##### Table of Contents





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 December 31, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to

Commission File Number 00-50347





JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its
charter)







|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|Tennessee                                                     |  | 45-0508261                            
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|120 Evans Avenue, Morristown, Tennessee  |  | 37814     
|(Address of principal executive offices) |  | (Zip code)

(423) 586-8421

(Registrants telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act. (Check one)



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).     Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date:

At February 17, 2009, the registrant had 6,762,284 shares of common stock, $0.01 par value per share, outstanding.









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##### Table of Contents

INDEX



|                              |  |                                                                                                                    |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --
|                              |  | Page                                                                                                              
|                             
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements                                                                                               |  |   
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Condition - Unaudited Six months ended December 31, 2008 and year ended June 30, 2008   |  | 3 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Earnings  Unaudited Three and six months ended December 31, 2008 and 2007              |  | 4 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Changes in Stockholders Equity  Unaudited Six months ended December 31, 2008 and 2007 |  | 5 
|                              |  |                                                                                                                   
|                              |  | Consolidated Statements of Cash Flows  Unaudited Six months ended December 31, 2008 and 2007                      |  | 6 
|                              |  |                                                                                                                   
|                              |  | Notes to Consolidated Financial Statements  Unaudited                                                             |  | 7 
|                              |  |                                                                                                                   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 13
|                              |  |                                                                                                                   
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 29
|                              |  |                                                                                                                   
|Item 4(T).                    |  | Controls and Procedures                                                                                            |  | 29
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                                                   
|Item 1.                       |  | Legal Proceedings                                                                                                  |  | 30
|Item 1A.                      |  | Risk Factors                                                                                                       |  | 30
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  | 31
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                    |  | 31
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                |  | 32
|Item 5.                       |  | Other Information                                                                                                  |  | 32
|Item 6.                       |  | Exhibits                                                                                                           |  | 32
|                              | 
|SIGNATURES                    |  |                                                                                                                   



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Condition

(Dollars in thousands)



|                                                                                                                                                                                            |  |              |         |   |          |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | -------- | - | ------- | -
|                                                                                                                                                                                            |  | December 31, |         |   | June 30, |  
|                                                                                                                                                                                            |  | 2008         |         |   | 2008     |  
|                                                                                                                                                                                            |  | (Unaudited)  |         |   |          |  
|Assets                                                                                                                                                                                      |  |              |         |   |          |   |         |  
|Cash and cash equivalents                                                                                                                                                                   |  | $            | 8,077   |   |          | $ | 2,398   |  
|Interest-earning deposits                                                                                                                                                                   |  |              | 8,737   |   |          |   | 14,112  |  
|Fed funds sold                                                                                                                                                                              |  |              | 3,516   |   |          |   | 1,106   |  
|Investment securities classified as available-for-sale, net                                                                                                                                 |  |              | 44,295  |   |          |   | 3,478   |  
|Federal Home Loan Bank stock                                                                                                                                                                |  |              | 4,735   |   |          |   | 1,868   |  
|Bank owned life insurance                                                                                                                                                                   |  |              | 6,041   |   |          |   | 5,926   |  
|Loans receivable, net of allowance for loan losses of $4,692 at December 31, 2008 and $1,836 at June 30, 2008                                                                               |  |              | 509,538 |   |          |   | 282,483 |  
|Loans held-for-sale                                                                                                                                                                         |  |              | 191     |   |          |   | 258     |  
|Premises and equipment, net                                                                                                                                                                 |  |              | 26,267  |   |          |   | 15,200  |  
|Foreclosed real estate, net                                                                                                                                                                 |  |              | 1,012   |   |          |   | 462     |  
|Accrued interest receivable:                                                                                                                                                                |  |              |         |   |          |   |         |  
|Investments                                                                                                                                                                                 |  |              | 404     |   |          |   | 38      |  
|Loans receivable                                                                                                                                                                            |  |              | 2,040   |   |          |   | 1,208   |  
|Deferred tax asset                                                                                                                                                                          |  |              | 10,791  |   |          |   | 844     |  
|Goodwill                                                                                                                                                                                    |  |              | 25,814  |   |          |   |        |  
|Core deposit intangible                                                                                                                                                                     |  |              | 3,323   |   |          |   |        |  
|Other assets                                                                                                                                                                                |  |              | 3,844   |   |          |   | 884     |  
|                                                                                                                                                                                            |  |              |         |   |          |   |         |  
|                                                                                                                                                                                            |  |             
|Total assets                                                                                                                                                                                |  | $            | 658,625 |   |          | $ | 330,265 |  
|                                                                                                                                                                                            |  |              |         |   |          |   |         |  
|                                                                                                                                                                                            |  |             
|Liabilities and Stockholders Equity                                                                                                                                                        |  |              |         |   |          |   |         |  
|                                                                                                                                                                                            |  |             
|Deposits:                                                                                                                                                                                   |  |              |         |   |          |   |         |  
|Noninterest-bearing                                                                                                                                                                         |  | $            | 32,337  |   |          | $ | 17,517  |  
|Interest-bearing                                                                                                                                                                            |  |              | 445,880 |   |          |   | 206,035 |  
|Repurchase agreements                                                                                                                                                                       |  |              | 1,400   |   |          |   |        |  
|Federal Home Loan Bank advances                                                                                                                                                             |  |              | 90,545  |   |          |   | 33,000  |  
|Subordinated debentures                                                                                                                                                                     |  |              | 6,853   |   |          |   |        |  
|Other liabilities                                                                                                                                                                           |  |              | 3,074   |   |          |   | 836     |  
|Accrued income taxes                                                                                                                                                                        |  |              | 16      |   |          |   | 100     |  
|                                                                                                                                                                                            |  |              |         |   |          |   |         |  
|Total liabilities                                                                                                                                                                           |  |              | 580,105 |   |          |   | 257,488 |  
|                                                                                                                                                                                            |  |              |         |   |          |   |         |  
|                                                                                                                                                                                            |  |             
|Commitments and contingent liabilities                                                                                                                                                      |  |              |        |   |          |   |        |  
|                                                                                                                                                                                            |  |             
|Stockholders equity:                                                                                                                                                                       |  |              |         |   |          |   |         |  
|Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding                                                                                              |  |              |        |   |          |   |        |  
|Common stock, $.01 par value; 30,000,000 shares authorized; 9,182,372 shares issued and 6,777,198 shares outstanding at December 31, 2008
and 6,207,702 shares outstanding at June 30, 2008 |  |              | 92      |   |          |   | 84      |  
|Additional paid-in capital                                                                                                                                                                  |  |              | 79,460  |   |          |   | 72,959  |  
|Unearned ESOP shares                                                                                                                                                                        |  |              | (4,321  | ) |          |   | (4,537  | )
|Unearned compensation                                                                                                                                                                       |  |              | (1,156  | ) |          |   | (1,659  | )
|Accumulated other comprehensive income                                                                                                                                                      |  |              | (658    | ) |          |   | (17     | )
|Retained earnings                                                                                                                                                                           |  |              | 35,624  |   |          |   | 34,965  |  
|Treasury stock, at cost; 2,405,174 shares at December 31, 2008 and 2,238,673 shares at June 30, 2008                                                                                        |  |              | (30,521 | ) |          |   | (29,018 | )
|                                                                                                                                                                                            |  |              |         |   |          |   |         |  
|Total stockholders equity                                                                                                                                                                  |  |              | 78,520  |   |          |   | 72,777  |  
|                                                                                                                                                                                            |  |              |         |   |          |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                  |  | $            | 658,625 |   |          | $ | 330,265 |  
|                                                                                                                                                                                            |  |              |         |   |          |   |         |  

See accompanying notes to financial statements.



3



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)



|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|--------------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------
|                                                    |  | Three Months Ended |       |   | Six Months Ended
|                                                    |  | December 31,       |       |   | December 31,    
|                                                    |  | 2008               |       |   | 2007             |   |       | 2008 |  |   | 2007  
|Interest income:                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Interest on loans receivable                        |  | $                  | 6,436 |   |                  | $ | 5,145 |      |  | $ | 11,033 |   |  | $ | 10,192
|Interest on investment securities                   |  |                    | 565   |   |                  |   | 253   |      |  |   | 594    |   |  |   | 526   
|Other interest                                      |  |                    | 71    |   |                  |   | 93    |      |  |   | 113    |   |  |   | 184   
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Total interest income                               |  |                    | 7,072 |   |                  |   | 5,491 |      |  |   | 11,740 |   |  |   | 10,902
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Interest expense:                                   |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Deposits                                            |  |                    | 2,311 |   |                  |   | 2,101 |      |  |   | 3,636  |   |  |   | 4,170 
|Repurchase agreements                               |  |                    | 6     |   |                  |   |      |      |  |   | 6      |   |  |   |      
|Advances from FHLB                                  |  |                    | 658   |   |                  |   | 434   |      |  |   | 1,014  |   |  |   | 875   
|Subordinated debentures                             |  |                    | 106   |   |                  |   |      |      |  |   | 106    |   |  |   |      
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Total interest expense                              |  |                    | 3,081 |   |                  |   | 2,535 |      |  |   | 4,762  |   |  |   | 5,045 
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Net interest income                                 |  |                    | 3,991 |   |                  |   | 2,956 |      |  |   | 6,978  |   |  |   | 5,857 
|Provision for loan losses                           |  |                    | 150   |   |                  |   | 60    |      |  |   | 310    |   |  |   | 128   
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Net interest income after provision for loan losses |  |                    | 3,841 |   |                  |   | 2,896 |      |  |   | 6,668  |   |  |   | 5,729 
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Noninterest income:                                 |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Dividends from investments                          |  |                    | 14    |   |                  |   | 11    |      |  |   | 25     |   |  |   | 19    
|Mortgage origination fee income                     |  |                    | 55    |   |                  |   | 98    |      |  |   | 109    |   |  |   | 223   
|Service charges and fees                            |  |                    | 395   |   |                  |   | 154   |      |  |   | 638    |   |  |   | 308   
|Gain on sale of fixed assets                        |  |                    | 1     |   |                  |   |      |      |  |   | 1      |   |  |   |      
|Gain on sale of foreclosed real estate, net         |  |                    | 8     |   |                  |   |      |      |  |   | 8      |   |  |   | 46    
|BOLI increase in cash value                         |  |                    | 55    |   |                  |   | 55    |      |  |   | 115    |   |  |   | 110   
|Other                                               |  |                    | 101   |   |                  |   | 29    |      |  |   | 127    |   |  |   | 53    
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Total noninterest income                            |  |                    | 629   |   |                  |   | 347   |      |  |   | 1,023  |   |  |   | 759   
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Noninterest expense:                                |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Compensation and benefits                           |  |                    | 1,870 |   |                  |   | 1,431 |      |  |   | 3,188  |   |  |   | 2,875 
|Occupancy expense                                   |  |                    | 310   |   |                  |   | 173   |      |  |   | 493    |   |  |   | 344   
|Equipment and data processing expense               |  |                    | 605   |   |                  |   | 362   |      |  |   | 963    |   |  |   | 721   
|DIF premiums                                        |  |                    | 9     |   |                  |   | 7     |      |  |   | 18     |   |  |   | 13    
|Advertising                                         |  |                    | 45    |   |                  |   | 121   |      |  |   | 48     |   |  |   | 216   
|Other                                               |  |                    | 696   |   |                  |   | 444   |      |  |   | 1,164  |   |  |   | 938   
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Total noninterest expense                           |  |                    | 3,535 |   |                  |   | 2,538 |      |  |   | 5,874  |   |  |   | 5,107 
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Earnings before income taxes                        |  |                    | 935   |   |                  |   | 705   |      |  |   | 1,817  |   |  |   | 1,381 
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Income taxes:                                       |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Current                                             |  |                    | 240   |   |                  |   | 184   |      |  |   | 572    |   |  |   | 418   
|Deferred                                            |  |                    | (95   | ) |                  |   | 697   |      |  |   | (78    | ) |  |   | 705   
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Total income taxes                                  |  |                    | 145   |   |                  |   | 881   |      |  |   | 494    |   |  |   | 1,123 
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Net earnings                                        |  | $                  | 790   |   |                  | $ | (176  | )    |  | $ | 1,323  |   |  | $ | 258   
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|                                                    |  |                    |       |  
|Net earnings per share, basic                       |  | $                  | 0.13  |   |                  | $ | (0.03 | )    |  | $ | 0.22   |   |  | $ | 0.04  
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       
|Net earnings per share, diluted                     |  | $                  | 0.13  |   |                  | $ | (0.03 | )    |  | $ | 0.22   |   |  | $ | 0.04  
|                                                    |  |                    |       |   |                  |   |       |      |  |   |        |   |  |   |       

See accompanying notes to financial statements.



4



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity

Six Months Ended December 30, 2008 and 2007

(Dollars in Thousands)



|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | ----------- | -- | ------------------------ | - | ------ | ----------------------------- |  | - | -------------------- | - |  | ----------------------------------- | ------ | - | ---------------- | - | ---- | ------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                                             |  | CommonStock |    | AdditionalPaid-inCapital |   |        | UnallocatedCommonStock inESOP |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |        |   | RetainedEarnings |   |      | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2008                                                                     |  | $           | 84 |                          | $ | 72,959 |                               |  | $ | (4,537               | ) |  | $                                   | (1,659 | ) |                  | $ | (17  | )             |  | $ | 34,965                   |   |  | $ | (29,018 | ) |  | $ | 72,777 |  
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                             |  |             |    |                          |   |        |                               | 
|Comprehensive income:                                                                        |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                                 |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | 1,323                    |   |  |   |        |   |  |   | 1,323  |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of (358) |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   | (641 | )             |  |   |                         |   |  |   |        |   |  |   | (641   | )
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Total comprehensive income                                                                   |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 682    |  
|                                                                                             |  |             |    |                          |   |        |                               | 
|Dividends                                                                                    |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | (780                     | ) |  |   |        |   |  |   | (780   | )
|Dividends used for ESOP payment                                                              |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | 116                      |   |  |   |        |   |  |   | 116    |  
|Shares committed to be released by the ESOP                                                  |  |             |   |                          |   | (25    | )                             |  |   | 216                  |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 191    |  
|Stock options expensed                                                                       |  |             |   |                          |   | 130    |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 130    |  
|Earned portion of stock grants                                                               |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     | 249    |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 249    |  
|Stock grant at acquisition                                                                   |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     | 254    |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Issuance of shares in acquisition (735,997 shares)                                           |  |             | 8  |                          |   | 6,396  |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Purchase of common stock (12,898 shares)                                                     |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   | (1,503  | ) |  |   | (1,503 | )
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at December 30, 2008                                                                 |  | $           | 92 |                          | $ | 79,460 |                               |  | $ | (4,321               | ) |  | $                                   | (1,156 | ) |                  | $ | (658 | )             |  | $ | 35,624                   |   |  | $ | (30,521 | ) |  | $ | 78,520 |  
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                             |  |             |    |                          |   |        |                               | 
|                                                                                             |  | CommonStock |    | AdditionalPaid-inCapital |   |        | UnallocatedCommonStock inESOP |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |        |   | RetainedEarnings |   |      | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2007                                                                     |  | $           | 84 |                          | $ | 72,738 |                               |  | $ | (4,969               | ) |  | $                                   | (2,182 | ) |                  | $ | (246 | )             |  | $ | 35,082                   |   |  | $ | (26,863 | ) |  | $ | 73,644 |  
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                             |  |             |    |                          |   |        |                               | 
|Comprehensive income:                                                                        |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                                 |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | 258                      |   |  |   |        |   |  |   | 258    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $138  |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   | 223  |               |  |   |                         |   |  |   |        |   |  |   | 223    |  
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Total comprehensive income                                                                   |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 481    |  
|                                                                                             |  |             |    |                          |   |        |                               | 
|Dividends                                                                                    |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | (763                     | ) |  |   |        |   |  |   | (763   | )
|Dividends used for ESOP payment                                                              |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   | 124                      |   |  |   |        |   |  |   | 124    |  
|Shares committed to be released by the ESOP                                                  |  |             |   |                          |   | 16     |                               |  |   | 216                  |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 232    |  
|Stock options expensed                                                                       |  |             |   |                          |   | 132    |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 132    |  
|Earned portion of stock grants                                                               |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     | 273    |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 273    |  
|Purchase of common stock (104,697 shares)                                                    |  |             |   |                          |   |       |                               |  |   |                     |   |  |                                     |       |   |                  |   |     |               |  |   |                         |   |  |   | (1,091  | ) |  |   | (1,091 | )
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at December 31, 2007                                                                 |  | $           | 84 |                          | $ | 72,886 |                               |  | $ | (4,753               | ) |  | $                                   | (1,909 | ) |                  | $ | (23  | )             |  | $ | 34,701                   |   |  | $ | (27,954 | ) |  | $ | 73,032 |  
|                                                                                             |  |             |    |                          |   |        |                               |  |   |                      |   |  |                                     |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  

See accompanying notes to financial statements.



5



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



|                                                                                               |  |                              |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Six Months EndedDecember 31, |        
|                                                                                               |  | 2008                         |         |   | 2007 |  
|Cash flows from operating activities:                                                          |  |                              |         |   |      |   |         |  
|Net earnings                                                                                   |  | $                            | 1,323   |   |      | $ | 258     |  
|Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: |  |                              |         |   |      |   |         |  
|Allocated ESOP shares                                                                          |  |                              | 191     |   |      |   | 232     |  
|Depreciation and amortization expense                                                          |  |                              | 445     |   |      |   | 330     |  
|Amortization of premiums (discounts), net on investment securities                             |  |                              | 381     |   |      |   | 8       |  
|Provision for loan losses                                                                      |  |                              | 310     |   |      |   | 128     |  
|FHLB stock dividends                                                                           |  |                              | (83     | ) |      |   |        |  
|Amortization of deferred loan fees, net                                                        |  |                              | (110    | ) |      |   | (121    | )
|(Gain) on sale of foreclosed real estate, net                                                  |  |                              | (8      | ) |      |   | (46     | )
|(Gain) on sale of fixed assets                                                                 |  |                              | (1      | ) |      |   |        |  
|Deferred tax benefit                                                                           |  |                              | (78     | ) |      |   | 705     |  
|Originations of mortgage loans held for sale                                                   |  |                              | (5,010  | ) |      |   | (13,229 | )
|Proceeds from sale of mortgage loans                                                           |  |                              | 5,077   |   |      |   | 15,571  |  
|Increase in cash value of life insurance                                                       |  |                              | (115    | ) |      |   | (110    | )
|Earned portion of MRP                                                                          |  |                              | 250     |   |      |   | 273     |  
|Stock options expensed                                                                         |  |                              | 130     |   |      |   | 132     |  
|Decrease (increase) in:                                                                        |  |                              |         |   |      |   |         |  
|Accrued interest receivable                                                                    |  |                              | 184     |   |      |   | 145     |  
|Other assets                                                                                   |  |                              | (831    | ) |      |   | (4      | )
|Increase (decrease) in other liabilities and accrued income taxes                              |  |                              | 2,119   |   |      |   | (124    | )
|                                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by (used for) operating activities                                           |  |                              | 4,174   |   |      |   | 4,148   |  
|                                                                                               |  |                              |         |   |      |   |         |  
|                                                                                               |  |                             
|Cash flows used for investing activities:                                                      |  |                              |         |   |      |   |         |  
|Loan originations, net of principal collections                                                |  |                              | (8,706  | ) |      |   | (10,933 | )
|Investment securities classified as available for sale:                                        |  |                              |         |   |      |   |         |  
|Proceeds from maturities, calls and prepayments                                                |  |                              |        |   |      |   |        |  
|Proceeds from sale                                                                             |  |                              |        |   |      |   | 4,917   |  
|Return of principal on mortgage-backed securities                                              |  |                              | 319     |   |      |   |        |  
|Purchase of securities                                                                         |  |                              | (9,962  | ) |      |   |        |  
|Acquisition, net of cash received                                                              |  |                              | 26,748  |   |      |   |        |  
|Purchase of premises and equipment                                                             |  |                              | (445    | ) |      |   | (128    | )
|Proceeds from sale of (additions to) foreclosed real estate, net                               |  |                              | 70      |   |      |   | 194     |  
|                                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by (used for) investing activities                                           |  |                              | 8,024   |   |      |   | (5,950  | )
|                                                                                               |  |                              |         |   |      |   |         |  
|                                                                                               |  |                             
|Cash flows from financing activities:                                                          |  |                              |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                            |  |                              | (7,237  | ) |      |   | 11,692  |  
|Proceeds from advances from FHLB                                                               |  |                              | 17,000  |   |      |   | 40,800  |  
|Repayment of FHLB advances                                                                     |  |                              | (17,000 | ) |      |   | (47,300 | )
|Purchase of treasury stock                                                                     |  |                              | (1,503  | ) |      |   | (1,091  | )
|Dividends paid                                                                                 |  |                              | (744    | ) |      |   | (769    | )
|                                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by (used for) financing activities                                           |  |                              | (9,484  | ) |      |   | 3,332   |  
|                                                                                               |  |                              |         |   |      |   |         |  
|                                                                                               |  |                             
|Net increase (decrease) in cash, cash equivalents and interest-earning deposits                |  |                              | 2,714   |   |      |   | 1,530   |  
|Cash, cash equivalents and interest-earning deposits at beginning of period                    |  |                              | 17,616  |   |      |   | 7,734   |  
|                                                                                               |  |                              |         |   |      |   |         |  
|                                                                                               |  |                             
|Cash, cash equivalents and interest-earning deposits at end of period                          |  | $                            | 20,330  |   |      | $ | 9,264   |  
|                                                                                               |  |                              |         |   |      |   |         |  
|                                                                                               |  |                             
|Supplemental disclosures of cash flow information:                                             |  |                              |         |   |      |   |         |  
|Cash paid during period for:                                                                   |  |                              |         |   |      |   |         |  
|Interest on deposits                                                                           |  | $                            | 2,852   |   |      | $ | 4,170   |  
|Interest on FHLB advances                                                                      |  | $                            | 1,014   |   |      | $ | 875     |  
|Income taxes                                                                                   |  | $                            | 701     |   |      | $ | 645     |  
|Real estate acquired in settlement of loans                                                    |  | $                            | 399     |   |      | $ | 1,007   |  

See accompanying notes to financial statements.



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##### Table of Contents

Notes To Consolidated Financial Statements



|(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). The unaudited financial statements of the Company were prepared with generally accepted accounting principles and with instructions for Form 10-Q 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 a fair
presentation of the interim financial statements. The results of operations for the period ended December 31, 2008 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, 2008, which was filed with the Securities and Exchange Commission on September 11, 2008. All dollar amounts,
other than per-share amounts, are in thousands unless otherwise noted.



|(2) | Principles of Consolidation
|--- | ---------------------------

The
consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly-owned subsidiary, Jefferson Federal Bank. All significant intercompany balances and transactions have been eliminated in consolidation.



|(3) | Use of Estimates
|--- | ----------------

In preparing the
consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the statement of condition dates and revenues and expenses for the periods shown. Actual
results could differ from the estimates and assumptions used in the consolidated financial statements. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan
losses, the valuation of foreclosed real estate and deferred tax assets.



|(4) | Limitation on Capital Distributions
|--- | -----------------------------------

Jefferson Federal may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of Jefferson
Federal at the time of its conversion to stock form.

Under applicable regulations, Jefferson Federal is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.

Under the banking laws of the State of Tennessee, a Tennessee chartered savings bank may not declare dividends in any calendar year that
exceeds the total of its net income of that year combined with its retained net income for the preceding two years without the prior approval of the Commissioner of the Department of Financial Institutions.



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|(5) | 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, exclusive of unallocated ESOP shares. Diluted earnings per
common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined
using the treasury stock method. For the period ended December 31, 2008, stock options to purchase 584,681 shares were not included in the computation of diluted net income per share as their effect would have been anti-dilutive. The following
table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:



|                                                                                                                                            |  |                                                                          |  |                                                                        |  |           |  |          
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | ---------------------------------------------------------------------- |  | --------- |  | ---------
|                                                                                                                                            |  | Weighted-Average SharesOutstanding for theThree Months
EndedDecember 31, |  | Weighted-Average SharesOutstanding for theSix Months
EndedDecember 31,
|                                                                                                                                            |  | 2008                                                                     |  | 2007                                                                   |  | 2008      |  | 2007     
|Weighted average number of common shares used in computing basic earnings per common share                                                  |  | 6,091,206                                                                |  | 5,840,831                                                              |  | 5,879,310 |  | 5,860,409
|Effect of dilutive stock options                                                                                                            |  |                                                                         |  |                                                                       |  |          |  |         
|                                                                                                                                            |  |                                                                          |  |                                                                        |  |           |  |          
|                                                                                                                                            |  |                                                                          |  |                                                                       
|Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming dilution |  | 6,091,206                                                                |  | 5,840,831                                                              |  | 5,879,310 |  | 5,860,409
|                                                                                                                                            |  |                                                                          |  |                                                                        |  |           |  |          



|(6) | 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.



|(7) | Allowance for Loan Losses
|--- | -------------------------

The following
table summarizes the activity in the allowance for loan losses for the six months ended December 31, 2008:



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|                             |  |                                                 |   |  |   |       |  
|---------------------------- |  | ----------------------------------------------- | - |  | - | ----- | -
|                             |  | Allowance for Loan Losses(Dollars in thousands) |  
|Balance at June 30, 2008     |  |                                                 |   |  | $ | 1,836 |  
|Allowance of acquired bank   |  |                                                 |   |  | $ | 2,577 |  
|Provision for loan losses    |  |                                                 |   |  |   | 310   |  
|Charge-offs                  |  | (72                                             | ) |  |   |       |  
|Recoveries                   |  | 41                                              |   |  |   |       |  
|                             |  |                                                 |   |  |   |       |  
|Net (charge-offs)/recoveries |  |                                                 |   |  |   | (31   | )
|                             |  |                                                 |   |  |   |       |  
|Balance at December 31, 2008 |  |                                                 |   |  | $ | 4,692 |  
|                             |  |                                                 |   |  |   |       |  



|(8) | Financial Instruments With Off-Balance Sheet Risk
|--- | -------------------------------------------------

Jefferson Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate
mortgage loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Companys maximum exposure to credit loss in the event of nonperformance by
the borrower is represented by the contractual amount and related accrued interest receivable of those instruments. The Company minimizes this risk by evaluating each borrowers creditworthiness on a case-by-case basis. Collateral held by the
Company consists of a first or second mortgage on the borrowers property. The amount of collateral obtained is based upon an appraisal of the property.

At December 31, 2008, we had approximately $4.6 million in loan commitments, consisting of commitments to originate real estate loans. In addition to commitments to originate loans we had $6.4 million in unused
letters of credit and approximately $50.1 million in unused lines of credit.



|(9) | Dividend Declaration
|--- | --------------------

On November 24,
2008 the Board of Directors of the Company approved a quarterly dividend of $0.06 per share to stockholders of record as of December 31, 2008 and payable on January 9, 2009.



|(10) | Stock Incentive Plans
|---- | ---------------------

The Companys
2004 Stock Incentive Plan authorizes the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors of Jefferson Federal and Jefferson Bancshares. As of December 31, 2008, there were 400,032 options
and 221,592 restricted stock awards granted under this plan which will vest pro-rata over a five-year period. The 2004 Plan has an expiration date of January 30, 2014.

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



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##### Table of Contents

The table below summarizes the status of the Companys stock option plans as of December 31,
2008.



|                                         |  |                    |  |                                |      
|---------------------------------------- |  | ------------------ |  | ------------------------------ | -----
|                                         |  | Three Months Ended
|                                         |  | December 31, 2008 
|                                         |  | Shares             |  | Weighted-averageexercise price
|Outstanding at beginning of period       |  | 400,032            |  | $                              | 13.69
|Converted options of State of Franklin   |  | 184,649            |  | $                              | 10.85
|Granted during the three-month period    |  |                   |  |                                |     
|Options forfeited                        |  |                   |  |                                |     
|Options exercised                        |  |                   |  |                                |     
|Outstanding at December 31, 2008         |  | 584,681            |  | $                              | 12.79
|                                         |  |                   
|Options exercisable at December 31, 2008 |  | 506,083            |  | $                              | 12.65

The following information applies to options outstanding at December 31, 2008:



|                                                |  |   |              
|----------------------------------------------- |  | - | -------------
|Number outstanding                              |  |   | 584,681      
|Range of exercise prices                        |  |   | 10.00 - 13.69
|Weighted-average exercise price                 |  | $ | 12.79        
|Weighted-average remaining contractual life     |  |   | 4.37         
|Number of options remaining for future issuance |  |   | 298,718      

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123R, Share Based Payment (SFAS 123R), an amendment of FASB Statement No. 123 (SFAS 123), Accounting for Stock-Based Compensation. SFAS 123R eliminates the
ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (APB 25) and requires a public entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. This statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after
June 15, 2005.

Effective July 1, 2005, the Company adopted SFAS 123R using the modified prospective application transition
method. This requires the Company to expense the unvested portion of options granted in 2004, which reduces net earnings by approximately $106 in fiscal year 2009. SFAS 123R provides for the use of alternative models to determine compensation cost
related to stock option grants. The estimated fair value of stock options at grant date has been determined using the Black-Scholes option-pricing model based on market data as of January 29, 2004. The expected dividend yield of 1.17% and
expected volatility of 7.01% were used to model the value. The risk free rate of return equaled 4.22%, which was based on the yield of a U.S. Treasury note with a term of ten years. The estimated time remaining before the expiration of the options
equaled ten years.



10



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##### Table of Contents

|(11) | Fair Value Disclosures
|---- | ----------------------

Effective
July 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements and SFAS No. 159 The Fair Value Options for Financial Assets and Liabilities.
SFAS No. 159, which was issued in February 2007, generally permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The statement also provides guidance on financial
assets and liabilities that are not subject to fair value measurement. Upon adoption of SFAS No. 159, the Company did not elect to adopt the fair value option for any financial instruments.

SFAS No. 157, which was issued in September 2006, defines fair value, provides a framework for measuring fair value under U.S. Generally Accepted
Accounting Principles and expands disclosures about fair value measurements. This Statement defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

In accordance with SFAS No. 157, when measuring fair value, the Company uses valuation techniques that are appropriate and
consistently applied. A hierarchy is also established under the standard and is used to prioritize valuation inputs into the following three levels to determine fair value:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than the quoted prices included in Level 1.

Level 3: Unobservable inputs.

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

Investment Securities Available for Sale

Investment securities available-for-sale are recorded at fair value on at least a monthly basis. Fair value measurements are based upon independent
pricing models or other model-based valuation techniques with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Level 2 securities include mortgage-backed securities issued by
government-sponsored entities, municipal bonds, bonds issued by government agencies, and corporate debt securities.

The fair value
measurements as of December 31, 2008, for investment securities available-for-sale are summarized below:



|                              |  |                              |  |         |        |         |   |       |   |       
|----------------------------- |  | ---------------------------- |  | ------- | ------ | ------- | - | ----- | - | ------
|                              |  | Fair Value Measurement Using |  |        
|Description                   |  | Level 1                      |  | Level 2 |        | Level 3 |   | Total
|Securities available for sale |  |                             |  | $       | 44,295 |         |  |       | $ | 44,295



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##### Table of Contents

|(12) | Business Combination
|---- | --------------------

On October 31,
2008, the Company completed its previously announced acquisition of State of Franklin. State of Franklin was headquartered in Johnson City, Tennessee, which is approximately 70 miles northeast of the Companys headquarters. State of Franklin
operates six offices in Johnson City and Kingsport with a branch under construction in Bristol, Tennessee. The primary reason for the acquisition of State of Franklin was to expand the Companys presence into upper East Tennessee. Under the
terms of the merger agreement, the Company issued a combination of shares of Company common stock and cash for the outstanding common shares of State of Franklin. State of Franklin shareholders were given the option of receiving $10.00 in cash,
1.1287 shares of Company common stock for each share of State of Franklin common stock, or a combination of stock and cash for each share of State of Franklin common stock, such that 60% of the shares of State of Franklin common stock would be
exchanged for Company common stock. However, all shares of State of Franklin common stock held by individuals residing outside of Tennessee were only eligible to receive cash consideration. Based on this structure and the current outstanding shares
of State of Franklin, the aggregate merger consideration included approximately $4.3 million in cash and 736,000 shares of Company common stock. The Company also incurred $557 in merger costs that were capitalized into goodwill. The acquisition was
accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. The assets acquired and liabilities assumed set forth below were
recorded by the Company at their fair values at the acquisition date:



|                          |  |   |        
|------------------------- |  | - | -------
|Cash and cash equivalents |  | $ | 32,062 
|Investment securities     |  |   | 31,767 
|Loans, net                |  |   | 221,023
|Premises and equipment    |  |   | 10,368 
|Core deposit intangible   |  |   | 3,421  
|Goodwill                  |  |   | 25,814 
|Other assets              |  |   | 16,590 
|                          |  |   |        
|Total assets acquired     |  |   | 341,045
|                          | 
|Deposits                  |  |   | 262,082
|Borrowings                |  |   | 64,462 
|Other liabilities         |  |   | 2,939  
|                          |  |   |        
|Total liabilities assumed |  |   | 329,483
|                          |  |   |        
|                          | 
|Net assets acquired       |  | $ | 11,562 
|                          |  |   |        

Intangible assets and purchase accounting fair value adjustments are amortized under various
methods over the expected lives of the related assets and liabilities. Recorded goodwill will not be amortized and is not deductible for tax purposes, but will be tested for impairment at least annually.

The pro forma information below presents combined results of operations as if the acquisition had occurred at the beginning of the respective periods
presented. The pro forma information includes adjustments for interest income on loans, deposits, and borrowings



12



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##### Table of Contents

acquired, amortization of intangibles, depreciation expense on property acquired, and the related income tax effects. The 2008 pro forma information includes
the loss from the sale of Fannie Mae and Freddie Mac preferred stock realized by State of Franklin. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the acquisition been
effected on the assumed dates.



|                        |  |                              |         |   |      |   |        |  
|----------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                        |  | Six Months EndedDecember 31, |        
|                        |  | 2008                         |         |   | 2007 |  
|Net interest income     |  | $                            | 10,016  |   |      | $ | 11,670 |  
|                        |  |                             
|Net loss                |  |                              | (13,451 | ) |      |   | (1,617 | )
|                        |  |                             
|Loss per share          |  | $                            | (0.25   | ) |      | $ | (1.32  | )
|Loss per share, diluted |  | $                            | (0.25   | ) |      | $ | (1.32  | )



|(13) | Subordinated Debt
|---- | -----------------

As part of the State of
Franklin acquisition, the Company acquired the State of Franklin Statutory Trust II (the Trust) and assumed the Trusts obligation with respect to certain capital securities described below. On December 13, 2006, State of
Franklin issued $10,310 of junior subordinated debentures to the Trust, a Delaware business trust wholly owned by State of Franklin. The Trust (a) sold $10,000 of capital securities through its underwriters to institutional investors and
upstreamed the proceeds to State of Franklin and (b) issued $310 of common securities to State of Franklin. The sole asset of the Trust is the $10,310 of junior subordinated debentures issued by State of Franklin. The securities are redeemable
at par after January 30, 2012, and have a final maturity January 30, 2037. The interest is payable quarterly at a floating rate equal to 3-month LIBOR plus 1.7%.



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

Managements discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The
information contained in this section should be read in conjunction with the financial statements and accompanying notes thereto. For further information, refer to the financial statements and footnotes included in the Companys Annual Report
on Form 10-K for the year ended June 30, 2008, which was filed with the Securities and Exchange Commission on September 11, 2008.

General

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



13



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

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

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

Private Securities Litigation Reform Act Safe Harbor Statement

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

Managements ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general
economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse
changes in the securities markets and changes in the quality or composition of the Companys loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended
June 30, 2008 under Item 1A. Risk Factors. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to
update any forward-looking statements.

Results of Operations for the Three and Six Months Ended December 31, 2008 and 2007

Net Income

Net income was $790,000, or $0.13 per diluted
share, for the quarter ended December 31, 2008 compared to net loss of $176,000, or ($0.03) per diluted share, for the corresponding quarter in 2007. For the six months ended December 31, 2008, net income was $1.3 million compared to
$258,000 for the same period in 2007. Financial results for the three and six month periods ended December 31, 2007 include a $637,000 non-cash charge to deferred income tax expense to establish a valuation allowance against deferred tax
assets. Excluding this tax charge, core net earnings were $461,000, or $0.08 per diluted share and $895,000, or $0.15 per diluted share, respectively, for the three and six month periods ended December 31, 2007.



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|                                      |  |                                              |      |   |                                              |   |       |      |  |   |       |   |  |   |      |  
|------------------------------------- |  | -------------------------------------------- | ---- | - | -------------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ---- | -
|                                      |  | Three Months EndedDecember 31,               |      |   | Six Months EndedDecember 31,                 |  
|                                      |  | 2008                                         |      |   | 2007                                         |   |       | 2008 |  |   | 2007  |  
|                                      |  | (Dollars in thousands,except per share data) |      |   | (Dollars in thousands,except per share data) |  
|Net earnings                          |  | $                                            | 790  |   |                                              | $ | (176  | )    |  | $ | 1,323 |   |  | $ | 258  |  
|Net earnings per share, basic         |  | $                                            | 0.13 |   |                                              | $ | (0.03 | )    |  | $ | 0.22  |   |  | $ | 0.04 |  
|Net earnings per share, diluted       |  | $                                            | 0.13 |   |                                              | $ | (0.03 | )    |  | $ | 0.22  |   |  | $ | 0.04 |  
|Return on average assets (annualized) |  |                                              | 0.57 | % |                                              |   | (0.21 | )%   |  |   | 0.60  | % |  |   | 0.15 | %
|Return on average equity (annualized) |  |                                              | 4.09 | % |                                              |   | (0.94 | )%   |  |   | 3.51  | % |  |   | 0.70 | %

While core net earnings is not a measure of performance calculated in accordance with GAAP, the Company believes
that this measure is important for the three and six month periods ended December 31, 2007 to convey to investors the Companys earnings for these periods absent the $637,000 non-cash charge to deferred income tax expense to establish a
valuation allowance against deferred tax assets during the quarter ended December 31, 2007. The valuation allowance was related to the charitable contribution carryforward directly attributable to the Companys contribution to the
Jefferson Federal Charitable Foundation in July 2003. The Company calculated its core net earnings for the three and six month periods ended December 31, 2007 by subtracting this $637,000 non-cash charge from net income for the respective
periods. Core net earnings should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data calculated in accordance with GAAP. Moreover, the manner in which
the Company calculates core net earnings may differ from that of other companies reporting measures with similar names. Reconciliations of the Companys GAAP and core net earnings for the three and six month periods ended December 31, 2007
follow.



|                                                     |  |                                               |      |      |                              |       |      |  |      |       |  |   |     
|---------------------------------------------------- |  | --------------------------------------------- | ---- | ---- | ---------------------------- | ----- | ---- |  | ---- | ----- |  | - | ----
|                                                     |  | Three Months endedDecember 31,                |      |      | Six Months EndedDecember 31,
|                                                     |  | 2008                                          |      | 2007 |                              |       | 2008 |  | 2007
|                                                     |  | (Dollars in thousands, except per share data)
|GAAP net earnings (loss)                             |  | $                                             | 790  |      | $                            | (176  | )    |  | $    | 1,323 |  | $ | 258 
|Plus: non-cash charge to deferred income tax expense |  | $                                             | 0    |      | $                            | 637   |      |  | $    | 0     |  | $ | 637 
|                                                     |  |                                               |      |      |                              |       |      |  |      |       |  |   |     
|Core net earnings                                    |  | $                                             | 790  |      | $                            | 461   |      |  | $    | 1,323 |  | $ | 895 
|                                                     |  |                                               |      |      |                              |       |      |  |      |       |  |   |     
|                                                     |  |                                               |      |     
|GAAP earnings (loss) per diluted share               |  | $                                             | 0.13 |      | $                            | (0.03 | )    |  | $    | 0.22  |  | $ | 0.04
|Plus: non-cash charge to deferred income tax expense |  | $                                             | 0.00 |      | $                            | 0.11  |      |  | $    | 0.00  |  | $ | 0.11
|                                                     |  |                                               |      |      |                              |       |      |  |      |       |  |   |     
|Core net earnings per diluted share                  |  | $                                             | 0.13 |      | $                            | 0.08  |      |  | $    | 0.22  |  | $ | 0.15
|                                                     |  |                                               |      |      |                              |       |      |  |      |       |  |   |     

Net Interest Income

Net interest income before loan loss provision increased $1.0 million, or 35.0%, to $4.0 million for the quarter ended December 31, 2008 from the corresponding period in 2007. The interest rate spread and net
interest margin for the quarter ended December 31, 2008 were 2.99% and 3.25%, respectively, compared to 2.97% and 3.73%, respectively, for the same period in 2007.



15



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##### Table of Contents

For the six months ended December 31, 2008, net interest income before loan loss provision increased $1.1 million,
or 19.1%, to $7.0 million from the corresponding period in 2007. The interest rate spread and net interest margin for the six months ended December 31, 2008 were 3.13% and 3.52%, respectively, compared to 2.95% and 3.73%, respectively, for the
same period in 2007.

The following table summarizes changes in interest income and expense for the three month period ended December 31, 2008 and
2007:



|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|------------------------- |  | ----------------------------- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                          |  | Three MonthsEndedDecember 31, |       |      |   |          |  |  
|                          |  | 2008                          |       | 2007 |   | $ Change |  |   | % Change |  
|                          |  | (Dollars in thousands)        |       |      |   |          |  |  
|Interest income:          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Loans                     |  | $                             | 6,436 |      | $ | 5,145    |  | $ | 1,291    |   |  | 25.1  | % 
|Investment securities     |  |                               | 565   |      |   | 253      |  |   | 312      |   |  | 123.3 | % 
|Interest-earning deposits |  |                               | 13    |      |   | 61       |  |   | (48      | ) |  | (78.7 | )%
|FHLB stock                |  |                               | 58    |      |   | 32       |  |   | 26       |   |  | 81.3  | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Total interest income     |  |                               | 7,072 |      |   | 5,491    |  |   | 1,581    |   |  | 28.8  | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Interest expense:         |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Deposits                  |  |                               | 2,311 |      |   | 2,101    |  |   | 210      |   |  | 10.0  | % 
|Borrowings                |  |                               | 770   |      |   | 434      |  |   | 336      |   |  | 77.4  | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Total interest expense    |  |                               | 3,081 |      |   | 2,535    |  |   | 546      |   |  | 21.5  | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Net interest income       |  | $                             | 3,991 |      | $ | 2,956    |  | $ | 1,035    |   |  | 35.0  | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   

The following table summarizes changes in interest income and expense for the six month period ended
December 31, 2008 and 2007:



|                          |  |                             |        |      |   |          |  |   |          |   |  |       |   
|------------------------- |  | --------------------------- | ------ | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                          |  | Six MonthsEndedDecember 31, |        |      |   |          |  |  
|                          |  | 2008                        |        | 2007 |   | $ Change |  |   | % Change |  
|                          |  | (Dollars in thousands)      |        |      |   |          |  |  
|Interest income:          |  |                             |        |      |   |          |  |   |          |   |  |       |   
|Loans                     |  | $                           | 11,033 |      | $ | 10,192   |  | $ | 841      |   |  | 8.3   | % 
|Investment securities     |  |                             | 594    |      |   | 526      |  |   | 68       |   |  | 12.9  | % 
|Interest-earning deposits |  |                             | 30     |      |   | 123      |  |   | (93      | ) |  | (75.6 | )%
|FHLB stock                |  |                             | 83     |      |   | 61       |  |   | 22       |   |  | 36.1  | % 
|                          |  |                             |        |      |   |          |  |   |          |   |  |       |   
|Total interest income     |  |                             | 11,740 |      |   | 10,902   |  |   | 838      |   |  | 7.7   | % 
|                          |  |                             |        |      |   |          |  |   |          |   |  |       |   
|Interest expense:         |  |                             |        |      |   |          |  |   |          |   |  |       |   
|Deposits                  |  |                             | 3,636  |      |   | 4,170    |  |   | (534     | ) |  | (12.8 | )%
|Borrowings                |  |                             | 1,126  |      |   | 875      |  |   | 251      |   |  | 28.7  | % 
|                          |  |                             |        |      |   |          |  |   |          |   |  |       |   
|Total interest expense    |  |                             | 4,762  |      |   | 5,045    |  |   | (283     | ) |  | (5.6  | )%
|                          |  |                             |        |      |   |          |  |   |          |   |  |       |   
|Net interest income       |  | $                           | 6,978  |      | $ | 5,857    |  | $ | 1,121    |   |  | 19.1  | % 
|                          |  |                             |        |      |   |          |  |   |          |   |  |       |   



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The following table summarizes average balances and average yields and costs for the three and six months ended
December 31, 2008 and December 31, 2007:



|                          |  |                                 |         |            |                               |   |                |      |            |  |      |                |  |            |         |  |                |   |            |   |         |  |      |  
|------------------------- |  | ------------------------------- | ------- | ---------- | ----------------------------- | - | -------------- | ---- | ---------- |  | ---- | -------------- |  | ---------- | ------- |  | -------------- | - | ---------- | - | ------- |  | ---- | -
|                          |  | Three Months Ended December 31, |         |            | Six Months Ended December 31, |  
|                          |  | 2008                            |         |            | 2007                          |   |                | 2008 |            |  | 2007 |               
|                          |  | AverageBalance                  |         | Yield/Cost |                               |   | AverageBalance |      | Yield/Cost |  |      | AverageBalance |  | Yield/Cost |         |  | AverageBalance |   | Yield/Cost |  
|                          |  | (Dollars in thousands)          |         |            | (Dollars in thousands)        |  
|Loans                     |  | $                               | 436,908 |            | 5.84                          | % |                | $    | 282,176    |  | 7.23 | %              |  | $          | 362,389 |  | 6.04           | % |            | $ | 278,657 |  | 7.26 | %
|Investment securities     |  |                                 | 29,510  |            | 7.78                          | % |                |      | 24,517     |  | 4.31 | %              |  |            | 16,502  |  | 7.45           | % |            |   | 25,420  |  | 4.32 | %
|Interest-earning deposits |  |                                 | 19,388  |            | 1.19                          | % |                |      | 7,052      |  | 3.43 | %              |  |            | 13,548  |  | 1.22           | % |            |   | 6,684   |  | 3.65 | %
|FHLB stock                |  |                                 | 3,788   |            | 1.36                          | % |                |      | 1,796      |  | 7.07 | %              |  |            | 2,828   |  | 2.10           | % |            |   | 1,796   |  | 6.74 | %
|Deposits                  |  |                                 | 366,621 |            | 2.50                          | % |                |      | 216,306    |  | 3.85 | %              |  |            | 284,783 |  | 2.53           | % |            |   | 214,448 |  | 3.86 | %
|Borrowings                |  |                                 | 76,946  |            | 3.97                          | % |                |      | 38,223     |  | 4.50 | %              |  |            | 56,002  |  | 3.99           | % |            |   | 36,671  |  | 4.73 | %

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



|                                                                  |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  
|----------------------------------------------------------------- |  | --------------------------------------------------- | ----- | - | ------------------------------------------------- | - | ---- | ------------------------- |  | - | ------ | - |  | ---- | ------- | - | --- | - | ------- | - |  | - | ----- | -
|                                                                  |  | Three MonthsEnded December 31,2008 Compared to 2007 |       |   | Six MonthsEnded December 31,2008 Compared to 2007 |  
|                                                                  |  | Increase (Decrease)Due To                           |       |   |                                                   |   |      | Increase (Decrease)Due To |  |   |        |  
|                                                                  |  | Volume                                              |       |   | Rate                                              |   |      | Net                       |  |   | Volume |   |  | Rate |         |   | Net |  
|                                                                  |  | (In thousands)                                      |       |   | (In thousands)                                    |  
|Interest income:                                                  |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  
|Loans receivable                                                  |  | $                                                   | 1,987 |   |                                                   | $ | (696 | )                         |  | $ | 1,291  |   |  | $    | 1,902   |   |     | $ | (1,061  | ) |  | $ | 841   |  
|Investment securities                                             |  |                                                     | 60    |   |                                                   |   | 252  |                           |  |   | 312    |   |  |      | (61     | ) |     |   | 129     |   |  |   | 68    |  
|Daily interest-earning deposits and other interest-earning assets |  |                                                     | (38   | ) |                                                   |   | 16   |                           |  |   | (22    | ) |  |      | (307    | ) |     |   | 236     |   |  |   | (71   | )
|                                                                  |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  
|Total interest-earning assets                                     |  |                                                     | 2,009 |   |                                                   |   | (428 | )                         |  |   | 1,581  |   |  |      | 1,534   |   |     |   | (696    | ) |  |   | 838   |  
|                                                                  |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  
|                                                                  |  |                                                     |       |   |                                                   |  
|Interest expense:                                                 |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  
|Deposits                                                          |  |                                                     | 424   |   |                                                   |   | (214 | )                         |  |   | 210    |   |  |      | 11,353  |   |     |   | (11,887 | ) |  |   | (534  | )
|Borrowings                                                        |  |                                                     | 381   |   |                                                   |   | (45  | )                         |  |   | 336    |   |  |      | 358     |   |     |   | (107    | ) |  |   | 251   |  
|                                                                  |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  
|Total interest-bearing liabilities                                |  |                                                     | 805   |   |                                                   |   | (259 | )                         |  |   | 546    |   |  |      | 11,711  |   |     |   | (11,994 | ) |  |   | (283  | )
|                                                                  |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  
|Net change in interest income                                     |  | $                                                   | 1,204 |   |                                                   | $ | (169 | )                         |  | $ | 1,035  |   |  | $    | (10,177 | ) |     | $ | 11,298  |   |  | $ | 1,121 |  
|                                                                  |  |                                                     |       |   |                                                   |   |      |                           |  |   |        |   |  |      |         |   |     |   |         |   |  |   |       |  

Total interest income increased $1.6 million, or 28.8%, to $7.1 million for the three months ended
December 31, 2008 and increased $838,000, or 7.7%, to $11.7 million for the six months ended December 31, 2008 compared to the corresponding periods in 2007 primarily as a result of an increase in average interest-earning assets arising
from the State of Franklin acquisition. Average interest-earning assets increased $174.1 million, or 55.2%, to $489.6 million for the three months ended December 31, 2008 and increased $82.7 million, or 26.5%, to $395.3 million for the six
months ended December 31, 2008. The increase in average earning assets for both the three and



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six month periods was primarily the result of increases in average outstanding loans. The average yield on earning assets declined by 118 basis points to
5.74% for the quarter ended December 31, 2008 and declined by 103 basis points to 5.90% for the six months ended December 31, 2008 compared to the corresponding periods in 2007. The decline in the average yield on earning assets was
primarily the result of lower yields on prime-based consumer and commercial loans resulting from decreases in the prime-lending rate during the period.

Total interest expense increased $546,000, or 21.5%, to $3.1 million for the three-month period ended December 31, 2008. The average balance of interest-bearing liabilities increased $189.0 million, or 74.3%, to $443.6 million, while
the rate paid on interest-bearing liabilities declined 120 basis points. The Company experienced an increase of $150.3 million, or 69.5%, in average interest-bearing deposits primarily due to deposits assumed in connection with the State of Franklin
acquisition. The average rate paid on deposits decreased 135 basis points to 2.50% due to decreases in short term interest rates. Average borrowings increased $38.7 million to $76.9 million due to the assumption of borrowings related to the State of
Franklin acquisition, while the average rate paid on borrowings decreased 53 basis points to 3.97%.

For the six months ended December 31, 2008,
interest expense declined $283,000, or 5.6%, to $4.8 million with average interest-bearing liabilities increasing $89.7 million, or 35.7%, to $340.8 million and the average cost declining 121 basis points to 2.77%.

Provision for Loan Losses

We review the level of the loan
loss allowance on a monthly basis and establish the provision for loan losses based on the volume and types of lending, delinquency levels, loss experience, the amount of classified loans, economic conditions and other factors related to the
collectibility of the loan portfolio. The provision for loan losses for the three-month period ended December 31, 2008 amounted to $150,000 compared to $60,000 for the comparable period in 2007. The increase in the provision for loan losses
reflects growth in commercial loans, managements evaluation of credit quality and current economic conditions. Nonperforming loans totaled $3.8 million at December 31, 2008 compared to $301,000 at June 30, 2008 and $814,000 at
December 31, 2007. The increase in nonperforming loans is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well as the current economic environment. State of Franklin nonperforming loans have
increased due to deterioration in the residential housing market.

Noninterest Income

Noninterest income increased $282,000, or 81.3%, to $629,000 for the three months ended December 31, 2008 compared to $347,000 for the corresponding period in 2007.
Service charges and fee income increased $241,000 to $395,000 for the three months ended December 31, 2008 due primarily to additional fee income generated during the two months following the acquisition of State of Franklin and the
implementation of an overdraft program. Mortgage origination fee income decreased $43,000, or 43.9%, to $55,000 for the three months ended December 31, 2008 due to a lower volume of loan originations.

Noninterest income increased $264,000, or 34.8%, to $1.0 million for the six months ended December 31, 2008 compared to $759,000 for the corresponding period in
2007. Service charges and fee income increased $330,000 to $638,000 for the six months ended December 31, 2008 due



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to the same trends outlined for three months ended December 31, 2008. Mortgage origination fee income decreased $114,000, or 51.1%, to $109,000 for the
six months ended December 31, 2008 due to a lower volume of loan originations. Gain on sale of foreclosed assets for the quarter ended December 31, 2008 was $8,000 compared to a $46,000 gain on sale of foreclosed assets for the
corresponding period in 2007.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent
changes for the three months ended December 31, 2008 compared to the same period in 2007.



|                                            |  |                                |     |         |   |     |         |   |     |   |  |       |   
|------------------------------------------- |  | ------------------------------ | --- | ------- | - | --- | ------- | - | --- | - |  | ----- | --
|                                            |  | Three Months EndedDecember 31, |     | $Change |   |     | %Change |  
|                                            |  | 2008                           |     | 2007    |   |    
|                                            |  | (Dollars in thousands)         |     |         |   |     |         |  
|Noninterest income:                         |  |                                |     |         |   |     |         |   |     |   |  |       |   
|Dividends from investments                  |  | $                              | 14  |         | $ | 11  |         | $ | 3   |   |  | 27.3  | % 
|Mortgage origination fee income             |  |                                | 55  |         |   | 98  |         |   | (43 | ) |  | (43.9 | )%
|Service charges and fees                    |  |                                | 395 |         |   | 154 |         |   | 241 |   |  | 156.5 | % 
|Gain on sale of fixed assets                |  |                                | 1   |         |   |    |         |   | 1   |   |  | NM    |   
|Gain on sale of foreclosed real estate, net |  |                                | 8   |         |   |    |         |   | 8   |   |  | NM    |   
|BOLI increase in cash value                 |  |                                | 55  |         |   | 55  |         |   |    |   |  | 0.0   | % 
|Other                                       |  |                                | 101 |         |   | 29  |         |   | 72  |   |  | 248.3 | % 
|                                            |  |                                |     |         |   |     |         |   |     |   |  |       |   
|Total noninterest income                    |  | $                              | 629 |         | $ | 347 |         | $ | 282 |   |  | 81.3  | % 
|                                            |  |                                |     |         |   |     |         |   |     |   |  |       |   

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and
percent changes for the six months ended December 31, 2008 compared to the same period in 2007.



|                                            |  |                              |       |         |   |     |         |   |      |   |  |       |   
|------------------------------------------- |  | ---------------------------- | ----- | ------- | - | --- | ------- | - | ---- | - |  | ----- | --
|                                            |  | Six Months EndedDecember 31, |       | $Change |   |     | %Change |  
|                                            |  | 2008                         |       | 2007    |   |    
|                                            |  | (Dollars in thousands)       |       |         |   |     |         |  
|Noninterest income:                         |  |                              |       |         |   |     |         |   |      |   |  |       |   
|Dividends from investments                  |  | $                            | 25    |         | $ | 19  |         | $ | 6    |   |  | 31.6  | % 
|Mortgage origination fee income             |  |                              | 109   |         |   | 223 |         |   | (114 | ) |  | (51.1 | )%
|Service charges and fees                    |  |                              | 638   |         |   | 308 |         |   | 330  |   |  | 107.1 | % 
|Gain on sale of fixed assets                |  |                              | 1     |         |   |    |         |   | 1    |   |  | NM    |   
|Gain on sale of foreclosed real estate, net |  |                              | 8     |         |   | 46  |         |   | (38  | ) |  | (82.6 | )%
|BOLI increase in cash value                 |  |                              | 115   |         |   | 110 |         |   | 5    |   |  | 4.5   | % 
|Other                                       |  |                              | 127   |         |   | 53  |         |   | 74   |   |  | 139.6 | % 
|                                            |  |                              |       |         |   |     |         |   |      |   |  |       |   
|Total noninterest income                    |  | $                            | 1,023 |         | $ | 759 |         | $ | 264  |   |  | 34.8  | % 
|                                            |  |                              |       |         |   |     |         |   |      |   |  |       |   

Noninterest Expense

Noninterest expense increased $997,000, or 39.3%, to $3.5 million for the three-month period ended December 31, 2008 and increased $767,000, or 15.0%, to $5.9 million compared to the corresponding 2007 period.
Advertising expense decreased for both the three and six month periods due to our decision to defer marketing initiatives to future periods. The increase in noninterest expense includes operations of six additional full-service offices obtained from
the acquisition of State of



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Franklin on October 31, 2008. In addition, noninterest expense includes the amortization of the core deposit intangible (CDI) resulting from
the acquisition of State of Franklin. The CDI totaled $3.4 million at the acquisition date and is being amortized over a 10 year period on an accelerated basis. The expense incurred for CDI amortization for both the three and six month period ended
December 31, 2008 was $98,000 compared to none for the prior periods.

The following table summarizes the dollar amounts for each category of
noninterest expense, and the dollar and percent changes for the three months ended December 31, 2008 compared to the same period in 2007.



|                                      |  |                                |       |         |   |       |         |   |     |   |  |       |   
|------------------------------------- |  | ------------------------------ | ----- | ------- | - | ----- | ------- | - | --- | - |  | ----- | --
|                                      |  | Three Months EndedDecember 31, |       | $Change |   |       | %Change |  
|                                      |  | 2008                           |       | 2007    |   |      
|                                      |  | (Dollars in thousands)         |       |         |   |       |         |  
|Compensation and benefits             |  | $                              | 1,870 |         | $ | 1,431 |         | $ | 439 |   |  | 30.7  | % 
|Occupancy expense                     |  |                                | 310   |         |   | 173   |         |   | 137 |   |  | 79.2  | % 
|Equipment and data processing expense |  |                                | 605   |         |   | 362   |         |   | 243 |   |  | 67.1  | % 
|Deposit insurance premiums            |  |                                | 9     |         |   | 7     |         |   | 2   |   |  | 28.6  | % 
|Advertising                           |  |                                | 45    |         |   | 121   |         |   | (76 | ) |  | (62.8 | )%
|Other                                 |  |                                | 696   |         |   | 444   |         |   | 252 |   |  | 56.8  | % 
|                                      |  |                                |       |         |   |       |         |   |     |   |  |       |   
|Total noninterest expense             |  | $                              | 3,535 |         | $ | 2,538 |         | $ | 997 |   |  | 39.3  | % 
|                                      |  |                                |       |         |   |       |         |   |     |   |  |       |   

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and
percent changes for the six months ended December 31, 2008 compared to the same period in 2007.



|                                      |  |                              |       |         |   |       |         |   |      |   |  |       |   
|------------------------------------- |  | ---------------------------- | ----- | ------- | - | ----- | ------- | - | ---- | - |  | ----- | --
|                                      |  | Six Months EndedDecember 31, |       | $Change |   |       | %Change |  
|                                      |  | 2008                         |       | 2007    |   |      
|                                      |  | (Dollars in thousands)       |       |         |   |       |         |  
|Compensation and benefits             |  | $                            | 3,188 |         | $ | 2,875 |         | $ | 313  |   |  | 10.9  | % 
|Occupancy expense                     |  |                              | 493   |         |   | 344   |         |   | 149  |   |  | 43.3  | % 
|Equipment and data processing expense |  |                              | 963   |         |   | 721   |         |   | 242  |   |  | 33.6  | % 
|Deposit insurance premiums            |  |                              | 18    |         |   | 13    |         |   | 5    |   |  | 38.5  | % 
|Advertising                           |  |                              | 48    |         |   | 216   |         |   | (168 | ) |  | (77.8 | )%
|Other                                 |  |                              | 1,164 |         |   | 938   |         |   | 226  |   |  | 24.1  | % 
|                                      |  |                              |       |         |   |       |         |   |      |   |  |       |   
|Total noninterest expense             |  | $                            | 5,874 |         | $ | 5,107 |         | $ | 767  |   |  | 15.0  | % 
|                                      |  |                              |       |         |   |       |         |   |      |   |  |       |   

Income Taxes

Income tax expense for the three months ended December 31, 2008 was $145,000 compared to $881,000 for the same period in 2007. Income tax expense for the six months ended December 31, 2008 was $494,000 compared to $1.1 million for
the same period in 2007. Income tax expense for the three and six month periods in 2007 included the non-cash charge to deferred income tax expense to establish a valuation allowance against the charitable contribution carryforward. As previously
mentioned, the carryforward is directly attributable to the contribution made to the Jefferson Federal Charitable Foundation in connection with the Companys public offering in July 2003.



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Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits were $20.3 million at
December 31, 2008 compared to $17.6 million at June 30, 2008. We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily liquidity needs.

Investments

Investment securities increased to $44.3 million
at December 31, 2008 compared to $3.5 million at June 30, 2008. The increase was primarily the result of $31.8 million in investment securities acquired from State of Franklin. We do not hold any Freddie Mac or Fannie Mae preferred or
common stock in our investment portfolio. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $1.0 million, or $658,000 net of taxes.

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



|                                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|------------------------------------ |  | ---------------------- | ------ | - | --------------- | - | ---------------- |  | -- | --------- | - |  | - | ------
|At December 31, 2008                 |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|                                     |  |                        |        |  
|                                     |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |    | FairValue
|                                     |  | (Dollars in thousands)
|Securities available-for-sale        |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Debt securities:                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Federal agency                       |  | $                      | 10,233 |   |                 | $ | 26               |  | $  |          |   |  | $ | 10,259
|Mortgage-backed securities           |  |                        | 24,936 |   |                 |   | 723              |  |    | (593      | ) |  |   | 25,066
|Municipal                            |  |                        | 5,348  |   |                 |   | 38               |  |    | (53       | ) |  |   | 5,333 
|Corporate                            |  |                        | 4,777  |   |                 |   | 11               |  |    | (1,151    | ) |  |   | 3,637 
|                                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Total securities available- for-sale |  | $                      | 45,294 |   |                 | $ | 798              |  | $  | (1,797    | ) |  | $ | 44,295
|                                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Weighted-average rate                |  |                        | 7.45   | % |                 |   |                  |  |    |           |   |  |   |       
|                                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|                                     |  |                        |        |  
|At June 30, 2008                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|                                     |  |                        |        |  
|                                     |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |    | FairValue
|                                     |  | (Dollars in thousands)
|Securities available-for-sale        |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Debt securities:                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Federal agency                       |  | $                      |       |   |                 | $ |                 |  | $  |          |   |  | $ |      
|Municipals                           |  |                        | 3,506  |   |                 |   | 7                |  |    | (35       | ) |  |   | 3,478 
|                                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Total securities available- for-sale |  | $                      | 3,506  |   |                 | $ | 7                |  | ($ | 35        | ) |  | $ | 3,478 
|                                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       
|Weighted-average rate                |  |                        | 3.62   | % |                 |   |                  |  |    |           |   |  |   |       
|                                     |  |                        |        |   |                 |   |                  |  |    |           |   |  |   |       

Loans

Net loans increased $227.1 million to $509.5 million at December 31, 2008 compared to $282.5 million at June 30, 2008. The increase was primarily attributable to the State of Franklin acquisition. Our primary lending activity is
the origination of loans secured by real estate. Real estate loans totaled $438.3 million, or 85.1% of total loans, at December 31, 2008 compared to



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$224.6 million, or 78.9% of total loans, at June 30, 2008. Commercial business loans increased $15.0 million, or 28.7%, to $67.0 million at
December 31, 2008, while consumer loans increased $1.6 million, or 20.4%, to $9.5 million at that date.

Loans receivable, net, are summarized as
follows:



|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|------------------------------ |  | ---------------------- | ------- | - | ------------------- | ----- | - | -------- | - | ------- | ------------------- |  | ----- | - |  | - | ------- | - |  | ----- | --
|                               |  | AtDecember 31,2008     |         |   | AtJune 30,2008      |       |   | $ Change |   |         | % Change            | 
|                               |  | Amount                 |         |   | Percentof Portfolio |       |   | Amount   |   |         | Percentof Portfolio |  |       |  
|                               |  | (Dollars in thousands) |         |   |                     |       |   |          |  
|Real estate loans:             |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|Residential one-to four-family |  | $                      | 152,926 |   |                     | 29.7  | % |          | $ | 63,340  |                     |  | 22.3  | % |  | $ | 89,586  |   |  | 141.4 | % 
|Home equity line of credit     |  |                        | 22,110  |   |                     | 4.3   | % |          |   | 5,723   |                     |  | 2.0   | % |  |   | 16,387  |   |  | 286.3 | % 
|Commercial                     |  |                        | 151,469 |   |                     | 29.4  | % |          |   | 90,933  |                     |  | 32.0  | % |  |   | 60,536  |   |  | 66.6  | % 
|Multi-family                   |  |                        | 9,655   |   |                     | 1.9   | % |          |   | 4,219   |                     |  | 1.5   | % |  |   | 5,436   |   |  | 128.8 | % 
|Construction                   |  |                        | 50,341  |   |                     | 9.8   | % |          |   | 19,553  |                     |  | 6.9   | % |  |   | 30,788  |   |  | 157.5 | % 
|Land                           |  |                        | 51,789  |   |                     | 10.1  | % |          |   | 40,862  |                     |  | 14.4  | % |  |   | 10,927  |   |  | 26.7  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Total real estate loans        |  |                        | 438,290 |   |                     | 85.1  | % |          |   | 224,630 |                     |  | 78.9  | % |  |   | 213,660 |   |  | 95.1  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Commercial business loans      |  |                        | 66,990  |   |                     | 13.0  | % |          |   | 52,037  |                     |  | 18.3  | % |  |   | 14,953  |   |  | 28.7  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Consumer loans:                |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|Automobile loans               |  |                        | 3,609   |   |                     | 0.7   | % |          |   | 3,973   |                     |  | 1.4   | % |  |   | (364    | ) |  | (9.2  | )%
|Mobile home loans              |  |                        | 53      |   |                     | 0.0   | % |          |   | 60      |                     |  | 0.0   | % |  |   | (7      | ) |  | (11.7 | )%
|Loans secured by deposits      |  |                        | 1,053   |   |                     | 0.2   | % |          |   | 930     |                     |  | 0.3   | % |  |   | 123     |   |  | 13.2  | % 
|Other consumer loans           |  |                        | 4,823   |   |                     | 0.9   | % |          |   | 2,961   |                     |  | 1.0   | % |  |   | 1,862   |   |  | 62.9  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Total consumer loans           |  |                        | 9,538   |   |                     | 1.9   | % |          |   | 7,924   |                     |  | 2.8   | % |  |   | 1,614   |   |  | 20.4  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Total gross loans              |  |                        | 514,818 |   |                     | 100.0 | % |          |   | 284,591 |                     |  | 100.0 | % |  |   | 230,227 |   |  | 80.9  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|                               |  |                        |         |   |                     |      
|Less:                          |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|Deferred loan fees, net        |  |                        | (588    | ) |                     |       |   |          |   | (272    | )                   |  |       |   |  |   | (316    | ) |  | 116.2 | % 
|Allowance for losses           |  |                        | (4,692  | ) |                     |       |   |          |   | (1,836  | )                   |  |       |   |  |   | (2,856  | ) |  | 155.6 | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   
|Loans receivable, net          |  | $                      | 509,538 |   |                     |       |   |          | $ | 282,483 |                     |  |       |   |  | $ | 227,055 |   |  | 80.4  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |         |   |  |       |   



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Loan Loss Allowance

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

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

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

The allowance for loan losses was $4.7 million at December 31, 2008 compared to $1.8 million at June 30, 2008. The increase in the allowance for loan losses reflects the addition of the State of Franklin
allowance for loan losses totaling $2.6 million. Our allowance for loan losses represented 0.91% of total loans and 125.05% of nonperforming loans at December 31, 2008 compared to 0.65% of total loans and 609.97% of nonperforming loans at
June 30, 2008.



|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                           |  | Three Months EndedDecember 31, |       |   | Six Months EndedDecember 31, |  
|                                                                           |  | 2008                           |       |   | 2007                         |   |       | 2008 |  |   | 2007  |  
|                                                                           |  | (Dollars in thousands)         |       |   | (Dollars in thousands)       |  
|Balance at beginning of period                                             |  | $                              | 1,958 |   |                              | $ | 1,955 |      |  | $ | 1,836 |   |  | $ | 1,955 |  
|Allowance of acquired bank                                                 |  |                                | 2,577 |   |                              |   | 0     |      |  |   | 2,577 |   |  |   | 0     |  
|Provision for loan losses                                                  |  |                                | 150   |   |                              |   | 60    |      |  |   | 310   |   |  |   | 128   |  
|Recoveries                                                                 |  |                                | 31    |   |                              |   | 20    |      |  |   | 41    |   |  |   | 30    |  
|Charge-offs                                                                |  |                                | (24   | ) |                              |   | (208  | )    |  |   | (72   | ) |  |   | (286  | )
|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Net charge-offs                                                            |  |                                | 7     |   |                              |   | (188  | )    |  |   | (31   | ) |  |   | (256  | )
|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Allowance at end of period                                                 |  | $                              | 4,692 |   |                              | $ | 1,827 |      |  | $ | 4,692 |   |  | $ | 1,827 |  
|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|                                                                           |  |                                |       |  
|Net charge-offs to average outstanding loans during the period, annualized |  |                                | 0.00  | % |                              |   | 0.27  | %    |  |   | 0.02  | % |  |   | 0.18  | %

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent.
Nonperforming loans totaled $3.8 million at December 31, 2008 compared to $301,000 at June 30, 2008. The increase in nonperforming loans is due in part to the addition of nonperforming loans from the State of Franklin acquisition, as well
as the current economic environment. State of Franklin nonperforming loans have increased due to deterioration in the residential housing market. Foreclosed real estate amounted to $1.0 million at December 31, 2008 compared to $462,000 at
June 30, 2008. Foreclosed real estate is initially



23



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##### Table of Contents

recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, less estimated selling costs. Any writedown to fair value is
charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.



|                                                       |  |                        |        |   |              |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                                                       |  | December 31,2008       |        |   | June 30,2008 |  
|                                                       |  | (Dollars in thousands) |       
|Nonaccruing loans:                                     |  |                        |        |   |              |   |        |  
|Real estate                                            |  | $                      | 3,563  |   |              | $ | 139    |  
|Commercial business                                    |  |                        | 182    |   |              |   | 162    |  
|Consumer                                               |  |                        | 7      |   |              |   |       |  
|                                                       |  |                        |        |   |              |   |        |  
|                                                       |  |                       
|Total nonaccrual loans                                 |  |                        | 3,752  |   |              |   | 301    |  
|                                                       |  |                       
|Real estate owned                                      |  |                        | 1,012  |   |              |   | 462    |  
|Other repossessed assets                               |  |                        | 5      |   |              |   | 5      |  
|                                                       |  |                        |        |   |              |   |        |  
|                                                       |  |                       
|Total nonperforming assets                             |  | $                      | 4,769  |   |              | $ | 768    |  
|                                                       |  |                        |        |   |              |   |        |  
|                                                       |  |                       
|Total nonperforming assets to total assets             |  |                        | 0.72   | % |              |   | 0.23   | %
|Total nonperforming loans to total loans               |  |                        | 0.73   | % |              |   | 0.11   | %
|Allowance for loan losses to total nonperforming loans |  |                        | 125.05 | % |              |   | 609.97 | %

Bank Owned Life Insurance

We hold bank owned life insurance (BOLI) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life
insurance contract. The cash surrender value of the BOLI at December 31, 2008 was $6.0 million.

Deposits

Total deposits increased $254.7 million to $478.2 million at December 31, 2008 due to increases in noninterest-bearing, NOW, savings, money market, and certificates
of deposit of $14.8 million, $18.6 million, $61.1 million, $6.9 million, and $153.3 million, respectively. The increases were attributable to deposits assumed in connection with the State of Franklin acquisition.



|                             |  |                        |         |              |   |          |  |          |         |  |       |  
|---------------------------- |  | ---------------------- | ------- | ------------ | - | -------- |  | -------- | ------- |  | ----- | -
|                             |  | December 31,2008       |         | June 30,2008 |   | $ Change |  | % Change |        
|                             |  | (Dollars in thousands) |         |              |   |          | 
|Noninterest-bearing accounts |  | $                      | 32,337  |              | $ | 17,517   |  | $        | 14,820  |  | 84.6  | %
|NOW accounts                 |  |                        | 38,980  |              |   | 20,352   |  |          | 18,628  |  | 91.5  | %
|Savings accounts             |  |                        | 70,228  |              |   | 9,153    |  |          | 61,075  |  | 667.3 | %
|Money market accounts        |  |                        | 56,639  |              |   | 49,781   |  |          | 6,858   |  | 13.8  | %
|Certificates of deposit      |  |                        | 280,033 |              |   | 126,749  |  |          | 153,284 |  | 120.9 | %
|                             |  |                        |         |              |   |          |  |          |         |  |       |  
|                             |  | $                      | 478,217 |              | $ | 223,552  |  | $        | 254,665 |  | 113.9 | %
|                             |  |                        |         |              |   |          |  |          |         |  |       |  

Advances

FHLB advances increased $57.5 million to $90.5 million at December 31, 2008, compared to $33.0 million at June 30, 2008. The State of Franklin acquisition added $57.5 million of borrowed funds.



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Stockholders Equity

Stockholders equity amounted to $78.5 million at December 31, 2008 compared to $72.8 million at June 30, 2008. The increase in stockholders equity is primarily due to the issuance of 736,000
shares of common stock related to the State of Franklin acquisition. Stock repurchases for the three months ended December 31, 2008 totaled 153,603 shares at an average cost of $9.01 per share. On November 13, 2008, the Company announced
its third stock repurchase program pursuant to which up to 620,770 shares of the Companys outstanding common stock may be repurchased. At December 31, 2008, 582,961 shares remained eligible for repurchase under the current stock
repurchase program. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders equity. At December 31, 2008, the adjustment to stockholders equity was a
net unrealized loss of $658,000 compared to a net unrealized loss of $17,000 at June 30, 2008. The Company declared a $0.06 per share dividend to shareholders of record at December 31, 2008 totaling $407,000 that was payable on
January 9, 2009.

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents and interest-earning assets. The levels of these assets are dependent on our operating,
financing, lending and investing activities during any given period. At December 31, 2008, cash and cash equivalents totaled $8.1 million and interest-earning deposits totaled $12.3 million, compared to $2.4 million and $15.2 million,
respectively, at June 30, 2008. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $44.3 million at December 31, 2008 compared to $3.5 million at June 30, 2008. In addition, at
December 31, 2008, our advance agreement with the FHLB provided us with the ability to borrow a total of approximately $113.7 million from the FHLB of Cincinnati. In the three-month period ended December 31, 2008, FHLB advances increased
$57.5 million to $90.5 million compared to $33.0 million at June 30, 2008 as a result of the State of Franklin acquisition.

We anticipate that we
will have sufficient funds available to meet current loan commitments. At December 31, 2008, we had approximately $4.6 million in loan commitments outstanding. In addition to commitments to originate loans, we had $6.0 million in
loans-in-process primarily related to undisbursed proceeds of construction loans, $6.4 million in unused letters of credit and approximately $44.1 million in unused lines of credit. At December 31, 2008, we had $192.9 million in certificates of
deposit due within one year and $198.2 million in other deposits without



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specific maturities. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by
the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase deposits. Occasionally, we offer promotional rates on
certain deposit products in order to attract deposits. We experienced a net increase in total deposits of $254.7 million during the six-month period ended December 31, 2008 as a result of the State of Franklin acquisition.

Off-Balance Sheet Arrangements

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

For the three months ended December 31, 2008, we engaged in no off-balance sheet transactions reasonably likely to have
a material effect on our financial condition, results of operations or cash flows.



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Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of December 31, 2008, Jefferson Federal met each of its capital requirements. The following table presents our capital
position relative to our regulatory capital requirements at December 31, 2008 and June 30, 2008:



|                                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|------------------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ----- |  | --- | ------ |  | - | ------ | ----- | - |  | ---- | -
|                                                  |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveProvisions Action |       
|                                                  |  | Amount                 |        | Ratio |                              |   | Amount |                                                               |        |  | Ratio |  |     | Amount |  |   |        | Ratio |  
|                                                  |  | (Dollars in thousands) |       
|At December 31, 2008                              |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                                                  |  |                        |        |       |                              |   |        |                                                              
|Total Risk-Based Capital(To Risk Weighted Assets) |  | $                      | 44,545 |       | 9.0                          | % |        | $                                                             | 39,608 |  | >     |  | 8.0 | %      |  | $ | 51,392 |       | > |  | 10.0 | %
|                                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                                                  |  |                        |        |       |                              |   |        |                                                              
|Tier 1 Capital(To Risk Weighted Assets)           |  |                        | 40,387 |       | 8.2                          | % |        |                                                               | 19,804 |  | >     |  | 4.0 | %      |  |   | 30,835 |       | > |  | 6.0  | %
|                                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                                                  |  |                        |        |       |                              |   |        |                                                              
|Tier 1 Capital(To Average Assets)                 |  |                        | 40,387 |       | 6.5                          | % |        |                                                               | 24,925 |  | >     |  | 4.0 | %      |  |   | 31,046 |       | > |  | 5.0  | %
|                                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                                                  |  |                        |        |       |                              |   |        |                                                              
|At June 30, 2008                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                                                  |  |                        |        |       |                              |   |        |                                                              
|Total Risk-Based Capital(To Risk Weighted Assets) |  |                        | 66,271 |       | 24.2                         | % |        |                                                               | 21,941 |  | >     |  | 8.0 | %      |  |   | 27,426 |       | > |  | 10.0 | %
|                                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                                                  |  |                        |        |       |                              |   |        |                                                              
|Tier 1 Capital(To Risk Weighted Assets)           |  |                        | 64,472 |       | 23.5                         | % |        |                                                               | 10,970 |  | >     |  | 4.0 | %      |  |   | 16,455 |       | > |  | 6.0  | %
|                                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  
|                                                  |  |                        |        |       |                              |   |        |                                                              
|Tier 1 Capital(To Average Assets)                 |  |                        | 64,472 |       | 19.6                         | % |        |                                                               | 13,175 |  | >     |  | 4.0 | %      |  |   | 16,469 |       | > |  | 5.0  | %
|                                                  |  |                        |        |       |                              |   |        |                                                               |        |  |       |  |     |        |  |   |        |       |   |  |      |  

Under the capital regulations of the Federal Deposit Insurance Corporation (the FDIC), Jefferson
Federal must satisfy minimum leverage ratio requirements and risk-based capital requirements. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I) capital to average adjusted assets of at least 3.00% if a
particular institution has the highest examination rating and at least 4.00% for all others. At December 31, 2008, Jefferson Federals leverage capital ratio was 6.16%. Based on this capital ratio, Jefferson Federal is considered well
capitalized under the regulatory framework for prompt corrective action at December 31, 2008. The FDICs risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-



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weighted assets of at least 8.00%. Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At December 31, 2008,
Jefferson Federal had a ratio of total capital to risk-weighted assets of 9.00%. Based on this capital ratio, Jefferson Federal is considered adequately capitalized under the regulatory framework for prompt corrective action at December 31,
2008. Because Jefferson Federals total capital to risk-weighted assets has dropped below 10.00%, Jefferson Federal is required to apply for a waiver from the FDIC to obtain additional brokered deposits, roll over existing brokered deposits or
offer rates of interest which are more than 75 basis points higher than the prevailing rates of interest offered on deposits by other insured depository institutions in its normal market area or a national rate specified in the FDICs
regulations.



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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, 2008. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Companys portfolio equity.
Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Companys asset and liability position since June 30, 2008.



|Item 4(T). | 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 December 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes to the risk
factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended June 30, 2008.



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



|                          |  |                                             |  |                                        |      |                                                                                            |         |                                                                                                                       |         |    
|------------------------- |  | ------------------------------------------- |  | -------------------------------------- | ---- | ------------------------------------------------------------------------------------------ | ------- | --------------------------------------------------------------------------------------------------------------------- | ------- | ---
|Period                    |  | (a)Total Numberof Shares(or units)Purchased |  | (b)AveragePrice Paidper Share(or Unit) |      | ( c )Total Number ofShares (or Units)Purchased
asPart of PubliclyAnnounced Plansor Progams |         | ( d )Maximum Number(or ApproximateDollar Value)of Shares
(orUnits) That MayYet Be PurchasedUnder the Plansor Programs |        
|Month #1 October 1, 2008  |  |                                            |  |                                        |     |                                                                                            |        |                                                                                                                       |        |    
|through October 31, 2008  |  |                                             |  |                                        |      |                                                                                            |         |                                                                                                                       |         |    
|Month #2 November 1, 2008 |  | 119,194                                     |  | $                                      | 9.21 |                                                                                            | 119,194 |                                                                                                                       | 617,370 | (1)
|through November 30, 2008 |  |                                             |  |                                        |      |                                                                                            |         |                                                                                                                       |         |    
|Month #3 December 1, 2008 |  | 34,409                                      |  | $                                      | 8.32 |                                                                                            | 34,409  |                                                                                                                       | 582,961 | (1)
|through December 31, 2008 |  |                                             |  |                                        |      |                                                                                            |         |                                                                                                                       |         |    
|Total                     |  | 153,603                                     |  | $                                      | 9.01 |                                                                                            | 153,603 |                                                                                                                       | 582,961 |    



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



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

None.



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

The Annual Meeting of Stockholders of the Company was held on October 30, 2008. The results of the vote on the matters presented at the meeting is as follows:



| | 1. | The following individuals were elected as directors, each for a three-year term:
| | -- | --------------------------------------------------------------------------------



|                     |  |           |  |               
|-------------------- |  | --------- |  | --------------
|                     |  | Votes for |  | Votes Withheld
|William T. Hale      |  | 4,774,630 |  | 372,927       
|John F. McCrary, Jr. |  | 4,710,432 |  | 437,125       



| | 2. | The appointment of Craine, Thompson & Jones, P.C. as auditors for the Company for the fiscal year ending June 30, 2008 was ratified by stockholders by the following
vote:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For 4,918,667; Against 33,415; Abstain 193,378



| | 3. | A shareholder proposal was defeated by the following vote:
| | -- | ----------------------------------------------------------

For 526,424; Against 2,910,951; Abstain 101,580



|Item 5. | Other Information
|------- | -----------------

The following disclosures would
otherwise have been furnished on Form 8-K under the heading: Item 2.02. Results of Operations and Financial Condition:

The
information relating to the Companys results of operations for the quarter ended September 30, 2008, which was furnished to the SEC via a Form 8-K on November 7, 2008, is incorporated herein by reference. The information being
incorporated by reference herein shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Amended and Restated Employment Agreement by and among Jefferson Bancshares, Inc., Jefferson Federal Bank and Anderson L. Smith * (1)
|     | 
|10.2 |  | Amended and Restated Jefferson Federal Bank Supplemental Executive Retirement Plan * (1)                                             
|     | 
|10.3 |  | Amended and Restated Change in Control Severance Plan of Jefferson Federal Bank * (1)                                                
|     | 
|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                                                                                                           



|* | Management contract or compensatory plan, contract or arrangement.
|- | ------------------------------------------------------------------



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|(1) | Amended during the quarter ended December 31, 2008 to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the Code) and
the regulations and guidance issued with respect to Section 409A of the Code.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.                      
|                  | 
|February 17, 2009 |  | /s/ Anderson L. Smith                           
|                  |  | Anderson L. Smith                               
|                  |  | President and Chief Executive Officer           
|                  | 
|February 17, 2009 |  | /s/ Jane P. Hutton                              
|                  |  | Jane P. Hutton                                  
|                  |  | Chief Financial Officer, Treasurer and Secretary



34