Document:

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                                                                    Exhibit 10.2

                                 LOAN AGREEMENT

         THIS LOAN AGREEMENT ("Loan Agreement") is made and entered into as of
the ______ day of _____________, 2003, by and between the JEFFERSON FEDERAL BANK
EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Borrower"), a trust forming part of the
Jefferson Federal Bank Employee Stock Ownership Plan ("ESOP"); and JEFFERSON
BANCSHARES, INC. ("Lender").

                               W I T N E S S E T H

         WHEREAS, the Borrower is authorized to purchase shares of common stock
of Jefferson Bancshares, Inc. ("Common Stock"), either directly from Jefferson
Bancshares, Inc. or in open market purchases in an amount not to exceed 691,297
shares of Common Stock.

         WHEREAS, the Borrower is authorized to borrow funds from the Lender for
the purpose of financing authorized purchases of Common Stock; and

         WHEREAS, the Lender is willing to make a loan to the Borrower for such
purpose:

         NOW, THEREFORE, the parties agree hereto as follows:

                                    ARTICLE I

                                   DEFINITIONS

         The following definitions shall apply for purposes of this Loan
Agreement, except to the extent that a different meaning is plainly indicated by
the context:

         Business Day means any day other than a Saturday, Sunday or other day
on which banks are authorized or required to close under federal or local law.

         Code means the Internal Revenue Code of 1986 (including the
corresponding provisions of any succeeding law).

         Default means an event or condition which would constitute an Event of
Default. The determination as to whether an event or condition would constitute
an Event of Default shall be determined without regard to any applicable
requirements of notice or lapse of time.

         ERISA means the Employee Retirement Income Security Act of 1974, as
amended (including the corresponding provisions of any succeeding law).

         Event of Default  means an event or condition described in Article 5.

         Loan means the loan described in section 2.1

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         Loan Documents means, collectively, the Loan Agreement, the Promissory
Note and the Pledge Agreement and all other documents now or hereafter executed
and delivered in connection with such documents, including all amendments,
modifications and supplements of or to all such documents.

         Pledge Agreement means the agreement described in section 2.8(a).

         Principal Amount means the face amount of the Promissory Note,
determined as set forth in section 2.1(c).

         Promissory Note means the promissory note described in section 2.3.

         Register means the register described in section 2.9.

                                   ARTICLE II

                           THE LOAN; PRINCIPAL AMOUNT;
                       INTEREST; SECURITY; INDEMNIFICATION

         Section 2.1   The Loan; Principal Amount.

         (a)   The Lender hereby agrees to lend to the Borrower such amount, and
at such time, as shall be determined under this Section 2.1; provided, however,
that in no event shall the aggregate amount lent under this Loan Agreement from
time to time exceed the greater of (i) $6,912,970 or (ii) the aggregate amount
paid by the Borrower to purchase up to 691,297 shares of Common Stock.

         (b)   Subject to the limitations of Section 2.1(a), the Borrower shall
determine the amounts borrowed under this Agreement, and the time at which such
borrowings are effected. Each such determination shall be evidenced in a writing
which shall set forth the amount to be borrowed and the date on which the Lender
shall disburse such amount, and such writing shall be furnished to the Lender by
notice from the Borrower. The Lender shall disburse to the Borrower the amount
specified in each such notice on the date specified therein or, if later, as
promptly as practicable following the Lender's receipt of such notice; provided,
however, that the Lender shall have no obligation to disburse funds pursuant to
this Agreement following the occurrence of a Default or an Event of Default
until such time as such Default or Event of Default shall have been cured.

         (c)   For all purposes of this Loan Agreement, the Principal Amount on
any date shall be equal to the excess, if any, of:

         (i)   the aggregate amount disbursed by the Lender pursuant to section
         2.1(b) on or before such date; over

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         (ii)   the aggregate amount of any repayments of such amounts made
         before such date.

The Lender shall maintain on the Register a record of, and shall record in the
Promissory Note, the Principal Amount, any changes in the Principal Amount and
the effective date of any changes in the Principal Amount.

         Section 2.2   Interest.

         (a)   The Borrower shall pay to the Lender interest on the Principal
Amount, for the period commencing with the first disbursement of funds under
this Loan Agreement and continuing until the Principal Amount shall be paid in
full, at the rate of _______________ percent (____%) per annum. Interest payable
under this Agreement shall be computed on the basis of a year of 365 days and
actual days elapsed (including the first day but excluding the last) occurring
during the period to which the computation relates.

         (b)   Accrued interest on the Principal Amount shall be payable by the
Borrower on the dates set forth in Schedule I to the Promissory Note. All
interest on the Principal Amount shall be paid by the Borrower in immediately
available funds.

         (c)   Anything in the Loan Agreement or the Promissory Note to the
contrary notwithstanding, the obligation of the Borrower to make payments of
interest shall be subject to the limitation that payments of interest shall not
be required to be made to the Lender to the extent that the Lender's receipt
thereof would not be permissible under the law or laws applicable to the Lender
limiting rates of interest which may be charged or collected by the Lender. Any
such payment referred to in the preceding sentence shall be made by the Borrower
to the Lender on the earliest interest payment date or dates on which the
receipt thereof would be permissible under the laws applicable to the Lender
limiting rates of interest which may be charged or collected by the Lender. Such
deferred interest shall not bear interest.

         Section 2.3   Promissory Note.

         The Loan shall be evidenced by the Promissory Note of the Borrower
attached hereto as an exhibit payable to the order of the lender in the
Principal Amount and otherwise duly completed.

         Section 2.4   Payment of Trust Loan.

         The Principal Amount of the Loan shall be repaid in accordance with
Schedule I to the Promissory Note on the dates specified therein until fully
paid.

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         Section 2.5   Prepayment.

         The Borrower shall be entitled to prepay the Loan in whole or in part,
at any time and from time to time; provided, however, that the Borrower shall
give notice to the Lender of any such prepayment; and provided, further, that
any partial prepayment of the Loan shall be in an amount not less than $1,000.
Any such prepayment shall be: (a) permanent and irrevocable; (b) accompanied by
all accrued interest through the date of such prepayment; (c) made without
premium or penalty; and (d) applied on the inverse order of the maturity of the
installment thereof unless the Lender and the Borrower agree to apply such
prepayments in some other order.

         Section 2.6   Method of Payments.

         (a)   All payments of principal, interest, other charges (including
indemnities) and other amounts payable by the Borrower hereunder shall be made
in lawful money of the United States, in immediately available funds, to the
Lender at the address specified in or pursuant to this Loan Agreement for
notices to the Lender, on the date on which such payment shall become due. Any
such payment made on such date but after such time shall, if the amount paid
bears interest, and except as expressly provided to the contrary herein, be
deemed to have been made on, and interest shall continue to accrue and be
payable thereon until, the next succeeding Business Day. If any payment of
principal or interest becomes due on a day other than a Business Day, such
payment may be made on the next succeeding Business Day, and when paid, such
payment shall include interest to the day on which payment is in fact made.

         (b)   Notwithstanding anything to the contrary contained in this Loan
Agreement or the Promissory Note, the Borrower shall not be obligated to make
any payment, repayment or prepayment on the Promissory Note if doing so would
cause the ESOP to cease to be an employee stock ownership plan within the
meaning of section 4975(e)(7) of the Code or qualified under section 401(a) of
the Code or cause the Borrower to cease to be a tax exempt trust under section
501(a) of the Code or if such act or failure to act would cause the Borrower to
engage in any "prohibited transaction" as such term is defined in the section
4975(c) of the Code and the regulations promulgated thereunder which is not
exempted by section 4975(c)(2) or (d) of the Code and the regulations
promulgated thereunder or in section 406 of ERISA and the regulations
promulgated thereunder which is not exempted by section 408(b) of ERISA and the
regulations promulgated thereunder; provided, however, that in each case, the
Borrower, may act or refrain from acting pursuant to this section 2.6(b) on the
basis of an opinion of counsel, and any opinion of such counsel. The Borrower
may consult with counsel, and any opinion of such counsel shall be full and
complete authorization and protection in respect of any action taken or suffered
or omitted by it hereunder in good faith and in accordance with such opinion of
counsel. Nothing contained in this section 2.6(b) shall be construed as imposing
a duty on the Borrower to consult with counsel. Any obligation of the Borrower
to make any payment, repayment or prepayment on the Promissory Note or refrain
from taking any other act hereunder or under the Promissory Note which is
excused pursuant to this section 2.6(b) shall be considered a binding obligation
of the Borrower, or both, as the case may be, for the purposes of determining
whether a Default or Event of Default has occurred hereunder or

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under the Promissory Note and nothing in this section 2.6(b) shall be construed
as providing a defense to any remedies otherwise available upon a Default or an
Event of Default hereunder (other than the remedy of specific performance).

         Section 2.7   Use of Proceeds of Loan.

         The entire proceeds of the Loan shall be used solely for acquiring
shares of Common Stock, and for no other purpose whatsoever.

         Section 2.8   Security.

         (a)   In order to secure the due payment and performance by the
Borrower of all of its obligations under this Loan Agreement, simultaneously
with the execution and delivery of this Loan Agreement by the Borrower, the
Borrower shall:

         (i)   pledge to the Lender as Collateral (as defined in the Pledge
         Agreement), and grant to the Lender a first priority lien on and
         security interest in, the Common Stock purchased with the Principal
         Amount, by the execution and delivery to the lender of the Pledge
         Agreement attached hereto as an exhibit; and

         (ii)  execute and deliver, or cause to be executed and delivered, such
         other agreement, instruments and documents as the Lender may reasonably
         require in order to effect the purposes of the Pledge Agreement and
         this Loan Agreement.

         (b)   The Lender shall release from encumbrance under the Pledge
Agreement and transfer to the Borrower, as of the date on which any payment or
repayment of the Principal Amount is made, a number of shares of Common Stock
held as Collateral determined pursuant to the applicable provisions of the ESOP.

         Section 2.9   Registration of the Promissory Note.

         (a)   The Lender shall maintain a Register providing for the
registration of the Principal Amount and any stated interest and of transfer and
exchange of the Promissory Note. Transfer of the Promissory Note may be effected
only by the surrender of the old instrument and either the reissuance by the
Borrower of the old instrument to the new holder or the issuance by the Borrower
of a new instrument to the new holder. The old Promissory Note so surrendered
shall be canceled by the Lender and returned to the Borrower after such
cancellation.

         (b)   Any new Promissory Note issued pursuant to section 2.9(a) shall
carry the same rights to interest (unpaid and to accrue) carried by the
Promissory Note so transferred or exchanged so that there will not be any loss
or gain of interest on the note surrender. Such new Promissory Note shall be
subject to all of the provisions and entitled to all of the benefits of this
Agreement. Prior to due presentment for registration or transfer, the Borrower
may deem and treat the registered holder of any Promissory Note as the holder
thereof for purposes of payment and other purposes. A notation

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shall be made on each new Promissory Note of the amount of all payments of
principal and interest theretofore paid.

                                   ARTICLE III

                 REPRESENTATIONS AND WARRANTIES OF THE BORROWER

         The Borrower hereby represents and warrants to the Lender as follows:

         Section 3.1   Power, Authority, Consents.

         The Borrower has the power to execute, deliver and perform this Loan
Agreement, the Promissory Note and Pledge Agreement, all of which have been duly
authorized by all necessary and proper corporate or other action.

         Section 3.2   Due Execution, Validity, Enforceability.

         Each of the Loan Documents, including, without limitation, this Loan
Agreement, the Promissory Note and the Pledge Agreement, has been duly executed
and delivered by the Borrower; and each constitutes the valid and legally
binding obligation of the Borrower, enforceable in accordance with its terms.

         Section 3.3   Properties, Priority of Liens.

         The liens which have been created and granted by the Pledge Agreement
constitute valid, first liens on the properties and assets covered by the Pledge
Agreement, subject to no prior or equal lien.

         Section 3.4   No Defaults, Compliance with Laws.

         The Borrower is not in default in any material respect under any
agreement, ordinance, resolution, decree, bond, note, indenture, order or
judgement to which it is a party or by which it is bound, or any other agreement
or other instrument by which any of the properties or assets owned by it is
materially affected.

         Section 3.5   Purchase of Common Stock.

         Upon consummation of any purchase of Common Stock by the Borrower with
the proceeds of the Loan, the Borrower shall acquire valid, legal and marketable
title to all of the Common Stock so purchased, free and clear of any liens,
other than a pledge to the Lender of the Common Stock so purchased pursuant to
the Pledge Agreement. Neither the execution and delivery of the Loan Documents
nor the performance of any obligation thereunder violates any provisions of law
or conflicts with or results in a breach of or creates (with or without the
giving of notice of lapse of time, or both) a default under any agreement to
which the Borrower is a party or by which it is bound

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or any of its properties is affected. No consent of any federal, state, or local
governmental authority, agency, or other regulatory body, the absence of which
could have a materially adverse effect on the Borrower or the Trustee, is or was
required to be obtained in connection with the execution, delivery, or
performance of the Loan Documents and the transaction contemplated therein or in
connection therewith, including without limitation, with respect to the transfer
of the shares of Common Stock purchased with the proceeds of the Loan pursuant
thereto.

         Section 3.6   ESOP; Contributions.

         As of the effective date of the ESOP sponsor's reorganization, the ESOP
and the Borrower will be duly created, organized and maintained by the ESOP
sponsor in compliance with all applicable laws, regulations and rulings. The
ESOP will qualify as an "employee stock ownership plan" as defined in section
4975(e)(7) of the Code. The ESOP provides that the ESOP sponsor may make
contributions to the ESOP in an amount necessary to enable the Trustee to
amortize the Loan in accordance with the terms of the Promissory Note; provided,
however, that no such contributions shall be required if they would adversely
affect the qualification of the ESOP under section 401(a) of the Code.

         Section 3.7   Trustee.

         The trustees of the ESOP have been duly appointed by the ESOP sponsor.

         Section 3.8   Compliance with Laws; Actions.

         Neither the execution and delivery by the Borrower of this Loan
Agreement or any instruments required thereby, nor compliance with the terms and
provisions of any such documents by the lender, constitutes a violation of any
provision of any law or any regulation, order, writ, injunction or decree or any
court or governmental instrumentality, or an event of default under any
agreement, to which the Borrower is a party of which the Borrower is bound or to
which the Borrower is subject, which violation or event of default would have a
material adverse effect on the Borrower. There is no action or proceeding
pending or threatened against either the ESOP or the Borrower before any court
or administrative agency.

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                                   ARTICLE IV

                  REPRESENTATIONS AND WARRANTIES OF THE LENDER

         The Lender hereby represents and warrants to the Borrower as follows:

         Section 4.1   Power, Authority, Consents.

         The Lender has the power to execute, deliver and perform this Loan
Agreement, the Pledge Agreement and all documents executed by the Lender in
connection with the Loan, all of which have been duly authorized by all
necessary and proper corporate or other action. No consent, authorization or
approval or other action by any governmental authority or regulatory body, and
no notice by the Lender to, or filing by the Lender with any governmental
authority or regulatory body is required for the due execution, delivery and
performance of this Loan Agreement.

         Section 4.2   Due Execution, Validity, Enforceability.

         This Loan Agreement and the Pledge Agreement have been duly executed
and delivered by the Lender, and each constitutes a valid and legally binding
obligation of the Lender, enforceable in accordance with its terms.

                                    ARTICLE V

                                EVENTS OF DEFAULT

         Section 5.1   Events of Default under Loan Agreement.

         Each of the following events shall constitute an "Event of Default"
hereunder:

         (a)   Failure to make any payment or mandatory prepayment of principal
of the Promissory Note when due, or failure to make any payment of interest on
the Promissory Note not later than five (5) Business Days after the date when
due.

         (b)   Failure by the Borrower to perform or observe any term, condition
or covenant of this Loan Agreement or of any of the other Loan Documents,
including without limitation, the Promissory Note and the Pledge Agreement.

         (c)   Any representation or warranty made in writing to the Lender in
any of the Loan Documents, or any certificate, statement or report made or
delivered in compliance with this Loan Agreement, shall have been false or
misleading in any material respect when made or delivered.

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         Section 5.2   Lender's Rights upon Event of Default.

         If an Event of Default under this Loan Agreement shall occur and be
continuing, the Lender shall have no rights to assets of the Borrower other
than: (a) contributions (other than contributions of Common Stock) that are made
by the ESOP sponsor to enable the Borrower to meet its obligations pursuant to
this Loan Agreement and earnings attributable to the investment of such
contributions and (b) "Eligible Collateral" (as defined in the Pledge
Agreement); provided, however, that; (i) the value of the Borrower's assets
transferred to the Lender following an Event of Default in satisfaction of the
due and unpaid amount of the Loan shall not exceed the amount in default
(without regard to amounts owing solely as a result of any acceleration of the
Loan); (ii) the Borrower's assets shall be transferred to the Lender following
an Event of Default only to the extent of the failure of the Borrower to meet
the payment schedule of the Loan; and (iii) all rights of the Lender to the
Common Stock purchased with the proceeds of the Loan covered by the Pledge
Agreement following an Event of Default shall be governed by the terms of the
Pledge Agreement.

                                   ARTICLE VI

                            Miscellaneous Provisions

         Section 6.1   Payments Due to the Lender.

         If any amount is payable by the Borrower to the Lender pursuant to any
indemnity obligation contained herein, then the Borrower shall pay, at the time
or times provided therefor, any such amount and shall indemnify the Lender
against and hold it harmless from any loss of damage resulting from or arising
out of the nonpayment or delay in payment of any such amount. If any amounts as
to which the Borrower has so indemnified the Lender hereunder shall be assessed
or levied against the Lender, the Lender may notify the Borrower and make
immediate payment thereof, together with interest or penalties in connection
therewith, and shall thereupon be entitled to and shall receive immediate
reimbursement therefor from the Borrower together with interest on each such
amount as provided in section 2.2(c). Notwithstanding any other provision
contained in this Loan Agreement, the covenants and agreements of the Borrower
contained in this section 6.1 shall survive: (a) payment of the Promissory Note
and (b) termination of this Loan Agreement.

         Section 6.2   Payments.

         All payments hereunder and under the Promissory Note shall be made
without set-off or counterclaim and in such amounts as may be necessary in order
that all such payments shall not be less than the amounts otherwise specified to
be paid under this Loan Agreement and the Promissory Note, subject to any
applicable tax withholding requirements. Upon payment in full of the Promissory
Note, the Lender shall mark such Promissory Note "Paid" and return it to the
Borrower.

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         Section 6.3   Survival.

         All agreements, representations and warranties made herein shall
survive the delivery of this Loan Agreement and the Promissory Note.

         Section 6.4   Modifications, Consents and Waivers; Entire Agreement.

         No modification, amendment or waiver of or with respect to any
provision of this Loan Agreement, the Promissory Note, the Pledge Agreement, or
any of the other Loan Documents, nor consent to any departure from any of the
terms or conditions thereof, shall in any event be effective unless it shall be
in writing and signed by the party against whom enforcement thereof is sought.
Any such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. No consent to or demand on a party in any case
shall, of itself, entitle it to any other or further notice or demand in similar
or other circumstances. This Loan Agreement embodies the entire agreement and
understanding between the Lender and the Borrower and supersedes all prior
agreements and understandings relating to the subject matter hereof.

         Section 6.5   Remedies Cumulative.

         Each and every right granted to the Lender hereunder or under any other
document delivered hereunder or in connection herewith, or allowed it by law or
equity, shall be cumulative and may be exercised from time to time. No failure
on the part of the Lender or the holder of the Promissory Note to exercise, and
no delay in exercising, any right shall operate as a waiver thereof, nor shall
any single or partial exercise of any right preclude any other or future
exercise thereof or the exercise of any other right. The due payment and
performance of the obligations under the Loan Documents shall be without regard
to any counterclaim, right of offset or any other claim whatsoever which the
Borrower may have against the Lender and without regard to any other obligation
of any nature whatsoever which the Lender may have to the Borrower, and no such
counterclaim or offset shall be asserted by the Borrower in any action, suit or
proceeding instituted by the Lender for payment or performance of such
obligations.

         Section 6.6   Further Assurances; Compliance with Covenants.

         At any time and from time to time, upon the request of the Lender, the
Borrower shall execute, deliver and acknowledge or cause to be executed,
delivered and acknowledged, such further documents and instruments and do such
other acts and things as the Lender may reasonably request in order to fully
effect the terms of this Loan Agreement, the Promissory Note, the Pledge
Agreement, the other Loan Documents and any other agreements, instruments and
documents delivered pursuant hereto or in connection with the Loan.

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         Section 6.7   Notices.

         Except as otherwise specifically provided for herein, all notice,
requests, reports and other communications pursuant to this Loan Agreement shall
be in writing, either by letter (delivered by hand or commercial messenger
service or sent by registered or certified mail, return receipt requested,
except for routine reports delivered in compliance with Article VI hereof which
may be sent by ordinary first-class mail) or telex or telecopier addressed as
follows:

         (a)           If to the Borrower:

                       Jefferson Federal Bank
                       Employee Stock Ownership Plan and Trust
                       c/o

         (b)           If to the Lender:

                       Jefferson Bancshares, Inc.
                       c/o Anderson L. Smith
                       120 Evans Avenue
                       Morristown, Tennessee

Any notice, request or communication hereunder shall be deemed to have been
given on the day on which it is delivered by hand or by commercial messenger
service, or sent by telex or telecopier, to such party at its address specified
above, or, if sent by mail, on the third Business Day after the day deposited in
the mail, postage prepaid, addressed as aforesaid. Any party may change the
person or address to whom or which notices are to be given hereunder, by notice
duly given hereunder; provided, however, that any such notice shall be deemed to
have been given only when actually received by the party to whom it is
addressed.

         Section 6.8   Counterparts.

         This Loan Agreement may be signed in any number of counterparts which,
when taken together, shall constitute one and the same document.

         Section 6.9   Construction; Governing Law.

         The headings used in the table of contents and in this Loan Agreement
are for convenience only and shall not be deemed to constitute a part hereof.
All uses herein of any gender or of singular or plural terms shall be deemed to
include uses of the other genders or plural or singular terms, as the context
may require. All references in this Loan Agreement of an Article or section
shall be to an Article or section of this Loan Agreement, unless otherwise
specified. This Loan Agreement, the Promissory Note, the Pledge Agreement and
the other Loan Documents shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Tennessee

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         Section 6.10  Severability.

         Wherever possible, each provision of this Loan Agreement shall be
interpreted in such manner as to be effective and valid under applicable law;
however, the provisions of this Loan Agreement are severable, and if any clause
of provision hereof shall be held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such clause or provision, or part thereof, in such jurisdiction and shall not in
any manner affect such clause or provision in any other jurisdiction, or any
other clause or provisions in this Loan Agreement in any jurisdiction. Each of
the covenants, agreements and conditions contained in this Loan Agreement
independent, and compliance by a party with any of them shall not excuse
non-compliance by such party with any other. The Borrower shall not take any
action the effect of which shall constitute a breach or violation of any
provision of this Loan Agreement.

         Section 6.11  Binding Effect: No Assignment or Delegation.

         This Loan Agreement shall be binding upon and inure to the benefit of
the Borrower and its successors and the Lender and its successors and assigns.
The rights and obligations of the Borrower under this Agreement shall not be
assigned or delegated without the prior written consent of the Lender, and any
purported assignment or delegation without such consent shall be void.

         IN WITNESS WHEREOF, the parties have caused this Loan Agreement to be
executed as of the date first written above.

                                       JEFFERSON FEDERAL BANK
                                       EMPLOYEE STOCK OWNERSHIP PLAN TRUST

                                       ______________________________________

                                       JEFFERSON BANCSHARES, INC.

                                       By: __________________________________
                                           Anderson L. Smith
                                           President and Chief Executive Officer

                                       12

<PAGE>

                                PLEDGE AGREEMENT

         THIS PLEDGE AGREEMENT ("Pledge Agreement") is made as of the ________
day of _________________________, 2003, by and between the JEFFERSON FEDERAL
BANK EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Pledgor"), and JEFFERSON BANCSHARES,
INC. ("Pledgee").

                               W I T N E S S E T H

         WHEREAS, this Pledge Agreement is being executed and delivered to the
Pledgee pursuant to the terms of a Loan Agreement ("Loan Agreement"), by and
between the Pledgor and the Pledgee;

         NOW, THEREFORE, in consideration of the mutual agreements contained
herein and in the Loan Agreement, the parties hereto do hereby covenant and
agree as follows:

         Section 1. Definitions. The following definitions shall apply for
purposes of this Pledge Agreement, except to the extent that a different meaning
is plainly indicated by the context; all capitalized terms used but not defined
herein shall have the respective meanings assigned to them in the Loan
Agreement:

         Collateral shall mean the Pledged Shares and, subject to section 5
hereof, and to the extent permitted by applicable law, all rights with respect
thereto, and all proceeds of such Pledged Shares and rights.

         ESOP shall mean the Jefferson Federal Bank Employee Stock Ownership
Plan.

         Event of Default shall mean an event so defined in the Loan Agreement.

         Liabilities shall mean all the obligations of the Pledgor to the
Pledgee, howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, now or hereafter existing, or due or to become due,
under the Loan Agreement and the Promissory Note.

         Pledged Shares shall mean all the Shares of Common Stock of the Pledgee
purchased by the Pledgor with the proceeds of the loan made by the Pledgee to
the Pledgor pursuant to the Loan Agreement, but excluding any such shares
previously released pursuant to section 4.

         Section 2. Pledge. To secure the payment of and performance of all the
Liabilities, the Pledgor hereby pledges to the Pledgee, and grants to the
Pledgee, a security interest in, and lien upon, the Collateral.

         Section 3. Representations and Warranties of the Pledgor. The Pledgor
represents, warrants, and covenants to the Pledgee as follows:

         (a)   the execution, delivery and performance of this Pledge Agreement
and the pledging

<PAGE>

of the Collateral hereunder do not and will not conflict with, result in a
violation of, or constitute a default under, any agreement binding upon the
Pledgor;

         (b)   the Pledged Shares are and will continue to be owned by the
Pledgor free and clear of any liens or rights of any other person except the
lien hereunder and under the Loan Agreement in favor of the Pledgee, and the
security interest of the Pledgee in the Pledged Shares and the proceeds thereof
is and will continue to be prior to and senior to the rights of all others;

         (c)   this Pledge Agreement is the legal, valid, binding and
enforceable obligation of the Pledgor in accordance with its terms;

         (d)   the Pledgor shall, from time to time, upon request of the
Pledgee, promptly deliver to the Pledgee such stock powers, proxies, and similar
documents, satisfactory in form and substance to the Pledgee, with respect to
the Collateral as the Pledgee may reasonably request; and

         (e)   subject to the first sentence of section 4(b), the Pledgor shall
not, so long as any Liabilities are outstanding, sell, assign, exchange, pledge
or otherwise transfer or encumber any of its rights in and to any of the
Collateral.

         Section 4.  Eligible Collateral.

         (a)   As used herein the term "Eligible Collateral" shall mean the
amount of Collateral which has an aggregate fair market value equal to the
amount by which the Pledgor is in default (without regard to any amounts owing
solely as the result of an acceleration of the Loan Agreement) or such lesser
amount of Collateral as may be required pursuant to section 13 of this Pledge
Agreement.

         (b)   The Pledged Shares shall be released from this Pledge Agreement
in a manner conforming to the requirements of Treasury Regulations Section
54.4975-7(b)(8), as the same may be from time to time amended or supplemented,
and the applicable provisions of the ESOP. Subject to such Regulations, the
Pledgee may from time to time, after any Default or Event of Default, and
without prior notice to the Pledgor, transfer all or any part of the Eligible
Collateral in the name of the Pledgee or its nominee, without disclosing that
such Eligible Collateral is subject to any rights of the Pledgor and may from
time to time, whether before or after any of the Liabilities shall become due
and payable, without notice to the Pledgor, take all or any of the following
actions: (i) notify the parties obligated on any of the Eligible Collateral to
make payment to the Pledgee of any amounts due or due to become due thereunder,
(ii) release or exchange all or any part of the Eligible Collateral, or
compromise or extend or renew for any period (whether or not longer than the
original period) any obligations of any nature of any party with respect
thereto, and (iii) take control of any proceeds of the Eligible Collateral.

                                       2

<PAGE>

         Section 5.  Delivery.

         (a)   The Pledgor shall deliver to the Pledgee upon execution of this
Pledge Agreement (i) either (A) certificates for the Pledged Shares, each
certificate duly signed in blank by the Pledgor or accompanied by a stock
transfer power duly signed in blank by the Pledgor and each such certificate
accompanied by all required documentary or stock transfer tax stamps or (B) if
the Trustee does not yet have possession of the Pledged Shares, an assignment by
the Pledgor of all the Pledgor's rights to and interest in the Pledged Shares
and (ii) an irrevocable proxy, in form and substance satisfactory to the
Pledgee, signed by the Pledgor with respect to the Pledged Shares.

         (b)   So long as no Default or Event of Default shall have occurred and
be continuing, (i) the Pledgor shall be entitled to exercise any and all voting
and other rights pertaining to the Collateral or any part thereof for any
purpose not inconsistent with the terms of this Pledge Agreement, and (ii) the
Pledgor shall be entitled to receive any and all cash dividends or other
distributions paid in respect of the Collateral.

         Section 6.  Events of Default.

         (a)   If a Default or Event Default shall be existing, in addition to
the rights it may have under the Loan Agreement, the Promissory Note, and this
Pledge Agreement, or by virtue of any other instrument, (i) the Pledgee may
exercise, with respect to the Eligible Collateral, from time to time, any rights
and remedies available to it under the Uniform Commercial Code as in effect from
time to time in the State of Connecticut or otherwise available to it and (ii)
the Pledgee shall have the right, for and in the name, place and stead of the
Pledgor, to execute endorsement, assignments, stock powers and other instruments
of conveyance or transfer with respect to all or any of the Eligible Collateral.
Written notification of intended disposition of any of the Eligible Collateral
shall be given by the Pledgee to the Pledgor at least three (3) Business Days
before such disposition. Subject to section 13 below, any proceeds of any
disposition of Eligible Collateral may be applied by the Pledgee to the payment
of expenses in connection with the Eligible Collateral, including, without
limitation, reasonable attorneys' fees and legal expenses, and any balance of
such proceeds may be applied by the Pledgee toward the payment of such of the
Liabilities as are in Default, and in such order of application, as the Pledgee
may from time to time elect. No action of the Pledgee permitted hereunder shall
impair or affect its rights in and to the Eligible Collateral. All rights and
remedies of the Pledgee expressed hereunder are in addition to all other rights
and remedies possessed by it, including, without limitation, those contained in
the documents referred to in the definition of Liability in section 1 hereof.

         (b)   In any sale of any of the Eligible Collateral after a Default or
an Event of Default shall have occurred, the Pledgee is hereby authorized to
comply with any limitation or restriction in connection with such sale as it may
be advised by counsel if necessary in order to avoid violation of applicable law
(including, without limitation, compliance with such procedures as may restrict
the number of prospective bidders and purchasers or further restrict such
prospective bidders or purchasers to persons who will represent and agree that
they are purchasing for their own account

                                       3

<PAGE>

for investment and not with a view to the distribution or resale of such
Eligible Collateral), or in order to obtain such required approval of the sale
or of the purchase by any governmental regulatory authority or official, and the
Pledgor further agrees that such compliance shall not result in such sale's
being considered or deemed not to have been made in a commercially reasonable
manner, nor shall the Pledgee be liable or accountable to the Pledgor for any
discount allowed by reason of the fact that such Eligible Collateral is sold in
compliance with any such limitation or restriction.

         Section 7.  Payment in Full. Upon the payment in full of all
outstanding Liabilities, this Pledge Agreement shall terminate and the Pledgee
shall forthwith assign, transfer and deliver to the Pledgor, against receipt and
without recourse to the Pledgee, all Collateral then held by the Pledgee
pursuant to the Pledge Agreement.

         Section 8.  No Waiver. No failure or delay in the part of the Pledgee
in exercising any right or remedy hereunder or under any other document which
confers or grants any rights to the Pledgee in respect of the Liabilities shall
operate as a waiver thereof nor shall any single or partial exercise of any such
rights or remedy preclude any other or further exercise thereof or the exercise
of any other right or remedy of the Pledgee.

         Section 9.  Binding Effect; No Assignment or Delegation. This Pledge
Agreement shall be binding upon and inure to the benefit of the Pledgor, the
Pledgee and their respective successors and assigns, except that the Pledgor may
not assign or transfer its rights hereunder without the prior written consent of
the Pledgee (which consent shall not unreasonably be withheld). Each duty or
obligation of the Pledgor to the Pledgee pursuant to the provisions of this
Pledge Agreement shall be performed in favor of any person or entity designated
by the Pledgee, and any duty or obligation of the Pledgee to the Pledgor may be
performed by any other person or entity designated by the Pledgee.

         Section 10. Governing Law. This Pledge Agreement shall be governed by
and construed in accordance with the laws of the State of Tennessee applicable
to agreements to be performed wholly within the State of Tennessee.

         Section 11. Notices. All notices, requests, instructions or documents
hereunder shall be in writing and delivered personally or sent by United States
mail, registered or certified, return receipt requested, with proper postage
prepaid as follows:

                                       4

<PAGE>

                  (a)      If to the Pledgee:
                           Jefferson Bancshares, Inc.
                           c/o Anderson L. Smith
                           120 Evans Avenue
                           Morristown, Tennessee

                  (b)      If to the Pledgor:
                           Jefferson Federal Bank
                           Employee Stock Ownership Plan Trust
                           c/o

or at such other address as either of the parties may designate by written
notice to the other party. If delivered personally, the date on which a notice,
request, instruction or document is delivered shall be the date on which such
delivery is made, and, if delivered by mail, the date on which such notice,
request, instruction, or document is deposited in the mail shall be the date of
delivery. Each notice, request, instruction or document shall bear the date on
which it is delivered.

         Section 12. Interpretation. Wherever possible each provision of this
Pledge Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision herein shall be prohibited by
or invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions hereof.

         Section 13. Construction. All provisions hereof shall be construed so
as to maintain (a) the ESOP as a qualified leveraged employee stock ownership
plan under section 401(a) and 4975(e)(7) of the Internal Revenue Code of 1986
(the "Code"), (b) the Trust as exempt from taxation under section 501(a) of the
Code and (c) the Trust Loan as an exempt loan under section 54.4975-7(b) of the
Treasury Regulations and as described in Department of Labor Regulation section
2550.408b-3.

                                       5

<PAGE>

         IN WITNESS WHEREOF, this Pledge Agreement has been duly executed by the
parties hereto as of the day and year first above written.

                                    JEFFERSON FEDERAL BANK
                                    EMPLOYEE STOCK OWNERSHIP PLAN TRUST

                                    __________________________________________

                                    JEFFERSON BANCSHARES, INC.

                                    By:___________________________________
                                       Anderson L. Smith
                                       President and Chief Executive Officer

                                       6

<PAGE>

                                 PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, JEFFERSON FEDERAL BANK EMPLOYEE STOCK
OWNERSHIP PLAN TRUST (the "Borrower"), hereby promises to pay to the order of
JEFFERSON BANCSHARES, INC. (the "Lender") up to $6,912,970 payable in accordance
with the Loan Agreement made and entered into between the Borrower and the
Lender of even date herewith ("Loan Agreement") pursuant to which this
Promissory Note is issued.

         The Principal Amount of this Promissory Note shall be payable in
accordance with the schedule attached hereto ("Schedule I").

         This Promissory Note shall bear interest at the rate per annum set for
or established under the Loan Agreement, such interest to be payable in
accordance with Schedule I.

         Anything herein to the contrary notwithstanding, the obligation of the
Borrower to make payments of interest shall be subject to the limitation that
payments of interest shall not be required to be made to the Lender to the
extent that the Lender's receipt thereof would not be permissible under the law
or laws applicable to the Lender limiting rates on interest which may be charged
or collected by the Lender. Any such payments on interest which are not made as
a result of the limitation referred to in the preceding sentence shall be made
by the Borrower to the Lender on the earliest interest payment date or dates on
which the receipt thereof would be permissible under the laws applicable to the
Lender limiting rates of interest which may be charged or collected by the
Lender. Such deferred interest shall not bear interest.

         Payments of both principal and interest on this Promissory Note are to
be made at the principal office of the Lender or such other place as the holder
hereof shall designate to the Borrower in writing, in lawful money of the United
States of America in immediately available funds.

         Failure to make any payments of principal on this Promissory Note when
due, or failure to make any payment of interest on this Promissory Note not
later than five (5) Business Days after the date when due, shall constitute a
default hereunder, whereupon the principal amount of accrued interest on this
Promissory Note shall immediately become due and payable in accordance with the
terms of the Loan Agreement.

         This Promissory Note is secured by a Pledge Agreement between the
Borrower and the Lender of even date herewith and is entitled to the benefits
thereof.

                                        JEFFERSON FEDERAL BANK
                                         EMPLOYEE STOCK OWNERSHIP PLAN TRUST

                                        ______________________________<PAGE>

                                                                    Exhibit 10.3

                              EMPLOYMENT AGREEMENT

     THIS AGREEMENT (the "Agreement"), made this 1/st/ day of January, 2003, by
and among JEFFERSON BANCSHARES, M.H.C. (the "Company"), JEFFERSON FEDERAL
SAVINGS AND LOAN ASSOCIATION (the "Association") and ANDERSON L. SMITH
("Executive").

                               W I T N E S S E T H

     WHEREAS, Executive serves in a position of substantial responsibility;

     WHEREAS, the Company and the Association wish to assure the services of
Executive for the period provided in this Agreement; and

     WHEREAS, Executive is willing to serve in the employ of the Association on
a full-time basis for said period.

     NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:

     1.   Employment. Executive is employed as the President and Chief Executive
Officer and of the Company and the Association. Executive shall perform all
duties and shall have all powers which are commonly incident to the offices of
President and Chief Executive Officer and which, consistent with those offices,
are delegated to him by the Chairman of the Board of Directors of the
Association and the Company.

     2.   Location and Facilities. The Executive will be furnished with the
working facilities and staff customary for executive officers with the title and
duties set forth in Section 1 and as are necessary for him to perform his
duties. The location of such facilities and staff shall be at the principal
administrative offices of the Company and the Association, or at such other site
or sites customary for such offices.

     3.   Term.

     a.   The term of this Agreement shall be (i) the initial term, consisting
          of the period commencing on the date of this Agreement (the "Effective
          Date") and ending on the third anniversary of the Effective Date, plus
          (ii) any and all extensions of the initial term made pursuant to this
          Section 3.

     b.   Commencing on the first year anniversary date of this Agreement, and
          continuing on each anniversary thereafter, the disinterested members
          of the boards of directors of the Association and the Company may
          extend the Agreement an additional year such that the remaining term
          of the Agreement shall be thirty-six (36) months, unless Executive
          elects not to extend the term of this Agreement by giving written
          notice in accordance with Section 19 of this Agreement. The Board of
          Directors of the Association (the "Board") will review the Agreement
          and Executive's performance annually for purposes of determining
          whether to extend the Agreement and the rationale and results thereof
          shall be included in the minutes of the Board's meeting. The Board of
          Directors of the Association shall give notice to Executive as soon as
          possible after such review as to whether the Agreement is to be
          extended.

<PAGE>

     4.   Base Compensation.

     a.   The Company and the Association agree to pay the Executive during the
          term of this Agreement a base salary at the rate of $165,000.00 per
          year, payable in accordance with customary payroll practices.

     b.   The Board shall review annually the rate of the Executive's base
          salary based upon factors they deem relevant, and may maintain or
          increase his salary, provided that no such action shall reduce the
          rate of salary below the rate in effect on the Effective Date.

     c.   In the absence of action by the Board, the Executive shall continue to
          receive salary at the annual rate specified on the Effective Date or,
          if another rate has been established under the provisions of this
          Section 4, the rate last properly established by action of the Board
          under the provisions of this Section 4.

     5.   Bonuses. In lieu of any bonus normally provided to permanent full-time
employees of the Association, the Association agrees to provide a bonus program
to the Executive which will provide the Executive with the opportunity to earn
up to 50% of the Executive's base salary, on an annual basis, the amount of
which shall be determined by specific performance standards and a formula agreed
to by Executive and the Association annually. Performance standards shall be
measured on a calendar year, and no bonus shall be payable if Executive is not
employed on December 31 of the year in question; provided, however, in the event
of death of the Executive, the bonus for the calendar year of Executive's death
shall be prorated on a quarterly basis, using the information for the quarter(s)
completed prior to Executive's death.

     6.   Benefit Plans. The Executive shall be entitled to participate in such
life insurance, medical, dental, pension, profit-sharing, retirement and
stock-based compensation plans and other programs and arrangements as may be
approved from time to time by the Company and the Association for the benefit of
their employees. In addition, during the term of this Agreement, the Association
shall provide the Executive with a supplemental life insurance policy with a
death benefit of not less than $350,000. Notwithstanding the termination of this
Agreement for any reason, other than upon the Executive's termination for Cause,
the Association further agrees that the Executive shall receive a supplemental
retirement benefit of $15,083 per year, beginning during the calendar year in
which the Executive attains age 65 and continuing for a total of fifteen (15)
years.

     7.   Vacation and Leave.

     a.   The Executive shall be entitled to vacations and other leave in
          accordance with policy for senior executives, or otherwise as approved
          by the Board, but, in any event, not less than four (4) weeks vacation
          annually.

     b.   In addition to paid vacations and other leave, the Executive shall be
          entitled, without loss of pay, to absent himself voluntarily from the
          performance of his employment for such additional periods of time and
          for such valid and legitimate reasons as the Board may in its
          discretion determine. Further, the Board may grant to the Executive a
          leave or leaves of absence, with or without pay, at such time or times
          and upon such terms and conditions as the Board in its discretion may
          determine.

                                       2

<PAGE>

     8.   Expense Payments and Reimbursements. The Executive shall be reimbursed
for all reasonable out-of-pocket business expenses that he shall incur in
connection with his services under this Agreement upon substantiation of such
expenses in accordance with applicable policies of the Company and the
Association. In addition, Executive shall receive an allowance of $2,400 per
year for dues in professional, social and civic organizations.

     9.   Automobile Allowance. During the term of this Agreement, the Executive
shall be entitled to an annual automobile allowance of $12,000, payable in equal
monthly installments. Executive shall comply with reasonable reporting and
expense limitations on the use of such automobile as may be established by the
Company or the Association from time to time, and the Company or the Association
shall annually include on Executive's Form W-2 any amount of income attributable
to Executive's personal use of such automobile.

     10.  Loyalty and Confidentiality; Noncompetition.

     a.   During the term of this Agreement, Executive: (i) shall devote all his
          time, attention, skill, and efforts to the faithful performance of his
          duties hereunder; provided, however, that from time to time, Executive
          may serve on the boards of directors of, and hold any other offices or
          positions in, companies or organizations which will not present any
          conflict of interest with the Company and the Association or any of
          their subsidiaries or affiliates, unfavorably affect the performance
          of Executive's duties pursuant to this Agreement, or violate any
          applicable statute or regulation and (ii) shall not engage in any
          business or activity contrary to the business affairs or interests of
          the Company and the Association.

     b.   Nothing contained in this Agreement shall prevent or limit Executive's
          right to invest in the capital stock or other securities of any
          business dissimilar from that of the Company and the Bank, or, solely
          as a passive, minority investor, in any business.

     c.   Executive agrees to maintain the confidentiality of any and all
          information concerning the operation or financial status of the
          Company and the Association; the names or addresses of any of its
          borrowers, depositors and other customers; any information concerning
          or obtained from such customers; and any other information concerning
          the Company and the Association to which he may be exposed during the
          course of his employment. The Executive further agrees that, unless
          required by law or specifically permitted by the Board in writing, he
          will not disclose to any person or entity, either during or subsequent
          to his employment, any of the above-mentioned information which is not
          generally known to the public, nor shall he employ such information in
          any way other than for the benefit of the Company and the Association.

     d.   Upon the termination of Executive's employment hereunder for any
          reason, Executive agrees not to compete with the Association for a
          period of two (2) years following such termination in any city, town
          or county in which the Executive's normal business office is located
          and the Association has an office or has filed an application for
          regulatory approval to establish an office (or within a 60-mile radius
          of each of such offices), determined as of the effective date of such
          termination, except as agreed to pursuant to a resolution duly adopted
          by the Board. Executive agrees that during such period and within said
          cities, towns and counties, Executive shall not work for or advise,
          consult or otherwise serve with, directly or indirectly, any entity
          whose business materially competes with the depository,

                                       3

<PAGE>

lending or other business activities of the Association. The parties hereto,
recognizing that irreparable injury will result to the Association, its business
and property in the event of Executive's breach of his obligations under this
paragraph and agree that in the event of any such breach by Executive, the
Association, will be entitled, in addition to any other remedies and damages
available, to an injunction to restrain the violation hereof by Executive,
Executive's partners, agents, servants, employees and all persons acting for or
under the direction of Executive. Nothing herein will be construed as
prohibiting the Association from pursuing any other remedies available to the
Association for such breach or threatened breach, including the recovery of
damages from Executive.

     11.  Termination and Termination Pay. Subject to Section 12 of this
Agreement, Executive's employment under this Agreement may be terminated in the
following circumstances:

     a.   Death. Executive's employment under this Agreement shall terminate
          upon his death during the term of this Agreement, in which event
          Executive's estate shall be entitled to receive the compensation due
          to the Executive through the last day of the calendar month in which
          his death occurred.

     b.   Retirement. This Agreement shall be terminated upon Executive's
          retirement under the retirement benefit plan or plans in which he
          participates pursuant to Section 6 of this Agreement or otherwise.

     c.   Disability.

          i.   The Board or Executive may terminate Executive's employment after
               having determined Executive has a Disability. For purposes of
               this Agreement, "Disability" means a physical or mental infirmity
               that impairs Executive's ability to substantially perform his
               duties under this Agreement and that results in Executive
               becoming eligible for long-term disability benefits under any
               long-term disability plans of the Company and the Association
               (or, if there are no such plans in effect, that impairs
               Executive's ability to substantially perform his duties under
               this Agreement for a period of one hundred eighty (180)
               consecutive days). The Board shall determine whether or not
               Executive is and continues to be permanently disabled for
               purposes of this Agreement in good faith, based upon competent
               medical advice and other factors that they reasonably believe to
               be relevant. As a condition to any benefits, the Board may
               require Executive to submit to such physical or mental
               evaluations and tests as it deems reasonably appropriate.

          ii.  In the event of such Disability, Executive's obligation to
               perform services under this Agreement will terminate. The
               Association will pay Executive, as Disability pay, an amount
               equal to seventy-five (75) percent of Executive's weekly rate of
               base salary in effect as of the date of his termination of
               employment due to Disability. Disability payments will be made on
               a monthly basis and will commence on the first day of the month
               following the effective date of Executive's termination of
               employment for Disability and end on the earlier of: (A) the date
               he returns to full-time employment at the Association in the same
               capacity as he was employed prior to his termination for
               Disability; (B) his death; or (C) the remaining term of the
               Agreement (if the Agreement had not been earlier terminated by
               the Executive's

                                       4

<PAGE>

               Disability). Such payments shall be reduced by the amount of any
               short- or long-term disability benefits payable to the Executive
               under any other disability programs sponsored by the Company and
               the Association. In addition, during any period of Executive's
               Disability, Executive and his dependents shall, to the greatest
               extent possible, continue to be covered under all benefit plans
               (including, without limitation, retirement plans and medical,
               dental and life insurance plans) of the Company and the
               Association, in which Executive participated prior to his
               Disability on the same terms as if Executive were actively
               employed by the Company and the Association.

     d.   Termination for Cause.

          i.   The Board may, by written notice to the Executive in the form and
               manner specified in this paragraph, immediately terminate his
               employment at any time, for "Cause". The Executive shall have no
               right to receive compensation or other benefits for any period
               after termination for Cause except for vested
               benefits.Termination for "Cause" shall mean termination because
               of, in the good faith determination of the Board, Executive's:

               (1)  Personal dishonesty;

               (2)  Incompetence;

               (3)  Willful misconduct;

               (4)  Breach of fiduciary duty involving personal profit;

               (5)  Intentional failure to perform duties under this Agreement;

               (6)  Willful violation of any law, rule or regulation (other than
                    traffic violations or similar offenses) that reflects
                    adversely on the reputation of the Company and the
                    Association, any felony conviction, any violation of law
                    involving moral turpitude, or any violation of a final
                    cease-and-desist order; or

               (7)  Material breach by Executive of any provision of this
                    Agreement.

          ii.  Notwithstanding the foregoing, Executive shall not be deemed to
               have been terminated for Cause by the Company and the Association
               unless there shall have been delivered to Executive a copy of a
               resolution duly adopted by the affirmative vote of three-fourths
               (3/4) of the entire membership of the Board at a meeting of such
               Board called and held for the purpose (after reasonable notice to
               Executive and an opportunity for Executive to be heard before the
               Board with counsel), of finding that in the good faith opinion of
               the Board, Executive was guilty of the conduct described above
               and specifying the particulars thereof.

     e.   Voluntary Termination by Executive. In addition to his other rights to
          terminate under this Agreement, Executive may voluntarily terminate
          employment during the term of this

                                       5

<PAGE>

     Agreement upon at least sixty (60) days prior written notice to the Board,
     in which case Executive shall receive only his compensation, vested rights
     and employee benefits up to the date of his termination.

f.        Without Cause or With Good Reason.

     i.   In addition to termination pursuant to Sections 11(a) through 11(e)
          the Board, may, by written notice to Executive, immediately terminate
          his employment at any time for a reason other than Cause (a
          termination "Without Cause") and Executive may, by written notice to
          the Board, immediately terminate this Agreement at any time within
          ninety (90) days following an event constituting "Good Reason" as
          defined below (a termination "With Good Reason").

     ii.  Subject to Section 12 of this Agreement, in the event of termination
          under this Section 11(f), Executive shall be entitled to receive a
          payment equal to the base salary (determined by reference to the
          Executive's base salary on the termination date) and bonuses
          (determined by reference to the Executive's average bonus over the
          three (3) years preceding his termination date or such lesser period
          as he was employed by the Association) that would otherwise have been
          payable over the remaining term of the Agreement. Such amount shall be
          paid in one lump sum within ten (10) calendar days of such
          termination. Also, in such event, Executive shall, for the remaining
          term of the Agreement, receive the benefits he would have received
          during the remaining term of the Agreement under any retirement
          programs (whether tax-qualified or non-qualified) in which Executive
          participated prior to his termination (with the amount of the benefits
          determined by reference to the benefits received by the Executive or
          accrued on his behalf under such programs during the twelve (12)
          months preceding his termination) and continue to participate in any
          benefit plans of the Company and the Association that provide health
          (including medical and dental), life, or similar coverage upon terms
          no less favorable than the most favorable terms provided to senior
          executives of the Company and the Association during such period. In
          the event that the Company and the Association are unable to provide
          such coverage by reason of Executive no longer being an employee, the
          Company and the Association shall provide Executive with comparable
          coverage on an individual policy basis.

     iii. "Good Reason" shall exist if, without Executive's express written
          consent, the Company and the Association materially breach any of
          their respective obligations under this Agreement. Without limitation,
          such a material breach shall be deemed to occur upon any of the
          following:

          (1)  A material reduction in Executive's responsibilities or authority
               in connection with his employment with the Company or the
               Association;

          (2)  Assignment to Executive of duties of a non-executive nature or
               duties for which he is not reasonably equipped by his skills and
               experience;

          (3)  A reduction in salary or benefits contrary to the terms of this
               Agreement, or, following a Change in Control as defined in
               Section 12 of this

                                        6

<PAGE>

                    Agreement, any reduction in salary or material reduction in
                    benefits below the amounts to which he was entitled prior to
                    the Change in Control;

               (4)  Termination of incentive and benefit plans, programs or
                    arrangements, or reduction of Executive's participation to
                    such an extent as to materially reduce their aggregate value
                    below their aggregate value as of the Effective Date; or

               (5)  A requirement that Executive relocate his principal business
                    office or his principal place of residence outside of the
                    area consisting of a twenty-five (25) mile radius from the
                    current main office and any branch of the Association, or
                    the assignment to Executive of duties that would reasonably
                    require such a relocation; or

          iv.  Notwithstanding the foregoing, a reduction or elimination of the
               Executive's benefits less than one or more benefit plans
               maintained by the Company and the Association as part of a good
               faith, overall reduction or elimination of such plans or benefits
               thereunder applicably to all participants in a manner that does
               not discriminate against Executive (except as such discrimination
               may be necessary to comply with law) shall not constitute an
               event of Good Reason or a material breach of this Agreement,
               provided that benefits of the type or to the general extent as
               those offered under such plans prior to such reduction or
               elimination are not available to other officers of the Company
               and the Association or any company that controls either of them
               under a plan or plans in or under which Executive is not entitled
               to participate.

     12.  Termination in Connection with a Change in Control.

     a.   For purposes of this Agreement, a "Change in Control" shall be deemed
          to occur on the earliest of:

          (i)  such time as any "person" (as the term is used in Sections 13(d)
               and 14(d) of the Securities Exchange Act of 1934, as amended
               ("Exchange Act")) is or becomes the "beneficial owner" (as
               defined in Rule 13d-3 under the Exchange Act), directly or
               indirectly, of voting securities of the Association representing
               25% or more of the Association's outstanding voting securities or
               the right to acquire such securities, except for any voting
               securities purchased by any employee benefit plan of the
               Association;

          (ii) such time as individuals who constitute the Board of Directors on
               the date hereof (the "Incumbent Board") cease for any reason to
               constitute at least a majority thereof, provided that any person
               becoming a director subsequent to the date hereof whose election
               was approved by a vote of at least three-quarters of the
               directors constituting the Incumbent Board (or members who were
               nominated by the

                                        7

<PAGE>

                Incumbent Board), or whose nomination for election by the
                Association's stockholders was approved by a Nominating
                Committee solely composed of members which are Incumbent Board
                members (or members nominated by the Incumbent Board), shall be,
                for purposes of this clause (iii), considered as though he or
                she were a member of the Incumbent Board;

          (iii) such time as a reorganization, merger, consolidation, or similar
                transaction occurs or is effectuated as a result of which 60% of
                shares of the common stock of the resulting entity are owned by
                persons who were not stockholders of the Association immediately
                prior to the consummation of the transaction;

          (iv)  such time as substantially all of the assets of the Association
                are sold or otherwise transferred to another corporation or
                other entity that is not controlled by the Association.

Notwithstanding anything in this Agreement to the contrary, in no event shall
(i) the conversion of the Company and the Association from the mutual holding
company form of organization to the full stock form of organization (including
without limitation, through the formation of a stock holding company as the
parent of the Association), (ii) the formation of a mid-tier holding company
controlled by the Company as the parent holding company of the Association or
(iii) the consummation of an additional offering by the Association (or any
mid-tier holding company controlled by the Company) in a transaction which
results in the Company continuing to qualify as a mutual holding company,
constitute a "Change in Control" for purposes of this Agreement.

     b.   Termination. If within the period ending two years after a Change in
          Control, (i) the Company and the Association shall terminate the
          Executive's employment Without Cause, or (ii) Executive voluntarily
          terminates his employment With Good Reason, the Company and the
          Association shall, within ten calendar days of the termination of
          Executive's employment, make a lump-sum cash payment to him equal to
          2.99 times the Executive's average Annual Compensation over the five
          (5) most recently completed calendar years ending with the year
          immediately preceding the effective date of the Change in Control (or
          such lesser number of completed calendar years as the Executive has
          been employed by the Company and the Association). In determining
          Executive's average Annual Compensation, Annual Compensation shall
          include base salary and any other taxable income, including but not
          limited to amounts related to the granting, vesting or exercise of
          restricted stock or stock option awards, commissions, bonuses (whether
          paid or accrued for the applicable period), as well as, retirement
          benefits, director or committee fees and fringe benefits paid or to be
          paid to Executive or paid for Executive's benefit during any such
          year, profit sharing, employee stock ownership plan and other
          retirement contributions or benefits, including to any tax-qualified
          plan or arrangement (whether or not taxable) made or accrued on behalf
          of Executive of such year. The cash payment made under this Section
          12(b) shall be made in lieu of any payment also required under Section
          11(f) of this Agreement because of a termination in such period.
          Executive's rights under Section 11(f) are not otherwise affected by
          this Section 12. Also, in such event, the Executive shall, for a
          thirty-six (36) month period following his termination of employment,
          receive the benefits he would have received over such period under any
          retirement programs (whether tax-qualified or nonqualified) in which
          the Executive participated prior to his termination (with the amount
          of the benefits determined by reference to the benefits received by
          the Executive or accrued on his behalf under such programs during the
          twelve (12) months preceding the Change in Control) and continue to
          participate in any benefit plans of the Company and the Association
          that provide health (including medical and dental), life, or similar
          coverage

                                        8

<PAGE>

          upon terms no less favorable than the most favorable terms provided to
          senior executives during such period. In the event that the Company
          and the Association are unable to provide such coverage by reason of
          the Executive no longer being an employee, the Company and the
          Association shall provide the Executive with comparable coverage on an
          individual policy.

     c.   The provisions of Sections 12 and Sections 14 through 25, including
          the defined terms used is such sections, shall continue in effect
          until the later of the expiration of this Agreement or two years
          following a Change in Control.

     13.  Indemnification and Liability Insurance.

     a.   Indemnification. The Company and the Association agree to indemnify
          the Executive (and his heirs, executors, and administrators), and to
          advance expenses related thereto, to the fullest extent permitted
          under applicable law and regulations against any and all expenses and
          liabilities reasonably incurred by him in connection with or arising
          out of any action, suit, or proceeding in which he may be involved by
          reason of his having been a director or Executive of the Company, the
          Association or any of their subsidiaries (whether or not he continues
          to be a director or Executive at the time of incurring any such
          expenses or liabilities) such expenses and liabilities to include, but
          not be limited to, judgments, court costs, and attorneys' fees and the
          cost of reasonable settlements, such settlements to be approved by the
          Board, if such action is brought against the Executive in his capacity
          as an Executive or director of the Company and the Association or any
          of their subsidiaries. Indemnification for expense shall not extend to
          matters for which the Executive has been terminated for Cause. Nothing
          contained herein shall be deemed to provide indemnification prohibited
          by applicable law or regulation. Notwithstanding anything herein to
          the contrary, the obligations of this Section 13 shall survive the
          term of this Agreement by a period of six (6) years.

     b.   Insurance. During the period in which indemnification of the Executive
          is required under this Section, the Company and the Association shall
          provide the Executive (and his heirs, executors, and administrators)
          with coverage under a directors' and Executives' liability policy at
          the expense of the Company and the Association, at least equivalent to
          such coverage provided to directors and senior Executives of the
          Company and the Association.

     14.  Reimbursement of Executive's Expenses to Enforce this Agreement. The
Company and the Association shall reimburse the Executive for all out-of-pocket
expenses, including, without limitation, reasonable attorneys' fees, incurred by
the Executive in connection with successful enforcement by the Executive of the
obligations of the Company and the Association to the Executive under this
Agreement. Successful enforcement shall mean the grant of an award of money or
the requirement that the Company and the Association take some action specified
by this Agreement (i) as a result of court order; or (ii) otherwise by the
Company and the Association following an initial failure of the Company and the
Association to pay such money or take such action promptly after written demand
therefor from the Executive stating the reason that such money or action was due
under this Agreement at or prior to the time of such demand.

     15.  Limitation of Benefits under Certain Circumstances. If the payments
and benefits pursuant to Section 12 of this Agreement, either alone or together
with other payments and benefits which the Executive has the right to receive
from the Company and the Association, would constitute a "parachute

                                        9

<PAGE>

payment" under Section 280G of the Code, the payments and benefits pursuant to
Section 12 shall be reduced or revised, in the manner determined by the
Executive, by the amount, if any, which is the minimum necessary to result in no
portion of the payments and benefits under Section 12 being non-deductible to
the Company and the Association pursuant to Section 280G of the Code and subject
to the excise tax imposed under Section 4999 of the Code. The determination of
any reduction in the payments and benefits to be made pursuant to Section 12
shall be based upon the opinion of the Company and the Association's independent
public accountants and paid for by the Company and the Association. In the event
that the Company, the Association and/or the Executive do not agree with the
opinion of such counsel, (i) the Company and the Association shall pay to the
Executive the maximum amount of payments and benefits pursuant to Section 12, as
selected by the Executive, which opinion indicates there is a high probability
of such payments and benefits being non-deductible to the Company and the
Association and subject to the imposition of the excise tax imposed under
Section 4999 of the Code and (ii) the Company and the Association may request,
and the Executive shall have the right to demand that they request, a ruling
from the IRS as to whether the disputed payments and benefits pursuant to
Section 12 have such consequences. Any such request for a ruling from the IRS
shall be promptly prepared and filed by the Company and the Association, but in
no event later than thirty (30) days from the date of the opinion of counsel
referred to above, and shall be subject to the Executive's approval prior to
filing, which shall not be unreasonably withheld. The Company, the Association
and the Executive agree to be bound by any ruling received from the IRS and to
make appropriate payments to each other to reflect any such rulings, together
with interest at the applicable federal rate provided for in Section 7872(f)(2)
of the Code. Nothing contained herein shall result in a reduction of any
payments or benefits to which the Executive may be entitled upon termination of
employment other than pursuant to Section 12 hereof, or a reduction in the
payments and benefits specified in Section 12 below zero.

     16.  Injunctive Relief. If there is a breach or threatened breach of
Section 10 of this Agreement, the parties agree that there is no adequate remedy
at law for such breach, and that the Company and the Association shall be
entitled to injunctive relief restraining the Executive from such breach or
threatened breach, but such relief shall not be the exclusive remedy hereunder
for such breach. The parties hereto likewise agree that the Executive, without
limitation, shall be entitled to injunctive relief to enforce the obligations of
the Company and the Association under this Agreement.

     17.  Successors and Assigns.

     a.   This Agreement shall inure to the benefit of and be binding upon any
          corporate or other successor of the Company and the Association which
          shall acquire, directly or indirectly, by merger, consolidation,
          purchase or otherwise, all or substantially all of the assets or stock
          of the Company and the Association.

     b.   Since the Company and the Association are contracting for the unique
          and personal skills of Executive, Executive shall be precluded from
          assigning or delegating his rights or duties hereunder without first
          obtaining the written consent of the Company and the Association.

     18.  No Mitigation. Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to Executive in any subsequent employment.

     19.  Notices. All notices, requests, demands and other communications in
connection with this Agreement shall be made in writing and shall be deemed to
have been given when delivered by hand or 48

                                       10

<PAGE>

hours after mailing at any general or branch United States Post Office, by
registered or certified mail, postage prepaid, addressed to the Company and/or
the Association at their principal business offices and to Executive at his home
address as maintained in the records of the Company and the Association.

     20.  No Plan Created by this Agreement. Executive, the Company and the
Association expressly declare and agree that this Agreement was negotiated among
them and that no provision or provisions of this Agreement are intended to, or
shall be deemed to, create any plan for purposes of the Employee Retirement
Income Security Act or any other law or regulation, and each party expressly
waives any right to assert the contrary. Any assertion in any judicial or
administrative filing, hearing, or process that such a plan was so created by
this Agreement shall be deemed a material breach of this Agreement by the party
making such an assertion.

     21.  Amendments. No amendments or additions to this Agreement shall be
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.

     22.  Applicable Law. Except to the extent preempted by Federal law, the
laws of the State of Tennessee shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.

     23.  Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

     24.  Headings. Headings contained herein are for convenience of reference
only.

     25.  Entire Agreement. This Agreement, together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof, other than written agreements with respect to specific plans, programs
or arrangements described in Sections 5 and 6. The parties agree that this
Agreement supercedes and replaces in its entirety the Agreement between the
Executive, the Association and the Company dated October 8, 2001.

     26.  Required Provisions. In the event any of the provisions of this
Section 26 are in conflict with the terms of this Agreement, this Section 26
shall prevail.

     a.   The Association may terminate Executive's employment at any time, but
          any termination by the Association, other than Termination for Cause,
          shall not prejudice Executive's right to compensation or other
          benefits under this Agreement. Executive shall not have the right to
          receive compensation or other benefits for any period after
          Termination for Cause as defined in Section 7 hereinabove.

     b.   If Executive is suspended from office and/or temporarily prohibited
          from participating in the conduct of the Association's affairs by a
          notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit
          Insurance Act, 12 U.S.C. (S)1818(e)(3) or (g)(1); the Association's
          obligations under this contract shall be suspended as of the date of
          service, unless stayed by appropriate proceedings. If the charges in
          the notice are dismissed, the Association may in its discretion: (i)
          pay Executive all or part of the compensation withheld

                                       11

<PAGE>

          while their contract obligations were suspended; and (ii) reinstate
          (in whole or in part) any of the obligations which were suspended.

     c.   If Executive is removed and/or permanently prohibited from
          participating in the conduct of the Association's affairs by an order
          issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit
          Insurance Act, 12 U.S.C. (S)1818(e)(4) or (g)(1), all obligations of
          the Association under this contract shall terminate as of the
          effective date of the order, but vested rights of the contracting
          parties shall not be affected.

     d.   If the Association is in default as defined in Section 3(x)(1) of the
          Federal Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1) all obligations
          of the Association under this contract shall terminate as of the date
          of default, but this paragraph shall not affect any vested rights of
          the contracting parties.

     e.   All obligations of the Association under this contract shall be
          terminated, except to the extent determined that continuation of the
          contract is necessary for the continued operation of the institution:
          (i) by the Director of the OTS (or his designee), the FDIC or the
          Resolution Trust Corporation, at the time the FDIC enters into an
          agreement to provide assistance to or on behalf of the Association
          under the authority contained in Section 13(c) of the Federal Deposit
          Insurance Act, 12 U.S.C. (S)1823(c); or (ii) by the Director of the
          OTS (or his designee) at the time the Director (or his designee)
          approves a supervisory merger to resolve problems related to the
          operations of the Association or when the Association is determined by
          the Director to be in an unsafe or unsound condition. Any rights of
          the parties that have already vested, however, shall not be affected
          by such action.

     f.   Any payments made to Executive pursuant to this Agreement, or
          otherwise, are subject to and conditioned upon compliance with 12
          U.S.C. (S)1828(k) and 12 C.F.R. Section 545.121 and any rules and
          regulations promulgated thereunder.

                                       12

<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first set forth above.

Attest:                           JEFFERSON BANCSHARES, M.H.C.

 /s/ Jack E. Campbell             By:  /s/ John F. McCrary, Jr.
---------------------------            -----------------------------------------
                                       Chairman of the Board of Directors

Attest:                           JEFFERSON FEDERAL SAVINGS AND
                                  LOAN ASSOCIATION

 /s/ Jack E. Campbell             By:  /s/ John F. McCrary, Jr.
---------------------------            -----------------------------------------
                                       Chairman of the Board of Directors

Witness:                          EXECUTIVE

 /s/ Jack E. Campbell             /s/ Anderson L. Smith
---------------------------       ----------------------------------------------
                                  Anderson L. Smith

                                       13

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