10-Q 1 jefferson10qfeb-06.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File Number 00-50347 JEFFERSON BANCSHARES, INC. -------------------------- (Exact name of registrant as specified in its charter) TENNESSEE 45-0508261 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 120 EVANS AVENUE, MORRISTOWN, TENNESSEE 37814 (Address of principal executive offices) (Zip code) (423) 586-8421 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No /_/ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer /_/ Accelerated filer /X/ Non-accelerated filer /_/ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes /_/ No /X/ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: At February 9, 2006, the registrant had 6,847,112 shares of common stock, $0.01 par value per share, outstanding.
INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Condition - Unaudited Six months ended December 31, 2005 and year ended June 30, 2005................................ 3 Consolidated Statements of Earnings - Unaudited Three and six months ended December 31, 2005 and 2004.......................................... 4 Consolidated Statements of Changes in Stockholders' Equity - Unaudited Six months ended December 31, 2005 and 2004.................................................... 5 Consolidated Statements of Cash Flows - Unaudited Six months ended December 31, 2005 and 2004.................................................... 6 Notes to Consolidated Financial Statements - Unaudited......................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 26 Item 4. Controls and Procedures........................................................................ 26 Part II. - OTHER INFORMATION Item 1. Legal Proceedings.............................................................................. 27 Item 1A. Risk Factors................................................................................... 27 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................... 27 Item 3. Defaults Upon Senior Securities................................................................ 28 Item 4. Submission of Matters to a Vote of Security Holders............................................ 28 Item 5. Other Information.............................................................................. 28 Item 6. Exhibits ...................................................................................... 28 SIGNATURES
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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS JEFFERSON BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Condition (Dollars in thousands) DECEMBER 31, JUNE 30, 2005 2005 ------------------ ------------------ (Unaudited) ASSETS Cash and cash equivalents $ 2,699 $ 3,799 Interest-earning deposits 6,916 7,228 Investment securities classified as available for sale, net 46,792 53,366 Federal Home Loan Bank stock 1,696 1,652 Bank owned life insurance 5,391 5,285 Loans receivable, net of allowance for loan losses of $2,234 and $2,293 227,668 208,438 Premises and equipment, net 9,277 7,073 Foreclosed real estate, net 260 914 Accrued interest receivable: Investments 493 489 Loans receivable 1,308 1,059 Deferred tax asset 1,953 1,878 Other assets 1,645 3,860 ------------------ ------------------ Total Assets $ 306,098 $ 295,041 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing $ 9,000 $ 9,973 Interest-bearing 186,200 184,733 Federal Home Loan Bank advances 32,000 17,000 Other liabilities 980 1,307 Accrued income taxes 6 - ------------------ ------------------ Total liabilities 228,186 213,013 ------------------ ------------------ Commitments and contingent liabilities - - Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 30,000,000 shares authorized; 8,385,517 shares issued and 6,902,612 and 7,289,284 outstanding 84 84 Additional paid-in capital 71,952 71,694 Unearned ESOP shares (5,617) (5,833) Unearned compensation (3,012) (3,232) Accumulated other comprehensive income (532) (155) Retained earnings 34,878 34,069 Treasury stock, at cost; 1,501,036 and 1,105,832 shares (19,841) (14,599) ------------------ ------------------ Total stockholders' equity 77,912 82,028 ------------------ ------------------ Total liabilities and stockholders' equity $ 306,098 $ 295,041 ================== ================== See accompanying notes to financial statements
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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 SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------ ------------ 2005 2004 2005 2004 ---- ---- ---- ---- INTEREST INCOME: Interest on loans receivable $ 3,870 $ 3,203 $ 7,514 $ 6,325 Interest on investment securities 431 621 899 1,344 Other interest 91 74 173 117 --------------- --------------- --------------- --------------- Total interest income 4,392 3,898 8,586 7,786 --------------- --------------- --------------- --------------- INTEREST EXPENSE: Deposits 1,293 1,008 2,494 2,016 Advances from FHLB 258 104 437 191 --------------- --------------- --------------- --------------- Total interest expense 1,551 1,112 2,931 2,207 --------------- --------------- --------------- --------------- NET INTEREST INCOME 2,841 2,786 5,655 5,579 Provision for loan losses - - - - --------------- --------------- --------------- --------------- Net interest income after provision for loan losses 2,841 2,786 5,655 5,579 --------------- --------------- --------------- --------------- NONINTEREST INCOME: Dividends from investments - - 17 26 Mortgage origination income 131 - 317 - Service charges and fees 134 133 273 284 Loss on sale of investment securities, net - (18) (44) (43) Gain on sale of foreclosed real estate, net 83 5 160 33 BOLI increase in cash value 53 54 106 108 Other 12 24 40 54 --------------- --------------- --------------- --------------- Total noninterest income 413 198 869 462 --------------- --------------- --------------- --------------- NONINTEREST EXPENSE: Compensation and benefits 1,299 905 2,580 1,844 Occupancy expense 90 79 197 152 Equipment and data processing expense 219 217 459 437 SAIF deposit insurance premium 7 7 13 15 Advertising 81 58 145 93 REO expense 11 12 37 32 Other 380 289 731 591 --------------- --------------- --------------- --------------- Total noninterest expense 2,087 1,567 4,162 3,164 --------------- --------------- --------------- --------------- EARNINGS BEFORE INCOME TAXES 1,167 1,417 2,362 2,877 --------------- --------------- --------------- --------------- INCOME TAXES: Current 406 425 708 950 Deferred 51 110 159 93 --------------- --------------- --------------- --------------- Total income taxes 457 535 867 1,043 --------------- --------------- --------------- --------------- NET EARNINGS $ 710 $ 882 $ 1,495 $ 1,834 =============== =============== =============== =============== NET EARNINGS PER SHARE, BASIC $ 0.11 $ 0.12 $ 0.23 $ 0.24 =============== =============== =============== ============== NET EARNINGS PER SHARE, DILUTED $ 0.11 $ 0.12 $ 0.23 $ 0.24 =============== =============== =============== ============== See accompanying notes to financial statements
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JEFFERSON BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Six Months Ended December 31, 2005 and 2004 (Unaudited) (Dollars in Thousands) UNALLOCATED ACCUMULATED ADDITIONAL COMMON OTHER TOTAL COMMON PAID-IN STOCK IN UNEARNED COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' STOCK CAPITAL ESOP COMPENSATION INCOME EARNINGS STOCK EQUITY ---------- ------------ ------------ ------------- ------------ --------- --------- ------------- Balance at June 30, 2005 $ 84 $ 71,694 $ (5,833) $ (3,232) $ (155) $ 34,069 $(14,599) $ 82,028 ------------ Comprehensive income: Net earnings - - - - - 1,495 - 1,495 Change in net unrealized gain (loss) on securities available for sale, net of taxes of $(234) - - - - (377) - - (377) ------------ Total comprehensive income - - - - - - - 1,118 Dividends - - - - - (843) - (843) Dividends used for ESOP payment - - - - - 157 - 157 Shares committed to be released by the employee stock ownership plan - 67 216 - - - - 283 Stock options expensed - 132 - - - - - 132 Tax benefit from exercise of nonqualifying stock options - - - - - - - - Earned portion of stock grants - - - 220 - - - 220 Exercise of options - 34 - - - - - 34 Tax benefit from exercise of nonqualifying stock options - 25 - - - - - 25 Purchase of common stock (395,204 shares) - - - - - - (5,242) (5,242) ---------- ------------ ------------ ------------- ------------ --------- --------- ------------- Balance at December 31, 2005 $ 84 $ 71,952 $ (5,617) $ (3,012) $ (532) $ 34,878 $(19,841) $ 77,912 ========== ============ ============ ============= ============ ========= ========= ============= Balance at June 30, 2004 $ 84 $ 71,496 $ (6,265) $ (3,488) $ (793) $ 32,349 $ - $ 93,383 ------------- Comprehensive income: Net earnings - - - - - 1,834 - 1,834 Change in net unrealized gain (loss) on securities available for sale, net of taxes of $475 - - - - 766 - - 766 ------------- Total comprehensive income - - - - - - - 2,600 Dividends - - - - - (795) - (795) Dividends used for ESOP payment - - - - - 143 - 143 Shares committed to be released by the employee stock ownership plan - 64 216 - - - - 280 Stock options expensed - - - - - - - - Earned portion of stock grants - - - 220 - - - 220 Exercise of options - 44 - - - - - 44 Purchase of stock for the 2004 Stock Incentive Plan - - - (184) - - - (184) Tax benefit from exercise of nonqualifying stock options - 25 - - - - - 25 Purchase of common stock (573,196 shares) - - - - - - (7,566) (7,566) ---------- ------------ ------------ ------------- ------------ --------- --------- ------------- Balance at December 31, 2004 $ 84 $ 71,629 $ (6,049) $ (3,452) $ (27) $ 33,531 $ (7,566) $ 88,150 ========== ============ ============ ============= ============ ========= ========= =============
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JEFFERSON BANCSHARES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) (Dollars in Thousands) SIX MONTHS ENDED DECEMBER 31, ------------------------ 2005 2004 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,495 $ 1,834 Adjustments to reconcile net earnings to net cash provided by (used for) operating activities Allocated ESOP shares 283 280 Depreciation and amortization expense 128 118 Amortization of premiums (discounts), net on investment securities 18 7 (Gain) loss on sale of investment securities and mortgage-backed securities, net 60 43 (Gain) on sale of equity investments (16) - FHLB stock dividends (44) (34) Amortization of deferred loan fees, net (66) (67) Loss (gain) on sale of foreclosed real estate, net (160) (33) Deferred tax benefit 159 637 Increase in cash value of life insurance (106) (108) Earned portion of MRP 220 220 Stock options expensed 133 - Decrease (increase) in: Accrued interest receivable (253) 233 Other assets 2,215 98 Increase (decrease) in other liabilities and accrued income taxes (6) 56 ----------- ---------- Net cash provided by (used for) operating activities 4,060 3,284 ----------- ---------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Loan originations, net of principal collections (18,368) (10,734) Investment securities classified as available for sale: Purchased (775) - Proceeds from sale 5,022 20,378 Proceeds from maturity - 1,500 Return of principal on mortgage-backed securities 1,639 2,363 Purchase of premises and equipment (2,332) (131) Proceeds from sale of (additions to) foreclosed real estate, net 214 220 ----------- --------- Net cash provided by (used for) investing activities (14,600) 13,596 ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 494 (2,981) Proceeds from advances from FHLB 27,000 15,000 Repayment of FHLB advances (12,000) (9,000) Purchase of company stock for the 2004 Stock Based Incentive Plan - (14) Purchase of treasury stock (5,242) (7,566) Cash dividend paid on common stock (1,158) (1,159) Proceeds from exercise of stock options 34 44 ----------- ---------- Net cash provided by (used for) financing activities 9,128 (5,676) ----------- ---------- Net increase (decrease) in cash, cash equivalents and interest-earning deposits (1,412) 11,204 Cash, cash equivalents and interest-earning deposits at beginning of period 11,027 6,411 ----------- ---------- Cash, cash equivalents and interest-earning deposits at end of period $ 9,615 $ 17,615 =========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during period for: Interest on deposits $ 2,494 $ 2,016 Interest on FHLB advances 437 191 Income taxes 720 1,030 Real estate acquired in settlement of loans 224 1,202 See accompanying notes to financial statements
6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION --------------------- The accompanying unaudited consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the "Company" or "Jefferson Bancshares") and its wholly-owned subsidiary, Jefferson Federal Bank (the "Bank" or "Jefferson Federal"). The unaudited financial statements of the Company were prepared with generally accepted accounting principles and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the interim financial statements. The results of operations for the period ended December 31, 2005 are not necessarily indicative of the results which may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2005. (2) PRINCIPLES OF CONSOLIDATION --------------------------- The consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly-owned subsidiary, Jefferson Federal Bank. All significant intercompany balances and transactions have been eliminated in consolidation. (3) USE OF ESTIMATES ---------------- In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the statement of condition dates and revenues and expenses for the periods shown. Actual results could differ from the estimates and assumptions used in the consolidated financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets. (4) LIMITATION ON CAPITAL DISTRIBUTIONS ----------------------------------- Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for "expedited treatment" of applications under Office of Thrift Supervision regulations (I.E., generally, examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with, or condition imposed by, the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary of a holding company. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any 7 institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federal's capital falls below its regulatory requirements or the Office of Thrift Supervision notifies it that it is in need of more than normal supervision, Jefferson Federal's ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the distribution would reduce its regulatory capital below the amount needed for the liquidation account established in connection with its conversion from the mutual holding company form of organization. (5) EARNINGS PER COMMON SHARE ------------------------- Earnings per common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unearned ESOP shares. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:
WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES OUTSTANDING FOR THE OUTSTANDING FOR THE THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------- --------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------- Weighted average number of common shares used in computing basic earnings per common share 6,416,745 7,383,907 6,485,859 7,569,166 Effect of dilutive stock options 18,062 22,950 22,847 19,308 ------------ ------------ ------------ ------------- Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming dilution 6,434,807 7,406,857 6,508,706 7,588,474 ============ ============ ============ =============
(6) STATEMENTS OF CASH FLOWS ------------------------ Dividends declared but not paid have been recorded in other liabilities; however, their non-effect on cash and operations dictates their exclusion from the cash flows until actually paid. (7) ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ------------------------------------------------ Impairment of loans having recorded investment of $80,000 at December 31, 2005 and an average investment of $80,000 during the six-month period ended December 31, 2005 has been recognized in conformity with the Financial Accounting Standards Board ("FASB") Statement No. 118. The total allowance for loan losses related to these loans was $2,000 at December 31, 2005. Other nonaccrual loans at December 31, 2005 were approximately $499,000. For the six months ended December 31, 2005, gross income which would have been recognized had impaired and nonaccrual loans been current in accordance with their original terms amounted to approximately $20,000. Interest income from impaired and non-accrual loans included in the Company's interest income amounted to $9,000 for the six months ended December 31, 2005. 8 The following table summarizes the activity in the allowance for loan losses for the three months ended December 31, 2005: ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS) ---------------------------- Balance at June 30, 2005 $ 2,293 Provision for loan losses - Charge-offs $ (135) Recoveries 76 ------------ Net (charge-offs)/recoveries (59) ------------ Balance at December 31, 2005 $ 2,234 ============ (8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK ------------------------------------------------- Jefferson Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount and related accrued interest receivable of those instruments. The Company minimizes this risk by evaluating each borrower's creditworthiness on a case-by-case basis. Collateral held by the Company consists of a first or second mortgage on the borrower's property. The amount of collateral obtained is based upon an appraisal of the property. At December 31, 2005, we had approximately $1.1 millon in loan commitments, consisting of $637,000 in commitments to originate residential loans and $482,000 to originate commercial loans. In addition to commitments to originate loans, we had $11.2 million in loans-in-process, $433,000 in unused standby letters of credit and approximately $11.6 million in unused lines of credit. (9) DIVIDEND DECLARATION -------------------- On November 30, 2005, the Board of Directors of the Company approved a quarterly dividend of $0.06 per share to stockholders of record as of December 31, 2005 and payable on January 13, 2006. (10) STOCK INCENTIVE PLANS --------------------- Under the Bank's 1995 Stock Option Plan and the 1995 Management Recognition and Development Plan ("MRP"), the Company issued a combined total of 179,176 shares to officers, employees and non-employee directors. Both plans vested pro-rata over a five-year period, with the Stock Option Plan having an expiration date of April 1, 2007. As of December 31, 2005, there were 42,726 options outstanding and no remaining shares available for grant under the 1995 Stock Option Plan. During the three-month period, 8,532 options were exercised. On January 8, 2004, the Company adopted the 2004 Stock Incentive Plan which authorized the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors. As of December 31, 2005, there were 401,778 options and 160,711 restricted stock awards granted under this plan which will vest pro-rata over a five-year period. The 2004 plan has an expiration date of January 30, 2014. 9 The table below summarizes the status of the Company's stock option plans as of December 31, 2005.
SIX MONTHS ENDED DECEMBER 31, 2005 ----------------- Weighted- average Shares exercise price ------------- --------------- Outstanding at beginning of period 453,036 $12.60 Granted during the six-month period - - Options exercised 8,532 $ 3.94 Outstanding at December 31, 2005 444,504 $12.77 Options exercisable at December 31, 2005 123,087 $10.36
The following information applies to options outstanding at December 31, 2005: Number outstanding 444,504 Range of exercise prices $3.52 - $13.69 Weighted-average exercise price $12.77 Weighted-average remaining contractual life 7.42 Number of options remaining for future issuance 296,972 In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123R, "Share Based Payment" (SFAS 123R), an amendment of FASB Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 ("APB 25") and requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Effective July 1, 2005, the Company adopted SFAS 123R using the modified prospective application transition method. This will require the Company to expense the unvested portion of options granted in 2004, which will reduce net earnings by approximately $217,000 in fiscal year 2006 and $542,500 in the remaining service period. SFAS 123R provides for the use of alternative models to determine compensation cost related to stock option grants. The estimated fair value of stock options at grant date has been determined using the Black-Scholes option-pricing model based on market data as of January 29, 2004. The expected dividend yield of 1.17% and expected volatility of 7.01% were used to model the value. The risk free rate of return equaled 4.22%, which was based on the yield of a U.S. Treasury note with a term of ten years. The estimated time remaining before the expiration of the options equaled ten years. 10
Three months Six months ended ended December 31, December 31, 2004 2004 --------------- --------------- Net Income: As reported $ 882 $ 1,834 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (54) (109) --------------- --------------- Pro-forma $ 828 $ 1,725 =============== =============== Basic net earnings per share: As reported $ 0.12 $ 0.24 Pro-forma $ 0.11 $ 0.23 Earnings per common share assuming dilution As reported $ 0.12 $ 0.24 Pro-forma $ 0.11 $ 0.23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2005. GENERAL ------- Jefferson Bancshares, Inc. (also referred to as the "Company" or "Jefferson Bancshares") is the holding company for Jefferson Federal Bank (the "Bank") or "Jefferson Federal." The Company has no significant assets, other than all of the outstanding shares of the Bank, and no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank. Jefferson Federal is a community oriented financial institution offering traditional financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential properties, as well as to originate commercial real estate and multi-family mortgage loans, construction loans, consumer loans, commercial non-real estate loans and make other investments permitted by applicable laws and regulations. 11 The Bank's savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation ("FDIC") through the Savings Association Insurance Fund ("SAIF"). Jefferson Federal Bank is a member of the Federal Home Loan Bank ("FHLB") System. PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT -------------------------------------------------------------- This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; but rather, are statements based on Jefferson Bancshares' current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company's loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended June 30, 2005 under "Item 1. Business - Risk Factors." These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004 NET INCOME ---------- Net income was $710,000, or $0.11 per diluted share, for the quarter ended December 31, 2005 compared to net income of $882,000, or $0.12 per diluted share, for the comparable period in 2004. For the six months ended December 31, 2005, net income was $1.5 million, or $0.23 per diluted share compared to $1.8 million, or $0.24 per diluted share, for the comparable period in 2004. The decline in net income for both the three and six month period ended December 31, 2005 was the result of an increase in noninterest expense, partially offset by an increase in net interest income and noninterest income. The increase in noninterest expense was the result of our expansion activities, as well as our adoption of Financial Accounting Standards Board's ("FASB") Statement 123R, which requires the expensing of stock options.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------- --------------------------- 2005 2004 2005 2004 ------------ ------------- ------------ ------------ (Dollars in thousands, (Dollars in thousands, except per share data) except per share data) Net earnings $ 710 $ 882 $1,495 $1,834 Net earnings per share, basic $0.11 $0.12 $ 0.23 $ 0.24 Net earnings per share, diluted $0.11 $0.12 $ 0.23 $ 0.24 Return on average assets (annualized) 0.94% 1.15% 0.99% 1.19% Return on average equity (annualized) 3.60% 3.95% 3.74% 4.02%
12 NET INTEREST INCOME ------------------- Net interest income before loan loss provision increased $55,000 to $2.8 million for the three months ended December 31, 2005 compared to the same period in 2004. The increase in short-term interest rates has improved the yield on earning assets; however, our cost of funds has also been affected by the increase in rates. The interest rate spread and net interest margin for the quarter ended December 31, 2005 were 3.33% and 4.03%, respectively, compared to 3.23% and 3.84% for the same period in 2004. The average yield on interest-earning assets increased 85 basis points to 6.23% while the average volume of earning assets declined $7.8 million, to $282.1 million for the three months ended December 31, 2005 compared to the same period in 2004. The average rate paid on interest-bearing liabilities increased 75 basis points to 2.90% while the average volume of interest-bearing liabilities increased $6.8 million, to $213.9 million for the three months ended December 31, 2005 compared to the same period in 2004. The following table summarizes changes in interest income and expense for the three-month periods ended December 31, 2005 and 2004:
THREE MONTHS ENDED DECEMBER 31, --------------------- 2005 2004 $ CHANGE % CHANGE --------- --------- ----------- ------------ (Dollars in thousands) INTEREST INCOME: Loans $ 3,870 $ 3,203 $ 667 20.8% Investment securities 431 621 (190) (30.6%) Interest-earning deposits 67 57 10 17.5% FHLB stock 24 17 7 41.2% --------- --------- ----------- Total interest income 4,392 3,898 494 12.7% INTEREST EXPENSE: Deposits 1,293 1,008 285 28.3% Borrowings 258 104 154 148.1% --------- --------- ----------- Total interest expense 1,551 1,112 439 39.5% --------- --------- ----------- Net interest income $ 2,841 $ 2,786 $ 55 2.0% ========= ========= ===========
Net interest income before loan loss provision increased $76,000 to $5.7 million for the six months ended December 31, 2005 compared to the same period in 2004. The interest rate spread and net interest margin for the six months ended December 31, 2005 were 3.35% and 4.04%, respectively, compared to 3.20% and 3.81% for the same period in 2004. The average yield on interest-earning assets increased 82 basis points to 6.14% while the average volume of earning assets declined $13.1 million, to $279.8 million for the six months ended December 31, 2005 compared to the same period in 2004. The average rate paid on interest-bearing liabilities increased 66 basis points to 2.78% while the average volume of interest-bearing liabilities increased $2.0 million, to $210.6 million for the six months ended December 31, 2005 compared to the same period in 2004. 13 The following table summarizes changes in interest income and expense for the six-month periods ended December 31, 2005 and 2004:
SIX MONTHS ENDED DECEMBER 31, --------------------- 2005 2004 $ CHANGE % CHANGE --------- --------- ----------- ------------ (Dollars in thousands) INTEREST INCOME: Loans $ 7,514 $ 6,325 $ 1,189 18.8% Investment securities 899 1,344 (445) (33.1%) Interest-earning deposits 129 83 46 55.4% FHLB stock 44 34 10 29.4% --------- --------- ----------- Total interest income 8,586 7,786 800 10.3% INTEREST EXPENSE: Deposits 2,494 2,016 478 23.7% Borrowings 437 191 246 128.8% --------- --------- ----------- Total interest expense 2,931 2,207 724 32.8% --------- --------- ----------- Net interest income $ 5,655 $ 5,579 $ 76 1.4% ========= ========= ===========
The following table summarizes average balances and average yields and costs:
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, --------------------------------------------- --------------------------------------------- 2005 2004 2005 2004 --------------------- ---------------------- ---------------------- --------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE COST BALANCE COST BALANCE COST BALANCE COST ------------ ------- ------------ -------- ------------ -------- ------------ ------- (Dollars in thousands) (Dollars in thousands) Loans $ 225,717 6.86% $ 199,672 6.42% $ 220,292 6.82% $ 199,323 6.35% Investment securities 47,008 3.67% 75,128 3.31% 48,988 3.67% 81,224 3.31% Interest-earning deposits 7,681 3.49% 13,449 1.70% 8,841 2.92% 10,798 1.54% FHLB stock 1,686 5.69% 1,608 4.23% 1,675 5.25% 1,599 4.25% Deposits 186,560 2.77% 195,124 2.07% 186,389 2.68% 196,753 2.05% Borrowings 27,333 3.78% 12,000 3.47% 24,167 3.62% 11,833 3.21%
The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume. 14
THREE MONTHS SIX MONTHS 2005 COMPARED TO 2004 2005 COMPARED TO 2004 -------------------------------- ----------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO ----------------------- ----------------------- VOLUME RATE NET VOLUME RATE NET ---------- ----------- ------- ---------- ----------- ---------- (In thousands) (In thousands) Interest income: Loans receivable $ 437 $ 230 $ 667 $ 690 $ 499 $ 1,189 Investment securities (258) 68 (190) (584) 139 (445) Other (63) 80 17 (48) 104 56 ---------- ----------- ------- ---------- ----------- ---------- Total interest-earning assets 116 378 494 58 742 800 ---------- ----------- ------- ---------- ----------- ---------- Interest expense: Deposits (42) 327 285 (99) 576 477 Borrowings 144 10 154 221 26 247 ---------- ----------- ------- ---------- ----------- ---------- Total interest-bearing liabilities 102 337 439 122 602 724 ---------- ----------- ------- ---------- ----------- ---------- Net change in interest income $ 14 $ 41 $ 55 $ (64) $ 140 $ 76 ========== =========== ======= ========== =========== ==========
Total interest income increased $494,000, or 12.7%, to $4.4 million for the three months ended December 31, 2005, and increased $800,000, or 10.3%, to $8.6 million for the six months ended December 31, 2005. The increase in interest income was primarily due to an increase in both the volume and yield on average loans more than offsetting a decrease in the volume of investment securities. Interest on loans increased $667,000, or 20.8%, to $3.9 million for the three months ended December 31, 2005 and increased $1.2 million, or 18.8%, to $7.5 million for the six months ended December 31, 2005. The increase in interest on loans is the result of a higher average balance, primarily due to growth in the commercial and consumer loan portfolio, combined with a higher average yield. The increase in the average yield on loans was primarily the result of increases in the prime lending rate. The average yield on loans increased 44 basis points, to 6.86% for the three months ended December 31, 2005 compared to the same period in 2004. Most of the commercial loans that have been originated have been tied to prime and will reprice quickly as interest rates change. Interest on investment securities decreased $190,000, or 30.6%, to $431,000 for the three months ended December 31, 2005 from the corresponding period in 2004. For the six moths ended December 31, 2005, interest on investments decreased $445,000, or 33.1%, to $899,000, from the corresponding period in 2004. The decrease for both periods was the result of a decrease in the average balance of investment securities more than offsetting an increase in the average yield. The average balance of investment securities decreased $28.1 million, to $47.0 million for the three months ended December 31, 2005 and decreased $32.2 million, to $49.0 million for the six months ended December 31, 2005. Proceeds from the sale of investment securities were used to fund stock repurchases and to fund growth in the loan portfolio. The average yield on investments increased 36 basis points to 3.67% for both the three and six months at December 31, 2005 compared to the same periods in 2004. Dividends on Federal Home Loan Bank ("FHLB") stock were $24,000 and $44,000, respectively for the three- and six-month period ended December 31, 2005, compared to $17,000 and $34,000 for the comparable period in 2004. FHLB dividends are paid with additional shares of FHLB stock. 15 Total interest expense increased $439,000, or 39.5%, to $1.6 million for the three-month period ended December 31, 2005 compared to the same period in 2004. For the six months ended December 31, 2005, total interest expense increased $724,000, or 32.8%, to $2.9 million compared to the same period in 2004. The increase in both periods was due to an increase in the average rate paid on interest-bearing liabilities combined with an increase in the average balance of Federal Home Loan Bank advances. Interest expense on deposits increased $285,000, or 28.3%, to $1.3 million for the three-month period ended December 31, 2005 and increased $478,000, or 23.7%, to $2.5 million for the six-month period ended December 31, 2005 . The increase for both periods was due to an increase in the average rate paid on deposits more than offsetting a decrease in the average balance of deposits. The average rate paid on deposits increased 70 basis points to 2.77% for the current three-month period and increased 63 basis points to 2.68% for the current six-month period due to higher rates paid on money market accounts and time deposits. The increase in the rate paid on deposits reflects an increase in short-term market interest rates. Interest expense on FHLB advances was $258,000 for the three months ended December 31, 2005 compared to $104,000 for the comparable period in 2004. For the six months ended December 31, 2005, interest expense on FHLB advances was $437,000 compared to $191,000 for the comparable period in 2004. The increase for both periods was due to a higher average balance and a higher rate paid. FHLB advances were utilized as a funding source for supporting loan growth during the three and six months ended December 31, 2005. PROVISION FOR LOAN LOSSES ------------------------- We review the level of the loan loss allowance on a monthly basis and establish the provision for loan losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the collectibility of the loan portfolio. Net charge-offs for the three and six month period ended December 31, 2005 amounted to $47,000 and $59,000, respectively, compared to $84,000 and $91,000 for the comparable periods in 2004. There were no additions to the allowance for loan losses for either six-month period. Nonperforming loans totaled $498,000 at December 31, 2005 compared to $1.4 million for the comparable period in 2004. NONINTEREST INCOME ------------------ Noninterest income increased $215,000 to $413,000 for the three months ended December 31, 2005 compared to $198,000 for the comparable period in 2004. Mortgage origination fee income accounted for the largest increase in noninterest income with $131,000 for the current three-month period and no comparable income from mortgage originations in 2004. In January 2004, we began originating and selling loans in secondary market. Gain on sale of foreclosed property was $83,000 for the three months ended December 31, 2005 compared to $5,000 for the same period in 2004. The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended December 31, 2005 compared to the same period in 2004. 16
THREE MONTHS ENDED DECEMBER 31, ------------------------- $ % 2005 2004 CHANGE CHANGE ----------- ----------- --------- ---------- (Dollars in thousands) Mortgage origination fees $ 131 $ - $ 131 NM Service charges and fees 134 133 1 0.8% Loss on sale of investment securities, net - (18) 18 -100.0% Gain on sale of foreclosed property 83 5 78 1560.0% BOLI increase in cash value 53 54 (1) (1.9%) Other 12 24 (12) (50.0%) ----------- ----------- --------- Total noninterest income $ 413 $ 198 $ 215 108.6% =========== =========== =========
Noninterest income increased $407,000, or 88.1%, to $869,000 for the six months ended December 31, 2005 compared to $462,000 for the comparable period in 2004. Mortgage origination fee income accounted for the largest increase in noninterest income with $317,000 for the current six-month period and no comparable income from mortgage originations in 2004. Gain on sale of foreclosed property was $160,000 for the six months ended December 31, 2005 compared to $33,000 for the same period in 2004. Service charges and fees decreased $11,000, or 3.9%, to $273,000 for the six months ended December 31, 2005 compared to $284,000 for the same period in 2004. The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the six months ended December 31, 2005 compared to the same period in 2004.
SIX MONTHS ENDED DECEMBER 31, ------------------------- $ % 2005 2004 CHANGE CHANGE ----------- ----------- --------- ---------- (Dollars in thousands) Dividends from investments $ 17 $ 26 $ (9) (34.6%) Mortgage origination fees 317 - 317 NM Service charges and fees 273 284 (11) (3.9%) Loss on sale of investment securities, net (44) (43) (1) 2.3% Gain on sale of foreclosed property 160 33 127 384.8% BOLI increase in cash value 106 108 (2) (1.9%) Other 40 54 (14) (25.9%) ----------- ----------- --------- Total noninterest income $ 869 $ 462 $ 407 88.1% =========== =========== =========
NONINTEREST EXPENSE ------------------- Noninterest expense increased $520,000, or 33.2%, to $2.1 million for the three-month period ended December 31, 2005, primarily due to an increase in compensation expense. Compensation expense increased $394,000, or 43.5%, to $1.3 million for the three-month period ended December 31, 2005, primarily due to staff additions for the lending office in Knoxville, Tennessee which opened on January 1, 2005 and our future branch office in Morristown, Tennessee and two future branch offices in Knoxville, Tennessee which are anticipated to open in 2006. There were 85 employees at December 31, 2005 compared to 68 employees at December 31, 2004. On July 1, 2005, we adopted FASB Statement No. 123R, "Share-Based Payment" using the modified prospective approach, which requires the expensing of unvested stock options granted prior to the adoption date. The expense will be based on the grant-date fair value and will be recognized over the remaining vesting period. The cost of stock options that have vested prior to the adoption of SFAS 123R is never recognized. Accordingly, for the three months ended December 31, 2005, compensation expense included $66,000 related to the expensing of stock options. 17 The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended December 31, 2005 compared to the same period in 2004.
THREE MONTHS ENDED DECEMBER 31, ------------------------- $ % 2005 2004 CHANGE CHANGE ----------- ----------- --------- ----------- (Dollars in thousands) Compensation and benefits $ 1,299 $ 905 $ 394 43.5% Occupancy 90 79 11 13.9% Equipment and data processing 219 217 2 0.9% SAIF deposit insurance premium 7 7 - 0.0% Advertising 81 58 23 39.7% REO expense 11 12 (1) (8.3%) Other 380 289 91 31.5% ----------- ----------- --------- Total noninterest expense $ 2,087 $ 1,567 $ 520 33.2% =========== =========== =========
For the six months ended December 31, 2005, noninterest expense increased $998,000, or 31.5%, to $4.2 million due primarily to an increase in compensation and benefits expense. Compensation and benefits expense increased $736,000, or 39.9%, to $2.6 million for the six months ended December 31, 2005 due to staff additions and stock option expensing. Compensation and benefits expense related to stock option expense totaled $133,000 for the six months ended December 31, 2005. The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the six months ended December 31, 2005 compared to the same period in 2004.
SIX MONTHS ENDED DECEMBER 31, ------------------------- $ % 2005 2004 CHANGE CHANGE ----------- ----------- --------- --------- (Dollars in thousands) Compensation and benefits $ 2,580 $ 1,844 $ 736 39.9% Occupancy 197 152 45 29.6% Equipment and data processing 459 437 22 5.0% SAIF deposit insurance premium 13 15 (2) (13.3%) Advertising 145 93 52 55.9% REO expense 37 32 5 15.6% Other 731 591 140 23.7% ----------- ----------- --------- Total noninterest expense $ 4,162 $ 3,164 $ 998 31.5% =========== =========== =========
INCOME TAXES ------------ Income tax expense for the three months ended December 31, 2005 was $457,000 compared to $535,000 for the same period in 2004 due to lower level of taxable income. For the six months ended December 31, 2005, income tax expense decreased $176,000, or 16.9%, to $867,000 due to lower taxable income. 18 FINANCIAL CONDITION ASSETS ------ At December 31, 2005, total assets were $306.1 million, an increase of $11.1 million, or 3.7%, compared to $295.0 million at June 30, 2005. The increase in assets was primarily attributable to an increase in loans, more than offsetting a decline in investment securities. Proceeds from sales and maturities of investment securities and repayments of mortgage-backed securities were utilized to fund stock repurchases and to fund growth in the loan portfolio. Additional FHLB advances were used to fund asset growth. INVESTMENTS ----------- Our investment portfolio consists primarily of Federal agency securities with maturities of seven years or less, municipal securities and mortgage-backed securities with stated final maturities of thirty years or less. Investment securities decreased $6.6 million, or 12.3%, to $46.8 million due primarily to sales of investment securities during the six-month period. Proceeds from the sale of investment securities were used to fund stock repurchases and to fund growth in the loan portfolio. Investment securities classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $863,000, or $377,000 net of taxes. The following table sets forth the carrying values of our investment securities portfolio at the dates indicated. All of our investment securities are classified as available-for-sale.
AT DECEMBER 31, 2005 AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ----------- ------------ (Dollars in thousands) Securities Available-for-Sale Debt securities: Federal agency $ 37,359 $ 24 $ (814) $ 36,569 Municipals 4,241 2 (105) 4,138 Mortgage-backed 6,054 34 (3) 6,085 ------------ ------------ ----------- ------------ Total securities available- for-sale $ 47,654 $ 60 $ (922) $ 46,792 ============ ============ =========== ============ Weighted-average rate 3.59% ============ AT JUNE 30, 2005 AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------ ------------ ----------- ------------ (Dollars in thousands) Securities Available-for-Sale Debt securities: Federal agency $ 42,447 $ 83 $ (393) $ 42,137 Municipals 3,475 2 (60) 3,417 Mortgage-backed 7,695 117 - 7,812 ------------ ------------ ----------- ------------ Total securities available- for-sale $ 53,617 $ 202 $ (453) $ 53,366 ============ ============ =========== ============ Weighted-average rate 3.42% ============
19 LOANS ----- Net loans increased $19.2 million, or 9.2%, to $227.7 million at December 31, 2005. Our expansion into the Knoxville, Tennessee market has generated additional lending opportunities, which has resulted in significant growth in our loan portfolio. Our primary lending activity is the origination of loans secured by real estate. Real estate loans totaled $190.5 million, or 82.8% of gross loans at December 31, 2005 compared to $168.8 million, or 80.0% of gross loans, at June 30, 2005. We originate real estate loans secured by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. The largest portion of loan growth occurred in commercial real estate, due to our emphasis on this type of lending. Commercial real estate loans increased $12.3 million, or 22.7%, to $66.5 million at December 31, 2005. Commercial business loans decreased $5.2 million, or 15.1%, to $29.4 million at December 31, 2005. Commercial business loans were 12.8% of gross loans at December 31, 2005 compared to 16.4% of gross loans at June 30, 2005. Most of the commercial business loans that we have originated have been tied to prime and will reprice quickly as interest rates change. We originate a variety of consumer loans, including loans secured by automobiles, mobile homes and deposit accounts at Jefferson Federal. Consumer loans totaled $10.3 million and represented 4.5% of total loans at December 31, 2005 compared to $7.6 million, or 3.6% of total loans at June 30, 2005. Consumer loans increased in the three months ended December 31, 2005 due to an increase in indirect automobile loans. Loans receivable, net, are summarized as follows: 20
AT AT DECEMBER 31, JUNE 30, 2005 2005 ------------------------- ------------------------- PERCENT PERCENT $ % AMOUNT OF PORTFOLIO AMOUNT OF PORTFOLIO CHANGE CHANGE ------------ ------------ ------------ ------------ ----------- ---------- (Dollars in thousands) Real estate loans: Residential one-to four-family $ 79,495 34.5% $ 79,652 37.7% $ (157) (0.2%) Multi-family 7,854 3.4% 8,568 4.1% (714) (8.3%) Construction 11,500 5.0% 7,029 3.3% 4,471 63.6% Commercial 66,546 28.9% 54,252 25.7% 12,294 22.7% Land 20,383 8.9% 14,415 6.8% 5,968 41.4% Home equity line of credit 4,739 2.1% 4,898 2.3% (159) (3.2%) ------------ ------------ ------------ ------------ ----------- Total real estate loans 190,517 82.8% 168,814 80.0% 21,703 12.9% ------------ ------------ ------------ ------------ ----------- Commercial business loans 29,380 12.8% 34,603 16.4% (5,223) (15.1%) ------------ ------------ ------------ ------------ ----------- Consumer Loans: Loans secured by deposit accounts 976 0.4% 1,041 0.5% (65) (6.2%) Other consumer loans 1,681 0.7% 1,705 0.8% (24) (1.4%) Loans secured by automobiles 7,364 3.2% 4,457 2.1% 2,907 65.2% Mobile home loans 280 0.1% 379 0.2% (99) (26.1%) ------------ ------------ ------------ ------------ ----------- Total non-real estate loans 10,301 4.5% 7,582 3.6% 2,719 35.9% ------------ ------------ ------------ ------------ ----------- Total commercial business and consumer loans 39,681 17.2% 42,185 20.0% (2,504) (5.9%) ------------ ------------ ------------ ------------ ----------- Total gross loans 230,198 100.0% 210,999 100.0% 19,199 9.1% Less: Deferred loan fees, net (296) (268) (28) 10.4% Allowance for losses (2,234) (2,293) 59 (2.6%) ------------ ------------ ----------- Loans receivable, net $ 227,668 $ 208,438 $ 19,230 9.2% ============ ============ ===========
LOAN LOSS ALLOWANCE ------------------- The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish reserves against losses on loans on a monthly basis. When additional reserves are necessary, a provision for loan losses is charged to earnings. In connection with assessing the allowance, we consider the level of classified loans, delinquency levels and loss experience. In addition, we assess the allowance using factors that cannot be associated with specific credit or loan categories. These factors include our subjective evaluation of local and national economic and business conditions, portfolio concentration and changes in the character and size of the loan portfolio. The allowance methodology appropriately reflects a margin for the imprecision necessarily inherent in estimates of expected credit losses. The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours. 21 Due to net charge-offs, the allowance for loan losses decreased $59,000 to $2.2 million at December 31, 2005. There were no additions to the allowance for loan losses during the six-month period ended December 31, 2005. Our allowance for loan losses represented 0.97% of total gross loans at December 31, 2005 compared to 1.09% of total gross loans at June 30, 2005.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------- --------------------------- 2005 2004 2005 2004 ----------- ------------ ------------ ----------- (Dollars in thousands) (Dollars in thousands) Balance at beginning of period $ 2,281 $ 2,472 $ 2,293 $ 2,479 Provision for loan losses - - - - Recoveries 40 74 76 186 Charge-offs (87) (158) (135) (277) ----------- ------------ ------------ ----------- Net charge-offs (47) (84) (59) (91) ----------- ------------ ------------ ----------- Allowance at end of period $ 2,234 $ 2,388 $ 2,234 $ 2,388 =========== ============ ============ =========== Net charge-offs to average outstanding loans during the period, annualized 0.08% 0.17% 0.05% 0.09%
NONPERFORMING ASSETS -------------------- We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent. Nonperforming assets were $772,000 at December 31, 2005 compared to $1.3 million at June 30, 2005. Nonperforming loans were $498,000 and $426,000 at December 31, 2005 and June 30, 2005, respectively. Foreclosed real estate decreased $654,000 to $260,000 at December 31, 2005 due to the disposition of several pieces of foreclosed property. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.
DECEMBER 31, JUNE 30, 2005 2005 --------------- --------------- (Dollars in thousands) Nonaccruing loans: Real estate $ 498 $ 426 Commercial business - - Consumer - - --------------- --------------- Total nonaccrual loans 498 426 Real estate owned 260 914 Other repossessed assets 14 - --------------- --------------- Total nonperforming assets $ 772 $ 1,340 =============== =============== Total nonperforming assets to total assets 0.25% 0.45% Total nonperforming loans to total loans 0.22% 0.20% Allowance for loan losses to total nonperforming loans 448.59% 538.26%
22 BANK OWNED LIFE INSURANCE ------------------------- We hold bank owned life insurance ("BOLI") to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at December 31, 2005 was $5.4 million. DEPOSITS -------- Total deposits increased $494,000 to $195.2 million at December 31, 2005. Transaction accounts increased $3.5 million, or 4.8%, to $77.1 million, while time deposits decreased $3.0 million, or 2.5%, to $118.1 million at December 31, 2005. We have focused on attracting lower costing transaction accounts to manage our cost of funds. Transaction accounts represented 39.5% of total deposits at December 31, 2005 compared to 37.8% at June 30, 2005 and 33.4% at December 31, 2004. The decrease in time deposits is the result of our pricing strategy combined with strong competition for time deposits in our market.
DECEMBER 31, JUNE 30, 2005 2005 $ CHANGE % CHANGE --------------- --------------- ------------- ------------ (Dollars in thousands) Certificates of deposit $ 118,098 $ 121,130 $ (3,032) (2.5%) Savings accounts 12,206 12,944 (738) (5.7%) Money market accounts 40,069 31,841 8,228 25.8% NOW accounts 15,827 18,818 (2,991) (15.9%) Non-interest bearing accounts 9,000 9,973 (973) (9.8%) --------------- --------------- ------------- $ 195,200 $ 194,706 $ 494 0.3% =============== =============== =============
ADVANCES AND OTHER LIABILITIES ------------------------------ FHLB advances increased $15.0 million to $32.0 million at December 31, 2005. We utilize FHLB cash management overnight advances as a funding source to manage daily liquidity needs. In addition, a combination of fixed and variable rate FHLB advances, with maturities ranging from August 2006 to March 2011, have been used as a funding source for loan growth. STOCKHOLDERS' EQUITY -------------------- Stockholders' equity decreased $4.1 million, or 5.0%, to $77.9 million at December 31, 2005. Retained earnings increased $809,000 to $34.9 million at December 31, 2005 due to net earnings of $1.5 million partially offset by the payment of dividends to shareholders in the amount of $843,000. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders' equity. At December 31, 2005, the adjustment to stockholders' equity was an unrealized loss of $532,000 compared to a net unrealized loss of $155,000 at June 30, 2005. During the six-month period ended December 31, 2005, there were 395,204 shares of treasury stock purchased at a cost of $5.2 million. 23 LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposits, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We regularly adjust our investments in liquid assets based on our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations. Our most liquid assets are cash and cash equivalents and interest-earning assets. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2005, cash and cash equivalents totaled $2.7 million and interest-earning deposits totaled $6.9 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $46.8 million at December 31, 2005. In addition, at December 31, 2005, we had arranged the ability to borrow a total of approximately $64.9 million from the Federal Home Loan Bank of Cincinnati. In the six-month period ended December 31, 2005, Federal Home Loan Bank advances increased $15.0 million to $32.0 million. We anticipate that we will have sufficient funds available to meet current loan commitments. At December 31, 2005, we had approximately $1.1 million in loan commitments, consisting of $637,000 in commitments to originate residential loans and $482,000 to originate commercial loans. In addition to commitments to originate loans, we had $11.2 million in loans-in-process, $433,000 in unused standby letters of credit and approximately $11.6 million in unused lines of credit We had $73.3 million in certificates of deposit due within one year and $77.1 million in other deposits without specific maturities at December 31, 2005. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We have the ability to attract and retain deposits by adjusting the interest rates offered. We experienced a net increase in total deposits of $494,000 during the six-month period ended December 31, 2005. At December 31, 2005, the average liquidity ratio was 22.02% compared to 33.42% at December 31, 2004. The level of liquidity has been reduced as net proceeds from the stock offering have been used for lending, operational growth and expansion activities. OFF-BALANCE SHEET ARRANGEMENTS In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments, unused lines of credit, amounts due mortgagors on construction loans, amounts due on commercial loans and commercial letters of credit. For the three months ended December 31, 2005, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows. 24 CAPITAL COMPLIANCE The following table presents our capital position relative to our regulatory capital requirements at December 31, 2005 and June 30, 2005:
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------------- ------------------------ ------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- (Dollars in thousands) AT DECEMBER 31, 2005 Total Capital (To Risk Weighted Assets) $ 67,682 31.9% $ 16,991 > 8.0% $ 21,239 > 10.0% --- --- Core Capital (To Tangible Assets) 65,633 21.8% 12,049 > 4.0% 15,062 > 5.0% --- --- Tangible Capital (To Tangible Assets) 65,633 21.8% 4,518 > 1.5% N/A --- Tier 1 Capital (To Risk Weighted Assets) 65,633 30.9% N/A 12,744 > 6.0% --- AT JUNE 30, 2005 Total Capital (To Risk Weighted Assets) $ 67,648 35.4% $ 15,293 > 8.0% $ 19,116 > 10.0% --- --- Core Capital (To Tangible Assets) 65,539 22.7% 11,539 > 4.0% 14,424 > 5.0% --- --- Tangible Capital (To Tangible Assets) 65,539 22.7% 4,327 > 1.5% N/A --- Tier 1 Capital (To Risk Weighted Assets) 65,539 34.3% N/A 11,470 > 6.0% ---
25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company's portfolio equity, see Item 7A in the Company's Annual Report on Form 10-K for the year ended June 30, 2005. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company's portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company's asset and liability position since June 30, 2005. ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company's internal control over financial reporting occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Jefferson Bancshares is not a party to any pending legal proceedings. Periodically, there have been various claims and lawsuits involving Jefferson Federal, such as claims to enforce liens, condemnation proceedings on properties in which Jefferson Federal holds security interests, claims involving the making and servicing of real property loans and other issues incident to Jefferson Federal's business. Jefferson Federal is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company. ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2005. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(d) MAXIMUM NUMBER (c) (OR APPROXIMATE TOTAL NUMBER OF DOLLAR VALUE) (a) (b) SHARES (OR UNITS) OF SHARES (OR TOTAL NUMBER AVERAGE PURCHASED AS UNITS) THAT MAY OF SHARES PRICE PAID PART OF PUBLICLY YET BE PURCHASED (OR UNITS) PER SHARE ANNOUNCED PLANS UNDER THE PLANS Period PURCHASED (OR UNIT) OR PROGAMS OR PROGRAMS --------------- ----------- -------------------- --------------------- Month #1 October 1, 2005 - - - 433,291 (1) through October 31, 2005 Month #2 November 1, 2005 239,370 $13.31 239,370 193,921 (1) through November 30, 2005 Month #3 December 1, 2005 17,853 $13.52 17,853 176,068 (1) through December 31, 2005 Total 257,223 $13.32 257,223 176,068
----------------------------------------- (1) On July 30, 2004, the Company announced a Stock Repurchase Program under which the Company may repurchase up to an aggregate of 838,552 shares, or 10%, of the Company's common stock, from time to time, subject to market conditions. On April 29, 2005, the Company announced a stock repurchase program under which the Company may repurchase an additional 838,552 shares of the Company's common stock, from time to time, subject to market conditions. The repurchase program will continue until completed or terminated by the Board of Directors. No repurchase authorization expired during the three months ended December 31, 2005. 27 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on October 27, 2005. The results of the vote on the matters presented at the meeting is as follows: 1. The following individuals were elected as directors, each for a three-year term: Votes for Votes Withheld --------- -------------- William T. Hale 6,299,130 160,355 John F. McCrary 6,299,258 160,227 2. The appointment of Craine, Thompson & Jones, P.C. as auditors for the Company for the fiscal year ending June 30, 2006 was ratified by stockholders by the following vote: For 6,289,382; Against 74,417; Abstain 95,686 Broker non-votes totaled none. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 31.1 Rule 13a-14(a)/15d-14(a) certification of the principal executive officer 31.2 Rule 13a-14(a)/15d-14(a) certification of the principal financial officer 32.1 Section 1350 certification 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JEFFERSON BANCSHARES, INC. February 9, 2006 /s/ Anderson L. Smith -------------------------------------- Anderson L. Smith President and Chief Executive Officer February 9, 2006 /s/ Jane P. Hutton -------------------------------------- Jane P. Hutton Chief Financial Officer, Treasurer and Secretary 29