10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2008

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 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  ¨   Smaller Reporting Company  ¨
    (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  ¨    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 May 9, 2008, the registrant had 6,207,702 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


Table of Contents

INDEX

 

   PART I. FINANCIAL INFORMATION   
          Page

Item 1.

   Financial Statements   
   Consolidated Statements of Condition - Unaudited
Nine months ended March 31, 2008 and year ended June 30, 2007
   3
   Consolidated Statements of Earnings - Unaudited
Three and nine months ended March 31, 2008 and 2007
   4
   Consolidated Statements of Changes in Stockholders’ Equity – Unaudited
Nine months ended March 31, 2008 and 2007
   5
   Consolidated Statements of Cash Flows - Unaudited
Nine months ended March 31, 2008 and 2007
   6
   Notes to Consolidated Financial Statements - Unaudited    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    11

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    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

  

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Condition

(Dollars in thousands)

 

     March 31,
2008
    June 30,
2007
 
     (Unaudited)        

Assets

    

Cash and cash equivalents

   $ 1,856     $ 1,955  

Interest-earning deposits

     12,333       4,802  

Fed funds sold

     1,646       977  

Investment securities classified as available-for-sale, net

     9,045       27,278  

Federal Home Loan Bank stock

     1,843       1,796  

Bank owned life insurance

     5,868       5,702  

Loans receivable, net of allowance for loan losses of $1,805 at March 31, 2008 and $1,955 at June 30, 2007

     282,075       274,881  

Loans held-for-sale

     789       2,468  

Premises and equipment, net

     15,324       15,572  

Foreclosed real estate, net

     407       275  

Accrued interest receivable:

    

Investments

     97       299  

Loans receivable

     1,243       1,414  

Deferred tax asset

     683       1,606  

Other assets

     747       678  
                

Total assets

   $ 333,956     $ 339,703  
                

Liabilities and Stockholders’ Equity

    

Deposits:

    

Noninterest-bearing

   $ 12,836     $ 12,561  

Interest-bearing

     214,728       207,521  

Federal Home Loan Bank advances

     33,000       44,800  

Other liabilities

     951       1,120  

Accrued income taxes

     —         57  
                

Total liabilities

     261,515       266,059  
                

Commitments and contingent liabilities

     —         —    

Stockholders’ equity:

    

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

     —         —    

Common stock, $.01 par value; 30,000,000 shares authorized; 8,446,375 shares issued and 6,207,865 shares outstanding at March 31, 2008 and 6,411,586 shares outstanding at June 30, 2007

     84       84  

Additional paid-in capital

     72,953       72,738  

Unearned ESOP shares

     (4,645 )     (4,969 )

Unearned compensation

     (1,784 )     (2,182 )

Accumulated other comprehensive income

     25       (246 )

Retained earnings

     34,824       35,082  

Treasury stock, at cost; 2,238,510 shares at March 31, 2008 and 2,034,789 shares at June 30, 2007

     (29,016 )     (26,863 )
                

Total stockholders’ equity

     72,441       73,644  
                

Total liabilities and stockholders’ equity

   $ 333,956     $ 339,703  
                

See accompanying notes to financial statements.

 

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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)

 

     Three Months Ended
March 31,
   Nine Months Ended
March 31,
 
     2008    2007    2008    2007  

Interest income:

           

Interest on loans receivable

   $ 4,972    $ 4,895    $ 15,164    $ 14,522  

Interest on investment securities

     152      262      678      855  

Other interest

     74      60      258      210  
                             

Total interest income

     5,198      5,217      16,100      15,587  
                             

Interest expense:

           

Deposits

     1,926      1,840      6,096      5,390  

Advances from FHLB

     367      541      1,242      1,804  
                             

Total interest expense

     2,293      2,381      7,338      7,194  
                             

Net interest income

     2,905      2,836      8,762      8,393  

Provision for loan losses

     243      —        371      30  
                             

Net interest income after provision for loan losses

     2,662      2,836      8,391      8,363  
                             

Noninterest income:

           

Dividends from investments

     12      8      31      55  

Mortgage origination fee income

     46      102      269      354  

Service charges and fees

     223      133      531      383  

Gain on sale of fixed assets

     1      —        1      —    

Gain on sale of investment securities, net

     —        —        —        (29 )

Gain on sale of foreclosed real estate, net

     5      1      51      35  

BOLI increase in cash value

     56      53      166      158  

Other

     35      27      88      65  
                             

Total noninterest income

     378      324      1,137      1,021  
                             

Noninterest expense:

           

Compensation and benefits

     1,287      1,485      4,162      4,526  

Occupancy expense

     175      139      519      441  

Equipment and data processing expense

     363      323      1,084      1,039  

DIF premiums

     6      6      19      18  

Advertising

     5      46      221      280  

Other

     454      450      1,392      1,350  
                             

Total noninterest expense

     2,290      2,449      7,397      7,654  
                             

Earnings before income taxes

     750      711      2,131      1,730  
                             

Income taxes:

           

Current

     205      181      623      495  

Deferred

     50      76      755      142  
                             

Total income taxes

     255      257      1,378      637  
                             

Net earnings

   $ 495    $ 454    $ 753    $ 1,093  
                             

Net earnings per share, basic

   $ 0.09    $ 0.07    $ 0.13    $ 0.18  
                             

Net earnings per share, diluted

   $ 0.09    $ 0.07    $ 0.13    $ 0.18  
                             

See accompanying notes to financial statements.

 

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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended March 31, 2008 and 2007 (Unaudited)

(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, 2007

   $ 84    $ 72,738     $ (4,969 )   $ (2,182 )   $ (246 )   $ 35,082     $ (26,863 )   $ 73,644  
                       

Comprehensive income:

                 

Net earnings

     —        —         —         —         —         753       —         753  

Change in net unrealized gain (loss) on securities available for sale, net of taxes of $168

     —        —         —         —         271       —         —         271  
                       

Total comprehensive income

     —        —         —         —         —         —         —         1,024  

Dividends

     —        —         —         —         —         (1,135 )     —         (1,135 )

Dividends used for ESOP payment

     —        —         —         —         —         124       —         124  

Shares committed to be released by the ESOP

     —        18       324       —         —         —         —         342  

Stock options expensed

     —        197       —         —         —         —         —         197  

Earned portion of stock grants

     —        —         —         398       —         —         —         398  

Purchase of common stock (203,721 shares)

     —        —         —         —         —         —         (2,153 )     (2,153 )
                                                               

Balance at March 31, 2008

   $ 84    $ 72,953     $ (4,645 )   $ (1,784 )   $ 25     $ 34,824     $ (29,016 )   $ 72,441  
                                                               
     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, 2006

   $ 84    $ 72,171     $ (5,401 )   $ (2,733 )   $ (609 )   $ 34,780     $ (23,749 )   $ 74,543  
                       

Comprehensive income:

                 

Net earnings

     —        —         —         —         —         1,093       —         1,093  

Change in net unrealized gain (loss) on securities available for sale, net of taxes of $253

     —        —         —         —         407       —         —         407  
                       

Total comprehensive income

     —        —         —         —         —         —         —         1,500  

Dividends

     —        —         —         —         —         (1,173 )     —         (1,173 )

Dividends used for ESOP payment

     —        —         —         —         —         149       —         149  

Shares committed to be released by the ESOP

     —        97       324       —         —         —         —         421  

Stock options expensed

     —        199       —         —         —         —         —         199  

Earned portion of stock grants

     —        —         —         415       —         —         —         415  

MRP vesting

     —        (13 )     —         —         —         —         —         (13 )

Exercise of options

     —        160       —         —         —         —         —         160  

Tax benefit from exercise of nonqualifying stock options

     —        46       —         —         —         —         —         46  

Purchase of common stock (198,471 shares)

     —        —         —         —         —         —         (2,590 )     (2,590 )
                                                               

Balance at March 31, 2007

   $ 84    $ 72,660     $ (5,077 )   $ (2,318 )   $ (202 )   $ 34,849     $ (26,339 )   $ 73,657  
                                                               

See accompanying notes to financial statements.

 

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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

 

     Nine Months Ended
March 31,
 
     2008     2007  

Cash flows from operating activities:

    

Net earnings

   $ 753     $ 1,093  

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

    

Allocated ESOP shares

     342       421  

Depreciation and amortization expense

     491       392  

Amortization of premiums (discounts), net on investment securities

     11       11  

Provision for loan losses

     371       30  

(Gain) loss on sale of fixed assets

     (1 )     —    

(Gain) loss on sale of investment securities and mortgage-backed securities, net

     —         29  

FHLB stock dividends

     (23 )     (52 )

Amortization of deferred loan fees, net

     (185 )     (113 )

(Gain) on sale of foreclosed real estate, net

     (51 )     (35 )

Deferred tax expense

     755       142  

Tax benefit from stock options and MRP

     —         46  

Originations of mortgage loans held for sale

     (18,211 )     (38,359 )

Proceeds from sale of mortgage loans

     19,890       38,963  

Increase in cash value of life insurance

     (166 )     (158 )

Earned portion of MRP

     398       415  

Stock options expensed

     197       199  

Decrease (increase) in:

    

Accrued interest receivable

     373       77  

Other assets

     (69 )     3,592  

Increase (decrease) in other liabilities and accrued income taxes

     (212 )     (283 )
                

Net cash provided by (used for) operating activities

     4,663       6,410  
                

Cash flows used for investing activities:

    

Loan originations, net of principal collections

     (7,565 )     (12,388 )

Investment securities classified as available for sale:

    

Purchased

     —         —    

Proceeds from sale

     1,000       3,965  

Proceeds from maturities, calls and prepayments

     17,662       1,145  

Purchase of premises and equipment

     (243 )     (2,857 )

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

     203       41  
                

Net cash provided by (used for) investing activities

     11,057       (10,094 )
                

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     7,482       20,089  

Proceeds from advances from FHLB

     45,100       63,500  

Repayment of FHLB advances

     (56,900 )     (79,600 )

Purchase of treasury stock

     (2,153 )     (2,590 )

Dividends paid

     (1,148 )     (1,348 )

Proceeds from exercise of stock options

     —         160  
                

Net cash provided by (used for) financing activities

     (7,619 )     211  
                

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

     8,101       (3,473 )

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

     7,734       11,956  
                

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

   $ 15,835     $ 8,483  
                

Supplemental disclosures of cash flow information:

    

Cash paid during period for:

    

Interest on deposits

   $ 6,080     $ 5,272  

Interest on FHLB advances

   $ 1,242     $ 1,804  

Income taxes

   $ 880     $ 570  

Real estate acquired in settlement of loans

   $ 423     $ 90  

See accompanying notes to financial statements.

 

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Notes To Consolidated Financial Statements

 

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the “Company” or “Jefferson Bancshares”) and its wholly-owned subsidiary, Jefferson Federal Bank (the “Bank” or “Jefferson Federal”). The unaudited financial statements of the Company were prepared with generally accepted accounting principles and with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the interim financial statements. The results of operations for the period ended March 31, 2008 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, 2007, which was filed with the Securities and Exchange Commission on September 13, 2007. 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

Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution

 

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would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with, or condition imposed by, the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary of a holding company. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federal’s capital falls below its regulatory requirements or the Office of Thrift Supervision notifies it that it is in need of more than normal supervision, Jefferson Federal’s ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the distribution would reduce its regulatory capital below the amount needed for the liquidation account established in connection with its conversion from the mutual holding company form of organization.

 

(5) Earnings Per Common Share

Earnings per common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated 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 March 31, 2008, stock options to purchase 401,778 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
March 31,
   Weighted-Average Shares
Outstanding for the

Nine Months Ended
March 31,
     2008    2007    2008    2007

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

   5,763,588    5,958,765    5,828,374    5,997,108

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

   5,763,588    5,958,765    5,828,374    5,997,108
                   

 

(6) Statements of Cash Flows

Dividends declared but not paid have been recorded in other liabilities; however, their non-effect on cash and operations dictates their exclusion from the cash flows until actually paid.

 

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(7) Accounting by Creditors for Impairment of a Loan

Impairment of loans is recognized in conformity with Financial Accounting Standards Board (“FASB”) Statement No. 118. There was no impairment of loans or allowance for loan losses related to impaired loans at March 31, 2008. Other nonaccrual loans at March 31, 2008 were approximately $386,000. For the nine months ended March 31, 2008, gross income which would have been recognized had nonaccrual loans been current in accordance with their original terms amounted to approximately $23,000. Interest income from non-accrual loans included in the Company’s interest income amounted to $12,000 for the nine months ended March 31, 2008.

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2008:

 

     Allowance for Loan
Losses
 
     (Dollars in thousands)  

Balance at June 30, 2007

     $ 1,955  

Provision for loan losses

       371  

Charge-offs

   (585 )  

Recoveries

   64    
        

Net (charge-offs)/recoveries

       (521 )
          

Balance at March 31, 2008

     $ 1,805  
          

 

(8) Financial Instruments With Off-Balance Sheet Risk

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

At March 31, 2008, we had approximately $7.3 million in loan commitments, consisting of commitments to originate real estate loans. In addition to commitments to originate loans, we had $7.6 million of loans-in-process, $9.4 million in unused standby letters of credit and approximately $21.6 million in unused lines of credit.

 

(9) Dividend Declaration

On February 28, 2008 the Board of Directors of the Company approved a quarterly dividend of $0.06 per share to stockholders of record as of March 31, 2008 and payable on April 11, 2008.

 

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(10) Stock Incentive Plans

The Company’s 2004 Stock Incentive Plan authorizes the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors of Jefferson Federal and Jefferson Bancshares. As of March 31, 2008, there were 401,778 options and 192,911 restricted stock awards granted under this plan which will vest pro-rata over a five-year period. The 2004 Plan has an expiration date of January 30, 2014.

The table below summarizes the status of the Company’s stock option plans as of March 31, 2008.

 

     Three Months Ended
March 31, 2008
     Shares    Weighted-
average
exercise price

Outstanding at beginning of period

   401,778    $ 13.69

Granted during the three-month period

   —        —  

Options exercised

   —        —  

Outstanding at March 31, 2008

   401,778    $ 13.69

Options exercisable at March 31, 2008

   321,434    $ 13.69

The following information applies to options outstanding at March 31, 2008:

 

Number outstanding

     401,778

Range of exercise prices

   $ 13.69

Weighted-average exercise price

   $ 13.69

Weighted-average remaining contractual life

     5.83

Number of options remaining for future issuance

     296,972

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”), an amendment of FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (“APB 25”) and requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.

Effective July 1, 2005, the Company adopted SFAS 123R using the modified prospective application transition method. This requires the Company to expense the unvested portion of options granted in 2004, which reduces net earnings by approximately $217,000 in fiscal year 2008 and $109,000 during the remaining service period. SFAS 123R provides for the use of alternative models to determine compensation cost related to stock option grants. The estimated fair value of stock options at grant date has

 

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

 

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

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2007, which was filed with the Securities and Exchange Commission on September 13, 2007.

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 Bank is a member of the Federal Home Loan Bank (“FHLB”) System.

Private Securities Litigation Reform Act Safe Harbor Statement

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

 

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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, 2007 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements.

Results of Operations for the Three and Nine Months Ended March 31, 2008 and 2007

Net Income

Net income was $495,000, or $0.09 per diluted share, for the quarter ended March 31, 2008 compared to net income of $454,000, or $0.07 per diluted share, for the corresponding quarter in 2007. The increase in net income for the three months ended March 31, 2008 was due to increases in net interest income and noninterest income, as well as a decrease in noninterest expense more than offsetting an increase in the provision for loan losses.

For the nine months ended March 31, 2008, net income was $753,000, or $0.13 per diluted share, compared to $1.1 million, or $0.18 per diluted share, for the comparable period in 2007. Net income for the current nine-month period was negatively impacted by a $637,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax assets. The deferred tax asset written down was the charitable contribution carryforward directly attributable to the contribution made to the Jefferson Federal Charitable Foundation in connection with the Company’s public offering in July 2003. Management determined that a valuation allowance was prudent because the tax benefit of the contribution may not be fully utilized based on an assessment of the Company’s future taxable income within the time allowed by the Internal Revenue Service. Excluding the non-cash charge to deferred income tax expense, core net earnings were $1.4 million, or $0.24 per share, for the nine months ended March 31, 2008 compared to earnings of $1.1 million, or $0.18, for the corresponding period in 2007. The increase in core net earnings for the nine months ended March 31, 2008 was due to increases in net interest income and noninterest income, as well as a decrease in noninterest expense more than offsetting an increase in the provision for loan losses.

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2008     2007     2008     2007  
     (Dollars in thousands,
except per share data)
    (Dollars in thousands,
except per share data)
 

Net earnings

   $ 495     $ 454     $ 753     $ 1,093  

Net earnings per share, basic

   $ 0.09     $ 0.07     $ 0.13     $ 0.18  

Net earnings per share, diluted

   $ 0.09     $ 0.07     $ 0.13     $ 0.18  

Return on average assets (annualized)

     0.59 %     0.55 %     0.30 %     0.44 %

Return on average equity (annualized)

     2.71 %     2.46 %     1.36 %     1.96 %

 

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While core net earnings is not a measure of performance calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company believes that this measure is important for the nine-month period ended March 31, 2008 to convey to investors the Company’s earnings for this period absent the $637,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax assets during the second quarter of fiscal 2008. As discussed above, the valuation allowance was related to the charitable contribution carryforward directly attributable to the Company’s contribution to the Jefferson Federal Charitable Foundation in July 2003. The Company calculated its core net earnings for the nine month period ended March 31, 2008 by subtracting this $637,000 non-cash charge from net income for the period. Core net earnings should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data calculated in accordance with GAAP. Moreover, the manner in which the Company calculates core net earnings may differ from that of other companies reporting measures with similar names. A reconciliation of the Company’s GAAP and core net earnings for the nine month period ended March 31, 2008 is set forth below.

 

     Nine Months Ended
March 31,
     2008    2007
     (Dollars in thousands,
except per share data)

GAAP net earnings

   $ 753    $ 1,093

Plus: non-cash charge to deferred income tax expense

     637      —  
             

Core net earnings

   $ 1,390    $ 1,093
             

GAAP earnings per diluted share

   $ 0.13    $ 0.18

Plus: non-cash charge to deferred income tax expense

   $ 0.11    $ 0.00
             

Core net earnings per diluted share

   $ 0.24    $ 0.18
             

Net Interest Income

Net interest income before loan loss provision increased $69,000, or 2.4%, to $2.9 million for the quarter ended March 31, 2008 from the corresponding period in 2007. The interest rate spread and net interest margin for the quarter ended March 31, 2008 were 3.01% and 3.75%, respectively, compared to 2.98% and 3.79%, respectively, for the same period in 2007.

The following table summarizes changes in interest income and expense for the three-month periods ended March 31, 2008 and 2007:

 

     Three Months Ended
March 31,
            
     2008    2007    $ Change     % Change  
     (Dollars in thousands)             

Interest income:

          

Loans

   $ 4,972    $ 4,895    $ 77     1.6 %

Investment securities

     152      262      (110 )   (42.0 )%

Interest-earning deposits

     50      32      18     56.3 %

FHLB stock

     24      28      (4 )   (14.3 )%
                        

Total interest income

     5,198      5,217      (19 )   (0.4 )%
                        

Interest expense:

          

Deposits

     1,926      1,840      86     4.7 %

Borrowings

     367      541      (174 )   (32.2 )%
                        

Total interest expense

     2,293      2,381      (88 )   (3.7 )%
                        

Net interest income

   $ 2,905    $ 2,836    $ 69     2.4 %
                        

 

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For the nine months ended March 31, 2008, net interest income increased $369,000, or 4.4%, to $8.8 million. The interest rate spread and net interest margin for the nine months ended March 31, 2008 were 2.97% and 3.73%, respectively, compared to 2.89% and 3.69%, respectively, for the same period in 2007.

The following table summarizes changes in interest income and expense for the nine-month periods ended March 31, 2008 and 2007:

 

     Nine Months Ended
March 31,
            
     2008    2007    $ Change     % Change  
     (Dollars in thousands)             

Interest income:

          

Loans

   $ 15,164    $ 14,522    $ 642     4.4 %

Investment securities

     678      855      (177 )   (20.7 )%

Interest-earning deposits

     173      130      43     33.1 %

FHLB stock

     85      80      5     6.3 %
                        

Total interest income

     16,100      15,587      513     3.3 %
                        

Interest expense:

          

Deposits

     6,096      5,390      706     13.1 %

Borrowings

     1,242      1,804      (562 )   (31.2 )%
                        

Total interest expense

     7,338      7,194      144     2.0 %
                        

Net interest income

   $ 8,762    $ 8,393    $ 369     4.4 %
                        

The following table summarizes average balances and average yields and costs:

 

     Three Months Ended March 31,     Nine Months Ended March 31,  
     2008     2007     2008     2007  
     Average
Balance
   Yield/
Cost
    Average
Balance
   Yield/
Cost
    Average
Balance
   Yield/
Cost
    Average
Balance
   Yield/
Cost
 
     (Dollars in thousands)     (Dollars in thousands)  

Loans

   $ 286,548    6.98 %   $ 269,981    7.35 %   $ 281,287    7.17 %   $ 267,082    7.24 %

Investment securities

     15,569    3.93 %     27,272    3.90 %     22,136    4.08 %     29,321    3.88 %

Interest-earning deposits

     7,990    2.52 %     4,364    2.97 %     7,119    3.23 %     4,939    3.51 %

FHLB stock

     1,800    5.36 %     1,806    6.29 %     1,797    6.30 %     1,780    5.99 %

Deposits

     214,248    3.62 %     199,961    3.73 %     214,381    3.78 %     196,113    3.66 %

Borrowings

     35,696    4.14 %     42,133    5.21 %     36,346    4.55 %     45,907    5.23 %

 

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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 March 31,
2008 Compared to 2007
    Nine Months
Ended March 31,
2008 Compared to 2007
 
     Increase (Decrease)           Increase (Decrease)        
     Due To           Due To        
     Volume     Rate     Net     Volume     Rate     Net  
     (In thousands)     (In thousands)  

Interest income:

            

Loans receivable

   $ 257     $ (180 )   $ 77     $ 764     $ (122 )   $ 642  

Investment securities

     (121 )     12       (109 )     (232 )     58       (174 )

Municipals

     (2 )     1       (1 )     (4 )     1       (3 )

Daily interest-earning deposits and other interest-earning assets

     21       (7 )     14       53       (5 )     48  
                                                

Total interest-earning assets

     155       (174 )     (19 )     581       (68 )     513  
                                                

Interest expense:

            

Deposits

     127       (41 )     86       514       192       706  

Borrowings

     (76 )     (98 )     (174 )     (346 )     (216 )     (562 )
                                                

Total interest-bearing liabilities

     51       (139 )     (88 )     168       (24 )     144  
                                                

Net change in interest income

   $ 104     $ (35 )   $ 69     $ 413     $ (44 )   $ 369  
                                                

Total interest income decreased $19,000, to $5.2 million for the three months ended March 31, 2008 due to a lower average yield on interest-earning assets more than offsetting an increase in the average balance of interest-earning assets. For the nine months ended March 31, 2008 interest income increased $513,000, or 3.3%, to $16.1 million as a result of growth in the average balance of interest-earning assets more than offsetting a decline in the average yield.

Interest on loans increased $77,000, or 1.6%, to $5.0 million for the three months ended March 31, 2008 and increased 642,000, or 4.4%, to $15.2 million for the nine months ended March 31, 2008.

 

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The increase in interest on loans is the result of a higher average balance, primarily due to growth in the commercial loan portfolio, combined with a decrease in the average yield. The average balance of loans increased $16.6 million, or 6.1%, to $286.5 million for the three months ended March 31, 2008 and increased $14.2 million, or 5.3%, to $281.3 million for the nine months ended March 31, 2008. The decrease in the average yield on loans was primarily the result of decreases in the prime lending rate.

Interest on investment securities decreased $110,000, or 42.0%, to $152,000 for the three months ended March 31, 2008 and decreased $177,000, or 20.7%, to $678,000 for the nine months ended March 31, 2008. The decrease for both periods was the result of a decline in the average balance of investment securities more than offsetting an increase in the average yield. The average balance of investment securities declined during both the three and nine-month period due to securities being called.

Total interest expense decreased $88,000, or 3.7%, to $2.3 million for the three-month period ended March 31, 2008 primarily due to a 30 basis point decline in the rate paid on interest-bearing liabilities resulting from decreases in short term interest rates. Interest expense increased $144,000, or 2.0%, to $7.3 million for the nine-month period ended March 31, 2008 as a result of an increase in the average balance of interest-bearing liabilities due to deposit growth.

Interest expense on deposits increased $86,000, or 4.7%, to $1.9 million for the three-month period ended March 31, 2008 due primarily to an increase in the average balance of money market accounts and certificates of deposit. For the nine months ended March 31, 2008 interest expense on deposits increased $706,000, or 13.1%, to $6.1 million as the result of an increase in the average balance of money market accounts and certificates of deposit, combined with an increase in the market interest rates. The increase in the average balance of deposits was primarily the result of marketing efforts and competitive pricing.

Interest expense on FHLB advances decreased $174,000, or 32.2%, to $367,000 for the three months ended March 31, 2008 compared to the same period in 2007. For the nine months ended March 31, 2008, interest expense on FHLB advances decreased $562,000, or 31.2%, to $1.2 million. The decrease for both periods was due to a lower average balance and lower interest rates.

Provision for Loan Losses

We review the level of the loan loss allowance on a monthly basis and establish the provision for loan losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the collectibility of the loan portfolio. Net charge-offs for the three- and nine-month periods ended March 31, 2008 amounted to $265,000 and $521,000, respectively, compared to $60,000 and $154,000, respectively, for the comparable periods in 2007. The provision for loan losses for the three- and nine-month periods ended March 31, 2008 totaled $243,000 and $371,000, respectively, compared to no provision and $30,000, respectively, for the corresponding periods in 2007. The increase in provision for loan losses reflects growth in commercial loans and current economic conditions. Nonperforming loans totaled $386,000 at March 31, 2008 compared to $333,000 at March 31, 2007.

 

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Noninterest Income

Noninterest income increased $54,000, or 16.7%, to $378,000 for the three months ended March 31, 2008 compared to $324,000 for the corresponding period in 2007. Service charges and fee income increased $90,000, or 67.7%, to $223,000 for the three months ended March 31, 2008 due to the implementation of a new overdraft program. Mortgage origination fee income decreased $56,000, or 54.9%, to $46,000 for the three months ended March 31, 2008 due to a lower volume of loan originations.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended March 31, 2008 compared to the same period in 2007.

 

     Three Months Ended
March 31,
   $ Change     % Change  
     2008    2007     
     (Dollars in thousands)             

Noninterest income:

          

Dividends from investments

   $ 12    $ 8    $ 4     50.0 %

Mortgage origination fee income

     46      102      (56 )   (54.9 )%

Service charges and fees

     223      133      90     67.7 %

Gain on sale of fixed assets

     1      —        1     NM  

Gain on sale of foreclosed real estate, net

     5      1      4     400.0 %

BOLI increase in cash value

     56      53      3     5.7 %

Other

     35      27      8     29.6 %
                        

Total noninterest income

   $ 378    $ 324    $ 54     16.7 %
                        

Noninterest income increased $116,000, or 11.4%, to $1.1 million for the nine months ended March 31, 2008 compared to $1.0 million for the corresponding period in 2007. Service charges and fee income increased $148,000, or 38.6%, to $531,000 for the nine months ended March 31, 2008 due to the implementation of a new overdraft program. Mortgage origination fee income decreased $85,000, or 24.0%, to $269,000 for the nine months ended March 31, 2008 due to a lower volume of loan originations.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the nine months ended March 31, 2008 compared to the same period in 2007.

 

     Nine Months Ended
March 31,
    $ Change     % Change  
     2008    2007      
     (Dollars in thousands)              

Noninterest income:

         

Dividends from investments

   $ 31    $ 55     $ (24 )   (43.6 )%

Mortgage origination fee income

     269      354       (85 )   (24.0 )%

Service charges and fees

     531      383       148     38.6 %

Gain on sale of fixed assets

     1      —         1     NM  

Gain (loss) on sale of investment securities, net

     —        (29 )     29     (100.0 )%

Gain on sale of foreclosed real estate, net

     51      35       16     45.7 %

BOLI increase in cash value

     166      158       8     5.1 %

Other

     88      65       23     35.4 %
                         

Total noninterest income

   $ 1,137    $ 1,021     $ 116     11.4 %
                         

 

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Noninterest Expense

Noninterest expense decreased $159,000, or 6.5%, to $2.3 million for the three-month period ended March 31, 2008. Compensation and benefits expense decreased $198,000, or 13.3%, to $1.3 million for the three months ended March 31, 2008 due in part to a lower number of employees. Occupancy expense and equipment and data processing expense increased due primarily to expenses associated with the new branch office in Knoxville, Tennessee.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended March 31, 2008 compared to the same period in 2007.

 

     Three Months Ended
March 31,
   $ Change     % Change  
     2008    2007     
     (Dollars in thousands)             

Compensation and benefits

   $ 1,287    $ 1,485    $ (198 )   (13.3 )%

Occupancy expense

     175      139      36     25.9 %

Equipment and data processing expense

     363      323      40     12.4 %

Deposit insurance premiums

     6      6      —       0.0 %

Advertising

     5      46      (41 )   (89.1 )%

Other

     454      450      4     0.9 %
                        

Total noninterest expense

   $ 2,290    $ 2,449    $ (159 )   (6.5 )%
                        

Noninterest expense decreased $257,000, or 3.4%, to $7.4 million for the nine-month period ended March 31, 2008, primarily due to a decrease in compensation and benefits expense. Compensation and benefits expense decreased $364,000, or 8.0%, to $4.2 million for the nine months ended March 31, 2008 due to a lower number of employees. Occupancy expense and equipment and data processing expense increased due primarily to expenses associated with the new branch office in Knoxville, Tennessee.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the nine months ended March 31, 2008 compared to the same period in 2007.

 

     Nine Months Ended
March 31,
   $ Change     % Change  
     2008    2007     
     (Dollars in thousands)             

Compensation and benefits

   $ 4,162    $ 4,526    $ (364 )   (8.0 )%

Occupancy expense

     519      441      78     17.7 %

Equipment and data processing expense

     1,084      1,039      45     4.3 %

DIF deposit insurance premiums

     19      18      1     5.6 %

Advertising

     221      280      (59 )   (21.1 )%

Other

     1,392      1,350      42     3.1 %
                        

Total noninterest expense

   $ 7,397    $ 7,654    $ (257 )   (3.4 )%
                        

 

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Income Taxes

Income tax expense for the three months ended March 31, 2008 was $255,000 compared to $257,000 for the same period in 2007. Income tax expense for the nine months ended March 31, 2008 was $1.4 million compared to $637,000 for the same period in 2007. The increase in income tax expense for the nine-month period was due to the non-cash charge to deferred income tax expense to establish a valuation allowance against the charitable contribution carryforward. As previously mentioned, the carryforward is directly attributable to the contribution made to the Jefferson Federal Charitable Foundation in connection with the Company’s public offering in July 2003.

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits were $15.8 million at March 31, 2008 compared to $7.7 million at June 30, 2007. We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily liquidity needs.

Investments

Our investment portfolio consists primarily of federal agency securities with maturities of seven years or less, and municipal securities. Investment securities decreased $18.2 million, or 66.8%, to $9.0 million due primarily to calls and maturities of investment securities during the nine-month period ended March 31, 2008. Investment securities classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $40,000, or $25,000 net of taxes.

 

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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 March 31, 2008

 

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

Securities available-for-sale

         

Debt securities:

         

Federal agency

   $ 5,150     $ 16    $ —       $ 5,166

Municipals

     3,855       25      (1 )     3,879
                             

Total securities available-for-sale

   $ 9,005     $ 41    $ (1 )   $ 9,045
                             

Weighted-average rate

     3.71 %       
               
At June 30, 2007          
     Amortized
Cost
    Unrealized
Gains
   Unrealized
Losses
    Fair
Value
           (Dollars in thousands)      

Securities available-for-sale

         

Debt securities:

         

Federal agency

   $ 23,339     $ —      $ (278 )   $ 23,061

Municipals

     4,338       1      (122 )     4,217
                             

Total securities available-for-sale

   $ 27,677     $ 1    $ (400 )   $ 27,278
                             

Weighted-average rate

     3.96 %       
               

Loans

Net loans increased $7.2 million to $282.1 million at March 31, 2008 primarily due to an increase in real estate loans and commercial business loans. Our primary lending activity is the origination of loans secured by real estate. Real estate loans totaled $229.2 million, or 80.6% of total loans, at March 31, 2008 compared to $225.5 million, or 81.4% of total loans, at June 30, 2007. Commercial business loans increased $5.0 million, or 12.0%, to $46.7 million at March 31, 2008, while consumer loans decreased $1.7 million, or 16.7%, to $8.3 million at that date. The decline in consumer loans was largely attributable to a decrease in indirect automobile loans.

 

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Loans receivable, net, are summarized as follows:

 

     At March 31, 2008     At June 30, 2007              
     Amount     Percent
of Portfolio
    Amount     Percent
of Portfolio
    $ Change     % Change  
     (Dollars in thousands)              

Real estate loans:

            

Residential one-to four-family

   $ 65,685     23.1 %   $ 69,693     25.1 %   $ (4,008 )   (5.8 )%

Home equity line of credit

     5,531     1.9 %     5,470     2.0 %     61     1.1 %

Commercial

     92,322     32.5 %     86,929     31.4 %     5,393     6.2 %

Multi-family

     4,286     1.5 %     8,182     3.0 %     (3,896 )   (47.6 )%

Construction

     19,169     6.7 %     21,634     7.8 %     (2,465 )   (11.4 )%

Land

     42,198     14.8 %     33,604     12.1 %     8,594     25.6 %
                                      

Total real estate loans

     229,191     80.6 %     225,512     81.4 %     3,679     1.6 %
                                      

Commercial business loans

     46,660     16.4 %     41,667     15.0 %     4,993     12.0 %
                                      

Consumer loans:

            

Automobile loans

     4,457     1.6 %     6,423     2.3 %     (1,966 )   (30.6 )%

Mobile home loans

     51     0.0 %     82     0.0 %     (31 )   (37.8 )%

Loans secured by deposits

     979     0.3 %     978     0.4 %     1     0.1 %

Other consumer loans

     2,858     1.0 %     2,540     0.9 %     318     12.5 %
                                      

Total consumer loans

     8,345     2.9 %     10,023     3.6 %     (1,678 )   (16.7 )%
                                      

Total gross loans

     284,196     100.0 %     277,202     100.0 %     6,994     2.5 %
                    

Less:

            

Deferred loan fees, net

     (316 )       (366 )       50     (13.7 )%

Allowance for losses

     (1,805 )       (1,955 )       150     (7.7 )%
                              

Loans receivable, net

   $ 282,075       $ 274,881       $ 7,194     2.6 %
                              

Loan Loss Allowance

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

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

 

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The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours.

The allowance for loan losses was $1.8 million at March 31, 2008 compared to $2.0 million at June 30, 2007. The decrease is the result of an increase in loans charged-off during the current nine-month period compared to the prior year nine-month period. The increase in charge-offs is the result of write-downs on commercial real estate acquired through foreclosure during the current nine-month period. Our allowance for loan losses represented 0.64% of total loans and 467.62% of nonperforming loans at March 31, 2008 compared to 0.71% of total loans and 778.88% of nonperforming loans at June 30, 2007.

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2008     2007     2008     2007  
     (Dollars in thousands)     (Dollars in thousands)  

Balance at beginning of period

   $ 1,827     $ 2,108     $ 1,955     $ 2,172  

Provision for loan losses

     243       —         371       30  

Recoveries

     34       32       64       75  

Charge-offs

     (299 )     (92 )     (585 )     (229 )
                                

Net charge-offs

     (265 )     (60 )     (521 )     (154 )
                                

Allowance at end of period

   $ 1,805     $ 2,048     $ 1,805     $ 2,048  
                                

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

     0.37 %     0.09 %     0.25 %     0.08 %

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent. Nonperforming loans totaled $386,000 at March 31, 2008 compared to $251,000 at June 30, 2007. Foreclosed real estate amounted to $407,000 at March 31, 2008 compared to $275,000 at June 30, 2007. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.

 

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Table of Contents
     March 31,
2008
    June 30,
2007
 
     (Dollars in thousands)  

Nonaccruing loans:

    

Real estate

   $ 386     $ 251  

Commercial business

     —         —    

Consumer

     —         —    
                

Total nonaccrual loans

     386       251  

Real estate owned

     407       275  

Other repossessed assets

     33       —    
                

Total nonperforming assets

   $ 826     $ 526  
                

Total nonperforming assets to total assets

     0.25 %     0.15 %

Total nonperforming loans to total loans

     0.14 %     0.09 %

Allowance for loan losses to total nonperforming loans

     467.62 %     778.88 %

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 March 31, 2008 was $5.9 million.

Deposits

Total deposits increased $7.5 million, or 3.4%, to $227.6 million at March 31, 2008 due to an increase in transaction accounts. Money market accounts increased $7.9 million, or 19.2%, to $49.2 million primarily due to competitive pricing and marketing efforts. Checking accounts increased $2.4 million, or 15.0%, to $18.7 million as a result of our emphasis on increasing the number of both retail and business checking accounts.

 

     March 31,
2008
   June 30,
2007
   $ Change     % Change  
     (Dollars in thousands)             

Noninterest-bearing accounts

   $ 12,836    $ 12,561    $ 275     2.2 %

NOW accounts

     18,662      16,230      2,432     15.0 %

Savings accounts

     8,969      9,690      (721 )   (7.4 )%

Money market accounts

     49,224      41,312      7,912     19.2 %

Certificates of deposit

     137,873      140,289      (2,416 )   (1.7 )%
                        
   $ 227,564    $ 220,082    $ 7,482     3.4 %
                        

Advances

FHLB advances decreased $11.8 million to $33.0 million at March 31, 2008 as proceeds from called investment securities were used to repay borrowings. Additional FHLB advances may be utilized in the future to manage daily liquidity needs and to support loan growth.

 

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Table of Contents

Stockholders’ Equity

Stockholders’ equity decreased $1.2 million to $72.4 million at March 31, 2008 due primarily to the repurchase of shares in the amount of $2.2 million. Stock repurchases for the three months ended March 31, 2008 totaled 99,024 shares at an average cost of $10.72 per share. On February 24, 2006, the Company announced its third stock repurchase program in which up to 690,261 shares of the Company’s outstanding common stock, may be repurchased. At March 31, 2008, 128,855 shares remained eligible for repurchase under the current stock repurchase program. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders’ equity. At March 31, 2008, the adjustment to stockholders’ equity was a net unrealized gain of $25,000 compared to a net unrealized loss of $246,000 at June 30, 2007. The Company declared a $0.06 per share dividend to shareholders of record at March 31, 2008 totaling $372,000 that was payable on April 11, 2008.

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 March 31, 2008, cash and cash equivalents totaled $1.9 million and interest-earning deposits totaled $14.0 million, compared to $2.0 million and $5.8 million, respectively, at June 30, 2007. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $9.0 million at March 31, 2008 compared to $27.3 million at June 30, 2007. In addition, at March 31, 2008, our advance agreement with the FHLB provided us with the ability to borrow a total of approximately $50.2 million from the FHLB of Cincinnati. In the nine-month period ended March 31, 2008, FHLB advances decreased $11.8 million to $33.0 million compared to $44.8 million at June 30, 2007.

We anticipate that we will have sufficient funds available to meet current loan commitments. At March 31, 2008, we had approximately $7.3 million in loan commitments outstanding. In addition to commitments to originate loans, we had $7.6 million in loans-in-process primarily related to undisbursed proceeds of construction loans, $9.4 million in unused standby letters of credit and approximately $21.6 million in unused lines of credit. We had $120.1 million in certificates of deposit due within one year and $89.7 million in other deposits without specific maturities at March 31, 2008. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net increase in total deposits of $7.5 million during the nine-month period ended March 31, 2008.

 

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Table of Contents

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 March 31, 2008, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

 

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Table of Contents

Capital Compliance

The following table presents our capital position relative to our regulatory capital requirements at March 31, 2008 and June 30, 2007:

 

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

At March 31, 2008

                     

Total Capital

                     

(To Risk Weighted Assets)

   $ 66,602    24.4 %   $ 21,829    >    8.0 %   $ 27,286    >    10.0 %
                         

Core Capital

                     

(To Tangible Assets)

     64,834    19.5 %     13,324    >    4.0 %     16,655    >    5.0 %
                         

Tangible Capital

                     

(To Tangible Assets)

     64,834    19.5 %     4,996    >    1.5 %     N/A      
                       

Tier 1 Capital

                     

(To Risk Weighted Assets)

     64,834    23.8 %     N/A           16,372    >    6.0 %
                       

At June 30, 2007

                     

Total Capital

                     

(To Risk Weighted Assets)

   $ 67,123    25.5 %   $ 21,099    >    8.0 %   $ 26,374    >    10.0 %
                         

Core Capital

                     

(To Tangible Assets)

     65,205    19.3 %     13,496    >    4.0 %     16,870    >    5.0 %
                         

Tangible Capital

                     

(To Tangible Assets)

     65,205    19.3 %     5,061    >    1.5 %     N/A      
                       

Tier 1 Capital

                     

(To Risk Weighted Assets)

     65,205    24.7 %     N/A           15,824    >    6.0 %
                       

 

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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, 2007. 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, 2007.

 

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 March 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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, 2007.

 

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 Progams
   ( d )
Maximum Number
(or Approximate
Dollar Value)

of Shares (or
Units) That May
Yet Be Purchased
Under the Plans

or Programs
 

Month #1

           

January 1, 2008 through January 31, 2008

   42,298    $ 10.09    42,298    185,581 (1)

Month #2

           

February 1, 2008 through February 29, 2008

   56,726    $ 11.19    56,726    128,855 (1)

Month #3

           

March 1, 2008 through March 31, 2008

   —        —      —      128,855 (1)

Total

   99,024    $ 10.72    99,024    128,855  

 

(1) On February 24, 2006, the Company announced a stock repurchase program under which the Company may repurchase up to 690,261 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.

 

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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

 

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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.
May 9, 2008    

/s/ Anderson L. Smith

    Anderson L. Smith
    President and Chief Executive Officer
May 9, 2008    

/s/ Jane P. Hutton

    Jane P. Hutton
    Chief Financial Officer, Treasurer and Secretary