##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended December 31, 2006

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



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JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Tennessee                                                      |  | 45-0508261                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



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

(423) 586-8421

(Registrants telephone number, including area code)

Not Applicable

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



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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 or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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 7, 2007, the registrant had 6,470,786 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 - UnauditedSix months ended December 31, 2006 and year ended June 30, 2006   |  | 3   
|                           |  |                                                                                                                  
|                           |  | Consolidated Statements of Earnings - UnauditedThree and six months ended December 31, 2006 and 2005              |  | 4   
|                           |  |                                                                                                                  
|                           |  | Consolidated Statements of Changes in Stockholders Equity - UnauditedSix months ended December 31, 2006 and 2005 |  | 5   
|                           |  |                                                                                                                  
|                           |  | Consolidated Statements of Cash Flows - UnauditedSix months ended December 31, 2006 and 2005                      |  | 6   
|                           |  |                                                                                                                  
|                           |  | Notes to Consolidated Financial Statements - Unaudited                                                            |  | 7   
|                           |  |                                                                                                                  
|Item 2.                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 11  
|                           |  |                                                                                                                  
|Item 3.                    |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 28  
|                           |  |                                                                                                                  
|Item 4.                    |  | Controls and Procedures                                                                                           |  | 28  
|                           | 
|PART II. OTHER INFORMATION |  |                                                                                                                  
|                           |  |                                                                                                                  
|Item 1.                    |  | Legal Proceedings                                                                                                 |  | 29  
|Item 1A.                   |  | Risk Factors                                                                                                      |  | 29  
|Item 2.                    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                       |  | 29  
|Item 3.                    |  | Defaults Upon Senior Securities                                                                                   |  | 30  
|Item 4.                    |  | Submission of Matters to a Vote of Security Holders                                                               |  | 30  
|Item 5.                    |  | Other Information                                                                                                 |  | 30  
|Item 6.                    |  | Exhibits                                                                                                          |  | 30  
|                           | 
|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 31,2006 |         |   | June 30,2006 |  
|                                                                                                                                                                                            |  | (Unaudited)      |         |   |              |  
|Assets                                                                                                                                                                                      |  |                  |         |   |              |   |         |  
|                                                                                                                                                                                            |  |                 
|Cash and cash equivalents                                                                                                                                                                   |  | $                | 2,596   |   |              | $ | 3,146   |  
|Interest-earning deposits                                                                                                                                                                   |  |                  | 5,613   |   |              |   | 8,810   |  
|Investment securities classified as available-for-sale, net                                                                                                                                 |  |                  | 27,422  |   |              |   | 31,845  |  
|Federal Home Loan Bank stock                                                                                                                                                                |  |                  | 1,796   |   |              |   | 1,745   |  
|Bank owned life insurance                                                                                                                                                                   |  |                  | 5,595   |   |              |   | 5,491   |  
|Loans receivable, net of allowance for loan losses of $2,108 at December 31, 2006 and $2,172 at June 30, 2006                                                                               |  |                  | 268,493 |   |              |   | 254,127 |  
|Loans held-for-sale                                                                                                                                                                         |  |                  | 1,257   |   |              |   | 1,645   |  
|Premises and equipment, net                                                                                                                                                                 |  |                  | 13,419  |   |              |   | 11,926  |  
|Foreclosed real estate, net                                                                                                                                                                 |  |                  | 30      |   |              |   | 74      |  
|Accrued interest receivable:                                                                                                                                                                |  |                  |         |   |              |   |         |  
|Investments                                                                                                                                                                                 |  |                  | 300     |   |              |   | 330     |  
|Loans receivable                                                                                                                                                                            |  |                  | 1,422   |   |              |   | 1,342   |  
|Deferred tax asset                                                                                                                                                                          |  |                  | 1,698   |   |              |   | 1,986   |  
|Other assets                                                                                                                                                                                |  |                  | 797     |   |              |   | 4,670   |  
|                                                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total assets                                                                                                                                                                                |  | $                | 330,438 |   |              | $ | 327,137 |  
|                                                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                        |  |                  |         |   |              |   |         |  
|                                                                                                                                                                                            |  |                 
|Deposits                                                                                                                                                                                    |  |                  |         |   |              |   |         |  
|Noninterest-bearing                                                                                                                                                                         |  | $                | 11,474  |   |              | $ | 10,806  |  
|Interest-bearing                                                                                                                                                                            |  |                  | 198,421 |   |              |   | 188,037 |  
|Federal Home Loan Bank advances                                                                                                                                                             |  |                  | 45,300  |   |              |   | 52,400  |  
|Other liabilities                                                                                                                                                                           |  |                  | 1,017   |   |              |   | 1,295   |  
|Accrued income taxes                                                                                                                                                                        |  |                  |        |   |              |   | 56      |  
|                                                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total liabilities                                                                                                                                                                           |  |                  | 256,212 |   |              |   | 252,594 |  
|                                                                                                                                                                                            |  |                  |         |   |              |   |         |  
|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; 8,415,781 shares issued and 6,517,777 shares outstanding at December 31, 2006
and 6,613,557 shares outstanding at June 30, 2006 |  |                  | 84      |   |              |   | 84      |  
|Additional paid-in capital                                                                                                                                                                  |  |                  | 72,390  |   |              |   | 72,171  |  
|Unearned ESOP shares                                                                                                                                                                        |  |                  | (5,185  | ) |              |   | (5,401  | )
|Unearned compensation                                                                                                                                                                       |  |                  | (2,457  | ) |              |   | (2,733  | )
|Accumulated other comprehensive income                                                                                                                                                      |  |                  | (252    | ) |              |   | (609    | )
|Retained earnings                                                                                                                                                                           |  |                  | 34,782  |   |              |   | 34,780  |  
|Treasury stock, at cost; 1,898,004 shares at December 31, 2006 and 1,793,091 shares at June 30, 2006                                                                                        |  |                  | (25,136 | ) |              |   | (23,749 | )
|                                                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                                                  |  |                  | 74,226  |   |              |   | 74,543  |  
|                                                                                                                                                                                            |  |                  |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                  |  | $                | 330,438 |   |              | $ | 327,137 |  
|                                                                                                                                                                                            |  |                  |         |   |              |   |         |  

See accompanying notes to financial statements.



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)



|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|--------------------------------------------------- |  | ------------------------------ | ----- | ---------------------------- | ---- | - | ----- |  | - | ------ | - |  | - | ----- | -
|                                                    |  | Three Months EndedDecember 31, |       | Six Months EndedDecember 31, |     
|                                                    |  | 2006                           |       |                              | 2005 |   | 2006  |  |   | 2005   |  
|Interest income:                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Interest on loans receivable                        |  | $                              | 4,893 |                              |      | $ | 3,870 |  | $ | 9,627  |   |  | $ | 7,514 |  
|Interest on investment securities                   |  |                                | 280   |                              |      |   | 431   |  |   | 593    |   |  |   | 899   |  
|Other interest                                      |  |                                | 63    |                              |      |   | 91    |  |   | 150    |   |  |   | 173   |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Total interest income                               |  |                                | 5,236 |                              |      |   | 4,392 |  |   | 10,370 |   |  |   | 8,586 |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Interest expense:                                   |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Deposits                                            |  |                                | 1,815 |                              |      |   | 1,293 |  |   | 3,550  |   |  |   | 2,494 |  
|Advances from FHLB                                  |  |                                | 613   |                              |      |   | 258   |  |   | 1,263  |   |  |   | 437   |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Total interest expense                              |  |                                | 2,428 |                              |      |   | 1,551 |  |   | 4,813  |   |  |   | 2,931 |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Net interest income                                 |  |                                | 2,808 |                              |      |   | 2,841 |  |   | 5,557  |   |  |   | 5,655 |  
|Provision for loan losses                           |  |                                | 30    |                              |      |   |      |  |   | 30     |   |  |   |      |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Net interest income after provision for loan losses |  |                                | 2,778 |                              |      |   | 2,841 |  |   | 5,527  |   |  |   | 5,655 |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Noninterest income:                                 |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Dividends from investments                          |  |                                | 17    |                              |      |   |      |  |   | 47     |   |  |   | 17    |  
|Mortgage origination fee income                     |  |                                | 102   |                              |      |   | 131   |  |   | 252    |   |  |   | 317   |  
|Service charges and fees                            |  |                                | 127   |                              |      |   | 134   |  |   | 250    |   |  |   | 273   |  
|Loss on sale of investment securities, net          |  |                                | (30   | )                            |      |   |      |  |   | (29    | ) |  |   | (44   | )
|Gain on sale of foreclosed real estate, net         |  |                                | 21    |                              |      |   | 83    |  |   | 34     |   |  |   | 160   |  
|BOLI increase in cash value                         |  |                                | 53    |                              |      |   | 53    |  |   | 105    |   |  |   | 106   |  
|Other                                               |  |                                | 20    |                              |      |   | 12    |  |   | 38     |   |  |   | 40    |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Total noninterest income                            |  |                                | 310   |                              |      |   | 413   |  |   | 697    |   |  |   | 869   |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Noninterest expense:                                |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Compensation and benefits                           |  |                                | 1,498 |                              |      |   | 1,299 |  |   | 3,041  |   |  |   | 2,580 |  
|Occupancy expense                                   |  |                                | 145   |                              |      |   | 90    |  |   | 302    |   |  |   | 197   |  
|Equipment and data processing expense               |  |                                | 372   |                              |      |   | 219   |  |   | 716    |   |  |   | 459   |  
|DIF premiums                                        |  |                                | 6     |                              |      |   | 7     |  |   | 12     |   |  |   | 13    |  
|Advertising                                         |  |                                | 65    |                              |      |   | 81    |  |   | 234    |   |  |   | 145   |  
|REO expense                                         |  |                                |      |                              |      |   | 11    |  |   | 8      |   |  |   | 37    |  
|Other                                               |  |                                | 453   |                              |      |   | 380   |  |   | 892    |   |  |   | 731   |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Total noninterest expense                           |  |                                | 2,539 |                              |      |   | 2,087 |  |   | 5,205  |   |  |   | 4,162 |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Earnings before income taxes                        |  |                                | 549   |                              |      |   | 1,167 |  |   | 1,019  |   |  |   | 2,362 |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Income taxes:                                       |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Current                                             |  |                                | 146   |                              |      |   | 406   |  |   | 314    |   |  |   | 708   |  
|Deferred                                            |  |                                | 54    |                              |      |   | 51    |  |   | 66     |   |  |   | 159   |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Total income taxes                                  |  |                                | 200   |                              |      |   | 457   |  |   | 380    |   |  |   | 867   |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Net earnings                                        |  | $                              | 349   |                              |      | $ | 710   |  | $ | 639    |   |  | $ | 1,495 |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Net earnings per share, basic                       |  | $                              | 0.06  |                              |      | $ | 0.11  |  | $ | 0.11   |   |  | $ | 0.23  |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  
|Net earnings per share, diluted                     |  | $                              | 0.06  |                              |      | $ | 0.11  |  | $ | 0.11   |   |  | $ | 0.23  |  
|                                                    |  |                                |       |                              |      |   |       |  |   |        |   |  |   |       |  

See accompanying notes to financial statements.



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity

Six Months Ended December 31, 2006 and 2005 (Unaudited)

(Dollars in Thousands)



|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ----------- | -- | ------------------------ | - | ------ | ------------------------------- |  | - | -------------------- | - |  | ------------------------------------ | ------ | - | ---------------- | - | ---- | ------------- |  | - | ------------------------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                                              |  | CommonStock |    | AdditionalPaid-inCapital |   |        | UnallocatedCommon Stock in ESOP |  |   | UnearnedCompensation |   |  | Accumulated OtherComprehensiveIncome |        |   | RetainedEarnings |   |      | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2006                                                                      |  | $           | 84 |                          | $ | 72,171 |                                 |  | $ | (5,401               | ) |  | $                                    | (2,733 | ) |                  | $ | (609 | )             |  | $ | 34,780                   |   |  | $ | (23,749 | ) |  | $ | 74,543 |  
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Comprehensive income:                                                                         |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                                  |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   | 639                      |   |  |   |        |   |  |   | 639    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $222   |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   | 357  |               |  |   |                         |   |  |   |        |   |  |   | 357    |  
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Total comprehensive income                                                                    |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 996    |  
|                                                                                              |  |             |    |                          |   |        |                                 | 
|Dividends                                                                                     |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   | (786                     | ) |  |   |        |   |  |   | (786   | )
|Dividends used for ESOP payment                                                               |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   | 149                      |   |  |   |        |   |  |   | 149    |  
|Shares committed to be released by the ESOP                                                   |  |             |   |                          |   | 67     |                                 |  |   | 216                  |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 283    |  
|Stock options expensed                                                                        |  |             |   |                          |   | 132    |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 132    |  
|Earned portion of stock grants                                                                |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      | 276    |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 276    |  
|MRP Vesting                                                                                   |  |             |   |                          |   | (12    | )                               |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | (12    | )
|Exercise of options                                                                           |  |             |   |                          |   | 32     |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 32     |  
|Purchase of common stock (104,913 shares)                                                     |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   | (1,387  | ) |  |   | (1,387 | )
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at December 31, 2006                                                                  |  | $           | 84 |                          | $ | 72,390 |                                 |  | $ | (5,185               | ) |  | $                                    | (2,457 | ) |                  | $ | (252 | )             |  | $ | 34,782                   |   |  | $ | (25,136 | ) |  | $ | 74,226 |  
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|                                                                                              |  |             |    |                          |   |        |                                 | 
|                                                                                              |  | CommonStock |    | AdditionalPaid-inCapital |   |        | UnallocatedCommonStock inESOP   |  |   | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome  |        |   | RetainedEarnings |   |      | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2005                                                                      |  | $           | 84 |                          | $ | 71,694 |                                 |  | $ | (5,833               | ) |  | $                                    | (3,232 | ) |                  | $ | (155 | )             |  | $ | 34,069                   |   |  | $ | (14,599 | ) |  | $ | 82,028 |  
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Comprehensive income:                                                                         |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Net earnings                                                                                  |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   | 1,495                    |   |  |   |        |   |  |   | 1,495  |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $(234) |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   | (377 | )             |  |   |                         |   |  |   |        |   |  |   | (377   | )
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Total comprehensive income                                                                    |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 1,118  |  
|                                                                                              |  |             |    |                          |   |        |                                 | 
|Dividends                                                                                     |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   | (843                     | ) |  |   |        |   |  |   | (843   | )
|Dividends used for ESOP payment                                                               |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   | 157                      |   |  |   |        |   |  |   | 157    |  
|Shares committed to be released by the ESOP                                                   |  |             |   |                          |   | 67     |                                 |  |   | 216                  |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 283    |  
|Stock options expensed                                                                        |  |             |   |                          |   | 132    |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 132    |  
|Earned portion of stock grants                                                                |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      | 220    |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 220    |  
|Exercise of options                                                                           |  |             |   |                          |   | 34     |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 34     |  
|Tax benefit from exercise of nonqualifying stock options                                      |  |             |   |                          |   | 25     |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   |        |   |  |   | 25     |  
|Purchase of common stock (395,204 shares)                                                     |  |             |   |                          |   |       |                                 |  |   |                     |   |  |                                      |       |   |                  |   |     |               |  |   |                         |   |  |   | (5,242  | ) |  |   | (5,242 | )
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  
|Balance at December 31, 2005                                                                  |  | $           | 84 |                          | $ | 71,952 |                                 |  | $ | (5,617               | ) |  | $                                    | (3,012 | ) |                  | $ | (532 | )             |  | $ | 34,878                   |   |  | $ | (19,841 | ) |  | $ | 77,912 |  
|                                                                                              |  |             |    |                          |   |        |                                 |  |   |                      |   |  |                                      |        |   |                  |   |      |               |  |   |                          |   |  |   |         |   |  |   |        |  

See accompanying notes to financial statements.



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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



|                                                                                               |  |                              |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Six Months endedDecember 31, |        
|                                                                                               |  | 2006                         |         |   | 2005 |  
|Cash flows from operating activities:                                                          |  |                              |         |   |      |   |         |  
|Net earnings                                                                                   |  | $                            | 639     |   |      | $ | 1,495   |  
|Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: |  |                              |         |   |      |   |         |  
|Allocated ESOP shares                                                                          |  |                              | 283     |   |      |   | 283     |  
|Depreciation and amortization expense                                                          |  |                              | 261     |   |      |   | 128     |  
|Amortization of premiums (discounts), net on investment securities                             |  |                              | 7       |   |      |   | 18      |  
|Provision for loan losses                                                                      |  |                              | 30      |   |      |   |        |  
|Loss on sale of investment securities and mortgage-backed securities, net                      |  |                              | 29      |   |      |   | 60      |  
|(Gain) on sale of equity investments                                                           |  |                              |        |   |      |   | (16     | )
|FHLB stock dividends                                                                           |  |                              | (52     | ) |      |   | (44     | )
|Amortization of deferred loan fees, net                                                        |  |                              | (71     | ) |      |   | (66     | )
|(Gain) on sale of foreclosed real estate, net                                                  |  |                              | (34     | ) |      |   | (160    | )
|Deferred tax benefit                                                                           |  |                              | 66      |   |      |   | 159     |  
|Originations of mortgage loans held for sale                                                   |  |                              | (29,448 | ) |      |   | (28,267 | )
|Proceeds from sale of mortgage loans                                                           |  |                              | 29,836  |   |      |   | 30,209  |  
|Increase in cash value of life insurance                                                       |  |                              | (104    | ) |      |   | (106    | )
|Earned portion of MRP                                                                          |  |                              | 276     |   |      |   | 220     |  
|Stock options expensed                                                                         |  |                              | 132     |   |      |   | 133     |  
|Decrease (increase) in:                                                                        |  |                              |         |   |      |   |         |  
|Accrued interest receivable                                                                    |  |                              | (50     | ) |      |   | (253    | )
|Other assets                                                                                   |  |                              | 3,873   |   |      |   | 273     |  
|Increase (decrease) in other liabilities and accrued income taxes                              |  |                              | (163    | ) |      |   | (6      | )
|                                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by (used for) operating activities                                           |  |                              | 5,510   |   |      |   | 4,060   |  
|                                                                                               |  |                              |         |   |      |   |         |  
|Cash flows used for investing activities:                                                      |  |                              |         |   |      |   |         |  
|Loan originations, net of principal collections                                                |  |                              | (14,149 | ) |      |   | (18,368 | )
|Investment securities classified as available for sale:                                        |  |                              |         |   |      |   |         |  
|Purchased                                                                                      |  |                              |        |   |      |   | (775    | )
|Proceeds from sale                                                                             |  |                              | 3,965   |   |      |   | 5,022   |  
|Proceeds from maturity                                                                         |  |                              | 1,000   |   |      |   |        |  
|Return of principal on mortgage-backed securities                                              |  |                              |        |   |      |   | 1,639   |  
|Purchase of premises and equipment                                                             |  |                              | (1,754  | ) |      |   | (2,332  | )
|Proceeds from sale of (additions to) foreclosed real estate, net                               |  |                              | 41      |   |      |   | 214     |  
|                                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by (used for) investing activities                                           |  |                              | (10,897 | ) |      |   | (14,600 | )
|                                                                                               |  |                              |         |   |      |   |         |  
|Cash flows from financing activities:                                                          |  |                              |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                            |  |                              | 11,052  |   |      |   | 494     |  
|Proceeds from advances from FHLB                                                               |  |                              | 55,700  |   |      |   | 27,000  |  
|Repayment of FHLB advances                                                                     |  |                              | (62,800 | ) |      |   | (12,000 | )
|Purchase of treasury stock                                                                     |  |                              | (1,387  | ) |      |   | (5,242  | )
|Dividends paid                                                                                 |  |                              | (957    | ) |      |   | (1,158  | )
|Proceeds from exercise of stock options                                                        |  |                              | 32      |   |      |   | 34      |  
|                                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by (used for) financing activities                                           |  |                              | 1,640   |   |      |   | 9,128   |  
|                                                                                               |  |                              |         |   |      |   |         |  
|Net increase (decrease) in cash, cash equivalents and interest-earning deposits                |  |                              | (3,747  | ) |      |   | (1,412  | )
|Cash, cash equivalents and interest-earning deposits at beginning of period                    |  |                              | 11,956  |   |      |   | 11,027  |  
|                                                                                               |  |                              |         |   |      |   |         |  
|Cash, cash equivalents and interest-earning deposits at end of period                          |  | $                            | 8,209   |   |      | $ | 9,615   |  
|                                                                                               |  |                              |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                             |  |                              |         |   |      |   |         |  
|Cash paid during period for:                                                                   |  |                              |         |   |      |   |         |  
|Interest on deposits                                                                           |  | $                            | 3,550   |   |      | $ | 2,494   |  
|Interest on FHLB advances                                                                      |  |                              | 1,263   |   |      |   | 437     |  
|Income taxes                                                                                   |  |                              | 495     |   |      |   | 720     |  
|Real estate acquired in settlement of loans                                                    |  |                              |        |   |      |   | 224     |  

See accompanying notes to financial statements.



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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, 2006 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, 2006.



|(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
|--- | -----------------------------------

Office
of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under
the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for expedited treatment of applications under
Office of Thrift Supervision regulations (i.e., generally, examination ratings in the top two categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the
preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with, or condition imposed by, the Office of Thrift Supervision. If an
application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary of a holding company. In addition, the Office of Thrift



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Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift
Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federals capital falls below its regulatory requirements or the Office of Thrift Supervision notifies it that it is in need of
more than normal supervision, Jefferson Federals ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the distribution would reduce its regulatory capital below the amount
needed for the liquidation account established in connection with its conversion from the mutual holding company form of organization.



|(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 unearned 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 solely to outstanding stock options and are
determined using the treasury stock method. 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 the
Three Months EndedDecember 31, |  | Weighted-Average SharesOutstanding for the
Six Months EndedDecember 31,
|                                                                                                                                            |  | 2006                                                                      |  | 2005                                                                    |  | 2006      |  | 2005     
|Weighted average number of common shares used in computing basic earnings per common share                                                  |  | 5,990,682                                                                 |  | 6,416,745                                                               |  | 6,015,862 |  | 6,485,859
|Effect of dilutive stock options                                                                                                            |  | 3,456                                                                     |  | 18,062                                                                  |  | 5,710     |  | 22,847   
|                                                                                                                                            |  |                                                                           |  |                                                                         |  |           |  |          
|Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming
dilution |  | 5,994,138                                                                 |  | 6,434,807                                                               |  | 6,021,572 |  | 6,508,706
|                                                                                                                                            |  |                                                                           |  |                                                                         |  |           |  |          



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

Impairment of loans is recognized in conformity with the Financial Accounting Standards Board (FASB) Statement No. 118. There was no impairment of loans or allowance for loan losses related to impaired loans at
December 31, 2006. Other nonaccrual loans at December 31, 2006 were approximately $527,000. For the six months ended December 31, 2006, gross income which would have been recognized had nonaccrual loans been current in accordance with
their original terms amounted to approximately $21,000.



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Interest income from non-accrual loans included in the Companys interest income amounted to $5,000 for the six months ended December 31, 2006.

The following table summarizes the activity in the allowance for loan losses for the six months ended December 31, 2006:



|                             |  |                                                 |   |  |   |       |  
|---------------------------- |  | ----------------------------------------------- | - |  | - | ----- | -
|                             |  | Allowance for Loan Losses(Dollars in thousands) |  
|Balance at June 30, 2006     |  |                                                 |   |  | $ | 2,172 |  
|Provision for loan losses    |  |                                                 |   |  |   | 30    |  
|Charge-offs                  |  | (136                                            | ) |  |   |       |  
|Recoveries                   |  | 42                                              |   |  |   |       |  
|                             |  |                                                 |   |  |   |       |  
|Net (charge-offs)/recoveries |  |                                                 |   |  |   | (94   | )
|                             |  |                                                 |   |  |   |       |  
|Balance at December 31, 2006 |  |                                                 |   |  | $ | 2,108 |  
|                             |  |                                                 |   |  |   |       |  



|(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, 2006, we had approximately $63,000 in loan commitments, consisting of commitments to originate real estate loans. In addition to commitments to originate loans, we had $16.8 million of
loans-in-process, $9.7 million in unused standby letters of credit and approximately $13.4 million in unused lines of credit.



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

On November 30,
2006, the Board of Directors of the Company approved a quarterly dividend of $0.06 per share to stockholders of record as of December 31, 2006 and payable on January 12, 2007.



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

Under the Banks
1995 Stock Option Plan and the 1995 Management Recognition and Development Plan (MRP), the Company issued a combined total of 179,176 shares to officers, employees and non-employee directors. Both plans vested pro-rata over a five-year
period, with the Stock Option Plan having an expiration date of April 1, 2007. As of December 31, 2006, there were 30,593 options outstanding and no remaining shares available for grant under the 1995 Stock Option Plan. During the
three-month period, 1,633 options were exercised.



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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. As of December 31, 2006, there were 401,778 options and 204,711 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.

The table below summarizes the status of the Companys stock option plans as of
December 31, 2006.



|                                         |  |                                     |  |                                |      
|---------------------------------------- |  | ----------------------------------- |  | ------------------------------ | -----
|                                         |  | Three Months EndedDecember 31, 2006
|                                         |  | Shares                              |  | Weighted-averageexercise price
|Outstanding at beginning of period       |  | 434,004                             |  | $                              | 12.98
|Granted during the three-month period    |  |                                    |  |                                |     
|Options exercised                        |  | 1,633                               |  | $                              | 3.52 
|Outstanding at December 31, 2006         |  | 432,371                             |  | $                              | 13.02
|Options exercisable at December 31, 2006 |  | 191,315                             |  | $                              | 12.17

The following information applies to options outstanding at December 31, 2006:



|                                                |  |   |             
|----------------------------------------------- |  | - | ------------
|Number outstanding                              |  |   | 432,371     
|Range of exercise prices                        |  | $ | 3.52 -$13.69
|Weighted-average exercise price                 |  | $ | 13.02       
|Weighted-average remaining contractual life     |  |   | 6.6         
|Number of options remaining for future issuance |  |   | 296,972     

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 $217,000 in fiscal year 2007 and $326,000 during the remaining service period. 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



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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.

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. 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, 2006.

General

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

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

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

The Banks savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation (FDIC) through the Deposit Insurance Fund. Jefferson Federal 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



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results and its future performance. Forward-looking statements are preceded by terms such as expects, believes,
anticipates, intends and similar expressions.

Managements ability to predict results or the effect of future plans or
strategies is inherently uncertain. 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, 2006 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, 2006 and 2005

Net Income

Net income was $349,000, or $0.06 per diluted share, for the quarter ended December 31, 2006 compared to net income of $710,000, or $0.11 per diluted share, for the quarter ended December 31, 2005. For the
six months ended December 31, 2006, net income was $639,000, or $0.11 per diluted share, compared to $1.5 million, or $0.23 per diluted share, for the comparable period in 2005. The decline in net income for both the three- and six-month
periods ended December 31, 2006 was primarily the result of a decline in noninterest income combined with an increase in noninterest expense. The increase in noninterest expense continues to reflect our expansion initiatives during the past
year.



|                                      |  |                                              |      |   |                                              |   |      |      |  |   |      |   |  |   |       |  
|------------------------------------- |  | -------------------------------------------- | ---- | - | -------------------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ----- | -
|                                      |  | Three Months EndedDecember 31,               |      |   | Six Months EndedDecember 31,                 |  
|                                      |  | 2006                                         |      |   | 2005                                         |   |      | 2006 |  |   | 2005 |  
|                                      |  | (Dollars in thousands,except per share data) |      |   | (Dollars in thousands,except per share data) |  
|Net earnings                          |  | $                                            | 349  |   |                                              | $ | 710  |      |  | $ | 639  |   |  | $ | 1,495 |  
|Net earnings per share, basic         |  | $                                            | 0.06 |   |                                              | $ | 0.11 |      |  | $ | 0.11 |   |  | $ | 0.23  |  
|Net earnings per share, diluted       |  | $                                            | 0.06 |   |                                              | $ | 0.11 |      |  | $ | 0.11 |   |  | $ | 0.23  |  
|Return on average assets (annualized) |  |                                              | 0.42 | % |                                              |   | 0.94 | %    |  |   | 0.39 | % |  |   | 0.99  | %
|Return on average equity (annualized) |  |                                              | 1.86 | % |                                              |   | 3.60 | %    |  |   | 1.71 | % |  |   | 3.74  | %

Net Interest Income

Net interest income before loan loss provision decreased $33,000, or 1.2%, to $2.8 million for the quarter ended December 31, 2006 from the corresponding quarter in 2005. The interest rate spread and net interest
margin for the quarter ended December 31, 2006 were 2.88% and 3.69%, respectively, compared to 3.33% and 4.03% for the same period in 2005. The average yield on interest-earning assets increased 65 basis points to 6.88% while the average volume
of earning assets increased $22.4 million, to $304.5 million for the three months ended December 31, 2006 compared to the same period in 2005. The average rate paid on interest-bearing



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liabilities increased 110 basis points to 4.00%, while the average volume of interest-bearing liabilities increased $28.8 million, to $242.7 million for the
three months ended December 31, 2006, compared to the same period in 2005.

The following table summarizes changes in interest income and expense for
the three-month periods ended December 31, 2006 and 2005:



|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|------------------------- |  | ----------------------------- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                          |  | Three MonthsEndedDecember 31, |       |      |   |          |  |  
|                          |  | 2006                          |       | 2005 |   | $ Change |  |   | % Change |  
|                          |  | (Dollars in thousands)        |       |      |   |          |  |  
|Interest income:          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Loans                     |  | $                             | 4,893 |      | $ | 3,870    |  | $ | 1,023    |   |  | 26.4  | % 
|Investment securities     |  |                               | 280   |      |   | 431      |  |   | (151     | ) |  | (35.0 | )%
|Interest-earning deposits |  |                               | 36    |      |   | 67       |  |   | (31      | ) |  | (46.3 | )%
|FHLB stock                |  |                               | 27    |      |   | 24       |  |   | 3        |   |  | 12.5  | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Total interest income     |  |                               | 5,236 |      |   | 4,392    |  |   | 844      |   |  | 19.2  | % 
|Interest expense:         |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Deposits                  |  |                               | 1,815 |      |   | 1,293    |  |   | 522      |   |  | 40.4  | % 
|Borrowings                |  |                               | 613   |      |   | 258      |  |   | 355      |   |  | 137.6 | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Total interest expense    |  |                               | 2,428 |      |   | 1,551    |  |   | 877      |   |  | 56.5  | % 
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Net interest income       |  | $                             | 2,808 |      | $ | 2,841    |  | $ | (33      | ) |  | (1.2  | )%
|                          |  |                               |       |      |   |          |  |   |          |   |  |       |   

For the six months ended December 31, 2006, net interest income decreased $98,000, or 1.7%, to $5.6 million.
The interest rate spread and net interest margin for the six months ended December 31, 2006 were 2.87% and 3.67%, respectively, compared to 3.35% and 4.04% for the same period in 2005. The average yield on interest-earning assets increased 71
basis points to 6.85% while the average volume of earning assets increased $23.1 million, to $302.9 million for the six months ended December 31, 2006 compared to the same period in 2005. The average rate paid on interest-bearing liabilities
increased 119 basis points to 3.98%, while the average volume of interest-bearing liabilities increased $31.4 million, to $242.0 million for the six months ended December 31, 2006, compared to the same period in 2005.



13



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##### Table of Contents

The following table summarizes changes in interest income and expense for the six-month periods ended December 31,
2006 and 2005:



|                          |  |                              |        |      |   |          |  |   |          |   |  |       |   
|------------------------- |  | ---------------------------- | ------ | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                          |  | Six Months EndedDecember 31, |        |      |   |          |  |  
|                          |  | 2006                         |        | 2005 |   | $ Change |  |   | % Change |  
|                          |  | (Dollars in thousands)       |        |      |   |          |  |  
|Interest income:          |  |                              |        |      |   |          |  |   |          |   |  |       |   
|Loans                     |  | $                            | 9,627  |      | $ | 7,514    |  | $ | 2,113    |   |  | 28.1  | % 
|Investment securities     |  |                              | 593    |      |   | 899      |  |   | (306     | ) |  | (34.0 | )%
|Interest-earning deposits |  |                              | 98     |      |   | 129      |  |   | (31      | ) |  | (24.0 | )%
|FHLB stock                |  |                              | 52     |      |   | 44       |  |   | 8        |   |  | 18.2  | % 
|                          |  |                              |        |      |   |          |  |   |          |   |  |       |   
|Total interest income     |  |                              | 10,370 |      |   | 8,586    |  |   | 1,784    |   |  | 20.8  | % 
|Interest expense:         |  |                              |        |      |   |          |  |   |          |   |  |       |   
|Deposits                  |  |                              | 3,550  |      |   | 2,494    |  |   | 1,056    |   |  | 42.3  | % 
|Borrowings                |  |                              | 1,263  |      |   | 437      |  |   | 826      |   |  | 189.0 | % 
|                          |  |                              |        |      |   |          |  |   |          |   |  |       |   
|Total interest expense    |  |                              | 4,813  |      |   | 2,931    |  |   | 1,882    |   |  | 64.2  | % 
|                          |  |                              |        |      |   |          |  |   |          |   |  |       |   
|Net interest income       |  | $                            | 5,557  |      | $ | 5,655    |  | $ | (98      | ) |  | (1.7  | )%
|                          |  |                              |        |      |   |          |  |   |          |   |  |       |   

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



|                          |  |                                 |         |            |                               |   |                |      |            |  |      |                |  |            |         |  |                |   |            |   |         |  |      |  
|------------------------- |  | ------------------------------- | ------- | ---------- | ----------------------------- | - | -------------- | ---- | ---------- |  | ---- | -------------- |  | ---------- | ------- |  | -------------- | - | ---------- | - | ------- |  | ---- | -
|                          |  | Three Months Ended December 31, |         |            | Six Months Ended December 31, |  
|                          |  | 2006                            |         |            | 2005                          |   |                | 2006 |            |  | 2005 |               
|                          |  | AverageBalance                  |         | Yield/Cost |                               |   | AverageBalance |      | Yield/Cost |  |      | AverageBalance |  | Yield/Cost |         |  | AverageBalance |   | Yield/Cost |  
|                          |  | (Dollars in thousands)          |         |            | (Dollars in thousands)        |  
|Loans                     |  | $                               | 269,631 |            | 7.26                          | % |                | $    | 225,717    |  | 6.86 | %              |  | $          | 265,633 |  | 7.25           | % |            | $ | 220,292 |  | 6.82 | %
|Investment securities     |  |                                 | 29,035  |            | 3.86                          | % |                |      | 47,008     |  | 3.67 | %              |  |            | 30,345  |  | 3.91           | % |            |   | 48,988  |  | 3.67 | %
|Interest-earning deposits |  |                                 | 4,069   |            | 3.54                          | % |                |      | 7,681      |  | 3.49 | %              |  |            | 5,138   |  | 3.81           | % |            |   | 8,841   |  | 2.92 | %
|FHLB stock                |  |                                 | 1,779   |            | 6.07                          | % |                |      | 1,686      |  | 5.69 | %              |  |            | 1,767   |  | 5.89           | % |            |   | 1,675   |  | 5.25 | %
|Deposits                  |  |                                 | 196,821 |            | 3.69                          | % |                |      | 186,560    |  | 2.77 | %              |  |            | 194,189 |  | 3.66           | % |            |   | 186,389 |  | 2.68 | %
|Borrowings                |  |                                 | 45,907  |            | 5.34                          | % |                |      | 27,333     |  | 3.78 | %              |  |            | 47,795  |  | 5.29           | % |            |   | 24,167  |  | 3.62 | %

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.



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|                                                                  |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  
|----------------------------------------------------------------- |  | ---------------------------------- | ---- | - | -------------------------------- | - | ---- | ------------------------- |  | - | ------ | - |  | ---- | ----- | - | --- | - | ----- | - |  | - | ----- | -
|                                                                  |  | Three Months 2006 Compared to 2005 |      |   | Six Months 2006 Compared to 2005 |  
|                                                                  |  | Increase (Decrease)Due To          |      |   |                                  |   |      | Increase (Decrease)Due To |  |   |        |  
|                                                                  |  | Volume                             |      |   | Rate                             |   |      | Net                       |  |   | Volume |   |  | Rate |       |   | Net |  
|                                                                  |  | (In thousands)                     |      |   | (In thousands)                   |  
|Interest income:                                                  |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  
|Loans receivable                                                  |  | $                                  | 787  |   |                                  | $ | 236  |                           |  | $ | 1,023  |   |  | $    | 1,621 |   |     | $ | 492   |   |  | $ | 2,113 |  
|Mortgage-backed securities                                        |  |                                    | (69  | ) |                                  |   |     |                           |  |   | (69    | ) |  |      | (145  | ) |     |   |      |   |  |   | (145  | )
|Investment securities                                             |  |                                    | (125 | ) |                                  |   | 39   |                           |  |   | (86    | ) |  |      | (266  | ) |     |   | 93    |   |  |   | (173  | )
|Municipals                                                        |  |                                    | 3    |   |                                  |   | 1    |                           |  |   | 4      |   |  |      | 9     |   |     |   | 3     |   |  |   | 12    |  
|Daily interest-earning deposits and other interest-earning assets |  |                                    | (31  | ) |                                  |   | 3    |                           |  |   | (28    | ) |  |      | (177  | ) |     |   | 154   |   |  |   | (23   | )
|                                                                  |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  
|Total interest-earning assets                                     |  |                                    | 565  |   |                                  |   | 279  |                           |  |   | 844    |   |  |      | 1,042 |   |     |   | 742   |   |  |   | 1,784 |  
|                                                                  |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  
|Interest expense:                                                 |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  
|Deposits                                                          |  |                                    | 74   |   |                                  |   | 448  |                           |  |   | 522    |   |  |      | 108   |   |     |   | 948   |   |  |   | 1,056 |  
|Borrowings                                                        |  |                                    | 221  |   |                                  |   | 134  |                           |  |   | 355    |   |  |      | 561   |   |     |   | 265   |   |  |   | 826   |  
|                                                                  |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  
|Total interest-bearing liabilities                                |  |                                    | 295  |   |                                  |   | 582  |                           |  |   | 877    |   |  |      | 669   |   |     |   | 1,213 |   |  |   | 1,882 |  
|                                                                  |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  
|Net change in interest income                                     |  | $                                  | 270  |   |                                  | $ | (303 | )                         |  | $ | (33    | ) |  | $    | 373   |   |     | $ | (471  | ) |  | $ | (98   | )
|                                                                  |  |                                    |      |   |                                  |   |      |                           |  |   |        |   |  |      |       |   |     |   |       |   |  |   |       |  

Total interest income increased $844,000, or 19.2%, to $5.2 million for the three months ended December 31,
2006, and increased $1.8 million, or 20.8%, to $10.4 million for the six months ended December 31, 2006. The increase in interest income was primarily due to an increase in both the volume and yield on average loans more than offsetting a
decrease in the volume of investment securities.

Interest on loans increased $1.0 million, or 26.4%, to $4.9 million for the three months ended
December 31, 2006 and increased $2.1 million, or 28.1%, to $9.6 million for the six months ended December 31, 2006. The increase in interest on loans is the result of a higher average balance, primarily due to growth in the commercial loan
portfolio, combined with a higher average yield. The average balance of loans increased $43.9 million, or 19.5%, to $269.6 million for the three months ended December 31, 2006 and increased $45.3 million, or 20.6%, to $265.6 million for the six
months ended December 31, 2006. The increase in the average yield on loans was primarily the result of increases in the prime lending rate. The average yield on loans increased 40 basis points, to 7.26%, for the three months ended
December 31, 2006 compared to the corresponding period in 2005 and increased 43 basis points, to 7.25% for the six months ended December 31, 2006.

Interest on investment securities decreased $151,000, or 35.0%, to $280,000 for the three months ended December 31, 2006 and decreased $306,000, or 34.0%, to $593,000, for the six months ended December 31, 2006. The decrease for
both periods was the result of a decrease in the average balance of investment securities more than offsetting an increase in the average yield. The average balance of investment securities decreased $18.0 million, to $29.0 million for the three
months ended December 31, 2006 and decreased $18.6 million, to $30.3 million for the six months ended December 31, 2006. Proceeds from the sale of investment securities were used to fund growth in the loan portfolio. The average yield on
investments increased 19 basis points to 3.86% for the three months ended December 31, 2006 and increased 24 basis



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points to 3.91% for the six months ended December 31, 2006 compared to the same periods in 2005. Dividends on Federal Home Loan Bank (FHLB)
stock were $27,000 and $52,000, respectively, for the three- and six-month periods ended December 31, 2006, compared to $24,000 and $44,000 for the comparable periods in 2005. FHLB dividends are paid with additional shares of FHLB stock.

Total interest expense increased $877,000, or 56.5%, to $2.4 million for the three-month period ended December 31, 2006 and increased $1.9 million,
or 64.2%, to $4.8 million for the six-month period ended December 31, 2006. The increase for both periods was due to higher rates paid on interest-bearing deposits and higher average balances of both deposits and FHLB advances.

Interest expense on deposits increased $522,000, or 40.4%, to $1.8 million for the three-month period ended December 31, 2006 and increased $1.1 million, or 42.3%,
to $3.6 million for the six-month period ended December 31, 2006. The increase for both periods was due to an increase in the average rate paid on deposits combined with an increase in the average balance of deposits. The average rate paid on
deposits increased 92 basis points to 3.69% for the three months ended December 31, 2006 and increased 98 basis points to 3.66% for the six months ended December 31, 2006 due to higher rates paid on money market accounts and time deposits.
The increase in the rate paid on deposits reflects an increase in short-term market interest rates. The increase in the average balance of deposits was primarily the result of a higher average balance of certificates of deposit. The average balance
of certificates of deposit has increased due to promotional rates offered in connection with the opening of our two new full-service offices in addition to customer preference for higher-yielding deposit accounts.

Interest expense on FHLB advances amounted to $613,000 for the three months ended December 31, 2006 compared to $258,000 for the corresponding period in 2005. For
the six months ended December 31, 2006, interest expense on FHLB advances was $1.3 million compared to $437,000 for the same period in 2005. The increase for both periods was due to a higher average balance and a higher rate paid. FHLB advances
have been utilized as a funding source for supporting loan growth.

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. Net charge-offs for the three and six month periods ended December 31, 2006 amounted to $66,000
and $94,000, respectively, compared to $47,000 and $59,000 for the comparable periods in 2005. The provision for loan losses totaled $30,000 for both the three and six months ended December 31, 2006 as a result of growth in the loan portfolio,
compared to no provision for the comparable periods in 2005. Nonperforming loans totaled $527,000 at December 31, 2006 compared to $498,000 at December 31, 2005.

Noninterest Income

Noninterest income decreased $103,000, or 24.9%, to $310,000 for the three months ended
December 31, 2006 compared to $413,000 for the corresponding period in 2005. A loss on



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##### Table of Contents

sale of investment securities totaling $30,000 was recorded in the three-month period ended December 31, 2006 and included as a component of noninterest
income. Gain on sale of foreclosed property was $21,000 for the three months ended December 31, 2006 compared to $83,000 for the same period in 2005. Mortgage origination fee income decreased $29,000, or 22.1%, to $102,000 due to a lower volume
of loan originations.

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, 2006 compared to the same period in 2005.



|                                                  |  |                                |     |          |      |   |          |  |   |      |   |  |       |   
|------------------------------------------------- |  | ------------------------------ | --- | -------- | ---- | - | -------- |  | - | ---- | - |  | ----- | --
|                                                  |  | Three Months EndedDecember 31, |     | $ Change |      |   | % Change | 
|                                                  |  | 2006                           |     |          | 2005 |   |         
|                                                  |  | (Dollars in thousands)         |     |          |      |   |          | 
|Noninterest income:                               |  |                                |     |          |      |   |          |  |   |      |   |  |       |   
|Dividends from investments                        |  | $                              | 17  |          |      | $ |         |  | $ | 17   |   |  | NM    |   
|Mortgage origination fee income                   |  |                                | 102 |          |      |   | 131      |  |   | (29  | ) |  | (22.1 | )%
|Service charges and fees                          |  |                                | 127 |          |      |   | 134      |  |   | (7   | ) |  | (5.2  | )%
|Gain (loss) on sale of investment securities, net |  |                                | (30 | )        |      |   |         |  |   | (30  | ) |  | NM    |   
|Gain on sale of foreclosed real estate, net       |  |                                | 21  |          |      |   | 83       |  |   | (62  | ) |  | (74.7 | )%
|BOLI increase in cash value                       |  |                                | 53  |          |      |   | 53       |  |   |     |   |  | 0.0   | % 
|Other                                             |  |                                | 20  |          |      |   | 12       |  |   | 8    |   |  | 66.7  | % 
|                                                  |  |                                |     |          |      |   |          |  |   |      |   |  |       |   
|Total noninterest income                          |  | $                              | 310 |          |      | $ | 413      |  | $ | (103 | ) |  | (24.9 | )%
|                                                  |  |                                |     |          |      |   |          |  |   |      |   |  |       |   

Noninterest income decreased $172,000, or 19.8%, to $697,000 for the six months ended December 31, 2006
compared to $869,000 for the corresponding period in 2005. A loss on sale of investment securities totaled $29,000 for the six-month period ended December 31, 2006 compared to $44,000 for the corresponding period in 2005. Gain on sale of
foreclosed property was $34,000 for the six months ended December 31, 2006 compared to $160,000 for the same period in 2005. Mortgage origination fee income decreased $65,000, or 20.5%, to $252,000 due to a lower volume of loan originations.
Service charge and fee income decreased $23,000, or 8.4%, to $250,000 for the six months ended December 31, 2006 primarily due to a decrease in late charge fee income.



17



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##### Table of Contents

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent
changes for the six months ended December 31, 2006 compared to the same period in 2005.



|                                                  |  |                               |     |   |          |   |     |          |  |   |      |   |  |       |   
|------------------------------------------------- |  | ----------------------------- | --- | - | -------- | - | --- | -------- |  | - | ---- | - |  | ----- | --
|                                                  |  | Six Months Ended December 31, |     |   | $ Change |   |     | % Change | 
|                                                  |  | 2006                          |     |   | 2005     |   |     |         
|                                                  |  | (Dollars in thousands)        |     |   |          |   |     |          | 
|Noninterest income:                               |  |                               |     |   |          |   |     |          |  |   |      |   |  |       |   
|Dividends from investments                        |  | $                             | 47  |   |          | $ | 17  |          |  | $ | 30   |   |  | 176.5 | % 
|Mortgage origination fee income                   |  |                               | 252 |   |          |   | 317 |          |  |   | (65  | ) |  | (20.5 | )%
|Service charges and fees                          |  |                               | 250 |   |          |   | 273 |          |  |   | (23  | ) |  | (8.4  | )%
|Gain (loss) on sale of investment securities, net |  |                               | (29 | ) |          |   | (44 | )        |  |   | 15   |   |  | (34.1 | )%
|Gain on sale of foreclosed real estate, net       |  |                               | 34  |   |          |   | 160 |          |  |   | (126 | ) |  | (78.8 | )%
|BOLI increase in cash value                       |  |                               | 105 |   |          |   | 106 |          |  |   | (1   | ) |  | (0.9  | )%
|Other                                             |  |                               | 38  |   |          |   | 40  |          |  |   | (2   | ) |  | (5.0  | )%
|                                                  |  |                               |     |   |          |   |     |          |  |   |      |   |  |       |   
|Total noninterest income                          |  | $                             | 697 |   |          | $ | 869 |          |  | $ | (172 | ) |  | (19.8 | )%
|                                                  |  |                               |     |   |          |   |     |          |  |   |      |   |  |       |   

Noninterest Expense

Noninterest expense increased $452,000, or 21.7%, to $2.5 million for the three-month period ended December 31, 2006, primarily due to an increase in compensation and benefits expense. Compensation and benefits
expense increased $199,000, or 15.3%, to $1.5 million for the three-month period ended December 31, 2006 primarily due to staff additions for our two new branch offices in Hamblen and Knox Counties and our future branch office in Knox County
scheduled to open in 2007. There were 94 full-time employees at December 31, 2006 compared to 85 full-time employees at December 31, 2005. Occupancy expense increased $55,000, or 61.1%, to $145,000 and equipment and data processing expense
increased $153,000, or 69.9%, to $372,000. The increases in occupancy, equipment and data processing expenses were also the result of our recent expansion activities.

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, 2006 compared to the same period in 2005.



|                                      |  |                                 |       |          |   |       |          |   |     |   |  |        |   
|------------------------------------- |  | ------------------------------- | ----- | -------- | - | ----- | -------- | - | --- | - |  | ------ | --
|                                      |  | Three Months Ended December 31, |       | $ Change |   |       | % Change |  
|                                      |  | 2006                            |       | 2005     |   |      
|                                      |  | (Dollars in thousands)          |       |          |   |       |          |  
|Compensation and benefits             |  | $                               | 1,498 |          | $ | 1,299 |          | $ | 199 |   |  | 15.3   | % 
|Occupancy expense                     |  |                                 | 145   |          |   | 90    |          |   | 55  |   |  | 61.1   | % 
|Equipment and data processing expense |  |                                 | 372   |          |   | 219   |          |   | 153 |   |  | 69.9   | % 
|Deposit insurance premiums            |  |                                 | 6     |          |   | 7     |          |   | (1  | ) |  | (14.3  | )%
|Advertising                           |  |                                 | 65    |          |   | 81    |          |   | (16 | ) |  | (19.8  | )%
|REO expense                           |  |                                 |      |          |   | 11    |          |   | (11 | ) |  | (100.0 | )%
|Other                                 |  |                                 | 453   |          |   | 380   |          |   | 73  |   |  | 19.2   | % 
|                                      |  |                                 |       |          |   |       |          |   |     |   |  |        |   
|Total noninterest expense             |  | $                               | 2,539 |          | $ | 2,087 |          | $ | 452 |   |  | 21.7   | % 
|                                      |  |                                 |       |          |   |       |          |   |     |   |  |        |   

Noninterest expense increased $1.0 million or 25.1%, to $5.2 million for the six-month period ended
December 31, 2006, primarily due to an increase in compensation and benefits expense. Compensation and benefits expense increased $461,000, or 17.9%, to $3.0 million for the six-month period ended December 31, 2006 primarily due to staff
additions. Advertising expense



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##### Table of Contents

amounted to $234,000 for the six months ended December 31, 2006 compared to $145,000 for the corresponding period in 2005 as a result of marketing
efforts and promotions associated with the opening of our two new branch offices. Occupancy expense increased $105,000, or 53.3%, to $302,000 and equipment and data processing expense increased $257,000, or 56.0%, to $716,000 as a result of our
recent expansion activities.

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, 2006 compared to the same period in 2005.



|                                      |  |                               |       |          |   |       |          |   |       |   |  |       |   
|------------------------------------- |  | ----------------------------- | ----- | -------- | - | ----- | -------- | - | ----- | - |  | ----- | --
|                                      |  | Six Months Ended December 31, |       | $ Change |   |       | % Change |  
|                                      |  | 2006                          |       | 2005     |   |      
|                                      |  | (Dollars in thousands)        |       |          |   |       |          |  
|Compensation and benefits             |  | $                             | 3,041 |          | $ | 2,580 |          | $ | 461   |   |  | 17.9  | % 
|Occupancy expense                     |  |                               | 302   |          |   | 197   |          |   | 105   |   |  | 53.3  | % 
|Equipment and data processing expense |  |                               | 716   |          |   | 459   |          |   | 257   |   |  | 56.0  | % 
|DIF deposit insurance premiums        |  |                               | 12    |          |   | 13    |          |   | (1    | ) |  | (7.7  | )%
|Advertising                           |  |                               | 234   |          |   | 145   |          |   | 89    |   |  | 61.4  | % 
|REO expense                           |  |                               | 8     |          |   | 37    |          |   | (29   | ) |  | (78.4 | )%
|Other                                 |  |                               | 892   |          |   | 731   |          |   | 161   |   |  | 22.0  | % 
|                                      |  |                               |       |          |   |       |          |   |       |   |  |       |   
|Total noninterest expense             |  | $                             | 5,205 |          | $ | 4,162 |          | $ | 1,043 |   |  | 25.1  | % 
|                                      |  |                               |       |          |   |       |          |   |       |   |  |       |   

Income Taxes

Income tax expense for the three months ended December 31, 2006 was $200,000 compared to $457,000 for the same period in 2005 due to a lower level of taxable income. For the six months ended December 31, 2006, income tax expense
decreased $487,000, or 56.2%, to $380,000 due to lower taxable income.

Financial Condition

Assets

At December 31, 2006, total assets were $330.4
million, an increase of $3.3 million, or 1.0%, compared to $327.1 million at June 30, 2006. The increase in assets was attributable to a $14.4 million increase in loans, funded primarily by an $11.1 million increase in deposits.

Cash, Cash Equivalents and Interest-Earning Deposits

Cash,
cash equivalents, and interest-earning deposits were $8.2 million at December 31, 2006 compared to $12.0 million at June 30, 2006. We manage the level of cash, cash equivalents and interest-earning deposits to meet loan demand and daily
liquidity needs.

Investments

Our investment
portfolio consists primarily of federal agency securities with maturities of seven years or less, and municipal securities. Investment securities decreased $4.4 million, or 13.9%, to $27.4 million due primarily to sales of investment securities
during the six-month period.



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Investment securities classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $408,000, or $252,000 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, 2006                 |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|                                     |  |                        |        |  
|                                     |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                                     |  | (Dollars in thousands)
|Securities available-for-sale        |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Debt securities:                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Federal agency                       |  | $                      | 23,337 |   |                 | $ |                 |  | $ | (338      | ) |  | $ | 22,999
|Municipals                           |  |                        | 4,493  |   |                 |   | 2                |  |   | (72       | ) |  |   | 4,423 
|                                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Total securities available- for-sale |  | $                      | 27,830 |   |                 | $ | 2                |  | $ | (410      | ) |  | $ | 27,422
|                                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Weighted-average rate                |  |                        | 3.75   | % |                 |   |                  |  |   |           |   |  |   |       
|                                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|                                     |  |                        |        |  
|At June 30, 2006                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|                                     |  |                        |        |  
|                                     |  | AmortizedCost          |        |   | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|                                     |  | (Dollars in thousands)
|Securities available-for-sale        |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Debt securities:                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Federal agency                       |  | $                      | 28,330 |   |                 | $ |                 |  | $ | (827      | ) |  | $ | 27,503
|Municipals                           |  |                        | 4,502  |   |                 |   |                  |  |   | (160      | ) |  |   | 4,342 
|                                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Total securities available- for-sale |  | $                      | 32,832 |   |                 | $ |                 |  | $ | (987      | ) |  | $ | 31,845
|                                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       
|Weighted-average rate                |  |                        | 3.36   | % |                 |   |                  |  |   |           |   |  |   |       
|                                     |  |                        |        |   |                 |   |                  |  |   |           |   |  |   |       

Loans

Net loans increased $14.4 million, or 5.7%, to $268.5 million at December 31, 2006. Our expansion into the Knoxville, Tennessee market has generated additional lending opportunities, which has resulted in growth in our loan portfolio.
Our primary lending activity is the origination of loans secured by real estate. Real estate loans totaled $221.0 million, or 81.5% of gross loans, at December 31, 2006 compared to $209.4 million, or 81.6% of gross loans, at June 30, 2006.
We originate real estate loans secured by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. The largest portion of loan growth occurred in commercial
real estate, due to our emphasis on this type of lending. Commercial real estate loans increased $13.8 million, or 17.7%, to $91.3 million at December 31, 2006.

Commercial business loans increased $2.7 million, or 7.7%, to $38.4 million at December 31, 2006. Commercial business loans were 14.2% of gross loans at December 31, 2006 compared to 13.9% of gross loans at
June 30, 2006. Most of the commercial business loans that we have



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##### Table of Contents

originated have rates based on the prime interest rate and will therefore reprice quickly as interest rates change.

We originate a variety of consumer loans, including loans secured by automobiles, mobile homes and deposit accounts at Jefferson Federal. Consumer loans totaled $11.6
million and represented 4.3% of total loans at December 31, 2006 compared to $11.5 million, or 4.5% of total loans at June 30, 2006.



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Loans receivable, net, are summarized as follows:



|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|------------------------------ |  | ---------------------- | ------- | - | ------------------- | ----- | - | -------- | - | ------- | ------------------- |  | ----- | - |  | - | ------ | - |  | ----- | --
|                               |  | At December 31, 2006   |         |   | At June 30, 2006    |       |   | $ Change |   |         | %Change             | 
|                               |  | Amount                 |         |   | Percentof Portfolio |       |   | Amount   |   |         | Percentof Portfolio |  |       |  
|                               |  | (Dollars in thousands) |         |   |                     |       |   |          |  
|Real estate loans:             |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Residential one-to four-family |  | $                      | 74,237  |   |                     | 27.4  | % |          | $ | 77,415  |                     |  | 30.2  | % |  | $ | (3,178 | ) |  | (4.1  | )%
|Home equity line of credit     |  |                        | 4,755   |   |                     | 1.8   | % |          |   | 5,954   |                     |  | 2.3   | % |  |   | (1,199 | ) |  | (20.1 | )%
|Commercial                     |  |                        | 91,273  |   |                     | 33.7  | % |          |   | 77,519  |                     |  | 30.2  | % |  |   | 13,754 |   |  | 17.7  | % 
|Multi-family                   |  |                        | 8,466   |   |                     | 3.1   | % |          |   | 7,929   |                     |  | 3.1   | % |  |   | 537    |   |  | 6.8   | % 
|Construction                   |  |                        | 12,765  |   |                     | 4.7   | % |          |   | 13,454  |                     |  | 5.2   | % |  |   | (689   | ) |  | (5.1  | )%
|Land                           |  |                        | 29,507  |   |                     | 10.9  | % |          |   | 27,133  |                     |  | 10.6  | % |  |   | 2,374  |   |  | 8.7   | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Total real estate loans        |  |                        | 221,003 |   |                     | 81.5  | % |          |   | 209,404 |                     |  | 81.6  | % |  |   | 11,599 |   |  | 5.5   | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Commercial business loans      |  |                        | 38,411  |   |                     | 14.2  | % |          |   | 35,665  |                     |  | 13.9  | % |  |   | 2,746  |   |  | 7.7   | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Consumer loans                 |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Automobile loans               |  |                        | 7,999   |   |                     | 3.0   | % |          |   | 8,458   |                     |  | 3.3   | % |  |   | (459   | ) |  | (5.4  | )%
|Mobile home loans              |  |                        | 148     |   |                     | 0.1   | % |          |   | 234     |                     |  | 0.1   | % |  |   | (86    | ) |  | (36.8 | )%
|Loans secured by deposits      |  |                        | 900     |   |                     | 0.3   | % |          |   | 977     |                     |  | 0.4   | % |  |   | (77    | ) |  | (7.9  | )%
|Other consumer loans           |  |                        | 2,557   |   |                     | 0.9   | % |          |   | 1,854   |                     |  | 0.7   | % |  |   | 703    |   |  | 37.9  | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Total consumer loans           |  |                        | 11,604  |   |                     | 4.3   | % |          |   | 11,523  |                     |  | 4.5   | % |  |   | 81     |   |  | 0.7   | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Total gross loans              |  |                        | 271,018 |   |                     | 100.0 | % |          |   | 256,592 |                     |  | 100.0 | % |  |   | 14,426 |   |  | 5.6   | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Less:                          |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Deferred loan fees, net        |  |                        | (417    | ) |                     |       |   |          |   | (293    | )                   |  |       |   |  |   | (124   | ) |  | 42.3  | % 
|Allowance for losses           |  |                        | (2,108  | ) |                     |       |   |          |   | (2,172  | )                   |  |       |   |  |   | 64     |   |  | (2.9  | )%
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   
|Loans receivable, net          |  | $                      | 268,493 |   |                     |       |   |          | $ | 254,127 |                     |  |       |   |  | $ | 14,366 |   |  | 5.7   | % 
|                               |  |                        |         |   |                     |       |   |          |   |         |                     |  |       |   |  |   |        |   |  |       |   

Loan Loss Allowance

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the adequacy of the allowance for loan losses 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 conducts monthly loan reviews to assess credit risks and the overall
quality of the loan portfolio.



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

Due to
net charge-offs, the allowance for loan losses decreased $94,000 to $2.1 million at December 31, 2006. The provision for loan losses totaled $30,000 for the six months ended December 31, 2006 as a result of growth in the loan portfolio,
compared to no provision for the comparable period in 2005. Our allowance for loan losses represented 0.78% of total gross loans at December 31, 2006 compared to 0.85% of total gross loans at June 30, 2006.



|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ---------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                           |  | Three Months EndedDecember 31, |       |   | Six Months EndedDecember 31, |  
|                                                                           |  | 2006                           |       |   | 2005                         |   |       | 2006 |  |   | 2005  |  
|                                                                           |  | (Dollars in thousands)         |       |   | (Dollars in thousands)       |  
|Balance at beginning of period                                             |  | $                              | 2,144 |   |                              | $ | 2,281 |      |  | $ | 2,172 |   |  | $ | 2,293 |  
|Provision for loan losses                                                  |  |                                | 30    |   |                              |   |      |      |  |   | 30    |   |  |   |      |  
|Recoveries                                                                 |  |                                | 17    |   |                              |   | 40    |      |  |   | 42    |   |  |   | 76    |  
|Charge-offs                                                                |  |                                | (83   | ) |                              |   | (87   | )    |  |   | (136  | ) |  |   | (135  | )
|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Net charge-offs                                                            |  |                                | (66   | ) |                              |   | (47   | )    |  |   | (94   | ) |  |   | (59   | )
|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Allowance at end of period                                                 |  | $                              | 2,108 |   |                              | $ | 2,234 |      |  | $ | 2,108 |   |  | $ | 2,234 |  
|                                                                           |  |                                |       |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Net charge-offs to average outstanding loans during the period, annualized |  |                                | 0.10  | % |                              |   | 0.08  | %    |  |   | 0.07  | % |  |   | 0.05  | %

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent.
Nonperforming assets were $557,000 at December 31, 2006 compared to $435,000 at June 30, 2006. Nonperforming loans were $527,000 and $345,000 at December 31, 2006 and June 30, 2006, respectively. Foreclosed real estate amounted
to $30,000 at December 31, 2006 compared to $74,000 at June 30, 2006. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling costs. Any writedown to fair value is
charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.



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##### Table of Contents

|                                                       |  |                        |        |   |              |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                                                       |  | December 31,2006       |        |   | June 30,2006 |  
|                                                       |  | (Dollars in thousands) |       
|Nonaccruing loans:                                     |  |                        |        |   |              |   |        |  
|Real estate                                            |  | $                      | 317    |   |              | $ | 296    |  
|Commercial business                                    |  |                        | 210    |   |              |   | 49     |  
|Consumer                                               |  |                        |       |   |              |   |       |  
|                                                       |  |                        |        |   |              |   |        |  
|Total nonaccrual loans                                 |  |                        | 527    |   |              |   | 345    |  
|                                                       |  |                       
|Real estate owned                                      |  |                        | 30     |   |              |   | 74     |  
|Other repossessed assets                               |  |                        |       |   |              |   | 16     |  
|                                                       |  |                        |        |   |              |   |        |  
|Total nonperforming assets                             |  | $                      | 557    |   |              | $ | 435    |  
|                                                       |  |                        |        |   |              |   |        |  
|Total nonperforming assets to total assets             |  |                        | 0.17   | % |              |   | 0.13   | %
|Total nonperforming loans to total loans               |  |                        | 0.19   | % |              |   | 0.13   | %
|Allowance for loan losses to total nonperforming loans |  |                        | 400.00 | % |              |   | 629.57 | %

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, 2006 was $5.6 million.

Deposits

Total deposits increased $11.1 million, or 5.6%, to $209.9 million at December 31, 2006 primarily as a result of marketing efforts and promotions associated with the
opening of our two new full-service offices. Certificates of deposit increased $10.0 million, or 8.0%, to $134.6 million primarily due to promotions and customer preference for higher-yielding accounts. The increase in deposits has provided funding
for loan growth and reduced our reliance on FHLB advances during the six months ended December 31, 2006.



|                              |  |                        |         |              |   |          |  |   |         |   |  |       |   
|----------------------------- |  | ---------------------- | ------- | ------------ | - | -------- |  | - | ------- | - |  | ----- | --
|                              |  | December 31,2006       |         | June 30,2006 |   | $ Change |  |   | %Change |  
|                              |  | (Dollars in thousands) |         |              |   |          |  |  
|Non-interest bearing accounts |  | $                      | 11,474  |              | $ | 10,806   |  | $ | 668     |   |  | 6.2   | % 
|NOW accounts                  |  |                        | 17,052  |              |   | 16,408   |  |   | 644     |   |  | 3.9   | % 
|Savings accounts              |  |                        | 9,597   |              |   | 11,524   |  |   | (1,927  | ) |  | (16.7 | %)
|Money market accounts         |  |                        | 37,218  |              |   | 35,502   |  |   | 1,716   |   |  | 4.8   | % 
|Certificates of deposit       |  |                        | 134,554 |              |   | 124,603  |  |   | 9,951   |   |  | 8.0   | % 
|                              |  |                        |         |              |   |          |  |   |         |   |  |       |   
|                              |  | $                      | 209,895 |              | $ | 198,843  |  | $ | 11,052  |   |  | 5.6   | % 
|                              |  |                        |         |              |   |          |  |   |         |   |  |       |   

Advances and Other Liabilities

FHLB advances decreased $7.1 million to $45.3 million at December 31, 2006. We utilize FHLB cash management overnight advances as a funding source to manage daily liquidity needs. Additional FHLB advances may be
utilized in the future to support loan growth.



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Stockholders Equity

Total equity decreased $317,000, to $74.2 million at December 31, 2006 due primarily to the repurchase of shares in the amount of $1.4 million. Stock repurchases for the three months ended December 31, 2006
totaled 57,562 shares at an average cost of $13.10 per share. On February 24, 2006, the Company announced its third stock repurchase program in which up to 690,261 shares, or 10% of the Companys outstanding common stock, may be
repurchased. At December 31, 2006, 469,361 shares remained eligible for repurchase under the current stock repurchase program. The Company paid a $0.06 per share dividend to shareholders during the quarter ended December 31, 2006 totaling
$391,000.

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 deposits, 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, 2006, cash and cash equivalents totaled $2.6 million and interest-earning deposits totaled $5.6 million. Securities classified as available-for-sale, which provide additional sources
of liquidity, totaled $27.4 million at December 31, 2006. In addition, at December 31, 2006, we had arranged the ability to borrow a total of approximately $59.7 million from the FHLB of Cincinnati. In the six-month period ended
December 31, 2006, FHLB advances decreased $7.1 million to $45.3 million.

We anticipate that we will have sufficient funds available to meet current
loan commitments. At December 31, 2006, we had approximately $63,000 in loan commitments, consisting of commitments to originate real estate loans. In addition to commitments to originate loans, we had $16.8 million in loans-in-process, $9.7
million in unused standby letters of credit and approximately $13.4 million in unused lines of credit. We had $101.8 million in certificates of deposit due within one year and $75.3 million in other deposits without specific maturities at
December 31, 2006. 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 have the ability to attract and retain deposits by adjusting the interest rates offered. We experienced a net increase in total deposits of $11.1 million during the six-month period ended December 31, 2006.



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##### Table of Contents

At December 31, 2006, the average liquidity ratio was 11.26% compared to 22.02% at December 31, 2005. The level
of liquidity has been reduced as net proceeds from the stock offering have been used for lending, operational growth and expansion activities.

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, 2006, 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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##### Table of Contents

Capital Compliance

The following table presents our capital position relative to our regulatory capital requirements at December 31, 2006 and June 30, 2006:



|                          |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|------------------------- |  | ---------------------- | ------ | ----- | ----------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | ----- |  |  | ------ | - |  | - | ------ |  | - |  |  | ---- | -
|                          |  | Actual                 |        |       | For Capital Adequacy Purposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                          |  | Amount                 |        | Ratio |                               |   | Amount |                                                               |        |  | Ratio |  |  | Amount |   |  |   | Ratio  | 
|                          |  | (Dollars in thousands) |       
|At December 31, 2006      |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|Total Capital             |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Risk Weighted Assets) |  | $                      | 67,374 |       | 26.5                          | % |        | $                                                             | 20,336 |  | 3     |  |  | 8.0    | % |  | $ | 25,420 |  | 3 |  |  | 10.0 | %
|                          |  |                        |        |       |                               |   |        |                                                              
|Core Capital              |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Tangible Assets)      |  |                        | 65,404 |       | 20.0                          | % |        |                                                               | 13,080 |  | 3     |  |  | 4.0    | % |  |   | 16,350 |  | 3 |  |  | 5.0  | %
|                          |  |                        |        |       |                               |   |        |                                                              
|Tangible Capital          |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Tangible Assets)      |  |                        | 65,404 |       | 20.0                          | % |        |                                                               | 4,905  |  | 3     |  |  | 1.5    | % |  |   | N/A    |  |   |  |  |      |  
|                          |  |                        |        |       |                               |   |        |                                                              
|Tier 1 Capital            |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Risk Weighted Assets) |  |                        | 65,404 |       | 25.7                          | % |        |                                                               | N/A    |  |       |  |  |        |   |  |   | 15,252 |  | 3 |  |  | 6.0  | %
|                          |  |                        |        |       |                               |   |        |                                                              
|At June 30, 2006          |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|                          |  |                        |        |       |                               |   |        |                                                              
|Total Capital             |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Risk Weighted Assets) |  | $                      | 67,000 |       | 27.5                          | % |        | $                                                             | 19,523 |  | 3     |  |  | 8.0    | % |  | $ | 24,404 |  | 3 |  |  | 10.0 | %
|                          |  |                        |        |       |                               |   |        |                                                              
|Core Capital              |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Tangible Assets)      |  |                        | 65,100 |       | 20.1                          | % |        |                                                               | 12,961 |  | 3     |  |  | 4.0    | % |  |   | 16,201 |  | 3 |  |  | 5.0  | %
|                          |  |                        |        |       |                               |   |        |                                                              
|Tangible Capital          |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Tangible Assets)      |  |                        | 65,100 |       | 20.1                          | % |        |                                                               | 4,860  |  | 3     |  |  | 1.5    | % |  |   | N/A    |  |   |  |  |      |  
|                          |  |                        |        |       |                               |   |        |                                                              
|Tier 1 Capital            |  |                        |        |       |                               |   |        |                                                               |        |  |       |  |  |        |   |  |   |        |  |   |  |  |      |  
|(To Risk Weighted Assets) |  |                        | 65,100 |       | 26.7                          | % |        |                                                               | N/A    |  |       |  |  |        |   |  |   | 14,643 |  | 3 |  |  | 6.0  | %



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##### Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Companys asset and
liability management policies, as well as the potential impact of interest rate changes upon the market value of the Companys portfolio equity, see Item 7A in the Companys Annual Report on Form 10-K for the year ended June 30,
2006. 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, 2006.

Item 4. Controls and Procedures

The Companys management, including the Companys principal executive officer
and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Companys disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the SEC) (1) is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Companys internal control over financial reporting occurred during the quarter ended December 31,
2006 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



28



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##### Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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, 2006.

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 Approximate Dollar Value) of Shares (orUnits) That MayYet Be PurchasedUnder the Plans orPrograms |        
|Month #1 October 1, 2006 through October 31, 2006   |  | 7,123                                         |  | $                                      | 13.24 |                                                                                           | 7,123  |                                                                                                                        | 519,800 | (1)
|                                                    |  |                                               |  |                                       
|Month #2 November 1, 2006 through November 30, 2006 |  | 11,306                                        |  | $                                      | 13.32 |                                                                                           | 11,306 |                                                                                                                        | 508,494 | (1)
|                                                    |  |                                               |  |                                       
|Month #3 December 1, 2006 through December 31, 2006 |  | 39,133                                        |  | $                                      | 13.01 |                                                                                           | 39,133 |                                                                                                                        | 469,361 | (1)
|                                                    |  |                                               |  |                                       
|Total                                               |  | 57,562                                        |  | $                                      | 13.10 |                                                                                           | 57,562 |                                                                                                                        | 469,361 |    

---

|(1) | On February 24, 2006, the Company announced a Stock Repurchase Program under which the Company may repurchase an additional 690,261 shares of the Companys common stock,
from time to time, subject to market conditions. The repurchase program will continue until completed or terminated by the Board of Directors.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Item 3. Defaults Upon Senior Securities

None.

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

The Annual Meeting of Stockholders of the
Company was held on October 26, 2006. 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
|Anderson L. Smith    |  | 4,843,539 |  | 25,054        
|Dr. Jack E. Campbell |  | 4,791,797 |  | 76,796        
|William F. Young     |  | 4,855,221 |  | 13,372        



| | 2. | The appointment of Craine, Thompson & Jones, P.C. as auditors for the Company for the fiscal year ending June 30, 2007 was ratified by stockholders by the following
vote:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For 4,745,627; Against 37,344; Abstain 85,621

Broker non-votes totaled none.

Item 5. Other Information

None.

Item 6. Exhibits



|     |  |                                                                          
|---- |  | -------------------------------------------------------------------------
|31.1 |  | Rule 13a-14(a)/15d-14(a) certification of the principal executive officer
|     | 
|31.2 |  | Rule 13a-14(a)/15d-14(a) certification of the principal financial officer
|     | 
|32.1 |  | Section 1350 certification                                               



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SIGNATURES

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



|                 |  |                                                 
|---------------- |  | ------------------------------------------------
|                 |  | JEFFERSON BANCSHARES, INC.                      
|                 | 
|February 7, 2007 |  | /s/ Anderson L. Smith                           
|                 |  | Anderson L. Smith                               
|                 |  | President and Chief Executive Officer           
|                 | 
|February 7, 2007 |  | /s/ Jane P. Hutton                              
|                 |  | Jane P. Hutton                                  
|                 |  | Chief Financial Officer, Treasurer and Secretary