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 December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------
Commission File Number 00-50347
JEFFERSON BANCSHARES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 45-0508261
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
120 EVANS AVENUE, MORRISTOWN, TENNESSEE 37814
(Address of principal executive offices) (Zip code)
(423) 586-8421
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No /_/
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer /_/ Accelerated filer /X/ Non-accelerated filer /_/
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 February 9, 2006, the registrant had 6,847,112 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
Six months ended December 31, 2005 and year ended June 30, 2005................................ 3
Consolidated Statements of Earnings - Unaudited
Three and six months ended December 31, 2005 and 2004.......................................... 4
Consolidated Statements of Changes in Stockholders' Equity - Unaudited
Six months ended December 31, 2005 and 2004.................................................... 5
Consolidated Statements of Cash Flows - Unaudited
Six months ended December 31, 2005 and 2004.................................................... 6
Notes to Consolidated Financial Statements - Unaudited......................................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 26
Item 4. Controls and Procedures........................................................................ 26
Part II. - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 27
Item 1A. Risk Factors................................................................................... 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Condition
(Dollars in thousands)
DECEMBER 31, JUNE 30,
2005 2005
------------------ ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,699 $ 3,799
Interest-earning deposits 6,916 7,228
Investment securities classified as available for sale, net 46,792 53,366
Federal Home Loan Bank stock 1,696 1,652
Bank owned life insurance 5,391 5,285
Loans receivable, net of allowance for loan losses
of $2,234 and $2,293 227,668 208,438
Premises and equipment, net 9,277 7,073
Foreclosed real estate, net 260 914
Accrued interest receivable:
Investments 493 489
Loans receivable 1,308 1,059
Deferred tax asset 1,953 1,878
Other assets 1,645 3,860
------------------ ------------------
Total Assets $ 306,098 $ 295,041
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 9,000 $ 9,973
Interest-bearing 186,200 184,733
Federal Home Loan Bank advances 32,000 17,000
Other liabilities 980 1,307
Accrued income taxes 6 -
------------------ ------------------
Total liabilities 228,186 213,013
------------------ ------------------
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 6,902,612 and 7,289,284 outstanding 84 84
Additional paid-in capital 71,952 71,694
Unearned ESOP shares (5,617) (5,833)
Unearned compensation (3,012) (3,232)
Accumulated other comprehensive income (532) (155)
Retained earnings 34,878 34,069
Treasury stock, at cost; 1,501,036 and 1,105,832 shares (19,841) (14,599)
------------------ ------------------
Total stockholders' equity 77,912 82,028
------------------ ------------------
Total liabilities and stockholders' equity $ 306,098 $ 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2005 2004 2005 2004
---- ---- ---- ----
INTEREST INCOME:
Interest on loans receivable $ 3,870 $ 3,203 $ 7,514 $ 6,325
Interest on investment securities 431 621 899 1,344
Other interest 91 74 173 117
--------------- --------------- --------------- ---------------
Total interest income 4,392 3,898 8,586 7,786
--------------- --------------- --------------- ---------------
INTEREST EXPENSE:
Deposits 1,293 1,008 2,494 2,016
Advances from FHLB 258 104 437 191
--------------- --------------- --------------- ---------------
Total interest expense 1,551 1,112 2,931 2,207
--------------- --------------- --------------- ---------------
NET INTEREST INCOME 2,841 2,786 5,655 5,579
Provision for loan losses - - - -
--------------- --------------- --------------- ---------------
Net interest income after provision for
loan losses 2,841 2,786 5,655 5,579
--------------- --------------- --------------- ---------------
NONINTEREST INCOME:
Dividends from investments - - 17 26
Mortgage origination income 131 - 317 -
Service charges and fees 134 133 273 284
Loss on sale of investment securities, net - (18) (44) (43)
Gain on sale of foreclosed real estate, net 83 5 160 33
BOLI increase in cash value 53 54 106 108
Other 12 24 40 54
--------------- --------------- --------------- ---------------
Total noninterest income 413 198 869 462
--------------- --------------- --------------- ---------------
NONINTEREST EXPENSE:
Compensation and benefits 1,299 905 2,580 1,844
Occupancy expense 90 79 197 152
Equipment and data processing expense 219 217 459 437
SAIF deposit insurance premium 7 7 13 15
Advertising 81 58 145 93
REO expense 11 12 37 32
Other 380 289 731 591
--------------- --------------- --------------- ---------------
Total noninterest expense 2,087 1,567 4,162 3,164
--------------- --------------- --------------- ---------------
EARNINGS BEFORE INCOME TAXES 1,167 1,417 2,362 2,877
--------------- --------------- --------------- ---------------
INCOME TAXES:
Current 406 425 708 950
Deferred 51 110 159 93
--------------- --------------- --------------- ---------------
Total income taxes 457 535 867 1,043
--------------- --------------- --------------- ---------------
NET EARNINGS $ 710 $ 882 $ 1,495 $ 1,834
=============== =============== =============== ===============
NET EARNINGS PER SHARE, BASIC $ 0.11 $ 0.12 $ 0.23 $ 0.24
=============== =============== =============== ==============
NET EARNINGS PER SHARE, DILUTED $ 0.11 $ 0.12 $ 0.23 $ 0.24
=============== =============== =============== ==============
See accompanying notes to financial statements
4
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended December 31, 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 - - - - - 1,495 - 1,495
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes of $(234) - - - - (377) - - (377)
------------
Total comprehensive income - - - - - - - 1,118
Dividends - - - - - (843) - (843)
Dividends used for ESOP payment - - - - - 157 - 157
Shares committed to be released
by the employee stock ownership
plan - 67 216 - - - - 283
Stock options expensed - 132 - - - - - 132
Tax benefit from exercise of
nonqualifying stock options - - - - - - - -
Earned portion of stock grants - - - 220 - - - 220
Exercise of options - 34 - - - - - 34
Tax benefit from exercise of
nonqualifying stock options - 25 - - - - - 25
Purchase of common stock
(395,204 shares) - - - - - - (5,242) (5,242)
---------- ------------ ------------ ------------- ------------ --------- --------- -------------
Balance at December 31, 2005 $ 84 $ 71,952 $ (5,617) $ (3,012) $ (532) $ 34,878 $(19,841) $ 77,912
========== ============ ============ ============= ============ ========= ========= =============
Balance at June 30, 2004 $ 84 $ 71,496 $ (6,265) $ (3,488) $ (793) $ 32,349 $ - $ 93,383
-------------
Comprehensive income:
Net earnings - - - - - 1,834 - 1,834
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes
of $475 - - - - 766 - - 766
-------------
Total comprehensive income - - - - - - - 2,600
Dividends - - - - - (795) - (795)
Dividends used for ESOP payment - - - - - 143 - 143
Shares committed to be released by
the employee stock ownership plan - 64 216 - - - - 280
Stock options expensed - - - - - - - -
Earned portion of stock grants - - - 220 - - - 220
Exercise of options - 44 - - - - - 44
Purchase of stock for the 2004
Stock Incentive Plan - - - (184) - - - (184)
Tax benefit from exercise of
nonqualifying stock options - 25 - - - - - 25
Purchase of common stock
(573,196 shares) - - - - - - (7,566) (7,566)
---------- ------------ ------------ ------------- ------------ --------- --------- -------------
Balance at December 31, 2004 $ 84 $ 71,629 $ (6,049) $ (3,452) $ (27) $ 33,531 $ (7,566) $ 88,150
========== ============ ============ ============= ============ ========= ========= =============
5
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
SIX MONTHS ENDED
DECEMBER 31,
------------------------
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,495 $ 1,834
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities
Allocated ESOP shares 283 280
Depreciation and amortization expense 128 118
Amortization of premiums (discounts), net on investment securities 18 7
(Gain) loss on sale of investment securities and mortgage-backed securities, net 60 43
(Gain) on sale of equity investments (16) -
FHLB stock dividends (44) (34)
Amortization of deferred loan fees, net (66) (67)
Loss (gain) on sale of foreclosed real estate, net (160) (33)
Deferred tax benefit 159 637
Increase in cash value of life insurance (106) (108)
Earned portion of MRP 220 220
Stock options expensed 133 -
Decrease (increase) in:
Accrued interest receivable (253) 233
Other assets 2,215 98
Increase (decrease) in other liabilities and accrued income taxes (6) 56
----------- ----------
Net cash provided by (used for) operating activities 4,060 3,284
----------- ----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Loan originations, net of principal collections (18,368) (10,734)
Investment securities classified as available for sale:
Purchased (775) -
Proceeds from sale 5,022 20,378
Proceeds from maturity - 1,500
Return of principal on mortgage-backed securities 1,639 2,363
Purchase of premises and equipment (2,332) (131)
Proceeds from sale of (additions to) foreclosed real estate, net 214 220
----------- ---------
Net cash provided by (used for) investing activities (14,600) 13,596
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 494 (2,981)
Proceeds from advances from FHLB 27,000 15,000
Repayment of FHLB advances (12,000) (9,000)
Purchase of company stock for the 2004 Stock Based Incentive Plan - (14)
Purchase of treasury stock (5,242) (7,566)
Cash dividend paid on common stock (1,158) (1,159)
Proceeds from exercise of stock options 34 44
----------- ----------
Net cash provided by (used for) financing activities 9,128 (5,676)
----------- ----------
Net increase (decrease) in cash, cash equivalents and interest-earning deposits (1,412) 11,204
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 $ 9,615 $ 17,615
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period for:
Interest on deposits $ 2,494 $ 2,016
Interest on FHLB advances 437 191
Income taxes 720 1,030
Real estate acquired in settlement of loans 224 1,202
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 the Company 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 December 31, 2005 are
not necessarily indicative of the results which may be expected for the
entire fiscal year. These unaudited consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended June 30, 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
7
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 its conversion from the mutual holding company form
of organization.
(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 WEIGHTED-AVERAGE SHARES
OUTSTANDING FOR THE OUTSTANDING FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ -------------
Weighted average number of common shares used
in computing basic earnings per common share 6,416,745 7,383,907 6,485,859 7,569,166
Effect of dilutive stock options 18,062 22,950 22,847 19,308
------------ ------------ ------------ -------------
Weighted average number of common shares and
dilutive potential common shares used in
computing earnings per common share
assuming dilution 6,434,807 7,406,857 6,508,706 7,588,474
============ ============ ============ =============
(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 December
31, 2005 and an average investment of $80,000 during the six-month
period ended December 31, 2005 has been recognized in conformity with
the Financial Accounting Standards Board ("FASB") Statement No. 118.
The total allowance for loan losses related to these loans was $2,000
at December 31, 2005. Other nonaccrual loans at December 31, 2005 were
approximately $499,000. For the six months ended December 31, 2005,
gross income which would have been recognized had impaired and
nonaccrual loans been current in accordance with their original terms
amounted to approximately $20,000. Interest income from impaired and
non-accrual loans included in the Company's interest income amounted to
$9,000 for the six months ended December 31, 2005.
8
The following table summarizes the activity in the allowance for loan
losses for the three months ended December 31, 2005:
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
----------------------------
Balance at June 30, 2005 $ 2,293
Provision for loan losses -
Charge-offs $ (135)
Recoveries 76
------------
Net (charge-offs)/recoveries (59)
------------
Balance at December 31, 2005 $ 2,234
============
(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 December 31, 2005, we had approximately $1.1 millon in loan
commitments, consisting of $637,000 in commitments to originate
residential loans and $482,000 to originate commercial loans. In
addition to commitments to originate loans, we had $11.2 million in
loans-in-process, $433,000 in unused standby letters of credit and
approximately $11.6 million in unused lines of credit.
(9) DIVIDEND DECLARATION
--------------------
On November 30, 2005, the Board of Directors of the Company approved a
quarterly dividend of $0.06 per share to stockholders of record as of
December 31, 2005 and payable on January 13, 2006.
(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
December 31, 2005, there were 42,726 options outstanding and no
remaining shares available for grant under the 1995 Stock Option Plan.
During the three-month period, 8,532 options were exercised.
On January 8, 2004, the Company adopted the 2004 Stock Incentive
Plan which authorized the granting of 698,750 options and 279,500
restricted stock awards to employees and non-employee directors. As of
December 31, 2005, there were 401,778 options and 160,711 restricted
stock awards granted under this plan which will vest pro-rata over a
five-year period. The 2004 plan has an expiration date of January 30,
2014.
9
The table below summarizes the status of the Company's stock option
plans as of December 31, 2005.
SIX MONTHS ENDED
DECEMBER 31, 2005
-----------------
Weighted-
average
Shares exercise price
------------- ---------------
Outstanding at beginning of period 453,036 $12.60
Granted during the six-month period - -
Options exercised 8,532 $ 3.94
Outstanding at December 31, 2005 444,504 $12.77
Options exercisable at December 31, 2005 123,087 $10.36
The following information applies to options outstanding at December
31, 2005:
Number outstanding 444,504
Range of exercise prices $3.52 - $13.69
Weighted-average exercise price $12.77
Weighted-average remaining contractual life 7.42
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 of ten
years. The estimated time remaining before the expiration of the
options equaled ten years.
10
Three months Six months
ended ended
December 31, December 31,
2004 2004
--------------- ---------------
Net Income:
As reported $ 882 $ 1,834
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects (54) (109)
--------------- ---------------
Pro-forma $ 828 $ 1,725
=============== ===============
Basic net earnings per share:
As reported $ 0.12 $ 0.24
Pro-forma $ 0.11 $ 0.23
Earnings per common share assuming dilution
As reported $ 0.12 $ 0.24
Pro-forma $ 0.11 $ 0.23
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") is the holding company for Jefferson Federal Bank (the "Bank") or
"Jefferson Federal."
The Company has no significant assets, other than all of the outstanding shares
of the Bank, and no significant liabilities. Management of the Company and the
Bank are substantially similar and the Company neither owns nor leases any
property, but instead uses the premises, equipment and furniture of the Bank.
Accordingly, the information set forth in this report, including the
consolidated financial statements and related financial data, relates primarily
to the Bank.
Jefferson Federal is a community oriented financial institution offering
traditional financial services to its local communities. The Bank is engaged
primarily in the business of attracting deposits from the general public using
such funds to originate loans secured by first mortgages on owner-occupied,
one-to four- family residential properties, as well as to originate commercial
real estate and multi-family mortgage loans, construction loans, consumer loans,
commercial non-real estate loans and make other investments permitted by
applicable laws and regulations.
11
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 AND SIX MONTHS ENDED DECEMBER 31, 2005 AND
2004
NET INCOME
- ----------
Net income was $710,000, or $0.11 per diluted share, for the quarter ended
December 31, 2005 compared to net income of $882,000, or $0.12 per diluted
share, for the comparable period in 2004. For the six months ended December 31,
2005, net income was $1.5 million, or $0.23 per diluted share compared to $1.8
million, or $0.24 per diluted share, for the comparable period in 2004. The
decline in net income for both the three and six month period ended December 31,
2005 was the result of an increase in noninterest expense, partially offset by
an increase in net interest income and noninterest income. The increase in
noninterest expense was the result of our expansion activities, as well as our
adoption of Financial Accounting Standards Board's ("FASB") Statement 123R,
which requires the expensing of stock options.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
(Dollars in thousands, (Dollars in thousands,
except per share data) except per share data)
Net earnings $ 710 $ 882 $1,495 $1,834
Net earnings per share, basic $0.11 $0.12 $ 0.23 $ 0.24
Net earnings per share, diluted $0.11 $0.12 $ 0.23 $ 0.24
Return on average assets (annualized) 0.94% 1.15% 0.99% 1.19%
Return on average equity (annualized) 3.60% 3.95% 3.74% 4.02%
12
NET INTEREST INCOME
- -------------------
Net interest income before loan loss provision increased $55,000 to $2.8 million
for the three months ended December 31, 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 December 31, 2005 were 3.33% and 4.03%, respectively, compared to
3.23% and 3.84% for the same period in 2004. The average yield on
interest-earning assets increased 85 basis points to 6.23% while the average
volume of earning assets declined $7.8 million, to $282.1 million for the three
months ended December 31, 2005 compared to the same period in 2004. The average
rate paid on interest-bearing liabilities increased 75 basis points to 2.90%
while the average volume of interest-bearing liabilities increased $6.8 million,
to $213.9 million for the three months ended December 31, 2005 compared to the
same period in 2004.
The following table summarizes changes in interest income and expense for the
three-month periods ended December 31, 2005 and 2004:
THREE MONTHS
ENDED
DECEMBER 31,
---------------------
2005 2004 $ CHANGE % CHANGE
--------- --------- ----------- ------------
(Dollars in thousands)
INTEREST INCOME:
Loans $ 3,870 $ 3,203 $ 667 20.8%
Investment securities 431 621 (190) (30.6%)
Interest-earning deposits 67 57 10 17.5%
FHLB stock 24 17 7 41.2%
--------- --------- -----------
Total interest income 4,392 3,898 494 12.7%
INTEREST EXPENSE:
Deposits 1,293 1,008 285 28.3%
Borrowings 258 104 154 148.1%
--------- --------- -----------
Total interest expense 1,551 1,112 439 39.5%
--------- --------- -----------
Net interest income $ 2,841 $ 2,786 $ 55 2.0%
========= ========= ===========
Net interest income before loan loss provision increased $76,000 to $5.7 million
for the six months ended December 31, 2005 compared to the same period in 2004.
The interest rate spread and net interest margin for the six months ended
December 31, 2005 were 3.35% and 4.04%, respectively, compared to 3.20% and
3.81% for the same period in 2004. The average yield on interest-earning assets
increased 82 basis points to 6.14% while the average volume of earning assets
declined $13.1 million, to $279.8 million for the six months ended December 31,
2005 compared to the same period in 2004. The average rate paid on
interest-bearing liabilities increased 66 basis points to 2.78% while the
average volume of interest-bearing liabilities increased $2.0 million, to $210.6
million for the six months ended December 31, 2005 compared to the same period
in 2004.
13
The following table summarizes changes in interest income and expense for the
six-month periods ended December 31, 2005 and 2004:
SIX MONTHS
ENDED
DECEMBER 31,
---------------------
2005 2004 $ CHANGE % CHANGE
--------- --------- ----------- ------------
(Dollars in thousands)
INTEREST INCOME:
Loans $ 7,514 $ 6,325 $ 1,189 18.8%
Investment securities 899 1,344 (445) (33.1%)
Interest-earning deposits 129 83 46 55.4%
FHLB stock 44 34 10 29.4%
--------- --------- -----------
Total interest income 8,586 7,786 800 10.3%
INTEREST EXPENSE:
Deposits 2,494 2,016 478 23.7%
Borrowings 437 191 246 128.8%
--------- --------- -----------
Total interest expense 2,931 2,207 724 32.8%
--------- --------- -----------
Net interest income $ 5,655 $ 5,579 $ 76 1.4%
========= ========= ===========
The following table summarizes average balances and average yields and costs:
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
--------------------------------------------- ---------------------------------------------
2005 2004 2005 2004
--------------------- ---------------------- ---------------------- ---------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE COST BALANCE COST BALANCE COST
------------ ------- ------------ -------- ------------ -------- ------------ -------
(Dollars in thousands) (Dollars in thousands)
Loans $ 225,717 6.86% $ 199,672 6.42% $ 220,292 6.82% $ 199,323 6.35%
Investment securities 47,008 3.67% 75,128 3.31% 48,988 3.67% 81,224 3.31%
Interest-earning deposits 7,681 3.49% 13,449 1.70% 8,841 2.92% 10,798 1.54%
FHLB stock 1,686 5.69% 1,608 4.23% 1,675 5.25% 1,599 4.25%
Deposits 186,560 2.77% 195,124 2.07% 186,389 2.68% 196,753 2.05%
Borrowings 27,333 3.78% 12,000 3.47% 24,167 3.62% 11,833 3.21%
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.
14
THREE MONTHS SIX MONTHS
2005 COMPARED TO 2004 2005 COMPARED TO 2004
-------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
----------------------- -----------------------
VOLUME RATE NET VOLUME RATE NET
---------- ----------- ------- ---------- ----------- ----------
(In thousands) (In thousands)
Interest income:
Loans receivable $ 437 $ 230 $ 667 $ 690 $ 499 $ 1,189
Investment securities (258) 68 (190) (584) 139 (445)
Other (63) 80 17 (48) 104 56
---------- ----------- ------- ---------- ----------- ----------
Total interest-earning assets 116 378 494 58 742 800
---------- ----------- ------- ---------- ----------- ----------
Interest expense:
Deposits (42) 327 285 (99) 576 477
Borrowings 144 10 154 221 26 247
---------- ----------- ------- ---------- ----------- ----------
Total interest-bearing liabilities 102 337 439 122 602 724
---------- ----------- ------- ---------- ----------- ----------
Net change in interest income $ 14 $ 41 $ 55 $ (64) $ 140 $ 76
========== =========== ======= ========== =========== ==========
Total interest income increased $494,000, or 12.7%, to $4.4 million for the
three months ended December 31, 2005, and increased $800,000, or 10.3%, to $8.6
million for the six months ended December 31, 2005. 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.
Interest on loans increased $667,000, or 20.8%, to $3.9 million for the three
months ended December 31, 2005 and increased $1.2 million, or 18.8%, to $7.5
million for the six months ended December 31, 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 increase in the average yield on loans was primarily the result of increases
in the prime lending rate. The average yield on loans increased 44 basis points,
to 6.86% for the three months ended December 31, 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 $190,000, or 30.6%, to $431,000 for
the three months ended December 31, 2005 from the corresponding period in 2004.
For the six moths ended December 31, 2005, interest on investments decreased
$445,000, or 33.1%, to $899,000, from the corresponding period in 2004. The
decrease for both periods was the 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 decreased $28.1 million, to $47.0
million for the three months ended December 31, 2005 and decreased $32.2
million, to $49.0 million for the six months ended December 31, 2005. Proceeds
from the sale of investment securities were used to fund stock repurchases and
to fund growth in the loan portfolio. The average yield on investments increased
36 basis points to 3.67% for both the three and six months at December 31, 2005
compared to the same periods in 2004. Dividends on Federal Home Loan Bank
("FHLB") stock were $24,000 and $44,000, respectively for the three- and
six-month period ended December 31, 2005, compared to $17,000 and $34,000 for
the comparable period in 2004. FHLB dividends are paid with additional shares of
FHLB stock.
15
Total interest expense increased $439,000, or 39.5%, to $1.6 million for the
three-month period ended December 31, 2005 compared to the same period in 2004.
For the six months ended December 31, 2005, total interest expense increased
$724,000, or 32.8%, to $2.9 million compared to the same period in 2004. The
increase in both periods was due to an increase in the average rate paid on
interest-bearing liabilities combined with an increase in the average balance of
Federal Home Loan Bank advances. Interest expense on deposits increased
$285,000, or 28.3%, to $1.3 million for the three-month period ended December
31, 2005 and increased $478,000, or 23.7%, to $2.5 million for the six-month
period ended December 31, 2005 . The increase for both periods was 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 70
basis points to 2.77% for the current three-month period and increased 63 basis
points to 2.68% for the current six-month period 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 market interest rates. Interest
expense on FHLB advances was $258,000 for the three months ended December 31,
2005 compared to $104,000 for the comparable period in 2004. For the six months
ended December 31, 2005, interest expense on FHLB advances was $437,000 compared
to $191,000 for the comparable period in 2004. The increase for both periods was
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 and six
months ended December 31, 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 for the three and six month period ended December 31,
2005 amounted to $47,000 and $59,000, respectively, compared to $84,000 and
$91,000 for the comparable periods in 2004. There were no additions to the
allowance for loan losses for either six-month period. Nonperforming loans
totaled $498,000 at December 31, 2005 compared to $1.4 million for the
comparable period in 2004.
NONINTEREST INCOME
- ------------------
Noninterest income increased $215,000 to $413,000 for the three months ended
December 31, 2005 compared to $198,000 for the comparable period in 2004.
Mortgage origination fee income accounted for the largest increase in
noninterest income with $131,000 for the current three-month period and no
comparable income from mortgage originations in 2004. In January 2004, we began
originating and selling loans in secondary market. Gain on sale of foreclosed
property was $83,000 for the three months ended December 31, 2005 compared to
$5,000 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 December 31, 2005 compared to the same period in 2004.
16
THREE MONTHS ENDED
DECEMBER 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- --------- ----------
(Dollars in thousands)
Mortgage origination fees $ 131 $ - $ 131 NM
Service charges and fees 134 133 1 0.8%
Loss on sale of investment securities, net - (18) 18 -100.0%
Gain on sale of foreclosed property 83 5 78 1560.0%
BOLI increase in cash value 53 54 (1) (1.9%)
Other 12 24 (12) (50.0%)
----------- ----------- ---------
Total noninterest income $ 413 $ 198 $ 215 108.6%
=========== =========== =========
Noninterest income increased $407,000, or 88.1%, to $869,000 for the six months
ended December 31, 2005 compared to $462,000 for the comparable period in 2004.
Mortgage origination fee income accounted for the largest increase in
noninterest income with $317,000 for the current six-month period and no
comparable income from mortgage originations in 2004. Gain on sale of foreclosed
property was $160,000 for the six months ended December 31, 2005 compared to
$33,000 for the same period in 2004. Service charges and fees decreased $11,000,
or 3.9%, to $273,000 for the six months ended December 31, 2005 compared to
$284,000 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 six months ended
December 31, 2005 compared to the same period in 2004.
SIX MONTHS ENDED
DECEMBER 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- --------- ----------
(Dollars in thousands)
Dividends from investments $ 17 $ 26 $ (9) (34.6%)
Mortgage origination fees 317 - 317 NM
Service charges and fees 273 284 (11) (3.9%)
Loss on sale of investment securities, net (44) (43) (1) 2.3%
Gain on sale of foreclosed property 160 33 127 384.8%
BOLI increase in cash value 106 108 (2) (1.9%)
Other 40 54 (14) (25.9%)
----------- ----------- ---------
Total noninterest income $ 869 $ 462 $ 407 88.1%
=========== =========== =========
NONINTEREST EXPENSE
- -------------------
Noninterest expense increased $520,000, or 33.2%, to $2.1 million for the
three-month period ended December 31, 2005, primarily due to an increase in
compensation expense. Compensation expense increased $394,000, or 43.5%, to $1.3
million for the three-month period ended December 31, 2005, primarily due to
staff additions for the lending office in Knoxville, Tennessee which opened on
January 1, 2005 and our future branch office in Morristown, Tennessee and two
future branch offices in Knoxville, Tennessee which are anticipated to open in
2006. There were 85 employees at December 31, 2005 compared to 68 employees at
December 31, 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 December 31, 2005, compensation expense included $66,000 related to
the expensing of stock options.
17
The following table summarizes the dollar amounts for each category of
noninterest expense, and the dollar and percent changes for the three months
ended December 31, 2005 compared to the same period in 2004.
THREE MONTHS ENDED
DECEMBER 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- --------- -----------
(Dollars in thousands)
Compensation and benefits $ 1,299 $ 905 $ 394 43.5%
Occupancy 90 79 11 13.9%
Equipment and data processing 219 217 2 0.9%
SAIF deposit insurance premium 7 7 - 0.0%
Advertising 81 58 23 39.7%
REO expense 11 12 (1) (8.3%)
Other 380 289 91 31.5%
----------- ----------- ---------
Total noninterest expense $ 2,087 $ 1,567 $ 520 33.2%
=========== =========== =========
For the six months ended December 31, 2005, noninterest expense increased
$998,000, or 31.5%, to $4.2 million due primarily to an increase in compensation
and benefits expense. Compensation and benefits expense increased $736,000, or
39.9%, to $2.6 million for the six months ended December 31, 2005 due to staff
additions and stock option expensing. Compensation and benefits expense related
to stock option expense totaled $133,000 for the six months ended December 31,
2005.
The following table summarizes the dollar amounts for each category of
noninterest expense, and the dollar and percent changes for the six months ended
December 31, 2005 compared to the same period in 2004.
SIX MONTHS ENDED
DECEMBER 31,
------------------------- $ %
2005 2004 CHANGE CHANGE
----------- ----------- --------- ---------
(Dollars in thousands)
Compensation and benefits $ 2,580 $ 1,844 $ 736 39.9%
Occupancy 197 152 45 29.6%
Equipment and data processing 459 437 22 5.0%
SAIF deposit insurance premium 13 15 (2) (13.3%)
Advertising 145 93 52 55.9%
REO expense 37 32 5 15.6%
Other 731 591 140 23.7%
----------- ----------- ---------
Total noninterest expense $ 4,162 $ 3,164 $ 998 31.5%
=========== =========== =========
INCOME TAXES
- ------------
Income tax expense for the three months ended December 31, 2005 was $457,000
compared to $535,000 for the same period in 2004 due to lower level of taxable
income. For the six months ended December 31, 2005, income tax expense decreased
$176,000, or 16.9%, to $867,000 due to lower taxable income.
18
FINANCIAL CONDITION
ASSETS
- ------
At December 31, 2005, total assets were $306.1 million, an increase of $11.1
million, or 3.7%, compared to $295.0 million at June 30, 2005. The increase in
assets was primarily attributable to an increase in loans, 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. Additional
FHLB advances were used to fund asset growth.
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 $6.6 million, or 12.3%, to $46.8 million due primarily to
sales of investment securities during the six-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 $863,000, or $377,000 net of taxes.
The following table sets forth the carrying values of our investment securities
portfolio at the dates indicated. All of our investment securities are
classified as available-for-sale.
AT DECEMBER 31, 2005
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency $ 37,359 $ 24 $ (814) $ 36,569
Municipals 4,241 2 (105) 4,138
Mortgage-backed 6,054 34 (3) 6,085
------------ ------------ ----------- ------------
Total securities available-
for-sale $ 47,654 $ 60 $ (922) $ 46,792
============ ============ =========== ============
Weighted-average rate 3.59%
============
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%
============
19
LOANS
- -----
Net loans increased $19.2 million, or 9.2%, to $227.7 million at December 31,
2005. Our expansion into the Knoxville, Tennessee market has generated
additional lending opportunities, which has resulted in significant growth in
our loan portfolio. Our primary lending activity is the origination of loans
secured by real estate. Real estate loans totaled $190.5 million, or 82.8% of
gross loans at December 31, 2005 compared to $168.8 million, or 80.0% of gross
loans, at June 30, 2005. 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. The largest portion of
loan growth occurred in commercial real estate, due to our emphasis on this type
of lending. Commercial real estate loans increased $12.3 million, or 22.7%, to
$66.5 million at December 31, 2005.
Commercial business loans decreased $5.2 million, or 15.1%, to $29.4 million at
December 31, 2005. Commercial business loans were 12.8% of gross loans at
December 31, 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 $10.3 million and represented 4.5% of total loans at December 31,
2005 compared to $7.6 million, or 3.6% of total loans at June 30, 2005. Consumer
loans increased in the three months ended December 31, 2005 due to an increase
in indirect automobile loans.
Loans receivable, net, are summarized as follows:
20
AT AT
DECEMBER 31, 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 $ 79,495 34.5% $ 79,652 37.7% $ (157) (0.2%)
Multi-family 7,854 3.4% 8,568 4.1% (714) (8.3%)
Construction 11,500 5.0% 7,029 3.3% 4,471 63.6%
Commercial 66,546 28.9% 54,252 25.7% 12,294 22.7%
Land 20,383 8.9% 14,415 6.8% 5,968 41.4%
Home equity line of credit 4,739 2.1% 4,898 2.3% (159) (3.2%)
------------ ------------ ------------ ------------ -----------
Total real estate loans 190,517 82.8% 168,814 80.0% 21,703 12.9%
------------ ------------ ------------ ------------ -----------
Commercial business loans 29,380 12.8% 34,603 16.4% (5,223) (15.1%)
------------ ------------ ------------ ------------ -----------
Consumer Loans:
Loans secured by deposit accounts 976 0.4% 1,041 0.5% (65) (6.2%)
Other consumer loans 1,681 0.7% 1,705 0.8% (24) (1.4%)
Loans secured by automobiles 7,364 3.2% 4,457 2.1% 2,907 65.2%
Mobile home loans 280 0.1% 379 0.2% (99) (26.1%)
------------ ------------ ------------ ------------ -----------
Total non-real estate loans 10,301 4.5% 7,582 3.6% 2,719 35.9%
------------ ------------ ------------ ------------ -----------
Total commercial business
and consumer loans 39,681 17.2% 42,185 20.0% (2,504) (5.9%)
------------ ------------ ------------ ------------ -----------
Total gross loans 230,198 100.0% 210,999 100.0% 19,199 9.1%
Less:
Deferred loan fees, net (296) (268) (28) 10.4%
Allowance for losses (2,234) (2,293) 59 (2.6%)
------------ ------------ -----------
Loans receivable, net $ 227,668 $ 208,438 $ 19,230 9.2%
============ ============ ===========
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.
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.
21
Due to net charge-offs, the allowance for loan losses decreased $59,000 to $2.2
million at December 31, 2005. There were no additions to the allowance for loan
losses during the six-month period ended December 31, 2005. Our allowance for
loan losses represented 0.97% of total gross loans at December 31, 2005 compared
to 1.09% of total gross loans at June 30, 2005.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2005 2004 2005 2004
----------- ------------ ------------ -----------
(Dollars in thousands) (Dollars in thousands)
Balance at beginning of period $ 2,281 $ 2,472 $ 2,293 $ 2,479
Provision for loan losses - - - -
Recoveries 40 74 76 186
Charge-offs (87) (158) (135) (277)
----------- ------------ ------------ -----------
Net charge-offs (47) (84) (59) (91)
----------- ------------ ------------ -----------
Allowance at end of period $ 2,234 $ 2,388 $ 2,234 $ 2,388
=========== ============ ============ ===========
Net charge-offs to average outstanding
loans during the period, annualized 0.08% 0.17% 0.05% 0.09%
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 $772,000 at December 31, 2005 compared to $1.3 million at June 30, 2005.
Nonperforming loans were $498,000 and $426,000 at December 31, 2005 and June 30,
2005, respectively. Foreclosed real estate decreased $654,000 to $260,000 at
December 31, 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.
DECEMBER 31, JUNE 30,
2005 2005
--------------- ---------------
(Dollars in thousands)
Nonaccruing loans:
Real estate $ 498 $ 426
Commercial business - -
Consumer - -
--------------- ---------------
Total nonaccrual loans 498 426
Real estate owned 260 914
Other repossessed assets 14 -
--------------- ---------------
Total nonperforming assets $ 772 $ 1,340
=============== ===============
Total nonperforming assets to total assets 0.25% 0.45%
Total nonperforming loans to total loans 0.22% 0.20%
Allowance for loan losses to total nonperforming loans 448.59% 538.26%
22
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 December 31, 2005 was $5.4 million.
DEPOSITS
- --------
Total deposits increased $494,000 to $195.2 million at December 31, 2005.
Transaction accounts increased $3.5 million, or 4.8%, to $77.1 million, while
time deposits decreased $3.0 million, or 2.5%, to $118.1 million at December 31,
2005. We have focused on attracting lower costing transaction accounts to manage
our cost of funds. Transaction accounts represented 39.5% of total deposits at
December 31, 2005 compared to 37.8% at June 30, 2005 and 33.4% at December 31,
2004. The decrease in time deposits is the result of our pricing strategy
combined with strong competition for time deposits in our market.
DECEMBER 31, JUNE 30,
2005 2005 $ CHANGE % CHANGE
--------------- --------------- ------------- ------------
(Dollars in thousands)
Certificates of deposit $ 118,098 $ 121,130 $ (3,032) (2.5%)
Savings accounts 12,206 12,944 (738) (5.7%)
Money market accounts 40,069 31,841 8,228 25.8%
NOW accounts 15,827 18,818 (2,991) (15.9%)
Non-interest bearing accounts 9,000 9,973 (973) (9.8%)
--------------- --------------- -------------
$ 195,200 $ 194,706 $ 494 0.3%
=============== =============== =============
ADVANCES AND OTHER LIABILITIES
- ------------------------------
FHLB advances increased $15.0 million to $32.0 million at December 31, 2005. We
utilize FHLB cash management overnight advances as a funding source to manage
daily liquidity needs. In addition, a combination of fixed and variable rate
FHLB advances, with maturities ranging from August 2006 to March 2011, have been
used as a funding source for loan growth.
STOCKHOLDERS' EQUITY
- --------------------
Stockholders' equity decreased $4.1 million, or 5.0%, to $77.9 million at
December 31, 2005. Retained earnings increased $809,000 to $34.9 million at
December 31, 2005 due to net earnings of $1.5 million partially offset by the
payment of dividends to shareholders in the amount of $843,000. Unrealized gains
and losses, net of taxes, in the available-for-sale investment portfolio are
reflected as an adjustment to stockholders' equity. At December 31, 2005, the
adjustment to stockholders' equity was an unrealized loss of $532,000 compared
to a net unrealized loss of $155,000 at June 30, 2005. During the six-month
period ended December 31, 2005, there were 395,204 shares of treasury stock
purchased at a cost of $5.2 million.
23
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 December 31, 2005,
cash and cash equivalents totaled $2.7 million and interest-earning deposits
totaled $6.9 million. Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $46.8 million at December 31, 2005. In
addition, at December 31, 2005, we had arranged the ability to borrow a total of
approximately $64.9 million from the Federal Home Loan Bank of Cincinnati. In
the six-month period ended December 31, 2005, Federal Home Loan Bank advances
increased $15.0 million to $32.0 million.
We anticipate that we will have sufficient funds available to meet current loan
commitments. At December 31, 2005, we had approximately $1.1 million in loan
commitments, consisting of $637,000 in commitments to originate residential
loans and $482,000 to originate commercial loans. In addition to commitments to
originate loans, we had $11.2 million in loans-in-process, $433,000 in unused
standby letters of credit and approximately $11.6 million in unused lines of
credit We had $73.3 million in certificates of deposit due within one year and
$77.1 million in other deposits without specific maturities at December 31,
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
$494,000 during the six-month period ended December 31, 2005.
At December 31, 2005, the average liquidity ratio was 22.02% compared to 33.42%
at December 31, 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.
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 December 31, 2005, we engaged in no off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.
24
CAPITAL COMPLIANCE
The following table presents our capital position relative to our regulatory
capital requirements at December 31, 2005 and June 30, 2005:
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
AT DECEMBER 31, 2005
Total Capital
(To Risk Weighted Assets) $ 67,682 31.9% $ 16,991 > 8.0% $ 21,239 > 10.0%
--- ---
Core Capital
(To Tangible Assets) 65,633 21.8% 12,049 > 4.0% 15,062 > 5.0%
--- ---
Tangible Capital
(To Tangible Assets) 65,633 21.8% 4,518 > 1.5% N/A
---
Tier 1 Capital
(To Risk Weighted Assets) 65,633 30.9% N/A 12,744 > 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%
---
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, 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 December 31, 2005
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
26
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 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in
the Company's Annual Report on Form 10-K for the year ended June 30, 2005.
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
October 1, 2005 - - - 433,291 (1)
through
October 31, 2005
Month #2
November 1, 2005 239,370 $13.31 239,370 193,921 (1)
through
November 30, 2005
Month #3
December 1, 2005 17,853 $13.52 17,853 176,068 (1)
through
December 31, 2005
Total 257,223 $13.32 257,223 176,068
- -----------------------------------------
(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 838,552
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 December 31, 2005.
27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on
October 27, 2005. The results of the vote on the matters presented at
the meeting is as follows:
1. The following individuals were elected as directors, each for a
three-year term:
Votes for Votes Withheld
--------- --------------
William T. Hale 6,299,130 160,355
John F. McCrary 6,299,258 160,227
2. The appointment of Craine, Thompson & Jones, P.C. as auditors
for the Company for the fiscal year ending June 30, 2006 was
ratified by stockholders by the following vote:
For 6,289,382; Against 74,417; Abstain 95,686
Broker non-votes totaled 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.
February 9, 2006 /s/ Anderson L. Smith
--------------------------------------
Anderson L. Smith
President and Chief Executive Officer
February 9, 2006 /s/ Jane P. Hutton
--------------------------------------
Jane P. Hutton
Chief Financial Officer, Treasurer
and Secretary
29