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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended March 31, 2011

OR



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

For the transition period from  to

Commission File Number 00-50347





JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Tennessee                                                      |  | 45-0508261                             
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|120 Evans Avenue, Morristown, Tennessee                        |  | 37814                                  
|(Address of principal executive offices)                       |  | (Zip code)                             

(423)
586-8421

(Registrants telephone number, including area code)

Not Applicable

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





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



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

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

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

At
May 13, 2011, the registrant had 6,634,759 shares of common stock, $0.01 par value per share, outstanding.









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##### Table of Contents

INDEX



|           |  |                                                                                                                 |  |      |    | 
|---------- |  | --------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|           |  |                                                                                                                 |  | Page |   
|           |  | PART I. FINANCIAL INFORMATION                                                                                   |  |      |    | 
|Item 1.    |  | Financial Statements                                                                                            |  |      |    | 
|           |  |                                                                                                                
|           |  | Consolidated Statements of Condition - UnauditedNine months ended March 31, 2011 and year ended June 30, 2010   |  |      | 3  | 
|           |  |                                                                                                                
|           |  | Consolidated Statements of Earnings - UnauditedThree and nine months ended March 31, 2011 and 2010              |  |      | 4  | 
|           |  |                                                                                                                
|           |  | Consolidated Statements of Changes in Stockholders Equity  UnauditedNine months ended March 31, 2011 and 2010 |  |      | 5  | 
|           |  |                                                                                                                
|           |  | Consolidated Statements of Cash Flows - UnauditedNine months ended March 31, 2011 and 2010                      |  |      | 6  | 
|           |  |                                                                                                                
|           |  | Notes to Consolidated Financial Statements - Unaudited                                                          |  |      | 7  | 
|           |  |                                                                                                                
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  |      | 20 | 
|           |  |                                                                                                                
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  |      | 36 | 
|           |  |                                                                                                                
|Item 4.    |  | Controls and Procedures                                                                                         |  |      | 36 | 
|           |  |                                                                                                                
|           |  | PART II. OTHER INFORMATION                                                                                      |  |      |    | 
|           |  |                                                                                                                
|Item 1.    |  | Legal Proceedings                                                                                               |  |      | 37 | 
|Item 1A.   |  | Risk Factors                                                                                                    |  |      | 37 | 
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                     |  |      | 37 | 
|Item 3.    |  | Defaults Upon Senior Securities                                                                                 |  |      | 38 | 
|Item 4.    |  | [Removed and Reserved]                                                                                          |  |      | 38 | 
|Item 5.    |  | Other Information                                                                                               |  |      | 38 | 
|Item 6.    |  | Exhibits                                                                                                        |  |      | 38 | 
|           |  |                                                                                                                
|SIGNATURES |  |                                                                                                                 |  |      |    | 



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

JEFFERSON BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

(Dollars in Thousands)



|                                                                                                                                                                                         |  |               |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                         |  | March 31,2011 |         |   | June 30,2010 |  
|                                                                                                                                                                                         |  | (Unaudited)   |         |   |              |  
|Assets                                                                                                                                                                                   |  |               |         |   |              |   |         |  
|                                                                                                                                                                                         |  |              
|Cash and cash equivalents                                                                                                                                                                |  | $             | 3,755   |   |              | $ | 5,071   |  
|Interest-earning deposits                                                                                                                                                                |  |               | 54,446  |   |              |   | 59,232  |  
|Fed funds sold                                                                                                                                                                           |  |               |        |   |              |   | 5,000   |  
|Investment securities classified as available for sale, net                                                                                                                              |  |               | 53,935  |   |              |   | 62,989  |  
|Federal Home Loan Bank stock                                                                                                                                                             |  |               | 4,735   |   |              |   | 4,735   |  
|Bank owned life insurance                                                                                                                                                                |  |               | 6,567   |   |              |   | 6,390   |  
|Loans receivable, net of allowance for loan losses of $7,881 and $9,649                                                                                                                  |  |               | 393,711 |   |              |   | 434,378 |  
|Loans held-for-sale                                                                                                                                                                      |  |               | 326     |   |              |   | 1,153   |  
|Premises and equipment, net                                                                                                                                                              |  |               | 26,897  |   |              |   | 27,555  |  
|Foreclosed real estate, net                                                                                                                                                              |  |               | 11,323  |   |              |   | 6,851   |  
|Accrued interest receivable:                                                                                                                                                             |  |               |         |   |              |   |         |  
|Investments                                                                                                                                                                              |  |               | 260     |   |              |   | 256     |  
|Loans receivable                                                                                                                                                                         |  |               | 1,554   |   |              |   | 1,744   |  
|Deferred tax asset                                                                                                                                                                       |  |               | 9,068   |   |              |   | 8,524   |  
|Core deposit intangible                                                                                                                                                                  |  |               | 2,098   |   |              |   | 2,475   |  
|Other assets                                                                                                                                                                             |  |               | 8,849   |   |              |   | 4,417   |  
|                                                                                                                                                                                         |  |               |         |   |              |   |         |  
|                                                                                                                                                                                         |  |              
|Total Assets                                                                                                                                                                             |  | $             | 577,524 |   |              | $ | 630,770 |  
|                                                                                                                                                                                         |  |               |         |   |              |   |         |  
|                                                                                                                                                                                         |  |              
|Liabilities and Stockholders Equity                                                                                                                                                     |  |               |         |   |              |   |         |  
|                                                                                                                                                                                         |  |              
|Deposits                                                                                                                                                                                 |  |               |         |   |              |   |         |  
|Noninterest-bearing                                                                                                                                                                      |  | $             | 53,301  |   |              | $ | 41,653  |  
|Interest-bearing                                                                                                                                                                         |  |               | 415,936 |   |              |   | 437,530 |  
|Repurchase agreements                                                                                                                                                                    |  |               | 992     |   |              |   | 944     |  
|Federal Home Loan Bank advances                                                                                                                                                          |  |               | 37,962  |   |              |   | 84,834  |  
|Subordinated debentures                                                                                                                                                                  |  |               | 7,105   |   |              |   | 7,021   |  
|Other liabilities                                                                                                                                                                        |  |               | 6,410   |   |              |   | 2,265   |  
|Accrued income taxes                                                                                                                                                                     |  |               |        |   |              |   |        |  
|                                                                                                                                                                                         |  |               |         |   |              |   |         |  
|Total liabilities                                                                                                                                                                        |  |               | 521,706 |   |              |   | 574,247 |  
|                                                                                                                                                                                         |  |               |         |   |              |   |         |  
|                                                                                                                                                                                         |  |              
|Commitments and contingent liabilities                                                                                                                                                   |  |               |        |   |              |   |        |  
|                                                                                                                                                                                         |  |              
|Stockholders equity:                                                                                                                                                                    |  |               |         |   |              |   |         |  
|Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding                                                                                           |  |               |         |   |              |   |         |  
|Common stock, $.01 par value; 30,000,000 shares authorized; 9,182,372 shares issued and 6,634,759 shares outstanding at March 31,
2011 and 6,659,212 shares outstanding at June 30, 2010 |  |               | 92      |   |              |   | 92      |  
|Additional paid-in capital                                                                                                                                                               |  |               | 78,966  |   |              |   | 79,175  |  
|Unearned ESOP shares                                                                                                                                                                     |  |               | (3,349  | ) |              |   | (3,673  | )
|Unearned compensation                                                                                                                                                                    |  |               | (1,019  | ) |              |   | (1,053  | )
|Accumulated other comprehensive income                                                                                                                                                   |  |               | (453    | ) |              |   | 1,206   |  
|Retained earnings                                                                                                                                                                        |  |               | 12,914  |   |              |   | 12,023  |  
|Treasury stock, at cost (2,547,613 and 2,523,160 shares)                                                                                                                                 |  |               | (31,333 | ) |              |   | (31,247 | )
|                                                                                                                                                                                         |  |               |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                                               |  |               | 55,818  |   |              |   | 56,523  |  
|                                                                                                                                                                                         |  |               |         |   |              |   |         |  
|                                                                                                                                                                                         |  |              
|Total liabilities and stockholders equity                                                                                                                                               |  | $             | 577,524 |   |              | $ | 630,770 |  
|                                                                                                                                                                                         |  |               |         |   |              |   |         |  

See accompanying notes to financial statements.



3



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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)



|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | --------------------------- | ----- | - | -------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | Three Months EndedMarch 31, |       |   | Nine Months EndedMarch 31, |  
|                                                    |  | 2011                        |       |   | 2010                       |   |       | 2011 |  |   | 2010   |  
|Interest income:                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Interest on loans receivable                        |  | $                           | 6,049 |   |                            | $ | 6,608 |      |  | $ | 18,443 |   |  | $ | 20,556 |  
|Interest on investment securities                   |  |                             | 411   |   |                            |   | 755   |      |  |   | 1,302  |   |  |   | 2,170  |  
|Other interest                                      |  |                             | 105   |   |                            |   | 67    |      |  |   | 306    |   |  |   | 204    |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Total interest income                               |  |                             | 6,565 |   |                            |   | 7,430 |      |  |   | 20,051 |   |  |   | 22,930 |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Interest expense:                                   |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Deposits                                            |  |                             | 1,293 |   |                            |   | 1,837 |      |  |   | 4,490  |   |  |   | 6,381  |  
|Repurchase agreements                               |  |                             | 1     |   |                            |   | 2     |      |  |   | 5      |   |  |   | 7      |  
|Advances from FHLB                                  |  |                             | 445   |   |                            |   | 799   |      |  |   | 1,788  |   |  |   | 2,438  |  
|Subordinated debentures                             |  |                             | 79    |   |                            |   | 78    |      |  |   | 241    |   |  |   | 245    |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Total interest expense                              |  |                             | 1,818 |   |                            |   | 2,716 |      |  |   | 6,524  |   |  |   | 9,071  |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Net interest income                                 |  |                             | 4,747 |   |                            |   | 4,714 |      |  |   | 13,527 |   |  |   | 13,859 |  
|Provision for loan losses                           |  |                             | 1,400 |   |                            |   | 1,500 |      |  |   | 2,350  |   |  |   | 3,309  |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Net interest income after provision for loan losses |  |                             | 3,347 |   |                            |   | 3,214 |      |  |   | 11,177 |   |  |   | 10,550 |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Noninterest income:                                 |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Mortgage origination fee income                     |  |                             | 66    |   |                            |   | 61    |      |  |   | 430    |   |  |   | 301    |  
|Service charges and fees                            |  |                             | 286   |   |                            |   | 386   |      |  |   | 957    |   |  |   | 1,250  |  
|Gain on investments                                 |  |                             | 1,279 |   |                            |   | 1,202 |      |  |   | 2,031  |   |  |   | 1,222  |  
|Gain (loss) on sale of fixed assets                 |  |                             |      |   |                            |   | (92   | )    |  |   |       |   |  |   | (92    | )
|Gain (loss) on sale of foreclosed real estate, net  |  |                             | (186  | ) |                            |   | 1     |      |  |   | (591   | ) |  |   | (8     | )
|BOLI increase in cash value                         |  |                             | 58    |   |                            |   | 58    |      |  |   | 177    |   |  |   | 175    |  
|Other                                               |  |                             | 194   |   |                            |   | 131   |      |  |   | 527    |   |  |   | 601    |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Total noninterest income                            |  |                             | 1,697 |   |                            |   | 1,747 |      |  |   | 3,531  |   |  |   | 3,449  |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Noninterest expense:                                |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Compensation and benefits                           |  |                             | 1,620 |   |                            |   | 1,664 |      |  |   | 5,064  |   |  |   | 5,381  |  
|Occupancy expense                                   |  |                             | 309   |   |                            |   | 598   |      |  |   | 1,031  |   |  |   | 1,701  |  
|Equipment and data processing expense               |  |                             | 638   |   |                            |   | 671   |      |  |   | 1,900  |   |  |   | 1,904  |  
|DIF premiums                                        |  |                             | 165   |   |                            |   | 154   |      |  |   | 490    |   |  |   | 506    |  
|Advertising                                         |  |                             | 62    |   |                            |   | 15    |      |  |   | 167    |   |  |   | 173    |  
|Valuation adjustment and expenses on OREO           |  |                             | 371   |   |                            |   | 437   |      |  |   | 1,475  |   |  |   | 763    |  
|Loss on early extinguishment of debt                |  |                             | 585   |   |                            |   |      |      |  |   | 775    |   |  |   |       |  
|Other                                               |  |                             | 885   |   |                            |   | 1,132 |      |  |   | 2,473  |   |  |   | 3,189  |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Total noninterest expense                           |  |                             | 4,635 |   |                            |   | 4,671 |      |  |   | 13,375 |   |  |   | 13,617 |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Earnings before income taxes                        |  |                             | 409   |   |                            |   | 290   |      |  |   | 1,333  |   |  |   | 382    |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Income taxes:                                       |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Current                                             |  |                             | 2     |   |                            |   | (175  | )    |  |   | 5      |   |  |   |       |  
|Deferred                                            |  |                             | 147   |   |                            |   | 142   |      |  |   | 450    |   |  |   | (10    | )
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Total income taxes                                  |  |                             | 149   |   |                            |   | (33   | )    |  |   | 455    |   |  |   | (10    | )
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Net earnings                                        |  | $                           | 260   |   |                            | $ | 323   |      |  | $ | 878    |   |  | $ | 392    |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|                                                    |  |                             |       |  
|Net earnings per share, basic                       |  | $                           | 0.04  |   |                            | $ | 0.05  |      |  | $ | 0.14   |   |  | $ | 0.06   |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Net earnings per share, diluted                     |  | $                           | 0.04  |   |                            | $ | 0.05  |      |  | $ | 0.14   |   |  | $ | 0.06   |  
|                                                    |  |                             |       |   |                            |   |       |      |  |   |        |   |  |   |        |  

See accompanying notes to financial statements.



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##### Table of Contents

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity

Nine Months Ended March 31, 2011 and 2010

(Dollars in Thousands)



|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ----------- | -- |  | ------------------------ | - | ------ | ----------------------------- |  | -- | -------------------- | - |  | ----------------------------------- | ----- | - | ---------------- | -- | ------ | ------------- |  | - | ------------------------ | - |  | -- | ------ | - |  | - | ------ | -
|                                                                                                |  | CommonStock |    |  | AdditionalPaid-inCapital |   |        | UnallocatedCommonStock
inESOP |  |    | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |       |   | RetainedEarnings |    |        | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2010                                                                        |  | $           | 92 |  |                          | $ | 79,175 |                               |  | ($ | 3,673                | ) |  | ($                                  | 1,053 | ) |                  | $  | 1,206  |               |  | $ | 12,023                   |   |  | ($ | 31,247 | ) |  | $ | 56,523 |  
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|                                                                                                |  |             |    |  |                          |   |        |                              
|Comprehensive income:                                                                           |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|Net earnings                                                                                    |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   | 878                      |   |  |    |       |   |  |   | 878    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($1,030) |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    | (1,659 | )             |  |   |                         |   |  |    |       |   |  |   | (1,659 | )
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|                                                                                                |  |             |    |  |                          |   |        |                              
|Total comprehensive income                                                                      |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   |                         |   |  |    |       |   |  |   | (781   | )
|Dividends used for ESOP payment                                                                 |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   | 13                       |   |  |    |        |   |  |   | 13     |  
|Shares committed to be released by the ESOP                                                     |  |             |   |  |                          |   | (209   | )                             |  |    | 324                  |   |  |                                     |      |   |                  |    |       |               |  |   |                         |   |  |    |       |   |  |   | 115    |  
|Earned portion of stock grants                                                                  |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     | 34    |   |                  |    |       |               |  |   |                         |   |  |    |       |   |  |   | 34     |  
|Purchase of common stock (24,453 shares)                                                        |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   |                         |   |  |    | (86    | ) |  |   | (86    | )
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|Balance at March 31, 2011                                                                       |  | $           | 92 |  |                          | $ | 78,966 |                               |  | ($ | 3,349                | ) |  | ($                                  | 1,019 | ) |                  | ($ | 453    | )             |  | $ | 12,914                   |   |  | ($ | 31,333 | ) |  | $ | 55,818 |  
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|                                                                                                |  |             |    |  |                          |   |        |                              
|                                                                                                |  | CommonStock |    |  | AdditionalPaid-inCapital |   |        | UnallocatedCommonStock inESOP |  |    | UnearnedCompensation |   |  | AccumulatedOtherComprehensiveIncome |       |   | RetainedEarnings |    |        | TreasuryStock |  |   | TotalStockholdersEquity |  
|Balance at June 30, 2009                                                                        |  | $           | 92 |  |                          | $ | 79,394 |                               |  | ($ | 4,105                | ) |  | ($                                  | 1,121 | ) |                  | $  | 150    |               |  | $ | 36,140                   |   |  | ($ | 31,045 | ) |  | $ | 79,505 |  
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|                                                                                                |  |             |    |  |                          |   |        |                              
|Comprehensive income:                                                                           |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|Net earnings                                                                                    |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   | 392                      |   |  |    |       |   |  |   | 392    |  
|Change in net unrealized gain (loss) on securities available for sale, net of taxes of $40      |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    | 199    |               |  |   |                         |   |  |    |       |   |  |   | 199    |  
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|                                                                                                |  |             |    |  |                          |   |        |                              
|Total comprehensive income                                                                      |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   |                         |   |  |    |       |   |  |   | 591    |  
|                                                                                                |  |             |    |  |                          |   |        |                              
|Dividends                                                                                       |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   | (200                     | ) |  |    |       |   |  |   | (200   | )
|Dividends used for ESOP payment                                                                 |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   | 78                       |   |  |    |       |   |  |   | 78     |  
|Shares committed to be released by the ESOP                                                     |  |             |   |  |                          |   | (158   | )                             |  |    | 324                  |   |  |                                     |      |   |                  |    |       |               |  |   |                         |   |  |    |       |   |  |   | 166    |  
|Earned portion of stock grants                                                                  |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     | 50    |   |                  |    |       |               |  |   |                         |   |  |    |       |   |  |   | 50     |  
|Purchase of common stock (22,775 shares)                                                        |  |             |   |  |                          |   |       |                               |  |    |                     |   |  |                                     |      |   |                  |    |       |               |  |   |                         |   |  |    | (95    | ) |  |   | (95    | )
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  
|Balance at March 31, 2010                                                                       |  | $           | 92 |  |                          | $ | 79,236 |                               |  | ($ | 3,781                | ) |  | ($                                  | 1,071 | ) |                  | $  | 349    |               |  | $ | 36,410                   |   |  | ($ | 31,140 | ) |  | $ | 80,095 |  
|                                                                                                |  |             |    |  |                          |   |        |                               |  |    |                      |   |  |                                     |       |   |                  |    |        |               |  |   |                          |   |  |    |        |   |  |   |        |  

See accompanying notes to financial statements.



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Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)



|                                                                                               |  |                            |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Nine Months EndedMarch 31, |        
|                                                                                               |  | 2011                       |         |   | 2010 |  
|Cash flows from operating activities:                                                          |  |                            |         |   |      |   |         |  
|Net earnings                                                                                   |  | $                          | 878     |   |      | $ | 392     |  
|Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: |  |                            |         |   |      |   |         |  
|Allocated ESOP shares                                                                          |  |                            | 115     |   |      |   | 164     |  
|Depreciation and amortization expense                                                          |  |                            | 812     |   |      |   | 1,291   |  
|Amortization of premiums (discounts), net on investment securities                             |  |                            | 88      |   |      |   | (566    | )
|Provision for loan losses                                                                      |  |                            | 2,350   |   |      |   | 3,309   |  
|Amortization of deferred loan fees, net                                                        |  |                            | (209    | ) |      |   | (221    | )
|(Gain) loss on sale of investment securities                                                   |  |                            | (2,031  | ) |      |   | (1,222  | )
|(Gain) loss on sale of foreclosed real estate, net                                             |  |                            | 591     |   |      |   | 8       |  
|Deferred tax benefit                                                                           |  |                            | 450     |   |      |   | (10     | )
|Originations of mortgage loans held for sale                                                   |  |                            | (16,708 | ) |      |   | (13,460 | )
|Proceeds from sale of mortgage loans                                                           |  |                            | 17,535  |   |      |   | 13,817  |  
|Increase in cash value of life insurance                                                       |  |                            | (177    | ) |      |   | (175    | )
|Earned portion of MRP                                                                          |  |                            | 35      |   |      |   | 51      |  
|Decrease (increase) in:                                                                        |  |                            |        |   |      |   |         |  
|Accrued interest receivable                                                                    |  |                            | 186     |   |      |   | 193     |  
|Other assets                                                                                   |  |                            | (4,432  | ) |      |   | (4,953  | )
|Increase (decrease) in other liabilities and accrued income taxes                              |  |                            | 4,145   |   |      |   | 1,774   |  
|                                                                                               |  |                            |         |   |      |   |         |  
|Net cash provided by (used for) operating activities                                           |  |                            | 3,628   |   |      |   | 392     |  
|                                                                                               |  |                            |         |   |      |   |         |  
|                                                                                               |  |                           
|Cash flows used for investing activities:                                                      |  |                            |         |   |      |   |         |  
|Loan originations, net of principal collections                                                |  |                            | 30,045  |   |      |   | 44,076  |  
|Investment securities classified as available-for-sale:                                        |  |                            |        |   |      |   |         |  
|Proceeds from maturities, calls and prepayments                                                |  |                            | 41,899  |   |      |   | 25,080  |  
|Proceeds from sale                                                                             |  |                            | 11,778  |   |      |   | 5,636   |  
|Purchase of securities                                                                         |  |                            | (45,371 | ) |      |   | (46,919 | )
|Proceeds from sale of premises and equipment, construction overpayments                        |  |                            |        |   |      |   | 3,323   |  
|Purchase of premises and equipment                                                             |  |                            | (183    | ) |      |   | (98     | )
|Proceeds from sale of (additions to) foreclosed real estate, net                               |  |                            | 3,363   |   |      |   | 1,458   |  
|                                                                                               |  |                            |         |   |      |   |         |  
|Net cash provided by (used for) investing activities                                           |  |                            | 41,531  |   |      |   | 32,556  |  
|                                                                                               |  |                            |         |   |      |   |         |  
|                                                                                               |  |                           
|Cash flows from financing activities:                                                          |  |                            |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                            |  |                            | (9,907  | ) |      |   | (1,412  | )
|Net increase in repurchase agreements                                                          |  |                            | 48      |   |      |   | 615     |  
|Proceeds from advances from FHLB                                                               |  |                            | 309     |   |      |   |        |  
|Repayment of FHLB advances                                                                     |  |                            | (46,625 | ) |      |   | (51     | )
|Purchase of treasury stock                                                                     |  |                            | (86     | ) |      |   | (95     | )
|Dividends paid                                                                                 |  |                            |        |   |      |   | (603    | )
|                                                                                               |  |                            |         |   |      |   |         |  
|Net cash provided by (used for) financing activities                                           |  |                            | (56,261 | ) |      |   | (1,546  | )
|                                                                                               |  |                            |         |   |      |   |         |  
|                                                                                               |  |                           
|Net increase (decrease) in cash, cash equivalents and interest-earning deposits                |  |                            | (11,102 | ) |      |   | 31,402  |  
|Cash, cash equivalents and interest-earning deposits at beginning of period                    |  |                            | 69,303  |   |      |   | 44,108  |  
|                                                                                               |  |                            |         |   |      |   |         |  
|                                                                                               |  |                           
|Cash, cash equivalents and interest-earning deposits at end of period                          |  | $                          | 58,201  |   |      | $ | 75,510  |  
|                                                                                               |  |                            |         |   |      |   |         |  
|                                                                                               |  |                           
|Supplemental disclosures of cash flow information:                                             |  |                            |         |   |      |   |         |  
|Cash paid during period for:                                                                   |  |                            |         |   |      |   |         |  
|Interest on deposits                                                                           |  | $                          | 4,470   |   |      | $ | 6,536   |  
|Interest on FHLB advances                                                                      |  | $                          | 1,788   |   |      | $ | 2,438   |  
|Interest on other borrowings                                                                   |  | $                          | 162     |   |      | $ | 252     |  
|Income taxes                                                                                   |  | $                          | 50      |   |      | $ | 410     |  
|Real estate acquired in settlement of loans                                                    |  | $                          | 11,897  |   |      | $ | 3,208   |  

See accompanying notes to financial statements.



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Notes To Consolidated Financial Statements



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

The condensed consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the Company or Jefferson Bancshares) and its wholly-owned subsidiary, Jefferson
Federal Bank (the Bank or Jefferson Federal). The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America
(GAAP), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. The results of operations for the period
ended March 31, 2011 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, 2010, which was filed with the Securities and Exchange Commission on September 24, 2010. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted. The Company has adopted
FASB ASC Topic 855 for Subsequent Events which did not significantly change the subsequent events the Company reports either through recognition or disclosure.



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

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



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

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



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

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

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

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



|(5) | Earnings Per Common Share
|--- | -------------------------

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of
unallocated employee stock ownership plan (ESOP) shares. Diluted earnings per



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common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company
relate to outstanding stock options and are determined using the treasury stock method. For the period ended March 31, 2011, stock options to purchase 525,287 shares were not included in the computation of diluted net income per share as their
effect would have been anti-dilutive. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:



|                                                                                                                                            |  |                         |           |  |                         |  |           |      |  |  |           |  |  |  |           | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- |  | ----------------------- |  | --------- | ---- |  |  | --------- |  |  |  | --------- | 
|                                                                                                                                            |  | Weighted-Average Shares |           |  | Weighted-Average Shares | 
|                                                                                                                                            |  | Outstanding for the     |           |  | Outstanding for the     | 
|                                                                                                                                            |  | Three Months Ended      |           |  | Nine Months Ended       | 
|                                                                                                                                            |  | March 31,               |           |  | March 31,               | 
|                                                                                                                                            |  | 2011                    |           |  | 2010                    |  |           | 2011 |  |  | 2010      | 
|                                                                                                                                            |  |                         |           | 
|Weighted average number of common shares used in computing basic earnings per common share                                                  |  |                         | 6,231,452 |  |                         |  | 6,251,105 |      |  |  | 6,211,295 |  |  |  | 6,227,472 | 
|Effect of dilutive stock options                                                                                                            |  |                         |          |  |                         |  |          |      |  |  |          |  |  |  |          | 
|                                                                                                                                            |  |                         |           |  |                         |  |           |      |  |  |           |  |  |  |           | 
|                                                                                                                                            |  |                         |           | 
|Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share
assuming dilution |  |                         | 6,231,452 |  |                         |  | 6,251,105 |      |  |  | 6,211,295 |  |  |  | 6,227,472 | 
|                                                                                                                                            |  |                         |           |  |                         |  |           |      |  |  |           |  |  |  |           | 



|(6) | Accounting for Allowance for Loan Losses and Impairment of a Loan
|--- | -----------------------------------------------------------------

The allowance for loan and lease losses is an estimate of the losses that are inherent in the loan and lease portfolio. The allowance is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Banks
charge-off policy is consistent with bank regulatory standards. Generally, loans are charged off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure 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 and lease losses. Any subsequent writedown of foreclosed real estate is charged against earnings.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful,
substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

In connection with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. Loans are grouped into pools based on loan type and
further segregated by loan grade. Loans pools include residential mortgage loans, multi-family loans, construction and land development loans, non-residential real estate loans (owner occupied and non-owner occupied), commercial loans and consumer
loans. Commercial business loans and loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans. In addition, loans secured by commercial real estate are more likely to be
negatively impacted by adverse conditions in the real estate market or the economy. Management utilizes a loan grading system and assigns a loan grade of Pass, Watch, Special Mention,



8



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Substandard, Doubtful or Loss based on risk characteristics of loans. Lending staff reviews the loan grades of customers on a regular basis and makes changes
as needed given that the creditworthiness of customers may change over time.

Descriptions of loan grades are as follows:

Pass - loans in this category represent an acceptable risk and do not require heightened levels of monitoring by
lending staff.

Watch - loans in this category represent an acceptable risk; however, require monitoring by
lending staff due to potential weakness for any number of reasons.

Special Mention - loans in this category have
potential weaknesses that may result in deteriorating prospects for the asset or in the Banks credit position at some future date.

Substandard - loans in this category are inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Borrowers in this category have a
well-defined weakness(es) that jeopardize the proper liquidation of the debt.

Doubtful - loans classified as
doubtful have a clear and defined weakness making the ultimate repayment of the loan, or portions thereof, highly improbable.

Loss - loans classified as loss are those of such little value that their continuance as bank assets is not
warranted, even though partial recovery may be affected in the future. Charge off is required in the month this grade is assigned.

Specific valuation allowances are established for impaired loans. The Company considers a loan to be impaired when, based on current information and events, it is probable that the company will be unable
to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. A specific reserve represents the difference between the recorded value of the loan and either its estimated fair value less estimated disposition
costs, or the net present value as determined by a discounted cash flow analysis. On a quarterly basis, Management evaluates individual loans which have an outstanding principal balance of $500,000 or more and which are classified as either
substandard, doubtful or loss according to the loan grading policy for impairment. Troubled debt restructurings (TDRs) are also considered to be impaired, except for those that have been performing under the new terms for at least six
consecutive months. A TDR occurs when the Bank grants a concession to a borrower with financial difficulties that it would not otherwise consider. The majority of the Banks TDRs involve a modification in loan terms such as a temporary period
of interest only or extension of the maturity date. A TDR may be non-accruing or it may accrue interest. A nonaccrual TDR will be returned to accruing status at such time when the borrower successfully performs under the new terms for six
consecutive months.

The accrual of interest on all loans is discontinued at the time the loan is 90 days delinquent. All
interest accrued but not collected for loans considered impaired, placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method until the loan is
returned to accrual status. Loans are returned to accrual status when future payments are reasonably assured. Payments received on non-accrual loans are applied to the remaining principal balance of the loans.



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The evaluation of the allowance for loan and lease losses is inherently subjective, as it
requires estimates that are susceptible to significant revision as more information becomes available. The Company is subject to periodic examination by regulatory agencies, which may require the Company to record increases in the allowances based
on the regulators evaluation of available information. There can be no assurance that the Companys regulators will not require further increases to the allowances.

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2011:



|                                       |  |                     |         |   |              |   |        |                                 |  |   |                            |   |  |               |        |   |            |   |        |          |  |   |        |   |  |   |       |   |  |   |         |  
|-------------------------------------- |  | ------------------- | ------- | - | ------------ | - | ------ | ------------------------------- |  | - | -------------------------- | - |  | ------------- | ------ | - | ---------- | - | ------ | -------- |  | - | ------ | - |  | - | ----- | - |  | - | ------- | -
|                                       |  | ResidentialMortgage |         |   | Multi-family |   |        | Constructionand landdevelopment |  |   | Non-residentialreal
estate |   |  | Owneroccupied |        |   | Commercial |   |        | Consumer |  |   | Total  |  
|                                       |  |                     |         |   |              |   |        |                                
|Allowance for Credit Losses:           |  |                     |         |   |              |   |        |                                 |  |   |                            |   |  |               |        |   |            |   |        |          |  |   |        |   |  |   |       |   |  |   |         |  
|Balance at June 30, 2010               |  | $                   | 1,812   |   |              | $ | 468    |                                 |  | $ | 1,162                      |   |  | $             | 2,408  |   |            | $ | 2,000  |          |  | $ | 1,733  |   |  | $ | 66    |   |  | $ | 9,649   |  
|Charge Offs                            |  |                     | (610    | ) |              |   | (740   | )                               |  |   | (865                       | ) |  |               | (95    | ) |            |   | (696   | )        |  |   | (1,199 | ) |  |   | (26   | ) |  |   | (4,231  | )
|Recoveries                             |  |                     | 4       |   |              |   |       |                                 |  |   |                           |   |  |               | 4      |   |            |   |       |          |  |   | 91     |   |  |   | 14    |   |  |   | 113     |  
|Provision                              |  |                     | 507     |   |              |   | 1,103  |                                 |  |   | 369                        |   |  |               | (355   | ) |            |   | (560   | )        |  |   | 1,301  |   |  |   | (15   | ) |  |   | 2,350   |  
|                                       |  |                     |         |   |              |   |        |                                 |  |   |                            |   |  |               |        |   |            |   |        |          |  |   |        |   |  |   |       |   |  |   |         |  
|                                       |  |                     |         |   |              |   |        |                                
|Balance at March 31, 2011              |  | $                   | 1,713   |   |              | $ | 831    |                                 |  | $ | 666                        |   |  | $             | 1,962  |   |            | $ | 744    |          |  | $ | 1,926  |   |  | $ | 39    |   |  | $ | 7,881   |  
|                                       |  |                     |         |   |              |   |        |                                 |  |   |                            |   |  |               |        |   |            |   |        |          |  |   |        |   |  |   |       |   |  |   |         |  
|                                       |  |                     |         |   |              |   |        |                                
|Ending balance, Individually Evaluated |  | $                   | 910     |   |              | $ | 767    |                                 |  | $ | 454                        |   |  | $             | 1,548  |   |            | $ | 145    |          |  | $ | 1,250  |   |  | $ |      |   |  | $ | 5,074   |  
|Ending balance, Collectively Evaluated |  | $                   | 803     |   |              | $ | 64     |                                 |  | $ | 212                        |   |  | $             | 414    |   |            | $ | 599    |          |  | $ | 676    |   |  | $ | 39    |   |  | $ | 2,807   |  
|                                       |  |                     |         |   |              |   |        |                                
|Loans:                                 |  |                     |         |   |              |   |        |                                 |  |   |                            |   |  |               |        |   |            |   |        |          |  |   |        |   |  |   |       |   |  |   |         |  
|                                       |  |                     |         |   |              |   |        |                                
|Balance at March 31, 2011              |  | $                   | 140,824 |   |              | $ | 14,659 |                                 |  | $ | 34,259                     |   |  | $             | 57,021 |   |            | $ | 75,923 |          |  | $ | 73,390 |   |  | $ | 5,906 |   |  | $ | 401,982 |  
|                                       |  |                     |         |   |              |   |        |                                
|Ending balance, Individually Evaluated |  | $                   | 5,834   |   |              | $ | 5,900  |                                 |  | $ | 5,033                      |   |  | $             | 6,600  |   |            | $ | 1,049  |          |  | $ | 4,223  |   |  | $ |      |   |  | $ | 28,639  |  
|Ending balance, Collectively Evaluated |  | $                   | 134,990 |   |              | $ | 8,759  |                                 |  | $ | 29,226                     |   |  | $             | 50,421 |   |            | $ | 74,874 |          |  | $ | 69,167 |   |  | $ | 5,906 |   |  | $ | 373,343 |  

The following table
is an aging analysis of the loan portfolio:



|                              |  |                   |       |  |                   |   |     |                    |  |   |               |  |  |              |        |  |                       |   |         |  |  |   |         | 
|----------------------------- |  | ----------------- | ----- |  | ----------------- | - | --- | ------------------ |  | - | ------------- |  |  | ------------ | ------ |  | --------------------- | - | ------- |  |  | - | ------- | 
|                              |  | 30-59days pastdue |       |  | 60-89days pastdue |   |     | Greaterthan 90days |  |   | Totalpast due |  |  | TotalCurrent |        |  | Total loansreceivable |  
|                              |  |                   |       |  |                   |  
|Residential Mortgage          |  | $                 | 2,642 |  |                   | $ | 346 |                    |  | $ | 4,580         |  |  | $            | 7,568  |  |                       | $ | 133,256 |  |  | $ | 140,824 | 
|Multi-family                  |  |                   |      |  |                   |   |    |                    |  |   |              |  |  |              |       |  |                       |   | 14,659  |  |  |   | 14,659  | 
|Construction/land development |  |                   | 259   |  |                   |   |    |                    |  |   | 1,577         |  |  |              | 1,836  |  |                       |   | 32,423  |  |  |   | 34,259  | 
|Non-residential real estate   |  |                   | 117   |  |                   |   |    |                    |  |   | 1,198         |  |  |              | 1,315  |  |                       |   | 55,706  |  |  |   | 57,021  | 
|Owner occupied                |  |                   | 183   |  |                   |   |    |                    |  |   | 1,077         |  |  |              | 1,260  |  |                       |   | 74,663  |  |  |   | 75,923  | 
|Commercial                    |  |                   | 146   |  |                   |   | 70  |                    |  |   | 2,035         |  |  |              | 2,251  |  |                       |   | 71,139  |  |  |   | 73,390  | 
|Consumer                      |  |                   | 183   |  |                   |   | 7   |                    |  |   | 63            |  |  |              | 252    |  |                       |   | 5,654   |  |  |   | 5,906   | 
|                              |  |                   |       |  |                   |   |     |                    |  |   |               |  |  |              |        |  |                       |   |         |  |  |   |         | 
|                              |  |                   |       |  |                   |  
|Total                         |  | $                 | 3,530 |  |                   | $ | 423 |                    |  | $ | 10,530        |  |  | $            | 14,483 |  |                       | $ | 387,500 |  |  | $ | 401,982 | 
|                              |  |                   |       |  |                   |   |     |                    |  |   |               |  |  |              |        |  |                       |   |         |  |  |   |         | 



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The following table summarizes the credit risk profile by internally assigned grade:



|                |  |                     |         |  |              |   |        |                                 |  |   |                            |  |  |               |        |  |            |   |        |          |  |   |        |  |  |   |       |  |  |   |         | 
|--------------- |  | ------------------- | ------- |  | ------------ | - | ------ | ------------------------------- |  | - | -------------------------- |  |  | ------------- | ------ |  | ---------- | - | ------ | -------- |  | - | ------ |  |  | - | ----- |  |  | - | ------- | 
|                |  | ResidentialMortgage |         |  | Multi-family |   |        | Constructionand landdevelopment |  |   | Non-residentialreal
estate |  |  | Owneroccupied |        |  | Commercial |   |        | Consumer |  |   | Total  | 
|                |  |                     |         |  |              |   |        |                                
|Grade:          |  |                     |         |  |              |   |        |                                 |  |   |                            |  |  |               |        |  |            |   |        |          |  |   |        |  |  |   |       |  |  |   |         | 
|Pass            |  | $                   | 124,742 |  |              | $ | 6,277  |                                 |  | $ | 28,603                     |  |  | $             | 49,372 |  |            | $ | 71,904 |          |  | $ | 63,433 |  |  | $ | 5,906 |  |  | $ | 350,237 | 
|Special mention |  |                     | 4,450   |  |              |   |       |                                 |  |   | 844                        |  |  |               | 810    |  |            |   | 2,149  |          |  |   | 513    |  |  |   |      |  |  |   | 8,766   | 
|Substandard     |  |                     | 11,632  |  |              |   | 8,382  |                                 |  |   | 4,812                      |  |  |               | 6,839  |  |            |   | 1,870  |          |  |   | 9,444  |  |  |   |      |  |  |   | 42,979  | 
|Doubtful        |  |                     |        |  |              |   |       |                                 |  |   |                           |  |  |               |       |  |            |   |        |          |  |   |       |  |  |   |      |  |  |   |        | 
|Loss            |  |                     |        |  |              |   |       |                                 |  |   |                           |  |  |               |       |  |            |   |       |          |  |   |       |  |  |   |      |  |  |   |        | 
|                |  |                     |         |  |              |   |        |                                 |  |   |                            |  |  |               |        |  |            |   |        |          |  |   |        |  |  |   |       |  |  |   |         | 
|                |  |                     |         |  |              |   |        |                                
|Total:          |  | $                   | 140,824 |  |              | $ | 14,659 |                                 |  | $ | 34,259                     |  |  | $             | 57,021 |  |            | $ | 75,923 |          |  | $ | 73,390 |  |  | $ | 5,906 |  |  | $ | 401,982 | 
|                |  |                     |         |  |              |   |        |                                 |  |   |                            |  |  |               |        |  |            |   |        |          |  |   |        |  |  |   |       |  |  |   |         | 



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The following table summarizes the composition of impaired loans, the associated specific
reserves, and interest income recognized on impaired loans:



|                                  |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|--------------------------------- |  | ------------------ | ------ |  | ---------------------- | - | ------ | ----------------- |  | - | ------------------------- |  |  | - | --- | 
|                                  |  | Recordedinvestment |        |  | Unpaidprincipalbalance |   |        | Specificallowance |  |   | Interest incomerecognized | 
|With an allowance recorded:       |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|Residential Mortgage              |  | $                  | 3,480  |  |                        | $ | 3,480  |                   |  | $ | 910                       |  |  | $ | 80  | 
|Multi-family                      |  |                    | 5,900  |  |                        |   | 5,900  |                   |  |   | 767                       |  |  |   | 223 | 
|Construction and land development |  |                    | 1,898  |  |                        |   | 1,898  |                   |  |   | 454                       |  |  |   | 56  | 
|Non-residential real estate       |  |                    | 3,736  |  |                        |   | 3,736  |                   |  |   | 1,548                     |  |  |   | 140 | 
|Owner occupied                    |  |                    | 373    |  |                        |   | 373    |                   |  |   | 145                       |  |  |   | 2   | 
|Commercial                        |  |                    | 4,085  |  |                        |   | 4,085  |                   |  |   | 1,250                     |  |  |   | 95  | 
|Consumer                          |  |                    |       |  |                        |   |       |                   |  |   |                          |  |  |   |    | 
|                                  |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|Total                             |  | $                  | 19,472 |  |                        | $ | 19,472 |                   |  | $ | 5,074                     |  |  | $ | 596 | 
|                                  |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|                                  |  |                    |        | 
|With no related allowance:        |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|Residential Mortgage              |  | $                  | 2,354  |  |                        | $ | 2,354  |                   |  | $ |                          |  |  | $ | 92  | 
|Multi-family                      |  |                    |       |  |                        |   |       |                   |  |   |                          |  |  |   |    | 
|Construction and land development |  |                    | 3,136  |  |                        |   | 3,136  |                   |  |   |                          |  |  |   | 54  | 
|Non-residential real estate       |  |                    | 2,863  |  |                        |   | 2,863  |                   |  |   |                          |  |  |   | 84  | 
|Owner occupied                    |  |                    | 676    |  |                        |   | 676    |                   |  |   |                          |  |  |   | 20  | 
|Commercial                        |  |                    | 138    |  |                        |   | 138    |                   |  |   |                          |  |  |   | 5   | 
|Consumer                          |  |                    |       |  |                        |   |       |                   |  |   |                          |  |  |   |    | 
|                                  |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|Total                             |  | $                  | 9,167  |  |                        | $ | 9,167  |                   |  | $ |                          |  |  | $ | 255 | 
|                                  |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|                                  |  |                    |        | 
|Total:                            |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|Residential Mortgage              |  | $                  | 5,834  |  |                        | $ | 5,834  |                   |  | $ | 910                       |  |  | $ | 172 | 
|Multi-family                      |  |                    | 5,900  |  |                        |   | 5,900  |                   |  |   | 767                       |  |  |   | 223 | 
|Construction and land development |  |                    | 5,034  |  |                        |   | 5,034  |                   |  |   | 454                       |  |  |   | 110 | 
|Non-residential real estate       |  |                    | 6,599  |  |                        |   | 6,599  |                   |  |   | 1,548                     |  |  |   | 224 | 
|Owner occupied                    |  |                    | 1,049  |  |                        |   | 1,049  |                   |  |   | 145                       |  |  |   | 22  | 
|Commercial                        |  |                    | 4,223  |  |                        |   | 4,223  |                   |  |   | 1,250                     |  |  |   | 100 | 
|Consumer                          |  |                    |       |  |                        |   |       |                   |  |   |                          |  |  |   |    | 
|                                  |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|Total                             |  | $                  | 28,639 |  |                        | $ | 28,639 |                   |  | $ | 5,074                     |  |  | $ | 851 | 
|                                  |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|                                  |  |                    |        | 
|Average impaired loans for the    |  |                    |        |  |                        |   |        |                   |  |   |                           |  |  |   |     | 
|Nine months ended March 31, 2011  |  | $                  | 34,643 |  |                        |   |        |                   |  |   |                           |  |  |   |     | 



|(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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At March 31, 2011, we had approximately $9.4 million in commitments to extend credit,
consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $4.8 million in unused letters of credit and approximately $34.7 million in unused lines of credit.



|(8) | Dividend Declaration
|--- | --------------------

On February 2, 2010, the Company announced that the Board of Directors had voted to suspend the payment of the quarterly cash dividend on the Companys common stock in an effort to conserve
capital.



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

The Company maintains stock-based benefit plans under which certain employees and directors are eligible to receive stock grants or options. Under the 2004 Stock-Based Benefit Plan, a maximum of 279,500
shares may be granted as restricted stock and a maximum of 698,750 shares may be issued through the exercise of nonstatutory or incentive stock options. The exercise price of each option equals the market price of the Companys stock on the
date of grant and an options maximum term is ten years.

Restricted stock grants aggregating 45,000 shares and having a
fair value of $597,000 were awarded in 2006. Restrictions on the grants lapse in annual increments over five years. The market value as of the grant date of the restricted stock grants is charged to expense as the restrictions lapse.

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

The table below summarizes the status of the Companys stock option plans as of March 31, 2011.



|                                      |  |                                  |         |  |                                |   |       | 
|------------------------------------- |  | -------------------------------- | ------- |  | ------------------------------ | - | ----- | 
|                                      |  | Three Months EndedMarch 31, 2011 |        
|                                      |  | Shares                           |         |  | Weighted-averageexercise price |  
|                                      |  |                                 
|Outstanding at beginning of period    |  |                                  | 525,287 |  |                                | $ | 12.69 | 
|Granted during the three-month period |  |                                  |        |  |                                |   |       | 
|Options forfeited                     |  |                                  |        |  |                                |   |       | 
|Options exercised                     |  |                                  |        |  |                                |   |       | 
|Outstanding at March 31, 2011         |  |                                  | 525,287 |  |                                | $ | 12.69 | 
|                                      |  |                                 
|Options exercisable at March 31, 2011 |  |                                  | 525,287 |  |                                | $ | 12.69 | 



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The following information applies to options outstanding at March 31, 2011:



|                                                |  |   |                | 
|----------------------------------------------- |  | - | -------------- | 
|Number outstanding                              |  |   | 525,287        | 
|Range of exercise prices                        |  | $ | 10.00 - $13.69 | 
|Weighted-average exercise price                 |  | $ | 12.69          | 
|Weighted-average remaining contractual life     |  |   | 2.04           | 
|Number of options remaining for future issuance |  |   | 358,112        | 

The estimated fair
value of stock options at grant date was determined using the Black-Scholes option-pricing model based on market data as of January 29, 2004. An expected dividend yield of 1.17% and expected volatility of 7.01% were used to model the value. The
risk free rate of return equaled 4.22%, which was based on the yield of a U.S. Treasury note with a term of ten years. The estimated time remaining before the expiration of the options equaled ten years.



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|(10) | Investment Securities
|---- | ---------------------

Investment securities are summarized as follows:



|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|----------------------------------- |  | ---------------------- | ------ | - | --------------- | - | ----- | ---------------- |  | - | --------- | - |  | - | ------ | 
|At March 31, 2011                   |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  | AmortizedCost          |        |   | UnrealizedGains |   |       | UnrealizedLosses |  |   | FairValue |  
|                                    |  | (Dollars in thousands) |       
|Securities available-for-sale       |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|Debt securities:                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|Federal agency                      |  | $                      | 29,499 |   |                 | $ | 56    |                  |  | $ | (106      | ) |  | $ | 29,449 | 
|Mortgage-backed                     |  |                        | 17,754 |   |                 |   | 484   |                  |  |   | (155      | ) |  |   | 18,083 | 
|Municipals                          |  |                        | 5,983  |   |                 |   | 115   |                  |  |   | (74       | ) |  |   | 6,024  | 
|Other Securities                    |  |                        | 1,433  |   |                 |   |      |                  |  |   | (1,054    | ) |  |   | 379    | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|Total securities available-for-sale |  | $                      | 54,669 |   |                 | $ | 655   |                  |  | $ | (1,389    | ) |  | $ | 53,935 | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |  
|Weighted-average rate               |  |                        | 2.48   | % |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |  
|Pledged at March 31, 2011           |  | $                      | 23,071 |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |  
|At June 30, 2010                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  | AmortizedCost          |        |   | UnrealizedGains |   |       | UnrealizedLosses |  |   | FairValue |  
|                                    |  | (Dollars in thousands) |       
|Securities available-for-sale       |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|Debt securities:                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|Federal agency                      |  | $                      | 31,975 |   |                 | $ | 132   |                  |  | $ |          |   |  | $ | 32,107 | 
|Mortgage-backed                     |  |                        | 21,812 |   |                 |   | 2,643 |                  |  |   | (142      | ) |  |   | 24,313 | 
|Municipals                          |  |                        | 5,650  |   |                 |   | 126   |                  |  |   | (12       | ) |  |   | 5,764  | 
|Other Securities                    |  |                        | 1,597  |   |                 |   | 183   |                  |  |   | (975      | ) |  |   | 805    | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|Total securities available-for-sale |  | $                      | 61,034 |   |                 | $ | 3,084 |                  |  | $ | (1,129    | ) |  | $ | 62,989 | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |  
|Weighted-average rate               |  |                        | 3.73   | % |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |  
|Pledged at June 30, 2010            |  | $                      | 9,574  |   |                 |   |       |                  |  |   |           |   |  |   |        | 
|                                    |  |                        |        |   |                 |   |       |                  |  |   |           |   |  |   |        | 

Securities with unrealized losses not recognized in income are as follows:



|                           |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |        |   |                  |   |        |  |  |   |        |  
|-------------------------- |  | ------------------- | ------ |  | ----------------- | - | ---- | --------- |  | - | ---------------- |  |  | --------- | ------ | - | ---------------- | - | ------ |  |  | - | ------ | -
|                           |  | Less than 12 months |        |  | 12 months or more |   |      | Total     | 
|                           |  | FairValue           |        |  | UnrealizedLosses  |   |      | FairValue |  |   | UnrealizedLosses |  |  | FairValue |        |   | UnrealizedLosses |  
|March 31, 2011             |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |        |   |                  |   |        |  |  |   |        |  
|Federal agency securities  |  | $                   | 7,789  |  |                   | $ | (106 | )         |  | $ |                 |  |  | $         |       |   |                  | $ | 7,789  |  |  | $ | (106   | )
|Mortgage-backed securities |  |                     | 5,008  |  |                   |   | (77  | )         |  |   | 726              |  |  |           | (78    | ) |                  |   | 5,734  |  |  |   | (155   | )
|Municipal securities       |  |                     | 1,961  |  |                   |   | (74  | )         |  |   |                 |  |  |           |       |   |                  |   | 1,961  |  |  |   | (74    | )
|Other securities           |  |                     |       |  |                   |   |     |           |  |   | 375              |  |  |           | (1,054 | ) |                  |   | 375    |  |  |   | (1,054 | )
|                           |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |        |   |                  |   |        |  |  |   |        |  
|                           |  | $                   | 14,758 |  |                   | $ | (257 | )         |  | $ | 1,101            |  |  | $         | (1,132 | ) |                  | $ | 15,859 |  |  | $ | (1,389 | )
|                           |  |                     |        |  |                   |   |      |           |  |   |                  |  |  |           |        |   |                  |   |        |  |  |   |        |  



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The Company evaluates its securities with significant declines in fair value on a quarterly
basis to determine whether they should be considered temporarily or other than temporarily impaired. The company has recognized all of the unrealized losses reflected in the foregoing table in other comprehensive income. The company neither has the
intent to sell nor is forecasting the need or requirement to sell the securities before their anticipated recovery.

Maturities
of debt securities at March 31, 2011, are summarized as follows:



|                               |  |               |        |  |           |   |        |                      |  |  |      |  
|------------------------------ |  | ------------- | ------ |  | --------- | - | ------ | -------------------- |  |  | ---- | -
|                               |  | AmortizedCost |        |  | FairValue |   |        | WeightedAverageYield | 
|Within 1 year                  |  | $             | 164    |  |           | $ | 164    |                      |  |  | 2.83 | %
|Over 1 year through 5 years    |  |               | 24,486 |  |           |   | 24,542 |                      |  |  | 1.29 | %
|After 5 years through 10 years |  |               | 8,281  |  |           |   | 8,301  |                      |  |  | 1.82 | %
|Over 10 years                  |  |               | 21,738 |  |           |   | 20,928 |                      |  |  | 4.06 | %
|                               |  |               |        |  |           |   |        |                      |  |  |      |  
|                               |  | $             | 54,669 |  |           | $ | 53,935 |                      |  |  | 2.48 | %
|                               |  |               |        |  |           |   |        |                      |  |  |      |  



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

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. When measuring fair value, the
Company uses valuation techniques that are appropriate and consistently applied. A hierarchy is also established under the standard and is used to prioritize valuation inputs into the following three levels used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and
derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and
derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government
and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.



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##### Table of Contents

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments
whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category
generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

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

Investment Securities Available for Sale

Level 2 investment securities classified as available-for-sale are recorded at fair value on at least a monthly basis. Fair value measurements are based upon independent pricing models or
other model-based valuation techniques with inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Level 2 securities include mortgage-backed securities issued by
government-sponsored entities, municipal bonds, bonds issued by government agencies, and corporate debt securities. Level 3 investment securities classified as available-for-sale are recorded at fair value on at least a semi-annual
basis. Fair value measurements are based upon independent pricing models based upon unobservable inputs which require significant management judgment or estimation. Level 3 includes certain mortgage-backed securities and other debt securities.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is
probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of
several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011,
substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. Impaired loans where an allowance is established based on the fair value of collateral require classification in
the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.



17



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##### Table of Contents

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:



|                              |  |                |   |  |         |   |        |         |  |   |                                                        |  |  |                                         |        |  |  |   |        | 
|----------------------------- |  | -------------- | - |  | ------- | - | ------ | ------- |  | - | ------------------------------------------------------ |  |  | --------------------------------------- | ------ |  |  | - | ------ | 
|                              |  | March 31, 2011 |  
|Description                   |  | Level 1        |   |  | Level 2 |   |        | Level 3 |  |   | Total CarryingAmount inStatement ofFinancial Condition |  |  | Assets/LiabilitiesMeasured atFair
Value |       
|                              |  |                |   |  |        
|Securities available for sale |  |                |  |  |         | $ | 50,634 |         |  | $ | 3,301                                                  |  |  | $                                       | 53,935 |  |  | $ | 53,935 | 

Assets and
Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure
certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value
on a nonrecurring basis are included in the table below.



|               |  |                |   |  |         |  |   |         |  |   |                                                        |  |  |                                         |        |  |  |   |        | 
|-------------- |  | -------------- | - |  | ------- |  | - | ------- |  | - | ------------------------------------------------------ |  |  | --------------------------------------- | ------ |  |  | - | ------ | 
|               |  | March 31, 2011 |  
|Description    |  | Level 1        |   |  | Level 2 |  |   | Level 3 |  |   | Total CarryingAmount inStatement ofFinancial Condition |  |  | Assets/LiabilitiesMeasured atFair
Value |       
|               |  |                |   |  |        
|Impaired Loans |  |                |  |  |         |  |  |         |  | $ | 23,565                                                 |  |  | $                                       | 23,565 |  |  | $ | 23,565 | 



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##### Table of Contents

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



|                                                                 |  |                |          |   |               |   |          |                |  |   |           |   |  |   |          |  
|---------------------------------------------------------------- |  | -------------- | -------- | - | ------------- | - | -------- | -------------- |  | - | --------- | - |  | - | -------- | -
|                                                                 |  | March 31, 2011 |          |   | June 30, 2010 |  
|                                                                 |  | CarryingAmount |          |   | FairValue     |   |          | CarryingAmount |  |   | FairValue |  
|Financial assets:                                                |  |                |          |   |               |   |          |                |  |   |           |   |  |   |          |  
|                                                                 |  |                |          |  
|Cash and due from banks and interest-earning deposits with banks |  | $              | 58,201   |   |               | $ | 58,201   |                |  | $ | 69,303    |   |  | $ | 69,303   |  
|Available-for-sale securities                                    |  |                | 53,935   |   |               |   | 53,935   |                |  |   | 62,989    |   |  |   | 62,989   |  
|Federal Home Loan Bank stock                                     |  |                | 4,735    |   |               |   | 4,735    |                |  |   | 4,735     |   |  |   | 4,735    |  
|Loans receivable                                                 |  |                | 401,982  |   |               |   | 403,234  |                |  |   | 444,474   |   |  |   | 445,655  |  
|Accrued interest receivable                                      |  |                | 1,814    |   |               |   | 1,814    |                |  |   | 2,000     |   |  |   | 2,000    |  
|Loans held-for-sale                                              |  |                | 326      |   |               |   | 326      |                |  |   | 1,153     |   |  |   | 1,153    |  
|                                                                 |  |                |          |  
|Financial liabilities:                                           |  |                |          |   |               |   |          |                |  |   |           |   |  |   |          |  
|Deposits                                                         |  |                | (469,237 | ) |               |   | (455,547 | )              |  |   | (479,183  | ) |  |   | (471,821 | )
|Repurchase agreements                                            |  |                | (992     | ) |               |   | (992     | )              |  |   | (944      | ) |  |   | (944     | )
|Borrowed funds                                                   |  |                | (37,962  | ) |               |   | (37,908  | )              |  |   | (84,834   | ) |  |   | (87,028  | )
|Subordinated debentures                                          |  |                | (7,105   | ) |               |   | (6,385   | )              |  |   | (7,021    | ) |  |   | (5,630   | )
|                                                                 |  |                |          |  
|Off-balance sheet assets (liabilities):                          |  |                |          |   |               |   |          |                |  |   |           |   |  |   |          |  
|Commitments to extend credit                                     |  |                |         |   |               |   | 9,424    |                |  |   |          |   |  |   | 18,023   |  
|Unused letters of credit                                         |  |                |         |   |               |   | 4,774    |                |  |   |          |   |  |   | 5,320    |  
|Unused lines of credit                                           |  |                |         |   |               |   | 34,663   |                |  |   |          |   |  |   | 36,192   |  



|(12) | Subordinated Debt
|---- | -----------------

As part of the State of Franklin acquisition, the Company acquired State of Franklin Statutory Trust II (the Trust) and
assumed the Trusts obligation with respect to certain capital securities described below. On December 13, 2006, State of Franklin issued $10.3 million of junior subordinated debentures to the Trust, a Delaware business trust wholly owned
by State of Franklin. The Trust (a) sold $10.0 million of capital securities through its underwriters to institutional investors and upstreamed the proceeds to State of Franklin and (b) issued $310,000 of common securities to State of
Franklin. The sole assets of the Trust are the $10.3 million of junior subordinated debentures issued by State of Franklin. The securities are redeemable at par after January 30, 2012, and have a final maturity of January 30, 2037. The
interest is payable quarterly at a floating rate equal to 3-month LIBOR plus 1.7%.



|(13) | Subsequent Events
|---- | -----------------

The company has evaluated subsequent events for potential recognition and disclosure for the three months ended March 31, 2011. No
items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.



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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 thereto. For further information, refer to the financial statements and footnotes included in the Companys Annual
Report on Form 10-K for the year ended June 30, 2010, which was filed with the Securities and Exchange Commission on September 24, 2010.

General

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

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

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

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

Private Securities Litigation Reform Act Safe Harbor Statement

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

Managements ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors
include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition
and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Companys loan or investment portfolios. Additional factors that may affect our results are discussed in the reports
we file with the SEC, including our Annual Report on Form 10-K for the year ended June 30, 2010 under Item 1A. Risk Factors. These factors should be considered in evaluating the forward-looking statements and undue reliance should
not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements.



20



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##### Table of Contents

Results of Operations for the Three Months Ended March 31, 2011 and 2010

Net Income

Net income for the
three months ended March 31, 2011 was $260,000, or $0.04 per diluted share, compared to $323,000, or $0.05 per diluted share, for the corresponding period in 2010. Net income for the three months ended March 31, 2011 was negatively
impacted by a prepayment penalty on the early payoff of FHLB advances totaling $585,000.



|                                      |  |                                              |      |   |      |   |      |  
|------------------------------------- |  | -------------------------------------------- | ---- | - | ---- | - | ---- | -
|                                      |  | Three Months EndedMarch 31,                  |     
|                                      |  | 2011                                         |      |   | 2010 |  
|                                      |  | (Dollars in thousands,except per share data) |     
|                                      |  |                                             
|Net earnings                          |  | $                                            | 260  |   |      | $ | 323  |  
|Net earnings per share, basic         |  | $                                            | 0.04 |   |      | $ | 0.05 |  
|Net earnings per share, diluted       |  | $                                            | 0.04 |   |      | $ | 0.05 |  
|Return on average assets (annualized) |  |                                              | 0.17 | % |      |   | 0.20 | %
|Return on average equity (annualized) |  |                                              | 1.83 | % |      |   | 1.59 | %

Net Interest Income

Net interest income remained relatively unchanged at $4.7 million for the three months ended March 31, 2011 compared to the same
period in 2010 The interest rate spread and net interest margin for the quarter ended March 31, 2011 were 3.54% and 3.66%, respectively, compared to 3.35% and 3.46%, respectively, for the same period in 2010.



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##### Table of Contents

The following table summarizes changes in interest income and expense for the three month periods ended
March 31, 2011 and 2010:



|                                |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|------------------------------- |  | ---------------------------- | ----- |  | ------- | - | ----- | ------- |  | -- | ---- | - |  |  | ----- | --
|                                |  | Three Months EndedMarch 
31, |       |  | $Change |   |       | %Change | 
|                                |  | 2011                         |       |  | 2010    |   |       |        
|                                |  | (Dollars in thousands)       |       |  |         |   |       |         | 
|                                |  |                              |       | 
|Interest income:                |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|Loans                           |  | $                            | 6,049 |  |         | $ | 6,608 |         |  | ($ | 559  | ) |  |  | (8.5  | %)
|Investment securities           |  |                              | 411   |  |         |   | 755   |         |  |    | (344 | ) |  |  | (45.6 | %)
|Interest-earning deposits       |  |                              | 51    |  |         |   | 14    |         |  |    | 37   |   |  |  | 264.3 | % 
|FHLB stock                      |  |                              | 54    |  |         |   | 53    |         |  |    | 1    |   |  |  | 1.9   | % 
|                                |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|Total interest income           |  |                              | 6,565 |  |         |   | 7,430 |         |  |    | (865 | ) |  |  | (11.6 | %)
|                                |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|                                |  |                              |       | 
|Interest expense:               |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|Deposits                        |  |                              | 1,293 |  |         |   | 1,837 |         |  |    | (544 | ) |  |  | (29.6 | %)
|Repurchase Agreements           |  |                              | 1     |  |         |   | 2     |         |  |    | (1   | ) |  |  | (50.0 | %)
|Borrowings                      |  |                              | 445   |  |         |   | 799   |         |  |    | (354 | ) |  |  | (44.3 | %)
|Subordinated Notes & Debentures |  |                              | 79    |  |         |   | 78    |         |  |    | 1    |   |  |  | 1.3   | % 
|                                |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|Total interest expense          |  |                              | 1,818 |  |         |   | 2,716 |         |  |    | (898 | ) |  |  | (33.1 | %)
|                                |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|                                |  |                              |       | 
|Net interest income             |  | $                            | 4,747 |  |         | $ | 4,714 |         |  | $  | 33   |   |  |  | 0.7   | % 
|                                |  |                              |       |  |         |   |       |         |  |    |      |   |  |  |       |   

The following table summarizes average balances and average yields and costs for the three months ended
March 31, 2011 and 2010. For purposes of this table nonaccrual loan balances and related accrued interest income have been excluded.



|                          |  |                              |         |  |            |  |      |                |  |   |            |  |  |  |      |  
|------------------------- |  | ---------------------------- | ------- |  | ---------- |  | ---- | -------------- |  | - | ---------- |  |  |  | ---- | -
|                          |  | Three Months Ended March 31, |        
|                          |  | 2011                         |         |  | 2010       | 
|                          |  | AverageBalance               |         |  | Yield/Cost |  |      | AverageBalance |  |   | Yield/Cost | 
|                          |  | (Dollars in thousands)       |        
|                          |  |                              |         | 
|Loans                     |  | $                            | 398,573 |  |            |  | 6.15 | %              |  | $ | 441,301    |  |  |  | 6.07 | %
|Investment securities     |  |                              | 52,101  |  |            |  | 3.37 | %              |  |   | 56,887     |  |  |  | 5.51 | %
|Interest-earning deposits |  |                              | 72,591  |  |            |  | 0.28 | %              |  |   | 51,120     |  |  |  | 0.11 | %
|FHLB stock                |  |                              | 4,735   |  |            |  | 4.63 | %              |  |   | 4,735      |  |  |  | 4.54 | %
|Deposits                  |  |                              | 426,378 |  |            |  | 1.23 | %              |  |   | 426,020    |  |  |  | 1.75 | %
|FHLB advances             |  |                              | 51,757  |  |            |  | 3.49 | %              |  |   | 90,029     |  |  |  | 3.60 | %
|Repurchase agreements     |  |                              | 836     |  |            |  | 0.49 | %              |  |   | 1,505      |  |  |  | 0.54 | %
|Subordinated debentures   |  |                              | 7,087   |  |            |  | 4.52 | %              |  |   | 6,975      |  |  |  | 4.54 | %

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



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##### Table of Contents

|                                                                  |  |                                                  |      |   |      |   |      |     |  |    |      |  
|----------------------------------------------------------------- |  | ------------------------------------------------ | ---- | - | ---- | - | ---- | --- |  | -- | ---- | -
|                                                                  |  | Three Months EndedMarch 31,2011 Compared to 2010 |     
|                                                                  |  | Increase (Decrease)Due To                        |      |   |      |  
|                                                                  |  | Volume                                           |      |   | Rate |   |      | Net | 
|                                                                  |  | (In thousands)                                   |     
|Interest income:                                                  |  |                                                  |      |   |      |   |      |     |  |    |      |  
|Loans receivable                                                  |  | ($                                               | 772  | ) |      | $ | 213  |     |  | ($ | 559  | )
|Investment securities                                             |  |                                                  | (78  | ) |      |   | (267 | )   |  |    | (344 | )
|Daily interest-earning deposits and other interest-earning assets |  |                                                  | 8    |   |      |   | 30   |     |  |    | 38   |  
|                                                                  |  |                                                  |      |   |      |   |      |     |  |    |      |  
|Total interest-earning assets                                     |  |                                                  | (842 | ) |      |   | (23  | )   |  |    | (865 | )
|                                                                  |  |                                                  |      |   |      |   |      |     |  |    |      |  
|                                                                  |  |                                                  |     
|Interest expense:                                                 |  |                                                  |      |   |      |   |      |     |  |    |      |  
|Deposits                                                          |  |                                                  | 2    |   |      |   | (546 | )   |  |    | (544 | )
|Total borrowings                                                  |  |                                                  | (342 | ) |      |   | (12  | )   |  |    | (354 | )
|                                                                  |  |                                                  |      |   |      |   |      |     |  |    |      |  
|Total interest-bearing liabilities                                |  |                                                  | (340 | ) |      |   | (558 | )   |  |    | (898 | )
|                                                                  |  |                                                  |      |   |      |   |      |     |  |    |      |  
|Net change in interest income                                     |  | ($                                               | 502  | ) |      | $ | 535  |     |  | $  | 33   |  
|                                                                  |  |                                                  |      |   |      |   |      |     |  |    |      |  

Total interest income decreased $865,000, or 11.6%, to $6.6 million for the three months ended March 31, 2011 primarily
due to a change in the mix of average earning assets. The average yield on earning assets declined 39 basis points to 5.06% compared to 5.45% for the same period in 2010, due primarily to a shift of average loan balances into lower yielding
investments and interest-earning deposits.

Interest on loans decreased $559,000, or 8.5%, to $6.0 million for the three months ended
March 31, 2011 primarily due to a lower average balance of loans. The average balance of loans decreased $42.7 million, or 9.7%, to $398.6 million, due to the combination of reduced loan demand, normal paydowns on existing loans, transfers to
OREO and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Banks market areas. The average yield on loans was 6.15% for the three months ended March 31, 2011 compared to 6.07% for the same period in
2010.

Interest on investment securities decreased $344,000, or 45.6%, to $411,000 for the three months ended March 31, 2011 due to a
lower average yield and a lower average balance. The average yield on investment securities decreased to 3.37% for the three months ended March 31, 2011 compared to 5.51% for the same period in 2010 due to lower interest rates and changes in
the composition of the portfolio. A portion of the proceeds from called securities has been reinvested in similar securities but with lower yields.

Total interest expense decreased $898,000 to $1.8 million for the three months ended March 31, 2011 compared to $2.7 million for the corresponding period in 2010 primarily due to lower interest rates
on deposits and a lower average balance of FHLB borrowings. The average rate paid on deposits was 1.23% for the three months ended March 31, 2011, compared to 1.75% for the same period in 2010 due to downward repricing of interest bearing
deposits in the current low interest rate environment. Average FHLB borrowings decreased $38.3 million to $51.8 million for the three months ended March 31, 2011 compared to $90.0 million for the comparable period in 2010, while the average
rate paid on borrowings decreased 11 basis points to 3.49%, as excess liquidity was used to repay FHLB advances.



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##### Table of Contents

Provision for Loan Losses

The provision for loan losses for the three months ended March 31, 2011 was $1.4 million, compared to $1.5 million for the comparable period in 2010. Net charge-offs for the three months ended
March 31, 2011 were $1.5 million compared to $1.3 million for the comparable period in 2010. Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in the
nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors. In addition, the Federal Deposit Insurance Corporation and Tennessee Department of Financial
Institutions, as an integral part of their examination process, periodically review our allowance for loan losses and may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information
available to them at the time of their examination.

Noninterest Income

Noninterest income decreased $50,000 to $1.7 million for the three months ended March 31, 2011 compared to the corresponding period in 2010. Service charges and fees declined $100,000, or 25.9%, to
$286,000 for the three months ended March 31, 2011 compared to the same period in 2010. Management believes fee revenue decreased due to heightened customer awareness of fees in the current economic downturn. For the three months ended
March 31, 2011, noninterest income included a loss on sale of foreclosed properties totaling $186,000.

The following table summarizes
the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended March 31, 2011 compared to the same period in 2010.



|                                                   |  |                             |       |   |         |   |       |         |  |    |      |   |  |  |        |   
|-------------------------------------------------- |  | --------------------------- | ----- | - | ------- | - | ----- | ------- |  | -- | ---- | - |  |  | ------ | --
|                                                   |  | Three Months EndedMarch 31, |       |   | $Change |   |       | %Change | 
|                                                   |  | 2011                        |       |   | 2010    |   |       |        
|                                                   |  | (Dollars in thousands)      |       |   |         |   |       |         | 
|                                                   |  |                             |       |  
|Noninterest income:                                |  |                             |       |   |         |   |       |         |  |    |      |   |  |  |        |   
|Mortgage origination fee income                    |  | $                           | 66    |   |         | $ | 61    |         |  | $  | 5    |   |  |  | 8.2    | % 
|Service charges and fees                           |  |                             | 286   |   |         |   | 386   |         |  |    | (100 | ) |  |  | (25.9  | %)
|Gain (loss) on sale of fixed assets                |  |                             |      |   |         |   | (92   | )       |  |    | 92   |   |  |  | (100.0 | %)
|(Loss) gain on investment securities               |  |                             | 1,279 |   |         |   | 1,202 |         |  |    | 77   |   |  |  | 6.4    | % 
|Gain (loss) on sale of foreclosed real estate, net |  |                             | (186  | ) |         |   | 1     |         |  |    | (187 | ) |  |  | NM     |   
|BOLI increase in cash value                        |  |                             | 58    |   |         |   | 58    |         |  |    |     |   |  |  | 0.0    | % 
|Other                                              |  |                             | 194   |   |         |   | 131   |         |  |    | 63   |   |  |  | 48.1   | % 
|                                                   |  |                             |       |   |         |   |       |         |  |    |      |   |  |  |        |   
|Total noninterest income                           |  | $                           | 1,697 |   |         | $ | 1,747 |         |  | ($ | 50   | ) |  |  | (2.9   | %)
|                                                   |  |                             |       |   |         |   |       |         |  |    |      |   |  |  |        |   

Noninterest Expense

Total noninterest expense was relatively unchanged at $4.6 million for the three months ended March 31, 2011 compared to the corresponding period in 2010. Prepayment penalties of $585,000 were
incurred in connection with the repayment of FHLB advances totaling $20.0 million during the three months ending March 31, 2011. Management believes the future savings in interest expense will more than offset the prepayment penalties.
Occupancy expense decreased $289,000 to $309,000 for the three months ended March 31, 2011, due to a decrease in amortization of leasehold improvements. Other changes in noninterest expense included declines in compensation expense, equipment
and data processing expense, and valuation adjustments and expenses on OREO.

The following table summarizes the dollar amounts for each
category of noninterest expense, and the dollar and percent changes for the three months ended March 31, 2011 compared to the same period in 2010.



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|                                          |  |                             |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|----------------------------------------- |  | --------------------------- | ----- |  | ------- | - | ----- | ------- |  | -- | ---- | - |  |  | ----- | --
|                                          |  | Three Months EndedMarch 31, |       |  | $Change |   |       | %Change | 
|                                          |  | 2011                        |       |  | 2010    |   |       |        
|                                          |  | (Dollars in thousands)      |       |  |         |   |       |         | 
|                                          |  |                             |       | 
|Noninterest expense:                      |  |                             |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|Compensation and benefits                 |  | $                           | 1,620 |  |         | $ | 1,664 |         |  | ($ | 44   | ) |  |  | (2.6  | %)
|Occupancy expense                         |  |                             | 309   |  |         |   | 598   |         |  |    | (289 | ) |  |  | (48.3 | %)
|Equipment and data processing expense     |  |                             | 638   |  |         |   | 671   |         |  |    | (33  | ) |  |  | (4.9  | %)
|Deposit insurance premiums                |  |                             | 165   |  |         |   | 154   |         |  |    | 11   |   |  |  | 7.1   | % 
|Advertising                               |  |                             | 62    |  |         |   | 15    |         |  |    | 47   |   |  |  | 313.3 | % 
|Valuation adjustment and expenses on OREO |  |                             | 371   |  |         |   | 437   |         |  |    | (66  | ) |  |  | (15.1 | %)
|Loss on early extinguishment of debt      |  |                             | 585   |  |         |   |      |         |  |    | 585  |   |  |  |      |   
|Other                                     |  |                             | 885   |  |         |   | 1,132 |         |  |    | (247 | ) |  |  | (21.8 | %)
|                                          |  |                             |       |  |         |   |       |         |  |    |      |   |  |  |       |   
|Total noninterest expense                 |  | $                           | 4,635 |  |         | $ | 4,671 |         |  | ($ | 36   | ) |  |  | (0.8  | %)
|                                          |  |                             |       |  |         |   |       |         |  |    |      |   |  |  |       |   

Income Taxes

Income tax expense for the three months ended March 31, 2011 was $149,000 compared to a tax benefit of $33,000 for the same period in 2010 due to higher taxable income.

Results of Operations for the Nine Months Ended March 31, 2011 and 2010

Net Income

Net income for the nine months ended March 31, 2011 was $878,000,
or $0.14 per diluted share compared to $392,000, or $0.06 per diluted share, for the same period in 2010. Net income for the nine months ended March 31, 2011 included a prepayment penalty on the early payoff of FHLB advances totaling $775,000.
Net income for the nine months ended March 31, 2011 was favorably impacted by an increase in gain on investment securities and a decrease in the provision for loan and lease losses which more than offset an increase in write-downs and losses on
OREO.



|                                      |  |                                              |      |   |      |   |      |  
|------------------------------------- |  | -------------------------------------------- | ---- | - | ---- | - | ---- | -
|                                      |  | Nine Months EndedMarch 31,                   |     
|                                      |  | 2011                                         |      |   | 2010 |  
|                                      |  | (Dollars in thousands,except per share data) |     
|                                      |  |                                             
|Net earnings                          |  | $                                            | 878  |   |      | $ | 392  |  
|Net earnings per share, basic         |  | $                                            | 0.14 |   |      | $ | 0.06 |  
|Net earnings per share, diluted       |  | $                                            | 0.14 |   |      | $ | 0.06 |  
|Return on average assets (annualized) |  |                                              | 0.19 | % |      |   | 0.08 | %
|Return on average equity (annualized) |  |                                              | 2.05 | % |      |   | 0.64 | %

Net Interest Income

Net interest income before loan loss provision decreased $332,000, or 2.4%, to $13.5 million for the nine months ended March 31,
2011 from $13.9 million for the corresponding period in 2010. The interest rate spread and net interest margin for the nine months ended March 31, 2011 were 3.21% and 3.31%, respectively, compared to 3.18% and 3.31%, respectively, for the same
period in 2010.



25



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##### Table of Contents

The following table summarizes changes in interest income and expense for the nine month periods ended
March 31, 2011 and 2010:



|                                |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   
|------------------------------- |  | -------------------------- | ------ |  | ------- | - | ------ | ------- |  | -- | ------ | - |  |  | ----- | --
|                                |  | Nine Months
EndedMarch 31, |        |  | $Change |   |        | %Change | 
|                                |  | 2011                       |        |  | 2010    |   |        |        
|                                |  | (Dollars in thousands)     |        |  |         |   |        |         | 
|                                |  |                            |        | 
|Interest income:                |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   
|Loans                           |  | $                          | 18,443 |  |         | $ | 20,556 |         |  | ($ | 2,113  | ) |  |  | (10.3 | %)
|Investment securities           |  |                            | 1,302  |  |         |   | 2,170  |         |  |    | (868   | ) |  |  | (40.0 | %)
|Interest-earning deposits       |  |                            | 151    |  |         |   | 38     |         |  |    | 113    |   |  |  | 297.4 | % 
|FHLB stock                      |  |                            | 155    |  |         |   | 166    |         |  |    | (11    | ) |  |  | (6.6  | %)
|                                |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   
|Total interest income           |  |                            | 20,051 |  |         |   | 22,930 |         |  |    | (2,879 | ) |  |  | (12.6 | %)
|                                |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   
|                                |  |                            |        | 
|Interest expense:               |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   
|Deposits                        |  |                            | 4,490  |  |         |   | 6,381  |         |  |    | (1,891 | ) |  |  | (29.6 | %)
|Repurchase Agreements           |  |                            | 5      |  |         |   | 7      |         |  |    | (2     | ) |  |  | (28.6 | %)
|Borrowings                      |  |                            | 1,788  |  |         |   | 2,438  |         |  |    | (650   | ) |  |  | (26.7 | %)
|Subordinated Notes & Debentures |  |                            | 241    |  |         |   | 245    |         |  |    | (4     | ) |  |  | (1.6  | %)
|                                |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   
|Total interest expense          |  |                            | 6,524  |  |         |   | 9,071  |         |  |    | (2,547 | ) |  |  | (28.1 | %)
|                                |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   
|                                |  |                            |        | 
|Net interest income             |  | $                          | 13,527 |  |         | $ | 13,859 |         |  | ($ | 332    | ) |  |  | (2.4  | %)
|                                |  |                            |        |  |         |   |        |         |  |    |        |   |  |  |       |   

The following table summarizes average balances and average yields and costs for the nine months ended
March 31, 2011 and 2010. For purposes of this table nonaccrual loan balances and related accrued interest income have been excluded.



|                          |  |                             |         |  |            |  |      |                |  |   |            |  |  |  |      |  
|------------------------- |  | --------------------------- | ------- |  | ---------- |  | ---- | -------------- |  | - | ---------- |  |  |  | ---- | -
|                          |  | Nine Months Ended March 31, |        
|                          |  | 2011                        |         |  | 2010       | 
|                          |  | AverageBalance              |         |  | Yield/Cost |  |      | AverageBalance |  |   | Yield/Cost | 
|                          |  | (Dollars in thousands)      |        
|                          |  |                             |         | 
|Loans                     |  | $                           | 407,360 |  |            |  | 6.03 | %              |  | $ | 457,865    |  |  |  | 5.98 | %
|Investment securities     |  |                             | 50,147  |  |            |  | 3.63 | %              |  |   | 46,222     |  |  |  | 5.05 | %
|Interest-earning deposits |  |                             | 84,995  |  |            |  | 0.24 | %              |  |   | 47,175     |  |  |  | 0.11 | %
|FHLB stock                |  |                             | 4,735   |  |            |  | 4.36 | %              |  |   | 4,735      |  |  |  | 4.67 | %
|Deposits                  |  |                             | 439,852 |  |            |  | 1.36 | %              |  |   | 430,349    |  |  |  | 1.98 | %
|FHLB advances             |  |                             | 67,960  |  |            |  | 3.50 | %              |  |   | 90,149     |  |  |  | 3.60 | %
|Repurchase agreements     |  |                             | 1,074   |  |            |  | 0.62 | %              |  |   | 1,429      |  |  |  | 0.65 | %
|Subordinated debentures   |  |                             | 7,059   |  |            |  | 4.55 | %              |  |   | 6,948      |  |  |  | 4.70 | %

The following table sets forth the effects
of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The net column



26



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##### Table of Contents

represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on
the changes due to rate and the changes due to volume.



|                                   |  |                                                  |        |   |      |   |        |   |  |    |        |  
|---------------------------------- |  | ------------------------------------------------ | ------ | - | ---- | - | ------ | - |  | -- | ------ | -
|                                   |  | Nine Months EndedMarch 
31,2011 Compared to 2010 |       
|                                   |  | Increase (Decrease)Due To                        |        |   | Net  |  
|                                   |  | Volume                                           |        |   | Rate |   |       
|                                   |  | (In thousands)                                   |       
|Interest income:                   |  |                                                  |        |   |      |   |        |   |  |    |        |  
|Loans receivable                   |  | ($                                               | 2,247  | ) |      | $ | 134    |   |  | ($ | 2,113  | )
|Investment securities              |  |                                                  | (136   | ) |      |   | (732   | ) |  |    | (868   | )
|Daily interest-earning deposits    |  |                                                  |        |   |      |   |       |   |  |    |        |  
|and other interest-earning assets  |  |                                                  | 45     |   |      |   | 57     |   |  |    | 102    |  
|                                   |  |                                                  |        |   |      |   |        |   |  |    |        |  
|Total interest-earning assets      |  |                                                  | (2,338 | ) |      |   | (541   | ) |  |    | (2,879 | )
|                                   |  |                                                  |        |   |      |   |        |   |  |    |        |  
|Interest expense:                  |  |                                                  |        |   |      |   |        |   |  |    |        |  
|Deposits                           |  |                                                  | 144    |   |      |   | (2,035 | ) |  |    | (1,891 | )
|Total borrowings                   |  |                                                  | (601   | ) |      |   | (55    | ) |  |    | (656   | )
|                                   |  |                                                  |        |   |      |   |        |   |  |    |        |  
|Total interest-bearing liabilities |  |                                                  | (457   | ) |      |   | (2,090 | ) |  |    | (2,547 | )
|                                   |  |                                                  |        |   |      |   |        |   |  |    |        |  
|Net change in interest income      |  | ($                                               | 1,881  | ) |      | $ | 1,549  |   |  | ($ | 332    | )
|                                   |  |                                                  |        |   |      |   |        |   |  |    |        |  

Total interest income decreased $2.9 million, or 12.6%, to $20.1 million for the nine months ended March 31, 2011
primarily due to a change in the mix of average earning assets. The average yield on earning assets declined 57 basis points to 4.90% compared to 5.46% for the same period in 2010, due primarily to a shift from average loan balances into lower
yielding investment and interest-earning deposits.

Interest on loans decreased $2.1 million, or 10.3%, to $18.4 million for the nine months
ended March 31, 2011 primarily due to a lower average balance of loans. The average balance of loans decreased $50.5 million, or 11.0%, to $407.4 million, due to the combination of reduced loan demand, normal paydowns on existing loans,
transfers to OREO and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Banks market areas. The average yield on loans was 6.03% for the nine months ended March 31, 2011 compared to 5.98% for the same
period in 2010.

Interest on investment securities decreased $868,000, or 40.0%, to $1.3 million for the nine months ended March 31, 2011
due to a lower average yield and a lower average balance. The average yield on investment securities decreased to 3.63% for the nine months ended March 31, 2011 compared to 5.05% for the same period in 2010 due to lower market interest rates
and changes in the composition of the portfolio. A portion of the proceeds from called securities has been reinvested in similar securities but with lower yields.

Total interest expense decreased $2.5 million to $6.5 million for the nine months ended March 31, 2011 compared to $9.1 million for the corresponding period in 2010 due primarily to a lower average
cost of deposits and a lower average balance of FHLB borrowings. The average rate paid on deposits was 1.36% for the nine months ended March 31, 2011, compared to 1.98% for the same period in 2010 due to downward repricing of interest bearing
deposits in the current low interest rate environment. Average FHLB borrowings decreased $22.2 million to $68.0 million for the nine months ended March 31, 2011 compared to $90.1 million for the nine months ended March 31, 2010, as excess
liquidity was used to repay FHLB advances.



27



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##### Table of Contents

Provision for Loan Losses

The provision for loan losses for the nine months ended March 31, 2011 was $2.4 million, compared to $3.3 million for the comparable period in 2010. Net charge-offs for the nine months ended
March 31, 2011 were $4.1 million compared to $2.6 million for the comparable period in 2010. A significant portion of the loan charge-offs during the nine months ended March 31, 2011 were against specific reserves and did not require
replenishment of the allowance for loan and lease losses.

Noninterest Income

Noninterest income increased $82,000 to $3.5 million for the nine months ended March 31, 2011 compared to $3.4 million for the corresponding period
in 2010 due to an increase in gain on investment securities. Gain on investment securities increased $809,000 to $2.0 million for the three months ended March 31, 2011 due to investment sales as well as a gain resulting from a large unexpected
prepayment of principal on a deeply discounted mortgage-backed security. The deep discount on this security originated from the required write down to fair value in connection with the Companys acquisition of State of Franklin Bancshares,
Inc., which was consummated on October 31, 2008. Loss on sale of foreclosed property increased $583,000 to $591,000 for the nine months ended March 31, 2011. Service charges and fees declined $293,000, or 23.4%, to $957,000 primarily due
to a reduction in customer decreases in late fees and overdraft fees.

The following table summarizes the dollar amounts for each category of
noninterest income, and the dollar and percent changes for the nine months ended March 31, 2011 compared to the same period in 2010.



|                                                   |  |                            |       |   |         |   |       |         |  |   |      |   |  |  |        |   
|-------------------------------------------------- |  | -------------------------- | ----- | - | ------- | - | ----- | ------- |  | - | ---- | - |  |  | ------ | --
|                                                   |  | Nine Months EndedMarch 31, |       |   | $Change |   |       | %Change | 
|                                                   |  | 2011                       |       |   | 2010    |   |       |        
|                                                   |  | (Dollars in thousands)     |       |   |         |   |       |         | 
|                                                   |  |                            |       |  
|Noninterest income:                                |  |                            |       |   |         |   |       |         |  |   |      |   |  |  |        |   
|Mortgage origination fee income                    |  | $                          | 430   |   |         | $ | 301   |         |  | $ | 129  |   |  |  | 42.9   | % 
|Service charges and fees                           |  |                            | 957   |   |         |   | 1,250 |         |  |   | (293 | ) |  |  | (23.4  | %)
|Gain (loss) on sale of fixed assets                |  |                            |      |   |         |   | (92   | )       |  |   | 92   |   |  |  | (100.0 | %)
|(Loss) gain on investment securities               |  |                            | 2,031 |   |         |   | 1,222 |         |  |   | 809  |   |  |  | 66.2   | % 
|Gain (loss) on sale of foreclosed real estate, net |  |                            | (591  | ) |         |   | (8    | )       |  |   | (583 | ) |  |  | 7287.5 | % 
|BOLI increase in cash value                        |  |                            | 177   |   |         |   | 175   |         |  |   | 2    |   |  |  | 1.1    | % 
|Other                                              |  |                            | 527   |   |         |   | 601   |         |  |   | (74  | ) |  |  | (12.3  | %)
|                                                   |  |                            |       |   |         |   |       |         |  |   |      |   |  |  |        |   
|Total noninterest income                           |  | $                          | 3,531 |   |         | $ | 3,449 |         |  | $ | 82   |   |  |  | 2.4    | % 
|                                                   |  |                            |       |   |         |   |       |         |  |   |      |   |  |  |        |   

Noninterest Expense

Noninterest expense decreased $242,000, or 1.8%, to $13.4 million for the nine months ended March 31, 2011 compared to the corresponding 2010 period. Prepayment penalties totaling $775,000 were
incurred in connection with the repayment of FHLB advances totaling $46.5 million during the nine months ending March 31, 2011. Management believes the future savings in interest expense will more than offset the prepayment penalties.
Compensation expense decreased $317,000, or 5.9%, to $5.1 million for the nine months ended March 31, 2011 compared to the same period in 2010 as the Bank has reduced the number of employees through attrition. The number of full-time equivalent
employees was 139 at March 31, 2011 compared to 147 in 2010. Expenses related to other real estate owned increased to $1.5 million for the nine months ended March 31, 2011 compared to $763,000 for the comparable 2010 period due to
valuation adjustments and expenses



28



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##### Table of Contents

related to the maintenance and disposition of foreclosed real estate. Occupancy expense decreased $670,000 to $1.0 million for the nine months ended March 31, 2011, due to a decrease in
amortization of leasehold improvements. Other categories of noninterest expense decreased $716,000 to $2.5 million for the nine months ended March 31, 2011 due to cost control initiatives, declines in legal and professional fees and lower
franchise tax expense.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent
changes for the nine months ended March 31, 2011 compared to the same period in 2010.



|                                          |  |                            |        |  |         |   |        |         |  |    |      |   |  |  |       |   
|----------------------------------------- |  | -------------------------- | ------ |  | ------- | - | ------ | ------- |  | -- | ---- | - |  |  | ----- | --
|                                          |  | Nine Months EndedMarch 31, |        |  | $Change |   |        | %Change | 
|                                          |  | 2011                       |        |  | 2010    |   |        |        
|                                          |  | (Dollars in thousands)     |        |  |         |   |        |         | 
|                                          |  |                            |        | 
|Noninterest expense:                      |  |                            |        |  |         |   |        |         |  |    |      |   |  |  |       |   
|Compensation and benefits                 |  | $                          | 5,064  |  |         | $ | 5,381  |         |  | ($ | 317  | ) |  |  | (5.9  | %)
|Occupancy expense                         |  |                            | 1,031  |  |         |   | 1,701  |         |  |    | (670 | ) |  |  | (39.4 | %)
|Equipment and data processing expense     |  |                            | 1,900  |  |         |   | 1,904  |         |  |    | (4   | ) |  |  | (0.2  | %)
|Deposit insurance premiums                |  |                            | 490    |  |         |   | 506    |         |  |    | (16  | ) |  |  | (3.2  | %)
|Advertising                               |  |                            | 167    |  |         |   | 173    |         |  |    | (6   | ) |  |  | (3.5  | %)
|Valuation adjustment and expenses on OREO |  |                            | 1,475  |  |         |   | 763    |         |  |    | 712  |   |  |  | 93.3  | % 
|Loss on early extinguishment of debt      |  |                            | 775    |  |         |   |       |         |  |    | 775  |   |  |  |      |   
|Other                                     |  |                            | 2,473  |  |         |   | 3,189  |         |  |    | (716 | ) |  |  | (22.5 | %)
|                                          |  |                            |        |  |         |   |        |         |  |    |      |   |  |  |       |   
|Total noninterest expense                 |  | $                          | 13,375 |  |         | $ | 13,617 |         |  | ($ | 242  | ) |  |  | (1.8  | %)
|                                          |  |                            |        |  |         |   |        |         |  |    |      |   |  |  |       |   

Income Taxes

Income tax expense for the nine months ended March 31, 2011 was $455,000 compared to a tax benefit of $10,000 for the same period in 2010 due to higher taxable income.

Financial Condition

Cash, Cash
Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits decreased $11.1 million to $58.2
million at March 31, 2011 compared to $69.3 million at June 30, 2010 as excess liquidity was used to repay FHLB advances. In addition, the Bank has purposely reduced the level of customer certificates of deposit in response to reduced loan
demand.

Investments

The Companys investment security portfolio primarily consists of U.S. Government agency obligations, mortgage-backed securities issued by
government-sponsored entities, and municipal bonds. Investment securities decreased to $53.9 million at March 31, 2011 compared to $63.0 million at June 30, 2010. Investments classified as available-for-sale are carried at fair market
value and reflect an unrealized loss of $734,000, or $453,000 net of taxes. The $9.1 million decrease in the investment portfolio is primarily due to sales and calls of securities exceeding new purchases.

Loans

Net loans decreased $40.7
million to $393.7 million at March 31, 2011 compared to $434.4 million at June 30, 2010 due primarily to reduced loan demand combined with normal paydowns on existing loans, transfers to OREO and charge-offs. Reduced loan demand has
resulted from continued economic weakness in the Banks market areas.



29



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##### Table of Contents

Loans receivable, net, are summarized as follows:



|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|------------------------------ |  | ---------------------- | ------- | - | ------------------- |  | ----- | ------ |  | - | ------------------- | - |  | ------- | ----- | - | ------- | - | ------- | - |  |  | ----- | --
|                               |  | AtMarch 31,2011        |         |   | AtJune 30,2010      |  |       |        |  |   |                     |  
|                               |  | Amount                 |         |   | Percentof Portfolio |  |       | Amount |  |   | Percentof Portfolio |   |  | $Change |       |   | %Change |  
|                               |  | (Dollars in thousands) |         |   |                     |  |       |        | 
|                               |  |                        |         |   |                     | 
|Real estate loans:             |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|Residential one-to four-family |  | $                      | 114,040 |   |                     |  | 28.4  | %      |  | $ | 136,430             |   |  |         | 30.7  | % |         | $ | (22,390 | ) |  |  | (16.4 | %)
|Home equity line of credit     |  |                        | 20,405  |   |                     |  | 5.1   | %      |  |   | 19,768              |   |  |         | 4.4   | % |         |   | 637     |   |  |  | 3.2   | % 
|Commercial                     |  |                        | 147,301 |   |                     |  | 36.6  | %      |  |   | 140,024             |   |  |         | 31.5  | % |         |   | 7,277   |   |  |  | 5.2   | % 
|Multi-family                   |  |                        | 14,659  |   |                     |  | 3.6   | %      |  |   | 16,536              |   |  |         | 3.7   | % |         |   | (1,877  | ) |  |  | (11.4 | %)
|Construction                   |  |                        | 2,072   |   |                     |  | 0.5   | %      |  |   | 21,073              |   |  |         | 4.7   | % |         |   | (19,001 | ) |  |  | (90.2 | %)
|Land                           |  |                        | 31,962  |   |                     |  | 8.0   | %      |  |   | 37,135              |   |  |         | 8.4   | % |         |   | (5,173  | ) |  |  | (13.9 | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|                               |  |                        |         |   |                     | 
|Total real estate loans        |  |                        | 330,439 |   |                     |  | 82.2  | %      |  |   | 370,966             |   |  |         | 83.5  | % |         |   | (40,527 | ) |  |  | (10.9 | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|                               |  |                        |         |   |                     | 
|Commercial business loans      |  |                        | 65,636  |   |                     |  | 16.3  | %      |  |   | 66,699              |   |  |         | 15.0  | % |         |   | (1,063  | ) |  |  | (1.6  | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|                               |  |                        |         |   |                     | 
|Consumer loans:                |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|Automobile loans               |  |                        | 1,447   |   |                     |  | 0.4   | %      |  |   | 1,848               |   |  |         | 0.4   | % |         |   | (401    | ) |  |  | (21.7 | %)
|Mobile home loans              |  |                        | 16      |   |                     |  | 0.0   | %      |  |   | 23                  |   |  |         | 0.0   | % |         |   | (7      | ) |  |  | (30.4 | %)
|Loans secured by deposits      |  |                        | 1,322   |   |                     |  | 0.3   | %      |  |   | 1,372               |   |  |         | 0.3   | % |         |   | (50     | ) |  |  | (3.6  | %)
|Other consumer loans           |  |                        | 3,122   |   |                     |  | 0.8   | %      |  |   | 3,566               |   |  |         | 0.8   | % |         |   | (444    | ) |  |  | (12.5 | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|                               |  |                        |         |   |                     | 
|Total consumer loans           |  |                        | 5,907   |   |                     |  | 1.5   | %      |  |   | 6,809               |   |  |         | 1.5   | % |         |   | (902    | ) |  |  | (13.2 | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|                               |  |                        |         |   |                     | 
|Total gross loans              |  |                        | 401,982 |   |                     |  | 100.0 | %      |  |   | 444,474             |   |  |         | 100.0 | % |         |   | (42,492 | ) |  |  | (9.6  | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|                               |  |                        |         |   |                     | 
|Less:                          |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|Deferred loan fees, net        |  |                        | (390    | ) |                     |  |       |        |  |   | (447                | ) |  |         |       |   |         |   | 57      |   |  |  | (12.8 | %)
|Allowance for losses           |  |                        | (7,881  | ) |                     |  |       |        |  |   | (9,649              | ) |  |         |       |   |         |   | 1,768   |   |  |  | (18.3 | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   
|Loans receivable, net          |  | $                      | 393,711 |   |                     |  |       |        |  | $ | 434,378             |   |  |         |       |   |         | $ | (40,667 | ) |  |  | (9.4  | %)
|                               |  |                        |         |   |                     |  |       |        |  |   |                     |   |  |         |       |   |         |   |         |   |  |  |       |   

Loan Loss Allowance

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

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



30



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

The allowance for loan losses was $7.9 million at March 31, 2011 compared to $9.6 million at June 30, 2010. Our allowance for loan losses
represented 1.96% of total loans and 74.85% of nonperforming loans at March 31, 2011 compared to 2.17% of total loans and 51.38% of nonperforming loans at June 30, 2010.



|                                                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                           |  | Three Months EndedMarch 31, |        |   | Nine Months EndedMarch 31, |  
|                                                                           |  | 2011                        |        |   | 2010                       |   |        | 2011 |  |   | 2010   |  
|                                                                           |  | (Dollars in thousands)      |        |   | (Dollars in thousands)     |  
|                                                                           |  |                             |        |  
|Balance at beginning of period                                             |  | $                           | 7,945  |   |                            | $ | 5,180  |      |  | $ | 9,649  |   |  | $ | 4,722  |  
|Provision for loan losses                                                  |  |                             | 1,400  |   |                            |   | 1,500  |      |  |   | 2,350  |   |  |   | 3,309  |  
|Recoveries                                                                 |  |                             | 11     |   |                            |   | 9      |      |  |   | 113    |   |  |   | 57     |  
|Charge-offs                                                                |  |                             | (1,475 | ) |                            |   | (1,277 | )    |  |   | (4,231 | ) |  |   | (2,676 | )
|                                                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Net charge-offs                                                            |  |                             | (1,464 | ) |                            |   | (1,268 | )    |  |   | (4,118 | ) |  |   | (2,619 | )
|                                                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Allowance at end of period                                                 |  | $                           | 7,881  |   |                            | $ | 5,412  |      |  | $ | 7,881  |   |  | $ | 5,412  |  
|                                                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                             |        |  
|Net charge-offs to average outstanding loans during the period, annualized |  |                             | 1.43   | % |                            |   | 1.10   | %    |  |   | 1.30   | % |  |   | 0.74   | %

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are
generally placed on nonaccrual status when the loan becomes more than 90 days delinquent. Nonaccrual loans totaled $10.5 million at March 31, 2011 compared to $18.8 million at June 30, 2010. The decrease in nonaccrual loans is primarily
due to an increase in both nonaccrual residential and commercial real estate loans. Troubled debt restructuring (TDR) loans were $5.4 million at March 31, 2011 compared to $3.1 million at June 30, 2010. In general, a TDR exists
when we grant a concession to a borrower experiencing financial difficulty that we normally would not otherwise consider. These concessions can result in avoidance of foreclosure proceedings and can result in the full repayment of the loan principal
amount. The majority of the Banks TDRs involve a modification in loan terms such as a temporary period of interest only or extension of the maturity date. The majority of loans in this category are in compliance with their modified loan terms
as of March 31, 2011. The amount of accruing TDR loans totaled $4.8 million at March 31, 2011. Foreclosed real estate amounted to $11.3 million at March 31, 2011 compared to $6.9 million at June 30, 2010. Foreclosed real estate
is initially recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, less estimated selling costs. Any initial writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of
foreclosed real estate is charged against earnings. Foreclosed real estate at March 31, 2011 consisted of vacant land totaling $1.4 million, residential property totaling $3.2 million and commercial real estate totaling $6.7 million.



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|                                                       |  |                        |        |   |              |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                                                       |  | March 31,2011          |        |   | June 30,2010 |  
|                                                       |  | (Dollars in thousands) |       
|Nonaccruing loans:                                     |  |                        |        |   |              |   |        |  
|Residential real estate                                |  | $                      | 6,156  |   |              | $ | 10,750 |  
|Commercial real estate                                 |  |                        | 2,275  |   |              |   | 6,617  |  
|Commercial business                                    |  |                        | 2,035  |   |              |   | 1,309  |  
|Consumer                                               |  |                        | 63     |   |              |   | 103    |  
|                                                       |  |                        |        |   |              |   |        |  
|                                                       |  |                       
|Total nonaccrual loans                                 |  |                        | 10,529 |   |              |   | 18,779 |  
|                                                       |  |                       
|Nonaccrual investments                                 |  |                        | 377    |   |              |   | 731    |  
|Real estate owned                                      |  |                        | 11,323 |   |              |   | 6,865  |  
|Other repossessed assets                               |  |                        |       |   |              |   |       |  
|                                                       |  |                        |        |   |              |   |        |  
|                                                       |  |                       
|Total nonperforming assets                             |  | $                      | 22,229 |   |              | $ | 26,375 |  
|                                                       |  |                        |        |   |              |   |        |  
|                                                       |  |                       
|Total nonperforming assets to total assets             |  |                        | 3.85   | % |              |   | 4.18   | %
|Total nonperforming loans to total loans               |  |                        | 2.62   | % |              |   | 4.22   | %
|Allowance for loan losses to total nonperforming loans |  |                        | 74.85  | % |              |   | 51.38  | %

The following table summarizes activity in
OREO during the nine months ended March 31, 2011:



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|OREO balance at beginning of period |  | $ | 6,851  |  
|OREO acquired                       |  |   | 11,897 |  
|OREO sold                           |  |   | (5,167 | )
|Initial valuation adjustments       |  |   | (1,770 | )
|Subsequent valuation adjustments    |  |   | (488   | )
|                                    |  |   |        |  
|OREO ending balance                 |  | $ | 11,323 |  
|                                    |  |   |        |  

Bank Owned Life Insurance

We hold bank owned life insurance (BOLI) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a
life insurance contract. The cash surrender value of the BOLI at March 31, 2011 was $6.6 million.

Deposits

Total deposits decreased $9.9 million to $469.2 million at March 31, 2011 due to planned runoff of certificates of deposit through lower interest
rates. Time deposits decreased $10.0 million, or 4.2%, to $230.2 million at March 31, 2011. NOW accounts decreased $13.6 million, or 23.3%, to 44.7 million at March 31, 2011 due to a planned reduction in public funds.



|                             |  |                        |         |  |              |   |         |         |  |    |         |   |  |  |       |   
|---------------------------- |  | ---------------------- | ------- |  | ------------ | - | ------- | ------- |  | -- | ------- | - |  |  | ----- | --
|                             |  | March 31,2011          |         |  | June 30,2010 |   |         | $Change |  |    | %Change |  
|                             |  | (Dollars in thousands) |         |  |              |   |         |         | 
|                             |  |                        |         | 
|Noninterest-bearing accounts |  | $                      | 53,301  |  |              | $ | 41,653  |         |  | $  | 11,648  |   |  |  | 28.0  | % 
|NOW accounts                 |  |                        | 44,694  |  |              |   | 58,257  |         |  |    | (13,563 | ) |  |  | (23.3 | %)
|Savings accounts             |  |                        | 86,852  |  |              |   | 82,830  |         |  |    | 4,022   |   |  |  | 4.9   | % 
|Money market accounts        |  |                        | 54,195  |  |              |   | 56,247  |         |  |    | (2,052  | ) |  |  | (3.6  | %)
|Certificates of deposit      |  |                        | 230,195 |  |              |   | 240,196 |         |  |    | (10,001 | ) |  |  | (4.2  | %)
|                             |  |                        |         |  |              |   |         |         |  |    |         |   |  |  |       |   
|Total                        |  | $                      | 469,237 |  |              | $ | 479,183 |         |  | ($ | 9,946   | ) |  |  | (2.1  | %)
|                             |  |                        |         |  |              |   |         |         |  |    |         |   |  |  |       |   



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##### Table of Contents

Advances

FHLB advances decreased $46.9 million to $38.0 million at March 31, 2011 compared to $84.8 million at June 30, 2010 as excess liquidity was used to repay FHLB advances. During the nine months
ended March 31, 2011, the Bank prepaid FHLB advances with an average cost of 3.82%. In addition, FHLB advances totaling $17.0 million with an average cost of 4.15% were prepaid and restructured. Although prepayment penalties totaling $775,000
for the nine months ended March 31, 2011 were incurred in connection with the repayment of the advances and recognized in noninterest expense, management believes the future savings in interest expense will more than offset the prepayment
penalties.

Stockholders Equity

Stockholders equity was $55.8 million at March 31, 2011 compared to $56.5 million at June 30, 2010. Unrealized gains and losses, net of taxes, in the available-for-sale investment
portfolio are reflected as an adjustment to stockholders equity. At March 31, 2011, the adjustment to stockholders equity was a net unrealized loss of $453,000 compared to a net unrealized gain of $1.2 million at June 30, 2010.
On November 13, 2008, the Company announced its third stock repurchase program pursuant to which up to 620,770 shares of the Companys outstanding common stock may be repurchased. At March 31, 2011, 440,522 shares remained eligible
for repurchase under the current stock repurchase program.

Liquidity and Capital Resources

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

Investments in liquid assets are regularly adjusted
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 marketable investment securities that are not pledged as collateral. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At March 31, 2011, cash and cash
equivalents totaled $58.2 million compared to $69.3 million at June 30, 2010. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $53.9 million at March 31, 2011 compared to $63.0 million at
June 30, 2010. At March 31, 2011, approximately $23.1 million of the investment portfolio was pledged as collateral for municipal deposits, FHLB borrowings and repurchase agreements. The Companys external sources of liquidity include
borrowing capacity with the Federal Home Loan Bank of Cincinnati, the Federal Reserve, and other correspondent banks. At March 31, 2011, borrowing capacity with the FHLB totaled $54.7 million based on pledged collateral, of which $12.0 million
was unused. In the nine-month period ended March 31, 2011, FHLB advances decreased $46.9 million to $38.0 million compared to $84.8 million at June 30, 2010. The Company had approximately $10.6 million of unused borrowing capacity with the
Federal Reserve Bank of Atlanta at March 31, 2011. In addition, the Company also maintains federal funds lines with two correspondent banks totaling $18.5 million under which no borrowings were outstanding.

The Company anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2011, we had approximately $9.4
million in loan commitments, consisting of commitments to fund



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##### Table of Contents

real estate loans. In addition to commitments to originate loans, we had $4.8 million in unused letters of credit and approximately $34.7 million in unused lines of credit. At March 31,
2011, we had $183.5 million in certificates of deposit due within one year and $239.0 million in other deposits without specific maturities. We believe, based on past experience, that a significant portion of those deposits will remain with us.
Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposits. Occasionally,
we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net decrease in total deposits of $10.0 million during the nine-month period ended March 31, 2011.

Jefferson Bancshares is a separate entity and apart from Jefferson Federal and must provide for its own liquidity. In addition to its operating expenses,
Jefferson Bancshares is responsible for the payment of dividends declared for its shareholders, and interest and principal on outstanding debt. At times, Jefferson Bancshares has repurchased and retired outstanding shares of its stock pursuant to
share repurchase programs adopted by the Board of Directors. Substantially all of Jefferson Bancshares revenues are obtained from dividends. Payment of such dividends to Jefferson Bancshares by Jefferson Federal is limited under Tennessee law.
The amount that can be paid in any calendar year, without prior approval from the Tennessee Department of Financial Institutions, cannot exceed the total of Jefferson Federals net income for the year combined with its retained net income for
the preceding two years. Jefferson Bancshares believes that such restriction will not have an impact on its ability to meet its ongoing cash obligations.

Off-Balance Sheet Arrangements

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

For the nine months ended March 31, 2011, we engaged in no off-balance sheet transactions reasonably likely to have a material
effect on our financial condition, results of operations or cash flows.



34



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##### Table of Contents

Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of March 31, 2011, Jefferson Federal met each of its capital requirements. The
following table presents our capital position relative to our regulatory capital requirements at March 31, 2011 and June 30, 2010:



|                          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|------------------------- |  | ------ | ------ |  | ---------------------------- |  | ----- | ------------------------------------------------------------- |  | - | ------ |  |  | ----- | - |  | ------ |  | --- | - |  | - | ------ |  |  |  | - |  |  |  | ---- | -
|                          |  | Actual |        |  | For CapitalAdequacy
Purposes |  |       | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions | 
|                          |  | Amount |        |  | Ratio                        |  |       | Amount                                                        |  |   |        |  |  | Ratio |   |  | Amount |  |     |   |  |   | Ratio  | 
|                          |  |        |        |  |                              |  |       | (Dollars in thousands)                                        |  |   |        |  |  |       |   |  |        | 
|At March 31, 2011         |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|                          |  |        |        |  |                              |  |       |                                                              
|Total Risk-Based Capital  |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|(To Risk Weighted Assets) |  | $      | 52,949 |  |                              |  | 12.73 | %                                                             |  | $ | 33,288 |  |  |       | > |  |        |  | 8.0 | % |  | $ | 41,610 |  |  |  | > |  |  |  | 10.0 | %
|                          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|                          |  |        |        |  |                              |  |       |                                                              
|Tier 1 Capital            |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|(To Risk Weighted Assets) |  |        | 47,715 |  |                              |  | 11.47 | %                                                             |  |   | 16,644 |  |  |       | > |  |        |  | 4.0 | % |  |   | 24,966 |  |  |  | > |  |  |  | 6.0  | %
|                          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|                          |  |        |        |  |                              |  |       |                                                              
|Tier 1 Capital            |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|(To Average Assets)       |  |        | 47,715 |  |                              |  | 8.11  | %                                                             |  |   | 23,545 |  |  |       | > |  |        |  | 4.0 | % |  |   | 29,431 |  |  |  | > |  |  |  | 5.0  | %
|                          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|                          |  |        |        |  |                              |  |       |                                                              
|At June 30, 2010          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|                          |  |        |        |  |                              |  |       |                                                              
|Total Risk-Based Capital  |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|(To Risk Weighted Assets) |  | $      | 52,352 |  |                              |  | 11.61 | %                                                             |  | $ | 36,073 |  |  |       | > |  |        |  | 8.0 | % |  | $ | 45,092 |  |  |  | > |  |  |  | 10.0 | %
|                          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|                          |  |        |        |  |                              |  |       |                                                              
|Tier 1 Capital            |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|(To Risk Weighted Assets) |  |        | 46,666 |  |                              |  | 10.35 | %                                                             |  |   | 18,037 |  |  |       | > |  |        |  | 4.0 | % |  |   | 27,055 |  |  |  | > |  |  |  | 6.0  | %
|                          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|                          |  |        |        |  |                              |  |       |                                                              
|Tier 1 Capital            |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  
|(To Average Assets)       |  |        | 46,666 |  |                              |  | 7.29  | %                                                             |  |   | 25,609 |  |  |       | > |  |        |  | 4.0 | % |  |   | 32,011 |  |  |  | > |  |  |  | 5.0  | %
|                          |  |        |        |  |                              |  |       |                                                               |  |   |        |  |  |       |   |  |        |  |     |   |  |   |        |  |  |  |   |  |  |  |      |  

Under the capital regulations of the FDIC, Jefferson Federal must satisfy various capital requirements. Banks
supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I) capital to average adjusted assets of at least 3.00% if a particular institution has the highest examination rating and at least 4.00% for all others. At
March 31, 2011, Jefferson Federals leverage capital ratio was 8.11%. The FDICs risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-weighted assets of at least 8.00%.
Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At March 31, 2011, Jefferson Federal had a ratio of total capital to risk-weighted assets of 12.73%. At March 31, 2011, the Bank met the minimum
regulatory capital requirements, and the Bank was well-capitalized within the meaning of federal regulatory requirements.



35



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

For a discussion of the Companys asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Companys portfolio equity, see
Item 7A in the Companys Annual Report on Form 10-K for the year ended June 30, 2010. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the
market value of the Companys portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Companys asset and liability position since June 30,
2010.



|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 March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



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

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



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

There have been no material
changes to the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended June 30, 2010.



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



|                  |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|----------------- |  | ------------------------------------------- | ----- |  | -------------------------------------- | - | ---- | ------------------------------------------------------------------------------------------- |  |  | --------------------------------------------------------------------------------------------------------------------- |  |  |  | ------- | ---
|Period            |  | (a)Total Numberof
Shares(or units)Purchased |       |  | (b)AveragePrice Paidper Share(or Unit) |   |      | ( c
)Total Number ofShares (or Units)Purchased asPart of PubliclyAnnounced Plansor Programs |  |  | ( d )Maximum Number(or ApproximateDollar Value)of Shares (orUnits) That MayYet Be PurchasedUnder the Plansor Programs | 
|                  |  |                                             |       | 
|Month #1          |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|January 1, 2011   |  |                                             | 1,285 |  |                                        | $ | 4.24 |                                                                                             |  |  | 1,285                                                                                                                 |  |  |  | 440,972 | (1)
|through           |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|January 31, 2011  |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|                  |  |                                             |       | 
|Month #2          |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|February 1, 2011  |  |                                             | 150   |  |                                        | $ | 4.28 |                                                                                             |  |  | 150                                                                                                                   |  |  |  | 440,822 | (1)
|through           |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|February 28, 2011 |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|                  |  |                                             |       | 
|Month #3          |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|March 1, 2011     |  |                                             | 300   |  |                                        | $ | 3.89 |                                                                                             |  |  | 300                                                                                                                   |  |  |  | 440,522 | (1)
|through           |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                      |  |  |  |         |    
|March 31, 2011    |  |                                             |       |  |                                        |   |      |                                                                                             |  |  |                                                                                                                       |  |  |  |         |    
|                  |  |                                             |       | 
|Total             |  |                                             | 1,735 |  |                                        | $ | 4.18 |                                                                                             |  |  | 1,735                                                                                                                 |  |  |  | 440,522 |    



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



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

None.



|Item 4. | [Removed and Reserved]
|------- | ----------------------



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

None.



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



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

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

| | 32.0 | Section 1350 certification
| | ---- | --------------------------



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SIGNATURES

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



|             |  |                                                 
|------------ |  | ------------------------------------------------
|             |  | JEFFERSON BANCSHARES, INC.                      
|             | 
|May 13, 2011 |  | /s/ Anderson L. Smith                           
|             |  | Anderson L. Smith                               
|             |  | President and Chief Executive Officer           
|             | 
|May 13, 2011 |  | /s/ Jane P. Hutton                              
|             |  | Jane P. Hutton                                  
|             |  | Chief Financial Officer, Treasurer and Secretary