10-Q 1 jban-10q_093012.htm QUARTERLY REPORT jban-10q_093012.htm


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, 2012
OR
 
o
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 o
 
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 x No o

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  o   Accelerated Filer  o
       
  Non-Accelerated Filer  o   Smaller Reporting Company  x
  (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 14, 2012, the registrant had 6,629,753 shares of common stock, $0.01 par value per share, outstanding.
 
 


 
 
INDEX
 

 
 
 
Page
     
 
       
    3  
         
    4  
         
     5  
         
    6  
         
    7  
 
 
 
 
 
   
8
 
         
   22  
         
 
35
 
         
 
35
 
         
PART II. OTHER INFORMATION
         
 
36
 
Risk Factors   36  
 
36  
 
37
 
 
37
 
 
37
 
 
37
 
         
   
 
 
2

 
 
 
Jefferson Bancshares, Inc. and Subsidiary
(Dollars in Thousands)
 
   
September 30,
   
June 30,
 
   
2012
   
2012
 
Assets
 
(Unaudited)
       
             
Cash and cash equivalents
  $ 4,200     $ 3,043  
Interest-earning deposits
    43,477       53,650  
Investment securities classified as available for sale, net
    86,089       83,483  
Federal Home Loan Bank stock
    4,735       4,735  
Bank owned life insurance
    6,921       6,861  
Loans receivable, net of allowance for loan losses of $5,761 and $5,852
    313,205       322,499  
Loans held-for-sale
    804       381  
Premises and equipment, net
    26,150       26,361  
Foreclosed real estate, net
    6,753       6,075  
Accrued interest receivable:
               
Investments     325       383  
Loans receivable     1,180       1,192  
Deferred tax asset
    10,468       10,676  
Core deposit intangible
    1,431       1,537  
Other assets
    1,529       2,054  
                 
Total Assets
  $ 507,267     $ 522,930  
                 
Liabilities and Stockholders’ Equity
               
                 
Deposits
               
Noninterest-bearing   $ 53,968     $ 52,436  
Interest-bearing     353,386       371,446  
Repurchase agreements
    664       398  
Federal Home Loan Bank advances
    37,682       37,863  
Subordinated debentures
    7,273       7,245  
Other liabilities
    1,093       913  
Accrued income taxes
    34        
Total liabilities     454,100       470,301  
                 
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 6,629,753 shares outstanding at September 30, 2012 and 6,631,989 shares outstanding at June 30, 2012
    92       92  
Additional paid-in capital
    78,489       78,571  
Unearned ESOP shares
    (2,701 )     (2,809 )
Unearned compensation
    (1,046 )     (1,046 )
Accumulated other comprehensive income
    1,319       1,095  
Retained earnings
    8,361       8,067  
Treasury stock, at cost (2,552,619 and 2,550,383 shares)
    (31,347 )     (31,341 )
Total stockholders’ equity
    53,167       52,629  
                 
Total liabilities and stockholders’ equity
  $ 507,267     $ 522,930  
 
See accompanying notes to financial statements.
 
 
3

 
 
Jefferson Bancshares, Inc. and Subsidiary
(Dollars in Thousands, Except Net Earnings Per Share)
 
   
Three Months Ended
 
   
September 30,
 
   
2012
   
2011
 
             
Interest income:
           
Interest on loans receivable
  $ 4,485     $ 5,572  
Interest on investment securities
    410       484  
Other interest
    74       64  
Total interest income
    4,969       6,120  
                 
Interest expense:
               
Deposits
    444       956  
Repurchase agreements
    1       2  
Advances from FHLB
    319       320  
Subordinated debentures
    82       77  
Total interest expense
    846       1,355  
 
               
Net interest income
    4,123       4,765  
Provision for loan losses
    300       2,986  
Net interest income after provision for loan losses
    3,823       1,779  
                 
Noninterest income:
               
Mortgage origination fee income
    146       95  
Service charges and fees
    253       292  
Gain on investments
    4       26  
Gain (loss) on sale of fixed assets
    1       (19 )
Loss on sale of foreclosed real estate, net
    (156 )     (16 )
BOLI increase in cash value
    60       59  
Other
    148       166  
Total noninterest income
    456       603  
                 
Noninterest expense:
               
Compensation and benefits
    1,680       1,606  
Occupancy expense
    362       362  
Equipment and data processing expense
    599       602  
DIF premiums
    207       202  
Advertising
    50       20  
Legal and professional services
    106       171  
Valuation adjustment and expenses on OREO
    211       404  
Amortization of intangible assets
    106       120  
Other
    585       533  
Total noninterest expense
    3,906       4,020  
                 
Earnings (loss) before income taxes
    373       (1,638 )
                 
Income taxes:
               
Current
    8        
Deferred
    70       (680 )
Total income taxes
    78       (680 )
                 
 
 
4

 
 
 
Net earnings (loss)
  $ 295     $ (958 )
                 
Net earnings (loss) per share, basic
  $ 0.05     $ (0.15 )
Net earnings (loss) per share, diluted
  $ 0.05     $ (0.15 )
                 
Net earnings (loss)
  $ 295     $ (958 )
                 
Other comprehensive income, net of income taxes:
               
Unrealized holding gain during the period, net of deferred income tax provision of $139 and $353, respectively
    224       569  
                 
Comprehensive income (loss)
  $ 519     $ (389 )
 
See accompanying notes to financial statements.
 
 
5

 
 
Jefferson Bancshares, Inc. and Subsidiary
Three Months Ended September 30, 2012 and 2011
(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, 2012
  $ 92     $ 78,571     $ (2,809 )   $ (1,046 )   $ 1,095     $ 8,067     $ (31,341 )   $ 52,629  
                                                                 
Net earnings
                                  294             294  
Other comprehensive income
                            224                   224  
Shares committed to be released by the ESOP
          (84 )     108                               24  
Stock options expensed
          2                                     2  
Purchase of common stock (2,236 shares)
                                        (6 )     (6 )
Balance at September 30, 2012
  $ 92     $ 78,489     $ (2,701 )   $ (1,046 )   $ 1,319     $ 8,361     $ (31,347 )   $ 53,167  
 
                
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, 2011
  $ 92     $ 78,895     $ (3,241 )   $ (1,019 )   $ 459     $ 12,067     $ (31,334 )   $ 55,919  
                                                                 
Net earnings
                                  (958 )           (958 )
Other comprehensive income
                            569                   569  
Shares committed to be released by the ESOP
          (76 )     108                               32  
Purchase of common stock (2,133 shares)
                                        (6 )     (6 )
Balance at September 30, 2011
  $ 92     $ 78,819     $ (3,133 )   $ (1,019 )   $ 1,028     $ 11,109     $ (31,340 )   $ 55,556  
 
 
6

 
 
Jefferson Bancshares, Inc.
   
Three Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net earnings
  $ 295     $ (958 )
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
               
Allocated ESOP shares
    24       32  
Depreciation and amortization expense
    459       485  
Amortization of premiums (discounts), net on investment securities
    141       (71 )
Provision for loan losses
    300       2,986  
Amortization of deferred loan fees, net
    (52 )     (43 )
(Gain) loss on sale of investment securities
    (4 )     (26 )
(Gain) loss on sale of foreclosed real estate, net
    156       16  
(Gain) loss on sale of fixed assets, net
    (1 )     19  
Deferred tax benefit
    70       (680 )
Stock options expensed
    1        
Originations of mortgage loans held for sale
    (6,436 )     (5,661 )
Proceeds from sale of mortgage loans
    6,013       3,973  
Increase in cash value of life insurance
    (60 )     (59 )
Decrease (increase) in:
               
Accrued interest receivable
    70       (3 )
Other assets
    525       1,304  
Increase (decrease) in other liabilities and accrued income taxes
    214       (988 )
Net cash provided by (used for) operating activities
    1,715       326  
                 
Cash flows used for investing activities:
               
Loan originations, net of principal collections
    7,254       5,632  
Investment securities classifed as available-for-sale:
               
Proceeds from maturities, calls and prepayments
    11,468       30,216  
Proceeds from sale
           
Purchase of securities
    (13,849 )     (34,331 )
Proceeds from sale of premises and equipment
          19  
Purchase of premises and equipment
    (48 )     (25 )
Proceeds from sale of (additions to) foreclosed real estate, net
    877       230  
Net cash provided by (used for) investing activities
    5,702       1,741  
                 
Cash flows from financing activities:
               
Net decrease in deposits
    (16,526 )     (10,132 )
Net increase (decrease) in repurchase agreements
    266       (170 )
Repayment of FHLB advances
    (167 )     (6 )
Purchase of treasury stock
    (6 )     (6 )
Net cash provided by (used for) financing activities
    (16,433 )     (10,314 )
                 
Net increase (decrease) in cash, cash equivalents and interest-earning deposits
    (9,016 )     (8,247 )
Cash, cash equivalents and interest-earning deposits at beginning of period
    56,693       40,548  
                 
Cash, cash equivalents and interest-earning deposits at end of period
  $ 47,677     $ 32,301  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during period for:
               
Interest on deposits
  $ 452     $ 982  
Interest on borrowed funds
  $ 263     $ 263  
Interest on subordinated debentures
  $ 54     $ 49  
Income taxes
           
Real estate acquired in settlement of loans
  $ 2,112     $ 1,467  
 
See accompanying notes to financial statements.
 
 
7

 
 

(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 three months ended September 30, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. 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, 2012, which was filed with the Securities and Exchange Commission on September 21, 2012 and amended on October 16, 2012. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted.

(2)
Principles of Consolidation
The consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly-owned subsidiary, Jefferson Federal Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

(3)
Use of Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the statement of condition dates and revenues and expenses for the periods shown. Actual results could differ from the estimates and assumptions used in the consolidated financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets.

(4)
Limitation on Capital Distributions
Jefferson Federal may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of Jefferson Federal at the time of its conversion to stock form.
 
Under applicable regulations, Jefferson Federal is prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) total risk-based capital ratio of less than 8.0%; (ii) Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
 
Under the banking laws of the State of Tennessee, a Tennessee chartered savings bank may not declare dividends in any calendar year in which the dividend would exceed the total of its net income for that year, combined with its retained net income for the preceding two years, without the prior approval of the Commissioner of the Tennessee Department of Financial Institutions.

(5)
Earnings Per Common Share
Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“ESOP”) shares. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential
 
 
8

 
 
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 three months ended September 30, 2012, stock options to purchase 360,638 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,
 
   
2012
   
2011
 
             
Weighted average number of common shares used in computing basic earnings per common share
    6,261,233       6,230,266  
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
    6,261,233       6,230,266  
 
(6)
Accounting for Allowance for Loan Losses and Impairment of a Loan

The allowance for loan and lease losses is an estimate of the losses that are inherent in the loan and lease portfolio. The allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Bank’s charge-off policy is consistent with bank regulatory standards. Generally, loans are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure 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 and lease losses. Any subsequent writedown of foreclosed real estate is charged against earnings.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

In connection with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. Loans are grouped into pools based on loan type and include residential mortgage loans, multi-family loans, construction and land development loans, non-residential real estate loans (owner occupied and non-owner occupied), commercial loans, HELOC and junior lien, and consumer loans. Commercial business loans and loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans. In addition, loans secured by commercial real estate are more likely to be negatively impacted by adverse conditions in the real estate market or the economy. Management utilizes a loan grading system and assigns a loan grade of “Pass”, “Watch”, “Special Mention”, “Substandard”, “Doubtful” or “Loss” based on risk characteristics of loans. Lending staff reviews the loan grades of customers on a regular basis and makes changes as needed given that the creditworthiness of customers may change over time.
 
 
9

 
 
Descriptions of loan grades are as follows:

Pass - loans in this category represent an acceptable risk and do not require heightened levels of monitoring by lending staff.

Watch - loans in this category represent an acceptable risk; however, require monitoring by lending staff due to potential weakness for any number of reasons.

Special Mention - loans in this category have potential weaknesses that may result in deteriorating prospects for the asset or in the Bank’s credit position at some future date.

Substandard - loans in this category are inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Borrowers in this category have a well-defined weakness(es) that jeopardize the proper liquidation of the debt.

Doubtful - loans classified as doubtful have a clear and defined weakness making the ultimate repayment of the loan, or portions thereof, highly improbable.

Loss - loans classified as “loss” are those of such little value that their continuance as bank assets is not warranted, even though partial recovery may be affected in the future. Charge off is required in the month this grade is assigned.

Specific valuation allowances are established for impaired loans. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. A specific reserve represents the difference between the recorded value of the loan and either its estimated fair value less estimated disposition costs, or the net present value as determined by a discounted cash flow analysis. On a quarterly basis, management evaluates individual loans and lending relationships which have outstanding principal balances of $500,000 or more and which are classified as either substandard, doubtful or loss according to the loan grading policy for impairment. Troubled debt restructurings (“TDRs”) are also considered to be impaired, except for those that have been performing under the new terms for at least six consecutive months.

A TDR occurs when the Bank grants a concession to a borrower with financial difficulties that it would not otherwise consider. The Bank has adopted the guidance and definitions found in ASU 2011-02 in determining if a borrower is experiencing financial difficulties and if a concession has been granted. The majority of the Bank’s TDRs involve a modification involving changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. A TDR may be non-accruing or it may accrue interest. A nonaccrual TDR will be returned to accruing status at such time when the borrower successfully performs under the new terms for at least six consecutive months. The Bank’s TDRs totaled $10.1 million at September 30, 2012 compared to $10.8 million at June 30, 2012.
 
 
10

 
 
The following table presents the Bank’s loans classified as TDRs by loan type and accrual status as of September 30, 2012:

   
September 30, 2012
 
   
Accrual
   
Non-accrual
   
Total
 
   
Status
   
Status
   
TDRs
 
                   
Residential Mortgage
  $ 896     $ 170     $ 1,066  
Multi-family
    628       5,155       5,783  
Construction and land development
          32       32  
Non-residential real estate
          1,933       1,933  
Owner occupied
    327       388       715  
Commercial
    122       306       428  
HELOC and Junior Lien
    171             171  
Total
  $ 2,144     $ 7,984     $ 10,128  
 
The accrual of interest on all loans is discontinued at the time the loan is 90 days delinquent. All interest accrued but not collected for loans considered impaired, placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method until the loan is returned to accrual status. Loans are returned to accrual status when future payments are reasonably assured.

The evaluation of the allowance for loan and lease losses is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The Company is subject to periodic examination by regulatory agencies, which may require the Company to record increases in the allowances based on the regulator’s evaluation of available information. There can be no assurance that the Company’s regulators will not require further increases to the allowances.
 
 
11

 
 
The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2012:
 
    
Resid. Mtg
   
Multi-family
   
Constr and land dev.
   
Non-residential real estate
   
Owner occupied
   
Comm’l
   
HELOC and junior lien
   
Consumer
   
Total
 
                                                       
Allowance for Credit Losses:
                                                     
Balance at June 30, 2012
  $ 699     $ 596     $ 777     $ 1,047     $ 347     $ 2,130     $ 234     $ 22     $ 5,852  
Charge Offs
    (465 )                             (312 )           (6 )     (783 )
Recoveries
                2             5       382             3       392  
Provision
    457       72       229       (207 )     (30 )     (322 )     98       3       300  
Balance at September 30, 2012
  $ 691     $ 668     $ 1,008     $ 840     $ 322     $ 1,878     $ 332     $ 22     $ 5,761  
                                                                         
Ending balance, Individually Evaluated
  $ 287     $ 429     $ 446     $ 513     $ 68     $ 854     $ 238     $     $ 2,835  
Ending balance, Collectively Evaluated
  $ 404     $ 239     $ 562     $ 327     $ 254     $ 1,024     $ 94     $ 22     $ 2,926  
                                                                         
Loans:
                                                                       
Balance at September 30, 2012
  $ 91,244     $ 11,310     $ 29,751     $ 48,836     $ 71,408     $ 43,983     $ 18,215     $ 4,512     $ 319,259  
                                                                         
Ending balance, Individually Evaluated
  $ 1,944     $ 5,783     $ 880     $ 3,356     $ 708     $ 2,739     $ 281     $     $ 15,691  
Ending balance, Collectively Evaluated
  $ 89,300     $ 5,527     $ 28,871     $ 45,480     $ 70,700     $ 41,244     $ 17,934     $ 4,512     $ 303,568  
 
 
12

 
 
The following table is an aging analysis of the loan portfolio at September 30, 2012:

   
30-59 days
past due
   
60-89 days
past due
   
Greater than
90 days
   
Total past due
   
Total Current
   
Total loans
receivable
 
                                     
                                     
Residential Mortgage
  $ 292     $     $ 3,724     $ 4,016     $ 87,228     $ 91,244  
Multi-family
    92       4       5,155       5,251       6,059       11,310  
Construction/land development
    457       43       2,118       2,618       27,133       29,751  
Non-residential real estate
    2,465             3,327       5,792       43,044       48,836  
Owner occupied
    444             1,439       1,883       69,525       71,408  
Commercial
    114       90       1,254       1,458       42,525       43,983  
HELOC and Junior Lien
    75             231       306       17,909       18,215  
Consumer
    35             5       40       4,472       4,512  
                                                 
Total
  $ 3,974     $ 137     $ 17,253     $ 21,364     $ 297,895     $ 319,259  
 
The following table summarizes the credit risk profile by internally assigned grade at September 30, 2012:
 
   
Residential Mortgage
   
Multi-family
   
Constr and
land dev.
   
Non-
residential
real estate
   
Owner
occupied
   
Comm’l
   
HELOC
and Junior
Lien
   
Consumer
   
Total
 
                                                       
Grade:
                                                     
Pass
  $ 82,333     $ 5,431     $ 25,507     $ 29,116     $ 63,073     $ 39,312     $ 16,713     $ 4,086     $ 265,571  
Watch
    2,269             1,444       13,564       6,361       1,319       89       414       25,460  
Special mention
                                                     
Substandard
    6,642       5,879       2,800       6,156       1,974       3,352       1,413       12       28,228  
Doubtful
                                                     
Loss
                                                     
                                                                         
Total:
  $ 91,244     $ 11,310     $ 29,751     $ 48,836     $ 71,408     $ 43,983     $ 18,215     $ 4,512     $ 319,259  

 
13

 
 
The following table summarizes the composition of impaired loans, the associated specific reserves, and interest income recognized on impaired loans at September 30, 2012:
 
   
Recorded
investment
   
Unpaid
principal
balance
   
Specific
allowance
   
Interest income
recognized
 
                         
With an allowance recorded:
                       
Residential Mortgage
  $ 1,657     $ 1,944     $ 287     $ 10  
Multi-family
    5,353       5,783       429       15  
Construction and land development
    434       880       446       5  
Non-residential real estate
    2,843       3,356       513       3  
Owner occupied
    640       708       68        
Commercial
    1,885       2,739       854       57  
HELOC and Junior Lien
    44       281       238       2  
Consumer
                       
Total
  $ 12,856     $ 15,691     $ 2,835     $ 92  
                                 
With no related allowance:
                               
Residential Mortgage
  $ 1,476     $ 1,476     $     $ 22  
Multi-family
                       
Construction and land development
    1,758       1,758             6  
Non-residential real estate
    3,390       3,390             41  
Owner occupied
    585       585              
Commercial
    816       816              
HELOC and Junior Lien
    673       673               5  
Consumer
                       
Total
  $ 8,698     $ 8,698     $     $ 74  
                                 
Total:
                               
Residential Mortgage
  $ 3,133     $ 3,420     $ 287     $ 32  
Multi-family
    5,353       5,783       429       15  
Construction and land development
    2,192       2,638       446       11  
Non-residential real estate
    6,233       6,746       513       44  
Owner occupied
    1,225       1,293       68        
Commercial
    2,701       3,555       854       57  
HELOC and Jr Lien
    717       954       238       7  
Consumer
                       
Total
  $ 21,554     $ 24,389     $ 2,835     $ 166  
                                 
Average impaired loans for the three months ended September 30, 2012
  $ 24,625                          
 
(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.
 
 
14

 
 
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, 2012, we had approximately $10.4 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $4.5 million in unused letters of credit and approximately $30.5 million in unused lines of credit.

(8)
Dividends
On February 2, 2010, the Company announced that the Board of Directors had voted to suspend the payment of the quarterly cash dividend on the Company’s common stock in an effort to conserve capital.

(9)
Stock Incentive Plans
The Company maintains stock-based benefit plans under which certain employees and directors are eligible to receive stock grants or options. Under the 2004 Stock-Based Benefit Plan, a maximum of 279,500 shares may be granted as restricted stock and a maximum of 698,750 shares may be issued through the exercise of nonstatutory or incentive stock options. The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years.
 
The table below summarizes the status of the Company’s stock option plans as of September 30, 2012.

   
Three Months Ended
 
   
September 30, 2012
 
             
         
Weighted-
 
         
average
 
   
Shares
   
exercise price
 
             
Outstanding at beginning of period
    340,638     $ 13.69  
Granted during the three-month period
    20,000     $ 1.97  
Options forfeited
           
Options exercised
           
Outstanding at September 30, 2012
    360,638     $ 13.04