10-Q 1 jeffersonform10qfeb-05.txt 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File Number 00-50347 JEFFERSON BANCSHARES, INC. -------------------------- (Exact name of registrant as specified in its charter) TENNESSEE 45-0508261 (State or other jurisdiction of (I.R.S. Employer I.D. Number) incorporation or organization) 120 EVANS AVENUE, MORRISTOWN, TENNESSEE 37814 (Address of principal executive offices) (Zip code) (423) 586-8421 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: At February 9, 2005, the registrant had 7,821,920 shares of common stock, $0.01 par value per share, outstanding. 2
INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Condition - Unaudited Six months ended December 31, 2004 and year ended June 30, 2004................................ 3 Consolidated Statements of Earnings - Unaudited Three and six months ended December 31, 2004 and 2003.......................................... 4 Consolidated Statements of Changes in Stockholders' Equity - Unaudited Six months ended December 31, 2004 and year ended June 30, 2004................................ 5 Consolidated Statements of Cash Flows - Unaudited Six months ended December 31, 2004 and 2003.................................................... 6 Notes to Consolidated Financial Statements - Unaudited......................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 28 Item 4. Controls and Procedures........................................................................ 28 Part II - OTHER INFORMATION Item 1. Legal Proceedings.............................................................................. 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................... 29 Item 3. Defaults Upon Senior Securities................................................................ 29 Item 4. Submission of Matters to a Vote of Security Holders............................................ 30 Item 5. Other Information.............................................................................. 30 Item 6. Exhibits ...................................................................................... 30 SIGNATURES
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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JEFFERSON BANCSHARES, INC. Consolidated Statements of Condition December 31, 2004 and June 30, 2004 (Dollars in Thousands) DECEMBER 31, JUNE 30, 2004 2004 ---------------- ---------------- (Unaudited) ASSETS Cash and cash equivalents $ 3,757 $ 3,803 Interest-earning deposits 13,858 2,608 Investment securities classified as available for sale, net 71,953 95,005 Federal Home Loan Bank stock 1,614 1,580 Bank owned life insurance 5,188 5,080 Loans receivable, net 195,962 186,601 Premises and equipment, net 5,133 5,120 Foreclosed real estate, net 1,332 552 Accrued interest receivable: Investments 652 870 Loans receivable 941 956 Deferred tax asset 1,865 2,502 Other assets 699 797 -------------- ------------- Total Assets $ 302,954 $ 305,474 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 201,952 $ 204,933 Federal Home Loan Bank advances 12,000 6,000 Other liabilities 852 1,084 Accrued income taxes - 74 -------------- ------------- Total liabilities 214,804 212,091 -------------- ------------- 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; 7,821,920 shares issued and outstanding 84 84 Additional paid-in capital 71,629 71,496 Unearned ESOP shares (6,049) (6,265) Unearned compensation (3,452) (3,488) Accumulated other comprehensive income (27) (793) Retained earnings 33,531 32,349 Treasury stock (7,566) - -------------- ------------- Total stockholders' equity 88,150 93,383 -------------- ------------- Total liabilities and stockholders' equity $ 302,954 $ 305,474 ============== =============
See accompanying notes to financial statements 3 4
JEFFERSON BANCSHARES, INC. Consolidated Statements of Earnings (Unaudited) (Dollars in Thousands, Except Net Earnings Per Share) THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 2004 2003 2004 2003 ---- ---- ---- ---- INTEREST INCOME: Interest on loans receivable $ 3,203 $ 3,147 $ 6,325 $ 6,443 Interest on investment securities 621 884 1,344 1,640 Other interest 74 32 117 122 ----------- ------------ ------------ ------------ Total interest income 3,898 4,063 7,786 8,205 ----------- ------------ ------------ ------------ INTEREST EXPENSE: Deposits 1,008 1,239 2,016 2,543 Advances from FHLB 104 25 191 50 ----------- ------------ ------------ ------------ Total interest expense 1,112 1,264 2,207 2,593 ----------- ------------ ------------ ------------ NET INTEREST INCOME 2,786 2,799 5,579 5,612 Provision for loan losses - - - - ----------- ------------ ------------ ------------ Net interest income after provision for loan losses 2,786 2,799 5,579 5,612 ----------- ------------ ------------ ------------ NONINTEREST INCOME: Dividends from investments - 22 26 22 Service charges and fees 133 160 284 319 Gain on sale of fixed assets - 1 - 1 Gain (loss) on sale of investment securities, net (18) - (43) 22 Gain on sale of foreclosed real estate, net 5 39 33 65 BOLI increase in cash value 54 - 108 - Other 24 30 54 57 ----------- ------------ ------------ ------------ Total noninterest income 198 252 462 486 ----------- ------------ ------------ ------------ NONINTEREST EXPENSE: Compensation and benefits 905 714 1,844 1,470 Occupancy expense 79 64 152 125 Equipment and data processing expense 217 215 437 442 SAIF deposit insurance premium 7 12 15 21 REO Expense 12 77 32 130 Advertising 58 75 93 122 Contribution to Jefferson Federal Charitable Foundation - - - 4,000 Other 289 357 591 752 ----------- ------------ ------------ ------------ Total noninterest expense 1,567 1,514 3,164 7,062 ----------- ------------ ------------ ------------ EARNINGS BEFORE INCOME TAXES 1,417 1,537 2,877 (964) ----------- ------------ ------------ ------------ INCOME TAXES: Current 425 425 950 778 Deferred 110 146 93 (1,117) ----------- ------------ ------------ ------------ Total income taxes 535 571 1,043 (339) ----------- ------------ ------------ ------------ NET EARNINGS (LOSS) $ 882 $ 966 $ 1,834 $ (625) =========== ============ ============ ============ NET EARNINGS (LOSS) PER SHARE, BASIC $ 0.12 $ 0.12 $ 0.24 $ (0.07) =========== ============ ============ ============ NET EARNINGS (LOSS) PER SHARE, DILUTED $ 0.12 $ 0.11 $ 0.24 $ (0.07) =========== ============ ============ ============
See accompanying notes to financial statements 4 5
JEFFERSON BANCSHARES, INC. Consolidated Statements of Changes in Stockholders' Equity Year Ended June 30, 2004 and Six Months Ended December 31, 2004 (Unaudited) (Dollars in Thousands) UNALLOCATED ACCUMULATED ADDITIONAL COMMON OTHER TOTAL COMMON PAID-IN STOCK IN UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' STOCK CAPITAL ESOP COMPENSATION INCOME EARNINGS STOCK EQUITY ---------- ----------- --------- ------------- ------------ -------- --------- ----------- Balance at June 30, 2003 1,876 1,167 - - 898 32,684 - 36,625 ----------- Comprehensive income: Net earnings - - - - - 1,387 - 1,387 Change in net unrealized gain (loss) on securities available for sale, net of taxes of $1,043 - - - - (1,691) - - (1,691) ----------- Total comprehensive income - - - - - - - (304) Dividends - - - - - (1,733) - (1,733) Merger of MHC into Jefferson Bancshares - 100 - - - 11 - 111 Proceeds of stock conversion, net 66 64,406 - - - - - 64,472 Conversion of shares held under MHC structure (1,876) 1,876 - - - - - - Shares issued in exchange for shares held under MHC structure 14 (14) - - - - - - Contribution of stock to the Jefferson Federal Charitable Foundation 4 3,746 - - - - - 3,750 Common stock acquired by employee stock ownership plan - - (6,701) - - - - (6,701) Shares committed to be released by the employee stock ownership plan - 154 436 - - - - 590 Stock options exercised - 33 - - - - - 33 Tax benefit from exercise of nonqualifying stock options - 28 - - - - - 28 Stock grants under the 2004 Stock Incentive Plan - - - (3,527) - - - (3,527) Earned portion of stock grants - - - 220 - - - 220 Purchase of stock for the 2004 Stock Incentive Plan - - - (181) - - - (181) -------- --------- --------- --------- ------- -------- -------- ---------- Balance at June 30, 2004 84 71,496 (6,265) (3,488) (793) 32,349 - 93,383 ---------- Comprehensive income: Net earnings - - - - - 952 - 952 Change in net unrealized gain (loss) on securities available for sale, net of taxes of $629 - - - - 1,014 - - 1,014 ----------- Total comprehensive income - - - - - - - 1,966 Dividends - - - - - (404) - (404) Shares committed to be released by the employee stock ownership plan - 30 108 - - - - 138 Earned portion of stock grants - - - 110 - - - 110 Purchase of stock for the 2004 Stock Incentive Plan - - - (184) - - - (184) Purchase of common stock (313,176 shares) - - - - - - (4,125) (4,125) -------- --------- --------- --------- ------- -------- -------- ---------- Balance at September 30, 2004 $ 84 $ 71,526 $ (6,157) $ (3,562) $ 221 $32,897 $(4,125) $ 90,884 ======== ========= ========= ========= ======= ======== ======== ========== Comprehensive income: Net earnings - - - - - 882 - 882 Change in net unrealized gain (loss) on securities available for sale, net of taxes of $(154) - - - - (248) - - (248) ---------- Total comprehensive income - - - - - - - 634 Dividends - - - - - (391) - (391) Dividends used for ESOP payment - - - - - 143 - - Shares committed to be released by the employee stock ownership plan - 34 108 - - - - 142 Stock options exercised - 44 - - - - - - Tax benefit from exercise of nonqualifying stock options - 25 - - - - - - Earned portion of stock grants - - - 110 - - - 110 Purchase of common stock (260,020 shares) - - - - - - (3,441) (3,441) -------- --------- --------- --------- ------- -------- -------- ---------- Balance at December 31, 2004 $ 84 $ 71,629 $ (6,049) $ (3,452) $ (27) $ 33,531 $(7,566) $ 88,150 ======== ========= ========= ========= ======= ======== ======== ==========
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JEFFERSON BANCSHARES, INC. Consolidated Statements of Cash Flows (Unaudited) (Dollars in Thousands) SIX MONTHS ENDED DECEMBER 31, ------------------------- 2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,834 $ (625) Adjustments to reconcile net earnings to net cash provided by (used for) operating activities Stock contributed to the Jefferson Federal Charitable Foundation - 3,750 Allocated ESOP shares 280 305 Depreciation and amortization expense 118 138 Amortization of premiums (discounts), net on investment securities 7 2 Gain on sale of fixed assets - 1 Gain (loss) on sale of investment securities and mortgage-backed securities, net 43 (22) FHLB stock dividends (34) (31) Amortization of deferred loan fees, net (67) (85) Loss (gain) on foreclosed real estate, net (33) (65) Increase in cash value of life insurance (108) - Earned portion of MRDP 220 - Decrease (increase) in: Accrued interest receivable 233 (103) Other assets 98 849 Deferred tax asset 637 (1,587) Increase (decrease) in other liabilities and accrued income taxes 56 (516) ----------- ----------- Net cash provided by (used for) operating activities 3,284 2,011 ----------- ----------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Loan originations, net of principal collections (10,734) (1,807) Investment securities classified as available for sale: Purchased - (63,662) Proceeds from sale 20,378 6,676 Proceeds from maturity 1,500 15,500 Return of principal on mortgage-backed securities 2,363 4,172 Purchase of premises and equipment (131) (1,133) Sale of fixed assets - 1 Proceeds from sale of (additions to) foreclosed real estate, net 220 510 ----------- ----------- Net cash provided by (used for) investing activities 13,596 (39,743) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits (2,981) (108,586) Proceeds from stock conversion, net - 57,771 Merger of MHC into Jefferson Bancshares - 111 Proceeds from advances from FHLB 15,000 - Repayment of FHLB advances (9,000) - Purchase of company stock for the 2004 Stock Based Incentive Plan (14) - Purchase of treasury stock (7,566) - Cash dividend paid on common stock (1,159) (441) Proceeds from exercise of stock options 44 34 ----------- ----------- Net cash provided by (used for) financing activities (5,676) (51,111) ----------- ----------- Net increase (decrease) in cash, cash equivalents and interest-earning deposits 11,204 (88,843) Cash, cash equivalents and interest-earning deposits at beginning of period 6,411 96,543 ----------- ----------- Cash, cash equivalents and interest-earning deposits at end of period $ 17,615 $ 7,700 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during period for: Interest on deposits $ 2,016 $ 2,543 Interest on FHLB advances 191 50 Income taxes 1,030 1,087 Real estate acquired in settlement of loans $ 1,202 $ 1,323
See accompanying notes to financial statements 6 7 (1) BASIS OF PRESENTATION --------------------- The accompanying unaudited consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the "Company" or "Jefferson Bancshares") and its wholly-owned subsidiary, Jefferson Federal Bank (the "Bank" or "Jefferson Federal"). The unaudited financial statements of Jefferson Bancshares, Inc. were prepared with generally accepted accounting principles and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for fair presentation of the interim financial statements. The results of operations for the period ended December 31, 2004 are not necessarily indicative of the results which may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2004. (2) CORPORATE REORGANIZATION AND STOCK OFFERING ------------------------------------------- On March 4, 2003, the Boards of Directors of Jefferson Bancshares, MHC (the "MHC") and the Bank adopted a Plan of Conversion to convert the MHC from mutual to stock form and to complete a related stock offering in which shares of common stock representing the MHC's ownership interest in the Bank would be sold to investors (the "Conversion"). The Plan of Conversion was approved by the stockholders and depositors of the Bank on June 25, 2003. The reorganization and stock offering were completed on July 1, 2003. As of that date, the Company sold 6,612,500 shares of common stock for $10.00 per share. After taking into consideration estimated related expenses of approximately $1.6 million, net proceeds from the stock offering amounted to approximately $64.5 million. An additional 1,388,485 shares were issued to existing stockholders, based on an exchange rate of 4.2661 shares of Company common stock for each existing share of Bank common stock, and 375,000 shares were issued to the Jefferson Federal Charitable Foundation, resulting in the total issuance of 8,375,985 shares. Cash was paid in lieu of fractional shares. Upon completion of the Conversion and stock offering, the MHC ceased to exist and its net assets of $111,000 were transferred to the Bank. The Conversion was accounted for as a change in corporate form with no subsequent change in the historical basis of the Company's assets, liabilities and equity. (3) LIMITATION ON CAPITAL DISTRIBUTIONS ----------------------------------- Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two 7 8 years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with or condition imposed by the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary of a holding company. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federal's capital falls below its regulatory requirements or the Office of Thrift Supervision notifies it that it is in need of more than normal supervision, Jefferson Federal's ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the distribution would reduce its regulatory capital below the amount needed for the liquidation account established in connection with the Conversion described in Note 2. (4) EARNINGS PER COMMON SHARE ------------------------- Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:
WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES OUTSTANDING FOR THE OUTSTANDING FOR THE THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------------- ------------------------------- Shares used for: 2004 2003 2004 2003 -------------- -------------- -------------- -------------- Basic Earnings Per Share 7,383,907 8,382,286 7,569,166 8,378,837 Diluted Earnings Per Share 7,406,857 8,426,876 7,588,474 8,421,943
(5) STATEMENTS OF CASH FLOWS ------------------------ Dividends declared but not paid have been recorded in other liabilities; however, their non-effect on cash and operations dictates their exclusion from the cash flows until actually paid. (6) ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ------------------------------------------------ At December 31, 2004 there were no loans with impairments, however an average investment of $200,000 during the six-month period ended December 31, 2004 has been recognized in conformity with FASB Statement No. 118. There was no allowance for loan losses related to these loans at December 31, 2004. Other nonaccrual loans at December 31, 2004 were approximately $1.4 million. For the six months ended December 31, 2004, gross income which would have been recognized had impaired and nonaccrual loans been current in accordance with their original terms, amounted to approximately $79,000. The amount of interest income from impaired and non-accrual loans included in the Company's interest income for the six months ended December 31, 2004 was approximately $15,000. The amount of interest income from impaired loans included in net income for the three months ended December 31, 2004 was approximately $3,000. 8 9 The following table summarizes the activity in the allowance for loan losses for the six months ended December 31, 2004: ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS) --------------------------- Balance at June 30, 2004 $ 2,479 Provision for loan losses - Charge-offs $ (277) Recoveries 186 ------------ Net (charge-offs)/recoveries (91) -------- Balance at December 31, 2004 $ 2,388 ======== (7) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK ------------------------------------------------- Jefferson Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments. The Company minimizes this risk by evaluating each borrower's creditworthiness on a case-by-case basis. Collateral held by the Company consists of a first or second mortgage on the borrower's property. The amount of collateral obtained is based upon an appraisal of the property. 9 10
The estimated fair values of the Company's financial instruments are as follows: DECEMBER 31, 2004 JUNE 30, 2004 ---------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (Dollars in Thousands) Financial assets: Cash and due from banks and interest-earning deposits with banks $ 17,615 $ 17,615 $ 6,411 $ 6,411 Available-for-sale securities 71,953 71,953 95,005 95,005 Federal Home Loan Bank stock 1,614 1,614 1,580 1,580 Loans receivable 195,962 195,023 186,601 189,153 Accrued interest receivable 1,593 1,593 1,826 1,826 Financial liabilities: Deposits (201,952) (201,868) (204,933) (205,248) FHLB advances (12,000) (12,124) (6,000) (6,115) Off-balance sheet assets (liabilities): Commitments to extend credit - (9,097) - (5,123) Unused standby letters of credit - (529) - (141) Unused lines of credit - (7,313) - (6,735)
(8) RECAPTURE OF TAX BAD DEBT RESERVES ---------------------------------- Current federal income tax law provides for the elimination of the preferential tax bad debt deduction for thrift institutions and the recapture of tax bad debt reserves in excess of the base year reserves (pre-1988 reserves). The excess tax bad debt reserves is required to be recaptured to income ratably over a six-year period unless a thrift institution meets the "residential loan requirement" test and suspends the recapture for up to two years. For Jefferson Bancshares, this tax accounting change was effective for the year ending June 30, 1997. Because deferred taxes have been recorded for such excess tax bad debt reserves, this legislation has not had a material effect on the Company's statement of condition or results of operation; however, it has resulted in an outflow of cash. The six-year recapture period began with the fiscal year ending June 30, 1999. The total amount of excess tax bad debt reserves recaptured during the six-year period amounted to $622,000 and resulted in additional federal income taxes of $211,000. (9) STOCK INCENTIVE PLANS --------------------- Under the Bank's 1995 Stock Option Plan and the 1995 Management Recognition and Development Plan ("MRP"), the Company issued a combined total of 179,176 shares to officers, employees and non-employee directors. Both plans vested pro-rata over a five-year period, with the Stock Option Plan having an expiration date of April 1, 2007. As of December 31, 2004, there were 51,258 options outstanding and no remaining shares available for grant under the 1995 Stock Option Plan. During the six-month period 9,599 options were exercised. 10 11 On January 8, 2004, the Company adopted the 2004 Stock Incentive Plan which authorized the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors. As of December 31, 2004, there were 401,778 options and 160,711 restricted stock awards granted under this plan which will vest pro-rata over a five-year period. The 2004 plan has an expiration date of January 30, 2014. The table below summarizes the status of the Company's stock option plans as of December 31, 2004. SIX MONTHS ENDED DECEMBER 31, 2004 ----------------- Weighted- average Shares exercise price ------------- --------------- Outstanding at beginning of period 462,635 $12.44 Granted during the six-month period - - Options exercised 9,599 $ 4.64 Outstanding at December 31, 2004 453,036 $12.60 Options exercisable at December 31, 2004 51,258 $ 4.08 The following information applies to options outstanding at December 31, 2004: Number outstanding 453,036 Range of exercise prices $3.52 - $13.69 Weighted-average exercise price $12.60 Weighted-average remaining contractual life 8.3 Number of options remaining for future issuance 296,972 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2004. GENERAL ------- Jefferson Bancshares, Inc. (also referred to as the "Company" or "Jefferson Bancshares") was organized as a Tennessee corporation at the direction of Jefferson Federal Bank, formerly known as Jefferson Federal Savings and Loan Association of Morristown (referred to as the "Bank" or "Jefferson Federal"), in 11 12 March 2003 to become the holding company for Jefferson Federal upon the completion of its "second-step" mutual-to-stock conversion (the "Conversion") of Jefferson Bancshares, M.H.C. (the "MHC"). The Conversion was completed on July 1, 2003. As part of the Conversion, the MHC merged into Jefferson Federal thereby ceasing to exist and Jefferson Federal Savings and Loan Association of Morristown changed its name to "Jefferson Federal Bank." The Company sold 6,612,500 shares of its common stock at a price of $10.00 per share to depositors of the Bank in a subscription offering raising approximately $64.5 million in net proceeds. The Company also exchanged approximately 1,389,000 shares of its common stock for all the outstanding shares of the Bank's common stock (other than shares held by the MHC), representing an exchange ratio of 4.2661 for each share of Jefferson Federal outstanding. In addition, the Bank established the Jefferson Federal Charitable Foundation, which was funded with $250,000 and 375,000 shares of Company common stock. The Company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds it retained from the Conversion, and no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank. Jefferson Federal is a community oriented financial institution offering traditional financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential properties, as well as to originate commercial real estate and multi-family mortgage loans, construction loans, consumer loans, commercial non-real estate loans and make other investments permitted by applicable laws and regulations. The Bank's savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation ("FDIC") through the Savings Association Insurance Fund ("SAIF"). Jefferson Federal Bank is a member of the Federal Home Loan Bank ("FHLB") System. PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT -------------------------------------------------------------- This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather are statements based on Jefferson Bancshares, Inc.'s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company's loan or investment portfolios. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements. 12 13 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003 NET EARNINGS ------------ Net earnings decreased $84,000, or 8.7% to $882,000 for the three months ended December 31, 2004. For the six months ended December 31, 2004, net earnings were $1.8 million compared to a net loss of $625,000 for the six months ended December 31, 2003. The net loss for 2003 was the result of the nonrecurring expense associated with the $4.0 million contribution to the Jefferson Federal Charitable Foundation.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------------- -------------------------------- 2004 2003 2004 2003 -------------- -------------- -------------- -------------- (Dollars in thousands, (Dollars in thousands, except per share data) except per share data) Net earnings $882 $ 966 $1,834 $ (625) Net earnings per share, basic $0.12 $0.12 $ 0.24 $(0.07) Net earnings per share, diluted $0.12 $0.11 $ 0.24 $(0.07) Return on average assets (annualized) 1.15% 1.22% 1.19% NM Return on average equity (annualized) 3.95% 4.02% 4.02% NM
NET INTEREST INCOME ------------------- Net interest income before loan loss provision decreased $13,000, or 0.5%, to $2.8 million for the three months ended December 31, 2004 compared to the same period in 2003. The decline in net interest income is primarily attributable to a decrease in the volume of investment securities partially offset by a decrease in the volume and average cost of interest bearing liabilities. The decline in investment securities was due to the deployment of conversion proceeds primarily into stock repurchases, bank owned life insurance, and other higher yielding assets. The net interest margin increased 18 basis points to 3.84% for the three months ended December 31, 2004. The interest rate spread was 3.23% and 2.93% for the quarters ended December 31, 2004 and 2003, respectively. The increase in the interest rate spread reflects a decrease in the average cost of interest-bearing liabilities combined with a slight increase in the average yield on interest-earning assets. The average rate paid on interest-bearing liabilities declined 23 basis points to 2.15%, while the average yield on interest-earning assets increased 7 basis points to 5.38%. 13 14 The following table summarizes changes in interest income and expense for the three-month periods ended December 31, 2004 and 2003:
THREE MONTHS ENDED DECEMBER 31, ------------------------------ 2004 2003 $ CHANGE % CHANGE ------------- -------------- ------------- -------------- (Dollars in thousands) INTEREST INCOME: Loans $ 3,203 $ 3,147 $ 56 1.8% Investment securities 621 884 (263) (29.8%) Interest-earning deposits 57 17 40 235.3% FHLB stock 17 15 2 13.3% ------------- -------------- ------------- Total interest income 3,898 4,063 (165) (4.1%) INTEREST EXPENSE: Deposits 1,008 1,239 (231) (18.6%) Borrowings 104 25 79 316.0% ------------- -------------- ------------- Total interest expense 1,112 1,264 (152) (12.0%) ------------- -------------- ------------- Net interest income $ 2,786 $ 2,799 $ (13) (0.5%) ============= ============== =============
For the six months ended December 31, 2004, net interest income decreased $33,000 to $5.6 million. The decline in net interest income is primarily attributable to a decrease in both the volume and yield of interest earning assets partially offset by a decrease in the volume and average rate paid on deposits. The net interest margin and interest rate spread was 3.81% and 3.20%, respectively, for the six months ended December 31, 2004 compared to 3.66% and 2.94% for the comparable period in 2003. The following table summarizes changes in interest income and expense for the six-month periods ended December 31, 2004 and 2003:
SIX MONTHS ENDED DECEMBER 31, ------------------------------ 2004 2003 $ CHANGE % CHANGE ------------- -------------- ------------- -------------- (Dollars in thousands) INTEREST INCOME: Loans $ 6,325 $ 6,443 $ (118) (1.8%) Investment securities 1,344 1,640 (296) (18.0%) Interest-earning deposits 83 92 (9) (9.8%) FHLB stock 34 30 4 13.3% ------------- -------------- ------------- Total interest income 7,786 8,205 (419) (5.1%) INTEREST EXPENSE: Deposits 2,016 2,543 (527) (20.7%) Borrowings 191 50 141 282.0% ------------- -------------- ------------- Total interest expense 2,207 2,593 (386) (14.9%) ------------- -------------- ------------- Net interest income $ 5,579 $ 5,612 $ (33) (0.6%) ============= ============== =============
14 15 The following table summarizes average balances and average yields and costs:
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ---------------------------------------------- ---------------------------------------------- 2004 2003 2004 2003 ---------------------- ---------------------- ---------------------- ---------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE COST BALANCE COST BALANCE COST BALANCE COST ------------ -------- ------------ -------- ----------- --------- ----------- --------- (Dollars in thousands) (Dollars in thousands) Loans $ 199,672 6.42% $ 183,371 6.86% $ 199,323 6.35% $ 182,359 7.07% Investment securities 75,128 3.31% 111,028 3.18% 81,224 3.31% 111,876 2.93% Interest-earning deposits 13,449 1.70% 10,341 0.66% 10,798 1.54% 10,548 1.74% FHLB stock 1,608 4.23% 1,544 3.89% 1,599 4.25% 1,536 3.91% Deposits 195,124 2.07% 210,877 2.35% 196,753 2.05% 212,236 2.40% Borrowings 12,000 3.47% 2,000 5.00% 11,833 3.21% 2,000 5.00%
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to change in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
THREE MONTHS SIX MONTHS 2004 COMPARED TO 2003 2004 COMPARED TO 2003 ----------------------------------- ----------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO ----------------------- ----------------------- VOLUME RATE NET VOLUME RATE NET ---------- ----------- ---------- ---------- ----------- ---------- (In Thousands) (In Thousands) Interest income: Loans receivable $ 269 $ (213) $ 56 $ 570 $ (688) $ (118) Investment securities (296) 33 (263) (489) 193 (296) Other 9 33 42 3 (8) (5) ---------- ----------- ---------- ---------- ----------- ---------- Total interest-earning assets (18) (147) (165) 84 (503) (419) ---------- ----------- ---------- ---------- ----------- ---------- Interest expense: Deposits (88) (143) (231) (177) (349) (526) Borrowings 89 (10) 79 164 (24) 140 ---------- ----------- ---------- ---------- ----------- ---------- Total interest-bearing liabilities 1 (153) (152) (13) (373) (386) ---------- ----------- ---------- ---------- ----------- ---------- Net change in interest income $ (19) $ 6 $ (13) $ 97 $ (130) $ (33) ========== =========== ========== ========== =========== ==========
Total interest income decreased $165,000, or 4.1%, to $3.9 million for the three months ended December 31, 2004, and decreased $419,000, or 5.1%, to $7.8 million for the six months ended December 31, 2004. The decrease in interest income for the both the three and six-month period was primarily attributable to a decrease in income from investment securities. The decrease in income from investment securities was primarily the result of a decrease in the average balance of investment securities more than offsetting an increase in the average yield. The decline in investment securities was due to the deployment of conversion proceeds primarily into stock repurchases, bank owned life insurance, and other higher yielding assets. Interest on loans increased for the three months ended December 31, 2004 due to an increase in the average balance of loans more than 15 16 offsetting a decrease in the average yield. The increase in the average balance of loans is the result of growth in the commercial loan portfolio. Most of the commercial loans that have been originated have been tied to prime and will reprice quickly as interest rates change. Dividends on Federal Home Loan Bank ("FHLB") stock were $17,000 for the three months ended December 31, 2004 and $15,000 for the comparable 2003 period. FHLB dividends are paid with additional shares of FHLB stock. Interest expense on interest-bearing liabilities decreased for both the three and six month period ended December 31, 2004 due to a decrease in interest paid on deposits more than offsetting an increase in interest paid on FHLB advances. Interest expense on deposits decreased $231,000, or 18.6%, to $1.0 million for the three-month period ended December 31, 2004 and decreased $527,000, or 20.7%, to $2.0 million for the six-month period ended December 31, 2004 due to a decrease in both the average balance and average rate paid. The average rate paid on deposits declined 28 basis points to 2.07% for the three-month period in 2004 and declined 35 basis points to 2.05% for the six-month period in 2004 as compared to 2003 due to the general decline in interest rates and also to the change in the composition of deposits. The decline in the average balance of certificates of deposit more than offset increases in transaction accounts for the three-month period ended December 31, 2004. The decline in certificates of deposit resulted from our decision not to compete aggressively for higher costing deposits. Interest expense on FHLB advances was $104,000 and $191,000 for the three and six months ended December 31, 2004, respectively, compared to $25,000 and $50,000 for the comparable periods in 2003 due to a higher average balance. FHLB advances were utilized during the current six-month period as a funding source for growth in the loan portfolio. PROVISION FOR LOAN LOSSES ------------------------- We review the level of the loan loss allowance on a monthly basis and establish the provision for loan losses based on the level of subprime loans in the loan portfolio, delinquency levels, loss experience, economic conditions and other factors related to the collectibility of the loan portfolio. We use Beacon credit scores to predict the likelihood that an existing borrower will become a credit risk. We consider loans to borrowers with a Beacon credit score below 600 to be "subprime." Net charge-offs were $91,000 for the six-month period ended December 31, 2004 compared to $259,000 for the same period in 2003. There were no additions to the allowance for loan losses during either period. Nonperforming loans totaled $1.4 million at December 31, 2004 compared to $1.2 million for 2003. The increase in nonperforming loans due reflects a deterioration in one lending relationship which includes commercial loans totaling $502,000 and personal real estate loans totaling $252,000. We believe the collateral securing these loans is adequate. NONINTEREST INCOME ------------------ Noninterest income decreased $54,000, or 21.4%, to $198,000 for the three months ended December 31, 2004 as a result of a decrease in net gain on foreclosed real estate, a loss on sale of investments, and a decrease in service fees and other revenues, offset by an increase in the cash surrender value of bank owned life insurance that amounted to $54,000 for the three months ended December 31, 2004. 16 17 The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended December 31, 2004 compared to the same period in 2003.
THREE MONTHS ENDED DECEMBER 31, ------------------------- $ % 2004 2003 CHANGE CHANGE ----------- ----------- ------------ ------------ (Dollars in thousands) Dividends from investments $ - $ 22 $ (22) (100.0%) Service charges and fees 133 160 (27) (16.9%) Gain on sale of fixed assets - 1 (1) (100.0%) Gain (loss) on sale of investments (18) - (18) NM Gain on sale of foreclosed property 5 39 (34) (87.2%) BOLI increase in cash value 54 - 54 NM Other 24 30 (6) (20.0%) ---------- ---------- ---------- Total noninterest income $ 198 $ 252 $ (54) (21.4%) ========== ========== ==========
Noninterest income decreased $24,000, or 4.9%, to $462,000 for the six months ended December 31, 2004 as a result of a decrease in net gain on foreclosed real estate, a loss on sale of investments, and a decrease in service fees and other revenues, partially offset by an increase in the cash surrender value of bank owned life insurance that amounted to $108,000 for the six months ended December 31, 2004. The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the six months ended December 31, 2004 compared to the same period in 2003.
SIX MONTHS ENDED DECEMBER 31, ------------------------- $ % 2004 2003 CHANGE CHANGE ----------- ----------- ------------ ------------ (Dollars in thousands) Dividends from investments $ 26 $ 22 $ 4 18.2% Service charges and fees 284 319 (35) (11.0%) Gain on sale of fixed assets - 1 (1) (100.0%) Gain (loss) on sale of investments (43) 22 (65) (295.5%) Gain on sale of foreclosed property 33 65 (32) (49.2%) BOLI increase in cash value 108 - 108 NM Other 54 57 (3) (5.3%) ---------- ---------- ----------- Total noninterest income $ 462 $ 486 $ (24) (4.9%) ========== ========== ===========
NONINTEREST EXPENSE ------------------- Noninterest expense totaled $1.6 million for the three months ended December 31, 2004 as compared to $1.5 million for the comparable period in 2003 primarily due to an increase in compensation expense. Compensation expense increased $191,000, or 26.8%, to $905,000 for the current three month period. This increase reflects the expense related to the stock awards made pursuant to the Company's 2004 Stock Incentive Plan combined with normal salary increases and additional staff. Noninterest expense for the three months ended December 31, 2004 included approximately $38,000 of operating expense associated with the opening of the new loan production office that opened in Knoxville, Tennessee on January 1, 2005. 17 18 The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended December 31, 2004 compared to the same period in 2003.
THREE MONTHS ENDED DECEMBER 31, ------------------------- $ % 2004 2003 CHANGE CHANGE ----------- ----------- ----------- ----------- (Dollars in thousands) Compensation and benefits $ 905 $ 714 $ 191 26.8% Occupancy 79 64 15 23.4% Equipment and data processing 217 215 2 0.9% SAIF Deposit insurance premiums 7 12 (5) (41.7%) REO expense 12 77 (65) (84.4%) Advertising 58 75 (17) (22.7%) Other 289 357 (68) (19.0%) ---------- ---------- ----------- Total noninterest expense $ 1,567 $ 1,514 $ 53 3.5% ========== ========== ===========
Noninterest expense totaled $3.2 million for the six months ended December 31, 2004 compared to $7.1 million for the comparable period in 2003. The $3.9 million decrease was primarily attributable to the nonrecurring expense associated with the $4.0 million contribution to the Jefferson Federal Charitable Foundation during the six months ended December 31, 2003. Compensation expense increased $374,000, or 25.4%, to $1.8 million for the current six-month period due to expenses related to the Stock Incentive Plan combined with normal salary increases and additional staff. The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the six months ended December 31, 2004 compared to the same period in 2003.
SIX MONTHS ENDED DECEMBER 31, ------------------------- $ % 2004 2003 CHANGE CHANGE ----------- ----------- ----------- ----------- (Dollars in thousands) Compensation and benefits $ 1,844 $ 1,470 $ 374 25.4% Occupancy 152 125 27 21.6% Equipment and data processing 437 442 (5) (1.1%) SAIF Deposit insurance premiums 15 21 (6) (28.6%) REO expense 32 130 (98) (75.4%) Advertising 93 122 (29) (23.8%) Contribution to Jefferson Federal Charitable Foundation - 4,000 (4,000) (100.0%) Other 591 752 (161) (21.4%) ----------- ----------- ----------- Total noninterest expense $ 3,164 $ 7,062 $ (3,898) (55.2%) =========== =========== ===========
18 19 INCOME TAXES ------------ Income tax expense for the three months ended December 31, 2004 was $535,000 compared to $571,000 for the same period in 2003. Income tax expense for the six months ended December 31, 2004 was $1.0 million compared to a tax benefit of $339,000 for the same period in 2003. The tax benefit (i.e., current and deferred) was due to the contribution of cash and common stock to the Jefferson Federal Charitable Foundation. The contribution to the Foundation was tax deductible, subject to a limitation based on 10% of the Company's annual taxable income. Any unused portion of the deduction may be carried forward for five years following the year in which the contribution is made. FINANCIAL CONDITION ASSETS ------ Total assets at December 31, 2004 were $303.0 million compared to $305.5 million at June 30, 2004. CASH, CASH EQUIVALENTS AND INTEREST-EARNING DEPOSITS ---------------------------------------------------- Cash and cash equivalents remained unchanged at $3.8 million at December 31, 2004. Interest-earning deposits increased $11.3 million to $13.9 million at December 31, 2004, which reflects our decision to increase liquidity for future loan demand. INVESTMENTS ----------- Our investment portfolio consists primarily of Federal agency securities with maturities of seven years or less, municipal securities and mortgage-backed securities with stated final maturities of thirty years or less. Investment securities decreased $23.1 million, or 24.3%, to $72.0 million due primarily to sales of investment securities during the current six-month period. Proceeds from the sale of investment securities were used to fund stock repurchases and to fund growth in the loan portfolio. Investment securities classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $44,000, or $27,000 net of taxes. 19 20 The following table sets forth the carrying values of our investment securities portfolio at the dates indicated. All of our investment securities are classified as available-for-sale.
AT DECEMBER 31, 2004: AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ----------- ------------ (Dollars in thousands) Securities Available-for-Sale Debt securities: Federal agency $ 58,527 $ 184 $ (302) $ 58,409 Municipals 3,417 3 (42) 3,378 Mortgage-backed 10,053 115 (2) 10,166 ------------ ------------ ----------- ------------ Total securities available-for-sale $ 71,997 $ 302 $ (346) $ 71,953 ============ ============ =========== ============ Weighted-average rate 3.30% ============ Federal Home Loan Bank of Cincinnati stock $ 1,614 $ - $ - $ 1,614 ============ ============ =========== ============ Weighted-average rate 4.25% ============ AT JUNE 30, 2004: AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ----------- ------------ (Dollars in Thousands) Securities Available-for-Sale Debt securities: Federal agency $ 80,443 $ 205 $ (1,375) $ 79,273 Municipals 3,425 1 (112) 3,314 Mortgage-backed 12,422 78 (82) 12,418 ------------ ------------ ----------- ------------ Total securities available- for-sale $ 96,290 $ 284 $ (1,569) $ 95,005 ============ ============ =========== ============ Weighted-average rate 3.22% ============ Federal Home Loan Bank of Cincinnati stock $ 1,580 $ - $ - $ 1,580 ============ ============ =========== ============ Weighted-average rate 4.00% ============
LOANS ----- Net loans increased $9.4 million, or 5.0%, to $196.0 million at December 31, 2004. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. Mortgage loans totaled $171.2 million, or 86.2%, of gross loans at December 31, 2004 compared to $170.9 million, or 90.2%, of gross loans at June 30, 2004. 20 21 Commercial business loans increased $9.7 million, or 76.8%, to $22.3 million at December 31, 2004 due to our continued emphasis on this type of lending. Commercial business loans were 11.3% of gross loans at December 31, 2004 compared to 6.7% of gross loans at June 30, 2004. Most of the commercial business loans that we have originated have been tied to prime and will reprice quickly as interest rates change. We originate a variety of consumer loans, including loans secured by automobiles, mobile homes and deposit accounts at Jefferson Federal. Consumer loans decreased $803,000, or 13.7%, to $5.1 million at December 31, 2004 due to lower demand for these types of loans. 21 22 Loans receivable, net are summarized as follows:
AT AT DECEMBER 31, JUNE 30, 2004 2004 ------------------------- ------------------------- PERCENT PERCENT $ % AMOUNT OF PORTFOLIO AMOUNT OF PORTFOLIO CHANGE CHANGE ------------ ------------ ------------ ------------ ----------- ---------- (Dollars in thousands) Real estate loans: Residential one-to four-family $ 83,009 41.8% $ 84,784 44.8% $ (1,775) (2.1%) Multi-family 8,863 4.5% 9,213 4.9% (350) (3.8%) Construction 2,258 1.1% 3,001 1.6% (743) (24.8%) Commercial 59,110 29.8% 59,993 31.7% (883) (1.5%) Land 13,972 7.0% 10,760 5.7% 3,212 29.9% Home equity line of credit 4,018 2.0% 3,143 1.7% 875 27.8% ------------ ------------ ------------ ------------ ----------- Total real estate loans 171,230 86.2% 170,894 90.2% 336 0.2% ------------ ------------ ------------ ------------ ----------- Commercial business loans 22,347 11.3% 12,640 6.7% 9,707 76.8% ------------ ------------ ------------ ------------ ----------- Consumer Loans: Loans secured by deposit accounts 1,088 0.5% 1,084 0.6% 4 0.4% Other consumer loans 1,534 0.8% 2,038 1.1% (504) (24.7%) Loans secured by automobiles 1,980 1.0% 2,200 1.2% (220) (10.0%) Mobile home loans 448 0.2% 531 0.3% (83) (15.6%) ------------ ------------ ------------ ------------ ----------- Total non-real estate loans 5,050 2.5% 5,853 3.1% (803) (13.7%) ------------ ------------ ------------ ------------ ----------- Total commercial business and consumer loans 27,397 13.8% 18,493 9.8% 8,904 48.1% ------------ ------------ ------------ ------------ ----------- Total gross loans 198,627 100.0% 189,387 100.0% 9,240 4.9% Less: Deferred loan fees, net (276) (306) 30 (9.8%) Unearned discount on loans (1) (1) - 0.0% Allowance for losses (2,388) (2,479) 91 (3.7%) ------------ ------------ ----------- Loans receivable, net $ 195,962 $ 186,601 $ 9,361 5.0% ============ ============ ===========
LOAN LOSS ALLOWANCE ------------------- The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish reserves against losses on loans on a monthly basis. When additional reserves are necessary, a provision for loan losses is charged to earnings. In connection with assessing the allowance, we consider the level of subprime loans held in the portfolio and delinquency levels and loss experience with respect to subprime and prime loans. In addition, we assess the allowance using factors 22 23 that cannot be associated with specific credit or loan categories. These factors include our subjective evaluation of local and national economic and business conditions, portfolio concentration and changes in the character and size of the loan portfolio. The allowance methodology appropriately reflects a margin for the imprecision necessarily inherent in estimates of expected credit losses. The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours. Due to net charge-offs, the allowance for loan losses decreased $91,000 to $2.4 million at December 31, 2004. There were no additions to the allowance for loan losses during the current three-month period. At December 31, 2004, our allowance for loan losses represented 1.20% of total gross loans and 167.1% of nonperforming loans, compared to 1.31% of total gross loans and 228.9% of nonperforming loans at June 30, 2004.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------- --------------------------- 2004 2003 2004 2003 ----------- ------------ ------------ ----------- (Dollars in thousands) (Dollars in thousands) Balance at beginning of period $ 2,472 $ 2,691 $ 2,479 $ 2,841 Provision for loan losses - - - - Recoveries 74 102 186 174 Charge-offs (158) (211) (277) (433) ----------- ------------ ------------ ----------- Net charge-offs (84) (109) (91) (259) ----------- ------------ ------------ ----------- Allowance at end of period $ 2,388 $ 2,582 $ 2,388 $ 2,582 =========== ============ ============ =========== Net charge-offs to average outstanding loans during the period, annualized 0.17% 0.24% 0.09% 0.28%
NONPERFORMING ASSETS We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent. Nonperforming assets increased $1.2 million to $2.8 million at December 31, 2004 due to an increase in nonaccrual loans and foreclosed property. The increase in nonperforming assets reflects an increase in foreclosed property and nonaccrual loans resulting from one borrowing relationship. This relationship includes nonaccrual loans totaling $754,000 and foreclosed property totaling $912,000. Nonperforming loans were $1.4 million and $1.1 million at December 31, 2004 and June 30, 2004, respectively. Foreclosed real estate increased $780,000 to $1.3 million at December 31, 2004. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings. 23 24
DECEMBER 31, JUNE 30, 2004 2004 --------------- ---------------- (Dollars in thousands) Nonaccruing loans: Real estate $ 793 $ 1,047 Commercial business 613 15 Consumer 23 21 --------------- ---------------- Total nonaccrual loans 1,429 1,083 Real estate owned 1,332 552 Other repossessed assets 35 - --------------- ---------------- Total nonperforming assets $ 2,796 $ 1,635 =============== ================ Total nonperforming assets to total assets 0.92% 0.54% Total nonperforming loans to total loans 0.73% 0.58% Allowance for loan losses to total nonperforming loans 167.11% 228.90%
BANK OWNED LIFE INSURANCE ------------------------- We purchased bank owned life insurance ("BOLI") to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value at December 31, 2004 was $5.2 million. DEPOSITS -------- Total deposits decreased $3.0 million to $202.0 million at December 31, 2004, due primarily to a $4.5 million decrease in certificates of deposit, partially offset by increases in NOW and non-interest bearing accounts. The continuing decline in the average balance of certificates of deposit reflects our emphasis on attracting lower cost deposits.
DECEMBER 31, JUNE 30, 2004 2004 $ CHANGE % CHANGE --------------- --------------- ------------- ------------ (Dollars in thousands) Certificates of deposit $ 134,477 $ 138,976 $ (4,499) (3.2%) Savings accounts 12,756 13,849 (1,093) (7.9%) Money market accounts 28,684 28,930 (246) (0.9%) NOW accounts 17,974 15,220 2,754 18.1% Non-interest bearing accounts 8,061 7,958 103 1.3% --------------- --------------- ------------- $ 201,952 $ 204,933 $ (2,981) (1.5%) =============== =============== =============
ADVANCES AND OTHER LIABILITIES ------------------------------ FHLB advances increased $6.0 million to $12.0 million at December 31, 2004. FHLB advances were utilized during the six months as a funding source for growth in the loan portfolio. 24 25 STOCKHOLDERS' EQUITY -------------------- Stockholders' equity decreased $5.2 million, or 5.6%, to $88.2 million at December 31, 2004. Retained earnings increased $1.2 million to $33.5 million at December 31, 2004 due to net earnings of $1.8 million partially offset by the payment of dividends to shareholders in the amount of $795,000. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders' equity. At December 31, 2004, the adjustment to stockholders' equity was an unrealized loss of $27,000 compared to a net unrealized loss of $793,000 at June 30, 2004. During the current six-month period, a Stock Repurchase Program was announced under which up to 838,552, or 10%, of the Company's outstanding common stock may be repurchased. During the current six-month period, 573,196 shares of treasury stock were purchased at a cost of $7.6 million. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We regularly adjust our investments in liquid assets based on our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S Government agency obligations. Our most liquid assets are cash and cash equivalents and interest-earning assets. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2004, cash and cash equivalents totaled $3.8 million and interest-earning deposits totaled $13.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $72.0 million at December 31, 2004. In addition, at December 31, 2004, we had arranged the ability to borrow a total of approximately $68.7 million from the Federal Home Loan Bank of Cincinnati. On that date, we had advances outstanding of $12.0 million. At December 31, 2004, we had approximately $1.4 million in loan commitments, consisting of $596,000 in commitments to originate residential loans and $800,000 to originate commercial loans. In addition to commitments to originate loans, we had $7.7 million in loans-in-process, $529,000 in unused standby letters of credit and approximately $7.3 million in unused lines of credit. We had $96.1 million in certificates of deposit due within one year and $67.5 million in other deposits without specific maturities at December 31, 2004. We believe, based on past experience, that a significant portion of those deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered. Our primary investing activities are the origination of loans and the purchase of investment securities. During the six-month period ended December 31, 2004, loan originations, net of principal collections were $10.7 million offset by the redemption, prepayment and sale of securities in the amount of $24.2 million. During the period, financing activities consisted primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in total deposits of $3.0 million during the six-month period ended December 31, 2004. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. In the six-month period ended December 31, 2004, Federal Home Loan Bank advances increased $6.0 million to $12.0 million. 25 26 At December 31, 2004, the average liquidity ratio was 33.42% compared to 41.95% at December 31, 2003. The capital from the Conversion has significantly increased our liquidity and capital resources. Over time, we expect the initial level of liquidity after the Conversion will continue to be reduced as net proceeds from the stock offering are used for future lending and operational growth and expansion activities. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, unused lines of credit, amounts due mortgagors on construction loans, amounts due on commercial loans and commercial letters of credit. For the three months ended December 31, 2004, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows. 26 27 CAPITAL COMPLIANCE The following table presents our capital position relative to our regulatory capital requirements at December 31, 2004 and June 30, 2004:
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------------- ------------------------ ------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (Dollars in Thousands) AT DECEMBER 31, 2004: Total Capital (To Risk Weighted Assets) $ 66,786 37.7% $ 14,183 > 8.0% $ 17,728 > 10.0% --- --- Core Capital (To Tangible Assets) 64,569 22.5% 11,458 > 4.0% 14,322 > 5.0% --- --- Tangible Capital (To Tangible Assets) 64,569 22.5% 4,297 > 1.5% N/A --- Tier 1 Capital (To Risk Weighted Assets) 64,569 36.4% N/A 10,637 > 6.0% --- AT JUNE 30, 2004: Total Capital (To Risk Weighted Assets) 64,731 38.8% 13,352 > 8.0% 16,690 > 10.0% --- --- Core Capital (To Tangible Assets) 62,640 22.2% 11,280 > 4.0% 14,101 > 5.0% --- --- Tangible Capital (To Tangible Assets) 62,640 22.2% 4,230 > 1.5% N/A --- Tier 1 Capital (To Risk Weighted Assets) 62,640 37.5% N/A 10,014 > 6.0% ---
27 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company's portfolio equity, see Item 7A in the Company's Annual Report on Form 10-K for the year ended June 30, 2004. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company's portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company's asset and liability position since June 30, 2004. As a result of the funds raised in the Company's stock offering and management's strategy of investing the funds from the offering and excess funds from operations in short-term investments with minimal extension risk, the Company is now more asset sensitive and is likely to experience an increase in net interest income in a rising interest rate environment. ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company's internal control over financial reporting occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 28 29 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Jefferson Bancshares is not a party to any pending legal proceedings. Periodically, there have been various claims and lawsuits involving Jefferson Federal, such as claims to enforce liens, condemnation proceedings on properties in which Jefferson Federal holds security interests, claims involving the making and servicing of real property loans and other issues incident to Jefferson Federal's business. Jefferson Federal is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
( d ) Maximum Number ( c ) (or Approximate Total Number of Dollar Value) (a) (b) Shares (or Units) of Shares (or Total Number Average Purchased as Units) That May of Shares Price Paid Part of Publicly Yet Be Purchased (or units) per Share Announced Plans Under the Plans Period Purchased (or Unit) or Progams or Programs --------------- ----------- -------------------- -------------------- Month #1 October 1, 2004 27,057 $13.00 27,057 498,319 (1) through October 31, 2004 Month #2 November 1, 2004 186,033 $13.26 186,033 312,286 (1) through November 30, 2004 Month #3 December 1, 2004 46,930 $13.26 46,930 265,356 (1) through December 31, 2004 Total 260,020 $13.23 260,020 265,356
(1) On July 30, 2004, the Company announced a Stock Repurchase Program under which the Company may repurchase up to 838,552 shares, or 10%, of the Company's common stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 29 30 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on October 21, 2004. The results of the vote on the matters presented at the meeting is as follows: 1. The following individuals were elected as directors, each for a three-year term: Votes for Votes Withheld --------- -------------- Dr. Terry M. Brimer 7,338,569 188,902 H. Scott Reams 6,909,105 618,366 2. The appointment of Craine, Thompson & Jones, P.C. as auditors for the Company for the fiscal year ending June 30, 2005 was ratified by stockholders by the following vote: For 7,392,595; Against 58,571; Abstain 76,305 Broker non-votes totaled none. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 31.1 Rule 13a-14(a)/15d-14(a) certification of the principal executive officer 31.2 Rule 13a-14(a)/15d-14(a) certification of the principal financial officer 32.1 Section 1350 certification 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JEFFERSON BANCSHARES, INC. February 8, 2005 /s/ Anderson L. Smith ------------------------------------ Anderson L. Smith President and Chief Executive Officer February 8, 2005 /s/ Jane P. Hutton --------------------------------------- Jane P. Hutton Chief Financial Officer, Treasurer and Secretary 31