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| JFBI > SEC Filings for JFBI > Form 10-K on 14-Sep-2009 | All Recent SEC Filings |
14-Sep-2009
Annual Report
The objective of this section is to help shareholders and potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this report.
Overview.
Income
We have two primary sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest income - which is the income that we earn on our loans and investments - and interest expense - which is the interest that we pay on our deposits and borrowings.
Our second principal source of pre-tax income is fee income - the compensation we receive from providing products and services. Most of our fee income comes from service charges on NOW accounts and fees for late loan payments. We also earn fee income from ATM charges, insurance commissions, safe deposit box rentals and other fees and charges.
We occasionally recognize gains or losses as a result of sales of investment securities or foreclosed real estate. These gains and losses are not a regular part of our income.
Expenses
The expenses we incur in operating our business consist of compensation and benefits expenses, occupancy expenses, equipment and data processing expense, deposit insurance premiums, advertising expenses, expenses for foreclosed real estate and other miscellaneous expenses.
Compensation and benefits consist primarily of the salaries and wages paid to our employees, fees paid to our directors and expenses for retirement and other employee benefits.
Occupancy expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and costs of utilities.
Equipment and data processing expense includes fees paid to our third-party data processing service and expenses and depreciation charges related to office and banking equipment.
Deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.
Expenses for foreclosed real estate include maintenance and repairs on foreclosed properties prior to sale.
Other expenses include expenses for attorneys, accountants and consultants, payroll taxes, franchise taxes, charitable contributions, insurance, office supplies, postage, telephone and other miscellaneous operating expenses.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies: allowance for loan losses and deferred income taxes.
Allowance for Loan Losses. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a monthly basis and establishes the
provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic condition and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, Tennessee Department of Financial Institutions and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. These agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.
Results of Operations for the Years Ended June 30, 2009 and 2008
Overview.
% Change
2009 2008 2009/2008
(Dollars in thousands, except per share data)
Net earnings $ 2,630 $ 1,247 110.9 %
Net earnings per share, basic $ 0.43 $ 0.22 95.5 %
Net earnings per share, diluted $ 0.43 $ 0.22 95.5 %
Return on average assets 0.48 % 0.37 %
Return on average equity 3.40 % 1.69 %
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Net income was $2.6 million, or $0.43 per diluted share, for the year ended June 30, 2009 compared to net income of $1.2 million, or $0.22 per diluted share, for the year ended June 30, 2008. The increase in net income for fiscal 2009 was due primarily to increases in both net interest income and noninterest income more than offsetting an increase in noninterest expense. Financial results for fiscal 2008 included a $667,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax assets related to the Jefferson Federal Charitable Foundation. Excluding this tax charge, core net earnings were $1.9 million, or $0.33 per diluted share, for the year ended June 30, 2008.
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 year ended June 30, 2008 to convey to investors the Company's earnings for this period absent the $667,000 non-cash charge to establish a valuation allowance against deferred tax assets during 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 year ended June 30, 2008 by subtracting this $667,000 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 year ended June 30, 2008 is set forth below.
Year Ended
June 30,
2009 2008
(Dollars in thousands,
except per share data)
GAAP net earnings $ 2,630 $ 1,247
Plus: non-cash charge to deferred income tax expense - $ 667
Core net earnings $ 2,630 $ 1,914
GAAP earnings per diluted share $ 0.43 $ 0.22
Plus: non-cash charge to deferred income tax expense $ 0.00 $ 0.11
Core net earnings per diluted share $ 0.43 $ 0.33
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Net Interest Income.
The following table summarizes changes in interest income and expense for the
years ended June 30, 2009 and 2008:
Year Ended %
June 30, Change
2009 2008 2009/2008
Interest income:
Loans $ 25,637 $ 19,782 29.6 %
Investment securities 848 733 15.7
Mortgage-backed securities 1,460 - NM
Interest-earning deposits 40 221 (81.9 )
FHLB stock 190 110 72.7
Total interest income 28,175 20,846 35.2
Interest expense:
Deposits 8,653 7,665 12.9
Borrowings 2,641 1,583 66.8
Subordinated debentures 325 - NM
Total interest expense 11,619 9,248 25.6
Net interest income $ 16,556 $ 11,598 42.7
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Net interest income before loan loss provision increased $5.0 million to $16.6 million for the year ended June 30, 2009. The interest rate spread and net interest margin for the year ended June 30, 2009 were 3.17% and 3.42%, respectively, compared to 3.00% and 3.73%, respectively, for the same period in 2008.
Total interest income increased $7.3 million, or 35.2%, to $28.2 million for fiscal 2009 compared to $20.8 million for fiscal 2008. The increase in interest income was primarily the result of an increase in average interest-earning assets arising from the State of Franklin acquisition. The average volume of earning assets increased $175.3 million to $485.9 million for the year ended June 30, 2009 while the average yield on interest-earning assets decreased 90 basis points to 5.81% compared to fiscal 2008.
Interest on loans increased $5.9 million, or 29.6%, to $25.6 million for fiscal 2009 as the result of a higher loan volume that was partially offset by lower rates. The average balance of loans increased $154.1 million, or 54.6%, to $436.2 million, while the average yield on loans decreased 113 basis points to 5.90%. The average balance of loans increased due to the merger with State of Franklin Bancshares. The decrease in the average yield on loans is attributable to decreases in the prime lending rate.
Interest on investment securities increased $1.6 million to $2.3 million for the year ended June 30, 2009. The increase was the result of both an increase in average balances and higher average rates on securities outstanding. The average balance of investment securities increased $9.9 million, to $28.1 million for 2009 due to the acquisition of State of Franklin Bancshares. The average yield on investments increased 418 basis points to 8.22% for fiscal 2009 compared to 4.04% for fiscal 2008. Dividends on Federal Home Loan Bank ("FHLB") stock were $190,000 for 2009, compared to $110,000 for 2008.
Total interest expense increased $2.4 million, or 25.6%, to $11.6 million for the year ended June 30, 2009, compared to $9.2 million for the corresponding period in 2008. The average volume of interest-bearing liabilities increased $190.7 million, to $439.6 million while the average rate paid on interest-bearing liabilities decreased 107 basis points to 2.64% for fiscal 2009. Interest expense on deposits was $8.7 million for 2009 compared to $7.7 million for fiscal 2008. The average balance of deposits increased $148.8 million to $362.3 million due to deposits assumed in connection with the State of Franklin Bancshares acquisition. The average rate paid on deposits decreased 120 basis points to 2.39% for the year ended June 30, 2009. The Company benefited from declining market interest rates as well as a shift in the mix of deposits towards more transaction accounts. Interest expense on FHLB advances was $2.6 million for fiscal 2009 compared to $1.6 million for fiscal 2008. The average balance of FHLB advances increased $36.4 million to $71.9 million due to the assumption of borrowings related to the State of Franklin Bancshares acquisition, while the average rate decreased 81 basis points to 3.65%.
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income and dividends from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table nonaccrual loans are included in average balances; however, accrued interest income has been excluded from these loans.
Year Ended June 30,
2009 2008 2007
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
Loans $ 436,165 $ 25,637 5.88 % $ 282,111 $ 19,782 7.01 % $ 268,874 $ 19,605 7.29 %
Mortgage-backed securities 16,226 1,460 9.00 - - - - - -
Investment securities 11,850 848 7.74 18,163 733 4.04 28,825 1,118 3.88
Daily interest deposits 17,836 40 0.22 8,501 221 2.60 4,845 172 3.55
Other earning assets 3,782 190 5.02 1,809 110 6.08 1,785 109 6.11
Total interest-earning assets 485,859 28,175 5.81 310,584 20,846 6.71 304,329 21,004 6.90
Noninterest-earning assets 63,133 - 25,996 - 26,222 -
Total assets $ 548,992 - $ 336,580 - $ 330,553 -
Interest-bearing liabilities:
Passbook accounts $ 50,506 640 1.27 % $ 8,929 49 0.55 % $ 10,138 51 0.50 %
NOW accounts 35,119 142 0.40 18,031 104 0.58 16,668 84 0.50
Money market accounts 49,924 799 1.60 46,132 1,399 3.03 37,821 1,394 3.69
Certificates of deposit 226,738 7,072 3.12 140,373 6,113 4.35 133,836 5,805 4.34
Total interest-bearing deposits 362,287 8,653 2.39 213,465 7,665 3.59 198,463 7,334 3.70
Borrowings 72,765 2,641 3.63 35,509 1,583 4.46 44,659 2,326 5.21
Subordinated debentures 4,578 325 7.10 - - - - - -
Total interest-bearing
liabilities $ 439,630 11,619 2.64 248,974 9,248 3.71 243,122 9,660 3.97
Noninterest-bearing deposits 29,244 13,284 12,102
Other noninterest-bearing
liabilities 2,747 709 1,008
Total liabilities 471,621 262,967 256,231
Stockholders' equity 77,371 73,613 74,322
Total liabilities and
stockholders' equity $ 548,992 $ 336,580 $ 330,553
Net interest income $ 16,556 $ 11,598 $ 11,344
Interest rate spread 3.17 % 3.00 % 2.93 %
Net interest margin 3.42 % 3.73 % 3.73 %
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 110.52 % 124.75 % 125.18 %
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Rate/Volume Analysis. 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.
2009 Compared to 2008 2008 Compared to 2007
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
(In Thousands)
Interest income:
Loans receivable $ 8,320 $ (2,465 ) $ 5,855 $ 798 $ (621 ) $ 177
Mortgage-backed securities 1,460 - 1,460 - - -
Investment securities 351 (236 ) 115 (462 ) 77 (385 )
Daily interest-bearing deposits and
other interest-earning assets (259 ) 158 (101 ) 77 (27 ) 50
Total interest-earning assets 9,872 (2,543 ) 7,329 413 (571 ) (158 )
Interest expense:
Deposits 1,901 (913 ) 988 529 (198 ) 331
Borrowings 1,286 (228 ) 1,058 (436 ) (307 ) (743 )
Subordinated debentures 325 - 325 - - -
Total interest-bearing liabilities 3,512 (1,141 ) 2,371 93 (505 ) (412 )
Net change in interest income $ 6,360 $ (1,402 ) $ 4,958 $ 320 $ (66 ) $ 254
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Provision for Loan Losses.
The provision for loan losses for fiscal 2009 was $910,000 compared to a provision of $451,000 for fiscal 2008. Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in the nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors. The provision for loan losses for 2009 was increased primarily due to management's evaluation of credit quality and current economic conditions. Net charge-offs for the year ended June 30, 2009 amounted to $601,000 compared to $570,000 for the year ended June 30, 2008. Nonperforming loans totaled $6.0 million at June 30, 2009 compared to $301,000 at June 30, 2008. The increase in nonperforming loans is due in part to the addition of nonperforming loans from the State of Franklin Bancshares acquisition, as well as deterioration in the residential housing market.
An analysis of the changes in the allowance for loan losses is presented under "Allowance for Loan Losses and Asset Quality."
Noninterest Income. The following table shows the components of noninterest income and the percentage changes from 2009 to 2008.
% Change
2009 2008 2009/2008
(Dollars in Thousands)
Mortgage origination fees $ 532 $ 338 57.4 %
Service charges and fees 1,384 768 80.2
Gain on sale of investments 565 - NM
Gain on sale of fixed assets 7 1 600.0
Gain on sale of foreclosed property 3 51 (94.1 )
BOLI increase in cash value 228 224 1.8
Other 466 138 237.7
Total noninterest income $ 3,185 $ 1,520 109.5 %
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For the year ended June 30, 2009, noninterest income increased $1.7 million, or 109.5%, to $3.2 million. Mortgage origination fee income increased $194,000, or 57.4%, to $532,000 for 2009 due to a higher volume of loan originations related to refinancing. Service charges and fee income increased $616,000 to $1.4 million for the year ended June 30, 2009 due primarily to additional fee income generated following the acquisition of State of Franklin Bancshares. There was a gain on sale of investment securities of $565,000 for fiscal 2009 compared to none for 2008.
Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes from 2009 to 2008.
% Change
2009 2008 2009/2008
(Dollars in Thousands)
Compensation and benefits $ 6,791 $ 5,518 23.1 %
Occupancy 1,364 702 94.3
Equipment and data processing 2,312 1,458 58.6
Deposit insurance premiums 787 26 2,926.9
Advertising 132 246 (46.3 )
Loss on Silverton Bank stock 368 - NM
Other 2,929 1,939 70.0
Total noninterest expense $ 14,683 $ 9,889 48.5
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For the year ended June 30, 2009, noninterest expense increased $4.8 million, or 48.5%, to $14.7 million due primarily to the operating expenses of additional branch offices resulting from the acquisition of State of Franklin Bancshares. In addition, noninterest expense was impacted by the write-off of an equity investment in Silverton Bank, which was closed by The Office of the Comptroller of the Currency, and increases in deposit insurance premium rates. Deposit insurance premiums increased $761,000, to $787,000, due the increase in the balance of insurable accounts combined with higher deposit insurance premiums. Approximately $309,000 of the increase in FDIC premiums was due to the FDIC special assessment imposed on all insured institutions during the fourth quarter of fiscal 2009. Noninterest expense includes the amortization of core deposit intangible ("CDI"), resulting from the acquisition of State of Franklin Bancshares. The CDI totaled $3.4 million at acquisition date and is being amortized over 10 years on an accelerated basis. The expense for CDI amortization was $393,000 for the year ended June 30, 2009 compared to none for 2008.
Income Taxes.
For the year ended June 30, 2009, income tax expense remained unchanged at $1.5 million compared to $1.5 million during the same period in 2008.
Balance Sheet Analysis
Loans. Net loans increased $215.6 million, or 76.3%, to $498.1 million at June 30, 2009 primarily due to the State of Franklin Bancshares acquisition. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. At June 30, 2009, real estate loans totaled $421.1 million, or 83.7% of our total loans, compared to $224.6 million, or 78.9% of total loans at June 30, 2008. Real estate loans increased $196.5 million, or 87.5%, in fiscal 2009.
The following table sets forth the composition of our loan portfolio at the dates indicated.
At June 30,
. . .
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