##### 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,
2003



OR



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



For the transition period from
 to



Commission File Number 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 I.D. Number)
|                                                               | 
|120 Evans Avenue, Morristown, Tennessee                        |  | 37814                        
|(Address of principal executive offices)                       |  | (Zip code)                   



(423) 586-8421

(Registrants telephone number, including area code)



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Not Applicable

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



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



Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



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



At February 12, 2004,
the registrant had 8,385,517 shares of $.01 par value common stock outstanding.



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##### Table of Contents

INDEX



|           |  |                                                                                                                                        |  |     
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                                        |  | Page
|           |  | Part I. FINANCIAL INFORMATION                                                                                                          |  |     
|Item 1.    |  | Financial Statements                                                                                                                   |  |     
|           |  |                                                                                                                                       
|           |  | Consolidated Statements of Condition - Unaudited Three months ended December 31, 2003 and year ended June 30, 2003                     |  | 3   
|           |  |                                                                                                                                       
|           |  | Consolidated Statements of Earnings - Unaudited Three and six months ended December 31, 2003 and 2002                                  |  | 4   
|           |  |                                                                                                                                       
|           |  | Consolidated Statements of Changes in Stockholders Equity  Unaudited Six months ended December 31, 2003 and year ended June 30, 2003 |  | 5   
|           |  |                                                                                                                                       
|           |  | Consolidated Statements of Cash Flows - Unaudited Six months ended December 31, 2003 and 2002                                          |  | 6   
|           |  |                                                                                                                                       
|           |  | Notes to Consolidated Financial Statements - Unaudited                                                                                 |  | 7   
|           |  |                                                                                                                                       
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                  |  | 12  
|           |  |                                                                                                                                       
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                             |  | 27  
|           |  |                                                                                                                                       
|Item 4.    |  | Controls and Procedures                                                                                                                |  | 27  
|           |  |                                                                                                                                       
|           |  | Part II  OTHER INFORMATION                                                                                                            |  |     
|           |  |                                                                                                                                       
|Item 1.    |  | Legal Proceedings                                                                                                                      |  | 28  
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                              |  | 28  
|Item 3.    |  | Defaults Upon Senior Securities                                                                                                        |  | 28  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                    |  | 28  
|Item 5.    |  | Other Information                                                                                                                      |  | 28  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                       |  | 28  
|          
|SIGNATURES



2



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##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Condition

December 31, 2003 and June 30, 2003

(Dollars in Thousands)



|                                                                                                    |  |                   |         |   |               |   |        
|--------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | - | -------
|                                                                                                    |  | December 31, 2003 |         |   | June 30, 2003
|                                                                                                    |  | (Unaudited)       |         |   |              
|Assets                                                                                              |  |                   |         |   |               |   |        
|                                                                                                    |  |                  
|Cash and cash equivalents                                                                           |  | $                 | 3,572   |   |               | $ | 7,597  
|Interest-earning deposits                                                                           |  |                   | 4,128   |   |               |   | 88,946 
|Investment securities classified as available for sale, net                                         |  |                   | 112,499 |   |               |   | 76,400 
|Federal Home Loan Bank stock                                                                        |  |                   | 1,549   |   |               |   | 1,518  
|Loans receivable, net                                                                               |  |                   | 182,465 |   |               |   | 180,010
|Premises and equipment, net                                                                         |  |                   | 5,163   |   |               |   | 4,168  
|Foreclosed real estate, net                                                                         |  |                   | 846     |   |               |   | 1,227  
|Accrued interest receivable:                                                                        |  |                   |         |   |               |   |        
|Investments                                                                                         |  |                   | 939     |   |               |   | 368    
|Loans receivable                                                                                    |  |                   | 1,098   |   |               |   | 1,566  
|Deferred tax asset                                                                                  |  |                   | 2,059   |   |               |   | 472    
|Other assets                                                                                        |  |                   | 481     |   |               |   | 1,330  
|                                                                                                    |  |                   |         |   |               |   |        
|Total Assets                                                                                        |  | $                 | 314,799 |   |               | $ | 363,602
|                                                                                                    |  |                   |         |   |               |   |        
|Liabilities and Stockholders Equity                                                                |  |                   |         |   |               |   |        
|                                                                                                    |  |                  
|Deposits                                                                                            |  | $                 | 215,661 |   |               | $ | 324,247
|Federal Home Loan Bank advances                                                                     |  |                   | 2,000   |   |               |   | 2,000  
|Other liabilities                                                                                   |  |                   | 549     |   |               |   | 570    
|Accrued income taxes                                                                                |  |                   |        |   |               |   | 160    
|                                                                                                    |  |                   |         |   |               |   |        
|Total liabilities                                                                                   |  |                   | 218,210 |   |               |   | 326,977
|                                                                                                    |  |                   |         |   |               |   |        
|Commitments and contingent liabilities                                                              |  |                   |        |   |               |   |       
|                                                                                                    |  |                  
|Stockholders equity:                                                                               |  |                   |         |   |               |   |        
|Preferred stock, $.01 par value; 10,000,000 shares authorized; shares issued and outstanding- none  |  |                   |        |   |               |   |       
|Common stock, $.01 par value; 30,000,000 shares authorized; 8,385,517 shares issued and outstanding |  |                   | 84      |   |               |   | 1,876  
|Unearned ESOP shares                                                                                |  |                   | (6,481  | ) |               |   |       
|Additional paid-in capital                                                                          |  |                   | 71,427  |   |               |   | 1,167  
|Accumulated other comprehensive income                                                              |  |                   | 131     |   |               |   | 898    
|Retained earnings                                                                                   |  |                   | 31,428  |   |               |   | 32,684 
|                                                                                                    |  |                   |         |   |               |   |        
|Total stockholders equity                                                                          |  |                   | 96,589  |   |               |   | 36,625 
|                                                                                                    |  |                   |         |   |               |   |        
|Total liabilities and stockholders equity                                                          |  | $                 | 314,799 |   |               | $ | 363,602
|                                                                                                    |  |                   |         |   |               |   |        



See accompanying notes
to financial statements



3



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##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Earnings (Unaudited)

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



|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|------------------------------------------------------- |  | ------------------------------- | ----- | ---- | ---------------------------- | ----- | ---- |  | - | ------ | - |  | - | -----
|                                                        |  | Three Months Ended December 31, |       |      | Six Months EndedDecember 31,
|                                                        |  | 2003                            |       | 2002 |                              |       | 2003 |  |   | 2002  
|Interest income:                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Interest on loans receivable                            |  | $                               | 3,147 |      | $                            | 3,732 |      |  | $ | 6,443  |   |  | $ | 7,595
|Interest on mortgage-backed securities                  |  |                                 | 143   |      |                              | 261   |      |  |   | 307    |   |  |   | 572  
|Interest on investment securities                       |  |                                 | 741   |      |                              | 324   |      |  |   | 1,333  |   |  |   | 681  
|Other interest                                          |  |                                 | 32    |      |                              | 50    |      |  |   | 122    |   |  |   | 96   
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Total interest income                                   |  |                                 | 4,063 |      |                              | 4,367 |      |  |   | 8,205  |   |  |   | 8,944
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Interest expense:                                       |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Deposits                                                |  |                                 | 1,239 |      |                              | 1,704 |      |  |   | 2,543  |   |  |   | 3,526
|Advances from FHLB                                      |  |                                 | 25    |      |                              | 25    |      |  |   | 50     |   |  |   | 50   
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Total interest expense                                  |  |                                 | 1,264 |      |                              | 1,729 |      |  |   | 2,593  |   |  |   | 3,576
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Net interest income                                     |  |                                 | 2,799 |      |                              | 2,638 |      |  |   | 5,612  |   |  |   | 5,368
|Provision for loan losses                               |  |                                 |      |      |                              | 240   |      |  |   |       |   |  |   | 547  
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Net interest income after provision for loan losses     |  |                                 | 2,799 |      |                              | 2,398 |      |  |   | 5,612  |   |  |   | 4,821
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Noninterest income:                                     |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Dividends from investments                              |  |                                 | 22    |      |                              |      |      |  |   | 22     |   |  |   |     
|Service charges and fees                                |  |                                 | 160   |      |                              | 171   |      |  |   | 319    |   |  |   | 338  
|Gain on sale of fixed assets                            |  |                                 | 1     |      |                              |      |      |  |   | 1      |   |  |   |     
|Gain on sale of investment securities, net              |  |                                 |      |      |                              |      |      |  |   | 22     |   |  |   | 81   
|Gain on sale of foreclosed real estate, net             |  |                                 | 39    |      |                              | 32    |      |  |   | 65     |   |  |   | 40   
|Other                                                   |  |                                 | 30    |      |                              | 32    |      |  |   | 57     |   |  |   | 60   
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Total noninterest income                                |  |                                 | 252   |      |                              | 235   |      |  |   | 486    |   |  |   | 519  
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Noninterest expense:                                    |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Compensation and benefits                               |  |                                 | 714   |      |                              | 591   |      |  |   | 1,470  |   |  |   | 1,177
|Occupancy expense                                       |  |                                 | 64    |      |                              | 64    |      |  |   | 125    |   |  |   | 135  
|Equipment and data processing expense                   |  |                                 | 215   |      |                              | 199   |      |  |   | 442    |   |  |   | 417  
|SAIF deposit insurance premium                          |  |                                 | 12    |      |                              | 10    |      |  |   | 21     |   |  |   | 20   
|REO Expense                                             |  |                                 | 77    |      |                              | 90    |      |  |   | 130    |   |  |   | 147  
|Advertising                                             |  |                                 | 75    |      |                              | 41    |      |  |   | 122    |   |  |   | 79   
|Contribution to Jefferson Federal Charitable Foundation |  |                                 |      |      |                              |      |      |  |   | 4,000  |   |  |   |     
|Other                                                   |  |                                 | 357   |      |                              | 309   |      |  |   | 752    |   |  |   | 559  
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Total noninterest expense                               |  |                                 | 1,514 |      |                              | 1,304 |      |  |   | 7,062  |   |  |   | 2,534
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Earnings before income taxes                            |  |                                 | 1,537 |      |                              | 1,329 |      |  |   | (964   | ) |  |   | 2,806
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Income taxes:                                           |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Current                                                 |  |                                 | 425   |      |                              | 506   |      |  |   | 778    |   |  |   | 1,042
|Deferred                                                |  |                                 | 146   |      |                              | (3    | )    |  |   | (1,117 | ) |  |   | 12   
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Total income taxes                                      |  |                                 | 571   |      |                              | 503   |      |  |   | (339   | ) |  |   | 1,054
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Net earnings (loss)                                     |  | $                               | 966   |      | $                            | 826   |      |  | $ | (625   | ) |  | $ | 1,752
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Net earnings per common share                           |  | $                               | 0.12  |      | $                            | 0.10  |      |  | $ | (0.07  | ) |  | $ | 0.22 
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      
|Net earnings per common share-assuming dilution         |  | $                               | 0.11  |      | $                            | 0.10  |      |  | $ | (0.07  | ) |  | $ | 0.22 
|                                                        |  |                                 |       |      |                              |       |      |  |   |        |   |  |   |      



See accompanying notes
to financial statements



4



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##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Changes in Stockholders Equity

Year Ended June 30, 2003

and Six
Months Ended December 31, 2003 (Unaudited)

(Dollars in Thousands)



|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ----------- | ------ | - | ------------------------ | - | ------ | ----------------------------------------------------------------- |  | - | ----------------------------------- | - |  | ---------------- | ---- | - | ------------------------ | - | ------ | - |  | - | ------ | -
|                                                                                              |  | CommonStock |        |   | AdditionalPaid-inCapital |   |        | Unallocated common stock held by the Employee StockOwnership Plan |  |   | AccumulatedOtherComprehensiveIncome |   |  | RetainedEarnings |      |   | TotalStockholdersEquity |  
|Balance at June 30, 2002                                                                      |  | $           | 1,876  |   |                          | $ | 1,167  |                                                                   |  | $ |                                    |   |  | $                | 537  |   |                          | $ | 29,321 |   |  | $ | 32,901 |  
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Comprehensive income:                                                                         |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Net earnings                                                                                  |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   | 3,592  |   |  |   | 3,592  |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $221   |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  | 361  |   |                          |   |       |   |  |   | 361    |  
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Total comprehensive income                                                                    |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   |       |   |  |   | 3,953  |  
|                                                                                              |  |             |        |   |                          |  
|Dividends                                                                                     |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   | (229   | ) |  |   | (229   | )
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Balance at June 30, 2003                                                                      |  |             | 1,876  |   |                          |   | 1,167  |                                                                   |  |   |                                    |   |  |                  | 898  |   |                          |   | 32,684 |   |  |   | 36,625 |  
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Comprehensive income:                                                                         |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Net earnings                                                                                  |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   | (1,591 | ) |  |   | (1,591 | )
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($462) |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  | (755 | ) |                          |   |       |   |  |   | (755   | )
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Total comprehensive income                                                                    |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   |       |   |  |   | (2,346 | )
|                                                                                              |  |             |        |   |                          |  
|Dividends                                                                                     |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   | (335   | ) |  |   | (335   | )
|Merger of MHC into Jefferson Bancshares                                                       |  |             |       |   |                          |   | 100    |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   | 11     |   |  |   | 111    |  
|Proceeds of stock conversion, net                                                             |  |             | 66     |   |                          |   | 64,406 |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   |        |   |  |   | 64,472 |  
|Conversion of shares held under MHC structure                                                 |  |             | (1,876 | ) |                          |   | 1,876  |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   |       |   |  |   |       |  
|Shares issued in exchange for shares held under MHC structure                                 |  |             | 14     |   |                          |   | (14    | )                                                                 |  |   |                                    |   |  |                  |     |   |                          |   |       |   |  |   |       |  
|Contribution of stock to the Jefferson Federal Charitable Foundation                          |  |             | 4      |   |                          |   | 3,746  |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   |       |   |  |   | 3,750  |  
|Common stock acquired by employee stock ownership plan                                        |  |             |       |   |                          |   |       |                                                                   |  |   | (6,701                              | ) |  |                  |     |   |                          |   |       |   |  |   | (6,701 | )
|Shares committed to be released by the employee stock ownership plan                          |  |             |       |   |                          |   | 36     |                                                                   |  |   | 110                                 |   |  |                  |     |   |                          |   |       |   |  |   | 146    |  
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Balance at September 30, 2003                                                                 |  |             | 84     |   |                          |   | 71,317 |                                                                   |  |   | (6,591                              | ) |  |                  | 143  |   |                          |   | 30,769 |   |  |   | 95,722 |  
|                                                                                              |  |             |        |   |                          |  
|Comprehensive income:                                                                         |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Net earnings                                                                                  |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   | 966    |   |  |   | 966    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($7)   |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  | (12  | ) |                          |   |       |   |  |   | (12    | )
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Total comprehensive income                                                                    |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   |       |   |  |   | 954    |  
|                                                                                              |  |             |        |   |                          |  
|Dividends                                                                                     |  |             |       |   |                          |   |       |                                                                   |  |   |                                    |   |  |                  |     |   |                          |   | (307   | ) |  |   | (307   | )
|Stock options exercised                                                                       |  |             |       |   |                          |   | 33     |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   | 33     |  
|Shares committed to be released by the employee stock ownership plan                          |  |             |       |   |                          |   | 49     |                                                                   |  |   | 110                                 |   |  |                  |     |   |                          |   |       |   |  |   | 159    |  
|Tax benefit from exercise of nonqualifying stock options                                      |  |             |        |   |                          |   | 28     |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   | 28     |  
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  
|Balance at December 31, 2003                                                                  |  | $           | 84     |   |                          | $ | 71,427 |                                                                   |  | $ | (6,481                              | ) |  | $                | 131  |   |                          | $ | 31,428 |   |  | $ | 96,589 |  
|                                                                                              |  |             |        |   |                          |   |        |                                                                   |  |   |                                     |   |  |                  |      |   |                          |   |        |   |  |   |        |  



See accompanying notes
to financial statements



5



---

##### Table of Contents

Jefferson Bancshares, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



|                                                                                              |  |                               |          |   |      |   |        |  
|--------------------------------------------------------------------------------------------- |  | ----------------------------- | -------- | - | ---- | - | ------ | -
|                                                                                              |  | Six Months ended December 31, |         
|                                                                                              |  | 2003                          |          |   | 2002 |  
|Cash flows from operating activities:                                                         |  |                               |          |   |      |   |        |  
|Net earnings                                                                                  |  | $                             | (625     | ) |      | $ | 1,752  |  
|Adjustments to reconcile net earnings to net cash provided by (used for) operating activities |  |                               |          |   |      |   |        |  
|Stock contributed to the Jefferson Federal Charitable Foundation                              |  |                               | 3,750    |   |      |   |       |  
|Allocated ESOP shares                                                                         |  |                               | 305      |   |      |   |       |  
|Depreciation and amortization expense                                                         |  |                               | 138      |   |      |   | 147    |  
|Amortization of premiums (discounts), net on investment securities                            |  |                               | 2        |   |      |   | 77     |  
|Provision for loan losses                                                                     |  |                               |         |   |      |   | 547    |  
|Gain on sale of fixed assets                                                                  |  |                               | 1        |   |      |   |       |  
|Gain on sale of investment securities and mortgage-backed securities, net                     |  |                               | (22      | ) |      |   | (81    | )
|FHLB stock dividends                                                                          |  |                               | (31      | ) |      |   | (34    | )
|Amortization of deferred loan fees, net                                                       |  |                               | (85      | ) |      |   | (79    | )
|Loss (gain) on foreclosed real estate, net                                                    |  |                               | (65      | ) |      |   | (40    | )
|Decrease (increase) in:                                                                       |  |                               |          |   |      |   |        |  
|Accrued interest receivable                                                                   |  |                               | (103     | ) |      |   | 134    |  
|Other assets                                                                                  |  |                               | 849      |   |      |   | 170    |  
|Deferred tax asset                                                                            |  |                               | (1,587   | ) |      |   | 237    |  
|Increase (decrease) in other liabilities and accrued income taxes                             |  |                               | (516     | ) |      |   | (166   | )
|                                                                                              |  |                               |          |   |      |   |        |  
|Net cash provided by (used for) operating activities                                          |  |                               | 2,011    |   |      |   | 2,664  |  
|                                                                                              |  |                               |          |   |      |   |        |  
|Cash flows from investing activities:                                                         |  |                               |          |   |      |   |        |  
|Loan originations, net of principal collections                                               |  |                               | (1,807   | ) |      |   | 2,021  |  
|Investment securities classified as available for sale:                                       |  |                               |          |   |      |   |        |  
|Purchased                                                                                     |  |                               | (63,662  | ) |      |   |       |  
|Proceeds from sale                                                                            |  |                               | 6,676    |   |      |   | 3,725  |  
|Proceeds from maturity                                                                        |  |                               | 15,500   |   |      |   | 5,065  |  
|Return of principal on mortgage-backed securities                                             |  |                               | 4,172    |   |      |   | 4,068  |  
|Purchase of premises and equipment                                                            |  |                               | (1,133   | ) |      |   | (177   | )
|Sale of fixed assets                                                                          |  |                               | 1        |   |      |   |       |  
|Proceeds from sale of (additions to) foreclosed real estate, net                              |  |                               | 510      |   |      |   | 316    |  
|                                                                                              |  |                               |          |   |      |   |        |  
|Net cash provided by (used for) investing activities                                          |  |                               | (39,743  | ) |      |   | 15,018 |  
|                                                                                              |  |                               |          |   |      |   |        |  
|Cash flows from financing activities:                                                         |  |                               |          |   |      |   |        |  
|Net increase (decrease) in deposits                                                           |  |                               | (108,586 | ) |      |   | (8,811 | )
|Proceeds from stock conversion, net                                                           |  |                               | 57,771   |   |      |   |       |  
|Merger of MHC into Jefferson Bancshares                                                       |  |                               | 111      |   |      |   |       |  
|Cash dividend paid on common stock                                                            |  |                               | (441     | ) |      |   | (147   | )
|Proceeds from exercise of stock options                                                       |  |                               | 34       |   |      |   |       |  
|                                                                                              |  |                               |          |   |      |   |        |  
|Net cash provided by (used for) financing activities                                          |  |                               | (51,111  | ) |      |   | (8,958 | )
|                                                                                              |  |                               |          |   |      |   |        |  
|Net increase (decrease) in cash, cash equivalents, and interest-earning deposits              |  |                               | (88,843  | ) |      |   | 8,724  |  
|Cash, cash equivalents, and interest-earning deposits at beginning of period                  |  |                               | 96,543   |   |      |   | 6,983  |  
|                                                                                              |  |                               |          |   |      |   |        |  
|Cash, cash equivalents, and interest-earning deposits at end of period                        |  | $                             | 7,700    |   |      | $ | 15,707 |  
|                                                                                              |  |                               |          |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                            |  |                               |          |   |      |   |        |  
|Cash paid during period for:                                                                  |  |                               |          |   |      |   |        |  
|Interest on deposits                                                                          |  | $                             | 2,543    |   |      | $ | 3,526  |  
|Interest on FHLB advances                                                                     |  |                               | 50       |   |      |   | 50     |  
|Income taxes                                                                                  |  |                               | 1,087    |   |      |   | 1,259  |  
|                                                                                              |  |                              
|Real estate acquired in settlement of loans                                                   |  | $                             | 1,323    |   |      | $ | 1,510  |  



See accompanying notes
to financial statements



6



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



The accompanying unaudited consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the Company or
Jefferson Bancshares) and its wholly-owned subsidiary, Jefferson Federal Bank (the Bank or Jefferson Federal). Financial statements as of June 30, 2003 and earlier are for the Bank. The unaudited financial
statements of Jefferson Bancshares, Inc. were prepared with generally accepted accounting principles and with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of financial condition,
results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for fair presentation of the interim financial
statements. The results of operations for the period ended December 31, 2003 are not necessarily indicative of the results which may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the year ended June 30, 2003.



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



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



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



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



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



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



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



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



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



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



|                                                              |  |                                                          |  |                                                       
|------------------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------------------------------------------
|                                                              |  | Weighted-Average Shares Outstanding For The Three Months |  | Weighted-Average Shares Outstanding For The Six Months
|Shares used for:                                              |  |                                                          |  |                                                       
|Earnings Per Common Share December 31, 2002                   |  | 8,001,071                                                |  | 8,001,071                                             
|Earnings Per Common Share-Assuming Dilution December 31, 2002 |  | 8,029,636                                                |  | 8,031,838                                             
|Earnings Per Common Share December 31, 2003                   |  | 8,382,286                                                |  | 8,378,837                                             
|Earnings Per Common Share-Assuming Dilution December 31, 2003 |  | 8,426,876                                                |  | 8,421,943                                             



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



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



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



Impairment of loans having recorded investment of $239,000 at December 31, 2003 and an average investment of $209,000 during the six-month period ended
December 31, 2003 has been recognized in conformity with FASB Statement No. 118. The total allowance for loan losses related to these loans was $28,000 at December 31, 2003. Other nonaccrual loans at December 31, 2003 were approximately $1.2
million. For the six months ended December 31, 2003, gross income which would have been recognized had impaired and nonaccrual loans been current in accordance with their original terms, amounted to approximately $50,000. The amount of interest
income from impaired and non-accrual loans included in the Companys



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interest income for the six months ended December 31, 2003 was approximately $35,000. The amount of
interest income from impaired loans included in net income for the six months ended December 31, 2003 was approximately $7,000.



The following table summarizes the activity in the allowance for loan losses for the six months ended December 31, 2003:



|                             |  |                                                  |      |   |  |   |       |  
|---------------------------- |  | ------------------------------------------------ | ---- | - |  | - | ----- | -
|                             |  | Allowance for Loan Losses (Dollars in Thousands) |     
|Balance at June 30, 2003     |  |                                                  |      |   |  | $ | 2,841 |  
|Provision for loan losses    |  |                                                  |      |   |  |   |      |  
|Charge-offs                  |  | $                                                | (433 | ) |  |   |       |  
|Recoveries                   |  |                                                  | 174  |   |  |   |       |  
|                             |  |                                                  |      |   |  |   |       |  
|Net (charge-offs)/recoveries |  |                                                  |      |   |  |   | (259  | )
|                             |  |                                                  |      |   |  |   |       |  
|Balance at December 31, 2003 |  |                                                  |      |   |  | $ | 2,582 |  
|                             |  |                                                  |      |   |  |   |       |  



|(7) | Financial Instruments With Off-Balance Sheet Risk
|--- | -------------------------------------------------



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



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



|                                                                 |  |                        |          |   |               |   |          |                 |  |   |            |   |  |   |          |  
|---------------------------------------------------------------- |  | ---------------------- | -------- | - | ------------- | - | -------- | --------------- |  | - | ---------- | - |  | - | -------- | -
|                                                                 |  | December 31, 2003      |          |   | June 30, 2003 |  
|                                                                 |  | Carrying Amount        |          |   | Fair Value    |   |          | Carrying Amount |  |   | Fair Value |  
|                                                                 |  | (Dollars in Thousands) |         
|Financial assets:                                                |  |                        |          |   |               |   |          |                 |  |   |            |   |  |   |          |  
|Cash and due from banks and interest-earning deposits with banks |  | $                      | 7,700    |   |               | $ | 7,700    |                 |  | $ | 96,543     |   |  | $ | 96,543   |  
|Available-for-sale securities                                    |  |                        | 112,499  |   |               |   | 112,499  |                 |  |   | 76,400     |   |  |   | 76,400   |  
|Federal Home Loan Bank stock                                     |  |                        | 1,549    |   |               |   | 1,549    |                 |  |   | 1,518      |   |  |   | 1,518    |  
|Loans receivable                                                 |  |                        | 182,465  |   |               |   | 183,097  |                 |  |   | 180,010    |   |  |   | 182,715  |  
|Accrued interest receivable                                      |  |                        | 2,037    |   |               |   | 2,037    |                 |  |   | 1,934      |   |  |   | 1,934    |  
|                                                                 |  |                        |          |  
|Financial liabilities:                                           |  |                        |          |   |               |   |          |                 |  |   |            |   |  |   |          |  
|Deposits                                                         |  |                        | (215,661 | ) |               |   | (216,545 | )               |  |   | (324,247   | ) |  |   | (325,855 | )
|FHLB advances                                                    |  |                        | (2,000   | ) |               |   | (2,190   | )               |  |   | (2,000     | ) |  |   | (2,273   | )
|                                                                 |  |                        |          |  
|Off-balance sheet assets (liabilities):                          |  |                        |          |   |               |   |          |                 |  |   |            |   |  |   |          |  
|Commitments to extend credit                                     |  |                        |         |   |               |   | (7,233   | )               |  |   |           |   |  |   | (3,238   | )
|Unused standby letters of credit                                 |  |                        |         |   |               |   | (99      | )               |  |   |           |   |  |   | (92      | )
|Unused lines of credit                                           |  |                        |         |   |               |   | (3,598   | )               |  |   |           |   |  |   | (1,848   | )



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



Current federal income tax law provides for elimination of the preferential tax bad debt deduction for thrift institutions and the recapture of tax bad
debt reserves in excess of the base year reserves (pre-1988 reserves). The excess tax bad debt reserves is required to be recaptured to income ratably over a six-year period unless a thrift institution meets the residential loan
requirement test and suspends the recapture for up to two years. For Jefferson Bancshares, this tax accounting change was effective for the year ending June 30, 1997. Because deferred taxes have been recorded for such excess tax bad debt
reserves, this legislation has not had a material effect on the Companys statement of condition or results of operation; however, it has resulted in an outflow of cash. The six-year recapture period began with the fiscal year ending June 30,
1999. The total amount of excess tax bad debt reserves to be recaptured during the six-year period amounted to $622,000, or $104,000 per year. On a cumulative basis, the Company has recaptured $519,000 in reserves during the five most recent fiscal
years, which resulted in additional federal income taxes of $176,000. During the six months ended December 31, 2003, Jefferson Bancshares recaptured $52,000 in excess tax bad debt reserves, which resulted in the cash payment of $18,000 in additional
federal income tax.



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



Under the Banks 1995 Stock Option Plan and 1995 Management Recognition and Development Plan (MRP), which were assumed by the Company,
the Company may issue a combined total of 179,176 shares to officers, employees and non-employee directors. Awards under both plans vest pro-rata over a five-year period. Any shares subject to an award that is



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forfeited will again be available for issuance. As of December 31, 2003, there were 60,857 options
outstanding and no remaining shares available for grant under the 1995 Stock Option Plan. No options were granted, or forfeited during the six months ended December 31, 2003. During the three months ended December 31, 2003, 9,532 options were
exercised.



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##### Table of Contents

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, 2003.



General



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



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



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



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



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Private Securities Litigation Reform Act Safe Harbor Statement



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



Managements ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect
actual results include interest rate trends, the general economic climate in the market area in which Jefferson Bancshares operates, as well as nationwide, Jefferson Bancshares ability to control costs and expenses, competitive products and
pricing, loan delinquency rates and changes in federal and state legislation and regulation. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson
Bancshares assumes no obligation to update any forward-looking statements.



Results of Operations for the Three and Six Months Ended December 31, 2003 and 2002



Net Earnings



For the three
months ended December 31, 2003, net earnings increased $140,000, or 16.9%, to $966,000. For the six months ended December 31, 2003, net earnings decreased as a result of the nonrecurring expense associated with the $4.0 million contribution to the
Jefferson Federal Charitable Foundation.



|                                      |  |                                               |      |   |                               |   |      |      |  |   |       |   |  |   |       |  
|------------------------------------- |  | --------------------------------------------- | ---- | - | ----------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                      |  | Three Months Ended December 31,               |      |   | Six Months Ended December 31, |  
|                                      |  | 2003                                          |      |   | 2002                          |   |      | 2003 |  |   | 2002  |  
|                                      |  | (Dollars in thousands, except per share data) |     
|Net earnings                          |  | $                                             | 966  |   |                               | $ | 826  |      |  | $ | (625  | ) |  | $ | 1,752 |  
|Net earnings per share, basic         |  | $                                             | 0.12 |   |                               | $ | 0.10 |      |  | $ | (0.07 | ) |  | $ | 0.22  |  
|Net earnings per share, diluted       |  | $                                             | 0.11 |   |                               | $ | 0.10 |      |  | $ | (0.07 | ) |  | $ | 0.22  |  
|Return on average assets (annualized) |  |                                               | 1.22 | % |                               |   | 1.26 | %    |  |   | NM    |   |  |   | 1.33  | %
|Return on average equity (annualized) |  |                                               | 4.02 | % |                               |   | 9.57 | %    |  |   | NM    |   |  |   | 10.25 | %



Net Interest Income



Net interest income increased $161,000, or 6.1%, to $2.8 million for the
three months ended December 31, 2003. The net interest margin decreased 51 basis points to 3.66% for the three months ended December 31, 2003. The decline in net interest margin reflects growth in earning assets with lower yields due to current low
market interest rates. The interest rate spread was 2.93% and 3.76% for the quarters ended December 31, 2003 and 2002, respectively. The average balance of interest-earning assets increased $53.0 million to $306.3 million, while the average balance
of interest-bearing liabilities decreased $7.9 million to $212.9 million. The average rate paid on interest-bearing liabilities decreased 75 basis points to 2.38%, while the average yield on interest-earning assets decreased 159 basis points to
5.31%.



13



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##### Table of Contents

The following table summarizes changes in interest income and expense for the three month period:



|                           |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|-------------------------- |  | ------------------------------- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                           |  | Three Months Ended December 31, |       |      |   |          |  |  
|                           |  | 2003                            |       | 2002 |   | $ Change |  |   | % Change |  
|                           |  | (Dollars in thousands)          |       |      |   |          |  |  
|Interest income:           |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Loans                      |  | $                               | 3,147 |      | $ | 3,732    |  | $ | (585     | ) |  | (15.7 | )%
|Investment securities      |  |                                 | 741   |      |   | 324      |  |   | 417      |   |  | 128.7 | % 
|Mortgage-backed securities |  |                                 | 143   |      |   | 261      |  |   | (118     | ) |  | (45.2 | )%
|Interest-earning deposits  |  |                                 | 17    |      |   | 33       |  |   | (16      | ) |  | (48.5 | )%
|FHLB stock                 |  |                                 | 15    |      |   | 17       |  |   | (2       | ) |  | (11.8 | )%
|                           |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Total interest income      |  |                                 | 4,063 |      |   | 4,367    |  |   | (304     | ) |  | (7.0  | )%
|Interest expense:          |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Deposits                   |  |                                 | 1,239 |      |   | 1,704    |  |   | (465     | ) |  | (27.3 | )%
|Borrowings                 |  |                                 | 25    |      |   | 25       |  |   |         |   |  | 0.0   | % 
|                           |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Total interest expense     |  |                                 | 1,264 |      |   | 1,729    |  |   | (465     | ) |  | (26.9 | )%
|                           |  |                                 |       |      |   |          |  |   |          |   |  |       |   
|Net interest income        |  | $                               | 2,799 |      | $ | 2,638    |  | $ | 161      |   |  | 6.1   | % 
|                           |  |                                 |       |      |   |          |  |   |          |   |  |       |   



For the six months ended December 31,
2003, net interest income increased $244,000, or 4.5%, to $5.6 million. This increase was primarily the result of an increase in the average balance of earning assets which more than offset a decrease in the interest rate spread. The net interest
margin and interest rate spread was 3.66% and 2.94%, respectively, for the six months ended December 31, 2003, compared to 4.20% and 3.79% for the comparable period in 2002.



The following table summarizes changes in interest income and expense for the six month period:



|                           |  |                               |       |      |   |          |  |   |          |   |  |       |   
|-------------------------- |  | ----------------------------- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                           |  | Six Months Ended December 31, |       |      |   |          |  |  
|                           |  | 2003                          |       | 2002 |   | $ Change |  |   | % Change |  
|                           |  | (Dollars in thousands)        |       |      |   |          |  |  
|Interest income:           |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Loans                      |  | $                             | 6,443 |      | $ | 7,595    |  | $ | (1,152   | ) |  | (15.2 | )%
|Investment securities      |  |                               | 1,333 |      |   | 681      |  |   | 652      |   |  | 95.7  | % 
|Mortgage-backed securities |  |                               | 307   |      |   | 572      |  |   | (265     | ) |  | (46.3 | )%
|Interest-earning deposits  |  |                               | 92    |      |   | 62       |  |   | 30       |   |  | 48.4  | % 
|FHLB stock                 |  |                               | 30    |      |   | 34       |  |   | (4       | ) |  | (11.8 | )%
|                           |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Total interest income      |  |                               | 8,205 |      |   | 8,944    |  |   | (739     | ) |  | (8.3  | )%
|Interest expense:          |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Deposits                   |  |                               | 2,543 |      |   | 3,526    |  |   | (983     | ) |  | (27.9 | )%
|Borrowings                 |  |                               | 50    |      |   | 50       |  |   |         |   |  | 0.0   | % 
|                           |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Total interest expense     |  |                               | 2,593 |      |   | 3,576    |  |   | (983     | ) |  | (27.5 | )%
|                           |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Net interest income        |  | $                             | 5,612 |      | $ | 5,368    |  | $ | 244      |   |  | 4.5   | % 
|                           |  |                               |       |      |   |          |  |   |          |   |  |       |   



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##### Table of Contents

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



|                           |  |                                 |         |             |                               |   |                 |      |            |  |      |                 |  |             |         |  |                 |   |            |   |         |  |      |  
|-------------------------- |  | ------------------------------- | ------- | ----------- | ----------------------------- | - | --------------- | ---- | ---------- |  | ---- | --------------- |  | ----------- | ------- |  | --------------- | - | ---------- | - | ------- |  | ---- | -
|                           |  | Three Months Ended December 31, |         |             | Six Months Ended December 31, |  
|                           |  | 2003                            |         |             | 2002                          |   |                 | 2003 |            |  | 2002 |                
|                           |  | Average Balance                 |         | Yield/ Cost |                               |   | Average Balance |      | Yield/Cost |  |      | Average Balance |  | Yield/ Cost |         |  | Average Balance |   | Yield/Cost |  
|Loans                      |  | $                               | 183,371 |             | 6.86                          | % |                 | $    | 190,318    |  | 7.84 | %               |  | $           | 182,359 |  | 7.07            | % |            | $ | 191,468 |  | 7.93 | %
|Investment securities      |  |                                 | 95,320  |             | 3.11                          | % |                 |      | 24,710     |  | 5.24 | %               |  |             | 95,111  |  | 2.80            | % |            |   | 26,182  |  | 5.20 | %
|Mortgage-backed securities |  |                                 | 15,708  |             | 3.64                          | % |                 |      | 24,835     |  | 4.20 | %               |  |             | 16,765  |  | 3.66            | % |            |   | 25,893  |  | 4.42 | %
|Interest-earning deposits  |  |                                 | 10,341  |             | 0.66                          | % |                 |      | 11,943     |  | 1.11 | %               |  |             | 10,548  |  | 1.74            | % |            |   | 10,904  |  | 1.14 | %
|FHLB stock                 |  |                                 | 1,544   |             | 3.89                          | % |                 |      | 1,484      |  | 4.58 | %               |  |             | 1,536   |  | 3.91            | % |            |   | 1,475   |  | 4.61 | %
|Deposits                   |  |                                 | 210,877 |             | 2.35                          | % |                 |      | 218,739    |  | 3.12 | %               |  |             | 212,236 |  | 2.40            | % |            |   | 221,562 |  | 3.18 | %
|Borrowings                 |  |                                 | 2,000   |             | 5.00                          | % |                 |      | 2,000      |  | 5.00 | %               |  |             | 2,000   |  | 5.00            | % |            |   | 2,000   |  | 5.00 | %



Total interest income decreased
$304,000, or 7.0%, to $4.1 million for the three months ended December 31, 2003 and decreased $739,000 or 8.3%, to $8.2 million for the six months ended December 31, 2003. The decrease in interest income for both the three and six month period was
the result of a decrease in the average yield of interest-earning assets more than offsetting an increase in the average balance of interest-earning assets. Interest on loans decreased as a result of declining rates and a decrease in the average
balance. The average yield on loans declined as we originated loans at lower interest rates due to the prevailing low interest rate environment, and loans with variable rates repriced to lower rates. Interest on investment securities increased due
to an increase in the average balance which more than offset a decline in the average yield. The average balance of investments increased as a result of the investment of the Conversion proceeds in short-term securities. The average yield on
investment securities decreased 213 basis points to 3.11% for the three month period and decreased 240 basis points to 2.80% for the six month period. Approximately 14% of the investment portfolio is held in mortgage-backed securities (MBSs). A
significant portion of our mortgage-backed securities have adjustable rates and have repriced downward in the current low interest rate environment. Dividends on FHLB stock were $15,000 for the three months ended December 31, 2003 and $17,000 for
the same period in 2002. Dividends on FHLB stock are paid with additional shares of FHLB stock.



Interest expense decreased $465,000, or 26.9%, to $1.3 million for the three month period ended December 31, 2003 and decreased $983,000, or 27.9%, to $2.6 million for the six month period ended December 31, 2003. For
both the three and six month period, the average balance of deposits declined due to a decrease in certificates of deposit which more than offset increases in transaction accounts. The average rate paid on deposits declined for both the three and
six month periods in 2003 as compared to the same periods in 2002 due to the current low interest rate environment. For the six month period ended December 31, 2003, certificates of deposit, which are a higher cost of funds, represented
approximately 70.6% of deposits at December 31, 2003 and 76.7% of deposits at December 31, 2002. The shift of deposits from certificates of deposit to lower costing transaction accounts has been a result of the prevailing low interest rate
environment and our strategy of emphasizing transaction accounts.



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##### Table of Contents

Provision for Loan Losses



We review the level of the allowance on a monthly basis and establish the provision for loan losses based on the level of subprime loans in
the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. We use Beacon credit scores to predict the likelihood that an existing borrower will become a credit
risk. We consider loans to borrowers with a Beacon credit score below 600 to be subprime. Provision for loan losses decreased $240,000 for the three months ended December 31, 2003 compared to the same period in 2002 due to lower
estimated losses in the loan portfolio. For the six months ended December 31, 2003, the provision for loan losses decreased $547,000 compared to the six month period in 2002 as there were no additions to the allowance for loan losses during the six
month period ended December 31, 2003. Net charge-offs were $259,000 for the six month period ended December 31, 2003 compared to $553,000 for the same period in 2002. Nonaccrual loans were $1.2 million at December 31, 2003 compared to $2.4 million
at December 31, 2002. The level of subprime loans at December 31, 2003 decreased approximately $9.7 million, or 29.0% from the level at December 31, 2002.



Noninterest Income



Noninterest income increased $17,000, or 7.2%, to $252,000 for the three months ended December 31, 2003 due to a combination of factors, including increases in dividends
from investments and gain on sale of foreclosed property more than offsetting a decrease in service charges and fees. 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, 2003 compared to the same period in 2002.



|                                    |  |                                |     |      |   |          |  |   |          |   |  |      |   
|----------------------------------- |  | ------------------------------ | --- | ---- | - | -------- |  | - | -------- | - |  | ---- | --
|                                    |  | Three Months EndedDecember 31, |     |      |   |          |  |  
|                                    |  | 2003                           |     | 2002 |   | $ Change |  |   | % Change |  
|Dividends from investments          |  | $                              | 22  |      |   |         |  | $ | 22       |   |  | NM   |   
|Service charges and fees            |  |                                | 160 |      | $ | 171      |  |   | (11      | ) |  | (6.4 | )%
|Gain on sale of fixed assets        |  |                                | 1   |      |   |         |  |   | 1        |   |  | NM   |   
|Gain on sale of foreclosed property |  |                                | 39  |      |   | 32       |  |   | 7        |   |  | 21.9 | % 
|Other                               |  |                                | 30  |      |   | 32       |  |   | (2       | ) |  | (6.3 | )%
|                                    |  |                                |     |      |   |          |  |   |          |   |  |      |   
|Total noninterest income            |  | $                              | 252 |      | $ | 235      |  | $ | 17       |   |  | 7.2  | % 
|                                    |  |                                |     |      |   |          |  |   |          |   |  |      |   



Noninterest income decreased $33,000,
or 6.4%, to $486,000 for the six months ended December 31, 2003, primarily due to a decrease in gain on sale of investments and service charges and fees more than offsetting increases in dividends from investments and gain on sale of foreclosed
property.



The following table summarizes the dollar amounts for each category
of noninterest income, and the dollar and percent changes for the six months ended December 31, 2003 compared to the same period in 2002.



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##### Table of Contents

|                                    |  |                             |     |      |   |          |  |   |          |   |  |       |   
|----------------------------------- |  | --------------------------- | --- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                                    |  | Six MonthsEndedDecember 31, |     |      |   |          |  |  
|                                    |  | 2003                        |     | 2002 |   | $ Change |  |   | % Change |  
|Dividends from investments          |  | $                           | 22  |      |   |         |  | $ | 22       |   |  | NM    |   
|Service charges and fees            |  |                             | 319 |      |   | 338      |  |   | (19      | ) |  | (5.6  | )%
|Gain on sale of fixed assets        |  |                             | 1   |      |   |         |  |   | 1        |   |  | NM    |   
|Gain on sale of investments         |  |                             | 22  |      |   | 81       |  |   | (59      | ) |  | (72.8 | )%
|Gain on sale of foreclosed property |  |                             | 65  |      |   | 40       |  |   | 25       |   |  | 62.5  | % 
|Other                               |  |                             | 57  |      |   | 60       |  |   | (3       | ) |  | (5.0  | )%
|                                    |  |                             |     |      |   |          |  |   |          |   |  |       |   
|Total noninterest income            |  | $                           | 486 |      | $ | 519      |  | $ | (33      | ) |  | (6.4  | )%
|                                    |  |                             |     |      |   |          |  |   |          |   |  |       |   



Noninterest Expense



Noninterest expense increased $210,000 to $1.5 million for the three
months ended December 31, 2003 due primarily to an increase in compensation and benefits. The increase in compensation and benefits was due primarily to expenses related to the Employee Stock Ownership Plan (ESOP). Compensation expense
is recognized for the ESOP in an amount equal to the fair market value of shares committed to be released for allocation to participant accounts.



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,
2003 compared to the same period in 2002.



|                                |  |                                |       |      |   |          |  |   |          |   |  |       |   
|------------------------------- |  | ------------------------------ | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                                |  | Three MonthsEnded December 31, |       |      |   |          |  |  
|                                |  | 2003                           |       | 2002 |   | $ Change |  |   | % Change |  
|Compensation and benefits       |  | $                              | 714   |      | $ | 591      |  | $ | 123      |   |  | 20.8  | % 
|Occupancy                       |  |                                | 64    |      |   | 64       |  |   |         |   |  | 0.0   | % 
|Equipment and data processing   |  |                                | 215   |      |   | 199      |  |   | 16       |   |  | 8.0   | % 
|SAIF Deposit insurance premiums |  |                                | 12    |      |   | 10       |  |   | 2        |   |  | 20.0  | % 
|REO expense                     |  |                                | 77    |      |   | 90       |  |   | (13      | ) |  | (14.4 | )%
|Advertising                     |  |                                | 75    |      |   | 41       |  |   | 34       |   |  | 82.9  | % 
|Other                           |  |                                | 357   |      |   | 309      |  |   | 48       |   |  | 15.5  | % 
|                                |  |                                |       |      |   |          |  |   |          |   |  |       |   
|Total noninterest expense       |  | $                              | 1,514 |      | $ | 1,304    |  | $ | 210      |   |  | 16.1  | % 
|                                |  |                                |       |      |   |          |  |   |          |   |  |       |   



Noninterest expense increased $4.5
million to $7.1 million for the six months ended December 31, 2003 due primarily to the $4.0 million contribution to the Jefferson Federal Charitable Foundation. Compensation and benefits increased $293,000, or 24.9%, due primarily to expenses
related to the ESOP. For the six months, compensation expense related to the ESOP was $305,000.



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, 2003 compared to the same period in 2002.



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##### Table of Contents

|                                                            |  |                               |       |      |   |          |  |   |          |   |  |       |   
|----------------------------------------------------------- |  | ----------------------------- | ----- | ---- | - | -------- |  | - | -------- | - |  | ----- | --
|                                                            |  | Six Months Ended December 31, |       |      |   |          |  |  
|                                                            |  | 2003                          |       | 2002 |   | $ Change |  |   | % Change |  
|Compensation and benefits                                   |  | $                             | 1,470 |      | $ | 1,177    |  | $ | 293      |   |  | 24.9  | % 
|Occupancy                                                   |  |                               | 125   |      |   | 135      |  |   | (10      | ) |  | (7.4  | )%
|Equipment and data processing                               |  |                               | 442   |      |   | 417      |  |   | 25       |   |  | 6.0   | % 
|SAIF Deposit insurance premiums                             |  |                               | 21    |      |   | 20       |  |   | 1        |   |  | 5.0   | % 
|REO expense                                                 |  |                               | 130   |      |   | 147      |  |   | (17      | ) |  | (11.6 | )%
|Advertising                                                 |  |                               | 122   |      |   | 79       |  |   | 43       |   |  | 54.4  | % 
|Contribution to the Jefferson Federal Charitable Foundation |  |                               | 4,000 |      |   |         |  |   | 4,000    |   |  | NM    |   
|Other                                                       |  |                               | 752   |      |   | 559      |  |   | 193      |   |  | 34.5  | % 
|                                                            |  |                               |       |      |   |          |  |   |          |   |  |       |   
|Total noninterest expense                                   |  | $                             | 7,062 |      | $ | 2,534    |  | $ | 4,528    |   |  | 178.7 | % 
|                                                            |  |                               |       |      |   |          |  |   |          |   |  |       |   



Income Taxes



Income tax expense for the three months ended December 31, 2003 was
$571,000 compared to $503,000 for the same period in 2002. Income tax benefit for the six months ended December 31, 2003 was $339,000 compared to income tax expense of $1.1 million for the same period in 2002. The tax benefit (i.e. current and
deferred) was due to the contribution of cash and common stock to the Jefferson Federal Charitable Foundation. The contribution to the Foundation is tax deductible, subject to a limitation based on 10% of the Companys annual taxable income.
Any unused portion of the deduction may be carried forward for five years following the year in which the contribution is made.



Financial Condition



Assets



Total assets at December
31, 2003 were $314.8 million, a decrease of $48.8 million or 13.4%, from total assets of $363.6 million at June 30, 2003. At June 30, 2003, orders received in the subscription and community offering totaled in excess of $105.0 million. Approximately
$39.1 million of unfilled orders was returned to subscribers during the following quarter.



Cash, Cash Equivalents and Interest-Earning Deposits



Cash and cash equivalents were $3.6 million at December 31, 2003 compared to $7.6 million at June 30, 2003. Interest-earning deposits decreased $84.8 million to $4.1 million at December 31, 2003. This decrease is
primarily attributable to the investment of Conversion proceeds and the return of funds for unfilled stock orders.



Investments



Our investment portfolio consists primarily of Federal agency securities with maturities of seven years or less and mortgage-backed securities with stated final maturities of thirty years or less. Investment
securities increased $36.1 million, or 47.3%, to $112.5 million due primarily to the investment of Conversion proceeds and the reinvestment of proceeds from called securities. Investment securities classified as available-for-sale are carried at
fair market value and reflect an unrealized gain of $212,000, or $131,000 net of taxes.



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##### Table of Contents

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.



|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|------------------------------------------ |  | ---------------------- | ------- | - | ---------------- | - | ----------------- |  | - | ---------- | - |  | - | -------
|                                           |  | Amortized Cost         |         |   | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value
|                                           |  | (Dollars in Thousands)
|At December 31, 2003:                      |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Securities Available-for-Sale              |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Debt securities:                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Federal agency                             |  | $                      | 94,667  |   |                  | $ | 368               |  | $ | (246       | ) |  | $ | 94,789 
|Municipals                                 |  |                        | 2,502   |   |                  |   | 1                 |  |   |           |   |  |   | 2,503  
|Mortgage-backed                            |  |                        | 15,118  |   |                  |   | 109               |  |   | (20        | ) |  |   | 15,207 
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Total securities available-for-sale        |  | $                      | 112,287 |   |                  | $ | 478               |  | $ | (266       | ) |  | $ | 112,499
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Weighted-average rate                      |  |                        | 3.17    | % |                  |   |                   |  |   |            |   |  |   |        
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Federal Home Loan Bank of Cincinnati stock |  | $                      | 1,549   |   |                  | $ |                  |  | $ |           |   |  | $ | 1,549  
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Weighted-average rate                      |  |                        | 4.00    | % |                  |   |                   |  |   |            |   |  |   |        
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|                                           |  |                        |         |  
|                                           |  | Amortized Cost         |         |   | Unrealized Gains |   | Unrealized Losses |  |   | Fair Value
|                                           |  | (Dollars in Thousands)
|At June 30, 2003:                          |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Securities Available-for-Sale              |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Debt securities:                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Federal agency                             |  | $                      | 55,646  |   |                  | $ | 928               |  | $ |           |   |  | $ | 56,574 
|Mortgage-backed                            |  |                        | 19,306  |   |                  |   | 520               |  |   |           |   |  |   | 19,826 
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Total securities available-for-sale        |  | $                      | 74,952  |   |                  | $ | 1,448             |  | $ |           |   |  | $ | 76,400 
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Weighted-average rate                      |  |                        | 3.40    | % |                  |   |                   |  |   |            |   |  |   |        
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Federal Home Loan Bank of Cincinnati stock |  | $                      | 1,518   |   |                  | $ |                  |  | $ |           |   |  | $ | 1,518  
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        
|Weighted-average rate                      |  |                        | 4.00    | % |                  |   |                   |  |   |            |   |  |   |        
|                                           |  |                        |         |   |                  |   |                   |  |   |            |   |  |   |        



Loans



Net loans increased $2.5 million, or 1.4%, to $182.5 million at December 31, 2003. Loan
originations for the six months ended December 31, 2003 were $31.4 million compared to $20.6 million for the same period in 2002. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured
by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. Mortgage loans increased $4.5 million, to $168.6 million at December 31, 2003. Mortgage loans
represented 89.9% of total loans at December 31, 2003. The largest segment of our mortgage loans is one- to four-family loans. One- to four-family loans decreased $4.6 million, or 5.5%, to $80.0 million as a result of overall weakened economic
conditions and as borrowers refinanced their loans with other lenders in the low interest rate environment.



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##### Table of Contents

Commercial real estate loans are the second largest segment of our mortgage loan portfolio. We have emphasized this type
of lending for several years and have grown this portfolio to $56.4 million at December 31, 2003, an increase of $7.4 million, or 15.0%, from the level at June 30, 2003.



Multi-family loans increased $376,000, or 2.8%, to $13.6 million during the six month period as a result of a continued emphasis on this
type of lending. Construction loans decreased $395,000, or 7.5%, to $4.9 million in the six months ended December 31, 2003. Land loans increased $1.3 million, or 12.4% to $11.5 million at December 31, 2003.



Commercial business loans decreased $953,000, or 7.1%, to $12.5 million at December 31, 2003.
Most of the commercial business loans that we have originated have been tied to prime and will reprice quickly as interest rates change.



We originate a variety of consumer loans, including loans secured by automobiles, mobile homes and deposit accounts at Jefferson Federal. Consumer loans decreased
$973,000, or 13.2%, to $6.4 million at December 31, 2003. We have tightened our underwriting standards and have originated fewer subprime loans in recent periods. In addition, we have experienced low demand for automobile loans as a result of
low-cost financing offered through automobile dealers.



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##### Table of Contents

Loans receivable, net are summarized as follows:



|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|-------------------------------------------- |  | ---------------------- | ------- | - | ------------------- | ----- | - | ------ | - | ------- | ------------------- |  | ----- | -
|                                             |  | At December 31, 2003   |         |   | At June 30, 2003    |      
|                                             |  | Amount                 |         |   | Percentof Portfolio |       |   | Amount |   |         | Percentof Portfolio | 
|                                             |  | (Dollars in Thousands) |        
|Real estate loans:                           |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Residential one-to-four family               |  | $                      | 80,002  |   |                     | 42.7  | % |        | $ | 84,628  |                     |  | 45.8  | %
|Multi-family                                 |  |                        | 13,605  |   |                     | 7.3   | % |        |   | 13,229  |                     |  | 7.2   | %
|Construction                                 |  |                        | 4,871   |   |                     | 2.6   | % |        |   | 5,266   |                     |  | 2.8   | %
|Commercial                                   |  |                        | 56,390  |   |                     | 30.1  | % |        |   | 49,020  |                     |  | 26.5  | %
|Land                                         |  |                        | 11,459  |   |                     | 6.1   | % |        |   | 10,197  |                     |  | 5.5   | %
|Home equity line of credit                   |  |                        | 2,287   |   |                     | 1.2   | % |        |   | 1,736   |                     |  | 0.9   | %
|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Total real estate loans                      |  |                        | 168,614 |   |                     | 89.9  | % |        |   | 164,076 |                     |  | 88.7  | %
|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Commercial business loans                    |  |                        | 12,519  |   |                     | 6.7   | % |        |   | 13,472  |                     |  | 7.3   | %
|                                             |  |                        |         |  
|Non-real estate loans:                       |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Loans secured by deposit accounts            |  |                        | 1,702   |   |                     | 0.9   | % |        |   | 1,841   |                     |  | 1.0   | %
|Other consumer loans                         |  |                        | 1,533   |   |                     | 0.8   | % |        |   | 1,715   |                     |  | 0.9   | %
|Loans secured by automobiles                 |  |                        | 2,526   |   |                     | 1.4   | % |        |   | 3,081   |                     |  | 1.7   | %
|Mobile home loans                            |  |                        | 622     |   |                     | 0.3   | % |        |   | 719     |                     |  | 0.4   | %
|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Total non-real estate loans                  |  |                        | 6,383   |   |                     | 3.4   | % |        |   | 7,356   |                     |  | 4.0   | %
|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Total commercial business and consumer loans |  |                        | 18,902  |   |                     | 10.1  | % |        |   | 20,828  |                     |  | 11.3  | %
|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Subtotal                                     |  |                        | 187,516 |   |                     | 100.0 | % |        |   | 184,904 |                     |  | 100.0 | %
|                                             |  |                        |         |  
|Less:                                        |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Loans in process                             |  |                        | (2,117  | ) |                     |       |   |        |   | (1,682  | )                   |  |       |  
|Deferred loan fees, net                      |  |                        | (350    | ) |                     |       |   |        |   | (366    | )                   |  |       |  
|Unearned discount on loans                   |  |                        | (2      | ) |                     |       |   |        |   | (5      | )                   |  |       |  
|Allowance for losses                         |  |                        | (2,582  | ) |                     |       |   |        |   | (2,841  | )                   |  |       |  
|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  
|Loans receivable, net                        |  | $                      | 182,465 |   |                     |       |   |        | $ | 180,010 |                     |  |       |  
|                                             |  |                        |         |   |                     |       |   |        |   |         |                     |  |       |  



Loan Loss Allowance



The allowance for loan losses is a valuation allowance for probable
losses inherent in the loan portfolio. We evaluate the need to establish reserves against losses on loans on a monthly basis.



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



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 $259,000 to $2.6 million at December 31, 2003. There were no additions to the allowance for loan losses
during the current six-month period. At December 31, 2003, our allowance for loan losses represented 1.38% of total gross loans and 217.6% of nonperforming loans, compared to 1.54% of total gross loans and 161.79% of nonperforming loans at June 30,
2003.



|                                                               |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------- |  | ------------------------------- | ----- | - | ----------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                               |  | Three Months Ended December 31, |       |   | Six Months Ended December 31, |  
|                                                               |  | 2003                            |       |   | 2002                          |   |       | 2003 |  |   | 2002  |  
|Balance at beginning of period                                 |  | $                               | 2,691 |   |                               | $ | 2,615 |      |  | $ | 2,841 |   |  | $ | 2,696 |  
|Provision for loan losses                                      |  |                                 |      |   |                               |   | 240   |      |  |   |      |   |  |   | 547   |  
|Recoveries                                                     |  |                                 | 102   |   |                               |   | 189   |      |  |   | 174   |   |  |   | 278   |  
|Charge-offs                                                    |  |                                 | (211  | ) |                               |   | (354  | )    |  |   | (433  | ) |  |   | (831  | )
|                                                               |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|Net charge-offs                                                |  |                                 | (109  | ) |                               |   | (165  | )    |  |   | (259  | ) |  |   | (553  | )
|                                                               |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|Allowance at end of period                                     |  | $                               | 2,582 |   |                               | $ | 2,690 |      |  | $ | 2,582 |   |  | $ | 2,690 |  
|                                                               |  |                                 |       |   |                               |   |       |      |  |   |       |   |  |   |       |  
|Net charge-offs to average outstanding loans during the period |  |                                 | 0.24  | % |                               |   | 0.35  | %    |  |   | 0.28  | % |  |   | 0.58  | %



Nonperforming Assets



We consider repossessed assets and nonaccrual loans to be nonperforming.
Loans are reviewed on a monthly basis and are generally placed on a nonaccrual status when the loan becomes more than 90 days delinquent. Nonperforming loans decreased 32.3% to $1.2 million at December 31, 2003. Foreclosed real estate decreased
$381,000, to $846,000 at December 31, 2003 from $1.2 million at June 30, 2003. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value, less estimated selling costs. Any writedown to fair value is
charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings.



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|                                                        |  |                   |        |   |              |   |       |  
|------------------------------------------------------- |  | ----------------- | ------ | - | ------------ | - | ----- | -
|                                                        |  | December 31, 2003 |        |   | June 30,2003 |  
|Nonaccruing loans:                                      |  |                   |        |   |              |   |       |  
|One-to-four-family                                      |  | $                 | 1,126  |   |              | $ | 1,335 |  
|Commercial                                              |  |                   | 21     |   |              |   | 387   |  
|Land                                                    |  |                   | 37     |   |              |   | 17    |  
|Commercial Business                                     |  |                   |       |   |              |   |      |  
|Consumer                                                |  |                   | 5      |   |              |   | 17    |  
|                                                        |  |                   |        |   |              |   |       |  
|Total nonaccrual loans                                  |  |                   | 1,189  |   |              |   | 1,756 |  
|                                                        |  |                  
|Real estate owned                                       |  |                   | 846    |   |              |   | 1,227 |  
|Other repossessed assets                                |  |                   | 1      |   |              |   | 16    |  
|                                                        |  |                   |        |   |              |   |       |  
|Total nonperforming assets                              |  | $                 | 2,036  |   |              | $ | 2,999 |  
|                                                        |  |                   |        |   |              |   |       |  
|Total nonperforming assets to total assets              |  |                   | 0.65   | % |              |   | 0.82  | %
|Total nonperforming loans to total loans                |  |                   | 0.65   | % |              |   | 0.98  | %
|Allowance for loan losses to total nonperforming assets |  |                   | 126.82 | % |              |   | 94.73 | %



Deposits



Total deposits decreased $108.6 million, or 33.5% to $215.7 million at December 31, 2003.
This decrease is primarily attributable to the funds held in the Conversion account at June 30, 2003, for the purchase of Jefferson Bancshares common stock.



|                              |  |               |         |           |   |          |  |   |          |   |  |       |   
|----------------------------- |  | ------------- | ------- | --------- | - | -------- |  | - | -------- | - |  | ----- | --
|                              |  | December 2003 |         | June 2003 |   | $ Change |  |   | % Change |  
|Certificates of deposit       |  | $             | 150,909 |           | $ | 159,437  |  | $ | (8,528   | ) |  | (5.3  | )%
|Savings accounts              |  |               | 13,871  |           |   | 19,346   |  |   | (5,475   | ) |  | (28.3 | )%
|Money market accounts         |  |               | 28,289  |           |   | 28,588   |  |   | (299     | ) |  | (1.0  | )%
|NOW accounts                  |  |               | 16,318  |           |   | 17,767   |  |   | (1,449   | ) |  | (8.2  | )%
|Non-interest bearing accounts |  |               | 6,274   |           |   | 99,109   |  |   | (92,835  | ) |  | (93.7 | )%
|                              |  |               |         |           |   |          |  |   |          |   |  |       |   
|                              |  | $             | 215,661 |           | $ | 324,247  |  | $ | (108,586 | ) |  | (33.5 | )%
|                              |  |               |         |           |   |          |  |   |          |   |  |       |   



Advances and Other
Liabilities



FHLB advances were $2.0 million at both December 31, 2003
and June 30, 2003 with maturity dates ranging from March 2004 through March 2006.



Stockholders Equity



Stockholders equity
increased $59.9 million to $96.6 million at December 31, 2003 due primarily to $64.5 million in net proceeds from the Conversion. As a result of a net loss for the six-month period combined with dividends paid to shareholders, retained earnings
decreased $1.3 million to $31.4



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million at December 31, 2003. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio
are reflected as an adjustment to stockholders equity. At December 31, 2003, the adjustment to stockholders equity was an unrealized gain of $131,000 compared to a net unrealized gain of $898,000 at June 30, 2003.



Liquidity and Capital Resources



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



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



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, 2003, cash and cash equivalents totaled $3.6 million and interest-earning
deposits totaled $4.1 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $112.5 million at December 31, 2003. In addition, at December 31, 2003, we had arranged the ability to borrow a total
of approximately $57.9 million from the Federal Home Loan Bank of Cincinnati. On that date, we had advances outstanding of $2.0 million.



At December 31, 2003, we had approximately $7.2 million in loan commitments, consisting of $407,000 in commitments to originate residential loans, $6.5 million to
originate commercial loans, and $348,000 to originate multi-family loans. In addition to commitments to originate loans, we had $2.1 million in loans-in-process primarily to fund undisbursed proceeds of construction loans, $99,000 in unused standby
letters of credit and approximately $3.6 million in unused lines of credit. We had $107.0 million in certificates of deposit due within one year and $64.8 million in other deposits without specific maturities at December 31, 2003. We believe, based
on past experience, that a significant portion of those deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.



Our primary investing activities are the origination of loans and the purchase of securities. In the six-month period ended December 31,
2003, we originated approximately $31.4 million of loans and purchased $63.7 million in securities.



Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in total deposits of $108.6 million during the six-month period ended December
31, 2003. However, we experienced a decline of only $48.8 million in assets during that period, most of which related to the return of excess subscriptions in connection with the Companys stock offering. Deposit flows are affected by the
overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing



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of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on
certain deposit products in order to attract deposits. In the six-month period ended December 31, 2003, Federal Home Loan Bank advances were unchanged.



At December 31, 2003, the average liquidity ratio was 41.95% compared to 26.50% at December 31, 2002. The capital from the Conversion has significantly increased our
liquidity and capital resources. Over time, we expect the initial level of liquidity after the Conversion will be reduced as net proceeds from the stock offering are used for future lending and operational growth and expansion activities.



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Capital Compliance



The following table presents our capital position relative to our regulatory capital requirements at December 31, 2003, and June 30, 2003:



|                                        |  |                        |        |  |                                |       |  |                                                                   |        |  |   |        |       |   |  |        |     |   |  |       |        |  |   |  |  |      |  
|--------------------------------------- |  | ---------------------- | ------ |  | ------------------------------ | ----- |  | ----------------------------------------------------------------- | ------ |  | - | ------ | ----- | - |  | ------ | --- | - |  | ----- | ------ |  | - |  |  | ---- | -
|                                        |  | Actual                 |        |  | For Capital Adequacy Purposes: |       |  | To Be Well Capitalized Under Prompt Corrective Action Provisions: |       
|                                        |  | Amount                 |        |  |                                | Ratio |  |                                                                   | Amount |  |   |        | Ratio |   |  | Amount |     |   |  | Ratio |       
|                                        |  | (Dollars in Thousands) |       
|At December 31, 2003:                   |  |                        |        |  |                                |       |  |                                                                   |        |  |   |        |       |   |  |        |     |   |  |       |        |  |   |  |  |      |  
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Total Capital(To Risk Weighted Assets)  |  | $                      | 64,030 |  | 3                              |       |  | 38.2                                                              | %      |  | $ | 13,405 |       | 3 |  |        | 8.0 | % |  | $     | 16,757 |  | 3 |  |  | 10.0 | %
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Core Capital(To Tangible Assets)        |  |                        | 61,929 |  | 3                              |       |  | 21.6                                                              | %      |  |   | 11,474 |       | 3 |  |        | 4.0 | % |  |       | 14,343 |  | 3 |  |  | 5.0  | %
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Tangible Capital(To Tangible Assets)    |  |                        | 61,929 |  | 3                              |       |  | 21.6                                                              | %      |  |   | 4,303  |       | 3 |  |        | 1.5 | % |  |       | N/A    |  |   |  |  |      |  
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Tier 1 Capital(To Risk Weighted Assets) |  |                        | 61,929 |  | 3                              |       |  | 37.0                                                              | %      |  |   | N/A    |       |   |  |        |     |   |  |       | 10,054 |  | 3 |  |  | 6.0  | %
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|At June 30, 2003:                       |  |                        |        |  |                                |       |  |                                                                   |        |  |   |        |       |   |  |        |     |   |  |       |        |  |   |  |  |      |  
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Total Capital(To Risk Weighted Assets)  |  |                        | 37,472 |  | 3                              |       |  | 21.1                                                              | %      |  |   | 14,235 |       | 3 |  |        | 8.0 | % |  |       | 17,794 |  | 3 |  |  | 10.0 | %
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Core Capital(To Tangible Assets)        |  |                        | 35,255 |  | 3                              |       |  | 9.8                                                               | %      |  |   | 14,468 |       | 3 |  |        | 4.0 | % |  |       | 18,085 |  | 3 |  |  | 5.0  | %
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Tangible Capital(To Tangible Assets)    |  |                        | 35,255 |  | 3                              |       |  | 9.8                                                               | %      |  |   | 5,426  |       | 3 |  |        | 1.5 | % |  |       | N/A    |  |   |  |  |      |  
|                                        |  |                        |        |  |                                |       |  |                                                                   |       
|Tier 1 Capital(To Risk Weighted Assets) |  |                        | 35,255 |  | 3                              |       |  | 19.8                                                              | %      |  |   | N/A    |       |   |  |        |     |   |  |       | 10,676 |  | 3 |  |  | 6.0  | %



Effect of Inflation and Changing
Prices



The financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting principles (GAAP) which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in relative
purchasing power of money over time due to inflation. The primary impact of



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inflation on operations of Jefferson Bancshares is reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institutions performance than do general levels of
inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



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



Item 4. Controls and Procedures



The
Companys management, including the Companys principal executive officer and principal financial officer, have evaluated the effectiveness of the Companys disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange Act). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Companys disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act
with the Securities and Exchange Commission (the SEC) (1) is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and (2) is accumulated and communicated to the Companys
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Companys internal control over
financial reporting occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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Part II



Item 1. Legal Proceedings



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



Item 2. Changes in Securities and Use of Proceeds



None.



Item 3. Defaults Upon Senior Securities



None.



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



None.



Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



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



| | 3.1 | Charter of Jefferson Bancshares, Inc. (1)
| | --- | -----------------------------------------



| | 3.2 | Bylaws of Jefferson Bancshares, Inc. (1)
| | --- | ----------------------------------------



| | 4.1 | Specimen Stock Certificate of Jefferson Bancshares, Inc. (1)
| | --- | ------------------------------------------------------------



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



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



| | 32.1 | Section 1350 certification
| | ---- | --------------------------



(1) Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement and amendments thereto, initially filed on March 21, 2003,
Registration No. 333-103961.



| | b. | Reports on Form 8-K during the quarter ended December 31, 2003:
| | -- | ---------------------------------------------------------------



On October 3, 2003, the Company filed a Form 8-K in which it reported under Item 5 the date of its annual meeting of shareholders.



On October 28, 2003, the Company furnished a Form 8-K in which it reported
under Item 12 the announcement of its results of operations for the quarter ended September 30, 2003.



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SIGNATURES



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



|                  |  |                                                 
|----------------- |  | ------------------------------------------------
|                  |  | JEFFERSON BANCSHARES, INC.                      
|                  | 
|February 12, 2004 |  | /s/ Anderson L. Smith                           
|                  |  | Anderson L. Smith                               
|                  |  | President and Chief Executive Officer           
|                  | 
|February 12, 2004 |  | /s/ Jane P. Hutton                              
|                  |  | Jane P. Hutton                                  
|                  |  | Chief Financial Officer, Treasurer and Secretary