (28)
Deferred tax benefit 108 (17)
Increase in cash value of life insurance (53) (53)
Earned portion of MRP 110 110
Stock options expensed 66 -
Decrease (increase) in:
Accrued interest receivable 48 369
Other assets 1,599 122
Increase (decrease) in other liabilities and accrued income taxes 325 522
------------ ------------
Net cash provided by (used for) operating activities 3,118 2,152
------------ ------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Loan originations, net of principal collections (6,003) (11,773)
Investment securities classified as available for sale:
Purchased (165) -
Proceeds from sale 5,022 16,396
Proceeds from maturity - 1,500
Return of principal on mortgage-backed securities 827 1,377
Purchase of premises and equipment (754) (24)
Proceeds from sale of (additions to) foreclosed real estate, net 178 69
------------ ------------
Net cash provided by (used for) investing activities (895) 7,545
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 1,369 (698)
Proceeds from advances from FHLB 11,000 15,000
Repayment of FHLB advances (6,000) (9,000)
Purchase of company stock for the 2004 Stock Based Incentive Plan - (14)
Purchase of treasury stock (1,816) (4,125)
Cash dividend paid on common stock (729) (755)
------------ ------------
Net cash provided by (used for) financing activities 3,824 408
------------ ------------
Net increase (decrease) in cash, cash equivalents and interest-earning deposits 6,047 10,105
Cash, cash equivalents and interest-earning deposits at beginning of period 11,027 6,411
------------ ------------
Cash, cash equivalents and interest-earning deposits at end of period $ 17,074 $ 16,516
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest on deposits $ 1,201 $ 1,008
Interest on FHLB advances 179 87
Income taxes 365 75
Real estate acquired in settlement of loans 109 118
See accompanying notes to financial statements
6
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 a fair presentation of the interim
financial statements. The results of operations for the period ended
September 30, 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,
2005.
(2) PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of Jefferson
Bancshares, Inc. and its wholly-owned subsidiary, Jefferson Federal
Bank. All significant intercompany balances and transactions have been
eliminated in consolidation.
(3) USE OF ESTIMATES
----------------
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the statement of condition
dates and revenues and expenses for the periods shown. Actual results
could differ from the estimates and assumptions used in the
consolidated financial statements. Material estimates that are
particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses, the valuation of
foreclosed real estate and deferred tax assets.
(4) 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 top two 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 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
7
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.
(5) EARNINGS PER COMMON SHARE
-------------------------
Earnings per common share and earnings per common share-assuming
dilution have been computed on the basis of dividing net earnings by
the weighted-average number of shares of common stock outstanding,
exclusive of unearned ESOP shares. Diluted earnings per common share
reflect additional common shares that would have been outstanding if
dilutive potential common shares had been issued. Potential common
shares that may be issued by the Company relate solely to outstanding
stock options and are determined using the treasury stock method. 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,
-------------------------------
2005 2004
--------------- --------------
Weighted average number of common shares used
in computing basic earnings per common share 6,620,320 7,701,618
Effect of dilutive stock options 13,169 15,865
--------------- --------------
Weighted average number of common shares and
dilutive potential common shares used in
computing earnings per common share
assuming dilution 6,633,489 7,717,483
=============== ==============
(6) 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.
(7) ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
------------------------------------------------
Impairment of loans having recorded investment of $80,000 at September
30, 2005 and an average investment of $80,000 during the three-month
period ended September 30, 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 $2,000
at September 30, 2005. Other nonaccrual loans at September 30, 2005
were approximately $221,000. For the three months ended September 30,
2005, gross income which would have been recognized had impaired and
nonaccrual loans been current in accordance with their original terms,
amounted to approximately $5,000. There was no interest income from
impaired and non-accrual loans included in the Company's interest
income for the three months ended September 30, 2005.
8
The following table summarizes the activity in the allowance for loan
losses for the three months ended September 30, 2005:
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
----------------------------
Balance at June 30, 2005 $ 2,293
Provision for loan losses -
Charge-offs $ (48)
Recoveries 36
---------
Net (charge-offs)/recoveries (12)
--------
Balance at September 30, 2005 $ 2,281
========
(8) 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.
At September 30, 2005, we had approximately $267,000 in loan
commitments, consisting of $175,000 in commitments to originate
residential loans and $92,000 to originate commercial loans. In
addition to commitments to originate loans, we had $10.0 million in
loans-in-process, $612,000 in unused standby letters of credit and
approximately $13.5 million in unused lines of credit.
(9) DIVIDEND DECLARATION
--------------------
On August 26, 2005, the Board of Directors of the Company approved a
quarterly dividend of $0.06 per share to stockholders of record as of
September 30, 2005 and payable on October 11, 2005.
(10) 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, 2005, there were 51,258 options outstanding and no
remaining shares available for grant under the 1995 Stock Option Plan.
During the three-month period, no options were exercised.
9
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,
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 September 30, 2005.
THREE MONTHS ENDED
SEPTEMBER 30, 2005
------------------
Weighted-
average
Shares exercise price
------------- ---------------
Outstanding at beginning of period 453,036 $12.60
Granted during the three-month period - -
Options exercised - -
Outstanding at September 30, 2005 453,036 $12.60
Options exercisable at September 30, 2005 131,619 $ 9.95
The following information applies to options outstanding at
September 30, 2005:
Number outstanding 453,036
Range of exercise prices $3.52 - $13.69
Weighted-average exercise price $12.60
Weighted-average remaining contractual life 7.55 years
Number of options remaining for future issuance 296,972
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123R, "Share Based
Payment" (SFAS 123R), an amendment of FASB Statement No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." SFAS 123R eliminates the
ability to account for share-based compensation transactions using
Accounting Principles Board Opinion No. 25 ("APB 25") and requires a
public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair
value of the award. This statement is effective for public entities that
do not file as small business issuers as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005.
Effective July 1, 2005, the Company adopted SFAS 123R using the modified
prospective application transition method. This will require the Company
to expense the unvested portion of options granted in 2004, which will
reduce net earnings by approximately $217,000 in fiscal year 2006 and
$542,500 in the remaining service period. SFAS 123R provides for the use
of alternative models to determine compensation cost related to stock
option grants. The estimated fair value of stock options at grant date
has been determined using the Black-Scholes option-pricing model based on
market data as of January 29, 2004. The expected dividend yield of 1.17%
and expected volatility of 7.01% were used to model the value. The risk
free rate of return equaled 4.22%, which was based on the yield of a U.S.
Treasury note with a term
10
of ten years. The estimated time remaining before the expiration of the
options equaled ten years.
Three months
ended
September 30,
2004
-----------------
Net Income:
As reported $ 952
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects. (54)
---------------
Pro-forma $ 898
===============
Basic net earnings per share:
As reported $ 0.12
Pro-forma $ 0.12
Earnings per common share assuming dilution
As reported $ 0.12
Pro-forma $ 0.12
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, 2005.
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.
11
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' 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.
Additional factors that may affect our results are discussed in our Annual
Report on Form 10-K for the year ended June 30, 2005 under "Item 1. Business -
Risk Factors." 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
NET INCOME
- ----------
Net income was $785,000, or $0.12 per diluted share, for the quarter ended
September 30, 2005 compared to net income of $952,000, or $0.12 per diluted
share, for the comparable period in 2004. Net income for the quarter ended
September 30, 2005 was adversely affected by an increase in noninterest expense
related to expansion activities in Knoxville, Tennessee, as well as our adoption
of Financial Accounting Standards Board's ("FASB") Statement 123R, which
requires the expensing of stock options.
12
Annualized return on average assets was 1.05% for the three months ended
September 30, 2005, compared to 1.22% for the comparable period in 2004.
Annualized return on average equity was 3.87% for the three months ended
September 30, 2005, compared with 4.09% for the comparable period in 2004.
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2005 2004
-------------- --------------
(Dollars in thousands,
except per share data)
Net earnings $ 785 $ 952
Net earnings per share, basic $0.12 $0.12
Net earnings per share, diluted $0.12 $0.12
Return on average assets (annualized) 1.05% 1.22%
Return on average equity (annualized) 3.87% 4.09%
NET INTEREST INCOME
- -------------------
Net interest income before loan loss provision increased $21,000 to $2.8 million
for the three months ended September 30, 2005 compared to the same period in
2004. The increase in short-term interest rates has improved the yield on
earning assets; however, our cost of funds has also been affected by the
increase in rates. The interest rate spread and net interest margin for the
quarter ended September 30, 2005 were 3.38% and 4.06%, respectively, compared to
3.17% and 3.78% for the same period in 2004. The average yield on
interest-earning assets increased 79 basis points to 6.05% while the average
volume of earning assets declined $18.4 million, to $277.5 million at September
30, 2005 compared to the same period in 2004. The average rate paid on
interest-bearing liabilities increased 57 basis points to 2.66% while the
average volume of interest-earning liabilities decreased $2.8 million, to $207.2
million at September 30, 2005 compared to the same period in 2004.
The following table summarizes changes in interest income and expense for the
three-month periods ended September 30, 2005 and 2004:
THREE MONTHS
ENDED
SEPTEMBER 30,
------------------------------
2005 2004 $ CHANGE % CHANGE
------------- -------------- ------------- --------------
(Dollars in thousands)
INTEREST INCOME:
Loans $ 3,644 $ 3,122 $ 522 16.7%
Investment securities 468 723 (255) (35.3%)
Interest-earning deposits 62 26 36 138.5%
FHLB stock 20 17 3 17.6%
------------- -------------- -------------
Total interest income 4,194 3,888 306 7.9%
INTEREST EXPENSE:
Deposits 1,201 1,008 193 19.1%
Borrowings 179 87 92 105.7%
------------- -------------- -------------
Total interest expense 1,380 1,095 285 26.0%
------------- -------------- -------------
Net interest income $ 2,814 $ 2,793 $ 21 0.8%
============= ============== =============
13
The following table summarizes average balances and average yields and costs:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2005 2004
---------------------- ----------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE COST
------------ -------- ------------ --------
(Dollars in thousands)
Loans $ 214,867 6.78% $ 198,974 6.28%
Investment securities 50,968 3.67% 87,319 3.31%
Interest-earning deposits 10,003 2.48% 8,046 1.29%
FHLB stock 1,665 4.80% 1,591 4.27%
Deposits 186,218 2.58% 198,382 2.03%
Borrowings 21,000 3.41% 11,667 2.98%
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
2005 COMPARED TO 2004
-----------------------------------
INCREASE (DECREASE)
DUE TO
-----------------------
VOLUME RATE NET
---------- ----------- ----------
(In thousands)
Interest income:
Loans receivable $ 259 $ 263 $ 522
Investment securities (374) 119 (255)
Other 8 31 39
---------- ----------- ----------
Total interest-earning assets (107) 413 306
---------- ----------- ----------
Interest expense:
Deposits (57) 250 193
Borrowings 78 14 92
---------- ----------- ----------
Total interest-bearing liabilities 21 264 285
---------- ----------- ----------
Net change in interest income $ (128) $ 149 $ 21
========== =========== ==========
For the three months ended September 30, 2005, total interest income was $4.2
million, an increase of $306,000, or 7.9%, when compared to $3.9 million for the
same period in 2004. The increase in interest income was primarily due to an
increase in both the volume and yield on average loans more than offsetting a
decrease in the volume of investment securities.
14
Interest on loans increased $522,000, or 16.7%, to $3.6 million for the three
months ended September 30, 2005. The increase in interest on loans is the result
of a higher average balance, primarily due to growth in the commercial and
consumer loan portfolio, combined with a higher average yield. The average yield
on loans increased 50 basis points, to 6.78% for the three months ended
September 30, 2005 compared to the same period in 2004. Most of the commercial
loans that have been originated have been tied to prime and will reprice quickly
as interest rates change.
Interest on investment securities decreased $255,000, or 35.3%, to $468,000 as
a result of a decrease in the average balance of investment securities more than
offsetting an increase in the average yield. The average balance of investment
securities was $51.0 million at September 30, 2005 compared to $87.3 million for
the comparable period in 2004. The average yield on investments increased 37
basis points to 3.67% at September 30, 2005. Proceeds from the sale of
investment securities were used to fund stock repurchases and to fund growth in
the loan portfolio. Interest on deposits increased for the three-month period
due to our increased liquidity for future loan demand. Interest on deposits was
$62,000 for the three-month period ended September 30, 2005, compared to $26,000
for the comparable period in 2004. Dividends on Federal Home Loan Bank ("FHLB")
stock were $20,000 for the three-month period ended September 30, 2005, and
$17,000 for the comparable period in 2004. FHLB dividends are paid with
additional shares of FHLB stock.
Total interest expense increased $285,000, or 26.0%, to $1.4 million for the
three-month period ended September 30, 2005 compared to the same period in 2004
due to an increase in the average rate paid on interest-bearing liabilities more
than offsetting a decrease in the average balance of interest-bearing
liabilities. Interest expense on deposits increased $193,000, or 19.1%, to $1.2
million for the three-month period ended September 30, 2005 due to an increase
in the average rate paid on deposits more than offsetting a decrease in the
average balance of deposits. The average rate paid on deposits increased 55
basis points to 2.58% for the three-month period in 2005 due to higher rates
paid on money market accounts and time deposits. The increase in the rate paid
on deposits reflects an increase in short-term interest rates. Interest expense
on FHLB advances was $179,000 for the three months ended September 30, 2005
compared to $87,000 for the comparable period in 2004 due to a higher average
balance and a higher rate paid. FHLB advances were utilized as a funding source
for supporting loan growth during the three months ended September 30, 2005.
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 $12,000 for the three-month period ended
September 30, 2005 compared to $7,000 for the comparable period in 2004. There
were no additions to the allowance for loan losses during either period.
Nonperforming loans totaled $221,000 at September 30, 2005 compared to $2.3
million for the comparable period in 2004.
NONINTEREST INCOME
- ------------------
Noninterest income increased $211,000, or 73.0%, to $500,000 for the three
months ended September 30, 2005 compared to $289,000 for the comparable period
in 2004. Mortgage origination fee income accounted for the largest increase in
noninterest income with $186,000 for the current three-month period and no
comparable income from mortgage originations in 2004. Gain on sale of foreclosed
property was $77,000 for the three months ended September 30, 2005 compared to
$28,000 for the
15
same period in 2004. Service charges and fees decreased $12,000, or 7.9%, to
$139,000 for the three months ended September 30, 2005 compared to $151,000 for
the same period in 2004.
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, 2005 compared to the same period in 2004.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- ------------ ------------
(Dollars in thousands)
Dividends from investments $ 17 $ 26 $ (9) (34.6%)
Mortgage origination fees 186 - 186 NM
Service charges and fees 139 151 (12) (7.9%)
Gain on sale of foreclosed property 77 28 49 175.0%
BOLI increase in cash value 53 54 (1) (1.9%)
Other 28 30 (2) (6.7%)
----------- ----------- ------------
Total noninterest income $ 500 $ 289 $ 211 73.0%
=========== =========== ============
NONINTEREST EXPENSE
- -------------------
Noninterest expense increased $497,000, or 30.6%, to $2.1 million for the
three-month period ended September 30, 2005, primarily due to an increase in
compensation expense. Compensation expense increased $342,000, or 36.4%, to $1.3
million for the three-month period ended September 30, 2005, primarily due to
staff additions for both the lending office in Knoxville, Tennessee which opened
on January 1, 2005 and our two Knoxville, Tennessee branch offices anticipated
to open in 2006. There were 81 employees at September 30, 2005 compared to 63
employees at September 30, 2004. On July 1, 2005, we adopted FASB Statement No.
123R, "Share-Based Payment" using the modified prospective approach, which
requires the expensing of unvested stock options granted prior to the adoption
date. The expense will be based on the grant-date fair value and will be
recognized over the remaining vesting period. The cost of stock options that
have vested prior to the adoption of SFAS 123R is never recognized. Accordingly,
for the three months ended September 30, 2005, compensation expense included
$66,000 related to the expensing of stock options.
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, 2005 compared to the same period in 2004.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- ----------- -----------
(Dollars in thousands)
Compensation and benefits $ 1,281 $ 939 $ 342 36.4%
Occupancy 107 73 34 46.6%
Equipment and data processing 240 220 20 9.1%
Loss on sale of investments 44 25 19 76.0%
SAIF deposit insurance premium 6 8 (2) (25.0%)
REO expense 26 20 6 30.0%
Advertising 64 35 29 82.9%
Other 351 302 49 16.2%
----------- ----------- -----------
Total noninterest expense $ 2,119 $ 1,622 $ 497 30.6%
=========== =========== ===========
INCOME TAXES
- ------------
Income tax expense for the three months ended September 30, 2005 was $410,000
compared to $508,000 for the same period in 2004 due to a lower level of taxable
income.
FINANCIAL CONDITION
ASSETS
- ------
At September 30, 2005, total assets were $300.2 million, an increase of $5.2
million, or 1.7%, compared to $295.0 million at June 30, 2005. The increase in
assets was primarily attributable to an increase in loans, cash and cash
equivalents, and interest-earning deposits more than offsetting 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 $5.1 million at September 30, 2005 compared to
$3.8 million at June 30, 2005. Interest-earning deposits increased $4.8 million
to $12.0 million at September 30, 2005, 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 $5.9 million, or 11.1%, to $47.5 million due primarily to
sales of investment securities during the three-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 $413,000, or $255,000 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, 2005
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency $ 37,363 $ 47 $ (486) $ 36,924
Municipals 3,635 4 (59) 3,580
Mortgage-backed 6,867 81 - 6,948
------------ ------------ ----------- ------------
Total securities available-
for-sale $ 47,865 $ 132 $ (545) $ 47,452
============ ============ =========== ============
Weighted-average rate 3.60%
============
AT JUNE 30, 2005
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency $ 42,447 $ 83 $ (393) $ 42,137
Municipals 3,475 2 (60) 3,417
Mortgage-backed 7,695 117 - 7,812
------------ ------------ ----------- ------------
Total securities available-
for-sale $ 53,617 $ 202 $ (453) $ 53,366
============ ============ =========== ============
Weighted-average rate 3.42%
============
LOANS
- -----
Net loans increased $6.6 million, or 3.2%, to $215.0 million at September 30,
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 $176.1
million, or 80.9% of gross loans at September 30, 2005 compared to $168.8
million, or 80.0% of gross loans, at June 30, 2005.
Commercial business loans decreased $2.2 million, or 6.3%, to $32.4 million at
September 30, 2005. Commercial business loans were 14.9% of gross loans at
September 30, 2005 compared to 16.4% of gross loans at June 30, 2005. 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 totaled $9.0 million and represented 4.2% of total loans at September 30,
2005 compared to $7.6 million, or 3.6% of total loans at June 30, 2005. Consumer
loans increased in the three months ended September 30, 2005 due to an increase
in indirect automobile loans.
18
Loans receivable, net, are summarized as follows:
AT AT
SEPTEMBER 30, JUNE 30,
2005 2005
------------------------- -------------------------
PERCENT PERCENT $ %
AMOUNT OF PORTFOLIO AMOUNT OF PORTFOLIO CHANGE CHANGE
------------ ------------ ------------ ------------ ----------- ----------
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 79,669 36.6% $ 79,652 37.7% $ 17 0.0%
Multi-family 8,139 3.7% 8,568 4.1% (429) (5.0%)
Construction 8,590 3.9% 7,029 3.3% 1,561 22.2%
Commercial 57,620 26.5% 54,252 25.7% 3,368 6.2%
Land 17,370 8.0% 14,415 6.8% 2,955 20.5%
Home equity line of credit 4,754 2.2% 4,898 2.3% (144) (2.9%)
------------ ------------ ------------ ------------ -----------
Total real estate loans 176,142 80.9% 168,814 80.0% 7,328 4.3%
------------ ------------ ------------ ------------ -----------
Commercial business loans 32,439 14.9% 34,603 16.4% (2,164) (6.3%)
------------ ------------ ------------ ------------ -----------
Consumer Loans:
Loans secured by deposit accounts 1,000 0.5% 1,041 0.5% (41) (3.9%)
Other consumer loans 1,650 0.8% 1,705 0.8% (55) (3.2%)
Loans secured by automobiles 6,034 2.8% 4,457 2.1% 1,577 35.4%
Mobile home loans 357 0.2% 379 0.2% (22) (5.8%)
------------ ------------ ------------ ------------ -----------
Total non-real estate loans 9,041 4.2% 7,582 3.6% 1,459 19.2%
------------ ------------ ------------ ------------ -----------
Total commercial business
and consumer loans 41,480 19.1% 42,185 20.0% (705) (1.7%)
------------ ------------ ------------ ------------ -----------
Total gross loans 217,622 100.0% 210,999 100.0% 6,623 3.1%
Less:
Deferred loan fees, net (301) (268) (33) 12.3%
Allowance for losses (2,281) (2,293) 12 (0.5%)
------------ ------------ -----------
Loans receivable, net $ 215,040 $ 208,438 $ 6,602 3.2%
============ ============ ===========
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.
19
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 $12,000 to $2.3
million at September 30, 2005. There were no additions to the allowance for loan
losses during the three-month period ended September 30, 2005. Our allowance for
loan losses represented 1.05% of total gross loans at September 30, 2005
compared to 1.09% of total gross loans at June 30, 2005.
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2005 2004
----------- ------------
(Dollars in thousands)
Balance at beginning of period $ 2,293 $ 2,479
Provision for loan losses - -
Recoveries 36 112
Charge-offs (48) (119)
----------- ------------
Net charge-offs (12) (7)
----------- ------------
Allowance at end of period $ 2,281 $ 2,472
=========== ============
Net charge-offs to average outstanding
loans during the period, annualized 0.02% 0.01%
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 $480,000 at September 30, 2005 compared to $1.3 million at June 30, 2005.
Nonperforming loans were $221,000 and $426,000 at September 30, 2005 and June
30, 2005, respectively. Foreclosed real estate decreased $655,000 to $259,000 at
September 30, 2005 due to the disposition of several pieces of foreclosed
property. 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.
20
SEPTEMBER 30, JUNE 30,
2005 2005
--------------- ----------------
(Dollars in thousands)
Nonaccruing loans:
Real estate $ 221 $ 426
Commercial business - -
Consumer - -
------------ -------------
Total nonaccrual loans 221 426
Real estate owned 259 914
Other repossessed assets - -
------------ -------------
Total nonperforming assets $ 480 $ 1,340
============ =============
Total nonperforming assets to total assets 0.16% 0.45%
Total nonperforming loans to total loans 0.10% 0.20%
Allowance for loan losses to total nonperforming loans 1032.13% 538.26%
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 September 30, 2005 was $5.3 million.
DEPOSITS
- --------
Total deposits increased $1.4 million to $196.1 million at September 30, 2005.
Transaction accounts increased $3.3 million, or 4.5%, to $76.9 million, while
time deposits decreased $2.0 million, or 1.6%, to $119.2 million at September
30, 2005. We have focused on attracting lower costing transaction accounts to
manage our cost of funds. Transaction accounts represented 39.2% of total
deposits at September 30, 2005 compared to 37.8% at June 30, 2005 and 33.1% at
September 30, 2004. The decrease in time deposits is the result of our pricing
strategy combined with strong competition for time deposits in our market.
SEPTEMBER 30, JUNE 30,
2005 2005 $ CHANGE % CHANGE
--------------- --------------- ------------- ------------
(Dollars in thousands)
Certificates of deposit $ 119,174 $ 121,130 $ (1,956) (1.6%)
Savings accounts 12,375 12,944 (569) (4.4%)
Money market accounts 37,544 31,841 5,703 17.9%
NOW accounts 17,971 18,818 (847) (4.5%)
Non-interest bearing accounts 9,011 9,973 (962) (9.6%)
--------------- --------------- -------------
$ 196,075 $ 194,706 $ 1,369 0.7%
=============== =============== =============
ADVANCES AND OTHER LIABILITIES
- ------------------------------
FHLB advances increased $5.0 million to $22.0 million at September 30, 2005.
During the three-month period ended September 30, 2005, FHLB advances were
utilized as a funding source for supporting loan growth.
21
STOCKHOLDERS' EQUITY
- --------------------
Stockholders' equity decreased $1.2 million, or 1.5%, to $80.8 million at
September 30, 2005. Retained earnings increased $356,000 to $34.4 million at
September 30, 2005 due to net earnings of $785,000 partially offset by the
payment of dividends to shareholders in the amount of $429,000. 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, 2005, the
adjustment to stockholders' equity was an unrealized loss of $255,000 compared
to a net unrealized loss of $155,000 at June 30, 2005. During the three-month
period ended September 30, 2005, there were 137,981 shares of treasury stock
purchased at a cost of $1.8 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 deposits, 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, 2005,
cash and cash equivalents totaled $5.1 million and interest-earning deposits
totaled $12.0 million. Securities classified as available-for-sale, which
provide additional sources of liquidity, totaled $47.5 million at September 30,
2005. In addition, at September 30, 2005, we had arranged the ability to borrow
a total of approximately $65.4 million from the Federal Home Loan Bank of
Cincinnati. In the three-month period ended September 30, 2005, Federal Home
Loan Bank advances increased $5.0 million to $22.0 million.
We anticipate that we will have sufficient funds available to meet current loan
commitments. At September 30, 2005, we had approximately $267,000 in loan
commitments, consisting of $175,000 in commitments to originate residential
loans and $92,000 to originate commercial loans. In addition to commitments to
originate loans, we had $10.0 million in loans-in-process, $612,000 in unused
standby letters of credit and approximately $13.5 million in unused lines of
credit. We had $73.3 million in certificates of deposit due within one year and
$76.9 million in other deposits without specific maturities at September 30,
2005. We believe, based on past experience, that a significant portion of those
deposits will remain with us. Deposit flows are affected by the overall level of
interest rates and products offered by us and our local competitors and other
factors. We have the ability to attract and retain deposits by adjusting the
interest rates offered. We experienced a net increase in total deposits of $1.4
million during the three-month period ended September 30, 2005.
At September 30, 2005, the average liquidity ratio was 25.88% compared to 33.58%
at September 30, 2004. The level of liquidity has been reduced as net proceeds
from the stock offering have been used for lending, operational growth and
expansion activities.
22
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, 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.
CAPITAL COMPLIANCE
The following table presents our capital position relative to our regulatory
capital requirements at September 30, 2005 and June 30, 2005:
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, 2005
Total Capital
(To Risk Weighted Assets) $ 67,711 34.2% $ 15,858 > 8.0% $ 19,822 > 10.0%
--- ---
Core Capital
(To Tangible Assets) 65,614 22.3% 11,779 > 4.0% 14,724 > 5.0%
--- ---
Tangible Capital
(To Tangible Assets) 65,614 22.3% 4,417 > 1.5% N/A
---
Tier 1 Capital
(To Risk Weighted Assets) 65,614 33.1% N/A 11,893 > 6.0%
---
AT JUNE 30, 2005
Total Capital
(To Risk Weighted Assets) 67,648 35.4% 15,293 > 8.0% 19,116 > 10.0%
--- ---
Core Capital
(To Tangible Assets) 65,539 22.7% 11,539 > 4.0% 14,424 > 5.0%
--- ---
Tangible Capital
(To Tangible Assets) 65,539 22.7% 4,327 > 1.5% N/A
---
Tier 1 Capital
(To Risk Weighted Assets) 65,539 34.3% N/A 11,470 > 6.0%
---
23
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, 2005. 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, 2005.
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, 2005
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
24
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
July 1, 2005 - - - 571,720 (1)
through
July 31, 2005
Month #2
August 1, 2005 135,115 $13.16 135,115 436,605 (1)
through
August 31, 2005
Month #3
September 1, 2005 2,866 $13.08 2,866 433,739 (1)
through
September 30, 2005
Total 137,981 $13.16 137,981 433,739
- -----------------------------------------
(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, from time to time, subject to market
conditions. On April 29, 2005, the Company announced a stock repurchase
program under which the Company may repurchase an additional 839,000
shares of the Company's common stock, from time to time, subject to market
conditions. The repurchase program will continue until completed or
terminated by the Board of Directors. No repurchase authorization expired
during the three months ended September 30, 2005. The Company has
repurchase authorization that it has elected to terminate prior to
expiration or under which it does not intend to make further purchases.
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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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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, 2005 /s/ Anderson L. Smith
-------------------------------------
Anderson L. Smith
President and Chief Executive Officer
November 9, 2005 /s/ Jane P. Hutton
-------------------------------------
Jane P. Hutton
Chief Financial Officer, Treasurer
and Secretary
27