##### Table of Contents

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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, 2003



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 0-50347



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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 I.D. 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 checkmark 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 checkmark whether the registrant is an
accelerated filer (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 14, 2003, the registrant had 8,385,517 shares of $.01 par value common stock 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, 2003 and year ended June 30, 2003                       |  | 3   
|                              |  |                                                                                                                                          
|                              |  | Consolidated Statements of Earnings - Unaudited Three months ended September 30, 2003 and 2002                                            |  | 4   
|                              |  |                                                                                                                                          
|                              |  | Consolidated Statements of Changes in Stockholders Equity  Unaudited Three months ended September 30, 2003 and year ended June 30, 2003 |  | 5   
|                              |  |                                                                                                                                          
|                              |  | Consolidated Statements of Cash Flows - Unaudited Three months ended September 30, 2003 and 2002                                          |  | 6   
|                              |  |                                                                                                                                          
|                              |  | Notes to Consolidated Financial Statements - Unaudited                                                                                    |  | 7   
|                              |  |                                                                                                                                          
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                     |  | 11  
|                              |  |                                                                                                                                          
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                |  | 23  
|                              |  |                                                                                                                                          
|Item 4.                       |  | Controls and Procedures                                                                                                                   |  | 23  
|                              | 
|Part II  OTHER INFORMATION   |  |                                                                                                                                          
|                              |  |                                                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                                                         |  | 24  
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                                                 |  | 24  
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                           |  | 24  
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                       |  | 24  
|Item 5.                       |  | Other Information                                                                                                                         |  | 25  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                          |  | 25  
|                              | 
|SIGNATURES                    |  |                                                                                                                                          



2



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##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Condition

September 30, 2003 and June 30, 2003

(Dollars in Thousands)



|                                                                                                    |  | September 30, 2003 |         |   | June 30, 2003
|--------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------
|                                                                                                    |  | (Unaudited)        |         |   |              
|Assets                                                                                              |  |                    |         |   |              
|                                                                                                    |  |                   
|Cash and cash equivalents                                                                           |  | $                  | 5,526   |   |              
|Interest-earning deposits                                                                           |  |                    | 10,190  |   |              
|Investment securities classified as available for sale, net                                         |  |                    | 112,669 |   |              
|Federal Home Loan Bank stock                                                                        |  |                    | 1,534   |   |              
|Loans receivable, net                                                                               |  |                    | 177,413 |   |              
|Premises and equipment, net                                                                         |  |                    | 5,117   |   |              
|Foreclosed real estate, net                                                                         |  |                    | 1,581   |   |              
|Accrued interest receivable:                                                                        |  |                    |         |   |              
|Investments                                                                                         |  |                    | 619     |   |              
|Loans receivable                                                                                    |  |                    | 1,092   |   |              
|Deferred tax asset                                                                                  |  |                    | 2,198   |   |              
|Other assets                                                                                        |  |                    | 441     |   |              
|                                                                                                    |  |                    |         |   |              
|Total Assets                                                                                        |  | $                  | 318,380 |   |              
|                                                                                                    |  |                    |         |   |              
|Liabilities and Stockholders Equity                                                                |  |                    |         |   |              
|                                                                                                    |  |                   
|Deposits                                                                                            |  | $                  | 219,618 |   |              
|Federal Home Loan Bank advances                                                                     |  |                    | 2,000   |   |              
|Other liabilities                                                                                   |  |                    | 650     |   |              
|Accrued income taxes                                                                                |  |                    | 390     |   |              
|                                                                                                    |  |                    |         |   |              
|Total liabilities                                                                                   |  |                    | 222,658 |   |              
|                                                                                                    |  |                    |         |   |              
|Commitments and contingent liabilities                                                              |  |                    |        |   |              
|                                                                                                    |  |                   
|Stockholders equity:                                                                               |  |                    |         |   |              
|Preferred stock, $.01 par value; 10,000,000 shares authorized; shares issued and outstanding- none  |  |                    |        |   |              
|Common stock, $.01 par value; 30,000,000 shares authorized; 8,375,985 shares issued and outstanding |  |                    | 84      |   |              
|Unearned ESOP shares                                                                                |  |                    | (6,591  | ) |              
|Additional paid-in capital                                                                          |  |                    | 71,317  |   |              
|Accumulated other comprehensive income                                                              |  |                    | 143     |   |              
|Retained earnings                                                                                   |  |                    | 30,769  |   |              
|                                                                                                    |  |                    |         |   |              
|Total stockholders equity                                                                          |  |                    | 95,722  |   |              
|                                                                                                    |  |                    |         |   |              
|Total liabilities and stockholders equity                                                          |  | $                  | 318,380 |   |              
|                                                                                                    |  |                    |         |   |              



See accompanying notes
to financial statements.



3



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##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Common Share)



|                                                                        |  | Three Months Ended September 30,
|----------------------------------------------------------------------- |  | --------------------------------
|                                                                        |  | 2003                            
|Interest income:                                                        |  |                                 
|Interest on loans receivable                                            |  | $                               
|Interest on mortgage-backed securities                                  |  |                                 
|Interest on investment securities                                       |  |                                 
|Other interest                                                          |  |                                 
|                                                                        |  |                                 
|Total interest income                                                   |  |                                 
|                                                                        |  |                                 
|Interest expense:                                                       |  |                                 
|Deposits                                                                |  |                                 
|Advances from FHLB                                                      |  |                                 
|                                                                        |  |                                 
|Total interest expense                                                  |  |                                 
|                                                                        |  |                                 
|Net interest income                                                     |  |                                 
|Provision for loan losses                                               |  |                                 
|                                                                        |  |                                 
|Net interest income after provision for loan losses                     |  |                                 
|                                                                        |  |                                 
|Noninterest income:                                                     |  |                                 
|Service charges on negotiable order of withdrawal (NOW) accounts, net |  |                                 
|Gain on sale of investment securities, net                              |  |                                 
|Gain (loss) on sale of foreclosed real estate, net                      |  |                                 
|Other                                                                   |  |                                 
|                                                                        |  |                                 
|Total noninterest income                                                |  |                                 
|                                                                        |  |                                 
|Noninterest expense:                                                    |  |                                 
|Compensation and benefits                                               |  |                                 
|Occupancy expense                                                       |  |                                 
|Equipment and data processing expense                                   |  |                                 
|SAIF deposit insurance premium                                          |  |                                 
|REO Expense                                                             |  |                                 
|Advertising                                                             |  |                                 
|Charitable contributions                                                |  |                                 
|Other                                                                   |  |                                 
|                                                                        |  |                                 
|Total noninterest expense                                               |  |                                 
|                                                                        |  |                                 
|Earnings before income taxes                                            |  |                                 
|                                                                        |  |                                 
|Income taxes:                                                           |  |                                 
|Current                                                                 |  |                                 
|Deferred                                                                |  |                                 
|                                                                        |  |                                 
|Total income taxes                                                      |  |                                 
|                                                                        |  |                                 
|Net earnings (loss)                                                     |  | $                               
|                                                                        |  |                                 
|Net earnings per common share                                           |  | $                               
|                                                                        |  |                                 
|Net earnings per common share-assuming dilution                         |  | $                               
|                                                                        |  |                                 



See accompanying notes
to financial statements



4



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##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Changes in Stockholders Equity

Year Ended June 30, 2003

and Three
Months Ended September 30, 2003 (Unaudited)

(Dollars in Thousands)



|                                                                                              |  | CommonStock |        |   | Additional Paid-in Capital |   |        | Unallocated common stock held by the Employee Stock Ownership Plan |  |   | Accumulated Other Comprehensive Income |   |  | Retained Earnings |      |   | Total Stockholders Equity |  
|--------------------------------------------------------------------------------------------- |  | ----------- | ------ | - | -------------------------- | - | ------ | ------------------------------------------------------------------ |  | - | -------------------------------------- | - |  | ----------------- | ---- | - | -------------------------- | -
|Balance at June 30, 2002                                                                      |  | $           | 1,876  |   |                            | $ | 1,167  |                                                                    |  | $ |                                       |   |  | $                 | 537  |   |                            | $
|                                                                                              |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Comprehensive income:                                                                         |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Net earnings                                                                                  |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $221   |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   | 361  |   |                            |  
|                                                                                              |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Total comprehensive income                                                                    |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|                                                                                              |  |             |        |   |                            |  
|Dividends                                                                                     |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|                                                                                              |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Balance at June 30, 2003                                                                      |  |             | 1,876  |   |                            |   | 1,167  |                                                                    |  |   |                                       |   |  |                   | 898  |   |                            |  
|                                                                                              |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Comprehensive income:                                                                         |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Net earnings                                                                                  |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $(462) |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   | (755 | ) |                            |  
|                                                                                              |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Total comprehensive income                                                                    |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|                                                                                              |  |             |        |   |                            |  
|Dividends                                                                                     |  |             |       |   |                            |   |       |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|Merger of MHC into Jefferson Bancshares                                                       |  |             |       |   |                            |   | 100    |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|Proceeds of stock conversion, net                                                             |  |             | 66     |   |                            |   | 64,406 |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|Conversion of shares held under MHC structure                                                 |  |             | (1,876 | ) |                            |   | 1,876  |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|Shares issued in exchange for shares held under MHC structure                                 |  |             | 14     |   |                            |   | (14    | )                                                                  |  |   |                                       |   |  |                   |     |   |                            |  
|Contribution of stock to the Jefferson Federal Charitable Foundation                          |  |             | 4      |   |                            |   | 3,746  |                                                                    |  |   |                                       |   |  |                   |     |   |                            |  
|Common stock acquired by employee stock ownership plan                                        |  |             |       |   |                            |   |       |                                                                    |  |   | (6,701                                 | ) |  |                   |     |   |                            |  
|Shares committed to be released by the employee stock ownership plan                          |  |             |       |   |                            |   | 36     |                                                                    |  |   | 110                                    |   |  |                   |     |   |                            |  
|                                                                                              |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  
|Balance at September 30, 2003                                                                 |  | $           | 84     |   |                            | $ | 71,317 |                                                                    |  | $ | (6,591                                 | ) |  | $                 | 143  |   |                            | $
|                                                                                              |  |             |        |   |                            |   |        |                                                                    |  |   |                                        |   |  |                   |      |   |                            |  



See accompanying notes
to financial statements



5



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##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



|                                                                                              |  | Three Months ended September 30, |         
|--------------------------------------------------------------------------------------------- |  | -------------------------------- | --------
|                                                                                              |  | 2003                             |         
|Cash flows from operating activities:                                                         |  |                                  |         
|Net earnings (loss)                                                                           |  | $                                | (1,591  
|Adjustments to reconcile net earnings to net cash provided by (used for) operating activities |  |                                  |         
|Stock contributed to the Jefferson Federal Charitable Foundation                              |  |                                  | 3,750   
|Allocated ESOP shares                                                                         |  |                                  | 146     
|Depreciation and amortization expense                                                         |  |                                  | 73      
|Amortization of premiums (discounts), net on investment securities                            |  |                                  | 14      
|Provision for loan losses                                                                     |  |                                  |        
|Gain on sale of investment securities and mortgage-backed securities, net                     |  |                                  | (22     
|FHLB stock dividends                                                                          |  |                                  | (15     
|Amortization of deferred loan fees, net                                                       |  |                                  | (47     
|Loss (gain) on foreclosed real estate, net                                                    |  |                                  | (26     
|Decrease (increase) in:                                                                       |  |                                  |         
|Accrued interest receivable                                                                   |  |                                  | 223     
|Other assets                                                                                  |  |                                  | 889     
|Deferred tax asset                                                                            |  |                                  | (1,726  
|Increase (decrease) in other liabilities and accrued income taxes                             |  |                                  | (25     
|                                                                                              |  |                                  |         
|Net cash provided by (used for) operating activities                                          |  |                                  | 1,643   
|                                                                                              |  |                                  |         
|Cash flows from investing activities:                                                         |  |                                  |         
|Loan originations, net of principal collections                                               |  |                                  | 2,681   
|Investment securities classified as available for sale:                                       |  |                                  |         
|Purchased                                                                                     |  |                                  | (57,158 
|Proceeds from sale                                                                            |  |                                  | 6,676   
|Proceeds from maturity                                                                        |  |                                  | 10,500  
|Return of principal on mortgage-backed securities                                             |  |                                  | 2,504   
|Purchase of premises and equipment                                                            |  |                                  | (1,022  
|Proceeds from sale of (additions to) foreclosed real estate, net                              |  |                                  | 202     
|                                                                                              |  |                                  |         
|Net cash provided by (used for) investing activities                                          |  |                                  | (35,617 
|                                                                                              |  |                                  |         
|Cash flows from financing activities:                                                         |  |                                  |         
|Net increase (decrease) in deposits                                                           |  |                                  | (104,629
|Proceeds from stock conversion, net                                                           |  |                                  | 57,771  
|Merger of MHC into Jefferson Bancshares                                                       |  |                                  | 111     
|Cash dividend paid on common stock                                                            |  |                                  | (106    
|                                                                                              |  |                                  |         
|Net cash provided by (used for) financing activities                                          |  |                                  | (46,853 
|                                                                                              |  |                                  |         
|Net increase (decrease) in cash, cash equivalents, and interest-earning deposits              |  |                                  | (80,827 
|Cash, cash equivalents, and interest-earning deposits at beginning of period                  |  |                                  | 96,543  
|                                                                                              |  |                                  |         
|Cash, cash equivalents, and interest-earning deposits at end of period                        |  | $                                | 15,716  
|                                                                                              |  |                                  |         
|Supplemental disclosures of cash flow information:                                            |  |                                  |         
|Cash paid during period for:                                                                  |  |                                  |         
|Interest on deposits                                                                          |  | $                                | 1,304   
|Interest on FHLB advances                                                                     |  |                                  | 25      
|Income taxes                                                                                  |  |                                  | 184     
|Real estate acquired in settlement of loans                                                   |  | $                                | 824     



See accompanying notes
to financial statements



6



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##### Table of Contents

|(1) | Basis of Presentation
|--- | ---------------------



The accompanying unaudited 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). Financial statements as of June 30, 2003 and earlier are for the Bank. The unaudited financial
statements of Jefferson Bancshares, Inc. were prepared with generally accepted accounting principles and with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of financial condition,
results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for fair presentation of the interim financial
statements. The results of operations for the period ended September 30, 2003 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, 2003.



|(2) | Corporate Reorganization and Stock Offering
|--- | -------------------------------------------



On March 4, 2003, the Boards of Directors of the Jefferson Bancshares, MHC (the MHC) and the Bank adopted a Plan of Conversion to convert the
MHC from mutual to stock form and to complete a related stock offering in which shares of common stock representing the MHCs ownership interest in the Bank would be sold to investors.



The Plan of Conversion was approved by the stockholders and depositors of
the Bank on June 25, 2003. The reorganization and stock offering was completed on July 1, 2003. As of that date, the Company sold 6,612,500 shares of common stock for $10.00 per share. After taking into consideration estimated related expenses of
approximately $1.6 million, net proceeds from the stock offering amounted to approximately $64.5 million. An additional 1,388,485 shares were issued to existing stockholders, based on an exchange rate of 4.2661 shares of Company common stock for
each existing share of Bank common stock, and 375,000 shares were issued to the Jefferson Federal Charitable Foundation, resulting in the total issuance of 8,375,985 shares. Cash was paid in lieu of fractional shares.



Upon completion of the conversion and stock offering, the MHC ceased to
exist and its net assets of $111,000 were transferred into the Bank.



The conversion was accounted for as a change in corporate form with no subsequent change in the historical basis of the Companys assets, liabilities and equity.



|(3) | Limitation on Capital Distributions
|--- | -----------------------------------



Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to
repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the
institution does not meet the criteria for expedited treatment of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the
calendar year exceed net



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##### Table of Contents

income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or agreement with or condition imposed by the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of
Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary of a holding company. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federals capital fell below its regulatory requirements or
the Office of Thrift Supervision notified it that it was in need of more than normal supervision, Jefferson Federals ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the
distribution would reduce its regulatory capital below the amount needed for the liquidation account established in connection with the Conversion described in Note 2.



|(4) | Earnings Per Common Share
|--- | -------------------------



Earnings per common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average
number of shares of common stock outstanding. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:



|                                                               |  | Weighted-Average Shares Outstanding For The Three Months
|-------------------------------------------------------------- |  | --------------------------------------------------------
|Shares used for:                                               |  |                                                         
|                                                               | 
|Earnings Per Common Share September 30, 2002                   |  | 8,001,070                                               
|                                                               | 
|Earnings Per Common Share-Assuming Dilution September 30, 2002 |  | 8,032,157                                               
|                                                               | 
|Earnings Per Common Share September 30, 2003                   |  | 8,375,985                                               
|                                                               | 
|Earnings Per Common Share-Assuming Dilution September 30, 2003 |  | 8,424,818                                               



|(5) | Statements of Cash Flows
|--- | ------------------------



Dividends declared but not paid have been recorded in other liabilities; however, their non-effect on cash and operations dictates their exclusion from
the cash flows until actually paid.



|(6) | Accounting by Creditors for Impairment of a Loan
|--- | ------------------------------------------------



Impairment of loans having recorded investment of $219,000 at September 30, 2003 and an average investment of $180,000 during the three-month period ended
September 30, 2003 has been recognized in conformity with FASB Statement No. 118. The total allowance for loan losses related to these loans was $27,000 at September 30, 2003. Other nonaccrual loans at September 30, 2003 were approximately $1.5
million. For the three months ended September 30, 2003, gross income which would have been recognized had impaired and nonaccrual loans been current in accordance with their original terms, amounted to approximately $32,000. The amount of interest
income from impaired and non-accrual loans included in the Companys



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##### Table of Contents

interest income for the three months ended September 30, 2003 was approximately $17,000. The amount of interest income from impaired loans included in net
income for the three months ended September 30, 2003 was approximately $4,000.



The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2003:



|                              |  | Allowance for Loan Losses (Dollars in Thousands) |     
|----------------------------- |  | ------------------------------------------------ | ----
|Balance at June 30, 2003      |  |                                                  |     
|Provision for loan losses     |  |                                                  |     
|Charge-offs                   |  | $                                                | (223
|Recoveries                    |  |                                                  | 73  
|                              |  |                                                  |     
|Net (charge-offs)/recoveries  |  |                                                  |     
|                              |  |                                                  |     
|Balance at September 30, 2003 |  |                                                  |     
|                              |  |                                                  |     



|(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.



9



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##### Table of Contents

The estimated fair values of the Companys financial instruments are as follows:



|                                                                 |  | September 30, 2003     |          |   | June 30, 2003 |  
|---------------------------------------------------------------- |  | ---------------------- | -------- | - | ------------- | -
|                                                                 |  | Carrying Amount        |          |   | Fair Value    |  
|                                                                 |  | (Dollars in Thousands) |         
|Financial assets:                                                |  |                        |          |   |               |  
|Cash and due from banks and interest-earning deposits with banks |  | $                      | 15,716   |   |               | $
|Available-for-sale securities                                    |  |                        | 112,669  |   |               |  
|Federal Home Loan Bank stock                                     |  |                        | 1,534    |   |               |  
|Loans receivable                                                 |  |                        | 177,413  |   |               |  
|Accrued interest receivable                                      |  |                        | 1,711    |   |               |  
|                                                                 |  |                        |          |  
|Financial liabilities:                                           |  |                        |          |   |               |  
|Deposits                                                         |  |                        | (219,618 | ) |               |  
|FHLB advances                                                    |  |                        | (2,000   | ) |               |  
|                                                                 |  |                        |          |  
|Off-balance sheet assets (liabilities):                          |  |                        |          |   |               |  
|Commitments to extend credit                                     |  |                        |         |   |               |  
|Unused standby letters of credit                                 |  |                        |         |   |               |  
|Unused lines of credit                                           |  |                        |         |   |               |  



|(8) | Recapture of Tax Bad Debt Reserves
|--- | ----------------------------------



Current federal income tax law provides for elimination of the preferential tax bad debt deduction for thrift institutions and the recapture of tax bad
debt reserves in excess of the base year reserves (pre-1988 reserves). The excess tax bad debt reserves is required to be recaptured to income ratably over a six-year period unless a thrift institution meets the residential loan
requirement test and suspends the recapture for up to two years. For Jefferson Bancshares, this tax accounting change was effective for the year ending June 30, 1997. Because deferred taxes have been recorded for such excess tax bad debt
reserves, this legislation has not had a material effect on the Companys statement of condition or results of operation; however, it has resulted in an outflow of cash. The six-year recapture period began with the fiscal year ending June 30,
1999. The total amount of excess tax bad debt reserves to be recaptured during the six-year period amounted to $622,000, or $104,000 per year. On a cumulative basis, the Company has recaptured $519,000 in reserves during the five most recent fiscal
years, which resulted in additional federal income taxes of $176,000. During the three months ended September 30, 2003, Jefferson Bancshares recaptured $26,000 in excess tax bad debt reserves, which resulted in the cash payment of $9,000 in
additional federal income tax.



|(9) | Stock Incentive Plans
|--- | ---------------------



Under the Banks 1995 Stock Option Plan and 1995 Management Recognition and Development Plan (MRP), which were assumed by the Company,
the Company may issue a combined total of 179,176 shares to officers, employees and non-employee directors. Awards under both plans vest pro-rata over a five-year period. Any shares subject to an award that is forfeited will again be available for
issuance. As of September 30, 2003, there were 70,389 options outstanding and no remaining shares available for grant under the 1995 Stock Option Plan. No options were granted, exercised or forfeited during the three months ended September 30, 2003.



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



Managements discussion and analysis of results of operations and financial condition 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. 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, 2003.



General



Jefferson Bancshares, Inc. (also referred to
as the Company or Jefferson Bancshares) was organized as a Tennessee corporation at the direction of Jefferson Federal Bank, formerly known as Jefferson Federal Savings and Loan Association of Morristown (referred to as the
Bank or Jefferson Federal), in March 2003 to become the holding company for Jefferson Federal upon the completion of its second-step mutual-to-stock conversion (the Conversion) of Jefferson Bancshares,
M.H.C. (the MHC). The Conversion was completed on July 1, 2003. As part of the Conversion, the MHC merged into Jefferson Federal thereby ceasing to exist and Jefferson Federal Savings and Loan Association of Morristown changed its name
to Jefferson Federal Bank. The Company sold 6,612,500 shares of its common stock at a price of $10.00 per share to depositors of the Bank in a subscription offering raising approximately $64.5 million in net proceeds. The Company also
exchanged approximately 1,389,000 shares of its common stock for all the outstanding shares of the Banks common stock (other than shares held by the MHC), representing an exchange ratio of 4.2661 for each share of Jefferson Federal
outstanding. In addition, the Bank established the Jefferson Federal Charitable Foundation, which was funded with $250,000 and 375,000 shares of Company common stock.



The company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds it retained
from the Conversion, 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 using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential properties, as well as to 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 Savings Association Insurance Fund (SAIF). Jefferson Federal Bank is a member of the Federal Home Loan Bank (FHLB) System.



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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, Inc.s current expectations regarding its business strategies and their intended results and its 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. Factors which could affect
actual results include interest rate trends, the general economic climate in the market area in which Jefferson Bancshares operates, as well as nationwide, Jefferson Bancshares ability to control costs and expenses, competitive products and
pricing, loan delinquency rates and changes in federal and state legislation and regulation. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson
Bancshares assumes no obligation to update any forward-looking statements.



Results of Operations for the Three Months Ended September 30, 2003 and 2002



Net Earnings



Net earnings
decreased as a result of the nonrecurring expense associated with the $4.0 million contribution to the Jefferson Federal Charitable Foundation.



|                                      |  | Three Months Ended September 30,              |       
|------------------------------------- |  | --------------------------------------------- | ------
|                                      |  | 2003                                          |       
|                                      |  | (Dollars in thousands, except per share data) |       
|Net earnings                          |  | $                                             | (1,591
|Net earnings per share, basic         |  | $                                             | (0.19 
|Net earnings per share, diluted       |  | $                                             | (0.19 
|Return on average assets (annualized) |  |                                               | NM    
|Return on average equity (annualized) |  |                                               | NM    



Net Interest Income



Net interest income increased $83,000, or 3.0%, to $2.8 million for the
three months ended September 30, 2003. The net interest margin decreased 55 basis points to 3.67% for the three months ended September 30, 2003. The decline in net interest margin reflects growth in earning assets with lower yields due to current
low market interest rates. The interest rate spread was 2.94% and 3.82% for the quarters ended September 30, 2003 and 2002, respectively. The average rate paid on interest-bearing liabilities decreased 79 basis points to 2.47%, while the average
yield on interest-earning assets decreased 167 basis points to 5.41%.



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The following table summarizes changes in interest income and expense:



|                          |  | Three Months EndedSeptember 30, |       |      |   |          |  |  
|------------------------- |  | ------------------------------- | ----- | ---- | - | -------- |  | -
|                          |  | 2003                            |       | 2002 |   | $ Change |  |  
|                          |  | (Dollars in thousands)          |       |      |   |          |  |  
|Interest income:          |  |                                 |       |      |   |          |  |  
|Loans                     |  | $                               | 3,296 |      | $ | 3,863    |  | $
|Investment securities     |  |                                 | 756   |      |   | 668      |  |  
|Interest-earning deposits |  |                                 | 75    |      |   | 29       |  |  
|FHLB stock                |  |                                 | 15    |      |   | 17       |  |  
|                          |  |                                 |       |      |   |          |  |  
|Total interest income     |  |                                 | 4,142 |      |   | 4,577    |  |  
|Interest expense:         |  |                                 |       |      |   |          |  |  
|Deposits                  |  |                                 | 1,304 |      |   | 1,822    |  |  
|Borrowings                |  |                                 | 25    |      |   | 25       |  |  
|                          |  |                                 |       |      |   |          |  |  
|Total interest expense    |  |                                 | 1,329 |      |   | 1,847    |  |  
|                          |  |                                 |       |      |   |          |  |  
|Net interest income       |  | $                               | 2,813 |      | $ | 2,730    |  | $
|                          |  |                                 |       |      |   |          |  |  



The following table summarizes average
balances and average yields and costs:



|                                          |  | Three Months Ended September 30, |        
|----------------------------------------- |  | -------------------------------- | -------
|                                          |  | 2003                             |        
|                                          |  | Average Balance                  |        
|Loans                                     |  | $                                | 181,347
|Investment and mortgage-backed securities |  |                                  | 112,723
|Interest-earning deposits                 |  |                                  | 10,754 
|Deposits                                  |  |                                  | 213,596
|Borrowings                                |  |                                  | 2,000  



Total interest income decreased
$435,000, or 9.5%, to $4.1 million for the three months ended September 30, 2003 resulting from a decrease in the average yield of interest-earning assets more than offsetting an increase in the average balance of interest-earning assets. Interest
on loans decreased as a result of declining rates and a decrease in the average balance. The average yield on loans declined as we originated loans at lower interest rates due to the prevailing low interest rate environment.



Interest on investment securities increased due to an increase in the average balance which
more than offset a decline in the average yield. The average balance of investments increased as a result of the investment of the conversion proceeds in short-term securities. The average yield on investment securities decreased 221 basis points to
2.68% for the 2003 period. Approximately 15% of the investment portfolio is held in mortgage-backed securities (MBSs). A significant portion of our mortgage-backed securities have adjustable rates and have repriced downward in the current low
interest rate environment. Dividends on FHLB stock were $15,000 for the three months ended September 30, 2003 and $17,000 for the same period in 2002. Dividends on FHLB stock are paid with additional shares of FHLB stock.



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Interest expense decreased $518,000, or 28.1%, to $1.3 million for the three-month period ended September 30, 2003 as the
average balance of deposits declined 4.8% to $213.6 million, and the average rate paid declined 81 basis points to 2.44%. Certificates of deposits, which are a higher cost of funds, were approximately 70.6% of deposits at September 30, 2003 and
76.7% of deposits at September 30, 2002. The shift of deposits from certificates of deposit to lower costing transaction accounts has been a result of the prevailing low interest rate environment and our strategy of emphasizing transaction accounts.



Provision for Loan Losses



We review the level of the allowance for loan losses on a monthly basis and establish the
provision for loan losses based on the level of subprime loans in the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. We use Beacon credit scores to
predict the likelihood that an existing borrower will become a serious credit risk. We consider loans to borrowers with a Beacon credit score below 600 to be subprime. Provision for loan losses decreased $307,000 for the three months ended September
30, 2003 due to lower estimated losses in the loan portfolio. There were no additions to the allowance for loan losses during the three-month period ended September 30, 2003. Net charge-offs were $150,000 for the three-month period ended September
30, 2003 compared to $388,000 for the same period in 2002. Nonaccrual loans decreased $988,000, to $1.5 million at September 30, 2003. The level of subprime loans at September 30, 2003 decreased approximately $8.2 million, or 23.0% from the level at
September 30, 2002.



Noninterest Income



Noninterest income decreased $50,000, or 17.6%, to $234,000 for the three months ended
September 30, 2003 due to a combination of factors, including a decrease in gain on sale of investments offsetting an increase in gain on sale of foreclosed property. 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, 2003 compared to the same period in 2002.



|                                    |  | Three Months EndedSeptember 30, |     |      |   |          |  |  
|----------------------------------- |  | ------------------------------- | --- | ---- | - | -------- |  | -
|                                    |  | 2003                            |     | 2002 |   | $ Change |  |  
|Service charges and fees            |  | $                               | 159 |      | $ | 167      |  | $
|Gain on sale of investments         |  |                                 | 22  |      |   | 81       |  |  
|Gain on sale of foreclosed property |  |                                 | 26  |      |   | 8        |  |  
|Other                               |  |                                 | 27  |      |   | 28       |  |  
|                                    |  |                                 |     |      |   |          |  |  
|Total noninterest income            |  | $                               | 234 |      | $ | 284      |  | $
|                                    |  |                                 |     |      |   |          |  |  



Noninterest Expense



Noninterest expense increased $4.3 million to $5.5 million for the three
months ended September 30, 2003 due primarily to the $4.0 million contribution to the Jefferson Federal Charitable Foundation. Compensation and benefits increased $171,000, or 29.2%, due primarily to expenses related to the Employee Stock Ownership
Plan, which we adopted in connection with the conversion.



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The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent
changes in for the three months ended September 30, 2003 compared to the same period in 2002.



|                                |  | Three MonthsEnded September 30, |       |      |   |          |  |  
|------------------------------- |  | ------------------------------- | ----- | ---- | - | -------- |  | -
|                                |  | 2003                            |       | 2002 |   | $ Change |  |  
|Compensation and benefits       |  | $                               | 756   |      | $ | 585      |  | $
|Occupancy                       |  |                                 | 61    |      |   | 71       |  |  
|Equipment and data processing   |  |                                 | 227   |      |   | 218      |  |  
|SAIF Deposit insurance premiums |  |                                 | 9     |      |   | 10       |  |  
|REO expense                     |  |                                 | 53    |      |   | 56       |  |  
|Advertising                     |  |                                 | 47    |      |   | 38       |  |  
|Charitable contributions        |  |                                 | 4,024 |      |   | 18       |  |  
|Other                           |  |                                 | 371   |      |   | 234      |  |  
|                                |  |                                 |       |      |   |          |  |  
|Total noninterest expense       |  | $                               | 5,548 |      | $ | 1,230    |  | $
|                                |  |                                 |       |      |   |          |  |  



Income Taxes



Income tax benefit for the three months ended September 30, 2003 was
$910,000 compared to income tax expense of $551,000 for the same period in 2002. The tax benefit was due to the contribution of cash and common stock to the Jefferson Federal Charitable Foundation. The contribution to the Foundation is tax
deductible, subject to a limitation based on 10% of the Companys annual taxable income. Any unused portion of the deduction may be carried forward for five years following the year in which the contribution is made.



Financial Condition



Assets



Total assets at September 30, 2003 were $318.4 million, a decrease of $45.2 million or 12.4%, from total assets of $363.6 million at June 30, 2003. At June 30, 2003,
orders received in the subscription and community offering totaled in excess of $105.0 million. Approximately $39.1 million of unfilled orders was returned to subscribers during the quarter ended September 30, 2003.



Cash, Cash Equivalents and Interest-Earning Deposits



Cash and cash equivalents decreased $2.1 million, or 27.3%, to $5.5 million at September 30,
2003. Interest-earning deposits decreased $78.8 million to $10.2 million at September 30, 2003. This decrease is primarily attributable to the investment of conversion proceeds and the return of funds for unfilled stock orders.



Investments



Our investment portfolio consists primarily of Federal agency securities with maturities of seven years or less and mortgage-backed
securities with stated final maturities of thirty years or less. Investment securities increased $36.3 million, or 47.5%, due primarily to the investment of conversion proceeds and the reinvestment of proceeds from called securities. Investment
securities classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $230,000, or $143,000 net of taxes.



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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.



Investments



At September 30, 2003:



|                                           |  | Amortized Cost         |         |   | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value
|------------------------------------------ |  | ---------------------- | ------- | - | ---------------- | - | ----------------- |  | - | ----------
|                                           |  | (Dollars in Thousands)
|Securities Available-for-Sale              |  |                        |         |   |                  |   |                   |  |   |           
|Debt securities:                           |  |                        |         |   |                  |   |                   |  |   |           
|Federal agency                             |  | $                      | 95,647  |   |                  | $ | 644               |  | $ | (557      
|Mortgage-backed                            |  |                        | 16,792  |   |                  |   | 170               |  |   | (27       
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Total securities available-for-sale        |  | $                      | 112,439 |   |                  | $ | 814               |  | $ | (584      
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Weighted-average rate                      |  |                        | 3.21    | % |                  |   |                   |  |   |           
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Federal Home Loan Bank of Cincinnati stock |  | $                      | 1,534   |   |                  | $ |                  |  | $ |          
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Weighted-average rate                      |  |                        | 4.00    | % |                  |   |                   |  |   |           
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|                                           |  |                        |         |  
|At June 30, 2003:                          |  |                        |         |   |                  |   |                   |  |   |           
|                                           |  |                        |         |  
|                                           |  | Amortized Cost         |         |   | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value
|                                           |  | (Dollars in Thousands)
|Securities Available-for-Sale              |  |                        |         |   |                  |   |                   |  |   |           
|Debt securities:                           |  |                        |         |   |                  |   |                   |  |   |           
|Federal agency                             |  | $                      | 55,646  |   |                  | $ | 928               |  | $ |          
|Mortgage-backed                            |  |                        | 19,306  |   |                  |   | 520               |  |   |          
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Total securities available-for-sale        |  | $                      | 74,952  |   |                  | $ | 1,448             |  | $ |          
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Weighted-average rate                      |  |                        | 3.40    | % |                  |   |                   |  |   |           
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Federal Home Loan Bank of Cincinnati stock |  | $                      | 1,518   |   |                  | $ |                  |  | $ |          
|                                           |  |                        |         |   |                  |   |                   |  |   |           
|Weighted-average rate                      |  |                        | 4.00    | % |                  |   |                   |  |   |           
|                                           |  |                        |         |   |                  |   |                   |  |   |           



Loans



Net loans decreased $2.6 million, or 1.4%, to $177.4 million at September 30, 2003, as new
loan originations were offset by loan repayments. Loan originations for the quarter ended September 30, 2003 were $13.1 million compared to $10.2 million for the same period in 2002. Our primary lending activity is the origination of loans secured
by real estate. We originate real estate loans secured by



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one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. Mortgage
loans decreased $1.0 million, to $163.1 million at September 30, 2003. Mortgage loans represented 89.5% of total loans at September 30, 2003. The largest segment of our mortgage loans is one- to four-family loans. One- to four-family loans decreased
$1.4 million, or 1.7%, to $83.2 million as a result of overall weakened economic conditions and as borrowers refinanced their loans with other lenders in the low interest rate environment.



Commercial real estate loans are the second largest segment of our mortgage loan portfolio.
We have emphasized this type of lending for several years and have grown this portfolio to $49.5 million at September 30, 2003, an increase of $511,000, or 1.0%, from the level at June 30, 2003.



Multi-family loans increased $595,000, or 4.5%, to $13.8 million during the three-month
period as a result of a continued emphasis on this type of lending. Construction loans decreased $1.3 million, or 25.1%, to $3.9 million in the three months ended September 30, 2003. Land loans increased $342,000, or 3.4% to $10.5 million at
September 30, 2003.



Commercial business loans decreased $1.5 million, or
11.1%, to $12.0 million at September 30, 2003. Most of the commercial business loans that we have originated have been tied to prime and will reprice quickly as interest rates change.



We originate a variety of consumer loans, including loans secured by automobiles, mobile homes and deposit accounts at Jefferson Federal.
Consumer loans decreased $267,000, or 3.6%, to $7.1 million at September 30, 2003. We have tightened our underwriting standards and have originated fewer subprime loans in recent periods. In addition, we have experienced low demand for automobile
loans as a result of low-cost financing offered through automobile dealers.



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Loans receivable, net are summarized as follows:



|                                             |  | At September 30, 2003  |         |   | At June 30, 2003    |      
|-------------------------------------------- |  | ---------------------- | ------- | - | ------------------- | -----
|                                             |  | Amount                 |         |   | Percentof Portfolio |      
|                                             |  | (Dollars in Thousands) |        
|Real Estate Loans:                           |  |                        |         |   |                     |      
|Residential one-to-four family               |  | $                      | 83,201  |   |                     | 45.7 
|Multi-family                                 |  |                        | 13,824  |   |                     | 7.6  
|Construction                                 |  |                        | 3,943   |   |                     | 2.2  
|Commercial                                   |  |                        | 49,531  |   |                     | 27.2 
|Land                                         |  |                        | 10,539  |   |                     | 5.8  
|Home equity line of credit                   |  |                        | 2,021   |   |                     | 1.1  
|                                             |  |                        |         |   |                     |      
|Total real estate loans                      |  |                        | 163,059 |   |                     | 89.5 
|                                             |  |                        |         |  
|Commercial Business Loans                    |  |                        | 11,975  |   |                     | 6.6  
|                                             |  |                        |         |  
|Non-real estate loans:                       |  |                        |         |   |                     |      
|Loans secured by deposit accounts            |  |                        | 1,888   |   |                     | 1.0  
|Other consumer loans                         |  |                        | 1,633   |   |                     | 0.9  
|Loans secured by automobiles                 |  |                        | 2,895   |   |                     | 1.6  
|Mobile home loans                            |  |                        | 673     |   |                     | 0.4  
|                                             |  |                        |         |   |                     |      
|Total non-real estate loans                  |  |                        | 7,089   |   |                     | 3.9  
|                                             |  |                        |         |  
|Total commercial business and consumer loans |  |                        | 19,064  |   |                     | 10.5 
|                                             |  |                        |         |   |                     |      
|Subtotal                                     |  |                        | 182,123 |   |                     | 100.0
|                                             |  |                        |         |   |                     |      
|Less:                                        |  |                        |         |   |                     |      
|Loans in process                             |  |                        | (1,657  | ) |                     |      
|Deferred loan fees, net                      |  |                        | (359    | ) |                     |      
|Unearned discount on loans                   |  |                        | (3      | ) |                     |      
|Allowance for losses                         |  |                        | (2,691  | ) |                     |      
|                                             |  |                        |         |   |                     |      
|Loans receivable, net                        |  | $                      | 177,413 |   |                     |      
|                                             |  |                        |         |   |                     |      



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 consider the level of subprime loans held in the portfolio and delinquency levels and loss experience with respect to subprime and prime loans. In addition, we assess the allowance using factors that cannot be associated with
specific credit or loan categories. These factors include our subjective evaluation of local and national economic and business conditions, portfolio concentration and changes in the character and size of the loan portfolio. The allowance
methodology reflects our objective that the overall allowance appropriately reflects a margin for the imprecision necessarily inherent in estimates of expected credit losses.



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The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for
loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours.



The allowance for loan losses decreased $150,000 to $2.7 million at September 30, 2003, due to net charge-offs during the three-month period ended September 30, 2003.
There were no additions to the allowance for loan losses during the current three-month period. At September 30, 2003, our allowance for loan losses represented 1.48% of total gross loans and 184.6% of nonperforming loans, compared to 1.54% of total
gross loans and 161.79% of nonperforming loans at June 30, 2003.



Nonperforming Assets



We consider repossessed assets
and nonaccrual loans to be nonperforming. Loans are reviewed on a monthly basis and are generally placed on a nonaccrual status when the loan becomes more than 90 days delinquent. Foreclosed real estate increased $354,000, to $1.6 million at
September 30, 2003 from $1.2 million at June 30, 2003. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling costs. Any writedown to fair value is charged to the allowance for
loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.



|                                                        |  | September 30, 2003 |       |   | June 30, 2003 |  
|------------------------------------------------------- |  | ------------------ | ----- | - | ------------- | -
|Nonaccruing loans:                                      |  |                    |       |   |               |  
|One-to-four-family                                      |  | $                  | 1,344 |   |               | $
|Commercial                                              |  |                    | 21    |   |               |  
|Land                                                    |  |                    | 8     |   |               |  
|Commercial Business                                     |  |                    | 30    |   |               |  
|Consumer                                                |  |                    | 55    |   |               |  
|                                                        |  |                    |       |   |               |  
|Total nonaccrual loans                                  |  |                    | 1,458 |   |               |  
|                                                        |  |                   
|Real estate owned                                       |  |                    | 1,581 |   |               |  
|Other repossessed assets                                |  |                    | 13    |   |               |  
|                                                        |  |                   
|Total nonperforming assets                              |  | $                  | 3,052 |   |               | $
|                                                        |  |                    |       |   |               |  
|Total nonperforming assets to total assets              |  |                    | 0.96  | % |               |  
|Total nonperforming loans to total loans                |  |                    | 0.80  | % |               |  
|Allowance for loan losses to total nonperforming assets |  |                    | 88.17 | % |               |  



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Deposits



Total deposits decreased $104.6 million, or 32.3% to $219.6 million at September 30, 2003. This decrease is primarily attributable to the funds held in the conversion
account at June 30, 2003, for the purchase of Jefferson Bancshares common stock.



|                              |  | September 2003 |         | June 2003 |   | $ Change |  |   | % Change |  
|----------------------------- |  | -------------- | ------- | --------- | - | -------- |  | - | -------- | -
|Certificates of Deposit       |  | $              | 155,031 |           | $ | 159,437  |  | $ | (4,406   | )
|Savings Accounts              |  |                | 14,079  |           |   | 19,346   |  |   | (5,267   | )
|Money Market Accounts         |  |                | 28,928  |           |   | 28,588   |  |   | 340      |  
|NOW Accounts                  |  |                | 15,315  |           |   | 17,767   |  |   | (2,452   | )
|Non-interest Bearing Accounts |  |                | 6,265   |           |   | 99,109   |  |   | (92,844  | )
|                              |  |                |         |           |   |          |  |   |          |  
|                              |  | $              | 219,618 |           | $ | 324,247  |  | $ | (104,629 | )
|                              |  |                |         |           |   |          |  |   |          |  



Advances and Other
Liabilities



FHLB advances were $2.0 million at both September 30,
2003 and June 30, 2003 with maturity dates ranging from March 2004 through March 2006.



Stockholders Equity



Stockholders equity
increased $59.1 million to $95.7 million at September 30, 2003 due primarily to $64.5 million in net proceeds from the conversion. As a result of a net loss for the three-month period combined with dividends paid to shareholders, retained earnings
decreased $1.9 million to $30.8 million at September 30, 2003. 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, 2003, the
adjustment to stockholders equity was an unrealized gain of $143,000 compared to a net unrealized gain of $898,000 at June 30, 2003.



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 Federal Home Loan Bank 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.



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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, 2003, cash and cash equivalents totaled $5.5 million and interest-earning deposits totaled $10.2 million. Securities classified as
available-for-sale, which provide additional sources of liquidity, totaled $112.7 million at September 30, 2003. In addition, at September 30, 2003, we had arranged the ability to borrow a total of approximately $57.1 million from the Federal Home
Loan Bank of Cincinnati. On that date, we had advances outstanding of $2.0 million.



At September 30, 2003, we had approximately $5.5 million in loan commitments, consisting of $2.3 million in commitments to originate residential loans and $3.2 million to originate commercial loans. In addition to commitments to originate
loans, we had $1.7 million in loans-in-process primarily to fund undisbursed proceeds of construction loans, $104,000 in unused standby letters of credit and approximately $3.5 million in unused lines of credit. We had $106.2 million in certificates
of deposit due within one year and $64.4 million in other deposits without specific maturities at September 30, 2003. We believe, based on past experience, that a significant portion of those deposits will remain with us. We have the ability to
attract and retain deposits by adjusting the interest rates offered.



Our
primary investing activities are the origination of loans and the purchase of securities. In the three-month period ended September 30, 2003, we originated approximately $13.1 million of loans and purchased $57.2 million in securities.



Financing activities consist primarily of activity in deposit accounts and Federal Home
Loan Bank advances. We experienced a net decrease in total deposits of $104.6 million during the three-month period ended September 30, 2003. However, we experienced a decline of only $45.2 million in assets during that period, most of which related
to the return of excess subscriptions in connection with the Companys stock offering. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage
the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. In the three-month period ended September 30, 2003, Federal
Home Loan Bank advances were unchanged.



At September 30, 2003, the average
liquidity ratio was 45.04% compared to 27.65% at September 30, 2002. The capital from the Conversion has significantly increased our liquidity and capital resources. Over time, we expect the initial level of liquidity after the conversion will be
reduced as net proceeds from the stock offering are used for future lending and operational growth and expansion activities.



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Capital Compliance



The following table presents our capital position relative to our regulatory capital requirements at September 30, 2003, and June 30, 2003:



|                                         |  | Actual                 |        |   | For Capital Adequacy Purposes: |      |   | To Be Well Capitalized Under Prompt Corrective Action Provisions: |  
|---------------------------------------- |  | ---------------------- | ------ | - | ------------------------------ | ---- | - | ----------------------------------------------------------------- | -
|                                         |  | Amount                 |        |   | Ratio                          |      |   | Amount                                                            |  
|                                         |  | (Dollars in Thousands) |       
|At September 30, 2003:                   |  |                        |        |   |                                |      |   |                                                                   |  
|                                         |  |                        |        |   |                                |     
|Total Capital (To Risk Weighted Assets)  |  | $                      | 63,265 | 3 |                                | 38.8 | % |                                                                   | $
|                                         |  |                        |        |   |                                |     
|Core Capital (To Tangible Assets)        |  |                        | 61,220 | 3 |                                | 21.1 | % |                                                                   |  
|                                         |  |                        |        |   |                                |     
|Tangible Capital (To Tangible Assets)    |  |                        | 61,220 | 3 |                                | 21.1 | % |                                                                   |  
|                                         |  |                        |        |   |                                |     
|Tier 1 Capital (To Risk Weighted Assets) |  |                        | 61,220 | 3 |                                | 37.6 | % |                                                                   |  
|                                         |  |                        |        |   |                                |     
|At June 30, 2003:                        |  |                        |        |   |                                |      |   |                                                                   |  
|                                         |  |                        |        |   |                                |     
|Total Capital (To Risk Weighted Assets)  |  |                        | 37,472 | 3 |                                | 21.1 | % |                                                                   |  
|                                         |  |                        |        |   |                                |     
|Core Capital (To Tangible Assets)        |  |                        | 35,255 | 3 |                                | 9.8  | % |                                                                   |  
|                                         |  |                        |        |   |                                |     
|Tangible Capital (To Tangible Assets)    |  |                        | 35,255 | 3 |                                | 9.8  | % |                                                                   |  
|                                         |  |                        |        |   |                                |     
|Tier 1 Capital (To Risk Weighted Assets) |  |                        | 35,255 | 3 |                                | 19.8 | % |                                                                   |  



Effect of Inflation and Changing
Prices



The financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting principles (GAAP) which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative
purchasing power of money over time due to inflation. The primary impact of inflation on operations of Jefferson Bancshares is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institutions performance than do general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



For a discussion of the Companys asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Companys portfolio equity, see Item 7A in the
Companys Annual Report on Form 10-K for the year ended June 30, 2003. 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 are no material changes in the market risk of the Companys asset and liability position since June 30, 2003. As a result of the funds
raised in the Companys stock offering and managements strategy of investing the funds from the offering and excess funds from operations in short-term investments with minimal extension risk, the Company is now more asset sensitive and
is likely to experience an increase in net interest income in a rising interest rate environment.



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, 2003 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

Part II



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.



Item 2. Changes in Securities and Use of Proceeds



The following information is provided with respect to the Companys sale of its common stock as part of the Conversion.



| | a. | The effective date of the Registration Statement on Form S-1 (File No. 333-103961) was May 13, 2003.
| | -- | ----------------------------------------------------------------------------------------------------



| | b. | The offering was consummated on July 1, 2003 with the sale of 6,612,500 shares of common stock. Keefe, Bruyette & Woods, Inc. acted as marketing agent for the offering.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | The class of securities registered was common stock, par value $0.01 per share. The aggregate amount of such securities registered was 8,376,573 shares, which represented an
aggregate offering amount of $83,765,730. The amount included 6,612,500 shares (or $66.1 million) sold in the offering, 1,388,485 shares of Company common stock exchanged for outstanding shares of Jefferson Federal common stock (other than shares
held by Jefferson Bancshares, M.H.C.) and 375,000 shares (or $3.75 million) issued to Jefferson Federal Charitable Foundation, Inc.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | A reasonable estimate of the expenses incurred in connection with the Conversion and offering was $1.6 million, including expenses paid to and for the underwriter of $625,000, and
other expenses of $1.0 million. The net proceeds resulting from the offering after deducting expenses were approximately $64.5 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | The net proceeds are invested in federal funds sold and fixed income securities. This use of net proceeds is materially consistent with the use of proceeds described in the
prospectus.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 3. Defaults Upon Senior Securities



None.



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



None.



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##### Table of Contents

Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



| | a. | 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
| | ---- | --------------------------



| | b. | Reports on Form 8-K during the quarter ended September 30, 2003:
| | -- | ----------------------------------------------------------------



On July 2, 2003, the Company furnished a Form 8-K in which it reported under Item 9 the results of its stock offering.



On July 25, 2003, the Company furnished a Form 8-K in which it reported
under Item 12 the announcement of its results of operations for the quarter and year ended June 30, 2003.



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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 14, 2003 |  |  |  | /s/ Anderson L. Smith                           
|                  |  |  |  | Anderson L. Smith                               
|                  |  |  |  | President and Chief Executive Officer           
|                  |  | 
|November 14, 2003 |  |  |  | /s/ Jane P. Hutton                              
|                  |  |  |  | Jane P. Hutton                                  
|                  |  |  |  | Chief Financial Officer, Treasurer and Secretary