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| JFBI > SEC Filings for JFBI > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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, 2009, which was filed with the Securities and Exchange Commission on September 14, 2009.
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, 2009 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, 2009 and 2008
Net Income
Net income was $484,000, or $0.08 per diluted share, for the quarter ended
September 30, 2009 compared to $533,000, or $0.09 per diluted share, for the
corresponding quarter in 2008.
Three Months Ended
September, 30
2009 2008
(Dollars in thousands,
except per share data)
Net earnings $ 484 $ 533
Net earnings per share, basic $ 0.08 $ 0.09
Net earnings per share, diluted $ 0.08 $ 0.09
Return on average assets (annualized) 0.29 % 0.65 %
Return on average equity (annualized) 2.39 % 2.89 %
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Net Interest Income
Net interest income before loan loss provision increased $1.7 million, or 57.2%, to $4.7 million for the quarter ended September 30, 2009 from the corresponding period in 2008. The interest rate spread and net interest margin for the quarter ended September 30, 2009 were 3.05% and 3.24%, respectively, compared to 3.37% and 3.95%, respectively, for the same period in 2008.
The following table summarizes changes in interest income and expense for the three month periods ended September 30, 2009 and 2008:
Three Months
Ended
September 30,
2009 2008 $ Change % Change
(Dollars in thousands)
Interest income:
Loans $ 7,129 $ 4,597 $ 2,532 55.1 %
Investment securities 745 29 716 2469.0 %
Interest-earning deposits 12 17 (5 ) (29.4 )%
FHLB stock 59 25 34 136.0 %
Total interest income 7,945 4,668 3,277 70.2 %
Interest expense:
Deposits 2,341 1,325 1,016 76.7 %
Repurchase Agreements 2 - 2 NM
Borrowings 819 356 463 130.1 %
Subordinated Notes & Debentures 88 - 88 NM
Total interest expense 3,250 1,681 1,569 93.3 %
Net interest income $ 4,695 $ 2,987 $ 1,708 57.2 %
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The following table summarizes average balances and average yields and costs for the three months ended September 30, 2009 and September 30, 2008:
Three Months Ended September 30,
2009 2008
Average Yield/ Average Yield/
Balance Cost Balance Cost
(Dollars in thousands)
Loans $ 489,673 5.78 % $ 287,869 6.34 %
Investment securities 42,826 7.07 % 3,467 3.32 %
Interest-earning deposits 39,884 0.12 % 7,707 0.88 %
FHLB stock 4,735 4.94 % 1,868 5.31 %
Deposits 432,946 2.15 % 202,947 2.59 %
Total borrowings 98,302 3.67 % 35,057 4.03 %
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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,
2009 Compared to 2008
Increase (Decrease)
Due To
Volume Rate Net
(In thousands)
Interest income:
Loans receivable $ 2,897 $ (365 ) $ 2,532
Investment securities 710 6 716
Daily interest-earning deposits and other
interest-earning assets 29 (0 ) 29
Total interest-earning assets 3,636 (359 ) 3,277
Interest expense:
Deposits 1,198 (182 ) 1,016
Total borrowings 587 (34 ) 553
Total interest-bearing liabilities 1,784 (215 ) 1,569
Net change in interest income $ 1,852 $ (144 ) $ 1,708
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Total interest income increased $3.3 million, or 70.2%, to $7.9 million for the three months ended September 30, 2009 compared to the corresponding period 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 $276.2 million, or 91.8%, to $577.1 million for the
quarter ended September 30, 2009. The increase in average earning assets for the three month period was primarily the result of increases in average outstanding loans. The average yield on earning assets declined by 70 basis points to 5.47% for the quarter ended September 30, 2009 compared to the corresponding period 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. In addition, the increase in nonaccrual loans during the quarter ended September 30, 2009 has negatively impacted interest income on loans and the net interest margin.
Total interest expense increased $1.6 million, or 93.3%, to $3.3 million for the quarter ended September 30, 2009. The average balance of interest-bearing liabilities increased $293.2 million, or 123.2%, to $531.2 million, while the rate paid on interest-bearing liabilities declined 38 basis points to 2.43% for the quarter ended September 30, 2009. The Company experienced an increase of $230.0 million, or 113.3%, 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 45 basis points to 2.15% for the quarter ended September 30, 2009. The Company benefited from declining market interest rates as well as a shift in the mix of deposits towards more transaction accounts. Average FHLB borrowings increased $55.2 million to $90.3 million due to the assumption of borrowings related to the State of Franklin acquisition, while the average rate paid on borrowings decreased 43 basis points to 3.60%.
Provision for Loan Losses
The provision for loan losses for the quarter ended September 30, 2009 amounted to $300,000 compared to $160,000 for the comparable period in 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 increase in the provision for loan losses reflects management's evaluation of credit quality and current economic conditions. Nonperforming loans totaled $7.0 million at September 30, 2009 compared to $6.0 million at June 30, 2009 and $725,000 at September 30, 2008. The increase in nonperforming loans compared to the 2008 period is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well as the current economic environment.
Noninterest Income
Noninterest income increased $504,000, or 127.9%, to $898,000 for the quarter ended September 30, 2009 compared to $394,000 for the corresponding period in 2008. Service charges and fee income increased $201,000 to $446,000 for the quarter ended September 30, 2009 due primarily to additional fee income generated following the acquisition of State of Franklin. Mortgage origination fee income increased $90,000, or 166.7%, to $144,000 for the quarter ended September 30, 2009 due to a higher volume of loan originations related to refinancing.
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, 2009 compared to the same period in 2008.
Three Months Ended
September 30, $ %
2009 2008 Change Change
(Dollars in thousands)
Noninterest income:
Mortgage origination fee income $ 144 $ 54 $ 90 166.7 %
Service charges and fees 446 245 201 82.0 %
Gain on sale of investment securities 7 - 7 NM
Gain (loss) on sale of foreclosed real
estate, net (9 ) - (9 ) NM
BOLI increase in cash value 58 60 (2 ) (3.3 )%
Other 252 35 217 620.0 %
Total noninterest income $ 898 $ 394 $ 504 127.9 %
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Noninterest Expense
Noninterest expense increased $2.3 million, or 96.7%, to $4.6 million for the quarter ended September 30, 2009 compared to the corresponding 2008 period. The increase in noninterest expense includes the costs incurred in operating six additional full-service offices obtained in connection with the acquisition of State of Franklin. Deposit insurance premiums increased $151,000, to $160,000, due to the increase in the balance of insurable accounts combined with higher deposit insurance premiums. 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 month period ended September 30, 2009 was $147,000 compared to no CDI amortization expense for the same period 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 September 30, 2009 compared to the same period in 2008.
Three Months Ended
September 30, $ %
2009 2008 Change Change
(Dollars in thousands)
Noninterest expense:
Compensation and benefits $ 1,988 $ 1,318 $ 670 50.8 %
Occupancy expense 548 183 365 199.5 %
Equipment and data processing expense 616 358 258 72.1 %
Deposit insurance premiums 160 9 151 1677.8 %
Advertising 66 3 63 2100.0 %
Other 1,223 468 755 161.3 %
Total noninterest expense $ 4,601 $ 2,339 $ 2,262 96.7 %
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Income Taxes
Income tax expense for the quarter ended September 30, 2009 was $208,000 compared to $349,000 for the same period in 2008 due to lower taxable income.
Financial Condition
Cash, Cash Equivalents and Interest-Earning Deposits
Cash, cash equivalents, and interest-earning deposits were $37.3 million at September 30, 2009 compared to $44.1 million at June 30, 2009. 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 $55.4 million at September 30, 2009 compared to $36.5 million at June 30, 2009 due primarily to purchases of government agency securities. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $1.2 million, or $742,000 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, 2009
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency $ 22,850 $ 12 $ (47 ) $ 22,815
Mortgage-backed 22,210 1,700 (937 ) 22,973
Municipals 4,535 172 - 4,707
Other Securities 4,641 1,129 (827 ) 4,943
Total securities available-for-sale $ 54,236 $ 3,013 $ (1,811 ) $ 55,438
Weighted-average rate 6.70 %
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At June 30, 2009
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency $ 4,206 $ 6 $ (65 ) $ 4,147
Mortgage-backed 23,088 1,395 (962 ) 23,521
Municipals 4,523 63 (19 ) 4,567
Other Securities 4,483 631 (805 ) 4,309
Total securities available-for-sale $ 36,300 $ 2,095 $ (1,851 ) $ 36,544
Weighted-average rate 7.65 %
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Loans
Net loans decreased $17.6 million to $480.5 million at September 30, 2009
compared to $498.1 million at June 30, 2009 due primarily to lower loan demand
combined with both residential and commercial loan payoffs during the quarter.
Loans receivable, net, are summarized as follows:
At At
September 30, June 30,
2009 2009
Percent Percent $ %
Amount of Portfolio Amount of Portfolio Change Change
(Dollars in thousands)
Real estate loans:
Residential one-to four-family $ 137,007 28.2 % $ 144,659 28.7 % $ (7,652 ) (5.3 )%
Home equity line of credit 22,983 4.7 % 22,467 4.5 % 516 2.3 %
Commercial 154,820 31.9 % 159,608 31.7 % (4,788 ) (3.0 )%
Multi-family 6,446 1.3 % 6,584 1.3 % (138 ) (2.1 )%
Construction 38,661 8.0 % 40,831 8.1 % (2,170 ) (5.3 )%
Land 45,529 9.4 % 46,987 9.3 % (1,458 ) (3.1 )%
Total real estate loans 405,446 83.5 % 421,136 83.7 % (15,690 ) (3.7 )%
Commercial business loans 71,884 14.8 % 73,467 14.6 % (1,583 ) (2.2 )%
Consumer loans:
Automobile loans 2,504 0.5 % 2,754 0.5 % (250 ) (9.1 )%
Mobile home loans 33 0.0 % 43 0.0 % (10 ) (23.3 )%
Loans secured by deposits 1,664 0.3 % 1,322 0.3 % 342 25.9 %
Other consumer loans 4,048 0.8 % 4,609 0.9 % (561 ) (12.2 )%
Total consumer loans 8,249 1.7 % 8,728 1.7 % (479 ) (5.5 )%
Total gross loans 485,579 100.0 % 503,331 100.0 % (17,752 ) (3.5 )%
Less:
Deferred loan fees, net (484 ) (502 ) 18 (3.6 )%
Allowance for losses (4,595 ) (4,722 ) 127 (2.7 )%
Loans receivable, net $ 480,500 $ 498,107 $ (17,607 ) (3.5 )%
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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 the Tennessee Department of Financial Institutions, as an integral part of their 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 $4.6 million at September 30, 2009 compared to $4.7 million at June 30, 2009. Our allowance for loan losses represented 0.95% of total loans and 66.07% of nonperforming loans at September 30, 2009 compared to 0.94% of total loans and 78.3% of nonperforming loans at June 30, 2009.
Three Months Ended
September 30,
2009 2008
(Dollars in thousands)
Balance at beginning of period $ 4,722 $ 1,836
Provision for loan losses 300 160
Recoveries 25 11
Charge-offs (452 ) (49 )
Net charge-offs (427 ) (38 )
Allowance at end of period $ 4,595 $ 1,958
Net charge-offs to average outstanding loans during
the period, annualized 0.35 % 0.05 %
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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. Nonaccrual loans totaled $7.0 million at September 30, 2009 compared to $6.0 million at June 30, 2009. The increase in nonaccrual loans is due to an increase in both nonaccrual commercial and residential real estate loans. Foreclosed real estate amounted to $2.3 million at September 30, 2009 compared to $3.3 million at June 30, 2009. 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.
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