Attached files

file filename
EX-31.1 - SECTION 302 CEO CERTIFICATION - JEFFERSON BANCSHARES INCdex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - JEFFERSON BANCSHARES INCdex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - JEFFERSON BANCSHARES INCdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2009

OR

 

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

For the transition period from              to             

Commission File Number 00-50347

 

 

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Tennessee   45-0508261

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

120 Evans Avenue, Morristown, Tennessee   37814
(Address of principal executive offices)   (Zip code)

(423) 586-8421

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

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

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

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

At November 9, 2009, the registrant had 6,703,307 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

INDEX

 

          Page
   PART I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
  

Consolidated Statements of Condition - Unaudited Three months ended September 30, 2009 and year ended

June 30, 2009

   3
   Consolidated Statements of Earnings - Unaudited Three months ended September 30, 2009 and 2008    4
   Consolidated Statements of Changes in Stockholders’ Equity - Unaudited Three months ended September 30, 2009 and 2008    5
   Consolidated Statements of Cash Flows - Unaudited Three months ended September 30, 2009 and 2008    6
   Notes to Consolidated Financial Statements - Unaudited    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    14

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    27

Item 4.

   Controls and Procedures    27
   PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings    28

Item 1A.

   Risk Factors    28

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    28

Item 3.

   Defaults Upon Senior Securities    29

Item 4.

   Submission of Matters to a Vote of Security Holders    29

Item 5.

   Other Information    29

Item 6.

   Exhibits    29

SIGNATURES

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Condition

(Dollars in thousands)

 

     September 30,
2009
    June 30,
2009
 
     (Unaudited)        

Assets

    

Cash and cash equivalents

   $ 11,033      $ 8,328   

Interest-earning deposits

     21,197        20,814   

Fed funds sold

     5,080        14,966   

Investment securities classified as available-for-sale, net

     55,438        36,544   

Federal Home Loan Bank stock

     4,735        4,735   

Bank owned life insurance

     6,213        6,155   

Loans receivable, net of allowance for loan losses of $4,595 at September 30, 2009 and $4,722 at June 30, 2009

     480,500        498,107   

Loans held-for-sale

     944        881   

Premises and equipment, net

     32,010        32,395   

Foreclosed real estate, net

     2,318        3,328   

Accrued interest receivable:

    

Investments

     365        241   

Loans receivable

     1,900        2,017   

Deferred tax asset

     6,816        7,337   

Goodwill and other intangibles

     24,664        24,811   

Other assets

     1,178        1,996   
                

Total assets

   $ 654,391      $ 662,655   
                

Liabilities and Stockholders’ Equity

    

Deposits:

    

Noninterest-bearing

   $ 42,675      $ 48,913   

Interest-bearing

     430,423        433,254   

Repurchase agreements

     1,479        789   

Federal Home Loan Bank advances

     90,190        90,309   

Subordinated debentures

     6,937        6,910   

Other liabilities

     1,993        2,943   

Accrued income taxes

     34        32   
                

Total liabilities

     573,731        583,150   
                

Commitments and contingent liabilities

     —          —     

Stockholders’ equity:

    

Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding

     —          —     

Common stock, $.01 par value; 30,000,000 shares authorized; 9,182,372 shares issued and 6,706,489 shares outstanding at September 30, 2009 and 6,706,489 shares outstanding at June 30, 2009

     92        92   

Additional paid-in capital

     79,348        79,394   

Unearned ESOP shares

     (3,997     (4,105

Unearned compensation

     (1,104     (1,121

Accumulated other comprehensive income

     742        150   

Retained earnings

     36,624        36,140   

Treasury stock, at cost; 2,475,883 shares at September 30, 2009 and 2,475,883 shares at June 30, 2009

     (31,045     (31,045
                

Total stockholders’ equity

     80,660        79,505   
                

Total liabilities and stockholders’ equity

   $ 654,391      $ 662,655   
                

See accompanying notes to financial statements.

 

3


Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)

 

     Three Months Ended
September 30,
     2009     2008

Interest income:

    

Interest on loans receivable

   $ 7,129      $ 4,597

Interest on investment securities

     745        29

Other interest

     71        42
              

Total interest income

     7,945        4,668
              

Interest expense:

    

Deposits

     2,341        1,325

Repurchase agreements

     2        —  

Advances from FHLB

     819        356

Subordinated debentures

     88        —  
              

Total interest expense

     3,250        1,681
              

Net interest income

     4,695        2,987

Provision for loan losses

     300        160
              

Net interest income after provision for loan losses

     4,395        2,827
              

Noninterest income:

    

Mortgage origination fee income

     144        54

Service charges and fees

     446        245

Gain on sale of investments

     7        —  

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

     (9     —  

BOLI increase in cash value

     58        60

Other

     252        35
              

Total noninterest income

     898        394
              

Noninterest expense:

    

Compensation and benefits

     1,988        1,318

Occupancy expense

     548        183

Equipment and data processing expense

     616        358

DIF premiums

     160        9

Advertising

     66        3

Other

     1,223        468
              

Total noninterest expense

     4,601        2,339
              

Earnings before income taxes

     692        882
              

Income taxes:

    

Current

     152        332

Deferred

     56        17
              

Total income taxes

     208        349
              

Net earnings

   $ 484      $ 533
              

Net earnings per share, basic

   $ 0.08      $ 0.09
              

Net earnings per share, diluted

   $ 0.08      $ 0.09
              

See accompanying notes to financial statements.

 

4


Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended September 30, 2009 and 2008

(Dollars in Thousands)

 

    Common
Stock
  Additional
Paid-in
Capital
    Unallocated
Common
Stock in
ESOP
    Unearned
Compensation
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
 

Balance at June 30, 2009

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

Comprehensive income:

               

Net earnings

    —       —          —          —          —          484        —          484   

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

    —       —          —          —          592        —          —          592   
                     

Total comprehensive income

    —       —          —          —          —          —          —          1,076   

Dividends

    —       —          —          —          —          —          —          —     

Shares committed to be released by the ESOP

    —       (46     108        —          —          —          —          62   

Earned portion of stock grants

    —       —          —          17        —          —          —          17   
                                                             

Balance at September 30, 2009

  $ 92   $ 79,348      $ (3,997   $ (1,104   $ 742      $ 36,624      $ (31,045   $ 80,660   
                                                             
    Common
Stock
  Additional
Paid-in
Capital
    Unallocated
Common
Stock in
ESOP
    Unearned
Compensation
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
 

Balance at June 30, 2008

  $ 84   $ 72,959      $ (4,537   $ (1,659   $ (17   $ 34,965      $ (29,018   $ 72,777   
                     

Comprehensive income:

               

Net earnings

    —       —          —          —          —          533        —          533   

Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($7)

    —       —          —          —          (11     —          —          (11
                     

Total comprehensive income

    —       —          —          —          —          —          —          522   

Dividends

    —       —          —          —          —          (372     —          (372

Shares committed to be released by the ESOP

    —       (10     108        —          —          —          —          98   

Stock options expensed

    —       65        —          —          —          —          —          65   

Earned portion of stock grants

    —       —          —          125        —          —          —          125   

Purchase of common stock (12,898 shares)

    —       —          —          —          —          —          (119     (119
                                                             

Balance at September 30, 2008

  $ 84   $ 73,014      $ (4,429   $ (1,534   $ (28   $ 35,126      $ (29,137   $ 73,096   
                                                             

 

5


Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Three Months Ended  
     September 30,  
     2009     2008  

Cash flows from operating activities:

    

Net earnings

   $ 484      $ 533   

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

    

Allocated ESOP shares

     60        99   

Depreciation and amortization expense

     374        152   

Amortization of premiums (discounts), net on investment securities

     (356     3   

Provision for loan losses

     300        160   

FHLB stock dividends

     —          (25

Amortization of deferred loan fees, net

     (69     (59

(Gain) on sale of investment securities

     (7     —     

Loss on sale of foreclosed real estate, net

     9        —     

Deferred tax expense

     56        17   

Originations of mortgage loans held for sale

     (4,191     (3,375

Proceeds from sale of mortgage loans

     4,128        3,551   

Increase in cash value of life insurance

     (58     (60

Earned portion of MRP

     17        125   

Stock options expensed

     —          65   

Decrease (increase) in:

    

Accrued interest receivable

     (7     (21

Other assets

     832        (107

Increase (decrease) in other liabilities and accrued income taxes

     (546     417   
                

Net cash provided by (used for) operating activities

     1,026        1,475   
                

Cash flows used for investing activities:

    

Loan originations, net of principal collections

     17,233        (4,177

Purchases of available-for-sale securities:

     (19,600     —     

Proceeds from maturities, calls and prepayments

     2,021        —     

Purchase of premises and equipment

     (52     (90

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

     1,188        (1
                

Net cash provided by (used for) investing activities

     790        (4,268
                

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     (8,874     (5,655

Net increase in repurchase agreements

     690        —     

Proceeds from advances from FHLB

     —          16,500   

Repayment of FHLB advances

     (28     (11,500

Purchase of treasury stock

     —          (119

Dividends paid

     (402     (372
                

Net cash provided by (used for) financing activities

     (8,614     (1,146
                

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

     (6,798     (3,939

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

     44,108        17,616   
                

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

   $ 37,310      $ 13,677   
                

Supplemental disclosures of cash flow information:

    

Cash paid during period for:

    

Interest on deposits

   $ 2,392      $ 1,078   

Interest on FHLB advances

   $ 819      $ 356   

Interest on other borrowings

   $ 90      $ 0   

Income taxes

   $ 50      $ 30   

Real estate acquired in settlement of loans

   $ 245      $ 12   

See accompanying notes to financial statements.

 

6


Table of Contents

Notes To Consolidated Financial Statements

(1) Basis of Presentation

The condensed consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the “Company” or “Jefferson Bancshares”) and its wholly-owned subsidiary, Jefferson Federal Bank (the “Bank” or “Jefferson Federal”). The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. The results of operations for the period ended September 30, 2009 are not necessarily indicative of the results which may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, which was filed with the Securities and Exchange Commission on September 14, 2009. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted. For the quarter ended September 30, 2009, the Company adopted FASB ASC Topic 855 for Subsequent Events which did not significantly change the subsequent events the Company reports either through recognition or disclosure. This guidance requires to Company to review for subsequent events through the date the interim or annual consolidated financial statements are issued. Management has evaluated for possible subsequent events through November 6, 2009 and concluded there are no subsequent events to report.

(2) Principles of Consolidation

The consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly-owned subsidiary, Jefferson Federal Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

(3) Use of Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the statement of condition dates and revenues and expenses for the periods shown. Actual results could differ from the estimates and assumptions used in the consolidated financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets.

(4) Limitation on Capital Distributions

Jefferson Federal may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of Jefferson Federal at the time of its conversion to stock form.

Under applicable regulations, Jefferson Federal is prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) total risk-based capital ratio of less than 8.0%; (ii) Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.

 

7


Table of Contents

Notes To Consolidated Financial Statements—(Continued)

 

Under the banking laws of the State of Tennessee, a Tennessee chartered savings bank may not declare dividends in any calendar year that exceeds the total of its net income of that year combined with its retained net income for the preceding two years without the prior approval of the Commissioner of the Tennessee Department of Financial Institutions.

(5) Earnings Per Common Share

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“ESOP”) shares. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method. For the period ended September 30, 2009, stock options to purchase 577,693 shares were not included in the computation of diluted net income per share as their effect would have been anti-dilutive. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:

 

     Weighted-Average Shares
Outstanding for the
Three Months Ended
September 30,
     2009    2008

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

   6,216,515    5,638,175

Effect of dilutive stock options

   —      —  
         

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

   6,216,515    5,638,175
         

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

Impairment of loans having a recorded investment of $17.2 million at September 30, 2009 and an average investment of $9.3 million during the three month period ended September 30, 2009 has been recognized. The valuation allowance related to impaired loans was $1.7 million at September 30, 2009. Total nonaccrual loans at September 30, 2009 were approximately $4.3 million. For the three months ended September 30, 2009, gross income which would have been recognized had nonaccrual loans been current in accordance with their original terms amounted to approximately $161,000. Interest income from non-accrual loans included in the Company’s interest income amounted to approximately $53,000 for the three months ended September 30, 2009.

 

8


Table of Contents

Notes To Consolidated Financial Statements—(Continued)

 

The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2009:

 

     Allowance for Loan Losses
(Dollars in thousands)
 

Balance at June 30, 2009

   $ 4,722   

Provision for loan losses

     300   

Charge-offs

     25   

Recoveries

     (452
        

Net (charge-offs)/recoveries

     (427
        

Balance at September 30, 2009

   $ 4,595   
        

(7) Financial Instruments With Off-Balance Sheet Risk

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

At September 30, 2009, we had approximately $34.1 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $7.2 million in unused letters of credit and approximately $36.3 million in unused lines of credit.

(8) Dividend Declaration

On October 29, 2009 the Board of Directors of the Company approved a quarterly dividend of $0.03 per share to stockholders of record as of November 9, 2009 and payable on November 23, 2009.

(9) Stock Incentive Plans

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

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

 

9


Table of Contents

Notes To Consolidated Financial Statements—(Continued)

 

In connection with the Company’s previously announced acquisition of State of Franklin Bancshares, Inc. (“State of Franklin”) on October 31, 2008, each outstanding State of Franklin non-qualified option with an exercise price of $13.50 or less was converted into an option to purchase shares of Jefferson Bancshares common stock with an expiration date of October 31, 2011.

The table below summarizes the status of the Company’s stock option plans as of September 30, 2009.

 

     Three Months Ended
September 30, 2009
     Shares    Weighted-
average
exercise price

Outstanding at beginning of period

   577,693    $ 12.78

Granted during the three-month period

   —     

Options forfeited

   —     

Options exercised

   —     
       

Outstanding at September 30, 2009

   577,693    $ 12.78

Options exercisable at September 30, 2009

   577,693    $ 12.78

The following information applies to options outstanding at September 30, 2009:

 

Number outstanding

     577,693

Range of exercise prices

   $ 10.00 - $13.69

Weighted-average exercise price

   $ 12.78

Weighted-average remaining contractual life

     3.61 years

Number of options remaining for future issuance

     305,706

The estimated fair value of stock options at grant date was determined using the Black-Scholes option-pricing model based on market data as of January 29, 2004. An expected dividend yield of 1.17% and expected volatility of 7.01% were used to model the value. The risk free rate of return equaled 4.22%, which was based on the yield of a U.S. Treasury note with a term of ten years. The estimated time remaining before the expiration of the options equaled ten years.

(10) Fair Value Disclosures

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. When measuring fair value, the Company uses valuation techniques that are appropriate and consistently applied. A hierarchy is also established under the standard and is used to prioritize valuation inputs into the following three levels used to measure fair value:

Level 1

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

 

10


Table of Contents

Notes To Consolidated Financial Statements—(Continued)

 

Level 2

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

Level 3

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

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

Investment Securities Available for Sale

Level 2 investment securities classified as “available-for-sale” are recorded at fair value on at least a monthly basis. Fair value measurements are based upon independent pricing models or other model-based valuation techniques with inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Level 2 securities include mortgage-backed securities issued by government-sponsored entities, municipal bonds, bonds issued by government agencies, and corporate debt securities. Level 3 investment securities classified as “available-for-sale” are recorded at fair value on at least a semi-annual basis. Fair value measurements are based upon independent pricing models based upon unobservable inputs which require significant management judgment or estimation. Level 3 securities include mortgage-backed securities issued by government-sponsored entities and other debt securities.

 

11


Table of Contents

Notes To Consolidated Financial Statements—(Continued)

 

Impaired Loans

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

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2009, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

 

     September 30, 2009

Description

   Level 1    Level 2    Level 3    Total Carrying
Amount in
Statement of
Financial Condition
   Assets/Liabilities
Measured at
Fair Value

Securities available for sale

   —      $ 49,142    6,296    55,438    $ 55,438

 

12


Table of Contents

Notes To Consolidated Financial Statements—(Continued)

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

 

     September 30, 2009

Description

   Level 1    Level 2    Level 3    Total Carrying
Amount in
Statement of
Financial Condition
   Assets/Liabilities
Measured at
Fair Value

Impaired loans

   —      —      15,583    15,583    $ 15,583

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

 

     September 30, 2009    June 30, 2009
     Carrying
Amount
   Fair
Value
   Carrying
Amount
   Fair
Value

Financial assets:

           

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

   $ 37,310    $ 37,310    $ 44,108    $ 44,108

Available-for-sale securities

     55,438      55,438      36,544      36,544

Federal Home Loan Bank stock

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

Loans receivable

     485,579      482,470      503,331      501,841

Accrued interest receivable

     2,265      2,265      2,258      2,258

Loans held-for-sale

     944      944      881      881

Financial liabilities:

           

Deposits

     473,098      463,826      482,167      479,770

Borrowed funds

     91,669      94,083      91,098      93,486

Off-balance sheet assets (liabilities):

           

Commitments to extend credit

     34,139         13,056   

Unused letters of credit

     7,179         6,134   

Unused lines of credit

     36,279         37,123   

(11) Business Combination

On October 31, 2008, the Company completed its previously announced acquisition of State of Franklin. State of Franklin was headquartered in Johnson City, Tennessee, which is approximately 70 miles northeast of the Company’s headquarters. State of Franklin operated six offices in Johnson City and Kingsport, Tennessee with a branch under construction in Bristol, Tennessee. The primary reason for the acquisition of State

 

13


Table of Contents

Notes To Consolidated Financial Statements—(Continued)

 

of Franklin was to expand the Company’s presence into upper East Tennessee. Under the terms of the merger agreement, the Company issued a combination of shares of Company common stock and cash for the outstanding common shares of State of Franklin. State of Franklin shareholders were given the option of receiving $10.00 in cash or 1.1287 shares of Company common stock for each share of State of Franklin common stock, or a combination of stock and cash for each share of State of Franklin common stock, provided that 60% of the aggregate shares of State of Franklin common stock would be exchanged for Company common stock and subject to the allocation and proration formula set forth in the merger agreement. However, all State of Franklin common stockholders residing outside of Tennessee were only eligible to receive cash consideration. Based on this structure, the aggregate merger consideration totaled approximately $4.3 million in cash and 736,000 shares of Company common stock. The Company also incurred $557,000 in merger costs that were capitalized into goodwill. The acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”

(12) Subordinated Debt

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

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes thereto. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, which was filed with the Securities and Exchange Commission on September 14, 2009.

 

14


Table of Contents

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 and using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential properties, as well as originate commercial real estate and multi-family mortgage loans, construction loans, consumer loans, commercial non-real estate loans and make other investments permitted by applicable laws and regulations.

The Bank’s savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”) through the Deposit Insurance Fund. Jefferson Federal is a member of the Federal Home Loan Bank (“FHLB”) System.

Private Securities Litigation Reform Act Safe Harbor Statement

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; but rather, are statements based on Jefferson Bancshares’ current expectations regarding its business strategies and their intended results and the Company’s future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended June 30, 2009 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements.

 

15


Table of Contents

Results of Operations for the Three Months Ended September 30, 2009 and 2008

Net Income

Net income was $484,000, or $0.08 per diluted share, for the quarter ended September 30, 2009 compared to $533,000, or $0.09 per diluted share, for the corresponding quarter in 2008.

 

     Three Months Ended  
     September, 30  
     2009     2008  
     (Dollars in thousands,  
     except per share data)  

Net earnings

   $ 484      $ 533   

Net earnings per share, basic

   $ 0.08      $ 0.09   

Net earnings per share, diluted

   $ 0.08      $ 0.09   

Return on average assets (annualized)

     0.29     0.65

Return on average equity (annualized)

     2.39     2.89

Net Interest Income

Net interest income before loan loss provision increased $1.7 million, or 57.2%, to $4.7 million for the quarter ended September 30, 2009 from the corresponding period in 2008. The interest rate spread and net interest margin for the quarter ended September 30, 2009 were 3.05% and 3.24%, respectively, compared to 3.37% and 3.95%, respectively, for the same period in 2008.

The following table summarizes changes in interest income and expense for the three month periods ended September 30, 2009 and 2008:

 

     Three Months
Ended
September 30,
            
       
       
     2009    2008    $ Change     % Change  
     (Dollars in thousands)             

Interest income:

          

Loans

   $ 7,129    $ 4,597    $ 2,532      55.1

Investment securities

     745      29      716      2469.0

Interest-earning deposits

     12      17      (5   (29.4 )% 

FHLB stock

     59      25      34      136.0
                        

Total interest income

     7,945      4,668      3,277      70.2
                        

Interest expense:

          

Deposits

     2,341      1,325      1,016      76.7

Repurchase Agreements

     2      —        2      NM   

Borrowings

     819      356      463      130.1

Subordinated Notes & Debentures

     88      —        88      NM   
                        

Total interest expense

     3,250      1,681      1,569      93.3
                        

Net interest income

   $ 4,695    $ 2,987    $ 1,708      57.2
                        

 

16


Table of Contents

The following table summarizes average balances and average yields and costs for the three months ended September 30, 2009 and September 30, 2008:

 

     Three Months Ended September 30,  
     2009     2008  
     Average    Yield/     Average    Yield/  
     Balance    Cost     Balance    Cost  
     (Dollars in thousands)  

Loans

   $ 489,673    5.78   $ 287,869    6.34

Investment securities

     42,826    7.07     3,467    3.32

Interest-earning deposits

     39,884    0.12     7,707    0.88

FHLB stock

     4,735    4.94     1,868    5.31

Deposits

     432,946    2.15     202,947    2.59

Total borrowings

     98,302    3.67     35,057    4.03

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

 

     Three Months
     Ended September 30,
     2009 Compared to 2008
     Increase (Decrease)
Due To
     
    
     Volume    Rate     Net
          (In thousands)      

Interest income:

       

Loans receivable

   $ 2,897    $ (365   $ 2,532

Investment securities

     710      6        716

Daily interest-earning deposits and other interest-earning assets

     29      (0     29
                     

Total interest-earning assets

     3,636      (359     3,277
                     

Interest expense:

       

Deposits

     1,198      (182     1,016

Total borrowings

     587      (34     553
                     

Total interest-bearing liabilities

     1,784      (215     1,569
                     

Net change in interest income

   $ 1,852    $ (144   $ 1,708
                     

Total interest income increased $3.3 million, or 70.2%, to $7.9 million for the three months ended September 30, 2009 compared to the corresponding period in 2008 primarily as a result of an increase in average interest-earning assets arising from the State of Franklin acquisition. Average interest-earning assets increased $276.2 million, or 91.8%, to $577.1 million for the

 

17


Table of Contents

quarter ended September 30, 2009. The increase in average earning assets for the three month period was primarily the result of increases in average outstanding loans. The average yield on earning assets declined by 70 basis points to 5.47% for the quarter ended September 30, 2009 compared to the corresponding period in 2008. The decline in the average yield on earning assets was primarily the result of lower yields on prime-based consumer and commercial loans. In addition, the increase in nonaccrual loans during the quarter ended September 30, 2009 has negatively impacted interest income on loans and the net interest margin.

Total interest expense increased $1.6 million, or 93.3%, to $3.3 million for the quarter ended September 30, 2009. The average balance of interest-bearing liabilities increased $293.2 million, or 123.2%, to $531.2 million, while the rate paid on interest-bearing liabilities declined 38 basis points to 2.43% for the quarter ended September 30, 2009. The Company experienced an increase of $230.0 million, or 113.3%, in average interest-bearing deposits primarily due to deposits assumed in connection with the State of Franklin acquisition. The average rate paid on deposits decreased 45 basis points to 2.15% for the quarter ended September 30, 2009. The Company benefited from declining market interest rates as well as a shift in the mix of deposits towards more transaction accounts. Average FHLB borrowings increased $55.2 million to $90.3 million due to the assumption of borrowings related to the State of Franklin acquisition, while the average rate paid on borrowings decreased 43 basis points to 3.60%.

Provision for Loan Losses

The provision for loan losses for the quarter ended September 30, 2009 amounted to $300,000 compared to $160,000 for the comparable period in 2008. Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in the nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors. The increase in the provision for loan losses reflects management’s evaluation of credit quality and current economic conditions. Nonperforming loans totaled $7.0 million at September 30, 2009 compared to $6.0 million at June 30, 2009 and $725,000 at September 30, 2008. The increase in nonperforming loans compared to the 2008 period is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well as the current economic environment.

Noninterest Income

Noninterest income increased $504,000, or 127.9%, to $898,000 for the quarter ended September 30, 2009 compared to $394,000 for the corresponding period in 2008. Service charges and fee income increased $201,000 to $446,000 for the quarter ended September 30, 2009 due primarily to additional fee income generated following the acquisition of State of Franklin. Mortgage origination fee income increased $90,000, or 166.7%, to $144,000 for the quarter ended September 30, 2009 due to a higher volume of loan originations related to refinancing.

 

18


Table of Contents

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended September 30, 2009 compared to the same period in 2008.

 

     Three Months Ended
September 30,
   $     %  
     2009     2008    Change     Change  
     (Dollars in thousands)             

Noninterest income:

         

Mortgage origination fee income

   $ 144      $ 54    $ 90      166.7

Service charges and fees

     446        245      201      82.0

Gain on sale of investment securities

     7        —        7      NM   

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

     (9     —        (9   NM   

BOLI increase in cash value

     58        60      (2   (3.3 )% 

Other

     252        35      217      620.0
                         

Total noninterest income

   $ 898      $ 394    $ 504      127.9
                         

Noninterest Expense

Noninterest expense increased $2.3 million, or 96.7%, to $4.6 million for the quarter ended September 30, 2009 compared to the corresponding 2008 period. The increase in noninterest expense includes the costs incurred in operating six additional full-service offices obtained in connection with the acquisition of State of Franklin. Deposit insurance premiums increased $151,000, to $160,000, due to the increase in the balance of insurable accounts combined with higher deposit insurance premiums. Noninterest expense includes the amortization of the core deposit intangible (“CDI”) resulting from the acquisition of State of Franklin. The CDI totaled $3.4 million at the acquisition date and is being amortized over a 10 year period on an accelerated basis. The expense incurred for CDI amortization for the three month period ended September 30, 2009 was $147,000 compared to no CDI amortization expense for the same period in 2008.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended September 30, 2009 compared to the same period in 2008.

 

     Three Months Ended
September 30,
   $    %  
     2009    2008    Change    Change  
     (Dollars in thousands)            

Noninterest expense:

        

Compensation and benefits

   $ 1,988    $ 1,318    $ 670    50.8

Occupancy expense

     548      183      365    199.5

Equipment and data processing expense

     616      358      258    72.1

Deposit insurance premiums

     160      9      151    1677.8

Advertising

     66      3      63    2100.0

Other

     1,223      468      755    161.3
                       

Total noninterest expense

   $ 4,601    $ 2,339    $ 2,262    96.7
                       

 

19


Table of Contents

Income Taxes

Income tax expense for the quarter ended September 30, 2009 was $208,000 compared to $349,000 for the same period in 2008 due to lower taxable income.

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits were $37.3 million at September 30, 2009 compared to $44.1 million at June 30, 2009. We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily liquidity needs.

Investments

Investment securities increased to $55.4 million at September 30, 2009 compared to $36.5 million at June 30, 2009 due primarily to purchases of government agency securities. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $1.2 million, or $742,000 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 September 30, 2009

 

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

Securities available-for-sale

         

Debt securities:

         

Federal agency

   $ 22,850      $ 12    $ (47   $ 22,815

Mortgage-backed

     22,210        1,700      (937     22,973

Municipals

     4,535        172      —          4,707

Other Securities

     4,641        1,129      (827     4,943
                             

Total securities available-for-sale

   $ 54,236      $ 3,013    $ (1,811   $ 55,438
                             

Weighted-average rate

     6.70       
               

At June 30, 2009

 

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

Securities available-for-sale

         

Debt securities:

         

Federal agency

   $ 4,206      $ 6    $ (65   $ 4,147

Mortgage-backed

     23,088        1,395      (962     23,521

Municipals

     4,523        63      (19     4,567

Other Securities

     4,483        631      (805     4,309
                             

Total securities available-for-sale

   $ 36,300      $ 2,095    $ (1,851   $ 36,544
                             

Weighted-average rate

     7.65       
               

 

20


Table of Contents

Loans

Net loans decreased $17.6 million to $480.5 million at September 30, 2009 compared to $498.1 million at June 30, 2009 due primarily to lower loan demand combined with both residential and commercial loan payoffs during the quarter.

Loans receivable, net, are summarized as follows:

 

     At
September 30,
2009
    At
June 30,
2009
             
     Amount     Percent
of Portfolio
    Amount     Percent
of Portfolio
    $
Change
    %
Change
 
     (Dollars in thousands)  

Real estate loans:

            

Residential one-to four-family

   $ 137,007      28.2   $ 144,659      28.7   $ (7,652   (5.3 )% 

Home equity line of credit

     22,983      4.7     22,467      4.5     516      2.3

Commercial

     154,820      31.9     159,608      31.7     (4,788   (3.0 )% 

Multi-family

     6,446      1.3     6,584      1.3     (138   (2.1 )% 

Construction

     38,661      8.0     40,831      8.1     (2,170   (5.3 )% 

Land

     45,529      9.4     46,987      9.3     (1,458   (3.1 )% 
                                      

Total real estate loans

     405,446      83.5     421,136      83.7     (15,690   (3.7 )% 
                                      

Commercial business loans

     71,884      14.8     73,467      14.6     (1,583   (2.2 )% 
                                      

Consumer loans:

            

Automobile loans

     2,504      0.5     2,754      0.5     (250   (9.1 )% 

Mobile home loans

     33      0.0     43      0.0     (10   (23.3 )% 

Loans secured by deposits

     1,664      0.3     1,322      0.3     342      25.9

Other consumer loans

     4,048      0.8     4,609      0.9     (561   (12.2 )% 
                                      

Total consumer loans

     8,249      1.7     8,728      1.7     (479   (5.5 )% 
                                      

Total gross loans

     485,579      100.0     503,331      100.0     (17,752   (3.5 )% 
                    

Less:

            

Deferred loan fees, net

     (484       (502       18      (3.6 )% 

Allowance for losses

     (4,595       (4,722       127      (2.7 )% 
                              

Loans receivable, net

   $ 480,500        $ 498,107        $ (17,607   (3.5 )% 
                              

 

21


Table of Contents

Loan Loss Allowance

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish reserves against losses on loans on a monthly basis. When additional reserves are necessary, a provision for loan losses is charged to earnings.

In connection with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. The methodology utilizes a loan grading system which segments loans with similar risk characteristics. Management performs a monthly assessment of the allowance for loan losses based on the nature and volume of the loan portfolio, the amount of impaired and classified loans and historical loan loss experience. In addition, management considers other qualitative factors, including delinquency trends, economic conditions and loan considerations.

The FDIC and the Tennessee Department of Financial Institutions, as an integral part of their examination process, periodically reviews our allowance for loan losses. The FDIC and/or the Tennessee Department of Financial Institutions may require us to make additional provisions for loan losses based on judgments different from ours.

The allowance for loan losses was $4.6 million at September 30, 2009 compared to $4.7 million at June 30, 2009. Our allowance for loan losses represented 0.95% of total loans and 66.07% of nonperforming loans at September 30, 2009 compared to 0.94% of total loans and 78.3% of nonperforming loans at June 30, 2009.

 

     Three Months Ended
September 30,
 
     2009     2008  
     (Dollars in thousands)  

Balance at beginning of period

   $ 4,722      $ 1,836   

Provision for loan losses

     300        160   

Recoveries

     25        11   

Charge-offs

     (452     (49
                

Net charge-offs

     (427     (38
                

Allowance at end of period

   $ 4,595      $ 1,958   
                

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

     0.35     0.05

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent. Nonaccrual loans totaled $7.0 million at September 30, 2009 compared to $6.0 million at June 30, 2009. The increase in nonaccrual loans is due to an increase in both nonaccrual commercial and residential real estate loans. Foreclosed real estate amounted to $2.3 million at September 30, 2009 compared to $3.3 million at June 30, 2009. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.

 

22


Table of Contents
     September 30,
2009
    June 30,
2009
 
     (Dollars in thousands)  

Nonaccruing loans:

    

Real estate

   $ 6,725      $ 5,724   

Commercial business

     198        252   

Consumer

     32        55   
                

Total nonaccrual loans

     6,955        6,031   

Real estate owned

     2,318        3,328   

Other repossessed assets

     24        106   
                

Total nonperforming assets

   $ 9,297      $ 9,465   
                

Total nonperforming assets to total assets

     1.42     1.43

Total nonperforming loans to total loans

     1.43     1.20

Allowance for loan losses to total nonperforming loans

     66.07     78.30

Bank Owned Life Insurance

We hold bank owned life insurance (“BOLI”) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at September 30, 2009 was $6.2 million.

Deposits

Total deposits decreased $9.1 million to $473.1 million at September 30, 2009 due to the planned runoff of higher costing time deposits, which was partially offset by increases in money market, interest-bearing NOW and savings deposits. Time deposits decreased $23.1 million to $249.0 million at September 30, 2009 compared to June 30, 2009.

 

     September 30,
2009
   June 30,
2009
   $ Change     % Change  
     (Dollars in thousands)             

Noninterest-bearing accounts

   $ 42,676    $ 48,913    $ (6,237   (12.8 )% 

NOW accounts

     48,168      43,795      4,373      10.0

Savings accounts

     78,022      69,074      8,948      13.0

Money market accounts

     55,281      48,332      6,949      14.4

Certificates of deposit

     248,951      272,053      (23,102   (8.5 )% 
                        
   $ 473,098    $ 482,167    $ (9,069   (1.9 )% 
                        

Advances

Federal Home Loan Bank of Cincinnati (“FHLB”) advances remain virtually unchanged at $90.2 million at September 30, 2009, compared to $90.3 million at June 30, 2009.

Stockholders’ Equity

Stockholders’ equity amounted to $80.7 million at September 30, 2009 compared to $79.5 million at June 30, 2009. On November 13, 2008, the Company announced its third stock repurchase program pursuant to which up to 620,770 shares of the Company’s outstanding common stock may be repurchased. At September 30, 2009, 512,252 shares remained eligible

 

23


Table of Contents

for repurchase under the current stock repurchase program. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders’ equity. At September 30, 2009, the adjustment to stockholders’ equity was a net unrealized gain of $742,000 compared to a net unrealized gain of $150,000 at June 30, 2009.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the FHLB of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based on our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations.

Our most liquid assets are cash and cash equivalents and interest-earning assets. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2009, cash and cash equivalents totaled $11.0 million and interest-earning deposits totaled $26.3 million, compared to $8.3 million and $35.8 million, respectively, at June 30, 2009. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $55.4 million at September 30, 2009 compared to $36.5 million at June 30, 2009. At September 30, 2009, our advance agreement with the FHLB provided us with the ability to borrow a total of approximately $90.0 million from the FHLB of Cincinnati. In addition, at September 30, 2009, we had a $10.0 million unsecured federal funds line with a bank under which no borrowings were outstanding. At September 30, 2009, FHLB advances were $89.0 million.

We anticipate that we will have sufficient funds available to meet current loan commitments. At September 30, 2009, we had approximately $34.1 million in loan commitments, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $7.2 million in unused letters of credit and approximately $36.3 million in unused lines of credit. At September 30, 2009, we had $200.9 million in certificates of deposit due within one year and $224.1 million in other deposits without specific maturities. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net decrease in total deposits of $9.1 million during the three-month period ended September 30, 2009.

Jefferson Bancshares is a separate entity and apart from Jefferson Federal and must provide for its own liquidity. In addition to its operating expenses, Jefferson Bancshares is responsible for the payment of dividends declared for its shareholders, and interest and principal on outstanding

 

24


Table of Contents

debt. At times, Jefferson Bancshares has redeemed and returned its stock. Substantially all of Jefferson Bancshares’ revenues are obtained from dividends. Payment of such dividends to Jefferson Bancshares by Jefferson Federal is limited under Tennessee law. The amount that can be paid in any calendar year, without prior approval from the Tennessee Department of Financial Institutions, cannot exceed the total of Jefferson Federal’s net income for the year combined with its retained net income for the preceding two years. Jefferson Bancshares believes that such restriction will not have an impact on its ability to meet its ongoing cash obligations.

Off-Balance Sheet Arrangements

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

For the three months ended September 30, 2009, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

25


Table of Contents

Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of September 30, 2009, Jefferson Federal met each of its capital requirements. The following table presents our capital position relative to our regulatory capital requirements at September 30, 2009 and June 30, 2009:

 

     Actual     For Capital
Adequacy Purposes
    To Be Well
Capitalized Under

Prompt Corrective
Action Provisions
 
     Amount    Ratio     Amount         Ratio     Amount         Ratio  
     (Dollars in thousands)  

At September 30, 2009

                     

Total Risk-Based Capital

                     

(To Risk Weighted Assets)

   54,951    11.11   39,571    ³      8.0   49,463    ³      10.0

Tier 1 Capital

                     

(To Risk Weighted Assets)

   50,350    10.18   19,785    ³      4.0   29,678    ³      6.0

Tier 1 Capital

                     

(To Average Assets)

   50,350    8.09   24,894    ³      4.0   31,118    ³      5.0

At June 30, 2009

                     

Total Risk-Based Capital

                     

(To Risk Weighted Assets)

   53,953    10.49   41,164    ³      8.0   51,456    ³      10.0

Tier 1 Capital

                     

(To Risk Weighted Assets)

   49,225    9.57   20,582    ³      4.0   30,873    ³      6.0

Tier 1 Capital

                     

(To Average Assets)

   49,225    7.85   25,081    ³      4.0   31,351    ³      5.0

Under the capital regulations of the FDIC, Jefferson Federal must satisfy various capital requirements. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (“Tier I”) capital to average adjusted assets of at least 3.00% if a particular institution has the highest examination rating and at least 4.00% for all others. At September 30, 2009, Jefferson Federal’s leverage capital ratio was 8.09%. The FDIC’s risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-weighted assets of at least 8.00%. Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At September 30, 2009, Jefferson Federal had a ratio of total capital to risk-weighted assets of 11.11%. At September 30, 2009, the Bank met the minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements.

 

26


Table of Contents
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, 2009. 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, 2009.

 

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

27


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Jefferson Bancshares is not a party to any pending legal proceedings. Periodically, there have been various claims and lawsuits involving Jefferson Federal, such as claims to enforce liens, condemnation proceedings on properties in which Jefferson Federal holds security interests, claims involving the making and servicing of real property loans and other issues incident to Jefferson Federal’s business. Jefferson Federal is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company or the Bank.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009.

 

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

 

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

That May Yet Be
Purchased Under
the Plans or Programs
 

Month #1

           

July 1, 2009 through July 31, 2009

   —      —      —      512,252  (1) 

Month #2

           

August 1, 2009 through August 31, 2009

   —      —      —      512,252  (1) 

Month #3

           

September 1, 2009 through September 30, 2009

   —      —      —      512,252  (1) 

Total

   —      —      —      512,252   

 

(1) On November 13, 2008, the Company announced a stock repurchase program under which the Company may repurchase up to 620,770 shares of the Company’s common stock, from time to time, subject to market conditions. The repurchase program will continue until completed or terminated by the Board of Directors.

 

28


Table of Contents
Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

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

 

29


Table of Contents

SIGNATURES

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

 

  JEFFERSON BANCSHARES, INC.
November 9, 2009  

/S/    ANDERSON L. SMITH        

  Anderson L. Smith
  President and Chief Executive Officer
November 9, 2009  

/S/    JANE P. HUTTON        

  Jane P. Hutton
  Chief Financial Officer, Treasurer and Secretary