Jefferson Bancshares 10-Q 2009
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2009
For the transition period from to
Commission File Number 00-50347
JEFFERSON BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
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 issuers classes of common stock as of the latest practicable date:
At May 11, 2009, the registrant had 6,706,868 shares of common stock, $0.01 par value per share, outstanding.
Consolidated Statements of Condition
(Dollars in thousands)
See accompanying notes to financial statements.
Consolidated Statements of Earnings (Unaudited)
(Dollars in Thousands, Except Net Earnings Per Share)
See accompanying notes to financial statements.
Consolidated Statements of Changes in Stockholders Equity
Nine Months Ended March 31, 2009 and 2008
(Dollars in Thousands)
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
See accompanying notes to financial statements.
Notes To Consolidated Financial Statements
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 to 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 March 31, 2009 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 Companys Annual Report on Form 10-K for the year ended June 30, 2008, which was filed with the Securities and Exchange Commission on September 11, 2008. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted.
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.
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.
Jefferson Federal may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of Jefferson Federal at the time of its conversion to stock form.
Under applicable regulations, Jefferson Federal is prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
Under the banking laws of the State of Tennessee, a Tennessee chartered savings bank may not declare dividends in any calendar year that exceeds the total of its net income of that year combined with its retained net income for the preceding two years without the prior approval of the Commissioner of the Department of Financial Institutions.
Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (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 to outstanding stock options and are determined using the treasury stock method. For the period ended March 31, 2009, stock options to purchase 584,681 shares were not included in the computation of diluted net income per share as their effect would have been anti-dilutive. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:
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.
The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2009:
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 Companys 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 borrowers creditworthiness on a case-by-case basis. Collateral held by the Company consists of a first or second mortgage on the borrowers property. The amount of collateral obtained is based upon an appraisal of the property.
At March 31, 2009, we had approximately $16.1 million in loan commitments, consisting of commitments to fund real estate loans. In addition to commitments to originate loans we had $6.1 million in unused letters of credit and approximately $32.7 million in unused lines of credit.
On February 26, 2009 the Board of Directors of the Company approved a quarterly dividend of $0.06 per share to stockholders of record as of March 31, 2009 and payable on April 10, 2009.
The Companys 2004 Stock Incentive Plan authorizes the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors of Jefferson Federal and Jefferson Bancshares. As of March 31, 2009, there were 61,440 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.
In connection with the Companys previously announced acquisition of State of Franklin Bancshares, Inc. (State of Franklin) on October 31, 2008, each outstanding State of Franklin non-qualified option with an exercise price of $13.50 or less was converted into an option to purchase shares of Jefferson Bancshares common stock with an expiration date of October 31, 2011.
The table below summarizes the status of the Companys stock option plans as of March 31, 2009.
The following information applies to options outstanding at March 31, 2009:
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 requires the Company to expense the unvested portion of options granted in 2004, which reduces net earnings by approximately $106 in fiscal year 2009. 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.
Effective July 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements and SFAS No. 159 The Fair Value Options for Financial Assets and Liabilities. SFAS No. 159, which was issued in February 2008, generally permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The statement also provides guidance on financial assets and liabilities that are not subject to fair value measurement. Upon adoption of SFAS No. 159, the Company did not elect to adopt the fair value option for any financial instruments.
SFAS No. 157, which was issued in September 2006, defines fair value, provides a framework for measuring fair value under U.S. Generally Accepted Accounting Principles and expands disclosures about fair value measurements. This Statement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.
In accordance with SFAS No. 157, when measuring fair value, the Company uses valuation techniques that are appropriate and consistently applied. A hierarchy is also established under the standard and is used to prioritize valuation inputs into the following three levels to determine fair value:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than the quoted prices included in Level 1.
Level 3: Unobservable inputs.
Following is a description of valuation methodologies used for assets recorded at fair value.
Investment Securities Available for Sale
Investment securities available-for-sale are recorded at fair value on at least a monthly basis. Fair value measurements are based upon independent pricing models or other model-based valuation techniques with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Level 2 securities include mortgage-backed securities issued by government-sponsored entities, municipal bonds, bonds issued by government agencies, and corporate debt securities.
The fair value measurements as of March 31, 2009, for investment securities available-for-sale are summarized below:
On October 31, 2008, the Company completed its previously announced acquisition of State of Franklin. State of Franklin was headquartered in Johnson City, Tennessee, which is approximately 70 miles northeast of the Companys headquarters. State of Franklin operated six offices in Johnson City and Kingsport with a branch under construction in Bristol, Tennessee. The primary reason for the acquisition of State of Franklin was to expand the Companys presence into upper East Tennessee. Under the terms of the merger agreement, the Company issued a combination of shares of Company common stock and cash for the outstanding common shares of State of Franklin. State of Franklin shareholders were given the option of receiving $10.00 in cash, or 1.1287 shares of Company common stock for each share of State of Franklin common stock, or a combination of stock and cash for each share of State of Franklin common stock, provided that 60% of the aggregate shares of State of Franklin common stock would be exchanged for Company common stock and subject to the allocation and proration formula set forth in the merger agreement. However, all State of Franklin common stockholders residing outside of Tennessee were only eligible to receive cash consideration. Based on this
structure, the aggregate merger consideration totaled approximately $4.3 million in cash and 736,000 shares of Company common stock. The Company also incurred $557,000 in merger costs that were capitalized into goodwill. The acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The assets acquired and liabilities assumed set forth below were recorded by the Company at their fair values at the acquisition date:
Intangible assets and purchase accounting fair value adjustments are amortized under various methods over the expected lives of the related assets and liabilities. Recorded goodwill will not be amortized and is not deductible for tax purposes, but will be tested for impairment at least annually.
The pro forma information below presents combined results of operations as if the acquisition had occurred at the beginning of the respective periods presented. The pro forma information includes adjustments for interest income on loans, deposits, and borrowings acquired, amortization of intangibles, depreciation expense on property acquired, and the related income tax effects. The 2009 pro forma information also includes the loss from the sale of Fannie Mae and Freddie Mac preferred stock realized by State of Franklin. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the acquisition been effected on the assumed dates.
As part of the State of Franklin acquisition, the Company acquired the State of Franklin Statutory Trust II (the Trust) and assumed the Trusts obligation with respect to certain capital securities described below. On December 13, 2006, State of Franklin issued $10,310 of junior subordinated debentures to the Trust, a Delaware business trust wholly owned by State of Franklin. The Trust (a) sold $10,000 of capital securities through its underwriters to institutional investors and upstreamed the proceeds to State of Franklin and (b) issued $310 of common securities to State of Franklin. The sole assets of the Trust are the $10,310 of junior subordinated debentures issued by State of Franklin. The securities are redeemable at par after January 30, 2012, and have a final maturity January 30, 2037. The interest is payable quarterly at a floating rate equal to 3-month LIBOR plus 1.7%.
Managements 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 thereto. For further information, refer to the financial statements and footnotes included in the Companys Annual Report on Form 10-K for the year ended June 30, 2008, which was filed with the Securities and Exchange Commission on September 11, 2008.
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 and using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential properties, as well as 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 Banks savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation (FDIC) through the Deposit Insurance Fund. Jefferson Federal 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 the Companys future performance. Forward-looking statements are preceded by terms such as expects, believes, anticipates, intends and similar expressions.
Managements 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 Companys 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, 2008 under Item 1A. 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 Nine Months Ended March 31, 2009 and 2008
Net income was $515,000, or $0.09 per diluted share, for the quarter ended March 31, 2009 compared to $495,000, or $0.09 per diluted share, for the corresponding quarter in 2008. For the nine months ended March 31, 2009, net income was $1.8 million compared to $753,000 for the same period in 2008. Financial results for the nine month period ended March 31, 2008 include a $637,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax assets related to the charitable contribution carryforward attributable to the Companys contribution to the Jefferson Federal Charitable Foundation in July 2003. Excluding this tax charge, core net earnings was $1.4 million, or $0.24 per diluted share for the nine month period ended March 31, 2008.
While core net earnings is not a measure of performance calculated in accordance with GAAP, the Company believes that this measure is important for the nine month period ended March 31, 2008 to convey to investors the Companys earnings for the period absent the $637,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax assets. The Company calculated its core net earnings for the nine month period ended March 31, 2008 by subtracting this $637,000 non-cash charge from net income for the period. Core net earnings should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data calculated in accordance with GAAP. Moreover, the manner in which the Company calculates core net earnings may differ from that of other companies reporting measures with similar names. Reconciliations of the Companys GAAP and core net earnings for the nine month period ended March 31, 2008 follows.
Net Interest Income
Net interest income before loan loss provision increased $1.7 million, or 57.0%, to $4.6 million for the quarter ended March 31, 2009 from the corresponding period in 2008. The interest rate spread and net interest margin for the quarter ended March 31, 2009 were 3.08% and 3.23%, respectively, compared to 3.03% and 3.76%, respectively, for the same period in 2008.
For the nine months ended March 31, 2009, net interest income before loan loss provision increased $2.8 million, or 31.7%, to $11.5 million from the corresponding period in 2008. The interest rate spread and net interest margin for the nine months ended March 31, 2009 were 3.11% and 3.39%, respectively, compared to 2.98% and 3.75%, respectively, for the same period in 2008.
The following table summarizes changes in interest income and expense for the three month periods ended March 31, 2009 and 2008:
The following table summarizes changes in interest income and expense for the nine month periods ended March 31, 2009 and 2008:
The following table summarizes average balances and average yields and costs for the three and nine months ended March 31, 2009 and March 31, 2008:
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.
Total interest income increased $2.8 million, or 54.6%, to $8.0 million for the three months ended March 31, 2009 and increased $3.7 million, or 22.8%, to $19.8 million for the nine months ended March 31, 2009 compared to the corresponding periods in 2008 primarily as a result of an increase in average interest-earning assets arising from the State of Franklin acquisition. Average interest-earning assets increased $263.5 million, or 84.5%, to $575.4 million for the three months ended March 31, 2009 and increased $143.0 million, or 45.8%, to $455.3 million for the nine months ended March 31, 2009. The increase in average earning assets for both the three and nine month periods was primarily the result of increases in average outstanding loans. The average yield on
earning assets declined by 104 basis points to 5.68% for the quarter ended March 31, 2009 and declined by 108 basis points to 5.80% for the nine months ended March 31, 2009 compared to the corresponding periods in 2008. The decline in the average yield on earning assets was primarily the result of lower yields on prime-based consumer and commercial loans resulting from decreases in the prime-lending rate during the period. In addition, the increase in nonaccrual loans during the quarter ended March 31, 2009 has negatively impacted interest income on loans and the net interest margin.
Total interest expense increased $1.2 million, or 51.6%, to $3.5 million for the three-month period ended March 31, 2009. The average balance of interest-bearing liabilities increased $292.1 million, or 116.9%, to $542.0 million, while the rate paid on interest-bearing liabilities declined 109 basis points. The Company experienced an increase of $228.8 million, or 106.8%, in average interest-bearing deposits primarily due to deposits assumed in connection with the State of Franklin acquisition. The average rate paid on deposits decreased 128 basis points to 2.33% due to decreases in short term interest rates. Average borrowings increased $55.1 million to $90.8 million due to the assumption of borrowings related to the State of Franklin acquisition, while the average rate paid on borrowings decreased 57 basis points to 3.56%.
For the nine months ended March 31, 2009, interest expense increased $900,000, or 12.3%, to $8.2 million with average interest-bearing liabilities increasing $157.1 million, or 62.7%, to $407.9 million and the average cost declining 120 basis points to 2.69%.
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. The provision for loan losses for the three-month period ended March 31, 2009 amounted to $300,000 compared to $243,000 for the comparable period in 2008. The increase in the provision for loan losses reflects managements evaluation of credit quality and current economic conditions. Nonperforming loans totaled $6.7 million at March 31, 2009 compared to $301,000 at June 30, 2008 and $386,000 at March 31, 2008. The increase in nonperforming loans is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well as the current economic environment. Nonperforming loans have increased due to deterioration in the residential housing market.
Noninterest income increased $267,000, or 70.6%, to $645,000 for the three months ended March 31, 2009 compared to $378,000 for the corresponding period in 2008. Service charges and fee income increased $143,000 to $366,000 for the three months ended March 31, 2009 due primarily to additional fee income generated following the acquisition of State of Franklin. Mortgage origination fee income increased $87,000, or 189.1%, to $133,000 for the three months ended March 31, 2009 due to a higher volume of loan originations related to refinancing.
Noninterest income increased $531,000, or 46.7%, to $1.7 million for the nine months ended March 31, 2009 compared to $1.1 million for the corresponding period in 2008. Service charges and fee income increased $473,000 to $1.0 million for the nine months ended March 31, 2009 due to the same trends outlined for three months ended March 31, 2009. Mortgage origination fee
income decreased $27,000, or 10.0%, to $242,000 for the nine months ended March 31, 2009 due to a lower volume of loan originations during the first two quarters of the current period. There was no gain on sale of foreclosed assets for the nine months ended March 31, 2009 compared to a $51,000 gain on sale of foreclosed assets for the corresponding period in 2008.
The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended March 31, 2009 compared to the same period in 2008.
The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the nine months ended March 31, 2009 compared to the same period in 2008.
Noninterest expense increased $1.7 million, or 76.3%, to $4.0 million for the three-month period ended March 31, 2009 and increased $2.5 million, or 34.0%, to $9.9 million for the nine months ended March 31, 2009 compared to the corresponding 2008 periods. Advertising expense decreased for the nine month period due to our decision to defer marketing initiatives to future periods. The increase in noninterest expense includes operations of six additional full-service offices obtained in connection with the acquisition of State of Franklin on October 31, 2008. In addition, noninterest expense includes the amortization of the core deposit intangible (CDI) resulting from the acquisition of State of Franklin. The CDI totaled $3.4 million at the acquisition
date and is being amortized over a 10 year period on an accelerated basis. The expense incurred for CDI amortization for the three and nine month periods ended March 31, 2009 was $147,000 and $246,000, respectively, compared to no CDI amortization expense for the same periods in 2008.
The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended March 31, 2009 compared to the same period in 2008.
The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the nine months ended March 31, 2009 compared to the same period in 2008.
Income tax expense for the three months ended March 31, 2009 was $354,000 compared to $255,000 for the same period in 2008. Income tax expense for the nine months ended March 31, 2009 was $848,000 compared to $1.4 million for the same period in 2008. Income tax expense for the nine month period in 2008 included the non-cash charge to deferred income tax expense to establish a valuation allowance against the charitable contribution carryforward. As previously mentioned, the carryforward is directly attributable to the contribution made to the Jefferson Federal Charitable Foundation in connection with the Companys public offering in July 2003.
Cash, Cash Equivalents and Interest-Earning Deposits
Cash, cash equivalents, and interest-earning deposits were $32.3 million at March 31, 2009 compared to $17.6 million at June 30, 2008. We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily liquidity needs.
Investment securities increased to $36.4 million at March 31, 2009 compared to $3.5 million at June 30, 2008. The increase was primarily the result of $31.8 million in investment securities acquired from State of Franklin. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $266,000, or $177,000 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.
Net loans increased $225.9 million to $508.4 million at March 31, 2009 compared to $282.5 million at June 30, 2008. The increase was primarily attributable to the State of Franklin acquisition. Our primary lending activity is the origination of loans secured by real estate. Real estate loans totaled $433.0 million, or 84.3% of total loans, at March 31, 2009 compared to $224.6
million, or 78.9% of total loans, at June 30, 2008. Commercial business loans increased $19.5 million, or 37.5%, to $71.5 million at March 31, 2009, while consumer loans increased $1.2 million, or 15.8%, to $9.2 million at that date.
Loans receivable, net, are summarized as follows:
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 have established a systematic methodology for determining the adequacy of the allowance for loan losses. The methodology utilizes a loan grading system which segments loans with similar risk characteristics. Management performs a monthly assessment of the allowance for loan losses based on the nature and volume of the loan portfolio, the amount of impaired and classified loans and historical loan loss experience. In addition, management considers other qualitative factors, including delinquency trends, economic conditions and loan considerations.
The FDIC and/or the Tennessee Department of Financial Institutions, as an integral part of its examination process, periodically reviews our allowance for loan losses. The FDIC and/or the Tennessee Department of Financial Institutions may require us to make additional provisions for loan losses based on judgments different from ours.
The allowance for loan losses was $4.8 million at March 31, 2009 compared to $1.8 million at June 30, 2008. The increase in the allowance for loan losses reflects the addition of the State of Franklin allowance for loan losses totaling $2.6 million. Our allowance for loan losses represented 0.94% of total loans and 72.69% of nonperforming loans at March 31, 2009 compared to 0.65% of total loans and 609.97% of nonperforming loans at June 30, 2008.
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 loans totaled $6.7 million at March 31, 2009 compared to $301,000 at June 30, 2008. The increase in nonperforming loans is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well as the current economic environment. Nonperforming loans have increased due to deterioration in the residential housing market. Foreclosed real estate amounted to $1.4 million at March 31, 2009 compared to $462,000 at June 30, 2008. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, 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.
Bank Owned Life Insurance
We hold bank owned life insurance (BOLI) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at March 31, 2009 was $6.1 million.
Total deposits increased $258.6 million to $482.1 million at March 31, 2009 due to increases in noninterest-bearing, NOW, savings, and certificates of deposit of $21.5 million, $28.5 million, $62.1 million, and $148.2 million, respectively. The increases were attributable to deposits assumed in connection with the State of Franklin acquisition.
Federal Home Loan Bank of Cincinnati (FHLB) advances increased $57.4 million to $90.4 million at March 31, 2009, compared to $33.0 million at June 30, 2008. The State of Franklin acquisition added $57.5 million of borrowed funds.
Stockholders equity amounted to $78.9 million at March 31, 2009 compared to $72.8 million at June 30, 2008. The increase in stockholders equity is primarily due to the issuance of 736,000 shares of common stock related to the State of Franklin acquisition. Stock repurchases for the three
months ended March 31, 2009 totaled 37,067 shares at an average cost of $7.34 per share. On November 13, 2008, the Company announced its third stock repurchase program pursuant to which up to 620,770 shares of the Companys outstanding common stock may be repurchased. At March 31, 2009, 545,894 shares remained eligible for repurchase under the current stock repurchase program. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders equity. At March 31, 2009, the adjustment to stockholders equity was a net unrealized loss of $177,000 compared to a net unrealized loss of $17,000 at June 30, 2008. The Company declared a $0.06 per share dividend to shareholders of record at March 31, 2009 totaling $404,000 that was payable on April 10, 2009.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the FHLB of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based on our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations.
Our most liquid assets are cash and cash equivalents and interest-earning assets. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2009, cash and cash equivalents totaled $9.0 million and interest-earning deposits totaled $24.3 million, compared to $2.4 million and $15.2 million, respectively, at June 30, 2008. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $36.4 million at March 31, 2009 compared to $3.5 million at June 30, 2008. In addition, at March 31, 2009, our advance agreement with the FHLB provided us with the ability to borrow a total of approximately $94.8 million from the FHLB of Cincinnati. In the three-month period ended March 31, 2009, FHLB advances increased $57.4 million to $90.4 million compared to $33.0 million at June 30, 2008 as a result of the State of Franklin acquisition.
We anticipate that we will have sufficient funds available to meet current loan commitments. At March 31, 2009, we had approximately $16.1 million in loan commitments, consisting of commitments to fund real estate loans. In addition to commitments to originate loans we had $6.1 million in unused letters of credit and approximately $32.7 million in unused lines of credit. At March 31, 2009, we had $209.0 million in certificates of deposit due within one year and $207.2 million in other deposits without specific maturities. 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 generally manage the pricing of our deposits to be competitive and to increase deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net increase in total deposits of $258.6 million during the nine-month period ended March 31, 2009 as a result of the State of Franklin acquisition.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers requests for funding and take the form of loan commitments, unused lines of credit, amounts due mortgagors on construction loans, amounts due on commercial loans and commercial letters of credit.
For the three months ended March 31, 2009, 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.
The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of March 31, 2009, Jefferson Federal met each of its capital requirements. The following table presents our capital position relative to our regulatory capital requirements at March 31, 2009 and June 30, 2008:
Under the capital regulations of the FDIC, Jefferson Federal must satisfy minimum leverage ratio requirements and risk-based capital requirements. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I) capital to average adjusted assets of at least 3.00% if a particular institution has the highest examination rating and at least 4.00% for all others. At March 31, 2009, Jefferson Federals leverage capital ratio was 6.16%. Based on this capital ratio, Jefferson Federal is considered well capitalized under the regulatory framework for prompt corrective action at March 31, 2009. The FDICs risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-weighted assets of at least 8.00%. Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At March 31, 2009, Jefferson Federal had a ratio of total capital to risk-weighted assets of 9.14%. Based on this capital ratio, Jefferson Federal is considered adequately capitalized under the regulatory
framework for prompt corrective action at March 31, 2009. Because Jefferson Federals total capital to risk-weighted assets has dropped below 10.00%, Jefferson Federal is required to apply for a waiver from the FDIC to obtain additional brokered deposits, roll over existing brokered deposits or offer rates of interest which are more than 75 basis points higher than the prevailing rates of interest offered on deposits by other insured depository institutions in its normal market area or a national rate specified in the FDICs regulations.
For a discussion of the Companys asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Companys portfolio equity, see Item 7A in the Companys Annual Report on Form 10-K for the year ended June 30, 2008. 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 Companys portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Companys asset and liability position since June 30, 2008.
The Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys 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 Companys 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 SECs rules and forms, and (2) is accumulated and communicated to the Companys 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 Companys internal control over financial reporting occurred during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
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 Federals 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 or the Bank.
There have been no material changes to the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended June 30, 2008.
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.