Jefferson Bancshares 10-Q 2011 Q3 Quarterly report

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, 2011

OR

¨ 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)

(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  ¨

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  ¨    No  ¨

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	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨  (Do not check if a smaller reporting company)	Smaller Reporting Company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    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 13, 2011, the registrant had 6,634,759 shares of common stock, $0.01 par value per share, outstanding.

INDEX

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Condition - Unaudited Nine months ended March 31, 2011 and year ended June 30, 2010		3
	Consolidated Statements of Earnings - Unaudited Three and nine months ended March 31, 2011 and 2010		4
	Consolidated Statements of Changes in Stockholders’ Equity – Unaudited Nine months ended March 31, 2011 and 2010		5
	Consolidated Statements of Cash Flows - Unaudited Nine months ended March 31, 2011 and 2010		6
	Notes to Consolidated Financial Statements - Unaudited		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		36
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Defaults Upon Senior Securities		38
Item 4.	[Removed and Reserved]		38
Item 5.	Other Information		38
Item 6.	Exhibits		38
SIGNATURES

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

JEFFERSON BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(Dollars in Thousands)

	March 31, 2011			June 30, 2010
	(Unaudited)
Assets
Cash and cash equivalents	$	3,755		$	5,071
Interest-earning deposits		54,446			59,232
Fed funds sold		—			5,000
Investment securities classified as available for sale, net		53,935			62,989
Federal Home Loan Bank stock		4,735			4,735
Bank owned life insurance		6,567			6,390
Loans receivable, net of allowance for loan losses of $7,881 and $9,649		393,711			434,378
Loans held-for-sale		326			1,153
Premises and equipment, net		26,897			27,555
Foreclosed real estate, net		11,323			6,851
Accrued interest receivable:
Investments		260			256
Loans receivable		1,554			1,744
Deferred tax asset		9,068			8,524
Core deposit intangible		2,098			2,475
Other assets		8,849			4,417
Total Assets	$	577,524		$	630,770
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	53,301		$	41,653
Interest-bearing		415,936			437,530
Repurchase agreements		992			944
Federal Home Loan Bank advances		37,962			84,834
Subordinated debentures		7,105			7,021
Other liabilities		6,410			2,265
Accrued income taxes		—			—
Total liabilities		521,706			574,247
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 6,634,759 shares outstanding at March 31, 2011 and 6,659,212 shares outstanding at June 30, 2010		92			92
Additional paid-in capital		78,966			79,175
Unearned ESOP shares		(3,349	)		(3,673	)
Unearned compensation		(1,019	)		(1,053	)
Accumulated other comprehensive income		(453	)		1,206
Retained earnings		12,914			12,023
Treasury stock, at cost (2,547,613 and 2,523,160 shares)		(31,333	)		(31,247	)
Total stockholders’ equity		55,818			56,523
Total liabilities and stockholders’ equity	$	577,524		$	630,770

See accompanying notes to financial statements.

3

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2011			2010			2011			2010
Interest income:
Interest on loans receivable	$	6,049		$	6,608		$	18,443		$	20,556
Interest on investment securities		411			755			1,302			2,170
Other interest		105			67			306			204
Total interest income		6,565			7,430			20,051			22,930
Interest expense:
Deposits		1,293			1,837			4,490			6,381
Repurchase agreements		1			2			5			7
Advances from FHLB		445			799			1,788			2,438
Subordinated debentures		79			78			241			245
Total interest expense		1,818			2,716			6,524			9,071
Net interest income		4,747			4,714			13,527			13,859
Provision for loan losses		1,400			1,500			2,350			3,309
Net interest income after provision for loan losses		3,347			3,214			11,177			10,550
Noninterest income:
Mortgage origination fee income		66			61			430			301
Service charges and fees		286			386			957			1,250
Gain on investments		1,279			1,202			2,031			1,222
Gain (loss) on sale of fixed assets		—			(92	)		—			(92	)
Gain (loss) on sale of foreclosed real estate, net		(186	)		1			(591	)		(8	)
BOLI increase in cash value		58			58			177			175
Other		194			131			527			601
Total noninterest income		1,697			1,747			3,531			3,449
Noninterest expense:
Compensation and benefits		1,620			1,664			5,064			5,381
Occupancy expense		309			598			1,031			1,701
Equipment and data processing expense		638			671			1,900			1,904
DIF premiums		165			154			490			506
Advertising		62			15			167			173
Valuation adjustment and expenses on OREO		371			437			1,475			763
Loss on early extinguishment of debt		585			—			775			—
Other		885			1,132			2,473			3,189
Total noninterest expense		4,635			4,671			13,375			13,617
Earnings before income taxes		409			290			1,333			382
Income taxes:
Current		2			(175	)		5			—
Deferred		147			142			450			(10	)
Total income taxes		149			(33	)		455			(10	)
Net earnings	$	260		$	323		$	878		$	392
Net earnings per share, basic	$	0.04		$	0.05		$	0.14		$	0.06
Net earnings per share, diluted	$	0.04		$	0.05		$	0.14		$	0.06

See accompanying notes to financial statements.

4

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended March 31, 2011 and 2010

(Dollars in Thousands)

	Common Stock		Additional Paid-in Capital			Unallocated Common Stock in ESOP			Unearned Compensation			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ 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
	Common Stock		Additional Paid-in Capital			Unallocated Common Stock in ESOP			Unearned Compensation			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance at June 30, 2009	$	92	$	79,394		($	4,105	)	($	1,121	)	$	150		$	36,140		($	31,045	)	$	79,505
Comprehensive income:
Net earnings		—		—			—			—			—			392			—			392
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $40		—		—			—			—			199			—			—			199
Total comprehensive income		—		—			—			—			—			—			—			591
Dividends		—		—			—			—			—			(200	)		—			(200	)
Dividends used for ESOP payment		—		—			—			—			—			78			—			78
Shares committed to be released by the ESOP		—		(158	)		324			—			—			—			—			166
Earned portion of stock grants		—		—			—			50			—			—			—			50
Purchase of common stock (22,775 shares)		—		—			—			—			—			—			(95	)		(95	)
Balance at March 31, 2010	$	92	$	79,236		($	3,781	)	($	1,071	)	$	349		$	36,410		($	31,140	)	$	80,095

See accompanying notes to financial statements.

5

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Nine Months Ended March 31,
	2011			2010
Cash flows from operating activities:
Net earnings	$	878		$	392
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		115			164
Depreciation and amortization expense		812			1,291
Amortization of premiums (discounts), net on investment securities		88			(566	)
Provision for loan losses		2,350			3,309
Amortization of deferred loan fees, net		(209	)		(221	)
(Gain) loss on sale of investment securities		(2,031	)		(1,222	)
(Gain) loss on sale of foreclosed real estate, net		591			8
Deferred tax benefit		450			(10	)
Originations of mortgage loans held for sale		(16,708	)		(13,460	)
Proceeds from sale of mortgage loans		17,535			13,817
Increase in cash value of life insurance		(177	)		(175	)
Earned portion of MRP		35			51
Decrease (increase) in:		—
Accrued interest receivable		186			193
Other assets		(4,432	)		(4,953	)
Increase (decrease) in other liabilities and accrued income taxes		4,145			1,774
Net cash provided by (used for) operating activities		3,628			392
Cash flows used for investing activities:
Loan originations, net of principal collections		30,045			44,076
Investment securities classified as available-for-sale:		—
Proceeds from maturities, calls and prepayments		41,899			25,080
Proceeds from sale		11,778			5,636
Purchase of securities		(45,371	)		(46,919	)
Proceeds from sale of premises and equipment, construction overpayments		—			3,323
Purchase of premises and equipment		(183	)		(98	)
Proceeds from sale of (additions to) foreclosed real estate, net		3,363			1,458
Net cash provided by (used for) investing activities		41,531			32,556
Cash flows from financing activities:
Net increase (decrease) in deposits		(9,907	)		(1,412	)
Net increase in repurchase agreements		48			615
Proceeds from advances from FHLB		309			—
Repayment of FHLB advances		(46,625	)		(51	)
Purchase of treasury stock		(86	)		(95	)
Dividends paid		—			(603	)
Net cash provided by (used for) financing activities		(56,261	)		(1,546	)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		(11,102	)		31,402
Cash, cash equivalents and interest-earning deposits at beginning of period		69,303			44,108
Cash, cash equivalents and interest-earning deposits at end of period	$	58,201		$	75,510
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	4,470		$	6,536
Interest on FHLB advances	$	1,788		$	2,438
Interest on other borrowings	$	162		$	252
Income taxes	$	50		$	410
Real estate acquired in settlement of loans	$	11,897		$	3,208

See accompanying notes to financial statements.

6

Notes To Consolidated Financial Statements

(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 period ended March 31, 2011 are not necessarily indicative of the results which may be expected for the entire fiscal year. 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, 2010, which was filed with the Securities and Exchange Commission on September 24, 2010. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted. The Company has adopted FASB ASC Topic 855 for Subsequent Events which did not significantly change the subsequent events the Company reports either through recognition or disclosure.

(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.

(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

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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 period ended March 31, 2011, stock options to purchase 525,287 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,
	2011		2010		2011		2010
Weighted average number of common shares used in computing basic earnings per common share		6,231,452		6,251,105		6,211,295		6,227,472
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		6,231,452		6,251,105		6,211,295		6,227,472

(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 further segregated by loan grade. Loans pools 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 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”,

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“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.

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 which have an outstanding principal balance 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 majority of the Bank’s TDRs involve a modification in loan terms such as a temporary period of interest only or extension of the maturity date. 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 six consecutive months.

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.

9

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.

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2011:

	Residential Mortgage			Multi- family			Construction and land development			Non- residential real estate			Owner occupied			Commercial			Consumer			Total
Allowance for Credit Losses:
Balance at June 30, 2010	$	1,812		$	468		$	1,162		$	2,408		$	2,000		$	1,733		$	66		$	9,649
Charge Offs		(610	)		(740	)		(865	)		(95	)		(696	)		(1,199	)		(26	)		(4,231	)
Recoveries		4			—			—			4			—			91			14			113
Provision		507			1,103			369			(355	)		(560	)		1,301			(15	)		2,350
Balance at March 31, 2011	$	1,713		$	831		$	666		$	1,962		$	744		$	1,926		$	39		$	7,881
Ending balance, Individually Evaluated	$	910		$	767		$	454		$	1,548		$	145		$	1,250		$	—		$	5,074
Ending balance, Collectively Evaluated	$	803		$	64		$	212		$	414		$	599		$	676		$	39		$	2,807
Loans:
Balance at March 31, 2011	$	140,824		$	14,659		$	34,259		$	57,021		$	75,923		$	73,390		$	5,906		$	401,982
Ending balance, Individually Evaluated	$	5,834		$	5,900		$	5,033		$	6,600		$	1,049		$	4,223		$	—		$	28,639
Ending balance, Collectively Evaluated	$	134,990		$	8,759		$	29,226		$	50,421		$	74,874		$	69,167		$	5,906		$	373,343

The following table is an aging analysis of the loan portfolio:

	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Total Current		Total loans receivable
Residential Mortgage	$	2,642	$	346	$	4,580	$	7,568	$	133,256	$	140,824
Multi-family		—		—		—		—		14,659		14,659
Construction/land development		259		—		1,577		1,836		32,423		34,259
Non-residential real estate		117		—		1,198		1,315		55,706		57,021
Owner occupied		183		—		1,077		1,260		74,663		75,923
Commercial		146		70		2,035		2,251		71,139		73,390
Consumer		183		7		63		252		5,654		5,906
Total	$	3,530	$	423	$	10,530	$	14,483	$	387,500	$	401,982

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The following table summarizes the credit risk profile by internally assigned grade:

	Residential Mortgage		Multi- family		Construction and land development		Non- residential real estate		Owner occupied		Commercial		Consumer		Total
Grade:
Pass	$	124,742	$	6,277	$	28,603	$	49,372	$	71,904	$	63,433	$	5,906	$	350,237
Special mention		4,450		—		844		810		2,149		513		—		8,766
Substandard		11,632		8,382		4,812		6,839		1,870		9,444		—		42,979
Doubtful		—		—		—		—				—		—		—
Loss		—		—		—		—		—		—		—		—
Total:	$	140,824	$	14,659	$	34,259	$	57,021	$	75,923	$	73,390	$	5,906	$	401,982

11

The following table summarizes the composition of impaired loans, the associated specific reserves, and interest income recognized on impaired loans:

	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized
With an allowance recorded:
Residential Mortgage	$	3,480	$	3,480	$	910	$	80
Multi-family		5,900		5,900		767		223
Construction and land development		1,898		1,898		454		56
Non-residential real estate		3,736		3,736		1,548		140
Owner occupied		373		373		145		2
Commercial		4,085		4,085		1,250		95
Consumer		—		—		—		—
Total	$	19,472	$	19,472	$	5,074	$	596
With no related allowance:
Residential Mortgage	$	2,354	$	2,354	$	—	$	92
Multi-family		—		—		—		—
Construction and land development		3,136		3,136		—		54
Non-residential real estate		2,863		2,863		—		84
Owner occupied		676		676		—		20
Commercial		138		138		—		5
Consumer		—		—		—		—
Total	$	9,167	$	9,167	$	—	$	255
Total:
Residential Mortgage	$	5,834	$	5,834	$	910	$	172
Multi-family		5,900		5,900		767		223
Construction and land development		5,034		5,034		454		110
Non-residential real estate		6,599		6,599		1,548		224
Owner occupied		1,049		1,049		145		22
Commercial		4,223		4,223		1,250		100
Consumer		—		—		—		—
Total	$	28,639	$	28,639	$	5,074	$	851
Average impaired loans for the
Nine months ended March 31, 2011	$	34,643

(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.

12

At March 31, 2011, we had approximately $9.4 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $4.8 million in unused letters of credit and approximately $34.7 million in unused lines of credit.

(8) Dividend Declaration

On February 2, 2010, 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.

Restricted stock grants aggregating 45,000 shares and having a fair value of $597,000 were awarded in 2006. Restrictions on the grants lapse in annual increments over five years. The market value as of the grant date of the restricted stock grants is charged to expense as the restrictions lapse.

In connection with the Company’s acquisition of State of Franklin Bancshares, Inc. (“State of Franklin”) on October 31, 2008, each outstanding State of Franklin non-qualified option with an exercise price of $13.50 or less was converted into an option to purchase shares of Jefferson Bancshares common stock with an expiration date of October 31, 2011.

The table below summarizes the status of the Company’s stock option plans as of March 31, 2011.

	Three Months Ended March 31, 2011
	Shares		Weighted- average exercise price
Outstanding at beginning of period		525,287	$	12.69
Granted during the three-month period		—
Options forfeited		—
Options exercised		—
Outstanding at March 31, 2011		525,287	$	12.69
Options exercisable at March 31, 2011		525,287	$	12.69

13

The following information applies to options outstanding at March 31, 2011:

Number outstanding		525,287
Range of exercise prices	$	10.00 - $13.69
Weighted-average exercise price	$	12.69
Weighted-average remaining contractual life		2.04
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, 2011
	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	29,499		$	56	$	(106	)	$	29,449
Mortgage-backed		17,754			484		(155	)		18,083
Municipals		5,983			115		(74	)		6,024
Other Securities		1,433			—		(1,054	)		379
Total securities available-for-sale	$	54,669		$	655	$	(1,389	)	$	53,935
Weighted-average rate		2.48	%
Pledged at March 31, 2011	$	23,071
At June 30, 2010
	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	31,975		$	132	$	—		$	32,107
Mortgage-backed		21,812			2,643		(142	)		24,313
Municipals		5,650			126		(12	)		5,764
Other Securities		1,597			183		(975	)		805
Total securities available-for-sale	$	61,034		$	3,084	$	(1,129	)	$	62,989
Weighted-average rate		3.73	%
Pledged at June 30, 2010	$	9,574

Securities with unrealized losses not recognized in income are as follows:

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2011
Federal agency securities	$	7,789	$	(106	)	$	—	$	—		$	7,789	$	(106	)
Mortgage-backed securities		5,008		(77	)		726		(78	)		5,734		(155	)
Municipal securities		1,961		(74	)		—		—			1,961		(74	)
Other securities		—		—			375		(1,054	)		375		(1,054	)
	$	14,758	$	(257	)	$	1,101	$	(1,132	)	$	15,859	$	(1,389	)

15

The Company evaluates its securities with significant declines in fair value on a quarterly basis to determine whether they should be considered temporarily or other than temporarily impaired. The company has recognized all of the unrealized losses reflected in the foregoing table in other comprehensive income. The company neither has the intent to sell nor is forecasting the need or requirement to sell the securities before their anticipated recovery.

Maturities of debt securities at March 31, 2011, are summarized as follows:

	Amortized Cost		Fair Value		Weighted Average Yield
Within 1 year	$	164	$	164		2.83	%
Over 1 year through 5 years		24,486		24,542		1.29	%
After 5 years through 10 years		8,281		8,301		1.82	%
Over 10 years		21,738		20,928		4.06	%
	$	54,669	$	53,935		2.48	%

(11) Fair Value Disclosures

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. When measuring fair value, the Company uses valuation techniques that are appropriate and consistently applied. A hierarchy is also established under the standard and is used to prioritize valuation inputs into the following three levels used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

16

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

The following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities Available for Sale

Level 2 investment securities classified as “available-for-sale” are recorded at fair value on at least a monthly basis. Fair value measurements are based upon independent pricing models or other model-based valuation techniques with inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Level 2 securities include mortgage-backed securities issued by government-sponsored entities, municipal bonds, bonds issued by government agencies, and corporate debt securities. Level 3 investment securities classified as “available-for-sale” are recorded at fair value on at least a semi-annual basis. Fair value measurements are based upon independent pricing models based upon unobservable inputs which require significant management judgment or estimation. Level 3 includes certain mortgage-backed securities and other debt securities.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

17

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:

	March 31, 2011
Description	Level 1		Level 2		Level 3		Total Carrying Amount in Statement of Financial Condition		Assets/Liabilities Measured at Fair Value
Securities available for sale		—	$	50,634	$	3,301	$	53,935	$	53,935

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.

	March 31, 2011
Description	Level 1		Level 2		Level 3		Total Carrying Amount in Statement of Financial Condition		Assets/Liabilities Measured at Fair Value
Impaired Loans		—		—	$	23,565	$	23,565	$	23,565

18

The carrying value and estimated fair value of the Company’s financial instruments are as follows:

	March 31, 2011						June 30, 2010
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and due from banks and interest-earning deposits with banks	$	58,201		$	58,201		$	69,303		$	69,303
Available-for-sale securities		53,935			53,935			62,989			62,989
Federal Home Loan Bank stock		4,735			4,735			4,735			4,735
Loans receivable		401,982			403,234			444,474			445,655
Accrued interest receivable		1,814			1,814			2,000			2,000
Loans held-for-sale		326			326			1,153			1,153
Financial liabilities:
Deposits		(469,237	)		(455,547	)		(479,183	)		(471,821	)
Repurchase agreements		(992	)		(992	)		(944	)		(944	)
Borrowed funds		(37,962	)		(37,908	)		(84,834	)		(87,028	)
Subordinated debentures		(7,105	)		(6,385	)		(7,021	)		(5,630	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		—			9,424			—			18,023
Unused letters of credit		—			4,774			—			5,320
Unused lines of credit		—			34,663			—			36,192

(12) Subordinated Debt

As part of the State of Franklin acquisition, the Company acquired State of Franklin Statutory Trust II (the “Trust”) and assumed the Trust’s obligation with respect to certain capital securities described below. On December 13, 2006, State of Franklin issued $10.3 million of junior subordinated debentures to the Trust, a Delaware business trust wholly owned by State of Franklin. The Trust (a) sold $10.0 million of capital securities through its underwriters to institutional investors and upstreamed the proceeds to State of Franklin and (b) issued $310,000 of common securities to State of Franklin. The sole assets of the Trust are the $10.3 million of junior subordinated debentures issued by State of Franklin. The securities are redeemable at par after January 30, 2012, and have a final maturity of January 30, 2037. The interest is payable quarterly at a floating rate equal to 3-month LIBOR plus 1.7%.

(13) Subsequent Events

The company has evaluated subsequent events for potential recognition and disclosure for the three months ended March 31, 2011. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.

19

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2010, which was filed with the Securities and Exchange Commission on September 24, 2010.

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 the reports we file with the SEC, including our Annual Report on Form 10-K for the year ended June 30, 2010 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.

20

Results of Operations for the Three Months Ended March 31, 2011 and 2010

Net Income

Net income for the three months ended March 31, 2011 was $260,000, or $0.04 per diluted share, compared to $323,000, or $0.05 per diluted share, for the corresponding period in 2010. Net income for the three months ended March 31, 2011 was negatively impacted by a prepayment penalty on the early payoff of FHLB advances totaling $585,000.

	Three Months Ended March 31,
	2011			2010
	(Dollars in thousands, except per share data)
Net earnings	$	260		$	323
Net earnings per share, basic	$	0.04		$	0.05
Net earnings per share, diluted	$	0.04		$	0.05
Return on average assets (annualized)		0.17	%		0.20	%
Return on average equity (annualized)		1.83	%		1.59	%

Net Interest Income

Net interest income remained relatively unchanged at $4.7 million for the three months ended March 31, 2011 compared to the same period in 2010 The interest rate spread and net interest margin for the quarter ended March 31, 2011 were 3.54% and 3.66%, respectively, compared to 3.35% and 3.46%, respectively, for the same period in 2010.

21

The following table summarizes changes in interest income and expense for the three month periods ended March 31, 2011 and 2010:

	Three Months Ended March  31,				$ Change			% Change
	2011		2010
	(Dollars in thousands)
Interest income:
Loans	$	6,049	$	6,608	($	559	)		(8.5	%)
Investment securities		411		755		(344	)		(45.6	%)
Interest-earning deposits		51		14		37			264.3	%
FHLB stock		54		53		1			1.9	%
Total interest income		6,565		7,430		(865	)		(11.6	%)
Interest expense:
Deposits		1,293		1,837		(544	)		(29.6	%)
Repurchase Agreements		1		2		(1	)		(50.0	%)
Borrowings		445		799		(354	)		(44.3	%)
Subordinated Notes & Debentures		79		78		1			1.3	%
Total interest expense		1,818		2,716		(898	)		(33.1	%)
Net interest income	$	4,747	$	4,714	$	33			0.7	%

The following table summarizes average balances and average yields and costs for the three months ended March 31, 2011 and 2010. For purposes of this table nonaccrual loan balances and related accrued interest income have been excluded.

	Three Months Ended March 31,
	2011					2010
	Average Balance		Yield/ Cost			Average Balance		Yield/ Cost
	(Dollars in thousands)
Loans	$	398,573		6.15	%	$	441,301		6.07	%
Investment securities		52,101		3.37	%		56,887		5.51	%
Interest-earning deposits		72,591		0.28	%		51,120		0.11	%
FHLB stock		4,735		4.63	%		4,735		4.54	%
Deposits		426,378		1.23	%		426,020		1.75	%
FHLB advances		51,757		3.49	%		90,029		3.60	%
Repurchase agreements		836		0.49	%		1,505		0.54	%
Subordinated debentures		7,087		4.52	%		6,975		4.54	%

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.

22

	Three Months Ended March 31, 2011 Compared to 2010
	Increase (Decrease) Due To
	Volume			Rate			Net
	(In thousands)
Interest income:
Loans receivable	($	772	)	$	213		($	559	)
Investment securities		(78	)		(267	)		(344	)
Daily interest-earning deposits and other interest-earning assets		8			30			38
Total interest-earning assets		(842	)		(23	)		(865	)
Interest expense:
Deposits		2			(546	)		(544	)
Total borrowings		(342	)		(12	)		(354	)
Total interest-bearing liabilities		(340	)		(558	)		(898	)
Net change in interest income	($	502	)	$	535		$	33

Total interest income decreased $865,000, or 11.6%, to $6.6 million for the three months ended March 31, 2011 primarily due to a change in the mix of average earning assets. The average yield on earning assets declined 39 basis points to 5.06% compared to 5.45% for the same period in 2010, due primarily to a shift of average loan balances into lower yielding investments and interest-earning deposits.

Interest on loans decreased $559,000, or 8.5%, to $6.0 million for the three months ended March 31, 2011 primarily due to a lower average balance of loans. The average balance of loans decreased $42.7 million, or 9.7%, to $398.6 million, due to the combination of reduced loan demand, normal paydowns on existing loans, transfers to OREO and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Bank’s market areas. The average yield on loans was 6.15% for the three months ended March 31, 2011 compared to 6.07% for the same period in 2010.

Interest on investment securities decreased $344,000, or 45.6%, to $411,000 for the three months ended March 31, 2011 due to a lower average yield and a lower average balance. The average yield on investment securities decreased to 3.37% for the three months ended March 31, 2011 compared to 5.51% for the same period in 2010 due to lower interest rates and changes in the composition of the portfolio. A portion of the proceeds from called securities has been reinvested in similar securities but with lower yields.

Total interest expense decreased $898,000 to $1.8 million for the three months ended March 31, 2011 compared to $2.7 million for the corresponding period in 2010 primarily due to lower interest rates on deposits and a lower average balance of FHLB borrowings. The average rate paid on deposits was 1.23% for the three months ended March 31, 2011, compared to 1.75% for the same period in 2010 due to downward repricing of interest bearing deposits in the current low interest rate environment. Average FHLB borrowings decreased $38.3 million to $51.8 million for the three months ended March 31, 2011 compared to $90.0 million for the comparable period in 2010, while the average rate paid on borrowings decreased 11 basis points to 3.49%, as excess liquidity was used to repay FHLB advances.

23

Provision for Loan Losses

The provision for loan losses for the three months ended March 31, 2011 was $1.4 million, compared to $1.5 million for the comparable period in 2010. Net charge-offs for the three months ended March 31, 2011 were $1.5 million compared to $1.3 million for the comparable period in 2010. 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. In addition, the Federal Deposit Insurance Corporation and Tennessee Department of Financial Institutions, as an integral part of their examination process, periodically review our allowance for loan losses and may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Noninterest Income

Noninterest income decreased $50,000 to $1.7 million for the three months ended March 31, 2011 compared to the corresponding period in 2010. Service charges and fees declined $100,000, or 25.9%, to $286,000 for the three months ended March 31, 2011 compared to the same period in 2010. Management believes fee revenue decreased due to heightened customer awareness of fees in the current economic downturn. For the three months ended March 31, 2011, noninterest income included a loss on sale of foreclosed properties totaling $186,000.

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, 2011 compared to the same period in 2010.

	Three Months Ended March 31,						$ Change			% Change
	2011			2010
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income	$	66		$	61		$	5			8.2	%
Service charges and fees		286			386			(100	)		(25.9	%)
Gain (loss) on sale of fixed assets		—			(92	)		92			(100.0	%)
(Loss) gain on investment securities		1,279			1,202			77			6.4	%
Gain (loss) on sale of foreclosed real estate, net		(186	)		1			(187	)		NM
BOLI increase in cash value		58			58			—			0.0	%
Other		194			131			63			48.1	%
Total noninterest income	$	1,697		$	1,747		($	50	)		(2.9	%)

Noninterest Expense

Total noninterest expense was relatively unchanged at $4.6 million for the three months ended March 31, 2011 compared to the corresponding period in 2010. Prepayment penalties of $585,000 were incurred in connection with the repayment of FHLB advances totaling $20.0 million during the three months ending March 31, 2011. Management believes the future savings in interest expense will more than offset the prepayment penalties. Occupancy expense decreased $289,000 to $309,000 for the three months ended March 31, 2011, due to a decrease in amortization of leasehold improvements. Other changes in noninterest expense included declines in compensation expense, equipment and data processing expense, and valuation adjustments and expenses on OREO.

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, 2011 compared to the same period in 2010.

24

	Three Months Ended March 31,				$ Change			% Change
	2011		2010
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits	$	1,620	$	1,664	($	44	)		(2.6	%)
Occupancy expense		309		598		(289	)		(48.3	%)
Equipment and data processing expense		638		671		(33	)		(4.9	%)
Deposit insurance premiums		165		154		11			7.1	%
Advertising		62		15		47			313.3	%
Valuation adjustment and expenses on OREO		371		437		(66	)		(15.1	%)
Loss on early extinguishment of debt		585		—		585			—
Other		885		1,132		(247	)		(21.8	%)
Total noninterest expense	$	4,635	$	4,671	($	36	)		(0.8	%)

Income Taxes

Income tax expense for the three months ended March 31, 2011 was $149,000 compared to a tax benefit of $33,000 for the same period in 2010 due to higher taxable income.

Results of Operations for the Nine Months Ended March 31, 2011 and 2010

Net Income

Net income for the nine months ended March 31, 2011 was $878,000, or $0.14 per diluted share compared to $392,000, or $0.06 per diluted share, for the same period in 2010. Net income for the nine months ended March 31, 2011 included a prepayment penalty on the early payoff of FHLB advances totaling $775,000. Net income for the nine months ended March 31, 2011 was favorably impacted by an increase in gain on investment securities and a decrease in the provision for loan and lease losses which more than offset an increase in write-downs and losses on OREO.

	Nine Months Ended March 31,
	2011			2010
	(Dollars in thousands, except per share data)
Net earnings	$	878		$	392
Net earnings per share, basic	$	0.14		$	0.06
Net earnings per share, diluted	$	0.14		$	0.06
Return on average assets (annualized)		0.19	%		0.08	%
Return on average equity (annualized)		2.05	%		0.64	%

Net Interest Income

Net interest income before loan loss provision decreased $332,000, or 2.4%, to $13.5 million for the nine months ended March 31, 2011 from $13.9 million for the corresponding period in 2010. The interest rate spread and net interest margin for the nine months ended March 31, 2011 were 3.21% and 3.31%, respectively, compared to 3.18% and 3.31%, respectively, for the same period in 2010.

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The following table summarizes changes in interest income and expense for the nine month periods ended March 31, 2011 and 2010:

	Nine Months Ended March 31,				$ Change			% Change
	2011		2010
	(Dollars in thousands)
Interest income:
Loans	$	18,443	$	20,556	($	2,113	)		(10.3	%)
Investment securities		1,302		2,170		(868	)		(40.0	%)
Interest-earning deposits		151		38		113			297.4	%
FHLB stock		155		166		(11	)		(6.6	%)
Total interest income		20,051		22,930		(2,879	)		(12.6	%)
Interest expense:
Deposits		4,490		6,381		(1,891	)		(29.6	%)
Repurchase Agreements		5		7		(2	)		(28.6	%)
Borrowings		1,788		2,438		(650	)		(26.7	%)
Subordinated Notes & Debentures		241		245		(4	)		(1.6	%)
Total interest expense		6,524		9,071		(2,547	)		(28.1	%)
Net interest income	$	13,527	$	13,859	($	332	)		(2.4	%)

The following table summarizes average balances and average yields and costs for the nine months ended March 31, 2011 and 2010. For purposes of this table nonaccrual loan balances and related accrued interest income have been excluded.

	Nine Months Ended March 31,
	2011					2010
	Average Balance		Yield/ Cost			Average Balance		Yield/ Cost
	(Dollars in thousands)
Loans	$	407,360		6.03	%	$	457,865		5.98	%
Investment securities		50,147		3.63	%		46,222		5.05	%
Interest-earning deposits		84,995		0.24	%		47,175		0.11	%
FHLB stock		4,735		4.36	%		4,735		4.67	%
Deposits		439,852		1.36	%		430,349		1.98	%
FHLB advances		67,960		3.50	%		90,149		3.60	%
Repurchase agreements		1,074		0.62	%		1,429		0.65	%
Subordinated debentures		7,059		4.55	%		6,948		4.70	%

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

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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.

	Nine Months Ended March  31, 2011 Compared to 2010
	Increase (Decrease) Due To						Net
	Volume			Rate
	(In thousands)
Interest income:
Loans receivable	($	2,247	)	$	134		($	2,113	)
Investment securities		(136	)		(732	)		(868	)
Daily interest-earning deposits					—
and other interest-earning assets		45			57			102
Total interest-earning assets		(2,338	)		(541	)		(2,879	)
Interest expense:
Deposits		144			(2,035	)		(1,891	)
Total borrowings		(601	)		(55	)		(656	)
Total interest-bearing liabilities		(457	)		(2,090	)		(2,547	)
Net change in interest income	($	1,881	)	$	1,549		($	332	)

Total interest income decreased $2.9 million, or 12.6%, to $20.1 million for the nine months ended March 31, 2011 primarily due to a change in the mix of average earning assets. The average yield on earning assets declined 57 basis points to 4.90% compared to 5.46% for the same period in 2010, due primarily to a shift from average loan balances into lower yielding investment and interest-earning deposits.

Interest on loans decreased $2.1 million, or 10.3%, to $18.4 million for the nine months ended March 31, 2011 primarily due to a lower average balance of loans. The average balance of loans decreased $50.5 million, or 11.0%, to $407.4 million, due to the combination of reduced loan demand, normal paydowns on existing loans, transfers to OREO and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Bank’s market areas. The average yield on loans was 6.03% for the nine months ended March 31, 2011 compared to 5.98% for the same period in 2010.

Interest on investment securities decreased $868,000, or 40.0%, to $1.3 million for the nine months ended March 31, 2011 due to a lower average yield and a lower average balance. The average yield on investment securities decreased to 3.63% for the nine months ended March 31, 2011 compared to 5.05% for the same period in 2010 due to lower market interest rates and changes in the composition of the portfolio. A portion of the proceeds from called securities has been reinvested in similar securities but with lower yields.

Total interest expense decreased $2.5 million to $6.5 million for the nine months ended March 31, 2011 compared to $9.1 million for the corresponding period in 2010 due primarily to a lower average cost of deposits and a lower average balance of FHLB borrowings. The average rate paid on deposits was 1.36% for the nine months ended March 31, 2011, compared to 1.98% for the same period in 2010 due to downward repricing of interest bearing deposits in the current low interest rate environment. Average FHLB borrowings decreased $22.2 million to $68.0 million for the nine months ended March 31, 2011 compared to $90.1 million for the nine months ended March 31, 2010, as excess liquidity was used to repay FHLB advances.

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Provision for Loan Losses

The provision for loan losses for the nine months ended March 31, 2011 was $2.4 million, compared to $3.3 million for the comparable period in 2010. Net charge-offs for the nine months ended March 31, 2011 were $4.1 million compared to $2.6 million for the comparable period in 2010. A significant portion of the loan charge-offs during the nine months ended March 31, 2011 were against specific reserves and did not require replenishment of the allowance for loan and lease losses.

Noninterest Income

Noninterest income increased $82,000 to $3.5 million for the nine months ended March 31, 2011 compared to $3.4 million for the corresponding period in 2010 due to an increase in gain on investment securities. Gain on investment securities increased $809,000 to $2.0 million for the three months ended March 31, 2011 due to investment sales as well as a gain resulting from a large unexpected prepayment of principal on a deeply discounted mortgage-backed security. The deep discount on this security originated from the required write down to fair value in connection with the Company’s acquisition of State of Franklin Bancshares, Inc., which was consummated on October 31, 2008. Loss on sale of foreclosed property increased $583,000 to $591,000 for the nine months ended March 31, 2011. Service charges and fees declined $293,000, or 23.4%, to $957,000 primarily due to a reduction in customer decreases in late fees and overdraft fees.

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, 2011 compared to the same period in 2010.

	Nine Months Ended March 31,						$ Change			% Change
	2011			2010
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income	$	430		$	301		$	129			42.9	%
Service charges and fees		957			1,250			(293	)		(23.4	%)
Gain (loss) on sale of fixed assets		—			(92	)		92			(100.0	%)
(Loss) gain on investment securities		2,031			1,222			809			66.2	%
Gain (loss) on sale of foreclosed real estate, net		(591	)		(8	)		(583	)		7287.5	%
BOLI increase in cash value		177			175			2			1.1	%
Other		527			601			(74	)		(12.3	%)
Total noninterest income	$	3,531		$	3,449		$	82			2.4	%

Noninterest Expense

Noninterest expense decreased $242,000, or 1.8%, to $13.4 million for the nine months ended March 31, 2011 compared to the corresponding 2010 period. Prepayment penalties totaling $775,000 were incurred in connection with the repayment of FHLB advances totaling $46.5 million during the nine months ending March 31, 2011. Management believes the future savings in interest expense will more than offset the prepayment penalties. Compensation expense decreased $317,000, or 5.9%, to $5.1 million for the nine months ended March 31, 2011 compared to the same period in 2010 as the Bank has reduced the number of employees through attrition. The number of full-time equivalent employees was 139 at March 31, 2011 compared to 147 in 2010. Expenses related to other real estate owned increased to $1.5 million for the nine months ended March 31, 2011 compared to $763,000 for the comparable 2010 period due to valuation adjustments and expenses

28

related to the maintenance and disposition of foreclosed real estate. Occupancy expense decreased $670,000 to $1.0 million for the nine months ended March 31, 2011, due to a decrease in amortization of leasehold improvements. Other categories of noninterest expense decreased $716,000 to $2.5 million for the nine months ended March 31, 2011 due to cost control initiatives, declines in legal and professional fees and lower franchise tax expense.

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, 2011 compared to the same period in 2010.

	Nine Months Ended March 31,				$ Change			% Change
	2011		2010
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits	$	5,064	$	5,381	($	317	)		(5.9	%)
Occupancy expense		1,031		1,701		(670	)		(39.4	%)
Equipment and data processing expense		1,900		1,904		(4	)		(0.2	%)
Deposit insurance premiums		490		506		(16	)		(3.2	%)
Advertising		167		173		(6	)		(3.5	%)
Valuation adjustment and expenses on OREO		1,475		763		712			93.3	%
Loss on early extinguishment of debt		775		—		775			—
Other		2,473		3,189		(716	)		(22.5	%)
Total noninterest expense	$	13,375	$	13,617	($	242	)		(1.8	%)

Income Taxes

Income tax expense for the nine months ended March 31, 2011 was $455,000 compared to a tax benefit of $10,000 for the same period in 2010 due to higher taxable income.

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits decreased $11.1 million to $58.2 million at March 31, 2011 compared to $69.3 million at June 30, 2010 as excess liquidity was used to repay FHLB advances. In addition, the Bank has purposely reduced the level of customer certificates of deposit in response to reduced loan demand.

Investments

The Company’s investment security portfolio primarily consists of U.S. Government agency obligations, mortgage-backed securities issued by government-sponsored entities, and municipal bonds. Investment securities decreased to $53.9 million at March 31, 2011 compared to $63.0 million at June 30, 2010. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $734,000, or $453,000 net of taxes. The $9.1 million decrease in the investment portfolio is primarily due to sales and calls of securities exceeding new purchases.

Loans

Net loans decreased $40.7 million to $393.7 million at March 31, 2011 compared to $434.4 million at June 30, 2010 due primarily to reduced loan demand combined with normal paydowns on existing loans, transfers to OREO and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Bank’s market areas.

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Loans receivable, net, are summarized as follows:

	At March 31, 2011						At June 30, 2010
	Amount			Percent of Portfolio			Amount			Percent of Portfolio			$ Change			% Change
	(Dollars in thousands)
Real estate loans:
Residential one-to four-family	$	114,040			28.4	%	$	136,430			30.7	%	$	(22,390	)		(16.4	%)
Home equity line of credit		20,405			5.1	%		19,768			4.4	%		637			3.2	%
Commercial		147,301			36.6	%		140,024			31.5	%		7,277			5.2	%
Multi-family		14,659			3.6	%		16,536			3.7	%		(1,877	)		(11.4	%)
Construction		2,072			0.5	%		21,073			4.7	%		(19,001	)		(90.2	%)
Land		31,962			8.0	%		37,135			8.4	%		(5,173	)		(13.9	%)
Total real estate loans		330,439			82.2	%		370,966			83.5	%		(40,527	)		(10.9	%)
Commercial business loans		65,636			16.3	%		66,699			15.0	%		(1,063	)		(1.6	%)
Consumer loans:
Automobile loans		1,447			0.4	%		1,848			0.4	%		(401	)		(21.7	%)
Mobile home loans		16			0.0	%		23			0.0	%		(7	)		(30.4	%)
Loans secured by deposits		1,322			0.3	%		1,372			0.3	%		(50	)		(3.6	%)
Other consumer loans		3,122			0.8	%		3,566			0.8	%		(444	)		(12.5	%)
Total consumer loans		5,907			1.5	%		6,809			1.5	%		(902	)		(13.2	%)
Total gross loans		401,982			100.0	%		444,474			100.0	%		(42,492	)		(9.6	%)
Less:
Deferred loan fees, net		(390	)					(447	)					57			(12.8	%)
Allowance for losses		(7,881	)					(9,649	)					1,768			(18.3	%)
Loans receivable, net	$	393,711					$	434,378					$	(40,667	)		(9.4	%)

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.

30

The FDIC and the Tennessee Department of Financial Institutions, as an integral part of their examination process, periodically review 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 $7.9 million at March 31, 2011 compared to $9.6 million at June 30, 2010. Our allowance for loan losses represented 1.96% of total loans and 74.85% of nonperforming loans at March 31, 2011 compared to 2.17% of total loans and 51.38% of nonperforming loans at June 30, 2010.

	Three Months Ended March 31,							Nine Months Ended March 31,
	2011			2010				2011			2010
	(Dollars in thousands)							(Dollars in thousands)
Balance at beginning of period	$	7,945		$	5,180			$	9,649		$	4,722
Provision for loan losses		1,400			1,500				2,350			3,309
Recoveries		11			9				113			57
Charge-offs		(1,475	)		(1,277	)			(4,231	)		(2,676	)
Net charge-offs		(1,464	)		(1,268	)			(4,118	)		(2,619	)
							��
Allowance at end of period	$	7,881		$	5,412			$	7,881		$	5,412
Net charge-offs to average outstanding loans during the period, annualized		1.43	%		1.10	%			1.30	%		0.74	%

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 $10.5 million at March 31, 2011 compared to $18.8 million at June 30, 2010. The decrease in nonaccrual loans is primarily due to an increase in both nonaccrual residential and commercial real estate loans. Troubled debt restructuring (“TDR”) loans were $5.4 million at March 31, 2011 compared to $3.1 million at June 30, 2010. In general, a TDR exists when we grant a concession to a borrower experiencing financial difficulty that we normally would not otherwise consider. These concessions can result in avoidance of foreclosure proceedings and can result in the full repayment of the loan principal amount. The majority of the Bank’s TDRs involve a modification in loan terms such as a temporary period of interest only or extension of the maturity date. The majority of loans in this category are in compliance with their modified loan terms as of March 31, 2011. The amount of accruing TDR loans totaled $4.8 million at March 31, 2011. Foreclosed real estate amounted to $11.3 million at March 31, 2011 compared to $6.9 million at June 30, 2010. 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 initial writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings. Foreclosed real estate at March 31, 2011 consisted of vacant land totaling $1.4 million, residential property totaling $3.2 million and commercial real estate totaling $6.7 million.

31

	March 31, 2011			June 30, 2010
	(Dollars in thousands)
Nonaccruing loans:
Residential real estate	$	6,156		$	10,750
Commercial real estate		2,275			6,617
Commercial business		2,035			1,309
Consumer		63			103
Total nonaccrual loans		10,529			18,779
Nonaccrual investments		377			731
Real estate owned		11,323			6,865
Other repossessed assets		—			—
Total nonperforming assets	$	22,229		$	26,375
Total nonperforming assets to total assets		3.85	%		4.18	%
Total nonperforming loans to total loans		2.62	%		4.22	%
Allowance for loan losses to total nonperforming loans		74.85	%		51.38	%

The following table summarizes activity in OREO during the nine months ended March 31, 2011:

OREO balance at beginning of period	$	6,851
OREO acquired		11,897
OREO sold		(5,167	)
Initial valuation adjustments		(1,770	)
Subsequent valuation adjustments		(488	)
OREO ending balance	$	11,323

Bank Owned Life Insurance

We hold bank owned life insurance (“BOLI”) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at March 31, 2011 was $6.6 million.

Deposits

Total deposits decreased $9.9 million to $469.2 million at March 31, 2011 due to planned runoff of certificates of deposit through lower interest rates. Time deposits decreased $10.0 million, or 4.2%, to $230.2 million at March 31, 2011. NOW accounts decreased $13.6 million, or 23.3%, to 44.7 million at March 31, 2011 due to a planned reduction in public funds.

	March 31, 2011		June 30, 2010		$ Change			% Change
	(Dollars in thousands)
Noninterest-bearing accounts	$	53,301	$	41,653	$	11,648			28.0	%
NOW accounts		44,694		58,257		(13,563	)		(23.3	%)
Savings accounts		86,852		82,830		4,022			4.9	%
Money market accounts		54,195		56,247		(2,052	)		(3.6	%)
Certificates of deposit		230,195		240,196		(10,001	)		(4.2	%)
Total	$	469,237	$	479,183	($	9,946	)		(2.1	%)

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Advances

FHLB advances decreased $46.9 million to $38.0 million at March 31, 2011 compared to $84.8 million at June 30, 2010 as excess liquidity was used to repay FHLB advances. During the nine months ended March 31, 2011, the Bank prepaid FHLB advances with an average cost of 3.82%. In addition, FHLB advances totaling $17.0 million with an average cost of 4.15% were prepaid and restructured. Although prepayment penalties totaling $775,000 for the nine months ended March 31, 2011 were incurred in connection with the repayment of the advances and recognized in noninterest expense, management believes the future savings in interest expense will more than offset the prepayment penalties.

Stockholders’ Equity

Stockholders’ equity was $55.8 million at March 31, 2011 compared to $56.5 million at June 30, 2010. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders’ equity. At March 31, 2011, the adjustment to stockholders’ equity was a net unrealized loss of $453,000 compared to a net unrealized gain of $1.2 million at June 30, 2010. On November 13, 2008, the Company announced its third stock repurchase program pursuant to which up to 620,770 shares of the Company’s outstanding common stock may be repurchased. At March 31, 2011, 440,522 shares remained eligible for repurchase under the current stock repurchase program.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the FHLB of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

Investments in liquid assets are regularly adjusted based on our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations.

Our most liquid assets are cash and cash equivalents and marketable investment securities that are not pledged as collateral. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At March 31, 2011, cash and cash equivalents totaled $58.2 million compared to $69.3 million at June 30, 2010. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $53.9 million at March 31, 2011 compared to $63.0 million at June 30, 2010. At March 31, 2011, approximately $23.1 million of the investment portfolio was pledged as collateral for municipal deposits, FHLB borrowings and repurchase agreements. The Company’s external sources of liquidity include borrowing capacity with the Federal Home Loan Bank of Cincinnati, the Federal Reserve, and other correspondent banks. At March 31, 2011, borrowing capacity with the FHLB totaled $54.7 million based on pledged collateral, of which $12.0 million was unused. In the nine-month period ended March 31, 2011, FHLB advances decreased $46.9 million to $38.0 million compared to $84.8 million at June 30, 2010. The Company had approximately $10.6 million of unused borrowing capacity with the Federal Reserve Bank of Atlanta at March 31, 2011. In addition, the Company also maintains federal funds lines with two correspondent banks totaling $18.5 million under which no borrowings were outstanding.

The Company anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2011, we had approximately $9.4 million in loan commitments, consisting of commitments to fund

33

real estate loans. In addition to commitments to originate loans, we had $4.8 million in unused letters of credit and approximately $34.7 million in unused lines of credit. At March 31, 2011, we had $183.5 million in certificates of deposit due within one year and $239.0 million in other deposits without specific maturities. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net decrease in total deposits of $10.0 million during the nine-month period ended March 31, 2011.

Jefferson Bancshares is a separate entity and apart from Jefferson Federal and must provide for its own liquidity. In addition to its operating expenses, Jefferson Bancshares is responsible for the payment of dividends declared for its shareholders, and interest and principal on outstanding debt. At times, Jefferson Bancshares has repurchased and retired outstanding shares of its stock pursuant to share repurchase programs adopted by the Board of Directors. Substantially all of Jefferson Bancshares’ revenues are obtained from dividends. Payment of such dividends to Jefferson Bancshares by Jefferson Federal is limited under Tennessee law. The amount that can be paid in any calendar year, without prior approval from the Tennessee Department of Financial Institutions, cannot exceed the total of Jefferson Federal’s net income for the year combined with its retained net income for the preceding two years. Jefferson Bancshares believes that such restriction will not have an impact on its ability to meet its ongoing cash obligations.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit, amounts due mortgagors on construction loans, amounts due on commercial loans and commercial letters of credit.

For the nine months ended March 31, 2011, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

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Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of March 31, 2011, Jefferson Federal met each of its capital requirements. The following table presents our capital position relative to our regulatory capital requirements at March 31, 2011 and June 30, 2010:

	Actual					For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
						(Dollars in thousands)
At March 31, 2011
Total Risk-Based Capital
(To Risk Weighted Assets)	$	52,949		12.73	%	$	33,288	>		8.0	%	$	41,610	>		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)		47,715		11.47	%		16,644	>		4.0	%		24,966	>		6.0	%
Tier 1 Capital
(To Average Assets)		47,715		8.11	%		23,545	>		4.0	%		29,431	>		5.0	%
At June 30, 2010
Total Risk-Based Capital
(To Risk Weighted Assets)	$	52,352		11.61	%	$	36,073	>		8.0	%	$	45,092	>		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)		46,666		10.35	%		18,037	>		4.0	%		27,055	>		6.0	%
Tier 1 Capital
(To Average Assets)		46,666		7.29	%		25,609	>		4.0	%		32,011	>		5.0	%

Under the capital regulations of the FDIC, Jefferson Federal must satisfy various capital requirements. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (“Tier I”) capital to average adjusted assets of at least 3.00% if a particular institution has the highest examination rating and at least 4.00% for all others. At March 31, 2011, Jefferson Federal’s leverage capital ratio was 8.11%. The FDIC’s risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-weighted assets of at least 8.00%. Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At March 31, 2011, Jefferson Federal had a ratio of total capital to risk-weighted assets of 12.73%. At March 31, 2011, the Bank met the minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since June 30, 2010.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Jefferson Bancshares is not a party to any pending legal proceedings. Periodically, there have been various claims and lawsuits involving Jefferson Federal, such as claims to enforce liens, condemnation proceedings on properties in which Jefferson Federal holds security interests, claims involving the making and servicing of real property loans and other issues incident to Jefferson Federal’s business. Jefferson Federal is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition or operations of the Company or the Bank.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period	(a) Total Number of Shares (or units) Purchased		(b) Average Price Paid per Share (or Unit)		( c ) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		( d ) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
Month #1
January 1, 2011		1,285	$	4.24		1,285		440,972	(1)
through
January 31, 2011
Month #2
February 1, 2011		150	$	4.28		150		440,822	(1)
through
February 28, 2011
Month #3
March 1, 2011		300	$	3.89		300		440,522	(1)
through						—
March 31, 2011
Total		1,735	$	4.18		1,735		440,522

(1) On November 13, 2008, the Company announced a stock repurchase program under which the Company may repurchase up to 620,770 shares of the Company’s common stock, from time to time, subject to market conditions. The repurchase program will continue until completed or terminated by the Board of Directors.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved]

Item 5. Other Information

None.

Item 6. Exhibits

31.1 Rule 13a-14(a)/15d-14(a) certification of the principal executive officer

31.2 Rule 13a-14(a)/15d-14(a) certification of the principal financial officer

32.0 Section 1350 certification

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	JEFFERSON BANCSHARES, INC.
May 13, 2011	/s/ Anderson L. Smith
	Anderson L. Smith
	President and Chief Executive Officer
May 13, 2011	/s/ Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary