XNAS:JFBI Jefferson Bancshares, Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012
 
OR
 
o
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)
 
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
(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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No o
 
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 o
Accelerated Filer o
     
 
Non-Accelerated Filer o
Smaller Reporting Company x
 
(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 o    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 15, 2012, the registrant had 6,632,039 shares of common stock, $0.01 par value per share, outstanding.
 
 
 

 
 
INDEX
 
  PART I. FINANCIAL INFORMATION  
     
Page
       
 
3
 
 
 
   
 
4
 
 
 
   
 
5
 
 
 
   
 
6
 
       
 
7
 
       
21
 
 
 
 
 
37
 
       
37
 
       
     
       
38
 
38
 
38
 
39
 
39
 
39
 
39
 
       
SIGNATURES       
 
 
2

 
 
 
 
JEFFERSON BANCSHARES, INC. AND SUBSIDIARY
(Dollars in Thousands)
 
   
March 31,
   
June 30,
 
   
2012
   
2011
 
Assets
 
(Unaudited)
       
             
Cash and cash equivalents
  $ 3,956     $ 5,327  
Interest-earning deposits
    34,661       35,221  
Investment securities classified as available for sale, net
    89,260       74,780  
Federal Home Loan Bank stock
    4,735       4,735  
Bank owned life insurance
    6,802       6,625  
Loans receivable, net of allowance for loan losses of $6,807 and $8,181
    341,524       378,587  
Loans held-for-sale
    243       -  
Premises and equipment, net
    26,501       26,617  
Foreclosed real estate, net
    7,823       9,498  
Accrued interest receivable:
               
Investments
    404       311  
Loans receivable
    1,279       1,521  
Deferred tax asset
    11,405       9,009  
Core deposit intangible
    1,642       1,978  
Other assets
    3,795       6,980  
                 
Total Assets
  $ 534,030     $ 561,189  
                 
Liabilities and Stockholders’ Equity
               
                 
Deposits
               
Noninterest-bearing
  $ 55,247     $ 54,340  
Interest-bearing
    378,575       399,922  
Repurchase agreements
    890       945  
Federal Home Loan Bank advances
    37,883       37,942  
Subordinated debentures
    7,217       7,133  
Other liabilities
    2,185       4,988  
Total liabilities
    481,997       505,270  
                 
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; 9,182,372 shares issued and 6,632,039 shares outstanding at March 31, 2012 and 6,634,523 shares outstanding at June 30, 2011
    92       92  
Additional paid-in capital
    78,657       78,895  
Unearned ESOP shares
    (2,916  )     (3,241 )
Unearned compensation
    (1,046 )     (1,019 )
Accumulated other comprehensive income
    811       459  
Retained earnings
    7,776       12,067  
Treasury stock, at cost (2,550,333 and 2,547,849 shares)
    (31,341 )     (31,334 )
 Total stockholders’ equity
    52,033       55,919  
                 
Total liabilities and stockholders’ equity
  $ 534,030     $ 561,189  
 
See accompanying notes to financial statements.
 
 
3

 
 
Jefferson Bancshares, Inc. and Subsidiary
(Dollars in Thousands, Except Net Earnings Per Share)
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Interest income:
                       
Interest on loans receivable
  $ 4,758     $ 6,049     $ 15,595     $ 18,443  
Interest on investment securities
    478       411       1,412       1,302  
Other interest
    66       105       190       306  
Total interest income
    5,302       6,565       17,197       20,051  
                                 
Interest expense:
                               
Deposits
    671       1,293       2,427       4,490  
Repurchase agreements
    2       1       5       5  
Advances from FHLB
    316       445       956       1,788  
Subordinated debentures
    84       79       243       241  
Total interest expense
    1,073       1,818       3,631       6,524  
                                 
Net interest income
    4,229       4,747       13,566       13,527  
Provision for loan losses
    600       1,400       9,273       2,350  
Net interest income after provision for loan losses
    3,629       3,347       4,293       11,177  
                                 
Noninterest income:
                               
Mortgage origination fee income
    68       66       264       430  
Service charges and fees
    265       286       841       957  
Gain on investments
    -       1,279       39       2,031  
Gain (loss) on sale of fixed assets
    -       -       (19 )     -  
Gain (loss) on sale of foreclosed real estate, net
    (61 )     (186 )     (140 )     (591 )
BOLI increase in cash value
    58       58       177       177  
Other
    178       194       527       527  
Total noninterest income
    508       1,697       1,689       3,531  
                                 
Noninterest expense:
                               
Compensation and benefits
    1,494       1,620       4,625       5,064  
Occupancy expense
    334       309       1,047       1,031  
Equipment and data processing expense
    591       638       1,798       1,900  
DIF premiums
    203       165       606       490  
Advertising
    155       62       290       167  
Legal and professional services
    72       144       383       387  
Valuation adjustment and expenses on OREO
    273       371       2,144       1,475  
Amortization of intangible assets
    106       120       336       377  
Loss on early extinguishment of debt
    -       585       -       775  
Other
    544       621       1,658       1,709  
Total noninterest expense
    3,772       4,635       12,887       13,375  
                                 
Earnings before income taxes
    365       409       (6,905 )     1,333  
                                 
Income taxes:
                               
Current
    -       2       -       5  
Deferred
    31       147       (2,614 )     450  
Total income taxes
    31       149       (2,614 )     455  
                                 
Net earnings
  $ 334     $ 260     $ (4,291 )   $ 878  
                                 
Net earnings per share, basic
  $ 0.05     $ 0.04     $ (0.69 )   $ 0.14  
Net earnings per share, diluted
  $ 0.05     $ 0.04     $ (0.69 )   $ 0.14  
 
See accompanying notes to financial statements.
 
 
4

 
 
Jefferson Bancshares, Inc. and Subsidiary
Nine Months Ended March 31, 2012 and 2011
(Dollars in Thousands)
 
               
Unallocated
         
Accumulated
                   
         
Additional
   
Common
         
Other
               
Total
 
   
Common
   
Paid-in
   
Stock in
   
Unearned
   
Comprehensive
   
Retained
   
Treasury
   
Stockholders’
 
   
Stock
   
Capital
   
ESOP
   
Compensation
   
Income
   
Earnings
   
Stock
   
Equity
 
Balance at June 30, 2011
  $ 92     $ 78,895     $ (3,241 )   $ (1,019 )   $ 459     $ 12,067     $ (31,334 )   $ 55,919  
                                                                 
Comprehensive income:
                                                               
Net earnings
    -       -       -       -       -       (4,291 )     -       (4,291 )
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $218
    -       -       -       -       352       -       -       352  
                                                                 
Total comprehensive income
    -       -       -       -       -       -       -       (3,939 )
Dividends used for ESOP payment
    -       -       -       -       -       -               -  
Shares committed to be released by the ESOP
    -       (238 )     325       (27 )     -       -       -       60  
Purchase of common stock (2,484 shares)
    -       -       -       -       -       -       (7 )     (7 )
Balance at March 31, 2012
  $ 92     $ 78,657     $ (2,916 )   $ (1,046 )   $ 811     $ 7,776     $ (31,341 )   $ 52,033  
 
               
Unallocated
         
Accumulated
                   
         
Additional
   
Common
         
Other
               
Total
 
   
Common
   
Paid-in
   
Stock in
   
Unearned
   
Comprehensive
   
Retained
   
Treasury
   
Stockholders’
 
   
Stock
   
Capital
   
ESOP
   
Compensation
   
Income
   
Earnings
   
Stock
   
Equity
 
Balance at June 30, 2010
  $ 92     $ 79,175     $ (3,673 )   $ (1,053 )   $ 1,206     $ 12,023     $ (31,247 )   $ 56,523  
                                                                 
Comprehensive income:
                                                               
Net earnings
    -       -       -       -       -       878       -       878  
Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($1,030)
    -       -       -       -       (1,659 )     -       -       (1,659 )
                                                                 
Total comprehensive income
    -       -       -       -       -       -       -       (781 )
Dividends used for ESOP payment
    -       -       -       -       -       13               13  
Shares committed to be released by the ESOP
    -       (209 )     324       -       -       -       -       115  
Earned portion of stock grants
    -       -       -       34       -       -       -       34  
Purchase of common stock (24,453 shares)
    -       -       -       -       -       -       (86 )     (86 )
Balance at March 31, 2011
  $ 92     $ 78,966     $ (3,349 )   $ (1,019 )   $ (453 )   $ 12,914     $ (31,333 )   $ 55,818  
 
See accompanying notes to the financial statements.
 
 
5

 
 
Jefferson Bancshares, Inc. and Subsidiary
(Dollars in Thousands)
 
   
Nine Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net earnings
  $ (4,291 )   $ 878  
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
               
Allocated ESOP shares
    87       115  
Depreciation and amortization expense
    1,404       812  
Amortization of premiums (discounts), net on investment securities
    228       88  
Provision for loan losses
    9,273       2,350  
Amortization of deferred loan fees, net
    (112 )     (209 )
(Gain) loss on sale of investment securities
    (39 )     (2,031 )
(Gain) loss on sale of foreclosed real estate, net
    140       591  
(Gain) loss on sale of fixed assets, net
    19       -  
Deferred tax benefit
    (2,614 )     450  
Originations of mortgage loans held for sale
    (11,391 )     (16,708 )
Proceeds from sale of mortgage loans
    11,148       17,535  
Increase in cash value of life insurance
    (177 )     (177 )
Earned portion of MRP
    (27 )     35  
Decrease (increase) in:
               
Accrued interest receivable
    149       186  
Other assets
    3,185       (4,432 )
Increase (decrease) in other liabilities and accrued income taxes
    (2,803 )     4,145  
Net cash provided by (used for) operating activities
    4,179       3,628  
                 
Cash flows used for investing activities:
               
Loan originations, net of principal collections
    27,235       30,045  
Investment securities classifed as available-for-sale:
    -       -  
Proceeds from maturities, calls and prepayments
    42,132       41,899  
Proceeds from sale
    501       11,778  
Purchase of securities
    (56,771 )     (45,371 )
Proceeds from sale of premises and equipment
    26       -  
Purchase of premises and equipment
    (707 )     (183 )
Proceeds from sale of (additions to) foreclosed real estate, net
    1,962       3,363  
Net cash provided by (used for) investing activities
    14,378       41,531  
                 
Cash flows from financing activities:
               
Net decrease in deposits
    (20,407 )     (9,907 )
Net increase (decrease) in repurchase agreements
    (55 )     48  
Proceeds from advances from FHLB
    -       309  
Repayment of FHLB advances
    (19 )     (46,625 )
Purchase of treasury stock
    (7 )     (86 )
Dividends paid
    -       -  
Net cash provided by (used for) financing activities
    (20,488 )     (56,261 )
                 
Net increase (decrease) in cash, cash equivalents and interest-earning deposits
    (1,931 )     (11,102 )
Cash, cash equivalents and interest-earning deposits at beginning of period
    40,548       69,303  
                 
Cash, cash equivalents and interest-earning deposits at end of period
  $ 38,617     $ 58,201  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during period for:
               
Interest on deposits
  $ 2,361     $ 4,470  
Interest on borrowed funds
  $ 786     $ 1,788  
Interest on subordinated debentures
  $ 159     $ 162  
Income taxes
    -     $ 50  
Real estate acquired in settlement of loans
  $ 2,495     $ 11,897  
 
See accompanying notes to financial statements.
 
 
6

 
 
 
(1)
Basis of Presentation
 
The condensed 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 accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. The results of operations for the nine months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. 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, 2011, which was filed with the Securities and Exchange Commission on September 27, 2011. 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
 
Jefferson Federal may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of Jefferson Federal at the time of its conversion to stock form.
   
 
Under applicable regulations, Jefferson Federal is prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) total risk-based capital ratio of less than 8.0%; (ii) Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
   
 
Under the banking laws of the State of Tennessee, a Tennessee chartered savings bank may not declare dividends in any calendar year in which the dividend would exceed the total of its net income for that year, combined with its retained net income for the preceding two years, without the prior approval of the Commissioner of the Tennessee Department of Financial Institutions.
 
 
7

 
 
(5)
Earnings Per Common Share
 
Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“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 three and nine months ended March 31, 2012, stock options to purchase 340,638 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
   
Weighted-Average Shares
 
   
Outstanding for the
   
Outstanding for the
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Weighted average number of common shares used in computing basic earnings per common share
    6,261,939       6,231,452       6,237,203       6,211,295  
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
    6,261,939       6,231,452       6,237,203       6,211,295  
 
(6)
Accounting for Allowance for Loan Losses and Impairment of a Loan
   
 
The allowance for loan and lease losses is an estimate of the losses that are inherent in the loan and lease portfolio. The allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Bank’s charge-off policy is consistent with bank regulatory standards. Generally, loans are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure 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 and lease losses. Any subsequent writedown of foreclosed real estate is charged against earnings.
   
 
The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
   
 
In connection with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. Loans are grouped into pools based on loan type and include residential mortgage loans, multi-family loans, construction and land development loans, non-residential real estate loans (owner occupied and non-owner occupied), commercial loans, HELOC and junior lien, and consumer loans. Commercial business loans and loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans. In addition, loans secured by commercial real estate are more likely to be negatively impacted by adverse conditions in the real estate market or the economy. Management utilizes a loan grading system and assigns a loan grade of “Pass”, “Watch”, “Special Mention”, “Substandard”, “Doubtful” or “Loss” based on risk characteristics of loans. Lending staff reviews the loan grades of customers on a regular basis and makes changes as needed given that the creditworthiness of customers may change over time.
 
 
8

 
 
 
Descriptions of loan grades are as follows:
   
 
Pass - loans in this category represent an acceptable risk and do not require heightened levels of monitoring by lending staff.
   
 
Watch - loans in this category represent an acceptable risk; however, require monitoring by lending staff due to potential weakness for any number of reasons.
   
 
Special Mention - loans in this category have potential weaknesses that may result in deteriorating prospects for the asset or in the Bank’s credit position at some future date.
   
 
Substandard - loans in this category are inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Borrowers in this category have a well-defined weakness(es) that jeopardize the proper liquidation of the debt.
   
 
Doubtful - loans classified as doubtful have a clear and defined weakness making the ultimate repayment of the loan, or portions thereof, highly improbable.
   
 
Loss - loans classified as “loss” are those of such little value that their continuance as bank assets is not warranted, even though partial recovery may be affected in the future. Charge off is required in the month this grade is assigned.
   
 
Specific valuation allowances are established for impaired loans. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. A specific reserve represents the difference between the recorded value of the loan and either its estimated fair value less estimated disposition costs, or the net present value as determined by a discounted cash flow analysis. On a quarterly basis, management evaluates individual loans and lending relationships which have outstanding principal balances of $500,000 or more and which are classified as either substandard, doubtful or loss according to the loan grading policy for impairment. Troubled debt restructurings (“TDRs”) are also considered to be impaired, except for those that have been performing under the new terms for at least six consecutive months.
   
 
A TDR occurs when the Bank grants a concession to a borrower with financial difficulties that it would not otherwise consider. The Bank has adopted the guidance and definitions found in ASU 2011-02 in determining if a borrower is experiencing financial difficulties and if a concession has been granted. The majority of the Bank’s TDRs involve a modification involving changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. A TDR may be non-accruing or it may accrue interest. A nonaccrual TDR will be returned to accruing status at such time when the borrower successfully performs under the new terms for at least six consecutive months. The Bank’s TDRs totaled $11.3 million at March 31, 2012 compared to $15.8 million at June 30, 2011.
 
 
9

 
 
 
The following table presents the Bank’s loans classified as TDRs by loan type and accrual status as of March 31, 2012:
 
   
March 31, 2012
 
   
Accrual
   
Non-accrual
   
Total
 
   
Status
   
Status
   
TDRs
 
                   
Residential Mortgage
  $ 904     $ 523     $ 1,427  
Multi-family
    632       5,284       5,916  
Construction and land development
    153       33       186  
Non-residential real estate
    -       2,000       2,000  
Owner occupied
    -       402       402  
Commercial
    836       338       1,174  
HELOC and Junior Lien
    172       -       172  
Total
  $ 2,697     $ 8,580     $ 11,277  
 
 
The following table presents newly restructured loans with concessions related to loan balances that occurred during the three- and nine-month periods ended March 31, 2012:
 
   
Nine Months Ended March 31, 2012
 
         
Pre-Modification
   
Post-Modification
 
         
Outstanding
   
Outstanding
 
   
Number of
   
Recorded
   
Recorded
 
   
Loans
   
Investment
   
Investment
 
                   
Multi-family
    2     $ 7,775     $ 5,284  
Non-residential real estate
    1       3,025       2,000  
Total
    3     $ 10,800     $ 7,284  
 
 
The accrual of interest on all loans is discontinued at the time the loan is 90 days delinquent. All interest accrued but not collected for loans considered impaired, placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method until the loan is returned to accrual status. Loans are returned to accrual status when future payments are reasonably assured. Payments received on non-accrual loans are applied to the remaining principal balance of the loans.
   
 
The evaluation of the allowance for loan and lease losses is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The Company is subject to periodic examination by regulatory agencies, which may require the Company to record increases in the allowances based on the regulator’s evaluation of available information. There can be no assurance that the Company’s regulators will not require further increases to the allowances.
 
 
10

 
 
 
The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2012:
 
   
Residential Mortgage
   
Multi-family
   
Construction and land development
   
Non-residential real estate
   
Owner occupied
   
Commercial
   
HELOC and junior Lien
   
Consumer
   
Total
 
                                                       
                                                       
Allowance for Credit Losses:
                                                     
Balance at June 30, 2011
  $ 1,543     $ 1,858     $ 803     $ 1,934     $ 803     $ 1,197     $ -     $ 43     $ 8,181  
Charge Offs
    (261 )     (2,491 )     (147 )     (1,102 )     (220 )     (6,617 )     (53 )     (13 )     (10,904 )
Recoveries
    5       -       -       -       -       230       3       19       257  
Provision
    (755 )     1,182       (118 )     228       (305 )     8,842       225       (26 )     9,273  
Balance at March 31, 2012
  $ 532     $ 549     $ 538     $ 1,060     $ 278     $ 3,652     $ 175     $ 23     $ 6,807  
                                                                         
Ending balance, Individually Evaluated
  $ 114     $ 139     $ 294     $ 753     $ 8     $ 2,358     $ 66     $ -     $ 3,732  
Ending balance, Collectively Evaluated
  $ 418     $ 410     $ 244     $ 307     $ 270     $ 1,294     $ 109     $ 23     $ 3,075  
                                                                         
Loans:
                                                                       
Balance at March 31, 2012
  $ 101,968     $ 10,836     $ 31,327     $ 50,419     $ 75,405     $ 53,511     $ 20,191     $ 4,909     $ 348,566  
                                                                         
Ending balance, Individually Evaluated
  $ 593     $ 632     $ 1,042     $ 5,282     $ 393     $ 5,378     $ 172     $ -     $ 13,492  
Ending balance, Collectively Evaluated
  $ 101,375     $ 10,204     $ 30,285     $ 45,137     $ 75,012     $ 48,133     $ 20,019     $ 4,909     $ 335,074  
 
 
11

 
 
 
The following table is an aging analysis of the loan portfolio at March 31, 2012:
 
   
30-59 days past due
   
60-89 days past due
   
Greater than 90 days
   
Total past due
   
Total Current
   
Total loans receivable
 
                                     
Residential Mortgage
  $ 2,609     $ -     $ 5,597     $ 8,206     $ 93,762     $ 101,968  
Multi-family
    -       -       5,284       5,284       5,552       10,836  
Construction/land development
    341       1,396       976       2,713       28,614       31,327  
Non-residential real estate
    1,790       -       2,915       4,705       45,714       50,419  
Owner occupied
    242       -       1,875       2,117       73,288       75,405  
Commercial
    111       1,234       1,579       2,924       50,587       53,511  
HELOC and Junior Lien
    2       -       204       206       19,985       20,191  
Consumer
    37       3       38       78       4,831       4,909  
                                                 
Total
  $ 5,132     $ 2,633     $ 18,468     $ 26,233     $ 322,333     $ 348,566  
 
 
The following table summarizes the credit risk profile by internally assigned grade at March 31, 2012:
 
   
Residential Mortgage
   
Multi-family
   
Construction and land development
   
Non-residential real estate
   
Owner occupied
   
Commercial
   
HELOC and Junior Lien
   
Consumer
   
Total
 
                                                       
Grade:
                                                     
Pass
  $ 89,997     $ 4,821     $ 26,358     $ 28,731     $ 66,679     $ 46,657     $ 18,312     $ 4,443     $ 285,998  
Watch
    2,984       -       1,976       15,563       6,527       1,450       622       420       29,542  
Special mention
    -       -       -       1,256       -       -       -       -       1,256  
Substandard
    8,987       6,015       2,993       4,869       2,199       5,404       1,257       46       31,770  
Doubtful
    -       -       -       -       -       -       -       -       -  
Loss
    -       -       -       -       -       -       -       -       -  
                                                                         
Total:
  $ 101,968     $ 10,836     $ 31,327     $ 50,419     $ 75,405     $ 53,511     $ 20,191     $ 4,909     $ 348,566  
 
 
12

 
 
 
The following table summarizes the composition of impaired loans, the associated specific reserves, and interest income recognized on impaired loans at March 31, 2012:
 
   
Recorded investment
   
Unpaid principal balance
   
Specific allowance
   
Interest income recognized
 
                         
With an allowance recorded:
                       
Residential Mortgage
  $ 593     $ 593     $ 114     $ 19  
Multi-family
    632       632       139       34  
Construction and land development
    1,042       1,042       294       68  
Non-residential real estate
    5,282       5,282       753       131  
Owner occupied
    393       393       8       27  
Commercial
    5,378       5,378       2,358       192  
HELOC and Junior Lien
    172       172       66       -  
Consumer
    -       -       -       -  
Total
  $ 13,492     $ 13,492     $ 3,732     $ 471  
                                 
With no related allowance:
                               
Residential Mortgage
  $ 3,021     $ 3,021     $ -     $ 133  
Multi-family
    5,284       5,284       -       98  
Construction and land development
    1,688       1,688       -       48  
Non-residential real estate
    3,098       3,098       -       132  
Owner occupied
    947       947       -       78  
Commercial
    396       396       -       31  
HELOC and Junior Lien
    703       703       -       15  
Consumer
    -       -       -       -  
Total
  $ 15,137     $ 15,137     $ -     $ 535  
                                 
Total:
                               
Residential Mortgage
  $ 3,614     $ 3,614     $ 114     $ 152  
Multi-family
    5,916       5,916       139       132  
Construction and land development
    2,730       2,730       294       116  
Non-residential real estate
    8,380       8,380       753       263  
Owner occupied
    1,340       1,340       8       105  
Commercial
    5,774       5,774       2,358       223  
HELOC and Jr Lien
    875       875       66       15  
Consumer
    -       -       -       -  
Total
  $ 28,629     $ 28,629     $ 3,732     $ 1,006  
                                 
Average impaired loans for the nine months ended March 31, 2012   $ 31,917                           
 
(7)
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.
 
 
13

 
 
 
At March 31, 2012, we had approximately $7.4 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $4.5 million in unused letters of credit and approximately $29.9 million in unused lines of credit.
   
(8)
Dividends
 
On February 2, 2011, the Company announced that the Board of Directors had voted to suspend the payment of the quarterly cash dividend on the Company’s common stock in an effort to conserve capital.
   
(9)
Stock Incentive Plans
 
The Company maintains stock-based benefit plans under which certain employees and directors are eligible to receive stock grants or options. Under the 2004 Stock-Based Benefit Plan, a maximum of 279,500 shares may be granted as restricted stock and a maximum of 698,750 shares may be issued through the exercise of nonstatutory or incentive stock options. The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years.
   
 
The table below summarizes the status of the Company’s stock option plans as of March 31, 2012.
 
   
Three Months Ended
 
   
March 31, 2012
 
             
         
Weighted-
 
         
average
 
   
Shares
   
exercise price
 
             
Outstanding at beginning of period
    340,638     $ 3.69  
Granted during the three-month period
    -       -  
Options forfeited
    -       -  
Options exercised
    -       -  
Outstanding at March 31, 2012
    340,638     $ 3.69  
                 
Options exercisable at March 31, 2012
    340,638     $ 3.69  
 
  The following information applies to options outstanding at March 31, 2012:
 
Number outstanding
    340,638  
Range of exercise prices
  $ 13.69  
Weighted-average exercise price
  $ 13.69  
Weighted-average remaining contractual life
    1.83  
Number of options remaining for future issuance
    358,112  
 
 
The estimated fair value of stock options at grant date was determined using the Black-Scholes option-pricing model based on market data as of January 29, 2004. An 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.
 
 
14

 
 
(10)
Investment Securities
   
 
Investment securities are summarized as follows:
 
At March 31, 2012
                       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(Dollars in thousands)
 
Securities available-for-sale
                       
Debt securities:
                       
Federal agency
  $ 24,217     $ 242     $ (160 )   $ 24,299  
Mortgage-backed
    58,683       1,534       (247 )   $ 59,970  
Municipals
    4,436       276       -       4,712  
Other Securities
    609       -       (330 )     279  
Total securities available-for-sale
  $ 87,945     $ 2,052     $ (737 )   $ 89,260  
                                 
Weighted-average rate
    2.32 %                        
                                 
Pledged at March 31, 2012
  $ 13,186                          
 
At June 30, 2011
                       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(Dollars in thousands)
 
Securities available-for-sale
                       
Debt securities:
                       
Federal agency
  $ 43,721     $ 228     $ -     $ 43,949  
Mortgage-backed
    24,551       861       (56 )