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| JFBI > SEC Filings for JFBI > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
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 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 and Nine Months Ended March 31, 2009 and 2008
Net Income
Net income was $515,000, or $0.09 per diluted share, for the quarter ended March 31, 2009 compared to $495,000, or $0.09 per diluted share, for the corresponding quarter in 2008. For the nine months ended March 31, 2009, net income was $1.8 million compared to $753,000 for the same period in 2008. Financial results for the nine month period ended March 31, 2008 include a $637,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax assets related to the charitable contribution carryforward attributable to the Company's contribution to the Jefferson Federal Charitable Foundation in July 2003. Excluding this tax charge, core net earnings was $1.4 million, or $0.24 per diluted share for the nine month period ended March 31, 2008.
Three Months Nine Months
Ended Ended
March 31, March 31,
2009 2008 2009 2008
(Dollars in (Dollars in
thousands, thousands,
except per except per share
share data) data)
Net earnings $ 515 $ 495 $ 1,838 $ 753
Net earnings per share, basic $ 0.09 $ 0.09 $ 0.31 $ 0.13
Net earnings per share, diluted $ 0.09 $ 0.09 $ 0.31 $ 0.13
Return on average assets (annualized) 0.31 % 0.59 % 0.48 % 0.30 %
Return on average equity (annualized) 2.60 % 2.71 % 3.20 % 1.36 %
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While core net earnings is not a measure of performance calculated in accordance with 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 the period absent the $637,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax assets. 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. Reconciliations of the Company's GAAP and core net earnings for the nine month period ended March 31, 2008 follows.
Nine Months
March 31,
2009 2008
GAAP net earnings (loss) $ 1,838 $ 753
Plus: non-cash charge to deferred income tax expense $ 0 637
Core net earnings $ 1,838 $ 1,390
GAAP earnings (loss) per diluted share $ 0.31 $ 0.13
Plus: non-cash charge to deferred income tax expense $ 0.00 $ 0.11
Core net earnings per diluted share $ 0.31 $ 0.24
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Net Interest Income
Net interest income before loan loss provision increased $1.7 million, or 57.0%, to $4.6 million for the quarter ended March 31, 2009 from the corresponding period in 2008. The interest rate spread and net interest margin for the quarter ended March 31, 2009 were 3.08% and 3.23%, respectively, compared to 3.03% and 3.76%, respectively, for the same period in 2008.
For the nine months ended March 31, 2009, net interest income before loan loss provision increased $2.8 million, or 31.7%, to $11.5 million from the corresponding period in 2008. The interest rate spread and net interest margin for the nine months ended March 31, 2009 were 3.11% and 3.39%, respectively, compared to 2.98% and 3.75%, respectively, for the same period in 2008.
The following table summarizes changes in interest income and expense for the three month periods ended March 31, 2009 and 2008:
Three Months
Ended March 31,
2009 2008 $ Change % Change
(Dollars in
thousands)
Interest income:
Loans $ 7,275 $ 4,972 $ 2,303 46.3 %
Investment securities 708 152 556 365.8 %
Interest-earning deposits 2 50 (48 ) (96.0 )%
FHLB stock 53 24 29 120.8 %
Total interest income 8,038 5,198 2,840 54.6 %
Interest expense:
Deposits 2,549 1,926 623 32.3 %
Borrowings 927 367 560 152.6 %
Total interest expense 3,476 2,293 1,183 51.6 %
Net interest income $ 4,562 $ 2,905 $ 1,657 57.0 %
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The following table summarizes changes in interest income and expense for the nine month periods ended March 31, 2009 and 2008:
Nine Months
Ended March 31,
2009 2008 $ Change % Change
(Dollars in
thousands)
Interest income:
Loans $ 18,308 $ 15,164 $ 3,144 20.7 %
Investment securities 1,302 678 624 92.0 %
Interest-earning deposits 32 173 (141 ) (81.5 )%
FHLB stock 136 85 51 60.0 %
Total interest income 19,778 16,100 3,678 22.8 %
Interest expense:
Deposits 6,185 6,096 89 1.5 %
Borrowings 2,053 1,242 811 65.3 %
Total interest expense 8,238 7,338 900 12.3 %
Net interest income $ 11,540 $ 8,762 $ 2,778 31.7 %
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The following table summarizes average balances and average yields and costs for the three and nine months ended March 31, 2009 and March 31, 2008:
Three Months Ended March 31, Nine Months Ended March 31,
2009 2008 2009 2008
Average Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Cost Balance Cost Balance Cost
(Dollars in thousands) (Dollars in thousands)
Loans $ 511,170 5.77 % $ 286,548 6.98 % $ 411,982 5.92 % $ 281,287 7.17 %
Investment securities 43,085 6.86 % 15,569 4.27 % 25,363 7.09 % 22,136 4.32 %
Interest-earning deposits 16,429 0.05 % 7,990 2.52 % 14,508 0.29 % 7,119 3.23 %
FHLB stock 4,735 4.54 % 1,800 5.36 % 3,464 5.23 % 1,797 6.30 %
Deposits 443,010 2.33 % 214,248 3.62 % 337,526 2.44 % 214,381 3.78 %
Borrowings 98,993 3.80 % 35,696 4.14 % 70,332 3.89 % 36,346 4.55 %
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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 Nine Months Ended
March 31, 2009 Compared March 31, 2009 Compared
to 2008 to 2008
Increase Increase
(Decrease) Due To (Decrease) Due To
Volume Rate Net Volume Rate Net
(In thousands) (In thousands)
Interest income:
Loans receivable $ 2,988 $ (685 ) $ 2,303 $ 5,055 $ (1,911 ) $ 3,144
Investment securities 401 155 556 111 513 624
Daily interest-earning deposits and
other interest-earning assets (45 ) 26 (19 ) (268 ) 178 (90 )
Total interest-earning assets 3,344 (504 ) 2,840 4,898 (1,220 ) 3,678
Interest expense:
Deposits 940 (317 ) 623 234 (145 ) 89
Borrowings 590 (30 ) 560 961 (150 ) 811
Total interest-bearing liabilities 1,529 (346 ) 1,183 1,194 (294 ) 900
Net change in interest income $ 1,815 $ (158 ) $ 1,657 $ 3,703 $ (925 ) $ 2,778
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Total interest income increased $2.8 million, or 54.6%, to $8.0 million for the three months ended March 31, 2009 and increased $3.7 million, or 22.8%, to $19.8 million for the nine months ended March 31, 2009 compared to the corresponding periods in 2008 primarily as a result of an increase in average interest-earning assets arising from the State of Franklin acquisition. Average interest-earning assets increased $263.5 million, or 84.5%, to $575.4 million for the three months ended March 31, 2009 and increased $143.0 million, or 45.8%, to $455.3 million for the nine months ended March 31, 2009. The increase in average earning assets for both the three and nine month periods was primarily the result of increases in average outstanding loans. The average yield on
earning assets declined by 104 basis points to 5.68% for the quarter ended March 31, 2009 and declined by 108 basis points to 5.80% for the nine months ended March 31, 2009 compared to the corresponding periods in 2008. The decline in the average yield on earning assets was primarily the result of lower yields on prime-based consumer and commercial loans resulting from decreases in the prime-lending rate during the period. In addition, the increase in nonaccrual loans during the quarter ended March 31, 2009 has negatively impacted interest income on loans and the net interest margin.
Total interest expense increased $1.2 million, or 51.6%, to $3.5 million for the three-month period ended March 31, 2009. The average balance of interest-bearing liabilities increased $292.1 million, or 116.9%, to $542.0 million, while the rate paid on interest-bearing liabilities declined 109 basis points. The Company experienced an increase of $228.8 million, or 106.8%, in average interest-bearing deposits primarily due to deposits assumed in connection with the State of Franklin acquisition. The average rate paid on deposits decreased 128 basis points to 2.33% due to decreases in short term interest rates. Average borrowings increased $55.1 million to $90.8 million due to the assumption of borrowings related to the State of Franklin acquisition, while the average rate paid on borrowings decreased 57 basis points to 3.56%.
For the nine months ended March 31, 2009, interest expense increased $900,000, or 12.3%, to $8.2 million with average interest-bearing liabilities increasing $157.1 million, or 62.7%, to $407.9 million and the average cost declining 120 basis points to 2.69%.
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 March 31, 2009 amounted to $300,000 compared to $243,000 for the comparable period in 2008. The increase in the provision for loan losses reflects management's evaluation of credit quality and current economic conditions. Nonperforming loans totaled $6.7 million at March 31, 2009 compared to $301,000 at June 30, 2008 and $386,000 at March 31, 2008. The increase in nonperforming loans is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well as the current economic environment. Nonperforming loans have increased due to deterioration in the residential housing market.
Noninterest Income
Noninterest income increased $267,000, or 70.6%, to $645,000 for the three months ended March 31, 2009 compared to $378,000 for the corresponding period in 2008. Service charges and fee income increased $143,000 to $366,000 for the three months ended March 31, 2009 due primarily to additional fee income generated following the acquisition of State of Franklin. Mortgage origination fee income increased $87,000, or 189.1%, to $133,000 for the three months ended March 31, 2009 due to a higher volume of loan originations related to refinancing.
Noninterest income increased $531,000, or 46.7%, to $1.7 million for the nine months ended March 31, 2009 compared to $1.1 million for the corresponding period in 2008. Service charges and fee income increased $473,000 to $1.0 million for the nine months ended March 31, 2009 due to the same trends outlined for three months ended March 31, 2009. Mortgage origination fee
income decreased $27,000, or 10.0%, to $242,000 for the nine months ended March 31, 2009 due to a lower volume of loan originations during the first two quarters of the current period. There was no gain on sale of foreclosed assets for the nine months ended March 31, 2009 compared to a $51,000 gain on sale of foreclosed assets for the corresponding period in 2008.
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, 2009 compared to the same period in 2008.
Three Months
Ended March 31,
2009 2008 $ Change % Change
(Dollars in
thousands)
Noninterest income:
Mortgage origination fee income $ 133 $ 46 $ 87 189.1 %
Service charges and fees 366 223 143 64.1 %
Gain on sale of fixed assets - 1 (1 ) (100.0 )%
Gain on sale of foreclosed real estate, net (8 ) 5 (13 ) (260.0 )%
BOLI increase in cash value 57 56 1 1.8 %
Other 97 47 50 106.4 %
Total noninterest income $ 645 $ 378 $ 267 70.6 %
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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, 2009 compared to the same period in 2008.
Nine Months
Ended March 31,
2009 2008 $ Change % Change
(Dollars in
thousands)
Noninterest income:
Mortgage origination fee income $ 242 $ 269 $ (27 ) (10.0 )%
Service charges and fees 1,004 531 473 89.1 %
Gain on sale of fixed assets 1 1 - 0.0 %
Gain on sale of foreclosed real estate, net - 51 (51 ) (100.0 )%
BOLI increase in cash value 172 166 6 3.6 %
Other 249 119 130 109.2 %
Total noninterest income $ 1,668 $ 1,137 $ 531 46.7 %
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Noninterest Expense
Noninterest expense increased $1.7 million, or 76.3%, to $4.0 million for the three-month period ended March 31, 2009 and increased $2.5 million, or 34.0%, to $9.9 million for the nine months ended March 31, 2009 compared to the corresponding 2008 periods. Advertising expense decreased for the nine month period due to our decision to defer marketing initiatives to future periods. The increase in noninterest expense includes operations of six additional full-service offices obtained in connection with the acquisition of State of Franklin on October 31, 2008. In addition, noninterest expense includes the amortization of the core deposit intangible ("CDI") resulting from the acquisition of State of Franklin. The CDI totaled $3.4 million at the acquisition
date and is being amortized over a 10 year period on an accelerated basis. The expense incurred for CDI amortization for the three and nine month periods ended March 31, 2009 was $147,000 and $246,000, respectively, compared to no CDI amortization expense for the same periods in 2008.
The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended March 31, 2009 compared to the same period in 2008.
Three Months
Ended March 31,
2009 2008 $ Change % Change
(Dollars in
thousands)
Compensation and benefits $ 1,893 $ 1,287 $ 606 47.1 %
Occupancy expense 355 175 180 102.9 %
Equipment and data processing expense 667 363 304 83.7 %
Deposit insurance premiums 140 6 134 2233.3 %
Advertising 58 5 53 1060.0 %
Other 925 454 471 103.7 %
Total noninterest expense $ 4,038 $ 2,290 $ 1,748 76.3 %
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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, 2009 compared to the same period in 2008.
Nine Months
Ended March 31,
2009 2008 $ Change % Change
(Dollars in
thousands)
Compensation and benefits $ 5,081 $ 4,162 $ 919 22.1 %
Occupancy expense 848 519 329 63.4 %
Equipment and data processing expense 1,630 1,084 546 50.4 %
Deposit insurance premiums 158 19 139 731.6 %
Advertising 106 221 (115 ) (52.0 )%
Other 2,089 1,392 697 50.1 %
Total noninterest expense $ 9,912 $ 7,397 $ 2,515 34.0 %
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Income Taxes
Income tax expense for the three months ended March 31, 2009 was $354,000 compared to $255,000 for the same period in 2008. Income tax expense for the nine months ended March 31, 2009 was $848,000 compared to $1.4 million for the same period in 2008. Income tax expense for the nine month period in 2008 included 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 $32.3 million at March 31, 2009 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
Investment securities increased to $36.4 million at March 31, 2009 compared to $3.5 million at June 30, 2008. The increase was primarily the result of $31.8 million in investment securities acquired from State of Franklin. Investments . . .
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