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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 September 30, 2009

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         |  | x
|                        |  |                                                  | 
|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 November 9, 2009, the registrant had 6,703,307 shares of common stock, $0.01 par value per share, outstanding.









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##### Table of Contents

INDEX



|           |  |                                                                                                                       |  |     
|---------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                       |  | Page
|           |  | PART I. FINANCIAL INFORMATION                                                                                         |  |     
|           |  |                                                                                                                      
|Item 1.    |  | Financial Statements                                                                                                  |  |     
|           |  |                                                                                                                      
|           |  | Consolidated Statements of Condition - Unaudited Three months ended September 30, 2009 and year ended June 30, 2009   |  | 3   
|           |  |                                                                                                                      
|           |  | Consolidated Statements of Earnings - Unaudited Three months ended September 30, 2009 and 2008                        |  | 4   
|           |  |                                                                                                                      
|           |  | Consolidated Statements of Changes in Stockholders Equity - Unaudited Three months ended September 30, 2009 and 2008 |  | 5   
|           |  |                                                                                                                      
|           |  | Consolidated Statements of Cash Flows - Unaudited Three months ended September 30, 2009 and 2008                      |  | 6   
|           |  |                                                                                                                      
|           |  | Notes to Consolidated Financial Statements - Unaudited                                                                |  | 7   
|           |  |                                                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 14  
|           |  |                                                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 27  
|           |  |                                                                                                                      
|Item 4.    |  | Controls and Procedures                                                                                               |  | 27  
|           |  |                                                                                                                      
|           |  | PART II. OTHER INFORMATION                                                                                            |  |     
|           |  |                                                                                                                      
|Item 1.    |  | Legal Proceedings                                                                                                     |  | 28  
|           |  |                                                                                                                      
|Item 1A.   |  | Risk Factors                                                                                                          |  | 28  
|           |  |                                                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                           |  | 28  
|           |  |                                                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                                                       |  | 29  
|           |  |                                                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 29  
|           |  |                                                                                                                      
|Item 5.    |  | Other Information                                                                                                     |  | 29  
|           |  |                                                                                                                      
|Item 6.    |  | Exhibits                                                                                                              |  | 29  
|           | 
|SIGNATURES |  |                                                                                                                      



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Condition

(Dollars in thousands)



|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                             |  | September 30,2009 |         |   | June 30,2009 |  
|                                                                                                                                                                                             |  | (Unaudited)       |         |   |              |  
|Assets                                                                                                                                                                                       |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|Cash and cash equivalents                                                                                                                                                                    |  | $                 | 11,033  |   |              | $ | 8,328   |  
|Interest-earning deposits                                                                                                                                                                    |  |                   | 21,197  |   |              |   | 20,814  |  
|Fed funds sold                                                                                                                                                                               |  |                   | 5,080   |   |              |   | 14,966  |  
|Investment securities classified as available-for-sale, net                                                                                                                                  |  |                   | 55,438  |   |              |   | 36,544  |  
|Federal Home Loan Bank stock                                                                                                                                                                 |  |                   | 4,735   |   |              |   | 4,735   |  
|Bank owned life insurance                                                                                                                                                                    |  |                   | 6,213   |   |              |   | 6,155   |  
|Loans receivable, net of allowance for loan losses of $4,595 at September 30, 2009 and $4,722 at June 30,
2009                                                                               |  |                   | 480,500 |   |              |   | 498,107 |  
|Loans held-for-sale                                                                                                                                                                          |  |                   | 944     |   |              |   | 881     |  
|Premises and equipment, net                                                                                                                                                                  |  |                   | 32,010  |   |              |   | 32,395  |  
|Foreclosed real estate, net                                                                                                                                                                  |  |                   | 2,318   |   |              |   | 3,328   |  
|Accrued interest receivable:                                                                                                                                                                 |  |                   |         |   |              |   |         |  
|Investments                                                                                                                                                                                  |  |                   | 365     |   |              |   | 241     |  
|Loans receivable                                                                                                                                                                             |  |                   | 1,900   |   |              |   | 2,017   |  
|Deferred tax asset                                                                                                                                                                           |  |                   | 6,816   |   |              |   | 7,337   |  
|Goodwill and other intangibles                                                                                                                                                               |  |                   | 24,664  |   |              |   | 24,811  |  
|Other assets                                                                                                                                                                                 |  |                   | 1,178   |   |              |   | 1,996   |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|Total assets                                                                                                                                                                                 |  | $                 | 654,391 |   |              | $ | 662,655 |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|Liabilities and Stockholders Equity                                                                                                                                                         |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|Deposits:                                                                                                                                                                                    |  |                   |         |   |              |   |         |  
|Noninterest-bearing                                                                                                                                                                          |  | $                 | 42,675  |   |              | $ | 48,913  |  
|Interest-bearing                                                                                                                                                                             |  |                   | 430,423 |   |              |   | 433,254 |  
|Repurchase agreements                                                                                                                                                                        |  |                   | 1,479   |   |              |   | 789     |  
|Federal Home Loan Bank advances                                                                                                                                                              |  |                   | 90,190  |   |              |   | 90,309  |  
|Subordinated debentures                                                                                                                                                                      |  |                   | 6,937   |   |              |   | 6,910   |  
|Other liabilities                                                                                                                                                                            |  |                   | 1,993   |   |              |   | 2,943   |  
|Accrued income taxes                                                                                                                                                                         |  |                   | 34      |   |              |   | 32      |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total liabilities                                                                                                                                                                            |  |                   | 573,731 |   |              |   | 583,150 |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|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 6,706,489 shares outstanding at
September 30, 2009 and 6,706,489 shares outstanding at June 30, 2009 |  |                   | 92      |   |              |   | 92      |  
|Additional paid-in capital                                                                                                                                                                   |  |                   | 79,348  |   |              |   | 79,394  |  
|Unearned ESOP shares                                                                                                                                                                         |  |                   | (3,997  | ) |              |   | (4,105  | )
|Unearned compensation                                                                                                                                                                        |  |                   | (1,104  | ) |              |   | (1,121  | )
|Accumulated other comprehensive income                                                                                                                                                       |  |                   | 742     |   |              |   | 150     |  
|Retained earnings                                                                                                                                                                            |  |                   | 36,624  |   |              |   | 36,140  |  
|Treasury stock, at cost; 2,475,883 shares at September 30, 2009 and 2,475,883 shares at June 30, 2009                                                                                        |  |                   | (31,045 | ) |              |   | (31,045 | )
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                                                   |  |                   | 80,660  |   |              |   | 79,505  |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|                                                                                                                                                                                             |  |                  
|Total liabilities and stockholders equity                                                                                                                                                   |  | $                 | 654,391 |   |              | $ | 662,655 |  
|                                                                                                                                                                                             |  |                   |         |   |              |   |         |  

See accompanying notes to financial statements.



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)



|                                                    |  |                                 |       |   |      |   |      
|--------------------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | -----
|                                                    |  | Three Months EndedSeptember 30,
|                                                    |  | 2009                            |       |   | 2008
|Interest income:                                    |  |                                 |       |   |      |   |      
|Interest on loans receivable                        |  | $                               | 7,129 |   |      | $ | 4,597
|Interest on investment securities                   |  |                                 | 745   |   |      |   | 29   
|Other interest                                      |  |                                 | 71    |   |      |   | 42   
|                                                    |  |                                 |       |   |      |   |      
|Total interest income                               |  |                                 | 7,945 |   |      |   | 4,668
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Interest expense:                                   |  |                                 |       |   |      |   |      
|Deposits                                            |  |                                 | 2,341 |   |      |   | 1,325
|Repurchase agreements                               |  |                                 | 2     |   |      |   |     
|Advances from FHLB                                  |  |                                 | 819   |   |      |   | 356  
|Subordinated debentures                             |  |                                 | 88    |   |      |   |     
|                                                    |  |                                 |       |   |      |   |      
|Total interest expense                              |  |                                 | 3,250 |   |      |   | 1,681
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Net interest income                                 |  |                                 | 4,695 |   |      |   | 2,987
|Provision for loan losses                           |  |                                 | 300   |   |      |   | 160  
|                                                    |  |                                 |       |   |      |   |      
|Net interest income after provision for loan losses |  |                                 | 4,395 |   |      |   | 2,827
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Noninterest income:                                 |  |                                 |       |   |      |   |      
|Mortgage origination fee income                     |  |                                 | 144   |   |      |   | 54   
|Service charges and fees                            |  |                                 | 446   |   |      |   | 245  
|Gain on sale of investments                         |  |                                 | 7     |   |      |   |     
|Gain (loss) on sale of foreclosed real estate, net  |  |                                 | (9    | ) |      |   |     
|BOLI increase in cash value                         |  |                                 | 58    |   |      |   | 60   
|Other                                               |  |                                 | 252   |   |      |   | 35   
|                                                    |  |                                 |       |   |      |   |      
|Total noninterest income                            |  |                                 | 898   |   |      |   | 394  
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Noninterest expense:                                |  |                                 |       |   |      |   |      
|Compensation and benefits                           |  |                                 | 1,988 |   |      |   | 1,318
|Occupancy expense                                   |  |                                 | 548   |   |      |   | 183  
|Equipment and data processing expense               |  |                                 | 616   |   |      |   | 358  
|DIF premiums                                        |  |                                 | 160   |   |      |   | 9    
|Advertising                                         |  |                                 | 66    |   |      |   | 3    
|Other                                               |  |                                 | 1,223 |   |      |   | 468  
|                                                    |  |                                 |       |   |      |   |      
|Total noninterest expense                           |  |                                 | 4,601 |   |      |   | 2,339
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Earnings before income taxes                        |  |                                 | 692   |   |      |   | 882  
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Income taxes:                                       |  |                                 |       |   |      |   |      
|Current                                             |  |                                 | 152   |   |      |   | 332  
|Deferred                                            |  |                                 | 56    |   |      |   | 17   
|                                                    |  |                                 |       |   |      |   |      
|Total income taxes                                  |  |                                 | 208   |   |      |   | 349  
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Net earnings                                        |  | $                               | 484   |   |      | $ | 533  
|                                                    |  |                                 |       |   |      |   |      
|                                                    |  |                                
|Net earnings per share, basic                       |  | $                               | 0.08  |   |      | $ | 0.09 
|                                                    |  |                                 |       |   |      |   |      
|Net earnings per share, diluted                     |  | $                               | 0.08  |   |      | $ | 0.09 
|                                                    |  |                                 |       |   |      |   |      

See accompanying notes to financial statements.



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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity

Three Months Ended September 30, 2009 and 2008

(Dollars in Thousands)



|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ----------- | -- | ------------------------ | - | ------ | ----------------------------- |  | - | -------------------- | - |  | ----------------------------------- | ------ | - | ---------------- | - | --- | ------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                                            |  | CommonStock |    | AdditionalPaid-inCapital |   |        | UnallocatedCommonStock inESOP |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |        |   | RetainedEarnings |   |     | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2009                                                                    |  | $           | 92 |                          | $ | 79,394 |                               |  | $ | (4,105               | ) |  | $                                   | (1,121 | ) |                  | $ | 150 |               |  | $ | 36,140                   |   |  | $ | (31,045 | ) |  | $ | 79,505 |  
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                            |  |             |    |                          |   |        |                               | 
|Comprehensive income:                                                                       |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                                |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   | 484                      |   |  |   |        |   |  |   | 484    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $367 |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   | 592 |               |  |   |                         |   |  |   |        |   |  |   | 592    |  
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                            |  |             |    |                          |   |        |                               | 
|Total comprehensive income                                                                  |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   | 1,076  |  
|                                                                                            |  |             |    |                          |   |        |                               | 
|Dividends                                                                                   |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   |       |  
|Shares committed to be released by the ESOP                                                 |  |             |   |                          |   | (46    | )                             |  |   | 108                  |   |  |                                     |       |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   | 62     |  
|Earned portion of stock grants                                                              |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     | 17     |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   | 17     |  
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2009                                                               |  | $           | 92 |                          | $ | 79,348 |                               |  | $ | (3,997               | ) |  | $                                   | (1,104 | ) |                  | $ | 742 |               |  | $ | 36,624                   |   |  | $ | (31,045 | ) |  | $ | 80,660 |  
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                            |  |             |    |                          |   |        |                               | 
|                                                                                            |  | CommonStock |    | AdditionalPaid-inCapital |   |        | UnallocatedCommonStock inESOP |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |        |   | RetainedEarnings |   |     | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2008                                                                    |  | $           | 84 |                          | $ | 72,959 |                               |  | $ | (4,537               | ) |  | $                                   | (1,659 | ) |                  | $ | (17 | )             |  | $ | 34,965                   |   |  | $ | (29,018 | ) |  | $ | 72,777 |  
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                            |  |             |    |                          |   |        |                               | 
|Comprehensive income:                                                                       |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                                |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   | 533                      |   |  |   |        |   |  |   | 533    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($7) |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   | (11 | )             |  |   |                         |   |  |   |        |   |  |   | (11    | )
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                            |  |             |    |                          |   |        |                               | 
|Total comprehensive income                                                                  |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   | 522    |  
|                                                                                            |  |             |    |                          |   |        |                               | 
|Dividends                                                                                   |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   | (372                     | ) |  |   |        |   |  |   | (372   | )
|Shares committed to be released by the ESOP                                                 |  |             |   |                          |   | (10    | )                             |  |   | 108                  |   |  |                                     |       |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   | 98     |  
|Stock options expensed                                                                      |  |             |   |                          |   | 65     |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   | 65     |  
|Earned portion of stock grants                                                              |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     | 125    |   |                  |   |    |               |  |   |                         |   |  |   |        |   |  |   | 125    |  
|Purchase of common stock (12,898 shares)                                                    |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |    |               |  |   |                         |   |  |   | (119    | ) |  |   | (119   | )
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at September 30, 2008                                                               |  | $           | 84 |                          | $ | 73,014 |                               |  | $ | (4,429               | ) |  | $                                   | (1,534 | ) |                  | $ | (28 | )             |  | $ | 35,126                   |   |  | $ | (29,137 | ) |  | $ | 73,096 |  
|                                                                                            |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |     |               |  |   |                          |   |  |   |         |   |  |   |        |  



5



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



|                                                                                               |  |                    |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Three Months Ended |        
|                                                                                               |  | September 30,      |        
|                                                                                               |  | 2009               |         |   | 2008 |  
|Cash flows from operating activities:                                                          |  |                    |         |   |      |   |         |  
|Net earnings                                                                                   |  | $                  | 484     |   |      | $ | 533     |  
|Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: |  |                    |         |   |      |   |         |  
|Allocated ESOP shares                                                                          |  |                    | 60      |   |      |   | 99      |  
|Depreciation and amortization expense                                                          |  |                    | 374     |   |      |   | 152     |  
|Amortization of premiums (discounts), net on investment securities                             |  |                    | (356    | ) |      |   | 3       |  
|Provision for loan losses                                                                      |  |                    | 300     |   |      |   | 160     |  
|FHLB stock dividends                                                                           |  |                    |        |   |      |   | (25     | )
|Amortization of deferred loan fees, net                                                        |  |                    | (69     | ) |      |   | (59     | )
|(Gain) on sale of investment securities                                                        |  |                    | (7      | ) |      |   |        |  
|Loss on sale of foreclosed real estate, net                                                    |  |                    | 9       |   |      |   |        |  
|Deferred tax expense                                                                           |  |                    | 56      |   |      |   | 17      |  
|Originations of mortgage loans held for sale                                                   |  |                    | (4,191  | ) |      |   | (3,375  | )
|Proceeds from sale of mortgage loans                                                           |  |                    | 4,128   |   |      |   | 3,551   |  
|Increase in cash value of life insurance                                                       |  |                    | (58     | ) |      |   | (60     | )
|Earned portion of MRP                                                                          |  |                    | 17      |   |      |   | 125     |  
|Stock options expensed                                                                         |  |                    |        |   |      |   | 65      |  
|Decrease (increase) in:                                                                        |  |                    |         |   |      |   |         |  
|Accrued interest receivable                                                                    |  |                    | (7      | ) |      |   | (21     | )
|Other assets                                                                                   |  |                    | 832     |   |      |   | (107    | )
|Increase (decrease) in other liabilities and accrued income taxes                              |  |                    | (546    | ) |      |   | 417     |  
|                                                                                               |  |                    |         |   |      |   |         |  
|Net cash provided by (used for) operating activities                                           |  |                    | 1,026   |   |      |   | 1,475   |  
|                                                                                               |  |                    |         |   |      |   |         |  
|                                                                                               |  |                   
|Cash flows used for investing activities:                                                      |  |                    |         |   |      |   |         |  
|Loan originations, net of principal collections                                                |  |                    | 17,233  |   |      |   | (4,177  | )
|Purchases of available-for-sale securities:                                                    |  |                    | (19,600 | ) |      |   |        |  
|Proceeds from maturities, calls and prepayments                                                |  |                    | 2,021   |   |      |   |        |  
|Purchase of premises and equipment                                                             |  |                    | (52     | ) |      |   | (90     | )
|Proceeds from sale of (additions to) foreclosed real estate, net                               |  |                    | 1,188   |   |      |   | (1      | )
|                                                                                               |  |                    |         |   |      |   |         |  
|Net cash provided by (used for) investing activities                                           |  |                    | 790     |   |      |   | (4,268  | )
|                                                                                               |  |                    |         |   |      |   |         |  
|                                                                                               |  |                   
|Cash flows from financing activities:                                                          |  |                    |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                            |  |                    | (8,874  | ) |      |   | (5,655  | )
|Net increase in repurchase agreements                                                          |  |                    | 690     |   |      |   |        |  
|Proceeds from advances from FHLB                                                               |  |                    |        |   |      |   | 16,500  |  
|Repayment of FHLB advances                                                                     |  |                    | (28     | ) |      |   | (11,500 | )
|Purchase of treasury stock                                                                     |  |                    |        |   |      |   | (119    | )
|Dividends paid                                                                                 |  |                    | (402    | ) |      |   | (372    | )
|                                                                                               |  |                    |         |   |      |   |         |  
|Net cash provided by (used for) financing activities                                           |  |                    | (8,614  | ) |      |   | (1,146  | )
|                                                                                               |  |                    |         |   |      |   |         |  
|                                                                                               |  |                   
|Net increase (decrease) in cash, cash equivalents and interest-earning deposits                |  |                    | (6,798  | ) |      |   | (3,939  | )
|Cash, cash equivalents and interest-earning deposits at beginning of period                    |  |                    | 44,108  |   |      |   | 17,616  |  
|                                                                                               |  |                    |         |   |      |   |         |  
|                                                                                               |  |                   
|Cash, cash equivalents and interest-earning deposits at end of period                          |  | $                  | 37,310  |   |      | $ | 13,677  |  
|                                                                                               |  |                    |         |   |      |   |         |  
|                                                                                               |  |                   
|Supplemental disclosures of cash flow information:                                             |  |                    |         |   |      |   |         |  
|Cash paid during period for:                                                                   |  |                    |         |   |      |   |         |  
|Interest on deposits                                                                           |  | $                  | 2,392   |   |      | $ | 1,078   |  
|Interest on FHLB advances                                                                      |  | $                  | 819     |   |      | $ | 356     |  
|Interest on other borrowings                                                                   |  | $                  | 90      |   |      | $ | 0       |  
|Income taxes                                                                                   |  | $                  | 50      |   |      | $ | 30      |  
|Real estate acquired in settlement of loans                                                    |  | $                  | 245     |   |      | $ | 12      |  

See accompanying notes to financial statements.



6



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##### Table of Contents

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 September 30, 2009 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, 2009, which was filed with the Securities and Exchange Commission on September 14, 2009. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted. For the quarter ended September 30, 2009, the
Company adopted FASB ASC Topic 855 for Subsequent Events which did not significantly change the subsequent events the Company reports either through recognition or disclosure. This guidance requires to Company to review for subsequent events through
the date the interim or annual consolidated financial statements are issued. Management has evaluated for possible subsequent events through November 6, 2009 and concluded there are no subsequent events to report.

(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%.



7



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##### Table of Contents

Notes To Consolidated Financial Statements(Continued)



Under the banking laws of the State of Tennessee, a Tennessee chartered savings bank may
not declare dividends in any calendar year that exceeds the total of its net income of 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 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 September 30, 2009, stock options to purchase 577,693 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 SharesOutstanding for theThree Months EndedSeptember 30,
|                                                                                                                                            |  | 2009                                                                      |  | 2008     
|                                                                                                                                            |  |                                                                          
|Weighted average number of common shares used in computing basic earnings per common share                                                  |  | 6,216,515                                                                 |  | 5,638,175
|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 |  | 6,216,515                                                                 |  | 5,638,175
|                                                                                                                                            |  |                                                                           |  |          

(6) Accounting by Creditors for Impairment of a Loan and Allowance for Loan Losses

Impairment of loans having a recorded investment of $17.2 million at September 30, 2009 and an average investment of $9.3 million
during the three month period ended September 30, 2009 has been recognized. The valuation allowance related to impaired loans was $1.7 million at September 30, 2009. Total nonaccrual loans at September 30, 2009 were approximately $4.3
million. For the three months ended September 30, 2009, gross income which would have been recognized had nonaccrual loans been current in accordance with their original terms amounted to approximately $161,000. Interest income from non-accrual
loans included in the Companys interest income amounted to approximately $53,000 for the three months ended September 30, 2009.



8



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##### Table of Contents

Notes To Consolidated Financial Statements(Continued)



The following table summarizes the activity in the allowance for loan losses for the
three months ended September 30, 2009:



|                              |  |                                                 |       |  
|----------------------------- |  | ----------------------------------------------- | ----- | -
|                              |  | Allowance for Loan Losses(Dollars in thousands) |      
|                              | 
|Balance at June 30, 2009      |  | $                                               | 4,722 |  
|Provision for loan losses     |  |                                                 | 300   |  
|Charge-offs                   |  |                                                 | 25    |  
|Recoveries                    |  |                                                 | (452  | )
|                              |  |                                                 |       |  
|Net (charge-offs)/recoveries  |  |                                                 | (427  | )
|                              |  |                                                 |       |  
|Balance at September 30, 2009 |  | $                                               | 4,595 |  
|                              |  |                                                 |       |  

(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.

At September 30, 2009, we had approximately $34.1 million in commitments to extend credit, consisting of
commitments to fund real estate loans. In addition to commitments to originate loans, we had $7.2 million in unused letters of credit and approximately $36.3 million in unused lines of credit.

(8) Dividend Declaration

On October 29, 2009 the Board of Directors of the Company approved a quarterly dividend of $0.03 per share to stockholders of record as of November 9, 2009 and payable on November 23, 2009.

(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.



9



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##### Table of Contents

Notes To Consolidated Financial Statements(Continued)



In connection with the Companys previously announced 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 September 30, 2009.



|                                          |  |                                      |  |                                |      
|----------------------------------------- |  | ------------------------------------ |  | ------------------------------ | -----
|                                          |  | Three Months EndedSeptember 30,
2009
|                                          |  | Shares                               |  | Weighted-averageexercise price
|                                          |  |                                     
|Outstanding at beginning of period        |  | 577,693                              |  | $                              | 12.78
|Granted during the three-month period     |  |                                     |  |                                |      
|Options forfeited                         |  |                                     |  |                                |      
|Options exercised                         |  |                                     |  |                                |      
|                                          |  |                                      |  |                                |      
|Outstanding at September 30, 2009         |  | 577,693                              |  | $                              | 12.78
|                                          |  |                                     
|Options exercisable at September 30, 2009 |  | 577,693                              |  | $                              | 12.78

The following information applies to options outstanding at September 30, 2009:



|                                                |  |   |               
|----------------------------------------------- |  | - | --------------
|Number outstanding                              |  |   | 577,693       
|Range of exercise prices                        |  | $ | 10.00 - $13.69
|Weighted-average exercise price                 |  | $ | 12.78         
|Weighted-average remaining contractual life     |  |   | 3.61 years    
|Number of options remaining for future issuance |  |   | 305,706       

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.

(10) 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.



10



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##### Table of Contents

Notes To Consolidated Financial Statements(Continued)



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.

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 securities include mortgage-backed securities issued by government-sponsored entities and other debt securities.



11



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##### Table of Contents

Notes To Consolidated Financial Statements(Continued)



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 September 30, 2009, 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.

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:



|                              |  |                    |  |         |        |         |       |                                                        |        |                                         |   |       
|----------------------------- |  | ------------------ |  | ------- | ------ | ------- | ----- | ------------------------------------------------------ | ------ | --------------------------------------- | - | ------
|                              |  | September 30, 2009
|Description                   |  | Level 1            |  | Level 2 |        | Level 3 |       | Total CarryingAmount inStatement ofFinancial Condition |        | Assets/LiabilitiesMeasured
atFair Value
|                              |  |                    |  |         |       
|Securities available for sale |  |                   |  | $       | 49,142 |         | 6,296 |                                                        | 55,438 |                                         | $ | 55,438



12



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##### Table of Contents

Notes To Consolidated Financial Statements(Continued)



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.



|               |  |                    |  |         |  |         |  |                                                        |  |                                         |       
|-------------- |  | ------------------ |  | ------- |  | ------- |  | ------------------------------------------------------ |  | --------------------------------------- | ------
|               |  | September 30, 2009
|Description    |  | Level 1            |  | Level 2 |  | Level 3 |  | Total CarryingAmount inStatement ofFinancial Condition |  | Assets/LiabilitiesMeasured
atFair Value
|               |  |                    |  |         | 
|Impaired loans |  |                   |  |        |  | 15,583  |  | 15,583                                                 |  | $                                       | 15,583

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



|                                                                 |  |                    |         |               |   |                |  |           |         |  |   |        
|---------------------------------------------------------------- |  | ------------------ | ------- | ------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                                                 |  | September 30, 2009 |         | June 30, 2009
|                                                                 |  | CarryingAmount     |         | FairValue     |   | CarryingAmount |  | FairValue
|                                                                 |  |                    |         |              
|Financial assets:                                                |  |                    |         |               |   |                |  |           |         |  |   |        
|Cash and due from banks and interest-earning deposits with banks |  | $                  | 37,310  |               | $ | 37,310         |  | $         | 44,108  |  | $ | 44,108 
|Available-for-sale securities                                    |  |                    | 55,438  |               |   | 55,438         |  |           | 36,544  |  |   | 36,544 
|Federal Home Loan Bank stock                                     |  |                    | 4,735   |               |   | 4,735          |  |           | 4,735   |  |   | 4,735  
|Loans receivable                                                 |  |                    | 485,579 |               |   | 482,470        |  |           | 503,331 |  |   | 501,841
|Accrued interest receivable                                      |  |                    | 2,265   |               |   | 2,265          |  |           | 2,258   |  |   | 2,258  
|Loans held-for-sale                                              |  |                    | 944     |               |   | 944            |  |           | 881     |  |   | 881    
|                                                                 |  |                    |         |              
|Financial liabilities:                                           |  |                    |         |               |   |                |  |           |         |  |   |        
|Deposits                                                         |  |                    | 473,098 |               |   | 463,826        |  |           | 482,167 |  |   | 479,770
|Borrowed funds                                                   |  |                    | 91,669  |               |   | 94,083         |  |           | 91,098  |  |   | 93,486 
|                                                                 |  |                    |         |              
|Off-balance sheet assets (liabilities):                          |  |                    |         |               |   |                |  |           |         |  |   |        
|Commitments to extend credit                                     |  |                    | 34,139  |               |   |                |  |           | 13,056  |  |   |        
|Unused letters of credit                                         |  |                    | 7,179   |               |   |                |  |           | 6,134   |  |   |        
|Unused lines of credit                                           |  |                    | 36,279  |               |   |                |  |           | 37,123  |  |   |        

(11) Business Combination

On October 31, 2008, the Company completed its previously announced acquisition of State of Franklin. State of Franklin was
headquartered in Johnson City, Tennessee, which is approximately 70 miles northeast of the Companys headquarters. State of Franklin operated six offices in Johnson City and Kingsport, Tennessee with a branch under construction in Bristol,
Tennessee. The primary reason for the acquisition of State



13



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##### Table of Contents

Notes To Consolidated Financial Statements(Continued)



of Franklin was to expand the Companys presence into upper East Tennessee. Under the terms of the merger agreement, the Company issued a combination of shares of Company common stock and
cash for the outstanding common shares of State of Franklin. State of Franklin shareholders were given the option of receiving $10.00 in cash or 1.1287 shares of Company common stock for each share of State of Franklin common stock, or a combination
of stock and cash for each share of State of Franklin common stock, provided that 60% of the aggregate shares of State of Franklin common stock would be exchanged for Company common stock and subject to the allocation and proration formula set forth
in the merger agreement. However, all State of Franklin common stockholders residing outside of Tennessee were only eligible to receive cash consideration. Based on this structure, the aggregate merger consideration totaled approximately $4.3
million in cash and 736,000 shares of Company common stock. The Company also incurred $557,000 in merger costs that were capitalized into goodwill. The acquisition was accounted for using the purchase method of accounting in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations.

(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%.



|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, 2009, which was filed with the Securities and Exchange Commission on September 14, 2009.



14



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##### Table of Contents

General

Jefferson Bancshares, Inc. (also referred to as the Company or Jefferson Bancshares) is the holding company for Jefferson Federal Bank (the Bank or Jefferson
Federal).

The Company has no significant assets, other than all of the outstanding shares of the Bank, and no significant liabilities.
Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report,
including the consolidated financial statements and related financial data, relates primarily to the Bank.

Jefferson Federal is a community
oriented financial institution offering traditional financial services to its local communities. The Bank is engaged primarily in the business of attracting deposits from the general public and using such funds to originate loans secured by first
mortgages on owner-occupied, one-to four- family residential properties, as well as originate commercial real estate and multi-family mortgage loans, construction loans, consumer loans, commercial non-real estate loans and make other investments
permitted by applicable laws and regulations.

The Banks savings accounts are insured up to the applicable legal limits by the Federal
Deposit Insurance Corporation (FDIC) through the Deposit Insurance Fund. Jefferson Federal is a member of the Federal Home Loan Bank (FHLB) System.

Private Securities Litigation Reform Act Safe Harbor Statement

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; but rather, are statements based on Jefferson
Bancshares current expectations regarding its business strategies and their intended results and the Companys future performance. Forward-looking statements are preceded by terms such as expects, believes,
anticipates, intends and similar expressions.

Managements ability to predict results or the effect of future
plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in
accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Companys loan or investment portfolios. Additional factors
that may affect our results are discussed in our Annual Report on Form 10-K for the year ended June 30, 2009 under Item 1A. Risk Factors. These factors should be considered in evaluating the forward-looking statements and undue
reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements.



15



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##### Table of Contents

Results of Operations for the Three Months Ended September 30, 2009 and 2008

Net Income

Net
income was $484,000, or $0.08 per diluted share, for the quarter ended September 30, 2009 compared to $533,000, or $0.09 per diluted share, for the corresponding quarter in 2008.



|                                      |  |                        |      |   |      |   |      |  
|------------------------------------- |  | ---------------------- | ---- | - | ---- | - | ---- | -
|                                      |  | Three Months Ended     |     
|                                      |  | September, 30          |     
|                                      |  | 2009                   |      |   | 2008 |  
|                                      |  | (Dollars in thousands, |     
|                                      |  | except per share data) |     
|Net earnings                          |  | $                      | 484  |   |      | $ | 533  |  
|Net earnings per share, basic         |  | $                      | 0.08 |   |      | $ | 0.09 |  
|Net earnings per share, diluted       |  | $                      | 0.08 |   |      | $ | 0.09 |  
|Return on average assets (annualized) |  |                        | 0.29 | % |      |   | 0.65 | %
|Return on average equity (annualized) |  |                        | 2.39 | % |      |   | 2.89 | %

Net Interest Income

Net interest income before loan loss provision increased $1.7 million, or 57.2%, to $4.7 million for the quarter ended September 30, 2009 from the
corresponding period in 2008. The interest rate spread and net interest margin for the quarter ended September 30, 2009 were 3.05% and 3.24%, respectively, compared to 3.37% and 3.95%, respectively, for the same period in 2008.

The following table summarizes changes in interest income and expense for the three month periods ended September 30, 2009 and 2008:



|                                |  |                                |       |      |   |          |  |   |          |   |  |        |   
|------------------------------- |  | ------------------------------ | ----- | ---- | - | -------- |  | - | -------- | - |  | ------ | --
|                                |  | Three MonthsEndedSeptember 30, |       |      |   |          |  |  
|                                |  |                               
|                                |  |                               
|                                |  | 2009                           |       | 2008 |   | $ Change |  |   | % Change |  
|                                |  | (Dollars in thousands)         |       |      |   |          |  |  
|Interest income:                |  |                                |       |      |   |          |  |   |          |   |  |        |   
|Loans                           |  | $                              | 7,129 |      | $ | 4,597    |  | $ | 2,532    |   |  | 55.1   | % 
|Investment securities           |  |                                | 745   |      |   | 29       |  |   | 716      |   |  | 2469.0 | % 
|Interest-earning deposits       |  |                                | 12    |      |   | 17       |  |   | (5       | ) |  | (29.4  | )%
|FHLB stock                      |  |                                | 59    |      |   | 25       |  |   | 34       |   |  | 136.0  | % 
|                                |  |                                |       |      |   |          |  |   |          |   |  |        |   
|Total interest income           |  |                                | 7,945 |      |   | 4,668    |  |   | 3,277    |   |  | 70.2   | % 
|                                |  |                                |       |      |   |          |  |   |          |   |  |        |   
|                                |  |                                |       |     
|Interest expense:               |  |                                |       |      |   |          |  |   |          |   |  |        |   
|Deposits                        |  |                                | 2,341 |      |   | 1,325    |  |   | 1,016    |   |  | 76.7   | % 
|Repurchase Agreements           |  |                                | 2     |      |   |         |  |   | 2        |   |  | NM     |   
|Borrowings                      |  |                                | 819   |      |   | 356      |  |   | 463      |   |  | 130.1  | % 
|Subordinated Notes & Debentures |  |                                | 88    |      |   |         |  |   | 88       |   |  | NM     |   
|                                |  |                                |       |      |   |          |  |   |          |   |  |        |   
|Total interest expense          |  |                                | 3,250 |      |   | 1,681    |  |   | 1,569    |   |  | 93.3   | % 
|                                |  |                                |       |      |   |          |  |   |          |   |  |        |   
|                                |  |                                |       |     
|Net interest income             |  | $                              | 4,695 |      | $ | 2,987    |  | $ | 1,708    |   |  | 57.2   | % 
|                                |  |                                |       |      |   |          |  |   |          |   |  |        |   



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##### Table of Contents

The following table summarizes average balances and average yields and costs for the three months ended
September 30, 2009 and September 30, 2008:



|                          |  |                                  |         |        |      |   |         |   |         |  |      |  
|------------------------- |  | -------------------------------- | ------- | ------ | ---- | - | ------- | - | ------- |  | ---- | -
|                          |  | Three Months Ended September 30, |        
|                          |  | 2009                             |         |        | 2008 |  
|                          |  | Average                          |         | Yield/ |      |   | Average |   | Yield/  | 
|                          |  | Balance                          |         | Cost   |      |   | Balance |   | Cost    | 
|                          |  | (Dollars in thousands)           |        
|Loans                     |  | $                                | 489,673 |        | 5.78 | % |         | $ | 287,869 |  | 6.34 | %
|Investment securities     |  |                                  | 42,826  |        | 7.07 | % |         |   | 3,467   |  | 3.32 | %
|Interest-earning deposits |  |                                  | 39,884  |        | 0.12 | % |         |   | 7,707   |  | 0.88 | %
|FHLB stock                |  |                                  | 4,735   |        | 4.94 | % |         |   | 1,868   |  | 5.31 | %
|Deposits                  |  |                                  | 432,946 |        | 2.15 | % |         |   | 202,947 |  | 2.59 | %
|Total borrowings          |  |                                  | 98,302  |        | 3.67 | % |         |   | 35,057  |  | 4.03 | %

The following table sets forth the effects of changing rates and volumes on our net interest income.
The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to
volume.



|                                                                  |  |                           |       |                |   |      |     |  |   |      
|----------------------------------------------------------------- |  | ------------------------- | ----- | -------------- | - | ---- | --- |  | - | -----
|                                                                  |  | Three Months             
|                                                                  |  | Ended September 30,      
|                                                                  |  | 2009 Compared to 2008    
|                                                                  |  | Increase (Decrease)Due To |       |                |  
|                                                                  | 
|                                                                  |  | Volume                    |       | Rate           |   |      | Net
|                                                                  |  |                           |       | (In thousands) |   |      |    
|Interest income:                                                  |  |                           |       |                |   |      |     |  |   |      
|Loans receivable                                                  |  | $                         | 2,897 |                | $ | (365 | )   |  | $ | 2,532
|Investment securities                                             |  |                           | 710   |                |   | 6    |     |  |   | 716  
|Daily interest-earning deposits and other interest-earning assets |  |                           | 29    |                |   | (0   | )   |  |   | 29   
|                                                                  |  |                           |       |                |   |      |     |  |   |      
|Total interest-earning assets                                     |  |                           | 3,636 |                |   | (359 | )   |  |   | 3,277
|                                                                  |  |                           |       |                |   |      |     |  |   |      
|                                                                  |  |                           |      
|Interest expense:                                                 |  |                           |       |                |   |      |     |  |   |      
|Deposits                                                          |  |                           | 1,198 |                |   | (182 | )   |  |   | 1,016
|Total borrowings                                                  |  |                           | 587   |                |   | (34  | )   |  |   | 553  
|                                                                  |  |                           |       |                |   |      |     |  |   |      
|Total interest-bearing liabilities                                |  |                           | 1,784 |                |   | (215 | )   |  |   | 1,569
|                                                                  |  |                           |       |                |   |      |     |  |   |      
|Net change in interest income                                     |  | $                         | 1,852 |                | $ | (144 | )   |  | $ | 1,708
|                                                                  |  |                           |       |                |   |      |     |  |   |      

Total interest income increased $3.3 million, or 70.2%, to $7.9 million for the three months ended
September 30, 2009 compared to the corresponding period in 2008 primarily as a result of an increase in average interest-earning assets arising from the State of Franklin acquisition. Average interest-earning assets increased $276.2 million, or
91.8%, to $577.1 million for the



17



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##### Table of Contents

quarter ended September 30, 2009. The increase in average earning assets for the three month period was primarily the result of increases in average outstanding loans. The average yield
on earning assets declined by 70 basis points to 5.47% for the quarter ended September 30, 2009 compared to the corresponding period in 2008. The decline in the average yield on earning assets was primarily the result of lower yields on
prime-based consumer and commercial loans. In addition, the increase in nonaccrual loans during the quarter ended September 30, 2009 has negatively impacted interest income on loans and the net interest margin.

Total interest expense increased $1.6 million, or 93.3%, to $3.3 million for the quarter ended September 30, 2009. The average balance of
interest-bearing liabilities increased $293.2 million, or 123.2%, to $531.2 million, while the rate paid on interest-bearing liabilities declined 38 basis points to 2.43% for the quarter ended September 30, 2009. The Company experienced an
increase of $230.0 million, or 113.3%, in average interest-bearing deposits primarily due to deposits assumed in connection with the State of Franklin acquisition. The average rate paid on deposits decreased 45 basis points to 2.15% for the quarter
ended September 30, 2009. The Company benefited from declining market interest rates as well as a shift in the mix of deposits towards more transaction accounts. Average FHLB borrowings increased $55.2 million to $90.3 million due to the
assumption of borrowings related to the State of Franklin acquisition, while the average rate paid on borrowings decreased 43 basis points to 3.60%.

Provision for Loan Losses

The provision for loan losses for the quarter ended
September 30, 2009 amounted to $300,000 compared to $160,000 for the comparable period in 2008. Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in
the nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors. The increase in the provision for loan losses reflects managements evaluation of credit
quality and current economic conditions. Nonperforming loans totaled $7.0 million at September 30, 2009 compared to $6.0 million at June 30, 2009 and $725,000 at September 30, 2008. The increase in nonperforming loans compared to the
2008 period is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well as the current economic environment.

Noninterest Income

Noninterest income increased $504,000, or 127.9%, to $898,000
for the quarter ended September 30, 2009 compared to $394,000 for the corresponding period in 2008. Service charges and fee income increased $201,000 to $446,000 for the quarter ended September 30, 2009 due primarily to additional fee
income generated following the acquisition of State of Franklin. Mortgage origination fee income increased $90,000, or 166.7%, to $144,000 for the quarter ended September 30, 2009 due to a higher volume of loan originations related to
refinancing.



18



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##### Table of Contents

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar
and percent changes for the three months ended September 30, 2009 compared to the same period in 2008.



|                                                   |  |                                 |     |   |      |   |        |  |   |        |   |  |       |   
|-------------------------------------------------- |  | ------------------------------- | --- | - | ---- | - | ------ |  | - | ------ | - |  | ----- | --
|                                                   |  | Three Months EndedSeptember 30, |     | $ |      |   | %      | 
|                                                   |  | 2009                            |     |   | 2008 |   | Change |  |   | Change |  
|                                                   |  | (Dollars in thousands)          |     |   |      |   |        | 
|                                                   |  |                                 |     |  
|Noninterest income:                                |  |                                 |     |   |      |   |        |  |   |        |   |  |       |   
|Mortgage origination fee income                    |  | $                               | 144 |   |      | $ | 54     |  | $ | 90     |   |  | 166.7 | % 
|Service charges and fees                           |  |                                 | 446 |   |      |   | 245    |  |   | 201    |   |  | 82.0  | % 
|Gain on sale of investment securities              |  |                                 | 7   |   |      |   |       |  |   | 7      |   |  | NM    |   
|Gain (loss) on sale of foreclosed real estate, net |  |                                 | (9  | ) |      |   |       |  |   | (9     | ) |  | NM    |   
|BOLI increase in cash value                        |  |                                 | 58  |   |      |   | 60     |  |   | (2     | ) |  | (3.3  | )%
|Other                                              |  |                                 | 252 |   |      |   | 35     |  |   | 217    |   |  | 620.0 | % 
|                                                   |  |                                 |     |   |      |   |        |  |   |        |   |  |       |   
|Total noninterest income                           |  | $                               | 898 |   |      | $ | 394    |  | $ | 504    |   |  | 127.9 | % 
|                                                   |  |                                 |     |   |      |   |        |  |   |        |   |  |       |   

Noninterest Expense

Noninterest expense increased $2.3 million, or 96.7%, to $4.6 million for the quarter ended September 30, 2009 compared to the corresponding 2008
period. The increase in noninterest expense includes the costs incurred in operating six additional full-service offices obtained in connection with the acquisition of State of Franklin. Deposit insurance premiums increased $151,000, to
$160,000, due to the increase in the balance of insurable accounts combined with higher deposit insurance premiums. Noninterest expense includes the amortization of the core deposit intangible (CDI) resulting from the acquisition of
State of Franklin. The CDI totaled $3.4 million at the acquisition date and is being amortized over a 10 year period on an accelerated basis. The expense incurred for CDI amortization for the three month period ended September 30, 2009 was
$147,000 compared to no CDI amortization expense for the same period in 2008.

The following table summarizes the dollar amounts for each
category of noninterest expense, and the dollar and percent changes for the three months ended September 30, 2009 compared to the same period in 2008.



|                                      |  |                                 |       |      |   |        |  |        |       |  |        |  
|------------------------------------- |  | ------------------------------- | ----- | ---- | - | ------ |  | ------ | ----- |  | ------ | -
|                                      |  | Three Months EndedSeptember 30, |       | $    |   | %      | 
|                                      |  | 2009                            |       | 2008 |   | Change |  | Change |      
|                                      |  | (Dollars in thousands)          |       |      |   |        | 
|                                      |  |                                 |      
|Noninterest expense:                  |  |                                 |       |      |   |        |  |        |      
|Compensation and benefits             |  | $                               | 1,988 |      | $ | 1,318  |  | $      | 670   |  | 50.8   | %
|Occupancy expense                     |  |                                 | 548   |      |   | 183    |  |        | 365   |  | 199.5  | %
|Equipment and data processing expense |  |                                 | 616   |      |   | 358    |  |        | 258   |  | 72.1   | %
|Deposit insurance premiums            |  |                                 | 160   |      |   | 9      |  |        | 151   |  | 1677.8 | %
|Advertising                           |  |                                 | 66    |      |   | 3      |  |        | 63    |  | 2100.0 | %
|Other                                 |  |                                 | 1,223 |      |   | 468    |  |        | 755   |  | 161.3  | %
|                                      |  |                                 |       |      |   |        |  |        |       |  |        |  
|Total noninterest expense             |  | $                               | 4,601 |      | $ | 2,339  |  | $      | 2,262 |  | 96.7   | %
|                                      |  |                                 |       |      |   |        |  |        |       |  |        |  



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##### Table of Contents

Income Taxes

Income tax expense for the quarter ended September 30, 2009 was $208,000 compared to $349,000 for the same period in 2008 due to lower taxable income.

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits were $37.3
million at September 30, 2009 compared to $44.1 million at June 30, 2009. We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily liquidity needs.

Investments

Investment securities increased to $55.4 million at September 30, 2009 compared to $36.5 million at June 30, 2009 due primarily to purchases of government agency securities. Investments classified as available-for-sale are carried
at fair market value and reflect an unrealized gain of $1.2 million, or $742,000 net of taxes.

The following table sets forth the carrying
values of our investment securities portfolio at the dates indicated. All of our investment securities are classified as available-for-sale.

At September 30, 2009



|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|----------------------------------- |  | ---------------------- | ------ | - | --------------- | - | ---------------- |  | - | --------- | - |  | - | ------
|                                    |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                                    |  | (Dollars in thousands)
|                                    |  |                        |        |  
|Securities available-for-sale       |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Debt securities:                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Federal agency                      |  | $                      | 22,850 |   |                 | $ | 12               |  | $ | (47       | ) |  | $ | 22,815
|Mortgage-backed                     |  |                        | 22,210 |   |                 |   | 1,700            |  |   | (937      | ) |  |   | 22,973
|Municipals                          |  |                        | 4,535  |   |                 |   | 172              |  |   |          |   |  |   | 4,707 
|Other Securities                    |  |                        | 4,641  |   |                 |   | 1,129            |  |   | (827      | ) |  |   | 4,943 
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Total securities available-for-sale |  | $                      | 54,236 |   |                 | $ | 3,013            |  | $ | (1,811    | ) |  | $ | 55,438
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|                                    |  |                        |        |  
|Weighted-average rate               |  |                        | 6.70   | % |                 |   |                  |  |   |           |   |  |   |       
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       

At June 30, 2009



|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|----------------------------------- |  | ---------------------- | ------ | - | --------------- | - | ---------------- |  | - | --------- | - |  | - | ------
|                                    |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                                    |  | (Dollars in thousands)
|                                    |  |                        |        |  
|Securities available-for-sale       |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Debt securities:                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Federal agency                      |  | $                      | 4,206  |   |                 | $ | 6                |  | $ | (65       | ) |  | $ | 4,147 
|Mortgage-backed                     |  |                        | 23,088 |   |                 |   | 1,395            |  |   | (962      | ) |  |   | 23,521
|Municipals                          |  |                        | 4,523  |   |                 |   | 63               |  |   | (19       | ) |  |   | 4,567 
|Other Securities                    |  |                        | 4,483  |   |                 |   | 631              |  |   | (805      | ) |  |   | 4,309 
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Total securities available-for-sale |  | $                      | 36,300 |   |                 | $ | 2,095            |  | $ | (1,851    | ) |  | $ | 36,544
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|                                    |  |                        |        |  
|Weighted-average rate               |  |                        | 7.65   | % |                 |   |                  |  |   |           |   |  |   |       
|                                    |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       



20



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##### Table of Contents

Loans

Net loans decreased $17.6 million to $480.5 million at September 30, 2009 compared to $498.1 million at June 30, 2009 due primarily to lower loan demand combined with both residential and
commercial loan payoffs during the quarter.

Loans receivable, net, are summarized as follows:



|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|------------------------------ |  | ---------------------- | ------- | - | ------------------- | ----- | - | ------ | - | ------- | ------------------- |  | ----- | ------- |  | - | ------- | - |  | ----- | --
|                               |  | AtSeptember 30,2009    |         |   | AtJune 30,2009      |       |   |        |   |         |                     | 
|                               |  | Amount                 |         |   | Percentof Portfolio |       |   | Amount |   |         | Percentof Portfolio |  |       | $Change |  |   | %Change |  
|                               |  | (Dollars in thousands) |        
|                               |  |                        |         |   |                     |      
|Real estate loans:             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|Residential one-to four-family |  | $                      | 137,007 |   |                     | 28.2  | % |        | $ | 144,659 |                     |  | 28.7  | %       |  | $ | (7,652  | ) |  | (5.3  | )%
|Home equity line of credit     |  |                        | 22,983  |   |                     | 4.7   | % |        |   | 22,467  |                     |  | 4.5   | %       |  |   | 516     |   |  | 2.3   | % 
|Commercial                     |  |                        | 154,820 |   |                     | 31.9  | % |        |   | 159,608 |                     |  | 31.7  | %       |  |   | (4,788  | ) |  | (3.0  | )%
|Multi-family                   |  |                        | 6,446   |   |                     | 1.3   | % |        |   | 6,584   |                     |  | 1.3   | %       |  |   | (138    | ) |  | (2.1  | )%
|Construction                   |  |                        | 38,661  |   |                     | 8.0   | % |        |   | 40,831  |                     |  | 8.1   | %       |  |   | (2,170  | ) |  | (5.3  | )%
|Land                           |  |                        | 45,529  |   |                     | 9.4   | % |        |   | 46,987  |                     |  | 9.3   | %       |  |   | (1,458  | ) |  | (3.1  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Total real estate loans        |  |                        | 405,446 |   |                     | 83.5  | % |        |   | 421,136 |                     |  | 83.7  | %       |  |   | (15,690 | ) |  | (3.7  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Commercial business loans      |  |                        | 71,884  |   |                     | 14.8  | % |        |   | 73,467  |                     |  | 14.6  | %       |  |   | (1,583  | ) |  | (2.2  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Consumer loans:                |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|Automobile loans               |  |                        | 2,504   |   |                     | 0.5   | % |        |   | 2,754   |                     |  | 0.5   | %       |  |   | (250    | ) |  | (9.1  | )%
|Mobile home loans              |  |                        | 33      |   |                     | 0.0   | % |        |   | 43      |                     |  | 0.0   | %       |  |   | (10     | ) |  | (23.3 | )%
|Loans secured by deposits      |  |                        | 1,664   |   |                     | 0.3   | % |        |   | 1,322   |                     |  | 0.3   | %       |  |   | 342     |   |  | 25.9  | % 
|Other consumer loans           |  |                        | 4,048   |   |                     | 0.8   | % |        |   | 4,609   |                     |  | 0.9   | %       |  |   | (561    | ) |  | (12.2 | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Total consumer loans           |  |                        | 8,249   |   |                     | 1.7   | % |        |   | 8,728   |                     |  | 1.7   | %       |  |   | (479    | ) |  | (5.5  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Total gross loans              |  |                        | 485,579 |   |                     | 100.0 | % |        |   | 503,331 |                     |  | 100.0 | %       |  |   | (17,752 | ) |  | (3.5  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Less:                          |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|Deferred loan fees, net        |  |                        | (484    | ) |                     |       |   |        |   | (502    | )                   |  |       |         |  |   | 18      |   |  | (3.6  | )%
|Allowance for losses           |  |                        | (4,595  | ) |                     |       |   |        |   | (4,722  | )                   |  |       |         |  |   | 127     |   |  | (2.7  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   
|Loans receivable, net          |  | $                      | 480,500 |   |                     |       |   |        | $ | 498,107 |                     |  |       |         |  | $ | (17,607 | ) |  | (3.5  | )%
|                               |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |         |  |   |         |   |  |       |   



21



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Loan Loss Allowance

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish reserves against
losses on loans on a monthly basis. When additional reserves are necessary, a provision for loan losses is charged to earnings.

In connection
with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. The methodology utilizes a loan grading system which segments loans with similar risk characteristics.
Management performs a monthly assessment of the allowance for loan losses based on the nature and volume of the loan portfolio, the amount of impaired and classified loans and historical loan loss experience. In addition, management considers other
qualitative factors, including delinquency trends, economic conditions and loan considerations.

The FDIC and the Tennessee Department of
Financial Institutions, as an integral part of their examination process, periodically reviews our allowance for loan losses. The FDIC and/or the Tennessee Department of Financial Institutions may require us to make additional provisions for loan
losses based on judgments different from ours.

The allowance for loan losses was $4.6 million at September 30, 2009 compared to $4.7
million at June 30, 2009. Our allowance for loan losses represented 0.95% of total loans and 66.07% of nonperforming loans at September 30, 2009 compared to 0.94% of total loans and 78.3% of nonperforming loans at June 30, 2009.



|                                                                           |  |                                 |       |   |      |   |       |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                           |  | Three Months EndedSeptember 30, |      
|                                                                           |  | 2009                            |       |   | 2008 |  
|                                                                           |  | (Dollars in thousands)          |      
|                                                                           |  |                                
|Balance at beginning of period                                             |  | $                               | 4,722 |   |      | $ | 1,836 |  
|Provision for loan losses                                                  |  |                                 | 300   |   |      |   | 160   |  
|Recoveries                                                                 |  |                                 | 25    |   |      |   | 11    |  
|Charge-offs                                                                |  |                                 | (452  | ) |      |   | (49   | )
|                                                                           |  |                                 |       |   |      |   |       |  
|Net charge-offs                                                            |  |                                 | (427  | ) |      |   | (38   | )
|                                                                           |  |                                 |       |   |      |   |       |  
|Allowance at end of period                                                 |  | $                               | 4,595 |   |      | $ | 1,958 |  
|                                                                           |  |                                 |       |   |      |   |       |  
|                                                                           |  |                                
|Net charge-offs to average outstanding loans during the period, annualized |  |                                 | 0.35  | % |      |   | 0.05  | %

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual
status when the loan becomes more than 90 days delinquent. Nonaccrual loans totaled $7.0 million at September 30, 2009 compared to $6.0 million at June 30, 2009. The increase in nonaccrual loans is due to an increase in both nonaccrual
commercial and residential real estate loans. Foreclosed real estate amounted to $2.3 million at September 30, 2009 compared to $3.3 million at June 30, 2009. Foreclosed real estate is initially recorded at the lower of the amount of the
loan or the fair value of the foreclosed real estate, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.



22



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|                                                       |  |                        |       |   |              |   |       |  
|------------------------------------------------------ |  | ---------------------- | ----- | - | ------------ | - | ----- | -
|                                                       |  | September 30,2009      |       |   | June 30,2009 |  
|                                                       |  | (Dollars in thousands) |      
|                                                       |  |                       
|Nonaccruing loans:                                     |  |                        |       |   |              |   |       |  
|Real estate                                            |  | $                      | 6,725 |   |              | $ | 5,724 |  
|Commercial business                                    |  |                        | 198   |   |              |   | 252   |  
|Consumer                                               |  |                        | 32    |   |              |   | 55    |  
|                                                       |  |                        |       |   |              |   |       |  
|                                                       |  |                       
|Total nonaccrual loans                                 |  |                        | 6,955 |   |              |   | 6,031 |  
|                                                       |  |                       
|Real estate owned                                      |  |                        | 2,318 |   |              |   | 3,328 |  
|Other repossessed assets                               |  |                        | 24    |   |              |   | 106   |  
|                                                       |  |                        |       |   |              |   |       |  
|                                                       |  |                       
|Total nonperforming assets                             |  | $                      | 9,297 |   |              | $ | 9,465 |  
|                                                       |  |                        |       |   |              |   |       |  
|                                                       |  |                       
|Total nonperforming assets to total assets             |  |                        | 1.42  | % |              |   | 1.43  | %
|Total nonperforming loans to total loans               |  |                        | 1.43  | % |              |   | 1.20  | %
|Allowance for loan losses to total nonperforming loans |  |                        | 66.07 | % |              |   | 78.30 | %

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 September 30, 2009 was $6.2 million.

Deposits

Total deposits decreased $9.1 million to $473.1 million at
September 30, 2009 due to the planned runoff of higher costing time deposits, which was partially offset by increases in money market, interest-bearing NOW and savings deposits. Time deposits decreased $23.1 million to $249.0 million at
September 30, 2009 compared to June 30, 2009.



|                             |  |                        |         |              |   |          |  |   |          |   |  |       |   
|---------------------------- |  | ---------------------- | ------- | ------------ | - | -------- |  | - | -------- | - |  | ----- | --
|                             |  | September 30,2009      |         | June 30,2009 |   | $ Change |  |   | % Change |  
|                             |  | (Dollars in thousands) |         |              |   |          |  |  
|                             |  |                        |         |             
|Noninterest-bearing accounts |  | $                      | 42,676  |              | $ | 48,913   |  | $ | (6,237   | ) |  | (12.8 | )%
|NOW accounts                 |  |                        | 48,168  |              |   | 43,795   |  |   | 4,373    |   |  | 10.0  | % 
|Savings accounts             |  |                        | 78,022  |              |   | 69,074   |  |   | 8,948    |   |  | 13.0  | % 
|Money market accounts        |  |                        | 55,281  |              |   | 48,332   |  |   | 6,949    |   |  | 14.4  | % 
|Certificates of deposit      |  |                        | 248,951 |              |   | 272,053  |  |   | (23,102  | ) |  | (8.5  | )%
|                             |  |                        |         |              |   |          |  |   |          |   |  |       |   
|                             |  | $                      | 473,098 |              | $ | 482,167  |  | $ | (9,069   | ) |  | (1.9  | )%
|                             |  |                        |         |              |   |          |  |   |          |   |  |       |   

Advances

Federal Home Loan Bank of Cincinnati (FHLB) advances remain virtually unchanged at $90.2 million at September 30, 2009, compared to $90.3 million at June 30, 2009.

Stockholders Equity

Stockholders equity amounted to $80.7 million at September 30, 2009 compared to $79.5 million at June 30, 2009. 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 September 30, 2009, 512,252 shares remained eligible



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for repurchase under the current stock repurchase program. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to
stockholders equity. At September 30, 2009, the adjustment to stockholders equity was a net unrealized gain of $742,000 compared to a net unrealized gain of $150,000 at June 30, 2009.

Liquidity and Capital Resources

Liquidity
is the ability to meet current and future financial obligations of a short-term nature. Our 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.

We regularly adjust our investments in liquid assets 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 interest-earning assets. The levels of these assets are dependent on
our operating, financing, lending and investing activities during any given period. At September 30, 2009, cash and cash equivalents totaled $11.0 million and interest-earning deposits totaled $26.3 million, compared to $8.3 million and $35.8
million, respectively, at June 30, 2009. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $55.4 million at September 30, 2009 compared to $36.5 million at June 30, 2009. At
September 30, 2009, our advance agreement with the FHLB provided us with the ability to borrow a total of approximately $90.0 million from the FHLB of Cincinnati. In addition, at September 30, 2009, we had a $10.0 million unsecured federal
funds line with a bank under which no borrowings were outstanding. At September 30, 2009, FHLB advances were $89.0 million.

We
anticipate that we will have sufficient funds available to meet current loan commitments. At September 30, 2009, we had approximately $34.1 million in loan commitments, consisting of commitments to fund real estate loans. In addition to
commitments to originate loans, we had $7.2 million in unused letters of credit and approximately $36.3 million in unused lines of credit. At September 30, 2009, we had $200.9 million in certificates of deposit due within one year and $224.1
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 deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We
experienced a net decrease in total deposits of $9.1 million during the three-month period ended September 30, 2009.

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



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##### Table of Contents

debt. At times, Jefferson Bancshares has redeemed and returned its stock. 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 three months ended September 30, 2009, 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.



25



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##### Table of Contents

Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of September 30, 2009, Jefferson Federal met each of its capital requirements. The
following table presents our capital position relative to our regulatory capital requirements at September 30, 2009 and June 30, 2009:



|                          |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|------------------------- |  | ---------------------- |  | ----- | ---------------------------- |  | ------ | ------------------------------------------------------------- | - |  | ----- | --- | - | ------ | ------ |  | - | ----- |  | ---- | -
|                          |  | Actual                 |  |       | For CapitalAdequacy Purposes |  |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |  
|                          |  | Amount                 |  | Ratio |                              |  | Amount |                                                               |   |  | Ratio |     |   | Amount |        |  |   | Ratio | 
|                          |  | (Dollars in thousands) | 
|                          |  |                        |  |       |                              |  |        |                                                              
|At September 30, 2009     |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|                          |  |                        |  |       |                              |  |        |                                                              
|Total Risk-Based Capital  |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|(To Risk Weighted Assets) |  | 54,951                 |  | 11.11 | %                            |  | 39,571 |                                                               | 3 |  |       | 8.0 | % |        | 49,463 |  | 3 |       |  | 10.0 | %
|                          |  |                        |  |       |                              |  |        |                                                              
|Tier 1 Capital            |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|(To Risk Weighted Assets) |  | 50,350                 |  | 10.18 | %                            |  | 19,785 |                                                               | 3 |  |       | 4.0 | % |        | 29,678 |  | 3 |       |  | 6.0  | %
|                          |  |                        |  |       |                              |  |        |                                                              
|Tier 1 Capital            |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|(To Average Assets)       |  | 50,350                 |  | 8.09  | %                            |  | 24,894 |                                                               | 3 |  |       | 4.0 | % |        | 31,118 |  | 3 |       |  | 5.0  | %
|                          |  |                        |  |       |                              |  |        |                                                              
|At June 30, 2009          |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|                          |  |                        |  |       |                              |  |        |                                                              
|Total Risk-Based Capital  |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|(To Risk Weighted Assets) |  | 53,953                 |  | 10.49 | %                            |  | 41,164 |                                                               | 3 |  |       | 8.0 | % |        | 51,456 |  | 3 |       |  | 10.0 | %
|                          |  |                        |  |       |                              |  |        |                                                              
|Tier 1 Capital            |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|(To Risk Weighted Assets) |  | 49,225                 |  | 9.57  | %                            |  | 20,582 |                                                               | 3 |  |       | 4.0 | % |        | 30,873 |  | 3 |       |  | 6.0  | %
|                          |  |                        |  |       |                              |  |        |                                                              
|Tier 1 Capital            |  |                        |  |       |                              |  |        |                                                               |   |  |       |     |   |        |        |  |   |       |  |      |  
|(To Average Assets)       |  | 49,225                 |  | 7.85  | %                            |  | 25,081 |                                                               | 3 |  |       | 4.0 | % |        | 31,351 |  | 3 |       |  | 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 September 30, 2009, Jefferson Federals leverage capital ratio was 8.09%. 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 September 30, 2009, Jefferson Federal had a ratio of total capital to risk-weighted assets of 11.11%. At September 30, 2009, the
Bank met the minimum regulatory capital requirements, and the Bank was well-capitalized within the meaning of federal regulatory requirements.



26



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##### Table of Contents

|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, 2009. 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,
2009.



|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 September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



27



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##### Table of Contents

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, 2009.



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



|                                             |  |                                             |  |                                         |  |                                                                                           |  |                                                                                                                      |    
|-------------------------------------------- |  | ------------------------------------------- |  | --------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | ---
|Period                                       |  | (a)Total Numberof Shares(or units)Purchased |  | (b)Average PricePaid per Share(or Unit) |  | (c) Total Numberof Shares(or Units)Purchased
asPart of PubliclyAnnounced Plansor Programs |  | (d)Maximum Number(or ApproximateDollar Value) ofShares (or Units)That May Yet BePurchased Underthe Plans or Programs |    
|                                             |  |                                             |  |                                        
|Month #1                                     |  |                                             |  |                                         |  |                                                                                           |  |                                                                                                                      |    
|July 1, 2009 through July 31, 2009           |  |                                            |  |                                        |  |                                                                                          |  | 512,252                                                                                                              | (1)
|                                             |  |                                             |  |                                        
|Month #2                                     |  |                                             |  |                                         |  |                                                                                           |  |                                                                                                                      |    
|August 1, 2009 through August 31, 2009       |  |                                            |  |                                        |  |                                                                                          |  | 512,252                                                                                                              | (1)
|                                             |  |                                             |  |                                        
|Month #3                                     |  |                                             |  |                                         |  |                                                                                           |  |                                                                                                                      |    
|September 1, 2009 through September 30, 2009 |  |                                            |  |                                        |  |                                                                                          |  | 512,252                                                                                                              | (1)
|                                             |  |                                             |  |                                        
|Total                                        |  |                                            |  |                                        |  |                                                                                          |  | 512,252                                                                                                              |    



|(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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##### Table of Contents

|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|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
|     | 
|32.1 |  | Section 1350 certification                                               



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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.                      
|                 | 
|November 9, 2009 |  | /S/    ANDERSON L.
SMITH                        
|                 |  | Anderson L. Smith                               
|                 |  | President and Chief Executive Officer           
|                 | 
|November 9, 2009 |  | /S/    JANE P.
HUTTON                           
|                 |  | Jane P. Hutton                                  
|                 |  | Chief Financial Officer, Treasurer and Secretary