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Jefferson Bancshares 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.0
  5. Ex-32.0
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

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

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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)

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

At November 12, 2010, the registrant had 6,645,777 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

 

INDEX

 

          Page  
PART I. FINANCIAL INFORMATION   
Item 1.    Financial Statements   
   Consolidated Statements of Condition - Unaudited
Three months ended September 30, 2010 and year ended June 30, 2010
     3   
   Consolidated Statements of Earnings - Unaudited
Three months ended September 30, 2010 and 2009
     4   
   Consolidated Statements of Changes in Stockholders’ Equity – Unaudited
Three months ended September 30, 2010 and 2009
     5   
   Consolidated Statements of Cash Flows - Unaudited
Three months ended September 30, 2010 and 2009
     6   
   Notes to Consolidated Financial Statements – Unaudited      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      16   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      30   
Item 4.    Controls and Procedures      30   
PART II. OTHER INFORMATION   
Item 1.    Legal Proceedings      31   
Item 1A.    Risk Factors      31   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      32   
Item 3.    Defaults Upon Senior Securities      32   
Item 4.    (Removed and Reserved)      32   
Item 5.    Other Information      32   
Item 6.    Exhibits      33   
SIGNATURES   

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

JEFFERSON BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(Dollars in Thousands)

 

     September 30,
2010
    June 30,
2010
 
     (Unaudited)        

Assets

    

Cash and cash equivalents

   $ 4,846      $ 5,071   

Interest-earning deposits

     103,476        59,232   

Fed funds sold

     5,000        5,000   

Investment securities classified as available for sale, net

     45,849        62,989   

Federal Home Loan Bank stock

     4,735        4,735   

Bank owned life insurance

     6,450        6,390   

Loans receivable, net of allowance for loan losses of $8,748 and $9,649

     422,738        434,378   

Loans held-for-sale

     2,133        1,153   

Premises and equipment, net

     27,325        27,555   

Foreclosed real estate, net

     5,631        6,851   

Accrued interest receivable:

    

Investments

     246        256   

Loans receivable

     1,623        1,744   

Deferred tax asset

     8,397        8,524   

Core deposit intangible

     2,341        2,475   

Other assets

     3,023        4,417   
                

Total Assets

   $ 643,813      $ 630,770   
                

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest-bearing

   $ 41,898      $ 41,653   

Interest-bearing

     450,720        437,530   

Repurchase agreements

     1,366        944   

Federal Home Loan Bank advances

     85,023        84,834   

Subordinated debentures

     7,049        7,021   

Other liabilities

     1,003        2,265   

Accrued income taxes

     —          —     
                

Total liabilities

     587,059        574,247   
                

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; 9,182,372 shares issued and 6,648,355 shares outstanding at September 30, 2010 and 6,659,212 shares outstanding at June 30, 2010

     92        92   

Additional paid-in capital

     79,107        79,175   

Unearned ESOP shares

     (3,565     (3,673

Unearned compensation

     (1,036     (1,053

Accumulated other comprehensive income

     1,150        1,206   

Retained earnings

     12,282        12,023   

Treasury stock, at cost (2,534,017 and 2,523,160 shares)

     (31,276     (31,247
                

Total stockholders’ equity

     56,754        56,523   
                

Total liabilities and stockholders’ equity

   $ 643,813      $ 630,770   
                

See accompanying notes to financial statements.

 

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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)

 

     Three Months Ended
September 30,
 
     2010     2009  

Interest income:

    

Interest on loans receivable

   $ 6,282      $ 7,129   

Interest on investment securities

     482        745   

Other interest

     92        71   
                

Total interest income

     6,856        7,945   
                

Interest expense:

    

Deposits

     1,663        2,341   

Repurchase agreements

     2        2   

Advances from FHLB

     761        819   

Subordinated debentures

     82        88   
                

Total interest expense

     2,508        3,250   
                

Net interest income

     4,348        4,695   

Provision for loan losses

     —          300   
                

Net interest income after provision for loan losses

     4,348        4,395   
                

Noninterest income:

    

Mortgage origination fee income

     140        144   

Service charges and fees

     356        446   

Gain on sale of investments

     9        7   

Gain (loss) on sale of foreclosed real estate, net

     (347     (9

BOLI increase in cash value

     60        58   

Other

     172        252   
                

Total noninterest income

     390        898   
                

Noninterest expense:

    

Compensation and benefits

     1,741        1,988   

Occupancy expense

     364        548   

Equipment and data processing expense

     652        616   

DIF premiums

     162        160   

Advertising

     46        66   

Valuation adjustment and expenses on OREO

     531        85   

Other

     857        1,138   
                

Total noninterest expense

     4,353        4,601   
                

Earnings before income taxes

     385        692   
                

Income taxes:

    

Current

     —          152   

Deferred

     126        56   
                

Total income taxes

     126        208   
                

Net earnings

   $ 259      $ 484   
                

Net earnings per share, basic

   $ 0.04      $ 0.08   
                

Net earnings per share, diluted

   $ 0.04      $ 0.08   
                

See accompanying notes to financial statements.

 

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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended September 30, 2010 and 2009

(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, 2010

   $ 92       $ 79,175      ($ 3,673   ($ 1,053   $ 1,206      $ 12,023       ($ 31,247   $ 56,523   
                        

Comprehensive income:

                  

Net earnings

     —           —          —          —          —          259         —          259   

Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($35)

     —           —          —          —          (56     —           —          (56
                        

Total comprehensive income

     —           —          —          —          —          —           —          203   

Shares committed to be released by the ESOP

     —           (68     108        —          —          —           —          40   

Earned portion of stock grants

     —           —          —          17        —          —           —          17   

Purchase of common stock (22,775 shares)

     —           —          —          —          —          —           (29     (29
                                                                  

Balance at September 30, 2010

   $ 92       $ 79,107      ($ 3,565   ($ 1,036   $ 1,150      $ 12,282       ($ 31,276   $ 56,754   
                                                                  
                  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, 2009

   $ 92       $ 79,394      ($ 4,105   ($ 1,121   $ 150      $ 36,140       ($ 31,045   $ 79,505   
                        

Comprehensive income:

                  

Net earnings

     —           —          —          —          —          484         —          484   

Change in net unrealized gain (loss) on securities available for sale, net of taxes of $367

     —           —          —          —          592        —           —          592   
                        

Total comprehensive income

     —           —          —          —          —          —           —          1,076   

Shares committed to be released by the ESOP

     —           (46     108        —          —             —          62   

Earned portion of stock grants

     —             —          17        —          —           —          17   
                                                                  

Balance at September 30, 2009

   $ 92       $ 79,348      ($ 3,997   ($ 1,104   $ 742      $ 36,624       ($ 31,045   $ 80,660   
                                                                  

 

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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Three Months Ended  
     September 30,  
     2010     2009  

Cash flows from operating activities:

    

Net earnings

   $ 259      $ 484   

Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:

    

Allocated ESOP shares

     40        60   

Depreciation and amortization expense

     354        374   

Amortization of premiums (discounts), net on investment securities

     97        (356

Provision for loan losses

     —          300   

Amortization of deferred loan fees, net

     (68     (69

(Gain) on sale of investment securities

     (9     (7

(Gain) loss on sale of foreclosed real estate, net

     347        9   

Deferred tax benefit

     126        56   

Originations of mortgage loans held for sale

     (5,632     (4,191

Proceeds from sale of mortgage loans

     4,652        4,128   

Increase in cash value of life insurance

     (60     (58

Earned portion of MRP

     17        17   

Decrease (increase) in:

    

Accrued interest receivable

     131        (7

Other assets

     1,394        832   

Increase (decrease) in other liabilities and accrued income taxes

     (1,262     (546
                

Net cash provided by (used for) operating activities

     386        1,026   
                

Cash flows used for investing activities:

    

Loan originations, net of principal collections

     11,645        17,233   

Investment securities classifed as available-for-sale:

    

Proceeds from maturities, calls and prepayments

     28,502        2,021   

Proceeds from sale

     756        —     

Purchase of securities

     (12,298     (19,600

Purchase of premises and equipment

     (48     (52

Proceeds from sale of (additions to) foreclosed real estate, net

     933        1,188   
                

Net cash provided by (used for) investing activities

     29,490        790   
                

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     13,451        (8,874

Net increase in repurchase agreements

     422        690   

Proceeds from advances from FHLB

     309        —     

Repayment of FHLB advances

     (10     (28

Purchase of treasury stock

     (29     —     

Dividends paid

     —          (402
                

Net cash provided by (used for) financing activities

     14,143        (8,614
                

Net increase (decrease) in cash, cash equivalents and interest-earning deposits

     44,019        (6,798

Cash, cash equivalents and interest-earning deposits at beginning of period

     69,303        44,108   
                

Cash, cash equivalents and interest-earning deposits at end of period

   $ 113,322      $ 37,310   
                

Supplemental disclosures of cash flow information:

    

Cash paid during period for:

    

Interest on deposits

   $ 1,671      $ 2,392   

Interest on FHLB advances

   $ 871      $ 819   

Interest on other borrowings

   $ 56      $ 90   

Income taxes

   $ 0      $ 50   

Real estate acquired in settlement of loans

   $ 100        245   

See accompanying notes to financial statements.

 

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Table of Contents

 

Notes To Consolidated Financial Statements

 

(1) Basis of Presentation

The condensed 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 accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. The results of operations for the period ended September 30, 2010 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, 2010, which was filed with the Securities and Exchange Commission on September 24, 2010. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted. The Company has adopted FASB ASC Topic 855 for Subsequent Events which did not significantly change the subsequent events the Company reports either through recognition or disclosure.

 

(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

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) total risk-based capital ratio of less than 8.0%; (ii) 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 in which the dividend would exceed the total of

 

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its net income for that year, combined with its retained net income for the preceding two years, without the prior approval of the Commissioner of the Tennessee Department of Financial Institutions.

 

(5) Earnings Per Common Share

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, 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 September 30, 2010, stock options to purchase 551,490 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:

 

     Weighted-Average Shares
Outstanding for the
Three Months Ended
September 30,
 
     2010      2009  

Weighted average number of common shares used in computing basic earnings per common share

     6,205,582         6,216,515   

Effect of dilutive stock options

     —           —     
                 

Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming dilution

     6,205,582         6,216,515   
                 

 

(6) Accounting by Creditors for Impairment of a Loan and Allowance for Loan Losses

Impairment of loans having a recorded investment of $41.6 million at September 30, 2010 and an average investment of $38.4 million during the three month period ended September 30, 2010 has been recognized. The valuation allowance related to impaired loans was $6.2 million at September 30, 2010. Total nonaccrual loans at September 30, 2010 were approximately $20.6 million. Interest income from impaired loans included in the Company’s interest income amounted to approximately $437,000 for the three months ended September 30, 2010.

 

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The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2010:

 

     Allowance for Loan Losses
(Dollars in thousands)
 

Balance at June 30, 2010

   $ 9,649   

Provision for loan losses

     —     

Charge-offs

     (909

Recoveries

     8   
        

Balance at September 30, 2010

   $ 8,748   
        

 

(7) Financial Instruments With Off-Balance Sheet Risk

Jefferson Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments. The Company minimizes this risk by evaluating each borrower’s creditworthiness on a case-by-case basis. Collateral held by the Company consists of a first or second mortgage on the borrower’s property. The amount of collateral obtained is based upon an appraisal of the property.

At September 30, 2010, we had approximately $14.2 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $5.1 million in unused letters of credit and approximately $32.7 million in unused lines of credit.

 

(8) Dividend Declaration

On February 2, 2010, the Company announced that the Board of Directors had voted to suspend the payment of the quarterly cash dividend on the Company’s common stock in an effort to conserve capital.

 

(9) Stock Incentive Plans

The Company maintains stock-based benefit plans under which certain employees and directors are eligible to receive stock grants or options. Under the 2004 Stock-Based Benefit Plan, a maximum of 279,500 shares may be granted as restricted stock and a maximum of 698,750 shares may be issued through the exercise of nonstatutory or incentive stock options. The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years.

Restricted stock grants aggregating 45,000 shares and having a fair value of $597,000 were awarded in 2006. Restrictions on the grants lapse in annual increments over five years. The market value as of the grant date of the restricted stock grants is charged to expense as the restrictions lapse.

 

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In connection with the Company’s 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 Company’s stock option plans as of September 30, 2010.

 

     Three Months Ended
September 30, 2010
 
     Shares      Weighted-
average
exercise price
 

Outstanding at beginning of period

     551,490       $ 12.74   

Granted during the three-month period

     —        

Options forfeited

     —        

Options exercised

     —        

Outstanding at September 30, 2010

     551,490       $ 12.74   

Options exercisable at September 30, 2010

     551,490       $ 12.74   

The following information applies to options outstanding at September 30, 2010:

 

Number outstanding

     551,490   

Range of exercise prices

   $ 10.00 - $13.69   

Weighted-average exercise price

   $ 12.74   

Weighted-average remaining contractual life

     2.58   

Number of options remaining for future issuance

     331,909   

The estimated fair value of stock options at grant date was determined using the Black-Scholes option-pricing model based on market data as of January 29, 2004. An 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.

 

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(10) Investment Securities

Investment securities are summarized as follows:

At September 30, 2010

 

     Amortized
Cost
    Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 
     (Dollars in thousands)  

Securities available-for-sale

         

Debt securities:

         

Federal agency

   $ 14,973      $ 74       $ (12   $ 15,035   

Mortgage-backed

     22,314        2,646         (127     24,833   

Municipals

     5,251        219         —          5,470   

Other Securities

     1,448        —           (937     511   
                                 

Total securities available- for-sale

   $ 43,986      $ 2,939       $ (1,076   $ 45,849   
                                 

Weighted-average rate

     3.70       
               

Pledged at September 30, 2010

     24,926          

At June 30, 2010

 

     Amortized
Cost
    Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 
     (Dollars in thousands)  

Securities available-for-sale

         

Debt securities:

         

Federal agency

   $ 31,975      $ 132       $ —        $ 32,107   

Mortgage-backed

     21,812        2,643         (142     24,313   

Municipals

     5,650        126         (12     5,764   

Other Securities

     1,597        183         (975     805   
                                 

Total securities available- for-sale

   $ 61,034      $ 3,084       $ (1,129   $ 62,989   
                                 

Weighted-average rate

     3.73       
               

Pledged at June 30, 2010

     9,574          

Securities with unrealized losses not recognized in income are as follows:

 

     Less than 12 months     12 months or more     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

September 30, 2010

               

Federal agency securities

   $ 2,134       $ (12   $ —         $ —        $ 2,134       $ (12

Mortgage-backed securities

     10         (58     1,120         (69     1,130         (127

Municipal securities

     —           —          —           —          —           —     

Other securities

     —           —          508         (937     508         (937
                                                   
   $ 2,144       $ (70   $ 1,628       $ (1,006   $ 3,772       $ (1,076
                                                   

The Company evaluates its securities with significant declines in fair value on a quarterly basis to determine whether they should be considered temporarily or other than

 

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temporarily impaired. The company has recognized all of the foregoing unrealized losses in other comprehensive income. The company neither has the intent to sell nor is forecasting the need or requirement to sell the securities before their anticipated recovery.

Maturities of debt securities at September 30, 2010, are summarized as follows:

 

     Amortized
Cost
     Fair
Value
     Weighted
Average
Yield
 

Within 1 year

     525         529         3.42

Over 1 year through 5 years

     10,087         10,179         1.44

After 5 years through 10 years

     8,976         9,111         1.73

Over 10 years

     24,398         26,030         5.37
                          
     43,986         45,849         3.70
                          

 

(11) Fair Value Disclosures

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or 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. 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 used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

 

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Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

The following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities Available for Sale

Level 2 investment securities classified as “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 that 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. Level 3 investment securities classified as “available-for-sale” are recorded at fair value on at least a semi-annual basis. Fair value measurements are based upon independent pricing models based upon unobservable inputs which require significant management judgment or estimation. Level 3 includes certain mortgage-backed securities and other debt securities.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2010, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair

 

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value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:

 

     September 30, 2010  
                          Total Carrying
Amount in
Statement of
    

Assets/Liabilities

Measured at

 

Description

   Level 1      Level 2      Level 3      Financial Condition      Fair Value  

Securities available for sale

     —         $ 38,981       $ 6,868       $ 45,849       $ 45,849   

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.

 

     September 30, 2010  
                          Total Carrying         
                          Amount in      Assets/Liabilities  
                          Statement of      Measured at  

Description

   Level 1      Level 2      Level 3      Financial Condition      Fair Value  

Impaired Loans

     —           —         $ 35,397       $ 35,397       $ 35,397   

 

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The carrying value and estimated fair value of the Company’s financial instruments are as follows:

 

     September 30, 2010     June 30, 2010  
     Carrying     Fair     Carrying     Fair  
     Amount     Value     Amount     Value  

Financial assets:

        

Cash and due from banks and interest-earning deposits with banks

   $ 113,322      $ 113,322      $ 69,303      $ 69,303   

Available-for-sale securities

     45,849        45,849        62,989        62,989   

Federal Home Loan Bank stock

     4,735        4,735        4,735        4,735   

Loans receivable

     431,922        433,002        444,474        445,655   

Accrued interest receivable

     1,869        1,869        2,000        2,000   

Loans held-for-sale

     2,133        2,133        1,153        1,153   

Financial liabilities:

        

Deposits

     (492,618     (485,376     (479,183     (471,821

Borrowed funds

     (85,023     (88,284     (85,778     (87,972

Subordinated debentures

     (7,049     (5,622     (7,021     (5,630

Off-balance sheet assets (liabilities):

        

Commitments to extend credit

       14,174        —          18,023   

Unused letters of credit

       5,128        —          5,320   

Unused lines of credit

       32,706        —          36,192   

 

(12) Business Combination

On October 31, 2008, the Company completed the acquisition of State of Franklin. State of Franklin was headquartered in Johnson City, Tennessee, which is approximately 70 miles northeast of the Company’s headquarters. State of Franklin operated six offices in Johnson City and Kingsport, Tennessee with a branch under construction in Bristol, Tennessee. The primary reason for the acquisition of State of Franklin was to expand the Company’s 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 generally accepted accounting principles for business combinations.

 

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(13) Subordinated Debt

As part of the State of Franklin acquisition, the Company acquired State of Franklin Statutory Trust II (the “Trust”) and assumed the Trust’s obligation with respect to certain capital securities described below. On December 13, 2006, State of Franklin issued $10.3 million of junior subordinated debentures to the Trust, a Delaware business trust wholly owned by State of Franklin. The Trust (a) sold $10.0 million of capital securities through its underwriters to institutional investors and upstreamed the proceeds to State of Franklin and (b) issued $310,000 of common securities to State of Franklin. The sole assets of the Trust are the $10.3 million of junior subordinated debentures issued by State of Franklin. The securities are redeemable at par after January 30, 2012, and have a final maturity of January 30, 2037. The interest is payable quarterly at a floating rate equal to 3-month LIBOR plus 1.7%.

 

(14) Subsequent Events

The company has evaluated subsequent events for potential recognition and disclosure for the three months ended September 30, 2010 through November 8, 2010. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.

 

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 thereto. 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, 2010, which was filed with the Securities and Exchange Commission on September 24, 2010.

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.

 

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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 Bank’s 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 Company’s 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, 2010 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 Months Ended September 30, 2010 and 2009

Net Income

Net income for the three months ended September 30, 2010 was $259,000, or $0.04 per diluted share, compared to net income of $484,000, or $0.08 per diluted share, for the corresponding period in 2009. The decrease in net income for the quarter ended September 30, 2010 was primarily the result of write-downs and losses on other real estate owned (“OREO”).

 

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     Three Months Ended
September 30,
 
     2010     2009  
     (Dollars in thousands,
except per share data)
 

Net earnings

   $ 259      $ 484   

Net earnings per share, basic

   $ 0.04      $ 0.08   

Net earnings per share, diluted

   $ 0.04      $ 0.08   

Return on average assets (annualized)

     0.16     0.29

Return on average equity (annualized)

     1.83     2.39

Net Interest Income

Net interest income before loan loss provision decreased $347,000 to $4.3 million for the quarter ended September 30, 2010 compared to $4.7 million for the same period in 2009. The interest rate spread and net interest margin for the quarter ended September 30, 2010 were 3.00% and 3.08%, respectively, compared to 3.17% and 3.31%, respectively, for the same period in 2009.

The following table summarizes changes in interest income and expense for the three month periods ended September 30, 2010 and 2009:

 

     Three Months
Ended
September 30,
              
     2010      2009      $ Change     % Change  
     (Dollars in thousands)               

Interest income:

          

Loans

   $ 6,282       $ 7,129       ($ 847     (11.9 %) 

Investment securities

     482         745         (263     (35.3 %) 

Interest-earning deposits

     39         12         27        225.0

FHLB stock

     53         59         (6     (10.2 %) 
                            

Total interest income

     6,856         7,945         (1,089     (13.7 %) 
                            

Interest expense:

          

Deposits

     1,663         2,341         (678     (29.0 %) 

Repurchase Agreements

     2         2         —          0.0

Borrowings

     761         819         (58     (7.1 %) 

Subordinated Notes & Debentures

     82         88         (6     (6.8 %) 
                            

Total interest expense

     2,508         3,250         (742     (22.8 %) 
                            

Net interest income

   $ 4,348       $ 4,695       ($ 347     (7.4 %) 
                            

 

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The following table summarizes average balances and average yields and costs for the three months ended September 30, 2010 and 2009. For purposes of this table nonaccrual loan balances and related accrued interest income have been excluded.

 

     Three Months Ended September 30,  
     2010     2009  
     Average
Balance
     Yield/
Cost
    Average
Balance
     Yield/
Cost
 
     (Dollars in thousands)  

Loans

   $ 418,199         5.96   $ 489,673         5.78

Investment securities

     54,624         3.64     42,826         7.07

Interest-earning deposits

     84,451         0.18     39,884         0.12

FHLB stock

     4,735         4.44     4,735         4.94

Deposits

     443,177         1.49     432,946         2.15

Total borrowings

     86,299         3.51     91,380         3.56

Subordinated debentures

     7,032         4.63     6,923         5.04

The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

     Three Months
Ended September 30,

2010 Compared to 2009
 
     Increase (Decrease)
Due To
       
     Volume     Rate     Net  
     (In thousands)  

Interest income:

      

Loans receivable

   ($ 883   $ 36      ($ 847

Investment securities

     (47     (216   ($ 263

Daily interest-earning deposits and other interest-earning assets

     20        1      $ 21   
                        

Total interest-earning assets

     (910     (179     (1,089
                        

Interest expense:

      

Deposits

     56        (734   ($ 678

Total borrowings

     (45     (19   ($ 64
                        

Total interest-bearing liabilities

     11        (753     (742
                        

Net change in interest income

   ($ 921   $ 574      ($ 347
                        

Total interest income decreased $1.1 million, or 13.7%, to $6.9 million for the three months ended September 30, 2010 primarily due to a change in the mix of average earning assets. The average volume of earning assets decreased $2.4 million to $562.0 million for the quarter ended September 30, 2010 while the average yield on earning assets declined 75 basis points to 4.85% compared to the same period in 2009.

 

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Interest on loans decreased $847,000, or 11.9%, to $6.3 million for the three months ended September 30, 2010 primarily due to a lower average balance of loans. The average balance of loans decreased $58.8 million, or 12.3%, to $418.2 million, due to the combination of reduced loan demand, normal paydowns on existing loans, transfers to OREO and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Bank’s market areas. The average yield on loans was 5.96% for the three months ended September 30, 2010 compared to 5.93% for the same period in 2009.

Interest on investment securities decreased $263,000 to $482,000 for the three months ended September 30, 2010 due primarily to a lower average yield on investment securities. The average yield on investment securities decreased to 3.64% for the three months ended September 30, 2010 compared to 7.07% for the same period in 2009 due to lower market interest rates and changes in the composition of the portfolio. A portion of the proceeds from called securities has been reinvested in similar securities but with lower yields. The average balance of investment securities increased $11.8 million, to $54.6 million, during the three months ended September 30, 2010 compared to the same period in 2009 period due to the investment of a portion of the Company’s excess liquidity into short- and intermediate-term U.S. agency securities.

Total interest expense decreased $742,000 to $2.5 million for the three months ended September 30, 2010. The average balance of interest-bearing liabilities increased $5.3 million, to $536.5 million during the quarter ended September 30, 2010, while the rate paid on interest-bearing liabilities declined 57 basis points to 1.85%. The Company experienced an increase in average interest-bearing deposits of $10.2 million, or 2.4%, to $443.2 million, primarily due to an increase in the average balance of transaction accounts more than offsetting a decrease in the average balance of time deposits. The average rate paid on deposits decreased 66 basis points to 1.49% for the three months ended September 30, 2010, primarily as a result of declining market interest rates as well as a shift in the mix of deposits towards more transaction accounts. Average FHLB borrowings decreased slightly to $85.1 million for the three months ended September 30, 2010 compared to $90.3 million for the three months ended September 30, 2009, while the average rate paid on borrowings remained stable at 3.60%.

Provision for Loan Losses

There was no provision for loan losses for the quarter ended September 30, 2010, compared to $5.5 million for the quarter ended June 30, 2010 and $300,000 for quarter ended September 30, 2009. During the fourth quarter of fiscal 2010, management took aggressive action to increase the allowance for loan losses following its quarterly analysis of the loan portfolio, including its analysis of net charge-offs, delinquency levels, nonperforming assets, nonaccrual loans and other subjective factors which identified additional weaknesses in the loan portfolio. The determination not to record a provision for loan losses for the quarter ended September 30, 2010 reflects stabilizing asset quality metrics.

 

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Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in the nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors. In addition, the Federal Deposit Insurance Corporation and Tennessee Department of Financial Institutions, as an integral part of their examination process, periodically review our allowance for loan losses and may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Noninterest Income

Noninterest income decreased $508,000 to $390,000 for the three months ended September 30, 2010 compared to $898,000 for the corresponding period in 2009 due primarily to an increase in loss on sale of foreclosed property. Loss on sale of foreclosed property increased $338,000 to $347,000 for the three months ended September 30, 2010. Service charges and fees declined $90,000, or 20.2% primarily due to decreases in late fees and overdraft fees. Management believes fee revenue decreased due to heightened customer awareness of fees and a resultant increased management of account balances in the current economic downturn. In addition, recently enacted legislation requiring customer opt-in for point-of-sale overdrafts became effective in mid-August 2010. This legislation may have a negative impact on future noninterest income.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended September 30, 2010 compared to the same period in 2009.

 

     Three Months Ended              
     September 30,     $     %  
     2010     2009     Change     Change  
     (Dollars in thousands)              

Noninterest income:

        

Mortgage origination fee income

   $ 140      $ 144      ($ 4     (2.8 %) 

Service charges and fees

     356        446        (90     (20.2 %) 

Gain on sale of investment securities

     9        7        2        28.6

Gain (loss) on sale of foreclosed real estate, net

     (347     (9     (338     3755.6

BOLI increase in cash value

     60        58        2        3.4

Other

     172        252        (80     (31.7 %) 
                          

Total noninterest income

   $ 390      $ 898      ($ 508     (56.6 %) 
                          

Noninterest Expense

Noninterest expense decreased $248,000, or 5.4%, to $4.4 million for the three months ended September 30, 2010 compared to the corresponding 2009 period. Compensation expense decreased $247,000, or 12.4%, to $1.7 million for the three months ended September 30, 2010 compared to the same period in 2009 due to an overall reduction in number of employees. The number of full-time equivalent employees was 130 at September 30, 2010 compared to 157 for

 

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the same period in 2009. The number of employees decreased from period to period primarily due to the integration of the State of Franklin acquisition. Expenses related to other real estate owned increased to $531,000 for the three months ended September 30, 2010 due to valuation adjustments and expenses related to the maintenance and disposition of foreclosed real estate. Occupancy expense decreased $184,000 to $364,000 due to lower leasehold expenses for the three months ended September 30, 2010.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended September 30, 2010 compared to the same period in 2009.

 

     Three Months Ended               
     September 30,      $     %  
     2010      2009      Change     Change  
     (Dollars in thousands)               

Noninterest expense:

          

Compensation and benefits

   $ 1,741       $ 1,988       ($ 247     (12.4 %) 

Occupancy expense

     364         548         (184     (33.6 %) 

Equipment and data processing expense

     652         616         36        5.8

Deposit insurance premiums

     162         160         2        1.3

Advertising

     46         66         (20     (30.3 %) 

Valuation adjustment and expenses on OREO

     531         85         446        524.7

Other

     857         1,138         (281     (24.7 %) 
                            

Total noninterest expense

   $ 4,353       $ 4,601       ($ 248     (5.4 %) 
                            

Income Taxes

Income tax expense for the three months ended September 30, 2010 was $126,000 compared to $208,000 for the same period in 2009 due to lower taxable income.

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits increased $44.0 million to $113.3 million at September 30, 2010 compared to $69.3 million at June 30, 2010 due to decreases in loan and investment balances combined with an increase in deposits. Management has maintained higher than usual levels of liquidity during the current economic downturn. The higher level of interest earning deposits at September 30, 2010 also reflects the anticipation of maturing FHLB advances totaling $20.0 million during the second quarter of fiscal 2011.

Investments

The Company’s investment security portfolio primarily consists of U.S. Government agency obligations, mortgage-backed securities issued by government-sponsored entities, and municipal bonds. Investment securities decreased to $45.8 million at September 30, 2010 compared to $63.0 million at June 30, 2010. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $1.9 million, or $1.1 million net of taxes. The $17.1 million decrease in the investment portfolio is due to calls of U.S. agency securities exceeding new purchases.

 

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Loans

Net loans decreased $11.6 million to $422.7 million at September 30, 2010 compared to $434.4 million at June 30, 2010 due primarily to reduced loan demand combined with normal paydowns on existing loans, transfers to OREO and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Bank’s market areas.

 

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Loans receivable, net, are summarized as follows:

 

     At
September 30,
2010
    At
June 30,
2010
             
     Amount     Percent
of Portfolio
    Amount     Percent
of Portfolio
    $
Change
    %
Change
 
     (Dollars in thousands)              

Real estate loans:

            

Residential one-to four-family

   $ 137,310        31.8   $ 136,430        30.7   $ 880        0.6

Home equity line of credit

     20,602        4.8     19,768        4.4     834        4.2

Commercial

     140,882        32.6     140,024        31.5     858        0.6

Multi-family

     18,199        4.2     16,536        3.7     1,663        10.1

Construction

     9,789        2.3     21,073        4.7     (11,284     (53.5 %) 

Land

     34,478        8.0     37,135        8.4     (2,657     (7.2 %) 
                                          

Total real estate loans

     361,260        83.6     370,966        83.5     (9,706     (2.6 %) 
                                          

Commercial business loans

     64,437        14.9     66,699        15.0     (2,262     (3.4 %) 
                                          

Consumer loans:

            

Automobile loans

     1,829        0.4     1,848        0.4     (19     (1.0 %) 

Mobile home loans

     20        0.0     23        0.0     (3     (13.0 %) 

Loans secured by deposits

     1,401        0.3     1,372        0.3     29        2.1

Other consumer loans

     2,975        0.7     3,566        0.8     (591     (16.6 %) 
                                          

Total consumer loans

     6,225        1.4     6,809        1.5     (584     (8.6 %) 
                                          

Total gross loans

     431,922        100.0     444,474        100.0     (12,552     (2.8 %) 
                        

Less:

            

Deferred loan fees, net

     (436       (447       11        (2.5 %) 

Allowance for losses

     (8,748       (9,649       901        (9.3 %) 
                              

Loans receivable, net

   $ 422,738        $ 434,378        $ (11,640     (2.7 %) 
                              

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.

 

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The FDIC and the Tennessee Department of Financial Institutions, as an integral part of their examination process, periodically review 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 $8.7 million at September 30, 2010 compared to $9.6 million at June 30, 2010. Our allowance for loan losses represented 2.03% of total loans and 42.43% of nonperforming loans at September 30, 2010 compared to 2.17% of total loans and 51.38% of nonperforming loans at June 30, 2010.

 

     Three Months Ended
September 30,
 
     2010     2009  
     (Dollars in thousands)  

Balance at beginning of period

   $ 9,649      $ 4,722   

Provision for loan losses

     —          300   

Recoveries

     8        25   

Charge-offs

     (909     (452
                

Net charge-offs

     (901     (427
                

Allowance at end of period

   $ 8,748      $ 4,595   
                

Net charge-offs to average outstanding loans during the period, annualized

     0.82     0.35

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. Nonaccrual loans totaled $20.6 million at September 30, 2010 compared to $18.8 million at June 30, 2010. The increase in nonaccrual loans is primarily due to an increase in both nonaccrual residential and commercial real estate loans. Foreclosed real estate amounted to $5.6 million at September 30, 2010 compared to $6.9 million at June 30, 2010. 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 initial writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings. Foreclosed real estate at September 30, 2010 consisted of vacant land totaling $964,000, residential property totaling $3.1 million and commercial real estate totaling $1.5 million.

 

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     September 30,
2010
    June 30,
2010
 
     (Dollars in thousands)  

Nonaccruing loans:

    

Residential real estate

   $ 12,124      $ 10,750   

Commercial real estate

     6,968        6,617   

Commercial business

     1,453        1,309   

Consumer

     73        103   
                

Total nonaccrual loans

     20,618        18,779   

Nonaccrual investments

     509        731   

Real estate owned

     5,631        6,865   

Other repossessed assets

     —          —     
                

Total nonperforming assets

   $ 26,758      $ 26,375   
                

Total nonperforming assets to total assets

     4.16     4.18

Total nonperforming loans to total loans

     4.77     4.22

Allowance for loan losses to total nonperforming loans

     42.43     51.38

Bank Owned Life Insurance

We hold bank owned life insurance (“BOLI”) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at September 30, 2010 was $6.5 million.

Deposits

Total deposits increased $13.4 million to $492.6 million at September 30, 2010 due primarily to customer preference for higher yielding time deposits during a period of economic uncertainty. Time deposits increased $10.2 million, or 4.3%, to $250.4 million at September 30, 2010.

 

     September 30,
2010
     June 30,
2010
     $ Change     % Change  
     (Dollars in thousands)               

Noninterest-bearing accounts

   $ 41,898       $ 41,653       $ 245        0.6

NOW accounts

     56,257         58,257         (2,000     (3.4 %) 

Savings accounts

     86,328         82,830         3,498        4.2

Money market accounts

     57,720         56,247         1,473        2.6

Certificates of deposit

     250,415         240,196         10,219        4.3
                            

Total

   $ 492,618       $ 479,183       $ 13,435        2.8
                            

Advances

Federal Home Loan Bank of Cincinnati (“FHLB”) advances remained virtually unchanged at $85.0 million at September 30, 2010, compared to $84.8 million at June 30, 2010.

 

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Stockholders’ Equity

Stockholders’ equity amounted to $56.8 million at September 30, 2010 compared to $56.5 million at June 30, 2010. On November 13, 2008, the Company announced its third stock repurchase program pursuant to which up to 620,770 shares of the Company’s outstanding common stock may be repurchased. At September 30, 2010, 454,118 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 September 30, 2010, the adjustment to stockholders’ equity was a net unrealized gain of $1.1 million compared to a net unrealized gain of $1.2 million at June 30, 2010.

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.

Investments in liquid assets are regularly adjusted 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 marketable investment securities that are not pledged as collateral. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At September 30, 2010, cash and cash equivalents totaled $113.3 million compared to $69.3 million at June 30, 2010. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $45.8 million at September 30, 2010 compared to $63.0 million at June 30, 2010. At September 30, 2010, approximately $24.9 million of the investment portfolio was pledged as collateral for municipal deposits, FHLB borrowings and repurchase agreements. At September 30, 2010, FHLB advances were $85.0 million and represented full utilization of the Company’s borrowing capacity with the FHLB. Additional eligible collateral may be transferred to the FHLB to increase borrowing capacity. The Company also maintains federal funds lines with two banks totaling $20.0 million under which no borrowings were outstanding. In addition, the Company had approximately $10.9 million of unused borrowing capacity with the Federal Reserve Bank of Atlanta at September 30, 2010.

The Company anticipates that it will have sufficient funds available to meet current loan commitments. At September 30, 2010, we had approximately $14.2 million in loan commitments, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $5.1 million in unused letters of credit and approximately $32.7 million in unused lines of credit. At September 30, 2010, we had $205.2 million in certificates

 

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of deposit due within one year and $242.2 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 $13.4 million during the three-month period ended September 30, 2010.

Jefferson Bancshares is a separate entity and apart from Jefferson Federal and must provide for its own liquidity. In addition to its operating expenses, Jefferson Bancshares is responsible for the payment of dividends declared for its shareholders, and interest and principal on outstanding debt. At times, Jefferson Bancshares has repurchased and retired outstanding shares of its stock pursuant to share repurchase programs adopted by the Board of Directors. Substantially all of Jefferson Bancshares’ revenues are obtained from dividends. Payment of such dividends to Jefferson Bancshares by Jefferson Federal is limited under Tennessee law. The amount that can be paid in any calendar year, without prior approval from the Tennessee Department of Financial Institutions, cannot exceed the total of Jefferson Federal’s net income for the year combined with its retained net income for the preceding two years. Jefferson Bancshares believes that such restriction will not have an impact on its ability to meet its ongoing cash obligations.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit, amounts due mortgagors on construction loans, amounts due on commercial loans and commercial letters of credit.

For the three months ended September 30, 2010, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

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Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of September 30, 2010, Jefferson Federal met each of its capital requirements. The following table presents our capital position relative to our regulatory capital requirements at September 30, 2010 and June 30, 2010:

 

                                      To Be Well  
                                      Capitalized Under  
                  For Capital     Prompt Corrective  
     Actual     Adequacy Purposes     Action Provisions  
     Amount      Ratio     Amount             Ratio     Amount             Ratio  
     (Dollars in thousands)  

At September 30, 2010

                     

Total Risk-Based Capital

                     

(To Risk Weighted Assets)

   $ 52,788         12.07   $ 34,982       ³           8.0   $ 43,728       ³           10.0

Tier 1 Capital

                     

(To Risk Weighted Assets)

     47,281         10.81     17,491       ³           4.0     26,237       ³           6.0

Tier 1 Capital

                     

(To Average Assets)

     47,281         7.54     25,091       ³           4.0     31,364       ³           5.0

At June 30, 2010

                     

Total Risk-Based Capital

                     

(To Risk Weighted Assets)

   $ 52,352         11.61   $ 36,073       ³           8.0   $ 45,092       ³           10.0

Tier 1 Capital

                     

(To Risk Weighted Assets)

     46,666         10.35     18,037       ³           4.0     27,055       ³           6.0

Tier 1 Capital

                     

(To Average Assets)

     46,666         7.29     25,609       ³           4.0     32,011       ³           5.0

Under the capital regulations of the FDIC, Jefferson Federal must satisfy various 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 September 30, 2010, Jefferson Federal’s leverage capital ratio was 7.54%. The FDIC’s 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 September 30, 2010, Jefferson Federal had a ratio of total capital to risk-weighted assets of 12.07%. At September 30, 2010, the Bank met the minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. 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, 2010.

 

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 or the Bank.

 

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, 2010.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

                      ( d )  
                      Maximum Number  
                ( c )     (or Approximate  
                Total Number of     Dollar Value)  
    (a)     (b)     Shares (or Units)     of Shares (or  
    Total Number     Average     Purchased as     Units) That May  
    of Shares     Price Paid     Part of Publicly     Yet Be Purchased  
    (or units)     per Share     Announced Plans     Under the Plans  
Period   Purchased     (or Unit)     or Progams     or Programs  

Month #1

       

July 1, 2010 through July 31, 2010

    5,000      $ 3.99        5,000        459,975 (1) 

Month #2

       

August 1, 2010 through August 31, 2010

    5,857      $ 3.65        5,857        454,118 (1) 

Month #3

       

September 1, 2010 through September 30, 2010

    —        $ —          —          454,118 (1) 

Total

    10,857      $ 3.81        10,857        454,118   

 

(1) On November 13, 2008, the Company announced a stock repurchase program under which the Company may repurchase up to 620,770 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.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

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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
32.0   Section 1350 certification

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    JEFFERSON BANCSHARES, INC.
November 12, 2010    

/s/ Anderson L. Smith

    Anderson L. Smith
    President and Chief Executive Officer
November 12, 2010    

/s/ Jane P. Hutton

    Jane P. Hutton
    Chief Financial Officer, Treasurer and Secretary
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