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| JFBI > SEC Filings for JFBI > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes thereto. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2008, which was filed with the Securities and Exchange Commission on September 11, 2008.
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.
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, 2008 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 Months Ended September 30, 2008 and 2007
Net Income
Net income was $533,000, or $0.09 per diluted share, for the quarter ended September 30, 2008 compared to net income of $434,000, or $0.07 per diluted share, for the corresponding quarter in 2007. The increase in net income for the three months ended September 30, 2008 was due to an increase in net interest income and a decrease in noninterest expense, partially offset by an increase in the provision for loan losses.
Three Months Ended
September 30,
2008 2007
(Dollars in thousands,
except per share data)
Net earnings $ 533 $ 434
Net earnings per share, basic $ 0.09 $ 0.07
Net earnings per share, diluted $ 0.09 $ 0.07
Return on average assets (annualized) 0.65 % 0.52 %
Return on average equity (annualized) 2.89 % 2.35 %
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Net Interest Income
Net interest income before loan loss provision increased $86,000, or 3.0%, to $3.0 million for the quarter ended September 30, 2008 from the corresponding period in 2007. The interest rate spread and net interest margin for the quarter ended September 30, 2008 were 3.35% and 3.94%, respectively, compared to 2.91% and 3.72%, respectively, for the same period in 2007.
The following table summarizes changes in interest income and expense for the three-month periods ended September 30, 2008 and 2007:
Three Months
Ended
September 30,
2008 2007 $ Change % Change
(Dollars in thousands)
Interest income:
Loans $ 4,597 $ 5,047 $ (450 ) (8.9 )%
Investment securities 29 273 (244 ) (89.4 )%
Interest-earning deposits 17 62 (45 ) (72.6 )%
FHLB stock 25 29 (4 ) (13.8 )%
Total interest income 4,668 5,411 (743 ) (13.7 )%
Interest expense:
Deposits 1,325 2,069 (744 ) (36.0 )%
Borrowings 356 441 (85 ) (19.3 )%
Total interest expense 1,681 2,510 (829 ) (33.0 )%
Net interest income $ 2,987 $ 2,901 $ 86 3.0 %
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The following table summarizes average balances and average yields and costs for the three months ended September 30, 2008 and September 30, 2007:
Three Months Ended September 30,
2008 2007
Average Yield/ Average Yield/
Balance Cost Balance Cost
(Dollars in thousands)
Loans $ 287,869 6.34 % $ 275,138 7.28 %
Investment securities 3,467 3.32 % 26,323 4.15 %
Interest-earning deposits 7,707 0.88 % 6,317 3.89 %
FHLB stock 1,868 5.31 % 1,796 6.41 %
Deposits 202,947 2.59 % 212,589 3.86 %
Borrowings 35,057 4.03 % 35,118 4.98 %
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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 September 30,
2008 Compared to 2007
Increase
(Decrease) Due To
Volume Rate Net
(In thousands)
Interest income:
Loans receivable $ 250 $ (700 ) $ (450 )
Investment securities (240 ) - (240 )
Municipals (7 ) 3 (4 )
Daily interest-earning deposits and other
interest-earning assets 19 (68 ) (49 )
Total interest-earning assets 22 (765 ) (743 )
Interest expense:
Deposits (90 ) (654 ) (744 )
Borrowings (1 ) (84 ) (85 )
Total interest-bearing liabilities (91 ) (738 ) (829 )
Net change in interest income $ 113 $ (27 ) $ 86
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Total interest income decreased $743,000, to $4.7 million for the three months ended September 30, 2008 due to a lower average yield on interest-earning assets more than offsetting an increase in the average balance of interest-earning assets.
Interest on loans decreased $450,000, or 8.9%, to $4.6 million for the three months ended September 30, 2008. The decrease in interest on loans was attributable to a decrease in the average yield partially offset by a higher average balance of loans. The average balance of loans increased $12.7 million, or 4.6%, to $287.9 million for the three months ended September 30, 2008 primarily due to growth in the commercial loan portfolio. The average yield on loans decreased 94 basis points to 6.34%, primarily as a result of decreases in the prime lending rate.
Interest on investment securities decreased $244,000 to $29,000 for the three months ended September 30, 2008 primarily due to a decline in the average balance of investment securities. The average balance of investment securities was $3.5 million for the three months ended September 30, 2008 compared to $26.3 million for the comparable period in 2007 due to securities being called.
Total interest expense decreased $829,000, or 33.0%, to $1.7 million for the three-month period ended September 30, 2008 primarily due to a 122 basis point decline in the rate paid on interest-bearing liabilities and a decrease in the average balance of interest-bearing liabilities.
Interest expense on deposits decreased $744,000, or 36.0%, to $1.3 million for the three-month period ended September 30, 2008 due to a decrease in the average rate paid on deposits and a decrease in the average balance of deposits. The average rate paid on deposits decreased 127 basis points to 2.59% due to decreases in short term interest rates while the average balance of deposits declined $9.6 million to $202.9 million due to a decrease in the average balance of certificates of deposit.
Interest expense on FHLB advances decreased $85,000, or 19.3%, to $356,000 for the three months ended September 30, 2008 compared to the same period in 2007. The decrease was due to a lower average rate paid on borrowings.
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. The provision for loan losses for the three-month period ended September 30, 2008 amounted to $160,000 compared to $68,000 for the comparable period in 2007. The increase in the provision for loan losses reflects growth in commercial loans, management's evaluation of credit quality and current economic conditions. Nonperforming loans totaled $725,000 at September 30, 2008 compared to $1.4 million at September 30, 2007.
Noninterest Income
Noninterest income decreased $18,000, or 4.4%, to $394,000 for the three months ended September 30, 2008 compared to $412,000 for the corresponding period in 2007. Service charges and fee income increased $91,000, or 59.1%, to $245,000 for the three months ended September 30, 2008 due to the implementation of a new overdraft program. Mortgage origination fee income decreased $71,000, or 56.8%, to $54,000 for the three months ended September 30, 2008 due to a lower volume of loan originations. There was no gain on sale of foreclosed assets for the quarter ended September 30, 2008 compared to a $46,000 gain on sale of foreclosed assets for the corresponding period in 2007.
The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended September 30, 2008 compared to the same period in 2007.
Three Months Ended
September 30, $ %
2008 2007 Change Change
(Dollars in thousands)
Noninterest income:
Dividends from investments $ 11 $ 8 $ 3 37.5 %
Mortgage origination fee income 54 125 (71 ) (56.8) %
Service charges and fees 245 154 91 59.1 %
Gain on sale of foreclosed real estate, net - 46 (46 ) (100.0) %
BOLI increase in cash value 60 55 5 9.1 %
Other 24 24 - 0.0 %
Total noninterest income $ 394 $ 412 $ (18 ) (4.4) %
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Noninterest Expense
Noninterest expense decreased $230,000, or 9.0%, to $2.3 million for the three-month period ended September 30, 2008 compared to the corresponding 2007 period. Compensation and benefits expense decreased $126,000, or 8.7%, to $1.3 million for the three months ended September 30, 2008 due in part to a lower number of employees. Advertising expense decreased $92,000 to $3,000 due to planned reductions in promotional advertising during the three months ended September 30, 2008.
The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended September 30, 2008 compared to the same period in 2007.
Three Months Ended
September 30, $ %
2008 2007 Change Change
(Dollars in thousands)
Compensation and benefits $ 1,318 $ 1,444 $ (126 ) (8.7) %
Occupancy expense 183 171 12 7.0 %
Equipment and data processing expense 358 359 (1 ) (0.3) %
Deposit insurance premiums 9 6 3 50.0 %
Advertising 3 95 (92 ) (96.8) %
Other 468 494 (26 ) (5.3) %
Total noninterest expense $ 2,339 $ 2,569 $ (230 ) (9.0) %
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Income Taxes
Income tax expense for the three months ended September 30, 2008 was $349,000 compared to $242,000 for the same period in 2007 due to higher taxable income.
Financial Condition
Cash, Cash Equivalents and Interest-Earning Deposits
Cash, cash equivalents, and interest-earning deposits were $13.7 million at September 30, 2008 compared to $17.6 million at June 30, 2008. 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 municipal securities with maturities of 20 years or less. We do not hold any Freddie Mac or Fannie Mae preferred or common stock in our investment portfolio. Investment securities amounted to $3.5 million at both September 30, 2008 and June 30, 2008. Investment securities classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $45,000, or $28,000 net of taxes.
The following table sets forth the carrying values of our investment securities portfolio at the dates indicated. All of our investment securities are classified as available-for-sale.
At September 30, 2008
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency $ - $ - $ - $ -
Municipals 3,503 7 (52 ) 3,458
Total securities available-for-sale $ 3,503 $ 7 $ (52 ) $ 3,458
Weighted-average rate 3.24 %
At June 30, 2008
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency $ - $ - $ - $ -
Municipals 3,506 7 (35 ) 3,478
Total securities available-for-sale $ 3,506 $ 7 $ (35 ) $ 3,478
Weighted-average rate 3.62 %
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Loans
Net loans increased $4.1 million to $286.5 million at September 30, 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 $228.8 million, or 79.2% of total loans, at September 30, 2008 compared to $224.6 million, or 78.9% of total loans, at June 30, 2008. Commercial business loans increased $562,000, or 1.1%, to $52.6 million at
September 30, 2008, while consumer loans decreased $581,000, or 7.3%, to $7.3 million at that date. The decline in consumer loans was largely attributable to a decrease in indirect automobile loans.
Loans receivable, net, are summarized as follows:
At At
September 30, June 30,
2008 2008
Percent Percent $ %
Amount of Portfolio Amount of Portfolio Change Change
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 64,099 22.2 % $ 63,340 22.3 % $ 759 1.2 %
Home equity line of credit 6,431 2.2 % 5,723 2.0 % 708 12.4 %
Commercial 93,225 32.3 % 90,933 32.0 % 2,292 2.5 %
Multi-family 4,877 1.7 % 4,219 1.5 % 658 15.6 %
Construction 19,603 6.8 % 19,553 6.9 % 50 0.3 %
Land 40,585 14.1 % 40,862 14.4 % (277 ) (0.7) %
Total real estate loans 228,820 79.2 % 224,630 78.9 % 4,190 1.9 %
Commercial business loans 52,599 18.2 % 52,037 18.3 % 562 1.1 %
Consumer loans:
Automobile loans 3,472 1.2 % 3,973 1.4 % (501 ) (12.6) %
Mobile home loans 57 0.0 % 60 0.0 % (3 ) (5.0) %
Loans secured by deposits 939 0.3 % 930 0.3 % 9 1.0 %
Other consumer loans 2,875 1.0 % 2,961 1.0 % (86 ) (2.9) %
Total consumer loans 7,343 2.5 % 7,924 2.8 % (581 ) (7.3) %
Total gross loans 288,762 100.0 % 284,591 100.0 % 4,171 1.5 %
Less:
Deferred loan fees, net (257 ) (272 ) 15 (5.5) %
Allowance for losses (1,958 ) (1,836 ) (122 ) 6.6 %
Loans receivable, net $ 286,547 $ 282,483 $ 4,064 1.4 %
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Loan Loss Allowance
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish reserves against losses on loans on a monthly basis. When additional reserves are necessary, a provision for loan losses is charged to earnings.
In connection with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. The methodology utilizes a loan grading system which segments loans with similar risk characteristics. Management performs a monthly assessment of the allowance for loan losses based on the nature and volume of the loan portfolio, the amount of impaired and classified loans and historical loan loss experience. In addition, management considers other qualitative factors, including delinquency trends, economic conditions and loan considerations.
The FDIC and/or the Tennessee Department of Financial Institutions, as an integral part of its examination process, periodically reviews our allowance for loan losses. The FDIC and/or the Tennessee Department of Financial Institutions may require us to make additional provisions for loan losses based on judgments different from ours.
The allowance for loan losses was $2.0 million at September 30, 2008 compared to $1.8 million at June 30, 2008. Our allowance for loan losses represented 0.68% of total loans and 270.07% of nonperforming loans at September 30, 2008 compared to 0.65% of total loans and 609.97% of nonperforming loans at June 30, 2008.
Three Months Ended
September 30,
2008 2007
(Dollars in thousands)
Balance at beginning of period $ 1,836 $ 1,955
Provision for loan losses 160 68
Recoveries 11 10
Charge-offs (49 ) (78 )
Net charge-offs (38 ) (68 )
Allowance at end of period $ 1,958 $ 1,955
Net charge-offs to average outstanding loans during the
period, annualized 0.05 % 0.10 %
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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 $725,000 at September 30, 2008 compared to $301,000 at June 30, 2008. Foreclosed real estate amounted to $474,000 at September 30, 2008 compared to $462,000 at June 30, 2008. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.
September 30, June 30,
2008 2008
(Dollars in thousands)
Nonaccruing loans:
Real estate $ 578 $ 139
Commercial business 147 162
Consumer - -
Total nonaccrual loans 725 301
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