S-1

As filed with the Securities and Exchange Commission on March 21, 2003

Registration No. 333-            

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee	6035	Applied For
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(IRS Employer Identification No.)

120 Evans Avenue

Morristown, Tennessee 37814

(423) 586-8421

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Anderson L. Smith

President and Chief Executive Officer

Jefferson Bancshares, Inc.

120 Evans Avenue

Morristown, Tennessee 37814

(423) 586-8421

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Paul M. Aguggia, Esquire

Aaron M. Kaslow, Esquire

Muldoon Murphy & Faucette LLP

5101 Wisconsin Avenue, N.W.

Washington, D.C. 20016

(202) 362-0840

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

CALCULATION OF REGISTRATION FEE

Title of each Class of Securities to be Registered	Amount to be Registered	Proposed Maximum Offering Price Per Unit		Proposed Maximum Aggregate Offering Price(2)		Amount of Registration Fee
Common Stock $.01 par value	8,376,573 Shares(1)	$	10.00	$	83,765,730	$6,776
Participation Interests	(3)		—	$	1,470,000	(4	)

(1) Includes shares of common stock to be issued to Jefferson Federal Charitable Foundation, a private foundation.

(2) Estimated solely for the purpose of calculating the registration fee.

(3) In addition, pursuant to Rule 416(c) under the Securities Act, this registration statement also covers an indeterminate amount of interests to be offered or sold pursuant to the employee benefit plan described herein.

(4) The securities of Jefferson Bancshares, Inc. to be purchased by Jefferson Federal Savings and Loan Association of Morristown 401(k) Plan are included in the amount shown for common stock. Accordingly, no separate fee is required for the participation interests. In accordance with Rule 457(h) of the Securities Act, as amended, the registration fee has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such Plan.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

Prospectus Supplement

INTERESTS IN

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

EMPLOYEES’ SAVINGS & PROFIT SHARING PLAN AND TRUST

AND

OFFERING OF 147,000 SHARES OF

JEFFERSON BANCSHARES, INC.

COMMON STOCK ($.01 PAR VALUE)

This prospectus supplement relates to the offer and sale to participants in the Jefferson Federal Savings and Loan Association of Morristown Employees’ Savings & Profit Sharing Plan and Trust of participation interests and shares of common stock of Jefferson Bancshares, Inc.

The Board of Directors of Jefferson Federal has adopted a plan that will convert Jefferson Federal from the mutual holding company form of organization to stock form. As part of the conversion, Jefferson Bancshares, Inc. has been established to offer its common stock to the public under certain purchase priorities in the plan of conversion. Savings Plan participants are now permitted to direct the trustee of the Savings Plan to use their current account balances to subscribe for and purchase shares of Jefferson Bancshares, Inc. common stock through the Jefferson Bancshares, Inc. Stock Fund. Based upon the value of the Savings Plan assets as of December 31, 2002, the trustee of the Savings Plan could purchase up to 147,000 shares of Jefferson Bancshares, Inc. common stock, assuming a purchase price of $10.00 per share. This prospectus supplement relates to the election of Savings Plan participants to direct the trustee of the Savings Plan to invest all or a portion of their Savings Plan accounts in Jefferson Bancshares, Inc. common stock.

The prospectus dated             , 2003 of Jefferson Bancshares, Inc., which we have attached to this prospectus supplement, includes detailed information regarding the conversion of Jefferson Federal from the mutual holding company form to the stock form, and the financial condition, results of operations and business of Jefferson Federal. This prospectus supplement provides information regarding the Savings Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.

Please refer to “Risk Factors” beginning on page          of the prospectus.

Neither the Securities and Exchange Commission, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, nor any other state or federal agency or any state securities commission, has approved or disapproved these securities. Any representation to the contrary is a criminal offense.

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

This prospectus supplement may be used only in connection with offers and sales by Jefferson Bancshares, Inc. of interests or shares of common stock under the Savings Plan to employees of Jefferson Federal. No one may use this prospectus supplement to reoffer or resell interests or shares of common stock acquired through the Savings Plan.

You should rely only on the information contained in this prospectus supplement and the attached prospectus. Jefferson Bancshares, Inc., Jefferson Federal and the Savings Plan have not authorized anyone to provide you with information that is different.

This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock shall under any circumstances imply that there has been no change in the affairs of Jefferson Federal or the Savings Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.

The date of this Prospectus Supplement is             , 2003.

TABLE OF CONTENTS

THE OFFERING	1
Securities Offered	1
Election to Purchase Jefferson Bancshares, Inc. Common Stock in the Conversion of Jefferson Federal	1
Value of Participation Interests	1
Method of Directing Transfer	2
Time for Directing Transfer	2
Irrevocability of Transfer Direction	2
Purchase Price of Jefferson Bancshares, Inc. Common Stock	2
Nature of a Participant’s Interest in Jefferson Bancshares, Inc. Common Stock	2
Voting and Tender Rights of Jefferson Bancshares, Inc. Common Stock	2
DESCRIPTION OF THE SAVINGS PLAN	3
Introduction	3
Eligibility and Participation	3
Contributions Under the Savings Plan	3
Limitations on Contributions	4
Limitation on Employee Salary Deferral	4
Investment of Contributions	5
Benefits Under the Savings Plan	7
Withdrawals and Distributions From the Savings Plan	7
Distribution Upon Retirement or Disability	8
Distribution Upon Termination for Any Other Reason	8
Nonalienation of Benefits	8
ADMINISTRATION OF THE SAVINGS PLAN	8
Reports to Savings Plan Participants	8
Plan Administrator	9
Amendment and Termination	9
Merger, Consolidation or Transfer	9
Federal Income Tax Consequences	9
Restrictions on Resale	11
SEC Reporting and Short-Swing Profit Liability	11
LEGAL OPINION	12

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THE OFFERING

Securities Offered

The securities offered in connection with this prospectus supplement are participation interests in the Savings Plan. Assuming a purchase price of $10.00 per share, the trustee may acquire up to 147,000 shares of Jefferson Bancshares, Inc. common stock for the Jefferson Bancshares, Inc. Stock Fund. The interests offered under this prospectus supplement are conditioned on the completion of the conversion of Jefferson Federal. Your investment in the Jefferson Bancshares, Inc. Stock Fund in connection with the conversion of Jefferson Federal is also governed by the purchase priorities contained in the plan of conversion. See the “Limitations on Purchases of Shares” section of the prospectus attached to this prospectus supplement for a discussion of the purchase priorities contained in the plan of conversion.

This prospectus supplement contains information regarding the Savings Plan. The attached prospectus contains information regarding the conversion of Jefferson Federal and the financial condition, results of operations and business of Jefferson Federal. The address of the principal executive office of Jefferson Federal is 120 Evans Avenue, Morristown, Tennessee 37814. The telephone number of Jefferson Federal is 423-586-8421.

Election to Purchase Jefferson Bancshares, Inc. Common Stock in the Conversion

In connection with the conversion of Jefferson Federal, the Savings Plan will permit you to direct the trustee to transfer all or part of the funds which represent your current beneficial interest in the assets of the Savings Plan to the Jefferson Bancshares, Inc. Stock Fund. The trustee of the Savings Plan will subscribe for Jefferson Bancshares, Inc. common stock offered for sale in connection with the conversion in accordance with each participant’s direction. If there is not enough common stock in the conversion to fill all subscriptions, the common stock will be apportioned and the trustee for the Savings Plan may not be able to purchase all of the common stock you requested. In such case, the trustee will purchase shares in the open market, on your behalf, after the conversion to fulfill your initial request. Such purchases may be at prices higher than the initial public offering price.

All plan participants are eligible to direct a transfer of funds to the Jefferson Bancshares, Inc. Stock Fund. However, such directions are subject to the purchase priorities in the plan of conversion. Your order will be filled based on your status as an eligible account holder or supplemental eligible account holder in the conversion of Jefferson Federal. An eligible account holder is a depositor whose savings account(s) totaled $50.00 or more on December 31, 2001. A supplemental eligible account holder is a depositor whose savings account(s) totaled $50.00 or more on March 31, 2003. No eligible account holder or supplemental eligible account holder may purchase more than $500,000 of Jefferson Bancshares, Inc. common stock in the offering. If you fall into one of the above subscription offering categories, you have subscription rights to purchase shares of common stock in the offering and you may use funds in the Savings Plan account to pay for the shares of Jefferson Bancshares, Inc. common stock which you are eligible to purchase.

Value of Participation Interests

As of December 31, 2002, the market value of the assets of the Savings Plan equaled approximately $1,473,000. The plan administrator has informed each participant of the value of his or her beneficial interest in the Savings Plan as of                 , 2003. The value of Savings Plan assets represents past contributions to the Savings Plan on your behalf, plus or minus earnings or losses on the contributions, less previous withdrawals and loans.

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Method of Directing Transfer

The last two pages of this prospectus supplement contain a form for you to direct a transfer to the Jefferson Bancshares, Inc. Stock Fund (the “Change of Investment Allocation Form”). If you wish to transfer all, or part, in multiples of not less than 1%, of your beneficial interest in the assets of the Savings Plan to the Jefferson Bancshares, Inc. Stock Fund, you should complete the Change of Investment Allocation Form. If you do not wish to make such an election at this time, you do not need to take any action. The minimum investment in the Jefferson Bancshares, Inc. Stock Fund during the initial public offering is $250.

Time for Directing Transfer

The deadline for submitting a direction to transfer amounts to the Jefferson Bancshares, Inc. Stock Fund in connection with the conversion is                 , 2003. You should return the Change of Investment Allocation Form to Anderson L. Smith by          p.m. on                         , 2003.

Irrevocability of Transfer Direction

Your direction to transfer amounts credited to your account in the Savings Plan to the Jefferson Bancshares, Inc. Stock Fund cannot be changed.

Purchase Price of Jefferson Bancshares, Inc. Common Stock

The trustee will use the funds transferred to the Jefferson Bancshares, Inc. Stock Fund to purchase shares of Jefferson Bancshares, Inc. common stock in the conversion. The trustee will pay the same price for shares of Jefferson Bancshares, Inc. common stock as all other persons who purchase shares of Jefferson Bancshares, Inc. common stock in the offering. If there is not enough common stock in the offering to fill all subscriptions, the common stock will be apportioned and the trustee for the Savings Plan may not be able to purchase all of the common stock you requested. In such case, the trustee will purchase shares in the open market, on your behalf, after the conversion to fulfill your initial request. Such purchases may be at prices higher or lower than the conversion offering price.

Nature of a Participant’s Interest in Jefferson Bancshares, Inc. Common Stock

The trustee will hold Jefferson Bancshares, Inc. common stock in the name of the Savings Plan. The trustee will credit shares of common stock acquired at your direction to your account under the Savings Plan. Therefore, earnings with respect to your account should not be affected by the investment designations of other participants in the Savings Plan.

Voting and Tender Rights of Jefferson Bancshares, Inc. Common Stock

The trustee generally will exercise voting and tender rights attributable to all Jefferson Bancshares, Inc. common stock held by the Jefferson Bancshares, Inc. Stock Fund as directed by participants with interests in the Jefferson Bancshares, Inc. Stock Fund. With respect to each matter as to which holders of Jefferson Bancshares, Inc. common stock have a right to vote, you will be given voting instruction rights reflecting your proportionate interest in the Jefferson Bancshares, Inc. Stock Fund. The number of shares of Jefferson Bancshares, Inc. common stock held in the Jefferson Bancshares, Inc. Stock Fund that are voted for and against on each matter will be proportionate to the number of voting

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instruction rights exercised in such manner. If there is a tender offer for Jefferson Bancshares, Inc. common stock, the Savings Plan provides that each participant will be allotted a number of tender instruction rights reflecting such participant’s proportionate interest in the Jefferson Bancshares, Inc. Stock Fund. The percentage of shares of Jefferson Bancshares, Inc. common stock held in the Jefferson Bancshares, Inc. Stock Fund that will be tendered will be the same as the percentage of the total number of tender instruction rights that are exercised in favor of the tender offer. The remaining shares of Jefferson Bancshares, Inc. common stock held in the Jefferson Bancshares, Inc. Stock Fund will not be tendered. The Savings Plan makes provisions for participants to exercise their voting instruction rights and tender instruction rights on a confidential basis.

DESCRIPTION OF THE SAVINGS PLAN

Introduction

Effective May 1, 2003, Jefferson Federal will amend its existing 401(k) Plan dated November 1, 1973, in its entirety into the Jefferson Federal Savings and Loan Association of Morristown Employees’ Savings & Profit Sharing Plan and Trust. Jefferson Federal intends for the Savings Plan to comply, in form and in operation, with all applicable provisions of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended, or “ERISA.” Jefferson Federal may change the Savings Plan from time to time in the future to ensure continued compliance with these laws. Jefferson Federal may also amend the Savings Plan from time to time in the future to add, modify, or eliminate certain features of the plan, as it sees fit. As a plan governed by ERISA, federal law provides you with various rights and protections as a plan participant. Although the Savings Plan is governed by many of the provisions of ERISA, your benefits under the plan are not guaranteed by the Pension Benefit Guaranty Corporation.

Reference to Full Text of the Plan. The following portions of this prospectus supplement provide an overview of the material provisions of the Savings Plan. Jefferson Federal qualifies this overview in its entirety by reference to the full text of the Savings Plan. You may obtain copies of the full Savings Plan document by sending a request to Anderson L. Smith at Jefferson Federal. You should carefully read the full text of the Savings Plan document to understand your rights and obligations under the plan.

Eligibility and Participation

Any employee of Jefferson Federal who attains age 20½ may participate in the Savings Plan as of the first of the calendar month coinciding with or next following the date an employee completes 500 Hours of Service within a consecutive six-month period with Jefferson Federal.

As of December 31, 2002, 57 of the 57 employees of Jefferson Federal elected to participate in the Savings Plan.

Contributions Under the Savings Plan

Savings Plan Participant Contributions. Subject to certain IRS limitations, the Savings Plan permits each participant to make monthly contributions to the Savings Plan equal to 50% of the participant’s monthly salary. Participants may change their rate of contribution with respect to pre-tax deferrals once each calendar year.

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Jefferson Federal Contributions. The Savings Plan provides that Jefferson Federal may make profit-sharing contributions. Profit-sharing contributions are allocated to those participants who have completed 1,000 Hours of Service during the Plan Year or who have retired, died or become totally and permanently disabled prior to the last day of the Plan Year.

Limitations on Contributions

Limitation on Employee Salary Deferral. Although the Savings Plan permits you to defer up to 25% of your compensation, by law your total deferrals under the Savings Plan, together with similar plans, may not exceed $12,000 for 2003. The Internal Revenue Service will periodically increase this annual limitation. Contributions in excess of this limitation, or excess deferrals, will be included in an affected participant’s gross income for federal income tax purposes in the year they are made. In addition, a participant will have to pay federal income taxes on any excess deferrals when distributed by the Savings Plan to the participant, unless the excess deferral and any related income allocable is distributed to the participant not later than the first April 15th following the close of the taxable year in which the excess deferral is made. Any income on the excess deferral that is distributed not later than such date shall be treated, for federal income tax purposes, as earned and received by the participant in the taxable year in which the distribution is made.

Limitations on Annual Additions and Benefits. Under the requirements of the Internal Revenue Code, the Savings Plan provides that the total amount of contributions and forfeitures (annual additions) credited to a participant during any year may not exceed the lesser of 100% of the participant’s compensation for that year, or $40,000.

Limitation on Plan Contributions for Highly Compensated Employees. Special provisions of the Internal Revenue Code limit the amount of salary deferrals and matching contributions that may be made to the Savings Plan in any year on behalf of highly compensated employees in relation to the amount of deferrals and matching contributions made by or on behalf of all other employees eligible to participate in the Savings Plan. If these limitations are exceeded, the level of deferrals by highly compensated employees must be adjusted.

In general, a highly compensated employee includes any employee who (1) was a five percent owner of the sponsoring employer at any time during the year or preceding year, or (2) had compensation for the preceding year in excess of $90,000 and, if the sponsoring employer so elects, was in the top 20% of employees by compensation for such year. The dollar amounts in the foregoing sentence are for 2003, but may be adjusted annually to reflect increases in the cost of living.

Top-Heavy Plan Requirements. If for any calendar year the Savings Plan is a Top-Heavy Plan, then Jefferson Federal may be required to make certain minimum contributions to the Savings Plan on behalf of non-key employees.

In general, the Savings Plan will be treated as a “Top-Heavy Plan” for any calendar year if, as of the last day of the preceding calendar year, the aggregate balance of the accounts of participants who are Key Employees exceeds 60% of the aggregate balance of the accounts of all participants. Key Employees generally include any employee who, at any time during the calendar year or any of the four preceding years, is:

(1) an officer of Jefferson Federal having annual compensation in excess of $130,000 who is in an administrative or policy-making capacity,

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(2) one of the ten employees having annual compensation in excess of $40,000 and owning, directly or indirectly, the largest interests in Jefferson Federal,

(3) a person who owns, directly or indirectly, more than 5% of the stock of Jefferson Bancshares, Inc., or stock possessing more than 5% of the total combined voting power of all stock of Jefferson Bancshares, Inc., or

(4) a person who owns directly or indirectly combined voting power of all stock and more than 1% of the total stock of Jefferson Bancshares, Inc. and has annual compensation in excess of $150,000.

The foregoing dollar amounts are for 2003.

Investment of Contributions

All amounts credited to participants’ accounts under the Savings Plan are held in trust. A trustee appointed by the board of directors of Jefferson Federal administers the trust.

The Savings Plan offers the following investment choices:

S&P500 Stock Fund. This stock fund invests in the stocks of a broad array of established U.S. companies. Its objective is long-term: to earn higher returns by investing in the largest companies in the U.S. economy.

Stable Value Fund. This fund invests primarily in Guaranteed Investment Contracts and Synthetic Guaranteed Investment Contracts. These contracts pay a steady rate of interest over a certain period of time, usually between three and five years. Its objective is short to intermediate-term: to achieve a stable return over short to intermediate periods of time while preserving the value of your investment.

S&P MidCap Stock Fund. This stock fund invests in the stocks of mid-sized U.S. companies, which are expected to grow faster than larger, more established companies. Its objective is long-term: to earn higher returns which reflect the growth potential of mid-sized companies.

Money Market Fund. This fund invests in a broad range of high-quality, short-term instruments issued by banks, corporations and the U.S. Government and its agencies. These instruments include certificates of deposit and U.S. Treasury bills. Its objective is short-term: to achieve competitive, short-term rates of return while preserving the value of your principal.

Government Bond Fund. This bond fund invests in U.S. Treasury bonds with a maturity of 20 years or more. Its objective is long-term: to earn a higher level of income along with the potential for capital appreciation.

International Stock Fund. This fund invests in over 1,000 foreign stocks in 20 countries, based in Europe, Australia, and the Far East. Its objective is long-term: to offer the potential return of investing in the stocks of established non-U.S. companies, as well as the potential risk-reduction of broad diversification.

Income Plus Asset Allocation Fund. This fund diversifies among a broad range of stable value securities to reduce short-term risk among a broad range of large U.S. and international companies to

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capture growth potential. The fund is structured to take advantage of market opportunities with a small flexible component. Its objective is intermediate-term: to preserve the value of your investment over short periods of time and to offer some potential for growth.

Growth and Income Asset Allocation Fund. This fund diversifies among U.S. and international stocks, U.S. bonds, and stable value investments to pursue long-term appreciation and short-term stability and takes advantage of market opportunities with a small flexible component. Its objective is intermediate-term: to provide a balance between the pursuit of growth and protection from risk.

Growth Asset Allocation Fund. This fund diversifies among a broad range of domestic and international stocks and takes advantage of market opportunities with a large flexible component. Its objective is long-term: to pursue high growth of your investment over time.

Russell 2000 Stock Fund. This fund seeks to emulate the performance of the Russell 2000 Index. The Russell 2000 Index is a subset of the Russell 3000 Index. The Russell 3000 Index is based on ranking of all U.S. publicly traded companies by market capitalization size. The Russell 2000 represents those 2000 companies ranked by size below the top 1000 companies. It is broadly diversified in terms of industries and economic sectors. This fund is intended for long-term investors seeking the potential high returns from investing in smaller U.S. companies.

S&P 500/Growth Stock Fund. This fund seeks to track the S&P/BARRA Growth Index by investing in many or all of the same stocks that make up the S&P/BARRA Growth Index. The fund maintains a low turnover of securities which results in low trading costs for investors. This fund is intended for long-term investors seeking a diversified portfolio of large-capitalization value stocks.

S&P 500/Value Stock Fund. This fund invests in most, or all of the stocks held in the S&P/BARRA Value Index. The index represents approximately 50% of the market capitalization of the S&P 500 Stock Index. This fund is intended for long-term investors seeking a diversified portfolio of large-capitalization value stocks.

NASDAQ 100. The Pentegra Nasdaq 100 Stock Fund invests in most or all of the same stocks held in the Nasdaq 100 Index. The Nasdaq 100 Index reflects Nasdaq’s largest non-financial companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.

The Savings Plan now provides the Jefferson Bancshares, Inc. Stock Fund as an additional choice to these investment alternatives. The Jefferson Bancshares, Inc. Stock Fund invests primarily in the common stock of Jefferson Bancshares, Inc. Participants in the Savings Plan may direct the trustee to invest all or a portion of their Savings Plan account balance in the Jefferson Bancshares, Inc. Stock Fund.

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The annual percentage return on the funds (net of fees) listed above for the prior three years was:

	2002		2001		2000
S&P 500 Stock Fund	-22.4	%	-12.3	%	-9.6	%
Stable Value Fund	5.3		5.7		5.8
S&P MidCap Stock Fund	-15.0		-0.9		16.8
Money Market Fund	1.6		4.0		6.2
Government Bond Fund	16.4		3.2		21.0
International Stock Fund	-18.5		-22.0		-14.7
Income Plus Asset Allocation Fund	-2.6		1.7		2.2
Growth and Income Asset Allocation Fund	-10.3		-5.2		-3.9
Growth Asset Allocation Fund	-18.8		-14.0		-11.3
Russell 2000 Stock Fund	-20.7		2.0		1.9
S&P 500/Growth Stock Fund	-24.0		-13.3		-19.0
S&P 500/Value Stock Fund	-21.2		-12.2		11.2
NASDAQ 100	-37.6		n/a		n/a

The Jefferson Bancshares, Inc. Stock Fund consists of investments in the common stock of Jefferson Bancshares, Inc. made on the effective date of the conversion. After the conversion of Jefferson Federal, the trustee of the Savings Plan will, to the extent practicable, use all amounts held by it in the Jefferson Bancshares, Inc. Stock Fund, including cash dividends paid on the common stock held in the fund, to purchase shares of common stock of Jefferson Bancshares, Inc. Savings Plan participants that invest in the Stock Fund will be permitted to direct the Stock Fund Trustee how to vote the shares of Jefferson Bancshares, Inc. common stock credited to their account.

As of the date of this prospectus supplement, none of the shares of Jefferson Bancshares, Inc. common stock have been issued or are outstanding and there is no established market for the Jefferson Bancshares, Inc. common stock. Accordingly, there is no record of the historical performance of the Jefferson Bancshares, Inc. Stock Fund. Performance of the Jefferson Bancshares, Inc. Stock Fund depends on a number of factors, including the financial condition and profitability of Jefferson Bancshares, Inc. and Jefferson Federal and market conditions for Jefferson Bancshares, Inc. common stock generally.

Benefits Under the Savings Plan

Vesting. Participants are 100% vested in their contributions. All profit-sharing contributions vest according to a three to seven year graded schedule.

Withdrawals and Distributions From the Savings Plan

Withdrawals Before Termination of Employment. You may receive in-service distributions from the Savings Plan under limited circumstances in the form of hardship distributions and loans. In order to qualify for a hardship withdrawal, you must have an immediate and substantial need to meet certain expenses and have no other reasonably available resources to meet the financial need. If you qualify for a hardship distribution, the trustee will make the distribution proportionately from the investment funds in which you have invested your account balances. Participants and beneficiaries are eligible for Savings Plan loans. The minimum loan amount is $1,000 calculated solely using a Participant’s vested interest in his or her account.

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Distribution Upon Retirement or Disability. Upon retirement or disability, you may receive a partial lump sum payment, a full lump sum payment, or installment payments from the Savings Plan equal to the value of your account.

Distribution Upon Death. If you die before your benefits are paid from the Savings Plan, your benefits will be paid to your surviving spouse or beneficiary under one or more of the forms available under the Savings Plan.

Distribution Upon Termination for Any Other Reason. If you terminate employment for any reason other than retirement, disability or death and your account balance exceeds $500, the trustee will make your distribution on your normal retirement date, unless you request otherwise. If your account balances do not exceed $500, the trustee will generally distribute your benefits to you as soon as administratively practicable following termination of employment.

Nonalienation of Benefits. Except with respect to federal income tax withholding and as provided with respect to a qualified domestic relations order, benefits payable under the Savings Plan will not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the Savings Plan will be void.

Applicable federal tax law requires the Savings Plan to impose substantial restrictions on your right to withdraw amounts held under the plan before your termination of employment with Jefferson Federal. Federal law may also impose an excise tax on withdrawals made from the Savings Plan before you attain 59½ years of age regardless of whether the withdrawal occurs during your employment with Jefferson Federal or after termination of employment.

Administration of the Savings Plan

The trustee with respect to the Savings Plan is the named fiduciary of the Savings Plan for purposes of ERISA.

Trustees. The board of directors of Jefferson Federal appoints the trustee to serve at its pleasure. The board of directors has appointed Bank of New York as trustee of the Jefferson Bancshares, Inc. Stock Fund.

The trustee receives, holds and invests the contributions to the Savings Plan in trust and distributes them to participants and beneficiaries in accordance with the terms of the Savings Plan and the directions of the plan administrator. The trustee is responsible for investment of the assets of the trust.

Reports to Savings Plan Participants

The plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, and any adjustments to your account to reflect earnings or losses.

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Plan Administrator

The current plan administrator of the Savings Plan is Jefferson Federal. The plan administrator is responsible for the administration of the Savings Plan, interpretation of the provisions of the plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the plan, maintenance of plan records, books of account and all other data necessary for the proper administration of the plan, and preparation and filing of all returns and reports relating to the plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under the Employee Retirement Income Security Act of 1974, as amended.

Amendment and Termination

Jefferson Federal intends to continue the Savings Plan indefinitely. Nevertheless, Jefferson Federal may terminate the Savings Plan at any time. If Jefferson Federal terminates the Savings Plan in whole or in part, then regardless of other provisions in the plan, all affected participants will become fully vested in their accounts. Jefferson Federal reserves the right to make, from time to time, changes which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that Jefferson Federal may amend the plan as it determines necessary or desirable, with or without retroactive effect, to comply with the Employee Retirement Income Security Act of 1974, as amended, or the Internal Revenue Code.

Merger, Consolidation or Transfer

If the Savings Plan merges or consolidates with another plan or transfers the trust assets to another plan, and if either the Savings Plan or the other plan is then terminated, the Savings Plan requires that you would receive a benefit immediately after the merger, consolidation or transfer. The benefit would be equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer if the Savings Plan had then terminated.

Federal Income Tax Consequences

The following is only a brief summary of the material federal income tax aspects of the Savings Plan. You should not rely on this survey as a complete or definitive description of the material federal income tax consequences relating to the Savings Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. You are urged to consult your tax advisor with respect to any distribution from the Savings Plan and transactions involving the Savings Plan.

As a “qualified retirement plan,” the Code affords the Savings Plan special tax treatment, including:

(1) The sponsoring employer is allowed an immediate tax deduction for the amount contributed to the plan each year;

(2) participants pay no current income tax on amounts contributed by the employer on their behalf; and

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(3) earnings of the plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.

Jefferson Federal will administer the Savings Plan to comply in operation with the requirements of the Internal Revenue Code as of the applicable effective date of any change in the law. If Jefferson Federal receives an adverse determination letter regarding its tax exempt status from the Internal Revenue Service, all participants would generally recognize income equal to their vested interest in the Savings Plan, the participants would not be permitted to transfer amounts distributed from the Savings Plan to an Individual Retirement Account or to another qualified retirement plan, and Jefferson Federal may be denied certain deductions taken with respect to the Savings Plan.

Lump Sum Distribution. A distribution from the Savings Plan to a participant or the beneficiary of a participant will qualify as a lump sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59 ¹/2; and consists of the balance credited to the participant under this plan and all other profit sharing plans, if any, maintained by Jefferson Federal. The portion of any lump sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump sum distribution less the amount of after-tax contributions, if any, you have made to any other profit sharing plans maintained by Jefferson Federal which is included in the distribution.

Jefferson Bancshares, Inc. Common Stock Included in Lump Sum Distribution. If a lump sum distribution includes Jefferson Bancshares, Inc. common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount will be reduced by the amount of any net unrealized appreciation with respect to Jefferson Bancshares, Inc. common stock, that is, the excess of the value of Jefferson Bancshares, Inc. common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of Jefferson Bancshares, Inc. common stock for purposes of computing gain or loss on its subsequent sale equals the value of Jefferson Bancshares, Inc. common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Jefferson Bancshares, Inc. common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain regardless of how long the Jefferson Bancshares, Inc. common stock, is held, or the “holding period.” Any gain on a subsequent sale or other taxable disposition of Jefferson Bancshares, Inc. common stock in excess of the amount of net unrealized appreciation at the time of distribution will be considered long-term capital gain regardless of the holding period of Jefferson Bancshares, Inc. common stock. Any gain on a subsequent sale or other taxable disposition of Jefferson Bancshares, Inc. common stock in excess of the amount of net unrealized appreciation at the time of distribution will be considered either short-term or long-term capital gain, depending upon the length of the holding period of Jefferson Bancshares, Inc. common stock. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by the regulations to be issued by the IRS.

Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA. You may roll over virtually all distributions from the Savings Plan to another qualified retirement plan or to an individual retirement account.

We have provided you with a brief description of the material federal income tax aspects of the Savings Plan which are of general application under the Code. It is not intended to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the Savings Plan. Accordingly, you are urged to consult a tax advisor

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concerning the federal, state and local tax consequences of participating in and receiving distributions from the Savings Plan.

Restrictions on Resale

Any person receiving a distribution of shares of common stock under the Savings Plan who is an “affiliate” of Jefferson Bancshares, Inc. under Rules 144 and 405 under the Securities Act of 1933, as amended, may reoffer or resell such shares only under a registration statement filed under the Securities Act of 1933, as amended, assuming the availability of a registration statement, or under Rule 144 or some other exemption of the registration requirements of the Securities Act of 1933, as amended. Directors, officers and substantial shareholders of Jefferson Bancshares, Inc. are generally considered “affiliates.” Any person who may be an “affiliate” of Jefferson Federal may wish to consult with counsel before transferring any common stock they own. In addition, participants are advised to consult with counsel as to the applicability of Section 16 of the Securities Exchange Act of 1934, as amended, which may restrict the sale of Jefferson Bancshares, Inc. common stock acquired under the Savings Plan, or other sales of Jefferson Bancshares, Inc. common stock.

Persons who are not deemed to be “affiliates” of Jefferson Federal at the time of resale will be free to resell any shares of Jefferson Bancshares, Inc. common stock distributed to them under the Savings Plan, either publicly or privately, without regard to the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, or compliance with the restrictions and conditions contained in the exemptive rules under federal law. An “affiliate” of Jefferson Federal is someone who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control, with Jefferson Federal. Normally, a director, principal officer or major shareholder of a corporation may be deemed to be an “affiliate” of that corporation. A person who may be deemed an “affiliate” of Jefferson Federal at the time of a proposed resale will be permitted to make public resales of the common stock only under a “reoffer” prospectus or in accordance with the restrictions and conditions contained in Rule 144 under the Securities Act of 1933, as amended, or some other exemption from registration, and will not be permitted to use this prospectus in connection with any such resale. In general, the amount of the common stock which any such affiliate may publicly resell under Rule 144 in any three-month period may not exceed the greater of one percent of Jefferson Bancshares, Inc. common stock then outstanding or the average weekly trading volume reported on the Nasdaq Stock Market during the four calendar weeks before the sale. Such sales may be made only through brokers without solicitation and only at a time when Jefferson Bancshares, Inc. is current in filing the reports required of it under the Securities Exchange Act of 1934, as amended.

SEC Reporting and Short-Swing Profit Liability

Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors and persons beneficially owning more than ten percent of public companies such as Jefferson Bancshares, Inc. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the filing of reports of beneficial ownership. Within ten days of becoming a person required to file reports under Section 16(a), a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Certain changes in beneficial ownership, such as purchases, sales, gifts and participation in savings and retirement plans must be reported periodically, either on a Form 4 within two days after a transaction, or annually on a Form 5 within 45 days after the close of a company’s fiscal year.

In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by Jefferson Bancshares, Inc. of profits

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realized by any officer, director or any person beneficially owning more than ten percent of the common stock resulting from the purchase and sale or sale and purchase of the common stock within any six-month period.

The SEC has adopted rules that exempt many transactions involving the Savings Plan from the “short-swing” profit recovery provisions of Section 16(b). The exemptions generally involve restrictions upon the timing of elections to buy or sell employer securities for the accounts of any officer, director or any person beneficially owning more than ten percent of the common stock.

Except for distributions of the common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons who are governed by Section 16(b) may, under limited circumstances involving the purchase of common stock within six months of the distribution, be required to hold shares of the common stock distributed from the Savings Plan for six months following the distribution date.

LEGAL OPINION

The validity of the issuance of the common stock of Jefferson Bancshares, Inc. will be passed upon by Muldoon Murphy & Faucette LLP, Washington, D.C. Muldoon Murphy & Faucette LLP acted as special counsel for Jefferson Federal in connection with the conversion of Jefferson Federal.

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JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN EMPLOYEES’

SAVINGS & PROFIT SHARING PLAN AND TRUST

CHANGE OF INVESTMENT ALLOCATION

1. Member Data

Print your full name above                                                                                 (Last, first, middle initial)                                                           Social Security Number

Street Address                                                                                                                                        City                                                             State                       Zip

2. Instructions

Jefferson Federal Savings and Loan Association of Morristown Employees’ Savings & Profit Sharing Plan and Trust (the “Savings Plan”) is giving members a special opportunity to invest their Savings Plan account balances in a new investment fund – the Jefferson Bancshares, Inc. Stock Fund – which is comprised primarily of common stock (“Common Stock”) issued by Jefferson Bancshares, Inc. (the “Company”) in connection with the conversion of Jefferson Federal from the mutual holding company form to the stock form. The percentage of a member’s account transferred at the direction of the member into the Jefferson Bancshares, Inc. Stock Fund will be used to purchase shares of Common Stock during the Offering. Please review the Prospectus (the “Prospectus”) and the Prospectus Supplement (the “Supplement”) before making any decision.

If there is not enough Common Stock in the conversion to fill all subscriptions, the Common Stock will be apportioned and the trustee for the Plan may not be able to purchase all of the Common Stock you requested. In such case, the trustee will purchase shares in the open market, on your behalf, after the conversion to fulfill your initial request. Such purchases may be at prices higher or lower than the initial offering price.

Investing in Common Stock entails some risks, and we encourage you to discuss this investment decision with your spouse and investment advisor. The Plan trustee and the Plan administrator are not authorized to make any representations about this investment other than what appears in the Prospectus and the Supplement, and you should not rely on any information other than what is contained in the Prospectus and the Supplement. For a discussion of certain factors that should be considered by each member as to an investment in the Common Stock, see “Risk Factors” beginning on page         of the Prospectus. Any shares purchased by the Plan pursuant to your election will be subject to the conditions or restrictions otherwise applicable to Common Stock, as discussed in the Prospectus and the Supplement.

3. Investment Directions (Applicable to Accumulated Balances Only)

To direct a transfer of all or part of the funds credited to your accounts to the Jefferson Bancshares, Inc. Stock Fund, you should complete and submit this form to                                               at Jefferson Federal Savings and Loan Association of Morristown, no later than                     , 2003 at              p.m. If you need any assistance in completing this form, please contact                                    . If you do not complete and return this form to                          by          p.m., on                     , 2003, the funds credited to your account under the Plan will continue to be invested in accordance with your prior investment direction, or in accordance with the terms of the Savings Plan if no investment direction had been provided.

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I hereby revoke any previous investment direction and now direct that the market value of the units that I have invested in the following funds, to the extent permissible, be transferred out of the specified fund and invested (in whole percentages) in the Jefferson Bancshares, Inc. Stock Fund as follows:

Fund	Percentage to be transferred
S&P 500 Stock Fund	%
Stable Value Fund	%
S&P MidCap Stock Fund	%
Money Market Fund	%
Government Bond Fund	%
International Stock Fund	%
Income Plus Asset Allocation Fund	%
Growth and Income Asset Allocation Fund	%
Growth Asset Allocation Fund	%
S&P 500/Value Stock Fund	%
S&P 500/Growth Stock Fund	%
Russell 2000 Stock Fund	%
NASDAQ 100	%

Note: The total amount transferred may not exceed the total value of your accounts.

4. Investment Directions (Applicable to Future Contributions Only)

I hereby revoke any previous investment instructions and now direct that any future contributions and/or loan repayments, if any, made by me or on my behalf by Jefferson Federal Savings and Loan Association of Morristown, including those contributions and/or repayments received by Jefferson Federal Savings and Loan Association of Morristown Employees’ Savings & Profit Sharing Plan and Trust during the same reporting period as this form, be invested in the following whole percentages. If I elect to invest in Jefferson Bancshares, Inc. Common Stock, such future contributions or loan repayments, if any, will be invested in the Jefferson Bancshares, Inc. Stock Fund the month following the conclusion of the Offering.

Fund	Percentage
S&P 500 Stock Fund	%
Stable Value Fund	%
S&P MidCap Stock Fund	%
Money Market Fund	%
Government Bond Fund	%
International Stock Fund	%
Income Plus Asset Allocation Fund	%
Growth and Income Asset Allocation Fund	%
Growth Asset Allocation Fund	%
S&P 500/Value Stock Fund	%
S&P 500/Growth Stock Fund
Russell 2000 Stock Fund	%
NASDAQ 100	%
Jefferson Bancshares, Inc. Stock Fund
Total (Important!)	100%

Notes: No amounts invested in the Stable Value Fund may be transferred directly to the Money Market Fund. Stable Value Fund amounts invested in the S&P 500 Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International Stock Fund, Income Plus Fund, Growth & Income Fund,

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Growth Fund and/or Employer Stock Fund, for a period of three months may be transferred to the Money Market Fund upon the submission of a separate Change of Investment Allocation Form.

The percentage that can be transferred to the Money Market Fund may be limited by any amounts previously transferred from the Stable Value Fund that have not satisfied the equity wash requirement. Such amounts will remain in either the S&P 500 Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International Stock Fund, Income Plus Fund, Growth & Income Fund, Growth Fund and/or Employer Stock Fund and a separate direction to transfer them to the Money Market Fund will be required when they become available.

5. Participant Signature and Acknowledgment – Required

By signing this Change Of Investment Allocation Form, I authorize and direct the Plan administrator and trustee to carry out my instructions. I acknowledge that I have been provided with and read a copy of the Prospectus and the Supplement relating to the issuance of Common Stock. I am aware of the risks involved in the investment in Common Stock, and understand that the trustee and Plan administrator are not responsible for my choice of investment.

Signature of Member Date

Pentegra Services, Inc. is hereby authorized to make the above listed change(s) to this member’s record.

Signature of Jefferson Federal Savings and Loan Association of Morristown Authorized Representative Date

Minimum Stock Purchase is $250

Maximum Stock Purchase is $500,000

PLEASE COMPLETE AND RETURN TO                         

AT JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION

OF MORRISTOWN

BY              P.M. ON                         , 2003.

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PROSPECTUS [LOGO]

Jefferson Bancshares, Inc.

(Proposed Holding Company for Jefferson Federal Savings and Loan Association of Morristown,

to become Jefferson Federal Bank)

Up to 5,750,000 Shares of Common Stock

Jefferson Bancshares, Inc. is offering common stock for sale in connection with the conversion of Jefferson Federal Savings and Loan Association of Morristown from the mutual holding company form of organization to stock form. The shares we are offering represent the ownership interest in Jefferson Federal Savings and Loan Association now owned by Jefferson Bancshares, M.H.C. The existing publicly held shares of Jefferson Federal, which represent the remaining interest in Jefferson Federal, will be exchanged for shares of common stock of Jefferson Bancshares. All shares offered for sale are offered at a price of $10.00 per share. We have applied to have our common stock listed for trading on the Nasdaq National Market under the symbol “JFBI.” No assurance can be given that our common stock will be approved for listing.

If you are or were a depositor of Jefferson Federal Savings and Loan Association:

• You may have priority rights to purchase shares of common stock.

If you are currently a shareholder of Jefferson Federal Savings and Loan Association:

• Each of your shares will automatically be exchanged for between 2.7419 and 3.7097 shares of Jefferson Bancshares.

• Your percentage ownership interest will be nearly equivalent to your current percentage ownership interest in Jefferson Federal Savings and Loan Association, before giving effect to our contribution of shares to the Jefferson Federal Charitable Foundation.

• You may also purchase additional shares of common stock in the offering after priority orders are filled.

If you are a participant in the Jefferson Federal Savings and Loan Association 401(k) Retirement Plan:

• You may direct that all or part of your current account balances in this plan be invested in common stock.

• You will be receiving separately a supplement to this prospectus that describes your rights under this plan.

If you fit none of the categories above, but are interested in purchasing shares of our common stock:

• You may purchase shares after priority orders are filled.

We are offering up to 5,750,000 shares of common stock for sale on a best efforts basis, subject to certain conditions. We must sell a minimum of 4,250,000 shares to complete the offering and the exchange of existing shares. We may sell up to 6,612,500 shares without resoliciting subscribers because of regulatory considerations, demand for the shares or changes in market conditions. The offering is expected to terminate at 12:00 noon, Eastern time, on [DATE]. We may extend this termination date without notice to you until [DATE], unless the Office of Thrift Supervision approves a later date, which will not be beyond [DATE].

Keefe, Bruyette & Woods, Inc. will use its best efforts to assist us in our selling efforts, but is not required to purchase any of the common stock that is being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering.

The minimum purchase is 25 shares. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond [DATE]. If the offering is extended beyond [DATE], subscribers will have the right to modify or rescind their purchase orders. Funds received prior to completion of the offering will be held in an escrow account at Jefferson Federal and will earn interest at its passbook rate.

We expect our directors and executive officers, together with their associates, to subscribe for 379,000 shares, which equals 7.6% of the shares offered at the midpoint of the offering range. Following the conversion, our directors and executive officers, together with their associates, are expected to own 559,806 shares of common stock (including exercisable options), or 8.7% of our outstanding common stock if shares are sold at the midpoint of the offering range.

OFFERING SUMMARY

Price Per Share: $10.00

	Minimum		Maximum
Number of shares		4,250,000		5,750,000
Gross offering proceeds	$	42,500,000	$	57,500,000
Estimated offering expenses	$	1,600,000	$	1,600,000
Estimated net proceeds	$	40,900,000	$	55,900,000
Estimated net proceeds per share	$	9.62	$	9.72

This investment involves a degree of risk, including the possible loss of principal.

Please read “ Risk Factors” beginning on page    .

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Neither the Securities and Exchange Commission, the Office of Thrift Supervision nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

KEEFE, BRUYETTE & WOODS, INC.

The date of this prospectus is [DATE], 2003

[map of Tennessee showing office locations of Jefferson Federal appears here]

Table of Contents

Questions and Answers about the Stock Offering	i
Summary	1
Risk Factors	13
A Warning About Forward-Looking Statements	19
Selected Financial and Other Data	20
Use of Proceeds	22
Our Dividend Policy	23
Market for the Common Stock	24
Capitalization	25
Regulatory Capital Compliance	26
Pro Forma Data	27
Comparison of Independent Valuation and Pro Forma Financial Information with and Without the Foundation	33
Management’s Discussion and Analysis of Results of Operations and Financial Condition	34
Our Business	60
Our Management	67
Stock Ownership	76
Subscriptions by Executive Officers and Directors	77
Regulation and Supervision	78
Federal and State Taxation	83
The Conversion	84
Comparison of Shareholders’ Rights	109
Restrictions of Acquisition of Jefferson Bancshares and Jefferson Federal	117
Description of Jefferson Bancshares Capital Stock	120
Transfer Agent and Registrar	121
Registration Requirements	121
Legal and Tax Opinions	121
Experts	121
Where You Can Find More Information	122
Index to Financial Statements	123

Questions and Answers about the Stock Offering

The following are answers to frequently asked questions. You should read this entire prospectus, including “Risk Factors” beginning on page      and “The Conversion” beginning on page     , for more information.

Q. What will happen as a result of Jefferson Federal’s reorganization?

A. Jefferson Federal is undergoing a reorganization referred to as a “second-step” conversion. In 1994, Jefferson Federal became a stock savings and loan association in connection with its reorganizing to the mutual holding company format. In the reorganization process, Jefferson Federal issued 83% of its stock to Jefferson Bancshares, M.H.C., a mutual holding company, and 17% of its stock to the public. Jefferson Federal is now reorganizing from this mutual holding company structure to a new stock holding company structure. Jefferson Federal has formed a new Tennessee chartered stock holding company named Jefferson Bancshares, Inc. After the reorganization, Jefferson Bancshares will own 100% of Jefferson Federal’s stock. In the reorganization, Jefferson Bancshares will exchange shares of its stock for the publicly held shares of Jefferson Federal. The rest of Jefferson Bancshares’ stock will be offered for sale to the public so that, after the reorganization process, 100% of its shares will be owned by the public, our employee stock ownership plan and our charitable foundation. When we complete the stock holding company reorganization, Jefferson Bancshares, M.H.C. will no longer exist and Jefferson Federal will change its name to “Jefferson Federal Bank.”

Q. How many shares of stock are being offered and at what price?

A. We are offering for sale up to 5,750,000 shares of common stock at a subscription price of $10.00 per share. We must sell at least 4,250,000 shares. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, the independent appraiser retained by us to determine the market value of Jefferson Federal concludes that the market value has increased, we may sell up to 6,612,500 shares without notice to you. In addition to the shares we are offering for sale, we will exchange up to 1,207,890 shares of our common stock for the publicly held shares of Jefferson Federal.

Q. What happens if we do not sell the minimum amount of shares being offered?

A. If we do not sell at least the minimum amount, or 4,250,000 shares, in the offering, then we will not sell any shares and the offering will be withdrawn. Purchase orders will be cancelled and any funds received by us from investors will be refunded promptly with interest at our passbook rate.

Q. What will happen to the current outstanding shares of Jefferson Federal?

A. If the offering is completed, the outstanding shares of Jefferson Federal (except for shares held by Jefferson Bancshares, M.H.C.) automatically will be exchanged for shares of Jefferson Bancshares. This exchange will be based on an exchange ratio ranging from 2.7419 to 3.7097 shares of Jefferson Bancshares stock for each outstanding share of Jefferson Federal stock.

Q. Who may purchase shares of common stock in the offering?

A. Rights to subscribe for common stock have been granted under our plan of conversion to the following persons in the following descending order of priority:

1. Jefferson Federal depositors with $50.00 or more on deposit as of December 31, 2001;

2. Our tax-qualified employee stock benefit plans, including our employee stock ownership plan;

3. Jefferson Federal depositors with $50.00 or more on deposit as of March 31, 2003, other than our officers and directors and their associates; and

4. Jefferson Federal depositors as of             , 2003 and borrowers of Jefferson Federal as of May 13, 1994 who continue as borrowers as of             , 2003.

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If the above persons do not subscribe for all of the shares offered, we will offer the remaining shares to the general public, giving preference to current shareholders of Jefferson Federal and next to people and trusts for the benefit of people who reside in Hamblen County, Tennessee and surrounding counties.

Q. What factors should I consider when deciding whether to purchase shares of stock offered in this offering?

A. There are many important factors for you to consider before making an investment decision, such as our profitability, lending activities and the competition we face for our products and services, as well as the suitability of the investment for your purposes. Factors you should consider are included in this prospectus. Therefore, you should read this entire prospectus before making your investment decision.

Q. Will I be charged a commission?

A. No. You will not be charged a commission or fee to purchase shares in the conversion.

Q. How much stock may I buy?

A. The minimum order is 25 shares. Generally, no person or group of persons on a single account may purchase more than $500,000 of common stock (which equals 50,000 shares) in the subscription offering, and no person, either alone or together with associates and persons acting in concert with such person, may purchase more than $750,000 of common stock (which equals 75,000 shares). If you are a shareholder of Jefferson Federal, your purchases in the offering, together with the shares you receive in exchange for your shares of Jefferson Federal, cannot exceed 2% of the shares issued and outstanding immediately following the conversion.

Q. Does Jefferson Bancshares plan to pay dividends on the common stock?

A. Yes. After the offering, we intend to pay a quarterly dividend on our common stock at an initial rate in the range of $0.046 to $0.034 per share, subject to our having sufficient funds available. The amount of dividends that we initially intend to pay after the offering is intended to achieve economic parity by adjusting the quarterly per share dividend amount to reflect the exchange ratio. In the past, we also have paid a special dividend of $0.20 per share in the fourth quarter of our fiscal year. Following the conversion, we will continue to evaluate whether it is appropriate to pay a special dividend to shareholders. We make no assurances that a special dividend will continue.

Q. How do I sell my stock after I purchase it?

A. After shares of the common stock begin trading, you may contact a stockbroker to buy or sell shares. We have applied to have our stock traded on the Nasdaq National Market under the trading symbol “JFBI”. There can be no assurance that someone will want to buy your shares or that you will be able to sell them for more money than you originally paid. There may also be a wide spread between the bid and asked price for our common stock.

Q. Will my stock be covered by deposit insurance or guaranteed by any government agency?

A. No. Unlike insured deposit accounts at Jefferson Federal, our common stock, like other common stock, will not be insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Q. When is the deadline for subscribing for stock?

A. We must receive a properly signed and completed order form with the required payment no later than 12:00 noon, Eastern time, on [DATE].

Q. Can the deadline for subscribing for stock be extended?

A. If we do not receive sufficient orders, we can extend the offering beyond [DATE]. We must complete any offering to the general public within 45 days after the close of the subscription offering, unless we receive regulatory

ii

approval to further extend the offering. No single extension can exceed 90 days, and the extensions may not go beyond [DATE].

Q. How do I subscribe for stock?

A. First, you should read this entire prospectus carefully. Then, complete, sign and return the enclosed stock order form, together with your payment. Subscription orders may be delivered in person to our office during regular banking hours, or by mail in the enclosed business reply envelope. If the stock offering is not completed by [DATE] and is not extended, then all funds will be returned promptly with interest, and all withdrawal authorizations will be cancelled.

Q. Can I change my mind after I place an order to subscribe for stock?

A. No. Once we receive your order, you cannot cancel or change it without our consent. If we extend the offering beyond              or if we intend to sell fewer than 4,250,000 shares or more than 6,612,500 shares, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will return your funds promptly with interest at our passbook rate.

Q. How can I pay for the stock?

A. You have two options: (1) you can pay by check or money order, or (2) you can authorize a withdrawal from your deposit account at Jefferson Federal (without any penalty for early withdrawal).

Q. May I obtain a loan from Jefferson Federal to pay for my stock?

A. No. Federal law prohibits Jefferson Federal from knowingly loaning funds to purchase stock in the offering. However, other financial institutions may make such a loan.

Q. As an eligible depositor or borrower placing an order in the subscription offering, may I register the shares in someone else’s name?

A. No. To preserve your purchase priority, you must register the shares only in the name or names of eligible purchasers at the applicable date of eligibility. You may not add the names of others who were not eligible to purchase common stock in the offering on the applicable date of eligibility.

Q. Can I purchase stock on behalf of someone else?

A. No. You may not transfer the subscription rights that you have as a depositor or borrower at Jefferson Federal. You will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding with another person involving the transfer of the shares that you purchase. We will not honor orders for shares of the common stock by anyone believed by us to be a party to such an agreement and we will pursue all legal remedies against any person who is a party to such an agreement.

Q. Will I receive interest on my subscription payment?

A. Yes. You will receive interest on your subscription funds at our passbook rate from the time we receive your funds until completion or termination of the conversion. If you authorize payment by withdrawal from an account at Jefferson Federal, your funds will continue to earn interest at the account rate until completion of the conversion.

Q. Can I subscribe for stock using funds in my individual retirement account at Jefferson Federal?

A. Yes. However, you cannot purchase stock with your existing IRA at Jefferson Federal. You must establish a self-directed IRA with an outside trustee to subscribe for stock using your IRA funds. Please call our stock information center at (423)                          to get more information. The transfer of IRA funds takes time, so please make arrangements at least one week before the expiration of the subscription offering.

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Q. What happens if there are not enough shares of stock to fill all orders?

A. If there is an oversubscription, then you might not receive any or all of the shares you want to purchase. We will allocate shares in the order of priority established in our plan of conversion.

Q. Who can help answer any other questions I might have about the stock offering?

A. For answers to other questions, we encourage you to read this prospectus. You may direct your questions to our stock information center at (423)                         . You may also visit our stock information center, which is located at 120 Evans Avenue, Morristown, Tennessee. The stock information center is open Monday through Friday from 8:30 a.m. to 4:30 p.m., Eastern time.

Q. Will depositors need to order new checks as a result of Jefferson Federal changing its name to “Jefferson Federal Bank”?

A. No. You may still use your Jefferson Federal Savings and Loan Association checks and related materials. The next time you order checks, your new checks will reflect the new Jefferson Federal Bank name.

To ensure that each person receives a prospectus at least 48 hours prior to the expiration date of the offering in accordance with federal law, no prospectus will be mailed any later than five days prior to the expiration date or hand delivered any later than two days prior to the expiration date.

iv

Summary

This summary highlights selected information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read this entire document carefully. In certain instances where appropriate, the terms “we,” “us” and “our” refer collectively to Jefferson Bancshares, Inc. and Jefferson Federal. For assistance, please contact our stock information center at (423)    .

The Companies

Jefferson Bancshares, M.H.C. 120 Evans Avenue Morristown, Tennessee 37814 (423) 586-8421	Jefferson Bancshares, M.H.C. is the federally chartered mutual holding company for Jefferson Federal Savings and Loan Association of Morristown. Jefferson Bancshares, M.H.C.’s principal business activity is the ownership of 1,550,000 shares of common stock of Jefferson Federal. At the conclusion of the conversion, Jefferson Bancshares, M.H.C. will no longer exist.
Jefferson Bancshares, Inc. 120 Evans Avenue Morristown, Tennessee 37814 (423) 586-8421	This offering is made by Jefferson Bancshares, Inc. Jefferson Bancshares, Inc. is a new Tennessee chartered corporation. Jefferson Federal recently formed Jefferson Bancshares to be its new stock holding company. To date, Jefferson Bancshares has only conducted organizational activities. After the conversion, Jefferson Bancshares will own all of Jefferson Federal’s capital stock and will direct, plan and coordinate Jefferson Federal’s business activities. In the future, Jefferson Bancshares might also acquire or organize other operating subsidiaries, including other financial institutions or financial services companies, although it currently has no specific plans or agreements to do so.
Jefferson Federal Savings and Loan Association of Morristown 120 Evans Avenue Morristown, Tennessee 37184 (423) 586-8421	Jefferson Federal is a community-oriented financial institution dedicated to serving the financial service needs of consumers and businesses within our market area. We engage primarily in the business of attracting deposits from the general public and using such funds to originate loans. We emphasize the origination of loans secured by first mortgages on owner-occupied, residential real estate and commercial real estate. To a lesser extent, we originate other types of real estate loans, commercial business loans and consumer loans. We currently operate out of a main office in Morristown, Tennessee and two drive through facilities also in Morristown. Jefferson Federal has 1,875,500 issued and outstanding shares of common stock. Jefferson Bancshares, M.H.C. currently owns 1,550,000 shares, and the remaining 325,500 shares are held by the public. At December 31, 2002, Jefferson Federal had total assets of $260.4 million, deposits of $223.0 million and total stockholders’ equity of $34.9 million.
	In the past, as part of our philosophy of serving the credit needs of all of the members of our local community, we regularly made loans to persons with poor or marginal credit histories. Several years ago, we began to monitor our residential mortgage and consumer loans by reference to the borrower’s Beacon credit score. A Beacon score is a principal measure of credit quality and is one of the significant criteria

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we rely upon in our underwriting. We categorized loans to borrowers with a Beacon credit score below 600 as “subprime” and loans to borrowers with a Beacon credit score of 600 or above as “prime.” We have substantially reduced our originations of subprime residential loans and are letting those loans run off. At December 31, 2002, subprime real estate loans totaled $31.5 million, or 18.2% of total real estate loans, and subprime consumer loans totaled $1.4 million, or 16.2% of total consumer loans.

Our Business Strategy (page        ) Our mission is to operate and grow a profitable community-oriented financial institution serving retail and commercial customers in our market area. We plan to achieve this by executing our strategy of:

• serving as a community-oriented financial institution;

• expanding our delivery system through a combination of increased uses of technology, such as internet banking, and additional branch facilities;

• pursuing growth by emphasizing commercial real estate lending and taking advantage of the higher loan-to-one-borrower limits resulting from the capital raised in the offering;

• improving the quality of our loan portfolio through careful attention to problem assets, structured underwriting and approval processes and stringent loan management;

• diversifying into other financial services-related activities; and

• utilizing asset/liability management to improve our net interest margin and mitigate interest rate risk.

The Conversion

What is the Conversion? (page        ) In May 1994 we reorganized Jefferson Federal into a stock savings and loan association with a mutual holding company structure. As part of that reorganization, we sold 17% of Jefferson Federal common stock to our customers in a subscription offering. The majority of Jefferson Federal’ s outstanding shares were retained by Jefferson Bancshares, M.H.C., a mutual holding company organized under the laws of the United States. As a result of this reorganization, our current organizational structure is as follows:

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The “second-step” conversion process that we are now undertaking involves as series of transactions by which we will convert our organization from the partially public mutual holding company form to the fully public stock holding company structure. In the stock holding company structure, all of Jefferson Federal’s stock will be owned by Jefferson Bancshares, and all of Jefferson Bancshares’ stock will be owned by the public, our employee stock ownership plan and our charitable foundation. Upon completion of the conversion and offering, Jefferson Bancshares, M.H.C. will cease to exist.

After the conversion, our ownership structure will be as follows:

As part of the conversion, we are offering for sale common stock representing the majority ownership interest of Jefferson Federal that is currently held by Jefferson Bancshares, M.H.C. At the conclusion of the conversion, existing public shareholders of Jefferson Federal will receive new shares of common stock in Jefferson Bancshares in exchange for their existing shares of Jefferson Federal.

The normal business operations of Jefferson Federal will continue without interruption during the conversion and the same officers and directors who currently serve Jefferson Federal in the mutual holding company structure will serve the new holding company and Jefferson Federal in the fully converted stock form. “Jefferson Federal Bank” will be Jefferson Federal’s new name upon completion of the conversion.

Conditions to Completing the Conversion We are conducting the conversion under the terms of our plan of conversion. We cannot complete the conversion and related offering unless:

• The plan of conversion is approved by at least a majority of votes eligible to be cast by members of Jefferson Bancshares, M.H.C. (depositors and certain borrowers of Jefferson Federal);

• The plan of conversion is approved by the holders of at least two-thirds of the outstanding shares of Jefferson Federal, including shares held by Jefferson Bancshares, M.H.C.;

• The plan of conversion is approved by at least a majority of the votes cast by shareholders of Jefferson Federal

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common stock, not including those shares held by Jefferson Bancshares, M.H.C.;

• We sell at least the minimum number of shares offered; and

• We receive the final approval of the Office of Thrift Supervision to complete the conversion and offering.

Jefferson Bancshares, M.H.C., which owns 83% of the outstanding shares of Jefferson Federal, intends to vote its shares in favor of the conversion. In addition, as of             , 2003, directors and executive officers of Jefferson Federal and their associates owned 41,515 shares of Jefferson Federal, or 12.8% of the outstanding shares not owned by Jefferson Bancshares, M.H.C. They intend to vote those shares in favor of the plan of conversion.

Reasons for the Conversion (page    ) Our primary reasons for the conversion are to:

• structure our business in the form used by most financial institutions;

• support future lending and operational growth;

• support future branching activities and/or the acquisition of other financial institutions or financial services companies or their assets;

• create a more liquid and active market than currently exists for Jefferson Federal’s common stock; and

• increase our capital, which will make Jefferson Federal stronger.

Although we have selected possible branch locations, we do not otherwise have any specific plans or arrangements for expansion and we do not now have any specific acquisition plans.

The conversion also will enable us to enhance our ability to attract and retain qualified directors and management through stock-based compensation plans. We also will be able to increase our philanthropic endeavors to the communities we serve through the formation and funding of the Jefferson Federal Charitable Foundation.

The Exchange of Existing Shares of Jefferson Federal Common Stock (page     ) If you are now a shareholder of Jefferson Federal, your existing shares will be cancelled and exchanged for shares of Jefferson Bancshares (our newly formed Tennessee corporation). The number of shares you will receive will be based on an exchange ratio determined as of the closing of the conversion, which will depend upon the final appraised value of Jefferson Bancshares. Under federal regulations, current shareholders of Jefferson Federal have dissenters’ rights in connection with the conversion. The following table shows how the exchange ratio will adjust, based on the number of shares sold in our offering.

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The table also shows how many shares a hypothetical owner of 100 shares of Jefferson Federal common stock would receive in the exchange, based on the number of shares sold in the offering.

	Shares to be Sold in the Offering			Shares to be Exchanged for Existing Shares of Jefferson Federal			Total Shares of Common Stock to be Outstanding(1)	Exchange Ratio	Shares to be Received for 100 Existing Shares(2)
	Amount	Percent		Amount	Percent
Minimum	4,250,000	82.64	%	892,788	17.36	%	5,142,788	2.7419	274
Midpoint	5,000,000	82.64		1,050,339	17.36		6,050,339	3.2258	322
Maximum	5,750,000	82.64		1,207,890	17.36		6,957,890	3.7097	370
15% above Maximum	6,612,500	82.64		1,389,073	17.36		8,001,573	4.2661	426

(1) Prior to the contribution of shares to the Jefferson Federal Charitable Foundation.

(2) Cash will be paid instead of issuing any fractional shares.

If you hold shares of Jefferson Federal with a bank or broker in “street name,” you do not need to take any action to exchange the shares. If you are the recordholder of Jefferson Federal shares, you will receive a transmittal form with instructions to surrender stock certificates after the conversion and offering are completed. New certificates of Jefferson Bancshares common stock will be mailed to you after the exchange agent receives a properly executed transmittal form and certificates.

No fractional shares of Jefferson Bancshares common stock will be issued in the conversion. For each fractional share that would otherwise be issued, we will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10.00 per share subscription price.

Reduced Shareholder Rights  (page     ) As a result of the conversion, existing shareholders of Jefferson Federal will become shareholders of Jefferson Bancshares. The rights of shareholders of Jefferson Bancshares will be less than the rights shareholders currently have. The decrease in shareholder rights results from differences between the charters and bylaws of Jefferson Bancshares and Jefferson Federal and from distinctions between Tennessee and federal law. The differences in shareholder rights under the Tennessee charter and bylaws of Jefferson Bancshares are not mandated by Tennessee law but have been chosen by management as being in the best interests of the corporation and all of its shareholders. The differences in shareholder rights include the following:

• approval by at least 80% of outstanding shares required to remove a director for cause;

• the inability of shareholders to call special meetings;

• greater lead time required for shareholders to submit business proposals and director nominations;

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• approval by at least 80% of the outstanding shares required to amend the bylaws and certain provisions of the charter;

• a residency requirement for directors;

• approval by at least 80% of the outstanding shares required to approve business comminations involving an interested shareholder; and

• limitations on voting rights of beneficial owners of more than 10% of Jefferson Bancshares’ common stock.

Jefferson Federal Charitable Foundation (page     ) To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, the Jefferson Federal Charitable Foundation, as part of the conversion. The foundation will be funded with $250,000 and 375,000 shares of Jefferson Bancshares common stock. Based on the purchase price of $10.00 per share, the foundation would be funded with $3.75 million of common stock. Jefferson Federal Charitable Foundation will make grants and donations to non-profit and community groups and projects located within our market area. The amount of common stock that we would offer for sale would be greater if the conversion were to be completed without the formation of the Jefferson Federal Charitable Foundation. For a further discussion of the financial impact of the foundation, including its effect on those who purchase shares in the conversion and on the shares issued to shareholders of Jefferson Federal, see “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

Benefits of the Conversion to Management (page    ) We intend to adopt the following benefit plans and employment agreements:

• Employee Stock Ownership Plan.    This plan intends to purchase 8% of the shares issued in the conversion, including shares contributed to the Jefferson Federal Charitable Foundation. We will allocate these shares to employees over a period of years in proportion to their compensation. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

• Stock-Based Incentive Plan.    We intend to implement a stock-based incentive plan no earlier than six months after the conversion. Shareholder approval of this plan will be required. Under this plan, we may award stock options and shares of restricted stock to key employees and directors. The number of options available under this plan will be equal to 10% of the number of shares sold in the conversion and contributed to the charitable foundation. The number of shares available for restricted stock awards will equal 4% of the number of shares sold in the conversion and contributed to the

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charitable foundation. Shares of restricted stock will be awarded at no cost to the recipient. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

• Employment Agreement.    Jefferson Federal has previously entered into an employment agreement with Anderson L. Smith, President and Chief Executive Officer of Jefferson Federal. This agreement provides for severance benefits if Mr. Smith is terminated following a change in control of Jefferson Bancshares or Jefferson Federal. Jefferson Bancshares will become a party to this agreement upon the completion of the conversion.

The following table summarizes the total number and dollar value of the shares of common stock that the employee stock ownership plan expects to acquire and the total value of all restricted stock awards that are expected to be available under the stock-based incentive plan. The table assumes the value of the shares is $10.00 per share. The table does not include a value for the options because their exercise price would be equal to the fair market value of the common stock on the day that the options are granted. As a result, financial gains can be realized on an option only if the market price of the common stock increases above the price at which the option is granted.

	Number of Shares to be Granted or Purchased			Dilution Resulting from Issuance of Shares for Stock Benefit Plans		Value of Grants At Maximum of Offering Range
	At Maximum of Offering Range	As a % of Common Stock Outstanding After Conversion
Employee stock ownership plan	586,631	8.0	%	N/A		$	5,866,310
Restricted stock awards	245,000	3.3		3.2	%		2,450,000
Stock options	612,500	8.4		7.7			–
Total	1,444,131	19.8	%	11.0		$	8,316,310

Tax Consequences (page     ) As a general matter, the conversion will not be a taxable transaction for purposes of federal or state income taxes to Jefferson Bancshares, M.H.C., Jefferson Bancshares, Inc., Jefferson Federal, persons eligible to subscribe for shares in the offering, or existing shareholders of Jefferson Federal. Existing shareholders of Jefferson Federal who receive cash in lieu of fractional share interests in shares of Jefferson Bancshares will recognize gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

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THE OFFERING

Persons Who Can Order Stock in the
Offering (page    ) We are offering shares of Jefferson Bancshares common stock in a “subscription offering” in the following order of priority to:

Note: Subscription rights are not transferable, and persons with subscription rights may not subscribe for shares for the benefit of any other person. If you violate this prohibition, you may lose your rights to purchase shares and may face criminal prosecution and/or other sanctions.	1.	Persons with $50 or more on deposit at Jefferson Federal as of December 31, 2001.
	2.	Our employee stock ownership plan, which provides retirement benefits to our employees.
	3.	Persons with $50 or more on deposit at Jefferson Federal as of March 31, 2003.
	4.	Jefferson Federal’s depositors as of                     , 2003 and borrowers as of May 13, 1994 whose loans continue to be outstanding at                     , 2003.

	If we receive subscriptions for more shares than are to be sold in this offering, shares will be allocated in order of the priorities described above under a formula outlined in the plan of conversion. If we increase the number of shares to be sold above 5,750,000, the Jefferson Federal employee stock ownership plan will have the first priority right to purchase any shares exceeding that amount to the extent that its subscription has not previously been filled. Any shares remaining will be allocated in the order of priorities described above. See “The Conversion—Subscription Offering and Subscription Rights” for a description of the allocation procedure.
	We may offer shares not sold in the subscription offering to the general public in a community offering. Current shareholders of Jefferson Federal, then people and trusts for the benefit of people who are residents of Hamblen County, Tennessee and surrounding counties will have first preference to purchase shares in a community offering. The community offering, if held, may begin at any time during the subscription offering or immediately after the end of the subscription offering.
Deadline for Ordering Stock (page     )	The subscription offering will end at 12:00 noon, Eastern time, on [DATE]. We expect that the community offering will terminate at the same time, although it may continue for up to 45 days after the end of the subscription offering, or longer if regulators approve a later date. All extensions, in the aggregate, may not go beyond [DATE].
Purchase Price	The purchase price is $10.00 per share. We consulted with Keefe, Bruyette & Woods in determining this price. You will not pay a commission to buy any shares in the conversion.
Number of Shares to be Sold	We are offering for sale between 4,250,000 and 5,750,000 shares of Jefferson Bancshares common stock in this offering. With regulatory approval, we may increase the number of shares to be sold to 6,612,500 shares without giving you further notice or the opportunity to change or cancel your order. The Office of Thrift Supervision will consider the level of

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subscriptions, our financial condition and results of operations and changes in market conditions in connection with a request to increase the offering size.

How We Determined the Offering Range (page     )

The offering range is based on an independent appraisal of Jefferson Federal by RP Financial, LC., an appraisal firm experienced in appraisals of savings institutions. The appraisal incorporated an analysis of a peer group of publicly-traded thrift institutions that RP Financial considered to be comparable to Jefferson Bancshares. This analysis included an evaluation of the average and median price-to-earnings and price-to-book value ratios indicated by the market prices of the peer companies. RP Financial applied the peer group’s pricing ratios, as adjusted for qualitative valuation factors, to Jefferson Bancshares’ fully converted pro forma earnings and book value to derive the estimated pro forma market value of Jefferson Bancshares. RP Financial’s estimate of our market value was also based in part upon our financial condition and results of operations and the effect of the additional capital raised in this offering. RP Financial’s appraisal, dated as of March 7, 2003, estimated the pro forma market value of Jefferson Bancshares to be between $55,175,000 and $73,325,000, with a midpoint of $64,250,000. We established the offering range of $42,500,000 to $57,500,000, with a midpoint of $50,000,000, to give effect to the sale of Jefferson Bancshares, M.H.C.’s 82.64% interest in Jefferson Federal. RP Financial’s independent appraisal will be updated before we complete our reorganization. Any changes in the appraisal would be subject to Office of Thrift Supervision approval. Subject to regulatory approval, we may increase the estimated market value of Jefferson Bancshares to up to $83,761,000. If this occurs, the maximum number of shares offered for sale will increase to 6,612,500. The following table presents a summary of selected pricing ratios utilized by RP Financial for the peer group companies and the resulting pricing ratios for Jefferson Bancshares.

	Price To Earnings Multiple	Price To Tangible Book Value Ratio
Jefferson Bancshares:
Minimum	13.99x	77.79	%
Maximum	17.37	87.42
Valuation of peer group companies:
Average	17.83	98.75
Median	17.72	102.29

The independent appraisal does not indicate market value. We cannot guarantee that anyone who purchases shares in the conversion will be able to sell their shares at or above the $10.00 purchase price.

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Purchase Limitations (page    )	Our plan of conversion establishes limitations on the purchase of stock in the offering. These limitations include the following:
	The minimum purchase is 25 shares.
	No individual may purchase more than 50,000 shares. If any of the following persons purchase stock, their purchases when combined with your purchases cannot exceed 75,000 shares.
	•    Your spouse or relatives of you or your spouse living in             your house;
	•    Companies, trusts or other entities in which you have a             controlling interest or hold a position; or
	•    Other persons who may be acting in concert with you.
	If you are now a Jefferson Federal shareholder, then in addition to the above purchase limitations, there is an ownership limitation. Shares that you purchase in the offering individually and together with persons described above, plus new shares you and they receive in the exchange for existing Jefferson Federal common stock, may not exceed 2% off the total number of shares issued in the conversion. Subject to the Office of Thrift Supervision‘s approval, we may increase or decrease the purchase and ownership limitations at any time.
How to Purchase Common Stock (page    )	If you want to place an order for shares in the conversion, you must complete an original stock order form and send it to us together with full payment. You must sign the certification that is on the reverse side of the stock order form. We must receive your stock order form before the end of the subscription offering or the end of the community offering, as appropriate. Once we receive your order, you cannot cancel or change it without our consent.
	To ensure that we properly identify your subscription rights, you must list all of your deposit accounts as of the eligibility dates on the stock order form. If you fail to do so, your subscription may be reduced or rejected if the offering is oversubscribed.
	We may, in our sole discretion, reject orders received in the community offering either in whole or in part. If your order is rejected in part, you cannot cancel the remainder of your order.
	You may pay for shares in the subscription offering or the community offering in any of the following ways:
	•    By check or money order made payable to Jefferson Bancshares, Inc.

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	•    By authorizing withdrawal from an account at Jefferson      Federal. To use funds in an Individual Retirement Account      at Jefferson Federal, you must transfer your account to an      unaffiliated institution or broker. Please contact the      stock information center at least one week before the      end of the subscription offering for assistance.
	We will pay interest on your subscription funds at the rate we pay on passbook accounts, which is currently .75%, from the date we receive your funds until the conversion is completed or terminated. All funds authorized for withdrawal from deposit accounts with us will earn interest at the applicable account rate until the conversion is completed. There will be no early withdrawal penalty for withdrawals from certificates of deposit used to pay for stock. If, as a result of a withdrawal from a certificate of deposit, the balance falls below the minimum balance requirement, the remaining funds will earn interest at our passbook rate.
How We Will Use the Proceeds of this Offering (page    )	The following table summarizes how Jefferson Bancshares will use the proceeds of this offering, based on the sale of shares at the minimum and maximum of the offering range.

	4,250,000 Shares at $10.00 Per Share		5,750,000 Shares at $10.00 Per Share
	(In thousands)
Offering proceeds	$	42,500	$	57,500
Less: offering expenses		1,600		1,600
Net offering proceeds		40,900		55,900
Less:
Proceeds contributed to Jefferson Federal		20,450		27,950
Proceeds contributed to the charitable foundation		250		250
Proceeds used for loan to employee stock ownership plan		4,414		5,866
Proceeds remaining for Jefferson Bancshares	$	15,786	$	21,834

Jefferson Bancshares may use the portion of the proceeds that it retains to invest in securities, pay cash dividends or buy back shares of common stock. Jefferson Federal may use the portion of the proceeds that it receives to fund new loans, invest in securities and expand its business activities. Jefferson Bancshares and Jefferson Federal may also use the proceeds of the offering to diversify their businesses and acquire other companies, although we have no specific plans to do so at this time.

Purchases by Directors and Executive Officers (page    )

We expect that our directors and executive officers, together with their associates, will subscribe for 379,000 shares, which equals 7.6% of the shares that would be sold at the midpoint of

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the offering range. Directors and executive officers will pay the same $10.00 per share price as everyone else who purchases shares in the conversion. Following the conversion, our directors and executive officers, together with their associates, are expected to own 559,806 shares of common stock (including exercisable options), or 8.7% of our outstanding common stock if shares are sold at the midpoint of the offering range.

Market for Jefferson Bancshares Common Stock (page     ) Jefferson Federal common stock is traded over-the-counter and quoted on the Pink Sheets. We have applied to have the common stock of Jefferson Bancshares listed for trading on the Nasdaq National Market under the symbol “JFBI.” Keefe, Bruyette & Woods currently intends to become a market maker in the common stock and will assist us in obtaining additional market makers. After shares of the common stock begin trading, you may contact a stock broker to buy or sell shares.

Jefferson Bancshares’ Dividend Policy (page    ) Jefferson Federal currently pays a cash dividend of $0.125 per share per quarter. After the conversion, we intend to continue to pay cash dividends on a quarterly basis if we are able. We expect dividends to equal $0.046, $0.039, $0.034 and $0.029 per share per quarter at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, which represents an annual dividend yield of 1.8%, 1.6%, 1.4% and 1.2%, respectively, based upon a price of $10.00 per share. The amount of dividends that we intend to pay following the conversion will approximate the per share dividend amount, adjusted to reflect the exchange ratio, that Jefferson Federal shareholders currently receive. In the past, we have also paid a special dividend of $0.20 per share in the fourth quarter of our fiscal year. Following the conversion, we will continue to evaluate whether it is appropriate to pay a special dividend. We make no assurances that we will continue to pay a special dividend.

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Risk Factors

You should consider carefully the following risk factors before purchasing Jefferson Bancshares common stock.

Our subprime loans subject our loan portfolio to increased risk.

As a result of our prior lending practices, we have a large number of subprime loans, which we define as loans to borrowers with a Beacon credit score of less than 600. Subprime loans are particularly susceptible to delinquencies and losses. Our delinquency and foreclosure rates on our residential and consumer loan portfolios have been higher than our peers. We believe that, to a significant extent, this is a result of our historical subprime residential and consumer lending practices. We expect that this trend will continue in the near future. We have substantially decreased our origination of subprime loans and have improved our collection policies and procedures. As a result, subprime loans have decreased from $45.5 million, or 25.9% of total loans, at June 30, 2000 to $33.0 million, or 17.2% of total loans, at December 31, 2002. Nevertheless, as a result of our having a subprime loans in our portfolio, we expect to have a higher level of nonperforming assets than our peers. If we experience increased losses from nonperforming assets, we may determine it necessary to increase our allowance for loan losses. Increased provisions for loan losses will hurt our profits.

A downturn in the local economy could hurt our profits.

The success of our business depends on our ability to generate profits and grow our franchise. We are located in Morristown, Tennessee and consider Hamblen County, with a population of 59,000, and its contiguous counties to be our primary market area. The economy of this market area is based primarily on manufacturing and agriculture. Our primary lending activity is the origination of loans secured by real estate. Nearly all of these loans are made to borrowers who live and work in our primary market area. According to the U.S. Bureau of Labor Statistics, the unemployment rates for the State of Tennessee have compared favorably to the national rate as well as the rate in Hamblen County. In this regard, the average monthly unemployment rate in Hamblen County has decreased from 6.2% for 2001 to 5.6% for 2002, but remained above the state average and slightly below the national average. Importantly, the slow economy in Jefferson Federal’s market has been evidenced in other ways such as through diminished hours worked for hourly employees in the manufacturing sector which is the largest component of the local economy.

Rising interest rates may hurt our profits.

Interest rates are at historically low levels. If interest rates rise, our net interest income and the value of our assets likely would be reduced if interest paid on interest-bearing liabilities, such as deposits and borrowings, increased more quickly than interest received on interest-earning assets, such as loans and investments. At December 31, 2002, approximately 60% of our residential mortgage loans provided for periodic interest rate adjustments. Our adjustable-rate residential mortgage loans generally do not adjust downwards below the initial contract rate. Accordingly, the interest rates on these loans have not decreased as a result of the declining interest rate environment. If market interest rates increase, our adjustable-rate mortgage loans will not adjust upward until the index rate exceeds the initial contract rate. As a result, in a rising interest rate environment, we expect that the interest we pay on deposits will increase faster than the interest we receive on loans, reducing our profitability. According to Office of Thrift Supervision calculations, if interest rates increase by 2%, the net value of our assets will decrease by 10%. If interest rates increase by 3%, the net value of our assets (our net portfolio value) will decrease by 18%. For further discussion of how changes in interest rates could impact us, see “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Management of Interest Rate Risk and Market Risk Analysis.”

We expect that our return on equity initially will decline after the conversion.

Return on equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. For the six months ended December 31, 2002, our annualized return on equity was 10.25%, while our pro forma return on equity for the same period is

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estimated to be 5.59%, assuming the sale of shares at the midpoint of the offering range. Our regional peers used in the valuation of Jefferson Bancshares had an average return on equity of 6.11% for the year ended December 31, 2002, while all publicly held thrifts had an average return on equity of 9.62% for the same period. Over time, we intend to use the net proceeds from this offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is competitive with other publicly traded financial institutions. This goal could take a number of years to achieve, and we cannot assure you that this goal will be attained. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with a higher return on equity. See “Pro Forma Data” for an illustration of the financial impact of this offering.

Strong competition within our market area could hurt our profits and slow growth.

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. As of June 30, 2002, we held 31% of the deposits in Hamblen County, which was the largest share of deposits out of eight financial institutions in the county. However, we compete with large regional banks owned by Suntrust Banks, Inc., First Tennessee National Corporation, Union Planters Corporation and National Commerce Financial Corporation. These competitors have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area. For more information about our market area and the competition we face, see “Our Business—Market Area” and “Our Business—Competition.”

Our commercial real estate and multi-family loans expose us to increased lending risks.

At December 31, 2002, $56.7 million, or 29.5%, of our loan portfolio consisted of commercial and multi-family real estate loans. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

We may require further additions to our allowance for loan losses, which would reduce net income.

If our borrowers do not repay their loans or if the collateral securing their loans is insufficient to provide for the full repayment, we may suffer credit losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for loan losses based on a number of factors. If our assumptions and judgments are wrong, our allowance for loan losses may not be sufficient to cover our losses. If we determine that our allowance for loan losses is insufficient, we would be required to take additional provisions for loan losses, which would reduce net income during the period those provisions are taken. In addition, the Office of Thrift Supervision periodically reviews our allowance for loan losses and may require us to increase our allowance for loan losses or to charge off particular loans.

Implementation of new benefit plans will increase our future compensation expense, which will reduce our profitability and stockholders’ equity.

We will recognize additional annual material employee compensation and benefit expenses stemming from the shares purchased or granted to employees and executives under new benefit plans. We cannot predict the actual amount of these new expenses because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future. We would recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and would recognize expenses for restricted stock awards over the vesting period of awards made to recipients. These expenses have been estimated in the pro forma financial information under “Pro Forma Data” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. In addition, changes in accounting guidelines may require us to recognize expenses relating to stock option grants. For further discussion of these plans, see “Our Management—Benefit Plans.”

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Issuance of shares for benefit programs may dilute your ownership interest.

We intend to adopt a stock-based incentive plan following the offering. If shareholders approve the new stock-based incentive plan, we intend to issue shares to our officers and directors through this plan. If the restricted stock awards under the stock-based incentive plan are funded from authorized but unissued stock, your ownership interest could be diluted by up to approximately 3.5%. If the shares issued upon the exercise of stock options under the stock-based incentive plan are issued from authorized but unissued stock, your ownership interest could be diluted by up to approximately 8.3%. See “Pro Forma Data” and “Our Management—Benefit Plans.”

Expected voting control by management and employees may prevent shareholders from taking actions opposed by management.

Our board of directors and executive officers intend to purchase approximately 7.6% of the shares offered at the midpoint of the offering range. These purchases, together with shares acquired through the exchange of shares of Jefferson Federal, the purchase of 8% of the shares by the employee stock ownership plan (including the shares contributed to the Jefferson Federal Charitable Foundation), the potential acquisition of 11.7% of our common stock through the stock-based incentive plan, and the 375,000 shares issued in the conversion to the Jefferson Federal Charitable Foundation, could result in management and employees controlling a significant percentage of Jefferson Bancshares’ common stock. If these individuals were to act together, they could have significant influence over the outcome of any shareholder vote. This voting power may discourage takeover attempts you might like to see happen. In addition, the total voting power of management and employees is likely to exceed 20% of Jefferson Bancshares’ outstanding stock. That level would enable management and employees as a group to defeat any shareholder matter that requires an 80% vote, including removal of directors, approval of certain business combinations with interested shareholders and certain amendments to our charter and bylaws. For information about management’s intended stock purchases and the number of shares that may be awarded under new benefit plans, see “Our Management—Benefit Plans,” and “Shares to Be Purchased by Management with Subscription Rights.”

The contribution to the Jefferson Federal Charitable Foundation means that a shareholder’s total ownership interest will be up to 6.8% less after the contribution.

Purchasers of shares will have their ownership and voting interests in Jefferson Bancshares diluted by up to 6.8% at the close of the conversion when Jefferson Bancshares issues an additional 375,000 shares and contributes those shares to the Jefferson Federal Charitable Foundation. For a further discussion regarding the effect of the contribution to the charitable foundation, see “Pro Forma Data” and “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

The contribution to the Jefferson Federal Charitable Foundation may decrease the number of shares issued in exchange for shares of Jefferson Federal.

The exchange ratio for converting shares of Jefferson Federal common stock into shares of Jefferson Bancshares common stock may be lower due to the contribution to the foundation. The number of shares that we are offering for sale is based on an independent appraisal of Jefferson Bancshares. RP Financial, LC., which performed the appraisal, has informed us that the value of Jefferson Bancshares would be greater if we did not form the charitable foundation and fund it with shares of Jefferson Bancshares common stock. The final exchange ratio for converting shares of Jefferson Federal common stock into shares of Jefferson Bancshares common will depend on the number of shares sold in the offering. The maximum number of shares that we may sell in the offering without resoliciting subscribers is 6,612,500, which would result in an exchange ratio of 4.2661. If we did not form the charitable foundation, the maximum number of shares that we would be able to sell in the offering without resoliciting subscribers would be 7,273,750, which would result in an exchange ratio of 4.6927.

Our contribution to the Jefferson Federal Charitable Foundation may not be tax deductible, which could hurt our profits.

We believe that our contribution to the Jefferson Federal Charitable Foundation, valued at $4.0 million, pre-tax, will be deductible for federal income tax purposes. However, we do not have any assurance that the Internal

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Revenue Service will grant tax-exempt status to the foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully.

Establishment of Jefferson Federal Charitable Foundation will hurt our profits for fiscal year 2003.

Jefferson Bancshares intends to contribute $250,000 plus 375,000 shares of its common stock to the Jefferson Federal Charitable Foundation. This contribution will be an additional operating expense and will reduce net income during the fiscal year in which the foundation is established, which is expected to be the year ending June 30, 2003, possibly resulting in an operating loss for that year. Based on the pro forma assumptions, the contribution to the Foundation would reduce net earnings by $2.5 million, after tax, in fiscal year 2003. If we experience delays in completing the conversion, we would recognize the expense in the fiscal year 2004.

Failure to approve the Jefferson Federal Foundation may materially affect the pro forma market value of Jefferson Bancshares, which may delay the completion of the conversion.

The establishment and funding of the foundation as part of the conversion is subject to the approval of the members of Jefferson Bancshares, M.H.C. and the shareholders of Jefferson Federal. In the event our members or our shareholders approve the conversion, but not the foundation, we may determine to complete the conversion without the establishment of the foundation and may do so without amending the plan of conversion or obtaining any further vote of our members or the shareholders of Jefferson Federal. RP Financial, LC., which performed the appraisal of Jefferson Bancshares on which this offering is based, has informed us that the value of Jefferson Bancshares would be greater if we did not form the charitable foundation and fund it with shares of Jefferson Bancshares common stock. Therefore, failure of our members or shareholders to approve the foundation may materially affect our pro forma market value. If our pro forma market value increases above $83,761,000, all subscribers will be resolicited and given the chance to change or cancel their orders. A resolicitation would delay the completion of the conversion.

Loss of our President and Chief Executive Officer could hurt our operations.

We rely heavily on our President and Chief Executive Officer, Anderson L. Smith. The loss of Mr. Smith could have an adverse effect on us because, as a small community bank, Mr. Smith is responsible for more aspects of our business than he might be at a larger financial institution with more employees. Moreover, as a small community bank, we have fewer management level employees who are in a position to succeed Mr. Smith. We have entered into a three-year employment agreement with Mr. Smith. We do not have key-man life insurance on Mr. Smith.

Various factors could make takeover attempts more difficult to achieve.

Provisions of Jefferson Bancshares’ charter and bylaws, federal and state regulations and various other factors may make it more difficult for companies or persons to acquire control of Jefferson Bancshares without the consent of Jefferson Bancshares’ board of directors. It is possible, however, that you might like to see a takeover attempt succeed because, for example, the potential acquiror could be offering a premium over the then prevailing market price of Jefferson Bancshares common stock. The factors that may discourage takeover attempts or make them more difficult include:

• Anti-takeover provisions and statutory provisions. Provisions in Jefferson Bancshares’ charter and bylaws, the corporate law of the State of Tennessee, and federal regulations may make it difficult and expensive to pursue a takeover attempt that management opposes. These provisions will also make the removal of the current board of directors or management of Jefferson Bancshares, or the appointment of new directors, more difficult. These provisions include: limitations on voting rights of beneficial owners of more than 10% of Jefferson Bancshares’ common stock; supermajority voting requirements for certain business combinations; the election of directors to staggered terms of three years; and the absence of cumulative voting by shareholders in the election of directors. The bylaws of

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Jefferson Bancshares also contain provisions regarding the timing and content of shareholder proposals and nominations and qualification for service on the board of directors. For further information about these provisions, see “Comparison of Shareholders’ Rights” and “Restrictions on Acquisition of Jefferson Bancshares and Jefferson Federal.”

• Required change in control payments. If a change in control had occurred at December 31, 2002 and all current executive officers and employees of Jefferson Federal were terminated, the aggregate value of the severance benefits required to be paid under our employment agreement with our chief executive officer and the employee severance plan, based on 2002 compensation data, would have been approximately $1.5 million. This estimate does not take into account future salary adjustments or bonus payments or the value of the continuation of other employee benefits. These payments may have the effect of increasing the costs of acquiring Jefferson Bancshares, thereby discouraging future attempts to take over Jefferson Bancshares.

• Office of Thrift Supervision regulations. Office of Thrift Supervision regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the acquisition of more than 10% of any class of equity security of a converted institution without the prior approval of the Office of Thrift Supervision.

Our stock price may decline when trading commences.

We cannot guarantee that if you purchase shares in the conversion that you will be able to sell them at or above the $10.00 purchase price. After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors, including prevailing interest rates, investor perceptions and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, have recently experienced substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect any market on which our common stock trade, the markets in which we operate, our operations and our profitability.

Terrorist attacks may negatively affect our operations and your investment in our common stock. We cannot assure you that there will not be further terrorist attacks against the United States or United States businesses.

The consequences of any armed conflict are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. More generally, any of these events could result in increased volatility in or damage to the United States and worldwide financial markets and economy. They also could result in a continuation of the current economic uncertainty in the United States or abroad. Adverse economic conditions could affect the ability of our borrowers to pay back their loans, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay dividends to shareholders, and may result in volatility in the market price for our securities.

There is a decrease in the rights of shareholders under our Tennessee charter and bylaws.

As a result of the conversion, existing shareholders of Jefferson Federal, a federal savings and loan association, will become shareholders of Jefferson Bancshares, a Tennessee corporation. The rights of shareholders of the new Tennessee corporation will be less than the rights shareholders currently have. The differences in shareholder rights under Jefferson Bancshares’ charter and bylaws are not mandated by Tennessee law but have been chosen by management as being in the best interests of the corporation and all of its shareholders. The differences in shareholder rights include the following: (1) approval by at least 80% of outstanding shares required to remove a director for cause; (2) the inability of shareholders to call special meetings; (3) greater lead time required for shareholders to submit shareholder proposals; (4) approval by at least 80% of the outstanding shares required to amend the charter and bylaws; (5) a residency requirement for directors; (6) approval by at least 80% of the

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outstanding shares required to approve business combinations involving an interested shareholder; and (7) limitations on voting rights of beneficial owners of more than 10% of Jefferson Bancshares’ common stock.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of our deposits. As a savings and loan holding company, Jefferson Bancshares will be subject to regulation and supervision by the Office of Thrift Supervision. Such regulation and supervision govern the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would reduce our profitability.

We intend to contribute approximately 50% of the net proceeds of the offering to Jefferson Federal. We may use the remaining net proceeds to finance the acquisition of other financial institutions or other businesses that are related to banking, pay dividends to shareholders, repurchase common stock, purchase investment securities, or for other general corporate purposes. We expect to use a portion of the net proceeds to fund the employee stock ownership plan purchases of shares in the offering. Jefferson Federal may use the proceeds it receives to establish or acquire new branches, acquire financial institutions or other businesses that are related to banking, fund new loans, purchase investment securities, or for general corporate purposes. We have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively would reduce our profitability.

We may not succeed in our plan to grow.

We intend to expand our branch network, initially in Hamblen County and possibly into surrounding counties, in future years. Building and staffing new branch offices will increase our operating expenses. There is no guarantee that new branch offices will generate revenues that are sufficient to justify our investment or that will exceed the expenses we would incur in expanding our branch network.

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A Warning About Forward-Looking Statements

This prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating strategies;

• statements regarding the quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• general economic conditions, either nationally or in our market area, that are worse than expected;

• changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

• increased competitive pressures among financial services companies;

• changes in consumer spending, borrowing and savings habits;

• legislative or regulatory changes that adversely affect our business;

• adverse changes in the securities markets;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies or the Financial Accounting Standards Board.

Any of the forward-looking statements that we make in this prospectus and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.

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Selected Financial and Other Data

The summary financial information presented below is derived in part from the financial statements of Jefferson Federal. The following is only a summary and you should read it in conjunction with the financial statements and notes beginning on page F-1. The information at June 30, 2002 and 2001 and for the three years ended June 30, 2002 is derived in part from the audited consolidated financial statements of Jefferson Federal that appear in this prospectus. The information at June 30, 2000, 1999 and 1998 and for the years ended June 30, 1999 and 1998 is derived in part from audited consolidated financial statements that do not appear in this prospectus. The operating data for the six months ended December 31, 2002 and 2001 was not audited, but, in the opinion of management, reflects all adjustments necessary for a fair presentation. No adjustments were other than normal recurring entries. The results of operations for the six months ended December 31, 2002 are not necessarily indicative of the results of operations that may be expected for the entire year.

	At December 31, 2002		At June 30,
			2002		2001		2000		1999		1998
	(Dollars in thousands)
Financial Condition Data:
Total assets	$	260,443	$	267,340	$	254,464	$	230,589	$	220,075	$	194,298
Loans receivable, net		186,351		190,032		181,191		170,172		167,984		159,532
Cash and cash equivalents, interest-bearing deposits, and investment securities		63,662		68,653		64,435		51,855		43,810		27,574
Borrowings		2,000		2,000		2,000		4,000		–		–
Deposits		223,038		231,849		222,061		199,141		194,339		170,355
Stockholders’ equity		34,940		32,901		29,892		26,936		25,205		23,489

	Six Months Ended December 31,				Year Ended June 30,
	2002		2001		2002		2001		2000		1999		1998
	(Dollars in thousands, except per share data)
Operating Data:
Interest income	$	8,944	$	9,895	$	19,380	$	19,254	$	17,646	$	16,535	$	15,102
Interest expense		3,576		5,946		10,267		11,740		10,058		9,427		8,517
Net interest income		5,368		3,949		9,113		7,514		7,588		7,108		6,585
Provision for loan losses		547		480		1,221		960		1,270		764		700
Net interest income after provision for loan losses		4,821		3,469		7,892		6,554		6,318		6,344		5,885
Noninterest income		519		391		1,021		910		1,222		760		878
Noninterest expense		2,534		2,366		5,069		3,993		3,732		3,314		3,094
Earnings before income taxes		2,806		1,494		3,844		3,471		3,808		3,790		3,669
Total income taxes		1,054		579		1,418		1,283		1,425		1,387		1,357
Net earnings	$	1,752	$	915	$	2,426	$	2,188	$	2,383	$	2,403	$	2,312
Per Share Data
Earnings per share, basic	$	0.93	$	0.49	$	1.30	$	1.17	$	1.28	$	1.29	$	1.24
Earnings per share, diluted	$	0.93	$	0.49	$	1.29	$	1.17	$	1.28	$	1.28	$	1.23
Dividends per share	$	0.25	$	0.25	$	0.70	$	0.70	$	0.70	$	0.70	$	0.70

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	At or For the Six Months Ended December 31,				At or For the Year Ended June 30,
	2002		2001		2002		2001		2000		1999		1998
Performance Ratios (1):
Return on average assets	1.33	%	0.69	%	0.91	%	0.90	%	1.05	%	1.15	%	1.27	%
Return on average equity	10.25		5.88		7.68		7.60		9.19		9.77		10.28
Interest rate spread (2)	3.79		2.49		3.02		2.56		2.92		2.93		3.11
Net interest margin (3)	4.20		3.08		3.53		3.20		3.47		3.52		3.73
Noninterest expense to average assets	1.92		1.79		1.90		1.65		1.64		1.59		1.69
Efficiency ratio (4)	43.64		54.72		50.73		47.46		42.36		41.93		41.28
Average interest-earning assets to average interest-bearing liabilities	114.47		112.75		112.77		112.70		111.80		112.69		112.88
Capital Ratios:
Tangible capital	13.0		11.5		12.0		11.5		11.6		11.3		11.8
Core capital	13.0		11.5		12.0		11.5		11.6		11.3		11.8
Risk-based capital	22.4		20.0		21.1		20.2		20.3		18.9		18.8
Dividend payout ratio (5)	4.64		8.57		9.06		10.04		9.19		9.11		9.43
Average equity to average assets	12.94		11.80		11.87		11.87		11.41		11.80		12.31
Asset Quality Ratios:
Allowance for loan losses as a percent of total gross loans	1.40		1.14		1.37		1.17		1.15		1.14		1.00
Allowance for loan losses as a percent of nonperforming loans	113.1		83.6		130.4		80.1		49.1		38.3		44.6
Net charge-offs to average outstanding loans during the period (1)	0.58		0.46		0.38		0.43		0.71		0.26		0.42
Nonperforming loans as a percent of total loans	1.28		1.42		1.09		1.52		2.43		3.08		2.33
Nonperforming assets as a percent of total assets	1.62		1.44		1.16		1.54		1.91		2.55		2.06
Other Data:
Number of:
Real estate loans outstanding	2,759		3,006		2,915		3,012		2,983		3,115		2,858
Deposit accounts	15,905		16,599		16,329		16,548		15,728		15,018		13,778
Full service customer service facilities	1		1		1		1		1		1		1
Drive-through facilities	2		2		2		2		2		2		2

(1) Ratios for the six months ended December 31 are annualized.

(2) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3) Represents net interest income as a percent of average interest-earning assets.

(4) Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities.

(5) Reflects total cash dividends paid divided by net earnings. If Jefferson Bancshares, M.H.C. had not waived the receipt of dividends, the ratio would have been 26.76% and 50.92% for the six months ended December 31, 2002 and 2001, respectively, and 53.79%, 59.62%, 54.72%, 54.27% and 56.36% for the years ended June 30, 2002, 2001, 2000, 1999 and 1998, respectively.

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Use of Proceeds

The following table shows how Jefferson Bancshares intends to use the net proceeds of the offering. The actual net proceeds will depend on the number of shares of common stock sold in the offering and the expenses incurred in connection with the offering. Payments for shares made through withdrawals from deposit accounts at Jefferson Federal will reduce Jefferson Federal’s deposits and will not result in the receipt of new funds for investment. See “Pro Forma Data” for the assumptions used to arrive at these amounts.

	4,250,000 Shares at $10.00 Per Share		5,000,000 Shares at $10.00 Per Share		5,750,000 Shares at $10.00 Per Share		6,612,500 Shares at $10.00 Per Share
	(In thousands)
Offering proceeds	$	42,500	$	50,000	$	57,500	$	66,125
Less: estimated underwriting commissions and other offering expenses		1,600		1,600		1,600		1,600
Net offering proceeds		40,900		48,400		55,900		64,525
Less:
Proceeds contributed to Jefferson Federal		20,450		24,200		27,950		32,263
Proceeds contributed to the charitable foundation		250		250		250		250
Proceeds used for loan to employee stock ownership plan		4,414		5,140		5,866		6,701
Proceeds remaining for Jefferson Bancshares	$	15,786	$	18,810	$	21,834	$	25,311

Jefferson Bancshares may use the proceeds it retains from the offering:

• to invest in securities;

• to pay dividends to shareholders;

• to repurchase shares of its common stock;

• to finance the possible acquisition of financial institutions or other businesses that are related to banking; and

• for general corporate purposes.

Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following conversion, except to fund stock-based benefit plans or, with prior regulatory approval, when extraordinary circumstances exist.

Jefferson Federal may use the proceeds that it receives from the offering, which is shown in the table above as the amount contributed to Jefferson Federal:

• to fund new loans;

• to invest in securities;

• to finance the possible expansion of its business activities, including developing new branch locations; and

• for general corporate purposes.

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We may need regulatory approvals to engage in some of the activities listed above. We currently have no specific plans or agreements regarding any expansion activities or acquisitions, although we have identified potential branch locations.

Except as described above, we have no specific plans for the investment of the proceeds of this offering. Although Jefferson Federal’s capital currently exceeds regulatory requirements, we are conducting the conversion primarily to structure our business in the form of organization used by commercial banks and most other financial services companies. For a discussion of our business reasons for undertaking the conversion, see “The Conversion—Reasons for the Conversion.”

Our Dividend Policy

Jefferson Federal currently pays a cash dividend of $0.125 per quarter. Jefferson Federal also has paid a special dividend of $0.20 per share during the fourth fiscal quarter. Following the conversion, Jefferson Bancshares’ Board of Directors intends to adopt a policy of paying regular cash dividends. We expect dividends to equal $0.046, $0.039, $0.034 and $0.029 per share per quarter at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, which represents an annual dividend yield of 1.8%, 1.6%, 1.4% and 1.2%, respectively, based upon a price of $10.00 per share. The amount of dividends that we intend to pay following the conversion will preserve the per share quarterly dividend amount of regular dividends, adjusted to reflect the exchange ratio, that Jefferson Federal shareholders currently receive. In addition, the Board of Directors may declare and pay periodic special cash dividends in addition to, or in lieu of, regular cash dividends. In determining whether to declare or pay any dividends, whether regular or special, the Board of Directors will take into account Jefferson Bancshares’ financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions. The regulatory restrictions that affect the payment of dividends by Jefferson Federal to Jefferson Bancshares discussed below will also be considered. Jefferson Bancshares cannot guarantee that it will pay dividends or that, if paid, that Jefferson Bancshares will not reduce or eliminate dividends in the future.

Jefferson Bancshares is subject to Tennessee law, which prohibits distributions to shareholders if, after giving effect to the distribution, the corporation would not be able to pay its debts as they become due in the usual course of business or the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Dividends from Jefferson Bancshares may depend, in part, upon receipt of dividends from Jefferson Federal because Jefferson Bancshares initially will have no source of income other than dividends from Jefferson Federal and earnings from the investment of the net proceeds from the offering retained by Jefferson Bancshares. Office of Thrift Supervision regulations limit distributions from Jefferson Federal to Jefferson Bancshares. In addition, Jefferson Federal may not declare or pay a cash dividend on its capital stock if its effect would be to reduce the regulatory capital of Jefferson Federal below the amount required for the liquidation account to be established as required by Jefferson Federal’s plan of conversion. See “Regulation and Supervision—Federal Savings Institution Regulation—Limitations on Capital Distributions” and “The Conversion—Effects of Conversion to Stock Form—Liquidation Account.”

Any payment of dividends by Jefferson Federal to Jefferson Bancshares that would be deemed to be drawn out of Jefferson Federal’s bad debt reserves would require the payment of federal income taxes by Jefferson Federal at the then current income tax rate on the amount deemed distributed. See “Federal and State Taxation—Federal Income Taxation” and note 10 of the notes to financial statements included in this prospectus. Jefferson Bancshares does not contemplate any distribution by Jefferson Federal that would result in this type of tax liability.

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Market for the Common Stock

The common stock of Jefferson Federal is currently traded over-the-counter and quoted on the Pink Sheets under the symbol “JFSZ.” Due to the small number of shareholders and shares outstanding, trading in shares of Jefferson Federal common stock is infrequent. Upon completion of the conversion, the shares of common stock of Jefferson Bancshares will replace existing shares of Jefferson Federal and will be traded on the Nasdaq National Market under the symbol “JFBI.” Keefe, Bruyette & Woods, Inc. intends to become a market maker in Jefferson Bancshares common stock following the conversion. Keefe, Bruyette & Woods, Inc. also will assist Jefferson Bancshares in obtaining other market makers after the conversion. We cannot assure you that other market makers will be obtained or that an active and liquid trading market for the common stock will develop or, if developed, will be maintained.

The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $10.00 price per share in the offering. Purchasers of our common stock should have a long-term investment intent and should recognize that there may be a limited trading market in the common stock.

The following table sets forth high and low sales prices for Jefferson Federal’s common stock and dividends paid per share for the periods indicated. Jefferson Bancshares, M.H.C. waived the receipt of all dividends paid by Jefferson Federal during the periods covered in this table.

	High	Low	Dividend Paid
Year Ended June 30, 2003
Fourth quarter (through         , 2003)
Third quarter			0.125
Second quarter	32.30	28.00	0.125
First quarter	35.00	29.50	0.125
Year Ended June 30, 2002
Fourth quarter	35.00	32.00	0.325
Third quarter	27.56	22.00	0.125
Second quarter	21.50	21.00	0.125
First quarter	17.00	13.50	0.125
Year Ended June 30, 2001
Fourth quarter	15.00	11.25	0.325
Third quarter	14.19	14.19	0.125
Second quarter	13.00	12.00	0.125
First quarter	14.00	11.00	0.125

On February 25, 2003, which was the day of the most recent trade preceding the public announcement of the conversion, the closing price of Jefferson Federal common stock as reported on the Pink Sheets was $33.50. On             , 2003, which the day of most recent trade before the date of this prospectus, the closing price of Jefferson Federal common stock as reported on the Pink Sheets was $             per share. At             , 2003, Jefferson Federal had approximately              shareholders of record. On the effective date of the conversion, all publicly held shares of Jefferson Federal common stock, including shares held by our officers and directors, will be converted automatically into and become the right to receive a number of shares of Jefferson Bancshares common stock determined pursuant to the exchange ratio. See “The Conversion—Share Exchange Ratio.” Options to purchase shares of Jefferson Federal common stock will be converted into options to purchase a number of shares of Jefferson Bancshares common stock determined pursuant to the exchange ratio, for the same aggregate exercise price.

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Capitalization

The following table presents the historical capitalization of Jefferson Federal at December 31, 2002 and the capitalization of Jefferson Bancshares reflecting the conversion (referred to as “pro forma” information). The pro forma capitalization gives effect to the assumptions listed under “Pro Forma Data,” based on the sale of the number of shares of common stock indicated in the table. This table does not reflect the issuance of additional shares under the proposed stock-based incentive plan. A change in the number of shares to be issued in the conversion may materially affect pro forma capitalization.

			Jefferson Bancshares Pro Forma Capitalization Based Upon the Sale of
	Jefferson Federal Capitalization as of December 31, 2002		4,250,000 Shares at $10.00 Per Share			5,000,000 Shares at $10.00 Per Share			5,750,000 Shares at $10.00 Per Share			6,612,500 Shares at $10.00 Per Share
	(In thousands)
Deposits (1)	$	223,038	$	223,038		$	223,038		$	223,038		$	223,038
Advances from Federal Home Loan Bank		2,000		2,000			2,000			2,000			2,000
Total deposits and borrowed funds	$	225,038	$	225,038		$	225,038		$	225,038		$	225,038
Stockholders’ equity:
Preferred stock:
10,000,000 shares, $.01 par value per share, authorized; none issued or outstanding	$	—	$	—		$	—		$	—		$	—
Common stock:
30,000,000, $.01 par value per share, authorized; specified number of shares assumed to be issued and outstanding		1,876		55			65			74			84
Additional paid-in capital		1,167		47,638			55,129			62,620			71,234
Retained earnings (2)		30,991		31,101			31,101			31,101			31,101
Accumulated other comprehensive income		906		906			906			906			906
Less:
Foundation contribution expense, net (3)		–		(2,508	)		(2,508	)		(2,508	)		(2,508	)
Common stock acquired by employee stock ownership plan (4)		–		(4,414	)		(5,140	)		(5,866	)		(6,701	)
Common stock to be acquired by stock-based incentive plan (5)		–		(1,850	)		(2,150	)		(2,450	)		(2,795	)
Total stockholders’ equity	$	34,940	$	70,928		$	77,402		$	83,876		$	91,321

(1) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Withdrawals to purchase common stock will reduce pro forma deposits by the amounts of the withdrawals.

(2) Pro forma retained earnings include assets held by Jefferson Bancshares, M.H.C. of $110,000. Retained earnings are restricted by applicable regulatory capital requirements. Additionally, Jefferson Federal will be prohibited from paying any dividend that would reduce its regulatory capital below the amount in the liquidation account, which will be established for the benefit of Jefferson Federal’s eligible depositors as of December 31, 2001 and March 31, 2003 at the time of the conversion and decreased subsequently as these account holders reduce their balances or cease to be depositors. See “The Conversion—Effects of Conversion to Stock Form—Liquidation Account.”

(3) Represents the expense, net of tax, of the contribution of common stock to the Jefferson Federal Charitable Foundation based on an estimated tax rate of 37.3%. The realization of the tax benefit is limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

(4) Assumes that 8% of the common stock issued in the conversion (including shares issued to our charitable foundation) will be acquired by the employee stock ownership plan in the conversion with funds borrowed from Jefferson Bancshares. Under generally accepted accounting principles, the amount of common stock to be purchased by the employee stock ownership plan represents unearned compensation and is, accordingly, reflected as a reduction of capital. As shares are released to plan participants’ accounts, a corresponding reduction in the charge against capital will occur. Since the funds are borrowed from Jefferson Bancshares, the borrowing will be eliminated in consolidation and no liability or interest expense will be reflected in the consolidated financial statements of Jefferson Bancshares. See “ Our Management—Benefit Plans—Employee Stock Ownership Plan.”

(5) Assumes the purchase in the open market at $10.00 per share, under the proposed stock-based incentive plan, of a number of shares equal to 4% of the shares of common stock issued in the conversion, excluding shares issued in exchange for shares of Jefferson Federal. The shares are reflected as a reduction of stockholders’ equity. The stock-based incentive plan will be submitted to shareholders for approval at a meeting following the conversion. See “Risk Factors—Issuance of shares for benefit programs may reduce your ownership interest,” “Pro Forma Data” and “Our Management—Benefit Plans—Stock-Based Incentive Plan .”

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Regulatory Capital Compliance

At December 31, 2002, Jefferson Federal exceeded all regulatory capital requirements. The following table presents Jefferson Federal’s capital position relative to its regulatory capital requirements at December 31, 2002, on an historical and a pro forma basis. The table reflects receipt by Jefferson Federal of 50% of the net proceeds of the offering. For purposes of the table, the amount expected to be borrowed by the employee stock ownership plan and the cost of the shares expected to be awarded under the stock-based incentive plan as restricted stock are deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see “Use of Proceeds,” “Capitalization” and “Pro Forma Data.” The definitions of the terms used in the table are those provided in the capital regulations issued by the Office of Thrift Supervision. For a discussion of the capital standards applicable to Jefferson Federal, see “Regulation and Supervision—Federal Savings Institution Regulation—Capital Requirements.”

					Pro Forma at December 31, 2002
					Minimum of Offering Range				MidPoint of Offering Range				Maximum of Offering Range				15% Above Maximum of Offering Range
	Historical at December 31, 2002				4,250,000 Shares at $10.00 Per Share				5,000,000 Shares at $10.00 Per Share				5,750,000 Shares at $10.00 Per Share				6,612,000 Shares at $10.00 Per Share
	Amount		Percent of Assets (1)		Amount		Percent of Assets		Amount		Percent of Assets		Amount		Percent of Assets		Amount		Percent of Assets
	(Dollars in thousands)
Generally accepted accounting principles capital	$	34,940	13.42	%	$	49,236	17.64	%	$	51,960	18.39	%	$	54,684	19.12	%	$	57,817	19.94	%
Tangible Capital:
Capital level (2)	$	33,650	13.01	%	$	47,946	17.28	%	$	50,670	18.04	%	$	53,394	18.78	%	$	56,527	19.61	%
Requirement		3,880	1.50			4,161	1.50			4,213	1.50			4,264	1.50			4,324	1.50
Excess	$	29,770	11.51	%	$	43,785	15.78	%	$	46,456	16.54	%	$	49,130	17.28	%	$	52,202	18.11	%
Core Capital:
Capital level (2)	$	33,650	13.01	%	$	47,946	17.28	%	$	50,670	18.04	%	$	53,394	18.78	%	$	56,527	19.61	%
Requirement		10,347	4.00			11,096	4.00			11,234	4.00			11,372	4.00			11,530	4.00
Excess	$	23,303	9.01	%	$	36,850	13.28	%	$	39,436	14.04	%	$	42,022	14.78	%	$	44,996	15.61	%
Total Risk-Based Capital:
Total risk-based capital (3)	$	35,649	22.38	%	$	49,945	30.64	%	$	52,669	32.17	%	$	55,393	33.69	%	$	58,526	35.43	%
Requirement		12,743	8.00			13,042	8.00			13,097	8.00			13,152	8.00			13,216	8.00
Excess	$	22,906	14.38	%	$	36,903	22.64	%	$	39,572	24.17	%	$	42,241	25.69	%	$	45,310	27.43	%

(1) Tangible capital and core capital levels are shown as a percentage of adjusted total assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.

(2) A portion of the net unrealized gains on available-for-sale securities accounts for the difference between stockholders’ equity calculated under generally accepted accounting principles and each of tangible capital and core capital. See note 12 to the notes to financial statements for additional information.

(3) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk-weighting.

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Pro Forma Data

The following tables show information about our net income and stockholders’ equity reflecting the conversion. The information provided illustrates our pro forma net income and stockholders’ equity based on the sale of common stock at the minimum of the offering range, the midpoint of the offering range, the maximum of the offering range and 15% above the maximum of the offering range. The actual net proceeds from the sale of the common stock cannot be determined until the conversion is completed. Net proceeds indicated in the following tables are based upon the following assumptions:

• All shares of stock will be sold in the subscription and community offerings;

• Our employee stock ownership plan will purchase a number of shares equal to 8% of the shares issued in the conversion, including shares contributed to our charitable foundation, with a loan from Jefferson Bancshares that will be repaid in equal installments over a period of 15 years;

• Total expenses of the offering, including fees and expenses paid to Keefe, Bruyette & Woods, Inc,. will be $1.6 million; and

• We will make a charitable contribution to our charitable foundation of $250,000 plus 375,000 shares of Jefferson Bancshares common stock, with an assumed value of $10.00 per share.

Actual expenses may vary from this estimate, and the fees paid will depend upon whether a syndicate of broker-dealers or other means is necessary to sell the shares, and other factors.

Pro forma net income for the six months ended December 31, 2002 and the year ended June 30, 2002 has been calculated as if the conversion were completed at the beginning of each period, and the net proceeds had been invested at 5.09% for the six months ended December 31, 2002 and 5.99% for the year ended June 30, 2002, which represents the arithmetic average of the weighted average yield earned by us on our interest-earning assets and the rates paid on our deposits as required by Office of Thrift Supervision regulation.

A pro forma after-tax return of 37.3% is used for both Jefferson Bancshares and Jefferson Federal for both the six months ended December 31, 2002 and the year ended June 30, 2002, after giving effect to a combined federal and state income tax rate of 34%. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the number of shares of common stock indicated in the tables.

When reviewing the following tables you should consider the following:

• The final column gives effect to a 15% increase in the offering range, which may occur without any further notice if RP Financial increases its appraisal to reflect the results of this offering, changes in the financial condition or results of operations of Jefferson Federal or changes in market conditions after the offering begins. See “The Conversion—Stock Pricing and Number of Shares to be Issued.”

• Since funds on deposit at Jefferson Federal may be withdrawn to purchase shares of common stock, the amount of funds available to Jefferson Bancshares for investment will be reduced by the amount of withdrawals for stock purchases. The pro forma tables do not reflect withdrawals from deposit accounts.

• Historical per share amounts have been computed as if the shares of common stock expected to be issued in the conversion had been outstanding at the beginning of the period covered by the table. However, neither historical nor pro forma stockholders’ equity has been adjusted to reflect the investment of the estimated net proceeds from the sale of the shares in the conversion, the additional employee stock ownership plan expense or the proposed stock-based incentive plan.

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• Pro forma stockholders’ equity (“book value”) represents the difference between the stated amounts of our assets and liabilities. The amounts shown for book value do not represent fair market values or amounts available for distribution to shareholders in the unlikely event of liquidation. The amounts shown do not reflect the liquidation account, which will be established for the benefit of eligible depositors as of December 31, 2001 and March 31, 2003, or the federal income tax consequences of the restoration to income of Jefferson Federal’s special bad debt reserves for income tax purposes, which would be required in the unlikely event of liquidation. See “Federal and State Taxation” and “The Conversion—Effects of Conversion to Stock Form.”

• The amounts shown as pro forma stockholders’ equity per share do not represent possible future price appreciation of Jefferson Bancshares’ common stock.

• The amounts shown do not account for the shares to be reserved for issuance upon the exercise of stock options that may be granted under our proposed stock-based incentive plan, which requires shareholder approval at a meeting following the conversion. Under the stock-based incentive plan, an amount equal to 10% of the common stock sold in the offering plus the amount contributed to the Jefferson Federal Charitable Foundation will be reserved for future issuance upon the exercise of options to be granted under the plan.

The following pro forma data, which are based on Jefferson Federal’s equity at June 30, 2002, and net income for the six months ended December 31, 2002 and the year ended June 30, 2002, may not represent the actual financial effects of the conversion or our operating results after the conversion. The pro forma data rely exclusively on the assumptions outlined above and in the notes to the pro forma tables. The pro forma data do not represent the fair market value of Jefferson Bancshares’ common stock, the current fair market value of our assets or liabilities, or the amount of money that would be available for distribution to shareholders if Jefferson Bancshares is liquidated after the conversion.

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	Six Months Ended December 31, 2002
	Minimum of Offering Range			Midpoint of Offering Range			Maximum of Offering Range			15% Above Maximum of Offering Range
	4,250,000 Shares at $10.00 Per Share			5,000,000 Shares at $10.00 Per Share			5,750,000 Shares at $10.00 Per Share			6,612,500 Shares at $10.00 Per Share
	(Dollars in thousands, except per share amounts)
Gross proceeds	$	42,500		$	50,000		$	57,500		$	66,125
Plus: shares issued in exchange for shares of Jefferson Federal		8,925			10,500			12,075			13,886
Plus: shares issued to the foundation		3,750			3,750			3,750			3,750
Pro forma market capitalization	$	55,175		$	64,250		$	73,325		$	83,761
Gross proceeds	$	42,500		$	50,000		$	57,500		$	66,125
Less: estimated expenses		1,600			1,600			1,600			1,600
Estimated net proceeds		40,900			48,400			55,900			64,525
Less: cash contribution to foundation		(250	)		(250	)		(250	)		(250	)
Less: common stock acquired by employee stock ownership plan (1)		(4,414	)		(5,140	)		(5,866	)		(6,701	)
Less: common stock to be acquired by stock-based incentive plan		(1,850	)		(2,150	)		(2,450	)		(2,795	)
Assets received from the mutual holding company		110			110			110			110
Net investable proceeds	$	34,496		$	40,970		$	47,444		$	54,889
Pro Forma Net Income:
Pro forma net income (2):
Historical	$	1,752		$	1,752		$	1,752		$	1,752
Pro forma income on net investable proceeds		550			654			757			876
Less: pro forma employee stock ownership plan adjustments (1)		(92	)		(107	)		(123	)		(140	)
Less: pro forma stock-based incentive plan adjustments (3)		(116	)		(135	)		(154	)		(175	)
Pro forma net income	$	2,094		$	2,164		$	2,232		$	2,313
Pro forma net income per share (2):
Historical	$	0.34		$	0.30		$	0.26		$	0.23
Pro forma income on net investable proceeds		0.11			0.11			0.11			0.11
Less: pro forma employee stock ownership plan adjustments (1)		(0.02	)		(0.02	)		(0.02	)		(0.02	)
Less: pro forma stock-based incentive plan adjustments (3)		(0.02	)		(0.02	)		(0.02	)		(0.02	)
Pro forma net income per share	$	0.41		$	0.37		$	0.33		$	0.30
Offering price as a multiple of pro forma net income per share		12.20x			13.51x			15.15x			16.67x
Number of shares used to calculate pro forma net income per share (4)		5,090,813			5,928,133			6,765,453			7,728,371
Pro Forma Stockholders’ Equity:
Pro forma stockholders’ equity (book value):
Historical	$	34,940		$	34,940		$	34,940		$	34,940
Estimated net proceeds		40,900			48,400			55,900			64,525
Mutual holding company capital consolidation		110			110			110			110
Plus: shares issued to the foundation		3,750			3,750			3,750			3,750
Less: after-tax cost of foundation		(2,508	)		(2,508	)		(2,508	)		(2,508	)
Less: common stock acquired by employee stock ownership plan (1)		(4,414	)		(5,140	)		(5,866	)		(6,701	)
Less: common stock to be acquired by stock-based incentive plan (3)		(1,850	)		(2,150	)		(2,450	)		(2,795	)
Pro forma stockholders’ equity	$	70,928		$	77,402		$	83,877		$	91,321
Pro forma stockholders’ equity per share:
Historical	$	6.33		$	5.44		$	4.77		$	4.17
Estimated net proceeds		7.65			7.72			7.78			7.85
Mutual holding company capital consolidation		0.02			0.02			0.02			0.01
Plus: shares issued to the foundation		0.68			0.58			0.51			0.45
Less: after-tax cost of foundation		(0.45	)		(0.39	)		(0.34	)		(0.30	)
Less: common stock acquired by employee stock ownership plan (1)		(0.80	)		(0.80	)		(0.80	)		(0.80	)
Less: common stock to be acquired by stock-based incentive plan (3)		(0.34	)		(0.33	)		(0.33	)		(0.33	)
Pro forma stockholders’ equity per share	$	12.86		$	12.05		$	11.44		$	10.90
Offering price as a percentage of pro forma stockholders’ equity per share		77.76	%		82.99	%		87.41	%		91.74	%
Number of shares used to calculate pro forma stockholders’ equity per share		5,517,500			6,425,000			7,332,500			8,376,125

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	Year Ended June 30, 2002
	Minimum of Offering Range			Midpoint of Offering Range			Maximum of Offering Range			15% Above Maximum of Offering Range
	4,250,000 Shares at $10.00 Per Share			5,000,000 Shares at $10.00 Per Share			5,750,000 Shares at $10.00 Per Share			6,612,500 Shares at $10.00 Per Share
	(Dollars in thousands, except per share amounts)
Gross proceeds	$	42,500		$	50,000		$	57,500		$	66,125
Plus: shares issued in exchange for shares of Jefferson Federal		8,925			10,500			12,075			13,886
Plus: shares issued to the foundation		3,750			3,750			3,750			3,750
Pro forma market capitalization	$	55,175		$	64,250		$	73,325		$	83,761
Gross proceeds	$	42,500		$	50,000		$	57,500		$	66,125
Less: estimated expenses		1,600			1,600			1,600			1,600
Estimated net proceeds		40,900			48,400			55,900			64,525
Less: cash contribution to foundation		(250	)		(250	)		(250	)		(250	)
Less: common stock acquired by employee stock ownership plan (1)		(4,414	)		(5,140	)		(5,866	)		(6,701	)
Less: common stock to be acquired by stock-based incentive plan		(1,850	)		(2,150	)		(2,450	)		(2,795	)
Assets received from the mutual holding company		110			110			110			110
Net investable proceeds	$	34,496		$	40,970		$	47,444		$	54,889
Pro Forma Net Income:
Pro forma net income (2):
Historical	$	2,426		$	2,426		$	2,426		$	2,426
Pro forma income on net investable proceeds		1,296			1,539			1,782			2,061
Less: pro forma employee stock ownership plan adjustments (1)		(185	)		(215	)		(245	)		(280	)
Less: pro forma stock-based incentive plan adjustments (3)		(232	)		(270	)		(307	)		(350	)
Pro forma net income	$	3,305		$	3,480		$	3,656		$	3,857
Pro forma net income per share (2):
Historical	$	0.48		$	0.41		$	0.36		$	0.31
Pro forma income on net investable proceeds		0.25			0.26			0.26			0.27
Less: pro forma employee stock ownership plan adjustments (1)		(0.04	)		(0.04	)		(0.04	)		(0.04	)
Less: pro forma stock-based incentive plan adjustments (3)		(0.05	)		(0.05	)		(0.05	)		(0.05	)
Pro forma net income per share	$	0.64		$	0.58		$	0.53		$	0.49
Offering price as a multiple of pro forma net income per share		15.63x			17.24x			18.87x			20.41x
Number of shares used to calculate pro forma net income per share (4)		5,105,527			5,945,267			6,785,007			7,750,708
Pro Forma Stockholders’ Equity:
Pro forma stockholders’ equity (book value):
Historical	$	32,901		$	32,901		$	32,901		$	32,901
Estimated net proceeds		40,900			48,400			55,900			64,525
Mutual holding company capital consolidation		110			110			110			110
Plus: shares issued to the foundation		3,750			3,750			3,750			3,750
Less: after-tax cost of foundation		(2,508	)		(2,508	)		(2,508	)		(2,508	)
Less: common stock acquired by employee stock ownership plan (1)		(4,414	)		(5,140	)		(5,866	)		(6,701	)
Less: common stock to be acquired by stock-based incentive plan (3)		(1,850	)		(2,150	)		(2,450	)		(2,795	)
Pro forma stockholders’ equity	$	68,889		$	75,363		$	81,838		$	89,282
Pro forma stockholders’ equity per share:
Historical	$	5.96		$	5.12		$	4.49		$	3.93
Estimated net proceeds		7.41			7.53			7.62			7.70
Mutual holding company capital consolidation		0.02			0.02			0.02			0.01
Plus: shares issued to the foundation		0.68			0.58			0.51			0.45
Less: after-tax cost of foundation		(0.45	)		(0.39	)		(0.34	)		(0.30	)
Less: common stock acquired by employee stock ownership plan (1)		(0.80	)		(0.80	)		(0.80	)		(0.80	)
Less: common stock to be acquired by stock-based incentive plan (3)		(0.34	)		(0.33	)		(0.33	)		(0.33	)
Pro forma stockholders’ equity per share	$	12.48		$	11.73		$	11.17		$	10.66
Offering price as a percentage of pro forma stockholders’ equity per share		80.13	%		85.25	%		89.53	%		93.81	%
Number of shares used to calculate pro forma stockholders’ equity per share		5,517,500			6,425,000			7,332,500			8,376,125

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(1) Assumes that the employee stock ownership plan will acquire an amount of stock equal to 8% of the shares of common stock issued in the conversion, including shares contributed to our charitable foundation. The employee stock ownership plan will borrow the funds used to acquire these shares from the net proceeds from the conversion retained by Jefferson Bancshares. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. This borrowing will have an interest rate equal to the prime rate as published in The Wall Street Journal, which is currently 4.25%. Jefferson Federal intends to make contributions to the employee stock ownership plan in amounts at least equal to the principal and interest requirement of the debt. As the debt is paid down, stockholders ‘ equity will be increased. Jefferson Federal’s payment of the employee stock ownership plan debt is based upon equal installments of principal over a 15-year period, assuming a combined federal and state income tax rate of 37.3%. Interest income earned by Jefferson Bancshares on the loan to the employee stock ownership plan offsets the interest paid on the loan by Jefferson Federal. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. Applicable accounting principles require that compensation expense for the employee stock ownership plan be based upon shares committed to be released and that unallocated shares be excluded from earnings per share computations. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of this calculation, was assumed to be equal to the $10.00 per share purchase price. See “Our Management—Benefit Plans—Employee Stock Ownership Plan.”

(2) Does not give effect to the non-recurring expense that will be recognized in 2003 as a result of the contribution of common stock to Jefferson Federal Charitable Foundation. The following table shows the estimated after-tax expense associated with the contribution to the foundation, as well as pro forma net income and pro forma net income per share assuming the contribution to the foundation was expensed during the periods presented. The pro forma data assume that we will realize 100% of the income tax benefit as a result of the contribution to the foundation based on a 34% tax rate. The realization of the tax benefit is limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

	Minimum of Offering Range			Midpoint of Offering Range			Maximum of Offering Range			15% Above Maximum of Offering Range
	(Dollars in thousands, except per share amounts)
After-tax expense of contribution to foundation:
Six months ended December 31, 2002	$	2,508		$	2,508		$	2,508		$	2,508
Year ended June 30, 2002		2,508			2,508			2,508			2,508
Pro forma net income:
Six months ended December 31, 2002		(414	)		(344	)		(276	)		(195	)
Year ended June 30, 2002		797			972			1,148			1,349
Pro forma net income per share:
Six months ended December 31, 2002		(0.08	)		(0.06	)		(0.04	)		(0.03	)
Year ended June 30, 2002		0.16			0.16			0.17			0.17

(3) In calculating the pro forma effect of the restricted stock awards, it is assumed that the required shareholder approval has been received, that the shares used to fund the awards were acquired at the beginning of the respective period in open market purchases at the $10.00 per share purchase price, that 20% of the amount contributed was an amortized expense during the period, and that the combined federal and state income tax rate is 37.3%. The issuance of authorized but unissued shares of the common stock instead of open market purchases would dilute the voting interests of existing shareholders by approximately 3.2%.

For purposes of the pro forma tables, shares of restricted stock issued under the stock-based incentive plan vest 20% per year and compensation expense is recognized on a straight-line basis over each vesting period. If the fair market value per share is greater than $10.00 per share on the date shares are awarded under the stock-based incentive plan, total stock-based incentive plan expense would be greater. The total estimated expense was multiplied by 20%, which is the total percent of shares for which expense is recognized in the first year.

The following table shows the estimated pro forma net income and stockholders’ equity per share if restricted shares awarded under the stock-based incentive plan were authorized but unissued shares instead of repurchased shares. The table also shows the estimated pre-tax stock-based incentive plan expense. The number of shares used to calculate pro forma net income per share in the following table is the total number of shares issued at the indicated point in the offering range, minus the number of shares sold to the employee stock ownership plan assumed not to be committed to be released within six months or one year following the conversion and plus the number of shares that may be awarded as restricted stock under the planned stock-based incentive plan. The number of shares used to calculate pro forma stockholders’ equity per

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share in the following table is the total number of shares issued at the indicated point in the offering range, plus the number of shares that may be awarded as restricted stock under the planned stock-based incentive plan.

	Minimum of Offering Range		Midpoint of Offering Range		Maximum of Offering Range		15% Above Maximum of Offering Range
	(Dollars in thousands, except per share data)
Pro forma net income per share:
Six months ended December 31, 2002	$	0.40	$	0.36	$	0.32	$	0.29
Year ended June 30, 2002		0.65		0.58		0.55		0.50
Number of shares used to calculate pro forma net income per share:
Six months ended December 31, 2002		5,275,813		6,143,133		7,010,453		8,007,871
Year ended June 30, 2002		5,290,527		6,160,267		7,030,007		8,030,208
Pro forma stockholders’ equity per share:
At December 31, 2002	$	12.76	$	11.98	$	11.39	$	10.87
At June 30, 2002		12.42		11.67		11.12		10.64
Number of shares used to calculate pro forma stockholders’ equity per share		5,702,500		6,640,000		7,577,500		8,655,625
Pre-tax stock-based incentive plan expense:
Six months ended December 31, 2002	$	185	$	215	$	246	$	279
Year ended June 30, 2002		370		431		490		558

(4) The following table shows how we derived the number of shares used to calculate pro forma net income per share.

	Minimum of Offering Range		Midpoint of Offering Range		Maximum of Offering Range		15% Above Maximum of Offering Range
Six months ended December 31, 2002:
Shares issued in the conversion	4,250,000		5,000,000		5,750,000		6,612,500
Exchange shares issued to minority shareholders	892,500		1,050,000		1,207,500		1,388,625
Shares contributed to the foundation	375,000		375,000		375,000		375,000
Total shares outstanding	5,517,500		6,425,000		7,357,500		8,376,125
Less:    shares purchased by the employee stock ownership plan	(441,400	)	(514,000	)	(588,600	)	(670,090	)
Plus:    shares committed to be released by the employee stock              ownership plan	14,713		17,133		19,553		22,336
Number of shares used to calculate pro forma net income per share	5,090,813		5,928,133		6,765,453		7,728,371
Year Ended June 30, 2002:
Shares issued in the conversion	4,250,000		5,000,000		5,750,000		6,612,500
Exchange shares issued to minority shareholders	892,500		1,050,000		1,207,500		1,388,625
Shares contributed to the foundation	375,000		375,000		375,000		375,000
Total shares outstanding	5,517,500		6,425,000		7,332,500		8,376,125
Less:    shares purchased by the employee stock ownership plan	(441,400	)	(514,000	)	(586,600	)	(670,090	)
Plus:    shares committed to be released by the employee stock              ownership plan	29,427		34,267		39,107		44,673
Number of shares used to calculate pro forma net income per share	5,105,527		5,945,267		6,785,007		7,750,708

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Comparison of Independent Valuation and Pro Forma Financial

Information With and Without the Foundation

As set forth in the following table, if we do not establish and fund the Jefferson Federal Charitable Foundation as part of the conversion, RP Financial estimates that our pro forma valuation would be greater, which would have resulted in an increase in the amount of common stock offered for sale in the conversion and an increase in the exchange ratio for converting shares of Jefferson Federal common stock into shares of Jefferson Bancshares common stock. If the foundation were not established, there is no assurance that the appraisal prepared at that time of conversion would conclude that our pro forma market value would be the same as the estimate set forth in the table below. Any appraisal prepared at the time of conversion would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.

The information presented in the following table is for comparative purposes only. It assumes that the conversion was completed at December 31, 2002, based on the assumptions set forth under “Pro Forma Data.”

	At the Minimum of Estimated Valuation Range						At the Midpoint of Estimated Valuation Range						At the Maximum of Estimated Valuation Range						At the Maximum, as Adjusted, of Estimated Valuation Range
	With Foundation			No Foundation			With Foundation			No Foundation			With Foundation			No Foundation			With Foundation			No Foundation
	(Dollars in thousands, except per share amounts)
Estimated offering amount (1)	$	42,500		$	46,750		$	50,000		$	55,000		$	57,500		$	63,250		$	66,125		$	72,738
Estimated pro forma valuation		55,175			56,568			64,250			66,550			73,325			76,533			83,761			88,012
Pro forma total assets		296,431			299,308			302,905			306,429			309,379			313,550			316,824			321,740
Pro forma total liabilities		225,503			225,503			225,503			225,503			225,503			225,503			225,503			225,503
Pro forma stockholders’ equity		70,928			73,805			77,402			80,926			83,877			88,048			91,321			96,237
Pro forma net income		2,094			2,160			2,164			2,237			2,232			2,312			2,313			2,401
Pro forma stockholders’ equity per share		12.86			13.05			12.05			12.16			11.44			11.50			10.90			10.93
Pro forma net income per share		0.41			0.41			0.37			0.36			0.33			0.33			0.30			0.30
Exchange Ratio		2.7419			3.0161			3.2258			3.5484			3.7097			4.0806			4.2661			4.6927
Pro Forma Pricing Ratios:
Offering price as a percentage of pro forma stockholders’ equity		77.76	%		76.63	%		82.99	%		82.24	%		87.41	%		86.96	%		91.74	%		91.49	%
Offering price as a multiple of pro forma net income per share (annualized)		12.20	x		12.20	x		13.51	x		13.89	x		15.15	x		15.15	x		16.67	x		16.67	x
Offering price to assets		18.61	%		18.90	%		21.21	%		21.72	%		23.70	%		24.41	%		26.44	%		27.36	%
Pro Forma Financial Ratios:
Return on assets (annualized)		1.41	%		1.44	%		1.43	%		1.46	%		1.44	%		1.47	%		1.46	%		1.49	%
Return on stockholders’ equity (annualized)		5.90	%		5.85	%		5.59	%		5.53	%		5.32	%		5.25	%		5.07	%		4.99	%
Stockholders’ equity to total assets		23.93	%		24.66	%		25.55	%		26.41	%		27.11	%		28.08	%		28.82	%		29.91	%

(1) Based on independent valuation prepared by RP Financial as of March 7, 2003.

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Management’s Discussion and Analysis of

Results of Operations and Financial Condition

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the financial statements and notes to the financial statements that appear at the end of this prospectus.

Overview

Income

We have two primary sources of pre-tax income. The first is net interest income. Net interest income is the difference between interest income—which is the income that we earn on our loans and investments—and interest expense—which is the interest that we pay on our deposits and borrowings.

Our second principal source of pre-tax income is fee income—the compensation we receive from providing products and services. Most of our fee income comes from service charges on NOW accounts and fees for late loan payments. We also earn fee income from ATM charges, insurance commissions, safe deposit box rentals and other fees and charges.

We occasionally recognize gains or losses as a result of sales of investment securities or foreclosed real estate. These gains and losses are not a regular part of our income.

Expenses

The expenses we incur in operating our business consist of compensation and benefits expenses, occupancy expenses, equipment and data processing expense, deposit insurance premiums, advertising expenses, expenses for foreclosed real estate and other miscellaneous expenses.

Compensation and benefits consist primarily of the salaries and wages paid to our employees, fees paid to our directors and expenses for retirement and other employee benefits.

Occupancy expenses, which are the fixed and variable costs of building and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance and costs of utilities.

Equipment and data processing expense includes fees paid to our third-party data processing service and expenses and depreciation charges related to office and banking equipment. Depreciation of premises and equipment is computed using the straight-line and accelerated methods based on the useful lives of the related assets. Estimated lives are five to 40 years for building and improvements, and three to 10 years for furniture and equipment.

Deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.

Expenses for foreclosed real estate include maintenance and repairs on foreclosed properties prior to sale.

Other expenses include expenses for attorneys, accountants and consultants, payroll taxes, franchise taxes, charitable contributions, insurance, office supplies, postage, telephone and other miscellaneous operating expenses.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting

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policies. We consider the following to be our critical accounting policies: allowance for loan losses and deferred income taxes.

Allowance for loan losses. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on growth in the loan portfolio, the level of subprime loans held within the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. Management also considers the amount of commercial real estate and construction loans held and the lending activity in commercial non-real estate and consumer loans, all of which carry greater inherent risk than one- to four-family residential loans. Although we believe that we use the best information available to establish the appropriate level of the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change.

Operating Strategy

Our mission is to operate and grow a profitable community-oriented financial institution serving retail and commercial customers in our market area. We plan to achieve this by executing our strategy of:

• Serving as a community-oriented financial institution;

• Expanding our delivery system through a combination of increased uses of technology, including internet banking, and additional branch facilities;

• Pursuing growth by emphasizing commercial real estate lending and taking advantage of the higher loan-to-one-borrower limits the result from the capital raised in the offering, while remaining well capitalized;

• Improving the quality of our loan portfolio through careful attention to problem assets, structured underwriting and approval processes and stringent loan management;

• Diversifying into other financial services-related activities; and

• Utilizing asset/liability management to improve our net interest margin and mitigate interest rate risk.

Serve as a community-oriented financial institution

We have a long tradition of focusing on the needs of consumers and businesses in our community and being an active corporate citizen. We deliver personalized service and respond with flexibility to customer needs. We believe our community orientation is attractive to our customers and distinguishes us from the large regional banks that operate in our market area, and we intend to maintain this focus as we grow.

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Expand our delivery system

We intend to expand the ways in which we reach and serve our customers. We implemented internet banking in April 2003, which allows our customers to access their accounts and pay bills online. We have identified potential branch locations in the west and south portions of Hamblen County. We intend to pursue expansion in these areas within the next one to two years as the surrounding properties and roads are developed. We also may consider expansion opportunities outside of Hamblen County.

Pursue growth while remaining well capitalized

We intend to grow our loan portfolio by focusing on the origination of commercial and residential real estate loans. The additional capital raised in the offering will increase our loan-to-one-borrower limit, which will allow us to pursue larger lending relationships. In 2001 we added an experienced commercial loan officer and our Chief Executive Officer has significant experience in this area.

Improve quality of loan portfolio

We have adopted more structured underwriting and approval processes that we believe will facilitate improvement in our asset quality and reduce exposure to credit risk. We have decreased our origination of subprime loans and introduced risk-based pricing to compensate us for making subprime loans. Subprime loans have decreased from $45.5 million, or 25.9% of total loans, at June 30, 2000 to $33.0 million, or 17.2% of total loans, at December 31, 2002. We have increased our loan monitoring efforts and have enhanced our collection procedures in an effort to reduce losses from nonperforming loans.

Diversify into related activities

We offer traditional banking products, such as deposits and loans, and have a reputation for being primarily a residential mortgage lender. We intend to continue to diversify our loan portfolio by emphasizing commercial real estate and business loans. In the future, we also intend to expand our product offerings by providing investment and insurance services.

Limit interest rate risk through asset/liability management

We manage interest rate risk through the terms of the loan and deposit products that we offer. We emphasize adjustable-rate loans and fixed-rate loans with terms of no more than 15 years or that are callable. We also invest in adjustable-rate mortgage-backed securities and medium-term debt securities to help manage interest rate risk. Our strong capital position further protects us from fluctuations in interest rates.

Results of Operations for the Six Months Ended December 31, 2002 and 2001

Overview. Net earnings increased as a result of significant improvement in net interest income.

	Six Months Ended December 31,
	2002			2001			% Change
	(Dollars in thousands, except per share data)
Net earnings	$	1,752		$	915		91.5	%
Net earnings per share, basic	$	0.93		$	0.49		89.8	%
Net earnings per share, diluted	$	0.93		$	0.49		89.8	%
Return on average assets (annualized)		1.33	%		0.69	%
Return on average equity (annualized)		10.25	%		5.88	%

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Net Interest Income. Net interest income increased $1.4 million, or 35.9%, to $5.4 million for the six months ended December 31, 2002 due primarily to the decrease in the average rate paid on interest-bearing liabilities exceeding the decrease in the average yield on interest-earning assets.

Total interest income decreased $951,000, or 9.6%, to $8.9 million for the six months ended December 31, 2002 primarily as a result of a decrease in the average yield on interest-earning assets. Interest on loans receivable decreased $485,000, or 6%, to $7.6 million for 2002 due to a decrease in the average yield that more than offset an increase in the average balance. The average yield on loans declined as we originated loans at lower interest rates due to the prevailing low interest rate environment. Although approximately 60% of our residential mortgage loans are adjustable-rate loans, these loans generally do not provide for downward adjustments below the initial contract rate. This feature has prevented these loans from adjusting downward during the current low interest rate environment and has contributed to increased interest income. Interest on investment securities decreased $415,000, or 25%, to $1.3 million due to a decrease in both the average balance and the average yield. The average balance of investments declined as a result of the proceeds of maturities and sales being reinvested in other asset categories. Our emphasis on adjustable-rate mortgage-backed securities has resulted in lower yields during the low interest rate environment. Interest income on other earning assets decreased as a result of declining yields in the low interest rate environment. The average balance of other earning assets increased as a result of proceeds from sales and calls of investment securities being invested in overnight deposits in anticipation of liquidity needs.

Interest expense decreased $2.4 million, or 40%, to $3.6 million for the six months ended December 31, 2002 due primarily to a significant decrease in the rate paid on deposits and a decrease in the average balance. The average rate paid on deposits decreased 205 basis points to 3.18% for 2002 as we lowered rates on savings and NOW accounts and maturing time deposits were renewed at lower rates. The average balance of deposits decreased $4.0 million to $221.6 million for 2002.

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Average Balances and Yields. The following tables presents information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income and dividends from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of month-end balances and nonaccrual loans are included in average balances; however, accrued interest income has been excluded from these loans.

	Six Months Ended December 31,
	2002							2001
	Average Balance			Interest and Dividends		Yield/ Cost		Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans	$	191,468		$	7,595	7.93	%	$	188,971		$	8,080	8.55	%
Mortgage-backed securities		25,893			572	4.42			24,506			635	5.18
Investment securities		26,182			681	5.20			36,671			1,033	5.63
Other earning assets		12,379			96	1.55			6,441			147	4.56
Total interest-earning assets		255,922			8,944	6.99			256,589			9,895	7.71
Noninterest-earning assets		8,239							7,250
Total assets	$	264,161						$	263,839
Interest-bearing liabilities:
Passbook accounts	$	13,835			84	1.21		$	12,546			154	2.45
NOW accounts		13,724			68	0.99			11,810			73	1.24
Money market accounts		20,921			224	2.14			7,908			113	2.86
Certificates of deposit		173,082			3,150	3.64			193,312			5,555	5.75
Total interest-bearing deposits		221,562			3,526	3.18			225,576			5,895	5.23
Borrowings		2,000			50	5.00			2,000			51	5.10
Total interest-bearing liabilities		223,562			3,576	3.20			227,576			5,946	5.22
Noninterest-bearing liabilities		6,418							5,132
Total liabilities		229,980							232,708
Stockholders’ equity		34,181							31,131
Total liabilities and stockholders’ equity	$	264,161						$	263,839
Net interest income				$	5,368						$	3,949
Interest rate spread						3.79							2.49
Net interest margin						4.20							3.08
Average interest-earning assets to average interest-bearing liabilities		114.47	%						112.75	%

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

	Six Months Ended December 31, 2002 Compared to Six Months Ended December 31, 2001
	Increase (Decrease) Due to
	Volume			Rate			Net
Interest income:
Loans receivable	$	106		$	(591	)	$	(485	)
Mortgage-backed securities		34			(97	)		(63	)
Investment securities		(278	)		(74	)		(352	)
Other interest-earning assets		71			(122	)		(51	)
Total interest-earning assets		(67	)		(884	)		(951	)
Interest expense:
Deposits		(103	)		(2,266	)		(2,369	)
Borrowings		—			(1	)		(1	)
Total interest-bearing liabilities		(103	)		(2,267	)		(2,370	)
Net change in interest income	$	36		$	1,383		$	1,419

Provision for Loan Losses. Provisions for loan losses were $547,000 for the six months ended December 31, 2002 compared to $480,000 for the same period in 2001. During the six months ended December 31, 2002, we determined to maintain our allowance for loan losses substantially unchanged, reflecting that since June 30, 2002, nonperforming loans had increased, charge-off levels had increased and subprime and prime loans delinquent 60 to 89 days had remained substantially level. Net charge-offs increased to $553,000 in the six months ended December 31, 2002 from $437,000 for the same period in 2001.

Noninterest Income. The following table shows the components of noninterest income and the percentage changes from 2002 to 2001.

	Six Months Ended December 31,					% Change
	2002		2001
Service charges and fees	$	338	$	331		(2.1	)%
Gain on sale of investment securities		81		16		406.3
Gain (loss) on sale of foreclosed real estate		40		(32	)	N/A
Other		60		76		(21.1	)
Total	$	519	$	391		32.7

Gain on sale of investment securities increased as we sold fixed-rate mortgage-backed securities for liquidity purposes and to reposition the investment portfolio to improve interest rate sensitivity.

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Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes from 2002 to 2001.

	Six Months Ended December 31,
	2002		2001		% Change
Compensation and benefits	$	1,177	$	1,067	10.3	%
Occupancy		135		112	20.5
Equipment and data processing		417		410	1.7
Deposit insurance premiums		20		20	—
Advertising		79		70	12.9
REO expense		147		100	47.0
Other		559		587	(4.8	)
Total	$	2,534	$	2,366	7.1

Expenses for foreclosed real estate accounted for most of the increase in noninterest expense. These expenses increased as a result of a larger number of foreclosures. The increase in compensation and benefits expenses reflected post-retirement payments to our former chief executive officer.

Income Taxes. Income taxes increased as a result of a higher level of taxable income. The effective tax rate for the six months ended December 31, 2002 was 37.6%, compared with 38.8% for the same period in 2001.

Results of Operations for the Years Ended June 30, 2002, 2001 and 2000

Overview

	2002			2001			2000			% Change 2002/2001		%Change 2001/2000
	(Dollars in thousands, except per share data)
Net earnings	$	2,426		$	2,188		$	2,383		10.9	%	(8.2	)%
Net earnings per share, basic	$	1.30		$	1.17		$	1.28		11.1	%	(8.6	)%
Net earnings per share, diluted	$	1.29		$	1.17		$	1.28		10.3	%	(8.6	)%
Return on average assets		0.91	%		0.90	%		1.05	%
Return on average equity		7.68	%		7.60	%		9.19	%

2002 v. 2001. Net earnings increased due primarily to an increase in both net interest income and noninterest income, which more than offset an increase in noninterest expense. Net interest income increased primarily as a result of growth in interest-earning assets and a decrease in the cost of funds. Noninterest income increased primarily as a result of an increase in the gain on sale of investment securities.

2001 v. 2000. Net earnings decreased due primarily to lower net interest income, lower noninterest income and higher noninterest expense. The volume of interest-earning assets and interest-bearing liabilities increased during 2001. However, our interest rate spread and net interest margin decreased due to higher rates paid on deposits, resulting in a decline in net interest income. Noninterest income for 2000 included a net gain on the sale of foreclosed property in the amount of $325,000. During 2000, we foreclosed on and sold a commercial property, which accounted for $302,000 of this net gain. Noninterest expense increased due primarily to an overall increase in the level of compensation and benefits.

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Net Interest Income.

2002 v. 2001. Net interest income increased $1.6 million, or 21.3%, to $9.1 million for 2002. The increase in net interest income for 2002 was primarily attributable to a higher volume of interest-earning assets and a decrease in the cost of funds.

Total interest income increased $125,000, or 0.7%, to $19.4 million for 2002, resulting from an increase in the volume of interest-earning assets, which more than offset a decrease in the average yield. During 2002, average interest-earning assets increased by $23.3 million, or 9.9%, to $258.3 million, while the average yield decreased 69 basis points to 7.50%. The composition of interest-earning assets generally consists of loans, investments and interest-bearing deposits. The increase in average interest-earning assets was primarily due to increases in the average balance of loans and mortgage-backed securities, which were partially offset by a decrease in investment securities. Interest on loans receivable increased $108,000, or 0.7%, to $16.0 million for 2002 due primarily to an increase in the volume of loans, which more than offset a decrease in the yield on mortgage loans. During 2002, we originated loans at lower interest rates due to the prevailing low interest rate environment. Interest on mortgage-backed securities increased 77.3% as we increased our balance of these investments. Interest on investment securities decreased 22.8% as a result of a decrease in both the average balance and the average yield. Maturities and calls reduced the size of our investment securities portfolio and left us with lower yielding securities.

Total interest expense decreased $1.5 million, or 12.6%, to $10.3 million for 2002 due primarily to a decrease in the average rate paid on deposits, which more than offset an increase in the average balance. The average interest rate paid on deposits decreased 114 basis points as a result of the prevailing low interest rate environment. During 2002 we emphasized low yielding transaction accounts and our customers preferred to invest in shorter-term certificates of deposit.

2001 v. 2000. Net interest income decreased $74,000, or 1.0%, to $7.5 million for 2001 due primarily to a lower net interest margin, which more than offset an increase in volume. Average interest-earning assets increased $16.2 million, or 7.4%, to $235.0 million for 2001 while average interest-bearing liabilities increased $12.8 million, or 6.6%, to $208.5 million for 2001.

Total interest income increased $1.6 million, or 9.1%, to $19.3 million for 2001 due primarily to an increase in the volume of interest-earning assets. Interest on loans receivable increased $1.3 million, or 8.5%, to $15.9 million for 2001 due to an increase in both the average volume and the average yield. The average yield on loans receivable increased due primarily to an increase in the yield on mortgage loans. During the year, we increased origination fees and implemented pricing based on credit risk. These changes resulted in increased yields. Interest on mortgage-backed securities increased $321,000, or 74.3%, to $753,000 for 2001 due to an increase in the average balance, as we used the proceeds from called investment securities to increase our portfolio of mortgage-backed securities. Interest on investment securities decreased $40,000, or 1.7%, to $2.3 million for 2001 primarily due to a decrease in both the average balance and the average yield. Due to the low rate environment, many of our Federal Agency debt securities were called and reinvested at lower rates.

Total interest expense increased $1.7 million, or 16.7%, to $11.7 million for 2001 due primarily to strong deposit growth in certificates of deposit and higher interest rates paid. Interest paid on certificates of deposit increased due to an increase in both the average balance and the average rate paid. During 2001 we offered some of the highest rates on certificates in our market area. Interest paid on advances from the FHLB decreased due to a decrease in the weighted-average balance, which more than offset an increase in the weighted-average rate paid.

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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, as well as the total dollar amounts of interest income and dividends from average interest-earning assets and interest expense on average interest-bearing liabilities and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of month-end balances, and nonaccrual loans are included in average balances; however, accrued interest income has been excluded from these loans.

	Year Ended June 30,
	2002							2001							2000
	Average Balance			Interest and Dividends		Yield/ Cost		Average Balance			Interest and Dividends		Yield/ Cost		Average Balance			Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans	$	190,980		$	15,987	8.37	%	$	180,340		$	15,879	8.81	%	$	171,255		$	14,629	8.54	%
Mortgage-backed securities		27,596			1,335	4.84			12,995			753	5.79			6,449			432	6.70
Investment securities		31,980			1,812	5.67			37,020			2,348	6.34			37,140			2,388	6.43
Other earning assets		7,738			245	3.17			4,657			274	5.88			3,956			197	4.98
Total interest-earning assets		258,294			19,379	7.50			235,012			19,254	8.19			218,800			17,646	8.06
Noninterest-earning assets		7,806							7,569							8,467
Total assets	$	266,100						$	242,581						$	227,267
Interest-bearing liabilities:
Passbook accounts	$	13,241		$	262	1.98	%	$	11,231		$	337	3.00	%	$	11,626		$	348	2.99	%
NOW accounts		12,325			137	1.11			10,632			204	1.92			10,861			215	1.98
Money market accounts		10,133			237	2.34			5,772			187	3.18			7,169			235	3.28
Certificates of deposit		191,350			9,528	4.98			178,088			10,839	6.09			162,850			9,074	5.57
Total interest-bearing deposits		227,049			10,164	4.48			205,823			11,567	5.62			192,506			9,872	5.13
Borrowings		2,000			102	5.10			2,708			173	6.39			3,208			186	5.80
Total interest-bearing liabilities		229,049			10,266	4.48			208,531			11,740	5.63			195,714			10,058	5.14
Noninterest-bearing liabilities		5,455							5,262							5,618
Total liabilities		234,504							213,793							201,332
Stockholders’ equity		31,596							28,788							25,935
Total liabilities and stockholders’ equity	$	266,100						$	242,581						$	227,267
Net interest income				$	9,113						$	7,514						$	7,588
Interest rate spread						3.02	%						2.56	%						2.92	%
Net interest margin						3.53	%						3.20	%						3.47	%
Average interest-earning assets to average interest- bearing liabilities		112.77	%						112.70	%						111.80	%

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

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	2002 Compared to 2001									2001 Compared to 2000
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Loans receivable	$	912		$	(804	)	$	108		$	791		$	459		$	1,250
Mortgage-backed securities		724			(142	)		582			386			(65	)		321
Investment securities		(301	)		(235	)		(536	)		(8	)		(32	)		(40	)
Daily interest-bearing deposits and other interest-earning assets		117			(146	)		(29	)		35			42			77
Total interest-earning assets		1,452			(1,327	)		125			1,204			404			1,608
Interest expense:
Deposits		1,111			(2,514	)		(1,403	)		710			985			1,695
Borrowings		(40	)		(31	)		(71	)		(31	)		18			(13	)
Total interest-bearing liabilities		1,071			(2,545	)		(1,474	)		679			1,003			1,682
Net change in interest income	$	381		$	1,218		$	1,599		$	525		$	(599	)	$	(74	)

Provision for Loan Losses

2002 v. 2001. Provision for loan losses increased $261,000, or 21%, to $1.2 million for 2002. The increase in the provision for loan losses reflected our anticipation of higher losses due to the implementation of a more aggressive collection strategy, an increase in personal and business bankruptcies in our market area and the continuation of adverse local and national economic conditions. Net charge-offs decreased $47,000, or 6%, from $781,000 for 2001 to $734,000 for 2002.

2001 v. 2000. Provision for loan losses decreased $310,000, or 24%, from $1.3 million for 2000 to $960,000 for 2001. The lower provision primarily reflected lower net loan charge-offs, which decreased $440,000, or 36%, from $1.2 million for 2000 to $781,000 for 2001.

Noninterest Income. The following table shows the components of noninterest income and the percentage changes from 2002 to 2001 and from 2001 to 2000.

	2002		2001		2000		% Change 2002/2001		% Change 2001/2000
Service charges and fees	$	669	$	658	$	707	1.7	%	(6.9	)%
Gain on sale of fixed assets		—		—		9	—		(100.0	)
Gain on sale of foreclosed real estate		45		33		325	36.4		(89.9	)
Gain on sale of investments		141		11		—	1,181.8		N/A
Other		166		208		181	(20.2	)	14.9
Total	$	1,021	$	910	$	1,222	12.2		(25.5	)

2002 v. 2001 . The increase in noninterest income was attributable primarily to an increase in gain on sale of investment securities in fiscal 2002. During fiscal 2002, we sold fixed rate mortgage-backed securities for liquidity purposes and to reposition the investment portfolio to improve interest rate sensitivity.

2001 v. 2000. The decrease in noninterest income was attributable primarily to a decrease in the gain on the sale of foreclosed real estate. During fiscal 2000, we had a gain of $302,000 on the sale of one piece of foreclosed commercial property.

Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes from 2002 to 2001 and from 2001 to 2000.

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	2002		2001		2000		% Change 2002/2001		% Change 2001/2000
Compensation and benefits	$	2,351	$	1,769	$	1,575	32.9	%	12.3	%
Occupancy		244		219		225	11.4		(2.7	)
Equipment and data processing		832		778		788	6.9		(1.3	)
Deposit insurance premiums		41		40		76	2.5		(47.4	)
REO expense		285		69		77	313.0		(10.4	)
Advertising		130		107		89	21.5		20.2
Other		1,186		1,011		902	17.3		12.1
Total	$	5,069	$	3,993	$	3,732	26.9		7.0

2002 v. 2001. Compensation and benefits increased due to salary increases and additional compensation related to the employment of a new Chief Executive Officer. Expenses related to foreclosed real estate increased due to costs associated with the increase in the volume of foreclosed real estate. Other general and administrative expenses increased due to increases in miscellaneous operating expenses and charitable contributions.

2001 v. 2000. Compensation and benefits increased due to salary increases and additional employees. Other general and administrative expenses increased due to higher professional fees and increases in several miscellaneous expense categories.

Income Taxes

2002 v. 2001. Income taxes increased due to a higher level of taxable income. The effective tax rate for 2002 was 36.9%, compared to 37.0% for 2001.

2001 v. 2000. Income taxes decreased due to a lower level of taxable income. The effective tax rate for 2001 was 37.0%, compared to 37.4% for 2000.

Balance Sheet

Loans. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. At December 31, 2002, real estate loans totaled $173.5 million, or 90.4% of our total loans, compared to $178.9 million, or 90.9% of total loans, at June 30, 2002 and $168.7 million, or 89.6% of total loans, at June 30, 2001. Mortgage loans declined $5.4 million, or 3.0%, in the six months ended December 31, 2002 and increased $10.2 million, or 6.1%, in the year ended June 30, 2002. Loans decreased in the six months ended December 31, 2002 as a result of heavy refinancing activity and our decision to tighten underwriting to strengthen asset quality.

The largest segment of our mortgage loans is one- to four-family loans. At December 31, 2002, one- to four-family loans totaled $91.0 million and represented 52.4% of mortgage loans and 47.4% of total loans. One- to four-family loans declined $3.6 million, or 3.8%, in the six months ended December 31, 2002 and $2.7 million, or 2.8%, in the year ended June 30, 2002 as borrowers refinanced their loans with other lenders in the low interest rate environment and we tightened underwriting standards and raised interest rates on subprime loans.

Commercial real estate loans is the second largest segment of our mortgage loan portfolio. We have emphasized this type of lending for several years and have grown this portfolio to $44.1 million as of December 31, 2002. Commercial real estate loans decreased $2.6 million, or 5.5%, in the six months ended December 31, 2002 and grew $5.5 million, or 13.4%, in the year ended June 30, 2002. We intend to continue to emphasize this type of lending. We hired an experienced commercial loan officer in 2001 and our Chief Executive Officer has significant experience in this area.

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We have also been successful in growing the multi-family, construction and land segments of our mortgage loan portfolio. Multi-family real estate loans decreased $605,000, or 4.6%, in the six months ended December 31, 2002 and grew $4.5 million, or 51.8%, in the year ended June 30, 2002. Construction loans decreased $2.7 million, or 24.2%, in the six months ended December 31, 2002 and grew $2.4 million, or 26.8%, in the year ended June 30, 2002. The decline in construction loans as of December 31, 2002 was primarily due to a seasonal decline in building and the tightening of our underwriting standards. Land loans grew $3.6 million, or 27.4%, in the six months ended December 31, 2002 and $261,000, or 2.1%, in the year ended June 30, 2002.

For several years we have maintained a portfolio of commercial business loans. Commercial business loans grew $2.2 million, or 28.3%, in the six months ended December 31, 2002 and $1.7 million, or 28.1%, in the year ended June 30, 2002. Since January 2002, most of the commercial business loans that we have originated have been tied to prime and, thus, will reprice quickly as interest rates change.

We originate a variety of consumer loans, including loans secured by automobiles, mobile homes, and deposit accounts at Jefferson Federal. Consumer loans totaled $8.5 million and represented 4.4% of total loans at December 31, 2002, compared to $10.2 million, or 5.2% of total loans, at June 30, 2002 and $13.5 million, or 7.2% of total loans, at June 30, 2001. We have tightened our underwriting standards and have originated fewer subprime loans in recent periods. In addition, we have experienced low demand for automobile loans as a result of low-cost financing offered through automobile dealers.

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The following table sets forth the composition of our loan portfolio at the dates indicated.

	At December 31, 2002					At June 30,
						2002					2001					2000					1999					1998
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
						(Dollars in thousands)
Real estate loans:
One-to four-family	$	90,975		47.4	%	$	94,595		48.0	%	$	97,270		51.7	%	$	90,742		51.6	%	$	84,070		48.1	%	$	85,771		51.9	%
Home equity lines of credit		799		0.4			253		0.1			—		—			—		—			—		—			—		—
Commercial		44,107		23.0			46,672		23.7			41,145		21.9			37,432		21.3			42,052		24.1			35,371		21.4
Multi-family		12,558		6.5			13,163		6.7			8,670		4.6			8,858		5.0			9,386		5.4			8,481		5.1
Construction		8,509		4.4			11,226		5.7			8,854		4.7			7,744		4.4			7,886		4.5			6,203		3.8
Land		16,576		8.6			13,011		6.6			12,750		6.8			9,643		5.5			8,424		4.8			7,703		4.7
Total real estate loans		173,524		90.4			178,920		90.9			168,689		89.6			154,419		87.8			151,818		87.0			143,529		86.9
Commercial business loans		9,956		5.2			7,759		3.9			6,055		3.2			6,959		4.0			6,949		4.0			6,429		3.9
Consumer loans:
Automobile loans		3,468		1.8			4,243		2.2			6,012		3.2			7,059		4.0			8,494		4.9			8,416		5.1
Mobile home loans		806		0.4			954		0.5			1,384		0.7			1,536		0.9			1,935		1.1			2,091		1.3
Loans secured by deposits		2,237		1.2			2,787		1.4			3,818		2.0			3,362		1.9			2,487		1.4			1,980		1.2
Other consumer loans		1,986		1.0			2,249		1.1			2,273		1.2			2,494		1.4			2,848		1.6			2,686		1.6
Total consumer loans		8,497		4.4			10,233		5.2			13,487		7.2			14,451		8.2			15,764		9.0			15,173		9.2
Total gross loans		191,977		100.0	%		196,912		100.0	%		188,231		100.0	%		175,829		100.0	%		174,531		100.0	%		165,131		100.0	%
Unearned discount on loans		(15	)				(36	)				(166	)				(736	)				(1,531	)				(1,476	)
Loans in process		(2,532	)				(3,761	)				(4,330	)				(2,593	)				(2,734	)				(2,158	)
Deferred loan fees, net		(389	)				(387	)				(335	)				(298	)				(301	)				(306	)
Allowance for losses		(2,690	)				(2,696	)				(2,209	)				(2,030	)				(1,981	)				(1,659	)
Total loans receivable, net	$	186,351				$	190,032				$	181,191				$	170,172				$	167,984				$	159,532

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The following table sets forth certain information at December 31, 2002 regarding the dollar amount of principal repayments becoming due during the periods indicated for loans. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

	Real Estate Loans		Commercial Business Loans		Consumer Loans		Total Loans
	(In thousands)
Amounts due in:
One year or less	$	11,325	$	5,968	$	4,015	$	21,308
More than one to three years		2,550		942		2,940		6,432
More than three to five years		8,592		949		953		10,494
More than five to 10 years		14,865		2,097		427		17,389
More than 10 to 15 years		54,904		—		162		55,066
More than 15 years		81,288		—		—		81,288
Total	$	173,524	$	9,956	$	8,497	$	191,977

The following table sets forth the dollar amount of all loans at December 31, 2002 that are due after December 31, 2003 and have either fixed interest rates or floating or adjustable interest rates. The amounts shown below exclude applicable loans in process, unearned interest on installment loans, nonperforming loans and deferred loan fees, net.

	Fixed-Rates		Floating or Adjustable-Rates		Total
	(In thousands)
Real estate loans:
One- to four-family	$	27,534	$	61,677	$	89,211
Home equity lines of credit		—		799		799
Commercial		22,844		19,845		42,689
Multi-family		6,470		5,937		12,407
Construction		939		6,342		7,281
Land		3,454		6,358		9,812
Commercial business loans		1,648		2,340		3,988
Consumer loans		4,482		—		4,482
Total	$	67,371	$	103,298	$	170,669

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The following table shows loan origination activity during the periods indicated. We did not purchase or sell any loans during these periods. Subprime loans accounted for $870,000 of the real estate loans originated during the six months ended December 31, 2002 and $369,000 of the consumer loans.

	Six Months Ended December 31,						Year Ended June 30,
	2002			2001			2002			2001			2000
	(In thousands)
Total loans at beginning of period	$	196,912		$	188,231		$	188,231		$	175,829		$	174,531
Loans originated:
Real estate		18,504			40,937			62,408			63,063			55,186
Commercial business		4,647			2,410			8,593			6,491			7,909
Consumer		2,516			4,691			7,559			13,152			14,754
Total loans originated		25,667			48,038			78,560			82,706			77,849
Real estate loan principal repayments		(22,367	)		(15,966	)		(32,973	)		(29,518	)		(33,319	)
Other repayments		(8,235	)		(22,627	)		(36,906	)		(40,786	)		(43,232	)
Net loan activity		(4,935	)		9,445			8,681			12,402			1,298
Total gross loans at end of period	$	191,977		$	197,676		$	196,912		$	188,231		$	175,829

Investments. Our investment portfolio consists primarily of Federal agency debt securities with maturities of seven years or less and mortgage-backed securities with stated final maturities of thirty years or less. Investment securities decreased $12.3 million, or 20.4%, in the six months ended December 31, 2002 as a result of sales and redemptions. The securities sold were fixed-rate mortgage-backed securities. The proceeds from the disposition of investment securities were invested in overnight deposits in anticipation of liquidity needs. Investment securities increased $6.0 million, or 11%, during the year ended June 30, 2002. Growth in investment securities occurred primarily due to excess funds invested from net growth in deposits. Initially, we began purchasing mortgage-backed securities with fixed interest rates and longer maturities to improve yields in the investment portfolio while providing call protection and enhancing our qualified thrift lender ratio. During 2002, we placed more emphasis on purchasing adjustable-rate mortgage-backed securities, which typically have lower yields. Although initial yields are lower on these securities, their rates are tied to a current market index and will reprice if interest rates change. In addition, these securities improve our interest rate sensitivity. All of our mortgage-backed securities were issued by either Ginnie Mae, Fannie Mae or Freddie Mac.

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

	At December 31, 2002				At June 30,
					2002				2001				2000
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Federal agency securities	$	22,843	$	23,751	$	27,933	$	28,464	$	32,979	$	32,954	$	40,411	$	39,063
Mortgage-backed securities		23,652		24,204		31,416		31,751		21,251		21,197		7,264		6,991
Total	$	46,495	$	47,955	$	59,349	$	60,215	$	54,230	$	54,151	$	47,675	$	46,054

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The following table sets forth the maturities and weighted average yields of investment securities at December 31, 2002. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At December 31, 2002, mortgage-backed securities with adjustable rates totaled $20.0 million.

	More than One Year to Five Years				More than Five Years to Ten Years				More than Ten Years				Total
	Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield
Federal agency securities	$	18,083	5.00	%	$	5,668	6.05	%	$	—	—	%	$	23,751	5.28	%
Mortgage-backed securities		—	—			590	6.77			23,614	4.46			24,204	4.54
Total	$	18,083			$	6,258			$	23,614			$	47,955	4.91

Deposits. Our primary source of funds is our deposit accounts. The deposit base is comprised of checking, savings, money market and time deposits. These deposits are provided primarily by individuals and businesses within our market area. We do not use brokered deposits as a source of funding. Deposits decreased $8.8 million, or 3.8%, in the six months ended December 31, 2002. The decrease in deposits consisted primarily of a decrease in certificates of deposit and, to a lesser extent, passbook accounts, which was partially offset by a significant increase in money market accounts. We have adjusted our pricing strategy to encourage the run-off of higher-rate certificates of deposit and to increase money market deposit accounts, which has resulted in the loss of some deposits. Deposits increased $9.8 million, or 4.4%, in the year ended June 30, 2002. The growth in deposits consisted of an increase in lower costing transaction accounts, which offset a decrease in higher costing certificates of deposit. The shift of deposits from certificates of deposit to deposits without specific maturities was attributable primarily to the prevailing low interest rate environment and our strategy of emphasizing transaction accounts.

In the unlikely event that Jefferson Federal is liquidated after the conversion, depositors will be entitled to full payment of their deposit accounts before any payment is made to Jefferson Bancshares as the sole stockholder of Jefferson Federal.

	At December 31, 2002		At June 30,
			2002		2001		2000
	(In thousands)
Noninterest-bearing accounts	$	4,870	$	4,809	$	3,955	$	4,610
NOW accounts		13,851		13,358		10,917		11,350
Passbook accounts		13,484		14,375		12,000		11,534
Money market deposit accounts		22,855		16,569		7,792		6,244
Certificates of deposit		167,978		182,738		187,397		165,403
Total	$	223,038	$	231,849	$	222,061	$	199,141

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The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of December 31, 2002. Jumbo certificates of deposit require minimum deposits of $100,000.

Maturity Period	Certificates of Deposits
	(In thousands)
Three months or less	$	3,522
Over three through six months		3,976
Over six through twelve months		12,619
Over twelve months		18,750
Total	$	38,867

The following table sets forth the time deposits classified by rates at the dates indicated.

	At December 31, 2002		At June 30,
			2002		2001		2000
			(In thousands)
1.01—2.00%	$	25,880	$	—	$	—	$	—
2.01—3.00%		71,123		59,947		—		—
3.01—4.00%		28,954		62,599		866		—
4.01—5.00%		24,772		31,452		38,381		15,314
5.01—6.00%		5,556		10,091		62,490		86,571
6.01—7.00%		11,693		18,649		85,660		63,498
7.01—8.00%		—		—		—		20
Total	$	167,978	$	182,738	$	187,397	$	165,403

The following table sets forth the amount and maturities of time deposits at December 31, 2002.

	Amount Due								Total		Percent of Total Certificate Accounts
	Less Than One Year		1-2 Years		2-3 Years		3-4 Years
	(Dollars in thousands)
1.01—2.00%	$	25,111	$	769	$	—	$	—	$	25,880	15.4	%
2.01—3.00%		67,173		3,115		835		—		71,123	42.3
3.01—4.00%		1,157		7,122		20,435		240		28,954	17.2
4.01—5.00%		2,093		17,040		4,751		888		24,772	14.8
5.01—6.00%		622		4,295		639		—		5,556	3.3
6.01—7.00%		9,664		2,029		—		—		11,693	7.0
Total	$	105,820	$	34,370	$	26,660	$	1,128	$	167,978	100.0	%

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The following table sets forth the savings activities for the periods indicated.

	Six Months Ended December 31,					Year Ended June 30,
	2002			2001		2002		2001		2000
	(In thousands)
Beginning balance	$	231,849		$	222,061	$	222,061	$	199,141	$	194,339
Increase (decrease) before interest credited		(11,629	)		4,695		1,576		13,510		(3,138	)
Interest credited		2,818			4,811		8,212		9,410		7,940
Net increase (decrease) in savings deposits		(8,811	)		9,506		9,788		22,920		4,802
Ending balance	$	223,038		$	231,567	$	231,849	$	222,061	$	199,141

Borrowings. We occasionally rely upon advances from the Federal Home Loan Bank of Cincinnati to supplement our supply of lendable funds and to meet deposit withdrawal requirements. During the year ended June 30, 2002, we borrowed $4.0 million and repaid $4.0 million in advances from the FHLB. The following table presents certain information regarding our use of Federal Home Loan Bank advances during the periods and at the dates indicated.

	Six Months Ended December 31,						Year Ended June 30,
	2002			2001			2002			2001			2000
	(Dollars in thousands)
Maximum amount of advances outstanding at any month end	$	2,000		$	2,000		$	2,000		$	5,000		$	6,500
Average advances outstanding		2,000			2,000			2,000			2,708			3,208
Weighted average interest rate during the period		5.00	%		5.10	%		5.10	%		6.39	%		5.80	%
Balance outstanding at end of period	$	2,000		$	2,000		$	2,000		$	2,000		$	4,000
Weighted average interest rate at end of period		5.01	%		5.01	%		5.01	%		5.01	%		6.78	%

Stockholders’ equity. Stockholders’ equity increased $2.0 million, or 6.2%, in the six months ended December 31, 2002 and $3.0 million, or 10.1%, in the year ended June 30, 2002. Retained earnings, less dividends paid, accounted for $1.7 million and $2.2 million of the increase in the six months ended December 31, 2002 and the year ended June 30, 2002, respectively. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders’ equity. At December 31, 2002, the adjustment to stockholders’ equity was a net unrealized gain of $906,000, compared to a net unrealized gain of $537,000 at June 30, 2002 and a net unrealized loss of $49,000 at June 30, 2001. During the year ended June 30, 2002, common stock and paid in capital increased due to the exercise of 11,300 stock options and the granting and vesting of restricted stock awards.

Allowance for Loan Losses and Asset Quality

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

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

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

At December 31, 2002, our allowance for loan losses represented 1.40% of total gross loans and 113.1% of nonperforming loans. In setting the allowance at that level, we considered the relative level of subprime and prime loans in the portfolio and the continuing downturn in the local economy. The allowance for loan losses decreased $6,000, or .2%, from June 30, 2002 to December 31, 2002. The small change in the allowance reflected that since June 30, 2002 nonperforming loans had increased, charge-off levels had increased and subprime and prime loans delinquent 60 to 89 days had remained substantially level.

At June 30, 2002, our allowance for loan losses represented 1.37% of total gross loans and 130.4% of nonperforming loans. The allowance for loan losses increased $487,000, or 22%, to $2.7 million at June 30, 2002 from $2.2 million at June 30, 2001. The increase in the allowance from June 30, 2001 to June 30, 2002 reflected anticipated credit quality deterioration as result of the downturn in the local and national economy as well as anticipated higher losses as a result of our more aggressive collection policies. In the past, we did not actively pursue foreclosure as a means to resolve problem loans. As a result, nonperforming loans were high and charge-offs were low. More recently, we have instituted new collection policies under which we more frequently pursue foreclosure or repossession when allowed by law. Our effort to reduce nonperforming assets has resulted in a higher level of foreclosures and charge-offs, which has necessitated a larger allowance for loan losses.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

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Summary of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated. Where specific loan loss reserves have been established, any difference between the loss reserve and the amount of loss realized has been charged or credited to current income.

	Six Months Ended December 31,						Year Ended June 30,
	2002			2001			2002			2001			2000			1999			1998
	(Dollars in thousands)
Allowance at beginning of period	$	2,696		$	2,209		$	2,209		$	2,030		$	1,981		$	1,659		$	1,610
Provision for loan losses		547			480			1,221			960			1,270			764			700
Recoveries:
Real estate loans		3			—			—			—			—			—			—
Commercial business loans		131			108			204			205			140			—			—
Consumer loans		144			265			479			401			616			128			168
Total recoveries		278			373			683			606			756			128			168
Charge offs:
Real estate loans		(324	)		(70	)		(295	)		—			—			(34	)		(195	)
Commercial business loans		(197	)		(222	)		(312	)		(624	)		(643	)		—			(56	)
Consumer loans		(310	)		(518	)		(810	)		(763	)		(1,334	)		(536	)		(568	)
Total charge-offs		(831	)		(810	)		(1,417	)		(1,387	)		(1,977	)		(570	)		(819	)
Net charge-offs		(553	)		(437	)		(734	)		(781	)		(1,221	)		(442	)		(651	)
Allowance at end of period	$	2,690		$	2,252		$	2,696		$	2,209		$	2,030		$	1,981		$	1,659
Allowance to nonperforming loans		113.1	%		83.6	%		130.4	%		80.1	%		49.1	%		38.3	%		44.6	%
Allowance to total gross loans outstanding at the end of the period		1.40	%		1.14	%		1.37	%		1.17	%		1.15	%		1.14	%		1.00	%
Net charge-offs to average loans outstanding during the period (1)		0.58	%		0.46	%		0.38	%		0.43	%		0.71	%		0.26	%		0.42	%

(1) Ratios for the six month periods are annualized.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

	At December 31, 2002						At June 30,
							2002						2001
	Amount		% of Allowance to Total Allowance		% of Loans in Category to Total Loans		Amount		% of Allowance to Total Allowance		% of Loans in Category to Total Loans		Amount		% of Allowance to Total Allowance		% of Loans in Category to Total Loans
Real estate	$	784	29.1	%	90.4	%	$	800	29.7	%	90.9	%	$	800	36.2	%	89.6	%
Commercial business		762	28.4		5.2			569	21.1		3.9			564	25.5		3.2
Consumer		1,144	42.5		4.4			1,327	49.2		5.2			845	38.3		7.2
Unallocated		—	—		N/A			—	—		N/A			—	—		N/A
Total allowance for loan losses	$	2,690	100.0	%			$	2,696	100.0	%			$	2,209	100.0	%

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	At June 30,
	2000						1999						1998
	Amount		% of Allowance to Total Allowance		% of Loans in Category to Total Loans		Amount		% of Allowance to Total Allowance		% of Loans in Category to Total Loans		Amount		% of Allowance to Total Allowance		% of Loans in Category to Total Loans
Real estate	$	225	11.1	%	87.8	%	$	225	11.4	%	87.0	%	$	225	13.6	%	86.9	%
Commercial business		541	26.6		4.0			351	17.7		4.0			287	17.3		3.9
Consumer		1,264	62.3		8.2			1,405	70.9		9.0			1,147	69.1		9.2
Unallocated		—	—		N/A			—	—		N/A			—	—		N/A
Total allowance for loan losses	$	2,030	100.0	%			$	1,981	100.0	%			$	1,659	100.0	%

Nonperforming and Classified Assets. When a loan becomes 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases and the reserve for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.

As a community financial institution, we have strived to serve the credit needs of our local communities, which has included lending to borrowers with marginal credit histories. Consequently, we have experienced a higher level of delinquencies, classified assets and charge-offs. In recent periods we have taken steps that are intended to help us to continue to serve the credit needs of the community while improving asset quality. These measures include the use of a credit scoring model that is designed to assist in predicting payment performance for newly originated loans. We now use Beacon credit scores to price loans according to risk, to monitor loan profitability, to monitor the diversification of the loan portfolio, including subprime loans, and to track loans that are charged off. We believe that these efforts have helped to reduce nonperforming assets.

We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property result in charges against income.

Nonperforming assets totaled $4.2 million, or 1.62% of total assets, at December 31, 2002, which is an increase of $1.1 million, or 35.8%, from June 30, 2002. Foreclosed real estate increased $797,000 during the six months ended December 31, 2002 due to an increase in bankruptcy filings and depressed local economic conditions. The increase in foreclosed real estate also reflected a weaker resale market for previously occupied homes. At December 31, 2002, foreclosed real estate consisted of 15 single family homes, nine mobile homes, four parcels of real estate, one commercial property and one apartment building that was under contract for sale. Nonaccrual mortgage loans also increased during the six months ended December 31, 2002. Nonaccrual residential mortgage loans increased $240,000 to $1.8 million, and nonaccrual commercial real estate loans increased $133,000 to $501,000.

Nonperforming assets totaled $3.1 million, or 1.16% of total assets, at June 30, 2002, which is a decrease of $801,000, or 20.5%, from June 30, 2001. Foreclosed real estate and other repossessed assets decreased $110,000 in fiscal 2002, and nonaccrual loans decreased $691,000. At June 30, 2002, nonaccrual loans included $1.6 million of residential mortgage loans, $368,000 of commercial real estate loans and $133,000 of consumer loans.

Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. We consider one- to four-family mortgage loans and consumer installment loans to be homogeneous and, therefore, do not separately evaluate them for impairment. All other loans are evaluated for impairment on an individual basis. At December 31, 2002, we had $147,000 of impaired loans, which consisted of one residential mortgage loan and one mobile home loan. At June 30, 2002, we had $114,000 of impaired loans, which consisted of one residential mortgage loan and one mobile home loan.

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The following table provides information with respect to our nonperforming assets at the dates indicated. We did not have any troubled debt restructurings at the dates presented.

	At December 31, 2002			At June 30,
				2002			2001			2000			1999			1998
	(Dollars in thousands)
Nonaccrual loans:
Real estate	$	2,326		$	1,935		$	2,692		$	3,898		$	4,020		$	2,715
Commercial business		—			—			17			155			496			424
Consumer		53			133			50			85			662			578
Total		2,379			2,068			2,759			4,138			5,178			3,717
Accruing loans past due 90 days or more		—			—			—			—			—			—
Total of nonaccrual and 90 days or more past due loans		2,379			2,068			2,759			4,138			5,178			3,717
Real estate owned		1,775			978			1,070			215			299			210
Other nonperforming assets		72			66			84			47			138			84
Total nonperforming assets	$	4,226		$	3,112		$	3,913		$	4,400		$	5,615		$	4,011
Total nonperforming loans to net loans		1.28	%		1.09	%		1.52	%		2.43	%		3.08	%		2.33	%
Total nonperforming loans to total assets		0.91	%		0.77	%		1.08	%		1.80	%		2.35	%		1.91	%
Total nonperforming assets to total assets		1.62	%		1.16	%		1.54	%		1.91	%		2.55	%		2.06	%

Interest income that would have been recorded for the six months ended December 31, 2002 and the year ended June 30, 2002 had nonaccruing loans been current according to their original terms amounted to $70,000 and $160,000, respectively. The amount of interest related to these loans included in interest income was $39,000 for the six months ended December 31, 2002 and $86,000 for the year ended June 30, 2002.

We use Beacon credit scores to predict the likelihood that an existing borrower or potential customer will become a serious credit risk. Beacon credit scores are based on data available in an individual’s credit report, such as payment history, outstanding debt and types of credit in use. Beacon scores range from 400 to 850. We consider loans by borrowers with a Beacon score of less than 600 to be subprime loans. There is no single definition of “subprime,” and other financial institutions may use different criteria to identify their subprime loans. For example, Fannie Mae and Freddie Mac generally designate borrowers with a credit bureau score of 660 or below as subprime.

The following table sets forth the amounts of subprime loans in our loan portfolio at the dates indicated.

	At December 31, 2002				At June 30,
					2002				2001				2000
	Dollar Amount		As a % of Loans in Category		Dollar Amount		As a % of Loans in Category		Dollar Amount		As a % of Loans in Category		Dollar Amount		As a % of Loans in Category
	(Dollars in thousands)
Subprime real estate loans	$	31,580	18.2	%	$	35,380	19.8	%	$	39,998	23.7	%	$	40,928	26.5	%
Subprime consumer loans		1,380	16.2			1,890	18.5			2,936	21.8			4,610	31.9
Total subprime loans	$	32,960			$	37,270			$	42,934			$	45,538

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Pursuant to federal regulations, we review and classify our assets on a regular basis. In addition, the Office of Thrift Supervision has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify an asset as substandard or doubtful we must establish a general allowance for loan losses. If we classify an asset as loss, we must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amount.

The following table shows the aggregate amounts of our classified assets at the dates indicated.

	At December 31, 2002		At June 30,
			2002		2001
	(In thousands)
Substandard assets	$	6,523	$	4,106	$	5,719
Doubtful assets		—		—		—
Loss assets		—		15		17
Total classified assets	$	6,523	$	4,121	$	5,736

At each of the dates in the above table, substandard assets consisted of nonperforming assets and other loans that we believed exhibited weakness. These substandard but performing loans totaled $2.3 million, $995,000 and $1.8 million at December 31, 2002, June 30, 2002 and June 30, 2001, respectively. At each date, substandard but performing loans included a commercial real estate loan that at December 31, 2002 had a balance of $898,000. At December 31, 2002 we included $579,000 of other loans by the same borrower or related persons, for a total of $1.5 million of substandard but performing loans to one borrower and related persons. The corporate borrower has been in bankruptcy, but has kept all loans current. At December 31, 2002, we also had $3.1 million of loans that we are monitoring because of concerns about the borrowers’ ability to continue to make payments in the future.

Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.

	At December 31, 2002				At June 30,
					2002				2001
	30-59 Days Past Due		60-89 Days Past Due		30-59 Days Past Due		60-89 Days Past Due		30-59 Days Past Due		60-89 Days Past Due
	(In thousands)
Real estate loans	$	8,486	$	1,572	$	7,200	$	1,618	$	6,664	$	2,769
Commercial business loans		193		—		76		—		377		—
Consumer loans		274		190		360		144		690		286
Total	$	8,953	$	1,762	$	7,636	$	1,762	$	7,731	$	3,055

At each of the dates in the above table, delinquent real estate loans consisted primarily of loans secured by residential real estate.

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Market Risk Analysis

Qualitative Aspects of Market Risk. Our most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, we actively originate adjustable-rate mortgage loans for retention in our loan portfolio. These loans generally reprice beginning after five years and annually thereafter. Most of our residential adjustable-rate mortgage loans may not adjust downward below their initial interest rate. Although historically we have been successful in originating adjustable-rate mortgage loans, the ability to originate such loans depends to a great extent on market interest rates and borrowers’ preferences. As an alternative to adjustable-rate mortgage loans, we offer fixed-rate mortgage loans with maturities of fifteen years or less. This product enables us to compete in the fixed-rate mortgage market while maintaining a shorter maturity. Fixed-rate mortgage loans typically have an adverse effect on interest rate sensitivity compared to adjustable-rate loans. In recent years we have used investment securities with terms of seven years or less and adjustable-rate mortgage-backed securities to help manage interest rate risk. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.

We have established an Asset/Liability Committee to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume and mix of assets and funding sources with the objective of managing assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk limits and profitability goals.

Quantitative Aspects of Market Risk. We use an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, this analysis is not performed for decreases of more than 100 basis points. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios. The following table, which is based on information that we provide to the Office of Thrift Supervision, presents the change in our net portfolio value at December 31, 2002 that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change.

	Net Portfolio Value (Dollars in thousands)						Net Portfolio Value as % of Portfolio Value of Assets
Basis Point (“bp”) Change in Rates	$ Amount		$ Change		% Change		NPV Ratio		Change
300 bp	$	35,225	(7,576	)	(18	)%	13.55	%	(214	)bp
200		38,381	(4,421	)	(10	)	14.49		(120	)
100		40,688	(2,113	)	(5	)	15.13		(57	)
0		42,801	—		—		15.69		—
(100)		46,742	3,941		9		16.76		107

The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, amount others. As with any method of measuring

57

interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.

Liquidity and Capital Resources

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

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations.

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2002, cash and cash equivalents totaled $2.3 million and interest-bearing deposits totaled $13.4 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $48.0 million at December 31, 2002. In addition, at December 31, 2002, we had arranged the ability to borrow a total of approximately $133.3 million from the Federal Home Loan Bank of Cincinnati. On that date, we had advances outstanding of $2.0 million.

At December 31, 2002, we had $1.9 million in loan commitments outstanding. In addition to commitments to originate loans, we had $2.5 million in loans-in-process primarily to fund undisbursed proceeds of construction loans, $1.8 million in unused standby letters of credit and $90,000 in unused lines of credit. Certificates of deposit due within one year of December 31, 2002 totaled $105.8 million. We believe, based on past experience, that a significant portion of those deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The following table presents certain of our contractual obligations as of December 31, 2002.

				Payments due by period
Contractual Obligations	Total			Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Long-term debt obligations	$	2,000	(1)	$	—	$	—	$	—	$	2,000
Capital lease obligations		—			—		—		—		—
Operating lease obligations		68	(2)		15		31		22		—
Purchase obligations		644	(3)		209		418		17		—
Other long-term liabilities reflected on the balance sheet		—			—		—		—		—
Total	$	2,712		$	224	$	449	$	39	$	2,000

(1) $1.0 million of this amount is callable on March 9, 2004 and $1.0 million is callable on March 9, 2006.

(2) Payments are for lease of real property. The lease expires in 2007, with an option to extend for an additional five years.

(3) Payments are minimum payments for data processing services. Actual payments may be higher, depending on usage.

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Our primary investing activities are the origination of loans and the purchase of securities. In the six months ended December 31, 2002, we originated $25.7 million of loans and purchased no securities. In fiscal 2002, we originated $78.6 million of loans and purchased $45.0 million of securities. In fiscal 2001, we originated $82.7 million of loans and purchased $41.0 million of securities. In fiscal 2000, we originated $77.8 million of loans and purchased $11.2 million of securities.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in total deposits of $8.8 million in six months ended December 31, 2002 and a net increase in total deposits of $9.8 million, $22.9 million and $4.8 million for the years ended June 30, 2002, 2001 and 2000, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. In the six months ended December 31, 2002, Federal Home Loan Bank advances were unchanged. During fiscal 2002, we began and ended the year with $2.0 million in advances outstanding. During fiscal 2001, Federal Home Loan Bank advances decreased $2.0 million. During fiscal 2000, Federal Home Loan Bank advances increased $4.0 million.

We are subject to various regulatory capital requirements administered by the Office of Thrift Supervision, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2002, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines. See “Regulation and Supervision—Federal Savings Institution Regulation—Capital Requirements” and “Regulatory Capital Compliance” and note 12 of the notes to the financial statements.

The capital from the conversion will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations will be enhanced by the capital from the conversion, resulting in increased net interest-earning assets and net income. However, due to the large increase in equity resulting from the capital raised in the offering, return on equity will be adversely impacted following the conversion.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements and have not had any such arrangements during the six months ended December 31, 2002 or the three years ended June 30, 2002.

Impact of Recent Accounting Pronouncements

For a discussion of the impact on us of recent accounting pronouncements, see note 3 to the notes to the financial statements.

Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this prospectus have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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Our Business

General

Jefferson Bancshares, Inc. was organized as a Tennessee corporation at the direction of Jefferson Federal in March 2003 to become the holding company for Jefferson Federal upon completion of the conversion. As a result of the conversion, Jefferson Federal will be a wholly owned subsidiary of Jefferson Bancshares.

Before the completion of the conversion, Jefferson Bancshares will not engage in any significant activities other than that of an organizational nature. Upon completion of the conversion, Jefferson Bancshares’ business activity will be the ownership of the outstanding capital stock of Jefferson Federal and management of the investment of offering proceeds retained from the conversion. Initially, Jefferson Bancshares will neither own nor lease any property but will instead use the premises, equipment and other property of Jefferson Federal with the payment of appropriate rental fees, as required by applicable law and regulations. In the future, Jefferson Bancshares may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.

Jefferson Federal was formed as a Tennessee building and loan association in 1960. In 1963, it converted to a federal mutual savings association and changed its name to Jefferson Federal Savings and Loan Association of Morristown. In 1994, Jefferson Federal reorganized into the mutual holding company form of organization by converting to stock form and issuing shares of its common stock to a newly formed mutual holding company and to its depositors. Upon the completion of the conversion, Jefferson Federal will change its name to Jefferson Federal Bank.

We operate as a community-oriented financial institution offering traditional financial services to consumers and businesses in our market area. We attract deposits from the general public and use those funds to originate mortgage, commercial and consumer loans, which we hold for investment.

Our website address is www.jeffersonfederal.com. Information on our website should not be considered a part of this prospectus.

Market Area

We are located in Morristown, Tennessee, which is situated approximately 40 miles northeast of Knoxville, Tennessee in the northeastern section of the state. We consider Hamblen County, with a population of approximately 59,000, and its contiguous counties to be our primary market area. The economy of our market area is primarily oriented to manufacturing and agriculture. Morristown and Hamblen County also serve as a hub for retail shopping and medical services for a number of surrounding rural counties. The manufacturing sector is focused on three types of products: automotive and heavy equipment components; plastics, paper and corrugated products; and furniture. According to the U.S. Bureau of Labor Statistics, the unemployment rates for the State of Tennessee have compared favorably to the national rate as well as the rate in Hamblen County. In this regard, the average monthly unemployment rate in Hamblen County has decreased from 6.2% for 2001 to 5.6% for 2002, but remained above the state average and slightly below the national average. Importantly, the slow economy in Jefferson Federal’s market has been evidenced in other ways such as through diminished hours worked for hourly employees in the manufacturing sector which is the largest component of the local economy.

Competition

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions operating in our market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds and other corporate and government securities. At June 30, 2002, which is the most recent date for which data is available from the FDIC, we held 31% of the deposits in Hamblen County, which is the largest market share out of eight financial institutions

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with offices in the county. However, banks owned by Suntrust Banks, Inc., First Tennessee National Corporation, Union Planters Corporation and National Commerce Financial Corporation, all of which are large regional bank holding companies, also operate in Hamblen County. These institutions are significantly larger than us and, therefore, have significantly greater resources.

Our competition for loans comes primarily from financial institutions in our market area, and to a lesser extent from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.

Lending Activities

General. Our loan portfolio consists of a variety of mortgage, commercial and consumer loans. As a community-oriented financial institution, we try to meet the borrowing needs of consumers and businesses in our market area. Mortgage loans constitute a significant majority of the portfolio, and residential mortgage loans are the largest segment in that category.

One- to Four-Family Residential Loans. Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new one- to four-family homes. We offer fixed-rate mortgage loans with terms up to 15 years and adjustable-rate mortgage loans with terms up to 25 years. Borrower demand for adjustable-rate loans versus fixed-rate loads is a function of the level of interest rates, the expectations of changes in the level of interest rates, the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the first year interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on our interest rate risk.

As of December 31, 2002, $94.3 million, or 60%, of our residential mortgage loans provided for periodic interest rate adjustments. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions. Interest rates and payments on our adjustable-rate loans generally are adjusted annually based on any change in the National Average Contract Mortgage Rate for the Purchase of Previously Occupied Homes by Combined Lenders as published by the Federal Housing Finance Board. Changes in this index tend to lag behind changes in market interest rates. Our adjustable-rate mortgage loans may have initial fixed-rate periods ranging from one to five years.

We originate all adjustable-rate loans at the fully indexed interest rate. The maximum amount by which the interest rate may be increased or decreased is generally 2% per year and the lifetime interest rate cap is generally 5% over the initial interest rate of the loan. Our adjustable-rate residential mortgage loans generally do not provide for a decrease in the rate paid below the initial contract rate. The inability of our residential real estate loans to adjust downward below the initial contract rate can contribute to increased income in periods of declining interest rates, and

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also assists us in our efforts to limit the risks to earnings and equity value resulting from changes in interest rates, subject to the risk that borrowers may refinance these loans during periods of declining interest rates.

While one- to four-family residential real estate loans are normally originated with up to 25-year terms; such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all of the mortgage loans in the our loan portfolio contain due-on-sale clauses providing that Jefferson Federal may declare the unpaid amount due and payable upon the sale of the property securing the loan. Jefferson Federal enforces these due—on-sale clauses to the extent permitted by law. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

We do not emphasize the origination of loans that conform to guidelines for sale in the secondary mortgage market, as we have not sold any loans in recent years. As a result of changes in our underwriting guidelines, we generally do not make mortgage loans to borrowers with a Beacon credit score below 600. With approval of our loan committee or Board of Directors we may make exceptions to this policy for existing customers. Although in the past we frequently made loans to subprime borrowers we did not have a subprime lending program in the sense that we did not focus on subprime lending through planned business strategies, tailored products or explicit borrower targeting. We generally do not make conventional loans with loan-to-value ratios exceeding 85% and generally make loans with a loan-to-value ratio in excess of 85% only when secured by first liens on owner-occupied one- to four-family residences. Loans with loan-to-value ratios in excess of 90% generally require private mortgage insurance or additional collateral. We require all properties securing mortgage loans in excess of $50,000 to be appraised by a board-approved appraiser. We require title insurance on all mortgage loans in excess of $25,000. Borrowers must obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan.

Home Equity Lines of Credit. We offer home equity lines of credit on single family residential property in amounts up to 80% of the appraised value. Rates and terms vary by borrower qualifications, but are generally offered on a variable rate, open-end term basis with maturities of ten years or less.

Commercial Real Estate and Multi-Family Loans. An important segment of our loan portfolio is mortgage loans secured by commercial and multi-family real estate. Our commercial real estate loans are secured by professional office buildings, shopping centers, manufacturing facilities, hotels, vacant land, churches and, to a lesser extent, by other improved property such as restaurants and retail operations. We intend to continue to emphasize and grow this segment of our loan portfolio

We originate both fixed- and adjustable-rate loans secured by commercial and multi-family real estate with terms up to 25 years. Fixed-rate loans have provisions that allow us to call the loan after five years. Adjustable-rate loans are based on prime and adjust monthly. Loan amounts generally do not exceed 85% of the lesser of the appraised value or the purchase price. When the borrower is a corporation, partnership or other entity, we generally require personal guarantees from significant equity holders. Currently, it is our philosophy to originate commercial real estate loans only to borrowers known to us and on properties in or near our market area.

Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties are often dependent on successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. In order to monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family loans. We also perform annual reviews and prepare write-ups on all lending relationships of $250,000 or more where the loan is secured by commercial or multi-family real estate.

At December 31, 2002, loans with principal balances of $500,000 or more secured by commercial real estate totaled $27.4 million, or 62.1% of commercial real estate loans, and loans with principal balances of $500,000

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or more secured by multi-family properties totaled $9.5 million, or 76.0% of multifamily loans. At December 31, 2002, all of these loans were performing in accordance with their terms.

Construction Loans. We originate loans to finance the construction of one-to four-family homes and, to a lesser extent, multi-family and commercial real estate properties. At December 31, 2002, $4.6 million of our construction loans were for the construction of one- to four-family homes and $3.9 million was for the construction of commercial or multi-family real estate. We principally finance the construction of single-family, owner-occupied homes. Construction loans are generally made on a “pre-sold” basis, however, contractors who have sufficient financial strength and a proven track record are considered for loans for model and speculative purposes, with preference given to contractors with whom we have had successful relationships. We generally limit loans to contractors for speculative construction to a total of $225,000 per contractor. Construction loans generally provide for interest-only payments at fixed-rates of interest and have terms of six to 12 months. At the end of the construction period, the loan generally converts into a permanent loan. Construction loans to a borrower who will occupy the home, or to a builder who has pre-sold the home, will be considered for loan-to-value ratios of up to 85%. Construction loans for speculative purposes, models, and commercial properties may be considered for loan-to-value ratios of up to 80%. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. We generally use in-house inspectors for construction disbursement purposes; however, we may rely on architect certifications for disbursements on larger commercial loans.

Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Land Loans. We originate loans secured by unimproved property, including lots for single family homes, raw land, commercial property and agricultural property. We originate both fixed- and adjustable-rate land loans with terms up to 15 years. Adjustable-rate loans are based on prime and adjust monthly. Loans secured by unimproved commercial property or for land development generally have five year terms with a longer amortization schedule. Loan amounts generally do not exceed 75% of the lesser of the appraised value or the purchase price.

At December 31, 2002, our largest land loan was for $4.3 million and was secured by commercial real estate. At December 31, 2002, loans with principal balances of $500,000 or more secured by unimproved property totaled $6.0 million, or 36.2% of land loans. All of these loans were performing in accordance with their terms at that date.

Commercial Business Loans. We extend commercial business loans on an unsecured and secured basis. Secured loans generally are collateralized by industrial/commercial machinery and equipment, livestock, farm machinery and, to a lesser extent, accounts receivable and inventory. We originate both fixed- and adjustable-rate commercial loans with terms up to 20 years. Fixed-rate loans have provisions that allow us to call the loan after five years. Adjustable-rate loans are based on prime and adjust monthly. Where the borrower is a corporation, partnership or other entity, we generally require personal guarantees from significant equity holders.

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with commercial and multi-family real estate lending. Although the repayment of commercial and multi-family real estate loans depends primarily on the cash-flow of the property or related business, the underlying collateral generally provides a sufficient source of repayment. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the

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liquidation of collateral if a borrower defaults is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the cash-flow, character and creditworthiness of the borrower (and any guarantors), while liquidation of collateral is secondary.

Consumer Loans. We offer a variety of consumer loans, primarily secured by automobiles and savings accounts. Other consumer loans include loans on recreational vehicles and boats, debt consolidation loans, and personal unsecured debt. We market education loans as a “Team Lender” through the Educational Funding of the South, Inc. (“EdSouth”), whereas EdSouth funds the loans and pays a marketing fee to us.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. We use a credit scoring system and charge borrowers with poorer credit scores higher interest rates to compensate for the additional risks associated with those loans.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, boats and recreational vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Loan Originations . All of our loans are originated by in-house lending officers and are underwritten and processed in-house. We rely on advertising, referrals from realtors and customers, and personal contact by our staff to generate loan originations. We generally retain for our portfolio all of the loans that we originate. We occasionally purchase participation interests in commercial real estate loans through other financial institutions in our market area.

Loan Approval Procedures and Authority. Loan approval authority has been granted by the Board of Directors to certain officers on an individual and combined basis for consumer (including residential mortgages) and commercial purpose loans up to a maximum of $500,000 per transaction. All loans with aggregate exposure of $1.0 million or more require the approval of our Loan Committee or the Board of Directors.

The Loan Committee meets every two weeks to review all mortgage loans made within granted lending authority of $75,000 or more and all non-mortgage loans made within granted lending authority of $50,000 or more. The committee approves all requests which exceed granted lending authority or when the request carries aggregate exposure to us of $1.0 million or more. The committee reviews credit relationships of $250,000 or more on a periodic basis in addition to addressing all other credit guideline issues as they may arise. The minutes of the committee are reported to and reviewed by the Board of Directors.

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited by regulation. At December 31, 2002 our regulatory limit on loans to one borrower was $5.5 million. At that date our largest lending relationship was $4.3 million and consisted of a commercial real estate loan. This loan was performing according to its original repayment terms at December 31, 2002.

Loan Commitments. We issue commitments for fixed-rate and adjustable-rate single-family residential mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers and generally expire in 90 days or less.

Delinquencies. When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We make initial contact with the borrower when the loan becomes 17 days past due. If payment is not then received, additional letters and phone

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calls generally are made. When the loan becomes 60 days past due, we send a letter notifying the borrower that we will commence foreclosure proceedings if the loan is not brought current within 30 days. When the loan becomes 90 days past due, we will commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Exceptions on commencement of foreclosure actions for commercial real estate loans and mortgage loans are made on a case-by-case basis by the Board of Directors. We may consider loan workout arrangements with certain borrowers under certain circumstances.

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the Federal Home Loan Bank of Cincinnati and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities. We also are required to maintain an investment in Federal Home Loan Bank of Cincinnati stock.

At December 31, 2002, our investment portfolio consisted of Federal agency debt securities with maturities of seven years or less and mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less. We purchase mortgage-backed securities in an effort to increase yield, improve liquidity, provide call protection, and enhance our qualified thrift lender ratio.

Our investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate risk, to provide an alternate source of low-risk investments when demand for loans is weak, and to generate a favorable return. Any two of the following officers are authorized to purchase or sell investments: President, Executive Vice President, and/or Vice President. There is a limit of $2.0 million par value on any single investment purchase unless approval is obtained from the Board of Directors. For mortgage-backed securities, real estate mortgage investment conduits and collateralized mortgage obligations issued by Ginnie Mae, Freddie Mac or Fannie Mae, purchases are limited to a current par value of $2.5 million without Board approval.

Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. We may use borrowings on a short-term basis to compensate for reductions in the availability of funds from other sources. Borrowings may also be used on a longer term basis for general business purposes.

Deposit Accounts. Substantially all of our depositors are residents of the State of Tennessee. Deposits are attracted from within our primary market area through the offering of a broad selection of deposit instruments, including NOW accounts, money market accounts, regular savings accounts, Christmas club savings accounts, certificates of deposit and retirement savings plans. We do not utilize brokered funds. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing monthly. In the past, our strategy had been to attract and retain deposits by offering the highest rates in our market area. Our current strategy is to offer competitive rates, but not be the market leader in every type and maturity. We have also changed our advertising to emphasize transaction accounts, with the goal of shifting our mix of deposits towards a smaller percentage of higher cost time deposits.

Borrowings. We have occasionally relied upon advances from the Federal Home Loan Bank of Cincinnati to supplement our supply of lendable funds and to meet deposit withdrawal requirements. Advances from the Federal Home Loan Bank are typically secured by our first mortgage loans.

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The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 25% of a member’s assets, and short-term borrowings of less than one year may not exceed 10% of the institution’s assets. The Federal Home Loan Bank determines specific lines of credit for each member institution. We have authority to borrow up to 20% of assets under a short-term line of credit.

Properties

We conduct our business through our main office and drive through facilities. The following table sets forth certain information relating to these facilities as of December 31, 2002.

Location	Year Opened	Net Book Value as of December 31, 2002		Square Footage	Owned/ Leased
	(Dollars in thousands)
Main Office 120 Evans Avenue Morristown, Tennessee	1997	$	3,351	24,000	Owned
Drive-Through 143 E. Main Street Morristown, Tennessee	1995		447	800	Owned
Drive-Through 1960 W. Morris Blvd. Morristown, Tennessee	1998		52	700	Leased	(1)

(1) The current lease expires in April 2007, with an option for an additional five years.

Personnel

As of December 31, 2002, we had 58 full-time employees and 7 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition or results of operations.

Subsidiaries

We have one subsidiary, Jefferson Service Corporation of Morristown, Tennessee, Inc., which owns stock in Intrieve, Inc., a computer service bureau, and has an ownership interest in Bankers Title of East Tennessee, LLC, a title insurance agency. Our subsidiary also has a small investment in a credit life reinsurance company.

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Our Management

Directors

The initial Board of Directors of Jefferson Bancshares consists of the seven directors of Jefferson Federal. At the first annual meeting of shareholders following the conversion, the directors will be elected to staggered terms so that at subsequent annual meetings approximately one-third of the directors will be elected.

The Board of Directors of Jefferson Federal presently is composed of seven members who are elected for terms of three years, approximately one third of whom are elected annually as required by the Bylaws of Jefferson Federal. All of the directors of Jefferson Federal are independent under the current listing standards of the Nasdaq Stock Market, except for Mr. Smith and Mr. McCrary. Mr. Smith is not independent because he is an employee of Jefferson Federal and Mr. McCrary is not independent because he receives a salary from Jefferson Federal for his service as Chairman of the Board of Directors. Information regarding the directors is provided below. Unless otherwise stated, each person has held his current occupation for the last five years. Ages presented are as of December 31, 2002.

The following directors have terms ending in 2003:

Dr. Jack E. Campbell is the President of Walters State Community College, Whitesburg, Tennessee. Age 65. Director since 1979.

Anderson L. Smith has served as the President and Chief Executive Officer of Jefferson Federal since January 2002. Prior to joining Jefferson Federal, Mr. Smith was President, Consumer Financial Services—East Tennessee Metro, First Tennessee Bank National Association. Age 55. Director since 2002.

William F. Young is the President and Chief Executive Officer of Young’s Furniture Manufacturing Co., Inc., of Whitesburg, Tennessee. Age 64. Director since 2000.

The following directors have terms ending in 2004:

Dr. Terry M. Brimer is the President and majority owner of Midtown Drug Company, Morristown, Tennessee. Age 56. Director since 1977.

H. Scott Reams is a Partner in the law firm of Taylor, Reams, Tilson and Harrison of Morristown, Tennessee. Age 55. Director since 1982.

The following directors have terms ending in 2005:

William T. Hale is the Executive Vice President and General Manager of PFG-Hale, Inc., a wholesale food distributor. Age 52. Director since 2000.

John F. McCrary, Jr. is Chairman of the Board of Directors of the Association. Mr. McCrary is a real estate broker and part owner of Masengill-McCrary Realtors Company and Masengill-McCrary-Gregg Company, an insurance agency, both located in Morristown, Tennessee. Age 78. Director since 1963.

Executive Officers

The executive officers of Jefferson Bancshares are elected annually by the Board of Directors and serve at the Board’s discretion. The executive officers of Jefferson Bancshares are:

Name	Position
Anderson L. Smith	President and Chief Executive Officer
Jane P. Hutton	Treasurer and Secretary

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The executive officers of Jefferson Federal are elected annually by the Board of Directors and serve at the Board’s discretion. Below is information regarding the executive officers of Jefferson Federal who are not also directors. Unless otherwise stated, each executive officer has held his or her current position for at least the last five years. Ages presented are as of December 31, 2002.

Douglas H. Rouse has been Senior Vice President since January 2002. From March 1994 until January 2002, Mr. Rouse served as Vice President. Age 50.

Jane P. Hutton has been Vice President and Comptroller since July 2002. From June 1999 until July 2002, Ms. Hutton served as Assistant Financial Analyst. Prior to joining Jefferson Federal, Ms. Hutton worked as a licensed insurance agent and was the business manager for a family owned dairy farm in Greeneville, Tennessee. Age 45.

Eric S. McDaniel has been Vice President and Senior Operations Officer since July 2002. From March 1996 until July 2002, Mr. McDaniel served as Director of Compliance and Internal Auditor. Age 33.

Meetings and Committees of the Board of Directors of Jefferson Federal

We conduct business through meetings of our Board of Directors and its committees. During the fiscal year ended June 30, 2002, the Board of Directors of Jefferson Federal held 12 regular meetings and 20 special meetings. No director attended fewer than 75% of the total meetings of the Board of Directors and committees on which such director served.

Our Board of Directors has standing Executive/Loan, Audit/Compliance, Compensation, Nominating/Corporate Governance and Asset/Liability Committees, among others.

The Executive/Loan Committee, consisting of Messrs. Smith (Chairman), McCrary, Campbell and Reams, is responsible for the review of new loans within delegated lending authority and approval of requests exceeding delegated authority. All actions of the Executive/Loan Committee must be ratified by the full Board of Directors. This committee met six times during fiscal year ended June 30, 2002.

The Audit/Compliance Committee, consisting of Messrs. Campbell (Chairman), Brimer and Hale, is responsible for developing and monitoring our internal audit and compliance programs. The committee also receives and reviews all the reports and findings and other information presented to them by our officers regarding financial reporting policies and practices. This committee met five times during the fiscal year ended June 30, 2002.

The Compensation Committee, consisting of Messrs. Brimer (Chairman), Campbell, McCrary and Smith, determines annual grade and salary levels for employees and establishes personnel policies. This committee met twice during the fiscal year ended June 30, 2002.

The Asset/Liability Committee, consisting of Messrs. Smith (Chairman), Reams and Young, and is responsible for managing asset and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk, profitability and interest rate sensitivity goals and limits. This committee met four times during the fiscal year ended June 30, 2002.

The Nominating/Corporate Governance Committee, consisting of Messrs. Reams (Chairman), Brimer, Campbell, Hale and Young is responsible for the annual selection of management’s nominees for election as directors. This committee met once in July 2002 to nominate the individuals for election at the 2002 annual meeting.

Committees of the Board of Directors of Jefferson Bancshares

In connection with the formation of Jefferson Bancshares, the following committees were established:

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The Audit/Compliance Committee, consisting of Messrs. Campbell (Chairman), Brimer and Hale, is responsible for ensuring that Jefferson Bancshares is maintaining reliable accounting policies and financial reporting processes, ensuring that the internal auditing department is adequate, and reviewing the work of Jefferson Bancshares’ independent accountants and internal auditing department to determine its effectiveness.

The Compensation Committee, consisting of Messrs. Brimer (Chairman), Campbell, Hale, Reams and Young, is responsible for determining annual grade and salary levels for employees and establishing personnel policies.

The Nominating/Corporate Governance Committee, consisting of Messrs. Reams (Chairman), Brimer, Campbell, Hale and Young, is responsible for the annual selection of management’s nominees for election as directors and developing and implementing policies and practices relating to corporate governance, including implementation of and monitoring adherence to Jefferson Bancshares’ corporate governance policy.

Each of the committees listed above operates under a written charter, which governs its composition, responsibilities and operations.

Corporate Governance Policies and Procedures

In addition to establishing committees of the board of directors, Jefferson Bancshares also adopted several policies to govern its activities, including a corporate governance policy, a code of business conduct and a code of ethics. The corporate governance policy sets forth:

• the duties and responsibilities of each director;

• the composition, responsibilities and operation of the board of directors;

• the establishment and operation of board committees;

• succession planning;

• appointing an independent lead director and convening executive sessions of independent directors;

• the board of directors’ interaction with management and third parties; and

• the evaluation of the performance of the board of directors and of the chief executive officer.

The code of conduct, which applies to all employees and directors, addresses conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. The code of ethics, which applies to senior financial officers of Jefferson Bancshares, is designed to deter wrongdoing and to promote honest and ethical conduct, the avoidance of conflicts of interest, full and accurate disclosure and compliance with all applicable laws, rules and regulations.

Directors’ Compensation

Fees. Directors of Jefferson Federal receive a fee of $800 per month for each regular board meeting they attend and $200 for attendance at each special meeting. The Chairman receives an additional fee of $1,000 per month. Members of committees receive an additional fee of $100 per meeting attended. Board of Directors of Jefferson Bancshares will receive a retainer of $1,000 per quarter.

Stock Options and Stock Awards. On February 26, 2002, Messrs. Hale and Young each received non-statutory options to purchase 1,000 shares of common stock at an exercise price of $22.13 per share, which was the average share price of Jefferson Federal common stock over the previous six month period. All of these stock

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options, which were granted under our 1995 Stock Option Plan, were fully vested upon grant. Also on February 26, 2002, Messrs. Hale and Young each received 167 shares of common stock. All of these shares, which were awarded under our 1995 Management Recognition and Development Plan, were fully vested upon award.

Executive Compensation

Summary Compensation Table. The following information is provided for Anderson L. Smith, our current President and Chief Executive Officer, and William T. Bales, our former President and Chief Executive Officer, who retired on December 31, 2001. Messrs. Smith and Bales are referred to in this section as the “named executive officers.” No other executive officer of Jefferson Federal received a salary and bonus of $100,000 or more during the year ended June 30, 2002.

		Annual Compensation						Long-Term Compensation Awards
Name and Position	Year	Salary($)		Bonus($)		Other Annual Compensation($) (1)		Restricted Stock Award($)			Securities Underlying Options(#)	All Other Compensation ($)
Anderson L. Smith     President and Chief     Executive Officer	2002	$	120,577	$	—	$	7,000	$	3,674	(2)	2,500	$	82,325	(3)
William W. Bales     Former President and     Chief Executive Officer	2002 2001 2000	$	55,500 110,122 106,962	$	4,269 4,154 3,923	$	6,400 13,400 13,400	$	—   —   —		—   —   —	$	98,847 18,001 16,571	(4)

(1) Represents directors’ fees.

(2) The dollar amount represents the market value of 166 shares on the date of grant. The stock award was vested on the date of grant.

(3) Includes life, medical and dental insurance premiums that we paid on his behalf ($2,453), automobile allowance ($9,000), and a one-time signing bonus of $70,872.

(4) Includes life, medical and dental insurance premiums that we paid on his behalf ($4,603), 401(k) plan contribution ($13,667), and payments associated with the termination of his employment agreement ($80,577).

Employment Agreement. Effective January 1, 2003, Anderson L. Smith entered into a three-year employment agreement with Jefferson Federal and Jefferson Bancshares, M.H.C. Under the employment agreement, the base salary for Mr. Smith is $165,000, which amount may be increased at the discretion of the Board of Directors. The employment agreement provides Mr. Smith with a bonus program that enables him to earn up to 50% of his base salary, on an annual basis. The amount of the bonus is determined by specific performance standards and a formula agreed to by Mr. Smith and Jefferson Federal annually. Commencing on the first year anniversary date of the employment agreement, and continuing on each anniversary thereafter, the disinterested members of the Board of Directors may extend the agreement for an additional year so that the remaining term of the agreement is 36 months, unless Mr. Smith gives notice of termination. The agreement is terminable by Jefferson Federal or Jefferson Federal Bancshares, M.H.C. at any time, with or without cause, and by Mr. Smith at any time, with or without cause, or for Good Reason (as defined in the employment agreement). If Mr. Smith is terminated from employment without cause or he elects to terminate the agreement following an event constituting Good Reason, Jefferson Federal would be required to honor the terms of the agreement through the expiration of the current term, including payment of current cash compensation and continuation of employee benefits.

The employment agreement also provides for severance payments and other benefits in the event Mr. Smith is terminated without cause or he elects to terminate the agreement with Good Reason, in connection with the any change in control of Jefferson Bancshares, M.H.C. or Jefferson Federal. The maximum present value of the severance benefits under the employment agreement is 2.99 times Mr. Smith’s annual compensation during the 5-year period preceding the effective date of the change in control (“base amount”). The employment agreement provides that the value of the maximum benefit is to be distributed in the form of a lump sum cash payment within 10 calendar days of the termination of Smith’s employment. Also, upon such event, Mr. Smith is entitled to receive, for a 36-month period following the termination of his employment, any employee benefits in which he participated.

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Section 280G of the Internal Revenue Code provides that severance payments that equal or exceed three times the individual’s base amount are deemed to be “excess parachute payments” if they are contingent upon a change in control. Individuals receiving excess parachute payments are subject to a 20% excise tax on the amount of the payment in excess of the base amount, and we would not be entitled to deduct such amount.

The employment agreement restricts Mr. Smith’s right to compete against us for a period of 2 years from the date of termination of the agreement.

Upon consummation of the conversion, Jefferson Bancshares will be substituted in the place of Jefferson Bancshares, M.H.C. as a party to the employment agreement.

Option Grants in Last Fiscal Year. The following information is provided for the named executive officers.

	Number of Securities Underlying Option Granted (1)	Percent of Total Options Granted to Employees in Fiscal Year		Exercise or Base Price			Potential Realizable Value At Assumed Annual Rates of Stock Price Appreciation For Option Term (2)
Name						Expiration Date	5% ($)		10% ($)
Anderson L. Smith	2,500	62.5	%	$	22.13	February 26, 2012	$	34,800	$	88,175

(1) Options were vested on the date of grant.

(2) The dollar gains under these columns result from calculations required by the Securities and Exchange Commission’s rules and are not intended to forecast future price appreciation of Jefferson Federal common stock. Options have value only if the stock price increases above the exercise price shown in the table during the effective option period. In order for the executive to realize the potential values set forth in the 5% and 10% columns in the table, the price per share of Jefferson Federal’s common stock would be approximately $36.05 per share and $57.40 per share, respectively, as of the expiration date of the options.

Option Exercise/Value Table. The following information is provided for the named executive officers.

	Shares Acquired on Exercise	Dollar Value Realized		Number of Securities Underlying Unexercised Options		Value of Unexercised In-the-Money Options at Fiscal Year End(1)
Name				Exercisable	Unexercisable	Exercisable		Unexercisable
Anderson L. Smith	—		—	2,500	—	$	21,550	—
William W. Bales	4,000	$	68,400	—	—		—	—

(1) Value of unexercised in-the-money stock options equals the market value of shares covered by in-the-money options on June 30, 2002 less the option exercise price. Options are in-the-money if the market value of shares covered by the options is greater than the exercise price.

Benefit Plans

401(k) Plan. We maintain the Jefferson Federal Savings Bank Employees’ Savings & Profit Sharing Plan and Trust for the benefit of eligible employees of Jefferson Federal. The Savings Plan is intended to be a tax-qualified plan under Sections 401(a) and 401(k) of the Internal Revenue Code. Employees of Jefferson Federal who have completed 500 hours of service during a continuous six-month period of service are eligible to participate in the Savings Plan beginning on the first day of the calendar quarter next following the date such requirements are satisfied. Participants may contribute up to 5% of their monthly salary up to the applicable limits ($12,000 in 2003) to the Savings Plan through a salary reduction election.

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We may contribute a discretionary amount to the Savings Plan in any plan year, which is allocated to individual participants in the proportion that their annual compensation bears to the total compensation of all participants during the plan year. Participants are at all times 100% vested in all salary reduction contributions. Profit-sharing contributions vest 20% per year beginning after three years of service. For the year ended June 30, 2002, we incurred total expenses of $192,000 in connection with the Savings Plan.

Generally, the investment of Savings Plan assets is directed by plan participants. In connection with the conversion, the investment options available to participants will be expanded to include the opportunity to direct the investment of up to 100% of their Savings Plan account balance to purchase shares of Jefferson Bancshares’ common stock. A participant in the Savings Plan who elects to purchase common stock in the conversion through the Savings Plan will receive the same subscription priority and be subject to the same individual purchase limitations as if the participant had elected to make such purchase using other funds. See “The Conversion—Limitations on Purchases of Shares.”

1995 Stock Option Plan. Our 1995 Stock Option Plan was adopted by our Board of Directors and approved by our shareholders in 1995. The 1995 Stock Option Plan provides for a grant of non-qualified stock options to eligible directors and employees. The purpose of the 1995 Stock Option Plan is to advance our interests by providing eligible individuals with an opportunity to acquire an interest in us, thereby creating a stronger incentive to work towards our continued growth and success and to encourage individuals to remain in our employ.

Our 1995 Stock Option Plan is administered by a committee of the Board of Directors, which has the authority to determine the eligible directors or employees to whom options shall be granted, the number of shares to be covered by each option, the option price and the conditions and limitations applicable to the exercise of the option. The 1995 Stock Option Plan provides for the grant of options covering 30,000 shares of common stock. As of December 31, 2002, options for a total of 16,500 shares of common stock were outstanding under the 1995 Stock Option Plan, with no options remaining available for issuance. If an option expires, terminates or is forfeited without having been exercised in full, the shares subject to the unexercised portion of such option will again be available for grant pursuant to the 1995 Stock Option Plan.

Our 1995 Stock Option Plan does not allow for the transfer of options except by the laws of descent and distribution or pursuant to a domestic relations order. Only the participant may exercise an option during his or her lifetime.

Our 1995 Stock Option Plan provides that in the event any merger, consolidation, share exchange or other similar corporate transaction affects the shares of Jefferson Federal in such a manner that an adjustment is required to preserve the benefits available under the Plan, the Committee has the authority to adjust the number shares which may be granted, the number of shares subject to outstanding stock options, and the exercise price of any stock option grant.

In addition, our 1995 Stock Option Plan provides that in the event we convert to stock form through the formation of a stock holding company, any options outstanding pursuant to a stock option grant, to the extent such options are not exercised prior to the conversion, will be converted into options for common stock of the successor stock holding company or bank, with appropriate adjustments.

Our 1995 Stock Option Plan will terminate in 2005. In addition, our Board of Directors has the authority to amend, suspend, discontinue or terminate the Plan.

1995 Management Recognition and Development Plan. Our 1995 Management Recognition and Development Plan was adopted by our Board of Directors and approved by our shareholders in 1995. The 1995 Recognition and Development Plan provided for the grant of 12,000 shares of restricted common stock. As of December 31, 2002, all shares awarded under the 1995 Recognition and Development Plan had vested and no shares remained available for award.

Employee Stock Ownership Plan. In connection with the conversion, Jefferson Federal’s Board of Directors has authorized the adoption of an employee stock ownership plan for employees of Jefferson Federal. Generally, our employees will become eligible to participate in the employee stock ownership plan upon the

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completion of six months of continuous service with us in which an employee completes 500 hours of service (as described in the plan); provided, however, that all eligible employees who are employed as of the date of the conversion will immediately become participants in the plan.

We intend to engage in an independent third party trustee to purchase 8% of the shares issued in the conversion on behalf of the employee stock ownership plan. This would range between 441,423 shares, assuming 5,517,788 shares are issued in the conversion, and 586,631 shares assuming 7,332,890 shares are issued in the conversion. If 8,376,573 shares are issued in the conversion, the employee stock ownership plan will purchase 670,125 shares. It is anticipated that the employee stock ownership plan will fund its purchase in the conversion through a loan from Jefferson Bancshares. The loan will equal 100% of the aggregate purchase price of the common stock. The loan to the employee stock ownership plan will be repaid principally from Jefferson Federal’s contributions to the employee stock ownership plan and dividends payable on common stock held by the employee stock ownership plan over the anticipated 15-year term of the loan. The interest rate for the employee stock ownership plan loan is expected to be the prime rate as published in The Wall Street Journal on the closing date of the conversion. See “Pro Forma Data.” If the employee stock ownership plan is unable to acquire 8% of the common stock issued in the conversion, it is anticipated that additional shares may be acquired following the conversion through open market purchases, subject to approval by the Office of Thrift Supervision.

In any plan year, we may make additional discretionary contributions (beyond those necessary to satisfy the loan obligation) to the employee stock ownership plan for the benefit of plan participants in either cash or shares of common stock, which may be acquired through the purchase of outstanding shares in the market or from individual shareholders or which constitute authorized but unissued shares or shares held in treasury by Jefferson Bancshares. The timing, amount, and manner of discretionary contributions will be affected by several factors, including applicable regulatory policies, the requirements of applicable laws and regulations, and market conditions. Our contributions to the employee stock ownership plan are not fixed, so benefits payable under the employee stock ownership plan cannot be estimated.

Shares purchased by the employee stock ownership plan with the proceeds of the loan from Jefferson Bancshares will be held in a suspense account and released on a pro rata basis as the loan is repaid. Discretionary contributions to the employee stock ownership plan and shares released from the suspense account will be allocated among participants on the basis of each participant’s proportional share of compensation.

Participants will vest in their accrued benefits under the employee stock ownership plan after three years of service with us. A participant will become fully vested at retirement, upon death or disability, a change in control or upon termination of the employee stock ownership plan. Benefits are generally distributable upon a participant’s separation from service. Any unvested shares that are forfeited upon a participant’s termination of employment will be reallocated among the remaining plan participants.

Plan participants will be entitled to direct the plan trustee on how to vote common stock credited to their accounts. The trustee will vote all allocated shares held in the employee stock ownership plan as instructed by the plan participants and unallocated shares and allocated shares for which no instructions are received will be voted in the same ratio on any matter as those shares for which instructions are given, subject to the fiduciary responsibilities of the trustee.

Under applicable accounting requirements, compensation expense for a leveraged employee stock ownership plan is recorded at the fair market value of the employee stock ownership plan shares when committed to be released to participants’ accounts.

The employee stock ownership plan must meet certain requirements of the Internal Revenue Code and the Employee Retirement Income Security Act. We intend to request a determination letter from the Internal Revenue Service regarding the tax-qualified status of the employee stock ownership plan. We expect to receive a favorable determination letter, but cannot guarantee that we will.

Supplemental Executive Retirement Plan. Following the conversion, we intend to implement a supplemental executive retirement plan to provide for supplemental retirement benefits with respect to the employee

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stock ownership plan. The plan will provide participating executives with benefits otherwise limited by other provisions of the Internal Revenue Code or the terms of the employee stock ownership plan loan. Specifically, the plan will provide benefits to eligible individuals (those designated by our Board of Directors) that cannot be provided under the employee stock ownership plan as a result of the limitations imposed by the Internal Revenue Code, but that would have been provided under the employee stock ownership plan but for such limitations. In addition to providing for benefits lost under tax-qualified plans as a result of limitations imposed by the Internal Revenue Code, the new plan will also provide supplemental benefits to designated individuals upon a change of control before the complete scheduled repayment of the employee stock ownership plan loan. Generally, upon such an event, the supplemental executive retirement plan will provide the individual with a benefit equal to what the individual would have received under the employee stock ownership plan had he or she remained employed throughout the term of the employee stock ownership plan loan less the benefits actually provided under the employee stock ownership plan on behalf of such individual. An individual’s benefits under the supplemental executive retirement plan will generally become payable upon the change in control of Jefferson Federal or Jefferson Bancshares. The plan will provide for Mr. Smith’s participation. The Board of Directors may designate other officers as participants in future years.

We may utilize a grantor trust in connection with the supplemental executive retirement plan in order to set aside funds that can be used to ultimately pay benefits under the plan. The assets of the grantor trust would be subject to the claims of our general creditors in the event of our insolvency until paid to the individual according to the terms of the supplemental executive retirement plan.

Severance Plan. In connection with the conversion, we intend to adopt a Change In Control Severance Plan, which will provide benefits to eligible employees upon a change in control of Jefferson Bancshares or Jefferson Federal. Eligible employees will be those with a minimum of one year of service with Jefferson Federal, except for officers who have entered into separate employment agreements with us. Under the severance plan, if a change in control of Jefferson Bancshares or Jefferson Federal occurs, eligible employees who are terminated or who terminate employment upon the occurrence of events specified in the severance plan within three months prior to a change in control or within a year thereafter will be entitled to a payment based on years of service with Jefferson Federal. The maximum payment for participants would be equal to 12 months of base pay, which would be earned after 12 years of service. For purposes of the plan, base pay means base compensation received over the 12 months prior to termination.

Stock-Based Incentive Plan. Following the conversion, we intend to adopt a stock-based incentive plan that will provide for the granting of options to purchase common stock and awards of restricted stock to eligible officers, employees, and directors of Jefferson Bancshares and Jefferson Federal. As required by the Office of Thrift Supervision, the stock-based incentive plan will not be implemented until at least six months after the completion of the conversion. We will submit the stock-based incentive plan to shareholders for their approval at which time shareholders will be provided with detailed information about the plan.

Under the stock-based incentive plan, Jefferson Bancshares intends to reserve shares for the grant of stock options in an amount equal to 10% of the shares of common stock sold in the conversion and contributed to the Jefferson Federal Charitable Foundation. The amount reserved would range from 462,500 shares, assuming 4,250,000 shares are sold in the conversion, to 612,500 shares, assuming 5,750,000 shares are sold in the conversion. If 6,612,500 shares are sold in the conversion, 698,750 shares will be reserved for grants of stock options. Additionally, Jefferson Bancshares intends to reserve shares for the grant of restricted stock awards in an amount equal to 4% of the shares of common stock sold in the conversion and contributed to the Jefferson Federal Charitable Foundation. The amount reserved would range from 185,000 shares, assuming 4,250,000 shares are sold in the conversion, to 245,000 shares, assuming 5,750,000 shares are sold in the conversion. If 6,612,500 shares are sold in the conversion, 279,500 shares would be reserved for stock awards. Any common stock awarded under the stock-based incentive plan will be awarded at no cost to the recipients. The plan may be funded through the purchase of common stock in the open market by a trust established in connection with the stock-based incentive plan or from authorized but unissued shares. If additional authorized but unissued shares are acquired by the stock-based incentive plan after the conversion, the interests of existing shareholders would be diluted. See “Pro Forma Data.”

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Transactions with Jefferson Federal

Loans and Extensions of Credit

The recently enacted Sarbanes-Oxley Act generally prohibits loans by Jefferson Bancshares to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by Jefferson Federal to its executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. Jefferson Federal is therefor prohibited from making any new loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public, except for loans made pursuant to programs generally available to all employees. Notwithstanding this rule, federal regulations permit Jefferson Federal to make loans to executive officers and directors at reduced interest rates if the loan is made under a benefit program generally available to all other employees and does not give preference to any executive officer or director over any other employee. Jefferson Federal has adopted a policy of offering employees residential mortgage loans at a discount of 1/2% to published rates and personal consumer loans at a discount of 1% to published rates. Jefferson Federal gives employees a discount of 50% on closing fees.

In addition, loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to the person and his or her related interests, are in excess of the greater of $25,000 or 5% of Jefferson Federal’s capital and surplus, up to a maximum of $500,000, must be approved in advance by a majority of the disinterested members of the Board of Directors. See “Regulation and Supervision—Federal Savings Institution Regulation—Transactions with Related Parties.”

The aggregate amount of loans by Jefferson Federal to its executive officers and directors was $893,000 at December 31, 2002, or approximately 1.2% of pro forma stockholders’ equity assuming that 5,000,000 shares are sold in the conversion. These loans were performing according to their original terms at December 31, 2002.

Other Transactions

Taylor, Reams, Tilson & Harrison of Morristown, Tennessee, of which H. Scott Reams is a partner, performs legal services for Jefferson Federal. In fiscal 2002, Jefferson Federal paid a total of $76,000 in legal fees to Mr. Reams’ firm.

Indemnification for Directors and Officers

Jefferson Bancshares’ charter contains provisions that limit the liability of and provide indemnification for its directors and officers. These provisions provide that a director or officer will be indemnified and held harmless by Jefferson Bancshares when that individual is made a party to civil, criminal, administrative and investigative proceedings. Directors and officers will be indemnified to the fullest extent authorized by the Tennessee law against all expense, liability and loss reasonably incurred. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Jefferson Bancshares pursuant to its charter or otherwise, Jefferson Bancshares has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

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Stock Ownership

The following table provides information as of             , 2003 about the persons known to us to be the beneficial owners of more than 5% of Jefferson Federal’s outstanding common stock. A person may be considered to beneficially own any shares of common stock over which he or she has, directly or indirectly, sole or shared voting or investing power.

Name and Address	Number of Shares Owned	Percent of Common Stock Outstanding
Jefferson Bancshares, M.H.C 120 Evans Avenue Morristown, TN 37814	1,550,000	82.6%

The following table provides information as of             , 2003 about the shares of Jefferson Federal common stock that may be considered to be beneficially owned by each of our directors and the named executive officers, and by all our directors and executive officers as a group. Unless otherwise indicated, each of the named individuals has sole voting power and sole investment power with respect to the number of shares shown. None of our executive officers or directors owns more than 1% of the outstanding shares of Jefferson Federal common stock. All executive officers and directors as group own 3.0% of the outstanding shares of Jefferson Federal common stock.

Name of Beneficial Owner	Number of Shares Owned		Options Exercisable Within 60 Days
Dr. Terry M. Brimer	4,695	(1)	1,500
Dr. Jack E. Campbell	1,596	(2)	1,500
William T. Hale	1,867		1,000
John F. McCrary, Jr.	15,600	(3)	1,500
H. Scott Reams	15,400	(4)	1,500
Anderson L. Smith	366	(5)	2,500
William F. Young	1,667	(6)	1,000
All executive officers and directors as a group (10 persons)	41,551		14,500

* Less than 1%.

(1) Includes 4,095 shares held jointly with his wife.

(2) Shares are held jointly with his wife.

(3) Includes 15,000 shares held jointly with his wife.

(4) Includes 14,800 shares held jointly with his wife.

(5) Includes 200 shares held jointly with his wife.

(6) Includes 380 shares held jointly with is wife and 425 shares held by his wife.

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Subscriptions by Executive Officers and Directors

The table below sets forth, for each of our directors and executive officers and for all of the directors and executive officers as a group, the following information:

• the number of shares of Jefferson Bancshares common stock to be received in exchange for shares of Jefferson Federal common stock upon consummation of the conversion, based upon their beneficial ownership of Jefferson Federal common stock as of     , 2003;

• the proposed purchases of Jefferson Bancshares common stock, assuming sufficient shares are available to satisfy their subscriptions; and

• the total amount of Jefferson Bancshares common stock to be held upon consummation of the conversion.

In each case, it is assumed that shares are sold and the exchange ratio is calculated at the midpoint of the offering range. See “The Conversion–Limitations on Common Stock Purchasers.”

	Number of Shares Received in Exchange for Shares of Jefferson Federal(2)	Proposed Purchases of Stock in the Offering(1)			Total Common Stock to be Held
Name of Beneficial Owner		Number of Shares	Dollar Amount		Number of Shares(2)	Percentage of Total Outstanding
Dr. Terry M. Brimer	19,983	50,000	$	500,000	69,983	1.1	%
Dr. Jack E. Campbell	9,987	50,000		500,000	59,987	*
William T. Hale	9,248	75,000		750,000	84,248	1.3
John F. McCrary, Jr.	55,161	50,000		500,000	105,161	1.6
H. Scott Reams	54,516	25,000		250,000	79,516	1.2
Anderson L. Smith	9,245	25,000		250,000	34,245	*
William F. Young	8,603	75,000		750,000	83,603	1.3
Douglas H. Rouse	12,451	15,000		150,000	27,451	*
Jane P. Hutton	—	10,000		100,000	10,000	*
Eric S. McDaniel	1,612	4,000		40,000	5,612	*
Total	180,806	379,000	$	3,790,000	559,806	8.7

* Less than 1%.

(1) Includes proposed subscriptions, if any, by associates.

(2) Based on information presented in “Stock Ownership.” Includes shares that may be acquired upon the exercise of outstanding stock options.

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Regulation and Supervision

General

As a savings and loan holding company, Jefferson Bancshares will be required by federal law to report to, and otherwise comply with, the rules and regulations of the Office of Thrift Supervision. Jefferson Federal is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as the deposit insurer. Jefferson Federal is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund managed by the Federal Deposit Insurance Corporation. Jefferson Federal must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The Office of Thrift Supervision conducts periodic examinations to test Jefferson Federal’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or the Congress, could have a material adverse impact on us and our operations. Certain of the regulatory requirements applicable to us are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this prospectus does not purport to be a complete description of such statutes and regulations and their effects on us.

Holding Company Regulation

Upon completion of the conversion, Jefferson Bancshares will be a nondiversified unitary savings and loan holding company within the meaning of federal law. Under federal law, Jefferson Bancshares may engage only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Upon any non-supervisory acquisition by Jefferson Bancshares of another savings association or savings bank that meets the qualified thrift lender test and is deemed to be a savings institution by the Office of Thrift Supervision, Jefferson Bancshares would become a multiple savings and loan holding company (if the acquired association is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain activities authorized by Office of Thrift Supervision regulations. However, the Office of Thrift Supervision has issued an interpretation concluding that the multiple savings and loan holding companies may also engage in activities permitted for financial holding companies.

A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company without prior written approval of the Office of Thrift Supervision and from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision considers the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

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Although savings and loan holding companies are not currently subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. Jefferson Federal must notify the Office of Thrift Supervision 30 days before declaring any dividend to Jefferson Bancshares. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Office of Thrift Supervision and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Federal Savings Institution Regulation

Business Activities. The activities of federal savings institutions are governed by federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which federal associations may engage. In particular, certain lending authority for federal association, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Capital Requirements. The Office of Thrift Supervision capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leverage (core capital) ratio (3% for certain institutions receiving the highest rating on the CAMELS examination rating system) and an 8% total risk-based capital ratio. In addition, the prompt corrective action regulations discussed below also establish minimum standards of 4% leverage (core capital) ratio (3% for institutions receiving the highest CAMELS rating), and a 4% Tier 1 risk-based ratio and an 8% total risk-based capital ratio in order for an institution to be adequately capitalized. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative perpetual preferred stock and certain other preferred stock, mandatory convertible securities, subordinated debt, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At December 31, 2002, Jefferson Federal met each of its capital requirements.

Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to narrow exceptions, the Office of Thrift Supervision is required to appoint a receiver or conservator 90 days after an institution becomes “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion.

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The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Insurance of Deposit Accounts. Jefferson Federal is a member of the Savings Association Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends upon the categories to which it is assigned. Assessment rates for Savings Association Insurance Fund member institutions are determined semiannually by the Federal Deposit Insurance Corporation and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. The FDIC has authority to increase insurance assessments. A significant increase in Savings Association Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Jefferson Federal. Management cannot predict what insurance assessment rates will be in the future.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation (“FICO”) to recapitalize the predecessor to the Savings Association Insurance Fund. During fiscal 2002, FICO payments for Savings Association Insurance Fund members approximated 1.75 basis points of assessable deposits.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

Qualified Thrift Lender Test. The Home Owners’ Loan Act requires savings associations to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.

A savings association that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. In addition, its holding company may be required to register as a bank holding company. As of December 31, 2002, Jefferson Federal met the qualified thrift lender test.

Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with or condition imposed by the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to Office of Thrift Supervision of the capital distribution if, like Jefferson Federal will be, it is a subsidiary of a holding company. In the event Jefferson Federal’s capital fell below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of more than normal supervision, Jefferson Federal’s ability to make capital distributions could be restricted. In addition, the Office of

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Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice.

Transactions with Related Parties. Jefferson Federal’s authority to engage in transactions with “affiliates” (e.g., any company that controls or is under common control with an institution, including Jefferson Bancshares and its non-savings institution subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings associations are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The recently enacted Sarbanes Oxley Act generally prohibits loans by Jefferson Bancshares to its executive officers and directors. However, that act contains a specific exception for loans by federally insured depository institutions to its executive officers and directors in compliance with federal banking laws. Under such laws Jefferson Federal’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law limits both the individual and aggregate amount of loans Jefferson Federal may make to insiders and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not to involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.

Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over savings associations and has the authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Office of Thrift Supervision determines that a savings institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard.

Federal Home Loan Bank System

Jefferson Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Jefferson Federal, as a member of the Federal Home Loan Bank of Cincinnati, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. Jefferson Federal was in

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compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2002 of $1.5 million.

The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, Jefferson Federal’s net interest income would likely also be reduced. The Gramm-Leach-Bliley Act has changed the structure of the Federal Home Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home Loan Banks. Management cannot predict the effect that these changes may have with respect to its Federal Home Loan Bank membership.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $42.1 million; a 10% reserve ratio is applied above $42.1 million. The first $6.0 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. Jefferson Federal complies with the foregoing requirements.

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Federal and State Taxation

Federal Income Taxation

General. We report our income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. Our federal income tax returns have been either audited or closed under the statute of limitations through tax year 1995. For its 2002 year, Jefferson Federal’s maximum federal income tax rate was 34%.

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately $1.5 million of our accumulated bad debt reserves would not be recaptured into taxable income unless Jefferson Federal makes a “non-dividend distribution” to Jefferson Bancshares as described below.

Distributions. If Jefferson Federal makes “non-dividend distributions” to Jefferson Bancshares, the distributions will be considered to have been made from Jefferson Federal’s unrecaptured tax bad debt reserves, including the balance of its reserves as of June 30, 1988, to the extent of the “non-dividend distributions,” and then from Jefferson Federal’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Jefferson Federal’s taxable income. Non-dividend distributions include distributions in excess of Jefferson Federal’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of Jefferson Federal’s current or accumulated earnings and profits will not be so included in Jefferson Federal’s taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Jefferson Federal makes a non-dividend distribution to Jefferson Bancshares, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. Jefferson Federal does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

State Taxation

Tennessee imposes franchise and excise taxes. The franchise tax ($0.25 per $100) is applied either to our apportioned net worth or the value of property owned and used in Tennessee, whichever is greater, as of the close of our fiscal year. The excise tax (6%) is applied to net earnings derived from business done in Tennessee. Under Tennessee regulations, bad debt deductions are deductible from the excise tax. There have not been any audits of our state tax returns during the past five years.

Any cash dividends, in excess of a certain exempt amount, that are paid with respect to Jefferson Bancshares common stock to a shareholder (including a partnership and certain other entities) who is a resident of the State of Tennessee will be subject to the Tennessee income tax which is levied at a rate of six percent. Any distribution by a corporation from earnings according to percentage ownership is considered a dividend, and the definition of a dividend for Tennessee income tax purposes may not be the same as the definition of a dividend for federal income tax purposes. A corporate distribution may be treated as a dividend for Tennessee tax purposes if it is made from funds that exceed the corporation’s earned surplus and profits under certain circumstances.

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The Conversion

The Boards of Directors of Jefferson Federal and Jefferson Bancshares, M.H.C. have approved the plan of conversion. The plan of conversion also must be approved by the members of Jefferson Bancshares, M.H.C. and the shareholders of Jefferson Federal. A special meeting of members and a special meeting of shareholders have been called for this purpose. The Office of Thrift Supervision also has conditionally approved the plan; however, such approval does not constitute a recommendation or endorsement of the plan of conversion by that agency.

General

On March 3, 2003, the respective Boards of Directors of Jefferson Federal and Jefferson Bancshares, M.H.C. unanimously adopted the plan of conversion. Under the plan of conversion, Jefferson Federal will convert from the mutual holding company form of organization to the stock holding company form of organization and become a wholly owned subsidiary of Jefferson Bancshares, a newly formed Tennessee corporation. Current shareholders of Jefferson Federal, other than Jefferson Bancshares, M.H.C., will receive shares of Jefferson Bancshares common stock in exchange for their shares of Jefferson Federal common stock. Following the conversion, Jefferson Bancshares, M.H.C. will no longer exist.

The conversion to a stock holding company structure also includes the offering by Jefferson Bancshares of its common stock to qualifying depositors and borrowers of Jefferson Federal in a subscription offering and, if necessary, to members of the general public through a community offering and/or a syndicate of registered broker-dealers. The completion of the offering depends on market conditions and other factors beyond our control. We can give no assurance as to the length of time that will be required to complete the sale of the common stock. If we experience delays, significant changes may occur in the appraisal of Jefferson Bancshares and Jefferson Federal as converted, which would require a change in the offering range. A change in the offering range would result in a change in the net proceeds realized by Jefferson Bancshares from the sale of the common stock. If the conversion is terminated, Jefferson Federal would be required to charge all conversion expenses against current income.

The Office of Thrift Supervision has approved our plan of conversion, subject to, among other things, approval of the plan of conversion by Jefferson Bancshares, M.H.C.’s members and Jefferson Federal’s shareholders. The establishment of the Jefferson Federal Charitable Foundation is subject to a separate vote of Jefferson Bancshares, M.H.C.’s members and Jefferson Federal’s shareholders. The special meetings of Jefferson Bancshares, M.H.C.’s members and Jefferson Federal’s shareholders have been called for this purpose on                     , 2003.

The following is a brief summary of the pertinent aspects of the conversion. A copy of the plan of conversion is available from Jefferson Federal upon request and is available for inspection at the offices of Jefferson Federal and at the Office of Thrift Supervision. The plan of conversion also is filed as an exhibit to the registration statement that Jefferson Bancshares has filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”

Reasons for the Conversion

After considering the advantages and disadvantages of the conversion, the Boards of Directors of Jefferson Federal and Jefferson Bancshares, M.H.C. unanimously approved the conversion as being in the best interests of Jefferson Federal, Jefferson Bancshares, M.H.C. and their respective shareholders and members. The Boards of Directors concluded that the conversion offers a number of advantages that will be important to the future growth and performance of Jefferson Federal.

The conversion will result in the raising of additional capital for Jefferson Bancshares and Jefferson Federal, which will support Jefferson Federal’s future lending and operational growth and may also support possible future branching activities or the acquisition of other financial institutions or financial service companies or their assets. As a fully converted stock holding company, we will have greater flexibility in structuring mergers and

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acquisitions, including the form of consideration paid in a transaction. Our current mutual holding company structure, by its nature, limits our ability to offer our common stock as consideration in a merger or acquisition. Our new stock holding company structure will enhance our ability to compete with other bidders when acquisition opportunities arise by better enabling us to offer stock or cash consideration, or a combination of the two.

After completion of the conversion, the unissued common and preferred stock authorized by Jefferson Bancshares’ charter will permit Jefferson Bancshares to raise additional capital through further sales of securities. Although Jefferson Federal currently has the ability to raise additional capital through the sale of additional shares of Jefferson Federal common stock, that ability is limited by the mutual holding company structure, which, among other things, requires that Jefferson Bancshares, M.H.C. hold a majority of the outstanding shares of Jefferson Federal common stock.

Although no assurances can be given, we expect the conversion to result in a more active and liquid market for Jefferson Bancshares common stock, which we have applied to have listed on the Nasdaq National Market, than currently exists for Jefferson Federal common stock, which is not listed on Nasdaq and currently trades infrequently.

The conversion will afford our officers and employees the opportunity to increase their stock ownership, which we believe to be an effective performance incentive and an effective means of attracting and retaining qualified personnel. The conversion also will provide our customers and local community members with an opportunity to acquire our stock. Due to the small number of shares of Jefferson Federal that are outstanding, it is difficult to purchase shares.

If Jefferson Federal had undertaken a standard conversion in 1994, applicable Office of Thrift Supervision regulations would have required a greater amount of Jefferson Federal common stock to be sold than the amount that was sold in connection with the formation of Jefferson Bancshares, M.H.C. If a standard conversion had been conducted in 1994, management of Jefferson Federal believed that it would have been difficult to prudently invest the larger amount of capital that would have been raised, when compared to the net proceeds raised in connection with the formation of Jefferson Bancshares, M.H.C. In addition, a standard conversion in 1994 would have immediately eliminated all aspects of the mutual form of organization.

The disadvantages of the conversion considered by Jefferson Federal’s Board of Directors are the additional expense and effort of operating as a public company listed on the Nasdaq Stock Market and the fact that operating in the stock holding company form of organization could subject Jefferson Federal to contests for corporate control. The Board of Directors determined that the advantages of the conversion outweighed the disadvantages.

Description of the Conversion

Jefferson Bancshares has been incorporated under Tennessee law as a first-tier wholly owned subsidiary of Jefferson Federal. In order to effect the conversion, the following will occur:

• Jefferson Bancshares, M.H.C. will convert from mutual form to a federal interim stock savings institution and simultaneously merge with and into Jefferson Federal, pursuant to which Jefferson Bancshares, M.H.C. will cease to exist and the shares of Jefferson Federal common stock held by Jefferson Bancshares, M.H.C. will be canceled; and

• Jefferson Interim Savings Association will be formed as a wholly owned subsidiary of Jefferson Bancshares, and then will merge with and into Jefferson Federal.

As a result of the merger of Jefferson Interim Savings Association with and into Jefferson Federal, Jefferson Federal will become a wholly-owned subsidiary of Jefferson Bancshares and the outstanding shares of Jefferson Federal common stock will be converted into a number of shares of Jefferson Bancshares common stock that will result in the holders of such shares owning in the aggregate approximately the same percentage of Jefferson Bancshares common stock to be outstanding upon the completion of the conversion (i.e., the common stock and the exchange shares) as the percentage of Jefferson Federal common stock owned by them in the aggregate immediately

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prior to consummation of the conversion before giving effect to (1) the payment of cash in lieu of issuing fractional exchange shares, (2) any shares of common stock purchased by public shareholders in the offering and (3) any shares of Jefferson Bancshares contributed to the Jefferson Federal Charitable Foundation.

Pursuant to Office of Thrift Supervision regulations, consummation of the conversion (including the offering of common stock in the offering, as described below) is conditioned upon the approval of the plan of conversion by (1) the Office of Thrift Supervision, (2) at least a majority of the total number of votes eligible to be cast by members of Jefferson Bancshares, M.H.C. at the special meeting of members and (3) holders of at least two-thirds of the shares of the outstanding Jefferson Federal common stock at the special meeting of shareholders. In addition, pursuant to Office of Thrift Supervision regulations, the consummation of the conversion is conditioned on the approval of the plan of conversion by at least a majority of the votes cast, in person or by proxy, by the current shareholders of Jefferson Federal, excluding Jefferson Bancshares, M.H.C., at the special meeting of shareholders.

We Plan to Establish the Jefferson Federal Charitable Foundation

General. In furtherance of our commitment to our local community, the plan of conversion provides that we will establish the Jefferson Federal Charitable Foundation as a nonstock Tennessee corporation in connection with the conversion. The foundation will be funded with Jefferson Bancshares common stock, as further described below. By further enhancing our visibility and reputation in our local community, we believe that the foundation will enhance the long-term value of Jefferson Federal’s community banking franchise. The conversion presents us with a unique opportunity to provide a substantial and continuing benefit to our community and to receive the associated tax benefits, without any significant cash outlay by us.

Purpose of the Charitable Foundation. We emphasize community lending and community activities. The Jefferson Federal Charitable Foundation is being formed to complement, not to replace our existing community activities. Although we intend to continue to emphasize community lending and community activities following the conversion, such activities are not our sole corporate purpose. The Jefferson Federal Charitable Foundation, on the other hand, will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in manners that are not presently available to us. We believe that the Jefferson Federal Charitable Foundation will enable us to assist the communities within our market area in areas beyond community development and lending and will enhance our current activities under the Community Reinvestment Act. Jefferson Federal received an “Outstanding” rating in its last Community Reinvestment Act examination by the Office of Thrift Supervision.

We further believe that the funding of the Jefferson Federal Charitable Foundation with Jefferson Bancshares common stock will allow our community to share in the potential growth and success of Jefferson Bancshares long after the conversion. The Jefferson Federal Charitable Foundation will accomplish that goal by providing for continued ties between it and Jefferson Federal, thereby forming a partnership within the communities in Hamblen County, Tennessee.

We do not expect the contribution to Jefferson Federal Charitable Foundation to take the place of our traditional community lending and charitable activities. For the year ended June 30, 2002, we contributed $173,000 to community organizations. We expect to continue making charitable contributions within our community. In connection with the closing of the conversion, Jefferson Bancshares intends to contribute to the Jefferson Federal Charitable Foundation $250,000 plus 375,000 shares of its common stock, or stock valued at $3.75 million based on the offering price of $10.00 per share.

Structure of the Charitable Foundation. The Jefferson Federal Charitable Foundation will be incorporated under Tennessee law as a non-stock corporation. The charter of the Jefferson Federal Charitable Foundation will provide that the corporation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. The Jefferson Federal Charitable Foundation’s charter will further provide that no part of the net earnings of the foundation will inure to the benefit of, or be distributable to, its directors, officers or members.

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We have selected two of our current officers,                      and                     , and two of our current directors,                      and                     , to serve on the initial board of directors of the foundation. As required by OTS regulations, we also will select one additional person to serve on the initial board of directors who will not be one of our officers or directors and who will have experience with local charitable organizations and grant making. While there are no plans to change the size of the initial board of directors during the year following the completion of the conversion, following the first anniversary of the conversion, the foundation may alter the size of and composition of its board of directors. For five years after the conversion, one seat on the foundation’s board of directors will be reserved for a person from our local community who has experience with local community charitable organizations and grant making and who is not one of our officers, directors or employees, and one seat on the foundation’s board of directors will be reserved for one of our directors.

The board of directors of the Jefferson Federal Charitable Foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of the Jefferson Federal Charitable Foundation will at all times be bound by their fiduciary duty to advance the foundation’s charitable goals, to protect its assets and to act in a manner consistent with the charitable purposes for which the foundation is established. The directors of the Jefferson Federal Charitable Foundation also will be responsible for directing the activities of the foundation, including the management and voting of the common stock of Jefferson Bancshares held by the foundation. However, as required by OTS regulations, all shares of common stock held by the Jefferson Federal Charitable Foundation must be voted in the same ratio as all other shares of the common stock on all proposals considered by shareholders of Jefferson Bancshares.

The Jefferson Federal Charitable Foundation’s place of business will be located at our administrative offices. The board of directors of Jefferson Federal Charitable Foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the OTS regulations governing transactions between Jefferson Federal and the foundation.

The Jefferson Federal Charitable Foundation will receive working capital from: (1) any dividends that may be paid on Jefferson Bancshares’ common stock in the future; (2) within the limits of applicable federal and state laws, loans collateralized by the common stock; or (3) the proceeds of the sale of any of the common stock in the open market from time to time. As a private foundation under Section 501(c)(3) of the Internal Revenue Code, the Jefferson Federal Charitable Foundation will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets. One of the conditions imposed on the gift of common stock by Jefferson Bancshares is that the amount of common stock that may be sold by the Jefferson Federal Charitable Foundation in any one year shall not exceed 5% of the average market value of the assets held by the Jefferson Federal Charitable Foundation, except where the board of directors of the foundation determines that the failure to sell an amount of common stock greater than such amount would result in a long-term reduction of the value of its assets and/or would otherwise jeopardize its capacity to carry out its charitable purposes.

Tax Considerations. Our independent tax advisor has advised us that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code and should be classified as a private foundation. The Jefferson Federal Charitable Foundation will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as the Jefferson Federal Charitable Foundation files its application for tax-exempt status within 15 months from the date of its organization, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its organization. Our independent tax advisor, however, has not rendered any advice on whether the Jefferson Federal Charitable Foundation’s tax exempt status will be affected by the regulatory requirement that all shares of common stock of Jefferson Bancshares held by the Jefferson Federal Charitable Foundation must be voted in the same ratio as all other outstanding shares of common stock of Jefferson Bancshares on all proposals considered by shareholders of Jefferson Bancshares.

Jefferson Bancshares is authorized by the Tennessee Business Corporation Act to make charitable contributions. We believe that the conversion presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we

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considered the dilutive impact of the contribution of common stock to the Jefferson Federal Charitable Foundation on the amount of common stock to be sold in the conversion. We believe that the contribution to the Jefferson Federal Charitable Foundation in excess of the 10% annual limitation on charitable deductions described below is justified given Jefferson Federal’s capital position and its earnings, the substantial additional capital being raised in the conversion and the potential benefits of the Jefferson Federal Charitable Foundation within our community. See “Capitalization,” “Historical and Pro Forma Regulatory Capital Compliance,” and “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.” The amount of the contribution will not adversely impact our financial condition. We therefore believe that the amount of the charitable contribution is reasonable given our pro forma capital position and does not raise safety and soundness concerns.

We have received an opinion from our independent tax advisor that Jefferson Bancshares’ contribution of its stock to the Jefferson Federal Charitable Foundation should not constitute an act of self-dealing and that we should be entitled to a deduction in the amount of the fair market value of the stock at the time of the contribution less the nominal amount that the Jefferson Federal Charitable Foundation is required to pay Jefferson Bancshares for such stock. We are permitted to deduct only an amount equal to 10% of our annual taxable income in any one year. We are permitted under the Internal Revenue Code to carry the excess contribution over the five year period following the contribution to the Jefferson Federal Charitable Foundation. We estimate that substantially all of the contribution should be deductible over the six-year period. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the foundation. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. We do not expect to make any further contributions to the Jefferson Federal Charitable Foundation within the first five years following the initial contribution, unless such contributions would be deductible under the Internal Revenue Code. Any such decisions would be based on an assessment of, among other factors, our financial condition at that time, the interests of our shareholders and depositors, and the financial condition and operations of the foundation.

Although we have received an opinion from our independent tax advisor that we should be entitled to a deduction for the charitable contribution, there can be no assurances that the Internal Revenue Service will recognize the Jefferson Federal Charitable Foundation as a Section 501(c)(3) exempt organization or that the deduction will be permitted. In such event, our contribution to the Jefferson Federal Charitable Foundation would be expensed without tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes such a determination.

As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2.0%. The Jefferson Federal Charitable Foundation will be required to file an annual return with the Internal Revenue Service within four and one-half months after the close of its fiscal year. The Jefferson Federal Charitable Foundation will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the foundation’s managers and a concise statement of the purpose of each grant.

Regulatory Conditions Imposed on the Charitable Foundation. Establishment of the Jefferson Federal Charitable Foundation will be subject to the following conditions imposed pursuant to the regulations of the Office of Thrift Supervision:

1. the Office of Thrift Supervision can examine the foundation;

2. the foundation must comply with all supervisory directives imposed by the Office of Thrift Supervision;

3. the foundation must provide annually to the Office of Thrift Supervision a copy of the annual report that the foundation submits to the IRS;

4. the foundation must operate according to written policies adopted by its board of directors, including a conflict of interest policy;

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5. the foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and

6. the foundation must vote its shares in the same ratio as all of the other shares voted on each proposal considered by the shareholders of Jefferson Bancshares.

In addition, within six months of completing the conversion, the Jefferson Federal Charitable Foundation must submit to the Office of Thrift Supervision a three-year operating plan.

Additionally, the establishment and funding of the Jefferson Federal Charitable Foundation must be separately approved by: (1) at least a majority of the total number of votes eligible to be cast by members of Jefferson Bancshares, M.H.C. at the special meeting of members and (2) holders of at least a majority of the votes cast, in person or by proxy, by the current shareholders of Jefferson Federal, excluding Jefferson Bancshares, M.H.C., at the special meeting of shareholders.

Consummation of the conversion and the offering of common stock is not conditioned upon member and shareholder approval of the charitable foundation. Failure to approve the charitable foundation may, however, materially increase the pro forma market value of Jefferson Bancshares. See “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

Effect of the Conversion on Shareholders of Jefferson Federal

As adjusted for the exchange ratio, the conversion will increase the stockholders’ equity (book value) per share and earnings per share of the current shareholders of Jefferson Federal. The following table compares historical information for Jefferson Federal with similar information on a pro forma and per equivalent Jefferson Federal share basis. The information listed as “per equivalent Jefferson Federal share” was obtained by multiplying the pro forma amounts by the exchange ratio indicated in the table.

The formation and funding of the charitable foundation with shares of Jefferson Bancshares common stock will increase the number of outstanding shares. In addition, pro forma income will be slightly lower compared to what it would be if we did not form the foundation because the issuance of additional shares will increase the size of our employee stock ownership plan and restricted stock awards. Thus, book value per share and earnings per share would be greater if we did not establish the charitable foundation in connection with the conversion. The following tables illustrates pro forma book value and earnings per share, based on the sale of the number of shares indicated, both with and without the foundation. Similar information is provided on a per equivalent Jefferson Federal share basis.

Because the actual exchange ratio will be depend on the number of shares sold in the offering, the formation of the charitable foundation will not affect the calculation of the exchange ratio. However, RP Financial has informed us that the value of Jefferson Bancshares would be greater if we did not form the charitable foundation and fund it with shares of Jefferson Bancshares common stock. Therefore, because the minimum of the offering range is lower than what it would be if we did not form the charitable foundation, we may sell fewer shares and exchange a smaller number of shares of Jefferson Bancshares for shares of Jefferson Federal compared to what we could sell and exchange if we did not form the charitable foundation. Similarly, because the maximum of the offering range is lower than what it would be if we did not form the charitable foundation, we would be able to sell more shares and exchange a larger number of shares of Jefferson Bancshares for shares of Jefferson Federal if we did not form the charitable foundation.

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	Jefferson Federal Historical		Pro Forma				Exchange Ratio	Per Equivalent Jefferson Federal Share
			With Foundation		Without Foundation			With Foundation		Without Foundation
Book value per share at December 31, 2002:
Sale of 4,250,000 shares(1)	$	18.63	$	12.86		N/A	2.7419	$	35.26		N/A
Sale of 5,000,000 shares		18.63		12.05	$	12.66	3.2258		38.87	$	40.84
Sale of 5,750,000 shares		18.63		11.44		11.94	3.7097		42.44		44.29
Sale of 6,612,500 shares		18.63		10.90		11.31	4.2661		46.50		48.25
Earnings per share for six months ended December 31, 2002:
Sale of 4,250,000 shares(1)	$	0.93	$	0.41		N/A	2.7419	$	1.12		N/A
Sale of 5,000,000 shares		0.93		0.37	$	0.39	3.2258		1.19	$	1.26
Sale of 5,750,000 shares		0.93		0.33		0.35	3.7097		1.22		1.30
Sale of 6,612,500 shares		0.93		0.30		0.32	4.2661		1.28		1.37
Price per share(2):
Sale of 4,250,000 shares(1)	$	33.50	$	10.00		N/A	2.7419	$	27.42		N/A
Sale of 5,000,000 shares		33.50		10.00	$	10.00	3.2258		32.26	$	32.26
Sale of 5,750,000 shares		33.50		10.00		10.00	3.7097		37.10		37.10
Sale of 6,612,500 shares		33.50		10.00		10.00	4.2661		42.66		42.66

(1) RP Financial has informed us that if we did not form the foundation as part of the conversion, the minimum of the offering range would be 4,675,000 shares. Accordingly pro forma amounts for the sale of shares below this level are not applicable, as we would not be able to close the offering.

(2) At February 25, 2003, which was the day of the last trade prior to announcement of the adoption of the plan of conversion.

Dissenters’ Rights. Under Office of Thrift Supervision regulations, the public shareholders of Jefferson Federal common stock will have dissenters’ rights as a result of the exchange of shares of Jefferson Bancshares common stock for shares of Jefferson Federal common stock as part of the conversion.

Share Exchange Ratio

Office of Thrift Supervision regulations provide that in a conversion from mutual holding company to stock holding company form, the public shareholders will be entitled to exchange their shares for common stock of the stock holding company, provided that the mutual holding company demonstrates to the satisfaction of the Office of Thrift Supervision that the basis for the exchange is fair and reasonable. Under the plan of conversion, each publicly held share of Jefferson Federal common stock will, on the effective date of the conversion, be converted automatically into and become the right to receive a number of new shares of Jefferson Bancshares common stock. The number of new shares of common stock will be determined pursuant to an exchange ratio that ensures that the public shareholders of Jefferson Federal common stock will own approximately the same percentage of new common stock in Jefferson Bancshares after the conversion as they held in Jefferson Federal immediately prior to the conversion, before giving effect to (1) the receipt of cash in lieu of fractional shares, (2) their purchase of additional shares in the offering, and (3) the contribution of shares to the Jefferson Federal Charitable Foundation. At March 31, 2003, there were 1,875,500 shares of Jefferson Federal common stock outstanding, of which 325,500 were publicly held. The exchange ratio is not dependent on the market value of Jefferson Federal common stock. It is calculated based on the percentage of Jefferson Federal common stock held by the public, the independent appraisal of Jefferson Federal prepared by RP Financial and the number of shares sold in the offering.

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The following table shows how the exchange ratio will adjust, based on the number of shares sold in the offering. The table also shows how many shares an owner of 100 shares of Jefferson Federal common stock would receive in the exchange, based on the number of shares sold in the offering.

	Shares to be Sold in This Offering			Shares to be Exchanged for Existing Shares of Jefferson Bancshares			Total Shares of Common Stock to be Outstanding(1)	Exchange Ratio	Shares to be Received for 100 Shares of Jefferson Federal (2)
	Amount	Percent		Amount	Percent
Minimum	4,250,000	82.64	%	842,788	17.36	%	5,142,788	2.7419	274
Midpoint	5,000,000	82.64		1,050,339	17.36		6,050,339	3.2258	322
Maximum	5,750,000	82.64		1,207,840	17.36		6,957,890	3.7097	370
15% above Maximum	6,612,500	82.64		1,384,673	17.36		8,001,573	4.2661	426

(1) Prior to the contribution of shares of Jefferson Bancshares common stock to the Jefferson Federal Charitable Foundation.

(2) Cash will be paid instead of issuing any fractional shares.

Outstanding options to purchase shares of Jefferson Federal common stock will be converted into and become options to purchase Jefferson Bancshares common stock. The number of shares of common stock to be received upon exercise of these options and the related exercise price will be adjusted for the exchange ratio. The aggregate exercise price, duration and vesting schedule of these options will not be affected. At March 31, 2003, there were 16,500 outstanding options to purchase Jefferson Federal common stock, all of which were vested.

Effects of Conversion on Deposits, Borrowers and Members

General. Each depositor in Jefferson Federal currently has both a deposit account in the institution and a pro rata ownership interest in the net worth of Jefferson Bancshares, M.H.C. based upon the balance in his or her account. However, this ownership interest is tied to the depositor’s account and has no value separate from such deposit account. Furthermore, this ownership interest may only be realized in the unlikely event that Jefferson Bancshares, M.H.C. is liquidated. In such event, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Jefferson Bancshares, M.H.C. after other claims are paid. Any depositor who opens a deposit account at Jefferson Federal obtains a pro rata ownership interest in the net worth of Jefferson Bancshares, M.H.C. without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his account receives a portion or all of the balance in the account but nothing for his or her ownership interest in the net worth of Jefferson Bancshares, M.H.C., which is lost to the extent that the balance in the account is reduced. When a mutual holding company converts to stock holding company form, depositors lose all rights to the net worth of the mutual holding company, except the right to claim a pro rata share of funds representing the liquidation account established in connection with the conversion.

Continuity. While the conversion is being accomplished, the normal business of Jefferson Federal will continue without interruption, including being regulated by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. After conversion, Jefferson Federal will continue to provide services for depositors and borrowers under current policies by its present management and staff.

The directors of Jefferson Federal at the time of conversion will serve as directors of Jefferson Federal after the conversion. The Board of Directors of Jefferson Bancshares is composed solely of individuals who serve on the Board of Directors of Jefferson Federal. All officers of Jefferson Federal at the time of conversion will retain their positions after the conversion.

Deposit Accounts and Loans. Under the plan of conversion, each depositor in Jefferson Federal at the time of the conversion will automatically continue as a depositor after the conversion, and each of the deposit accounts will remain the same with respect to deposit balance, interest rate and other terms, except to the extent that funds in the accounts are withdrawn to purchase common stock in the offering. Each account will be insured by the

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Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts. No loan outstanding from Jefferson Federal will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as they were contractually fixed prior to the conversion.

Effect on Voting Rights of Members. Voting rights in Jefferson Bancshares, M.H.C., as a mutual holding company, belong to its depositor and borrower members. After the conversion, depositors and borrowers will no longer be members and will no longer have voting rights in Jefferson Bancshares, M.H.C., which will cease to exist. The holders of the common stock of Jefferson Bancshares will possess all voting rights in Jefferson Bancshares, and Jefferson Bancshares, as the sole shareholder of Jefferson Federal, will possess all voting rights in Jefferson Federal. Depositors of Jefferson Federal will not have any voting rights after the conversion except to the extent that they become shareholders of Jefferson Bancshares by purchasing common stock.

Effect on Liquidation Rights. If Jefferson Bancshares, M.H.C. were to liquidate, all claims of Jefferson Bancshares, M.H.C.’s creditors would be paid first. Thereafter, if there were any assets remaining, members of Jefferson Bancshares, M.H.C. would receive such remaining assets, pro rata, based upon the deposit balances in their deposit accounts at Jefferson Federal immediately prior to liquidation. In the unlikely event that Jefferson Federal were to liquidate after the conversion, all claims of creditors (including those of depositors, to the extent of their deposit balances) also would be paid first, followed by distribution of the “liquidation account” to certain depositors (see “—Liquidation Rights” below), with any assets remaining thereafter distributed to Jefferson Bancshares as the holder of Jefferson Federal’s capital stock.

Tax Aspects

Completion of the conversion is conditioned upon prior receipt of either a ruling or an opinion of counsel with respect to federal tax laws, and either a ruling or an opinion with respect to Tennessee tax laws, that no gain or loss will be recognized by Jefferson Bancshares, M.H.C., Jefferson Federal or Jefferson Bancshares as a result of the conversion or by account holders receiving subscription rights, except to the extent, if any, that subscription rights are deemed to have fair market value on the date such rights are issued. We believe that the tax opinions summarized below address all material federal income tax consequences that are generally applicable to Jefferson Bancshares, M.H.C., Jefferson Federal and Jefferson Bancshares and persons receiving subscription rights.

Muldoon Murphy & Faucette LLP has issued an opinion to Jefferson Bancshares, M.H.C., Jefferson Federal and Jefferson Bancshares that, for federal income tax purposes:

(1) the conversion of Jefferson Bancshares, M.H.C. from mutual form to a federal interim stock savings institution will qualify as a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code, and no gain or loss will be recognized by Jefferson Bancshares, M.H.C. by reason of such conversion;

(2) the merger of Jefferson Bancshares, M.H.C. into Jefferson Federal will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code, and no gain or loss will be recognized by Jefferson Bancshares, M.H.C. or Jefferson Federal by reason of such merger;

(3) the merger of Jefferson Interim Savings Association with and into Jefferson Federal (“bank merger”) will qualify either as a reorganization within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code or as an exchange under Section 351 of the Internal Revenue Code, and no gain or loss will be recognized by Jefferson Interim Savings Association, or Jefferson Federal or Jefferson Bancshares by reason of the bank merger;

(4) no gain or loss will be recognized by the current shareholders of Jefferson Federal upon the receipt of shares of common stock of Jefferson Bancshares pursuant to the bank merger, except to the extent of any cash received in lieu of a fractional share interest in Jefferson Bancshares;

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(5) the aggregate tax basis of the shares of the Jefferson Bancshares common stock to be received by the current shareholders of Jefferson Federal will be the same as the aggregate tax basis of the Jefferson Federal common stock surrendered in exchange therefore reduced by any amount allocable to a fractional share interest in Jefferson Federal for which cash is received;

(6) the holding period of the shares of Jefferson Bancshares common stock to be received by the current shareholders of Jefferson Federal will include the holding period of the shares of Jefferson Federal common stock, provided that Jefferson Federal common stock was held as a capital asset on the date of the bank merger;

(7) a holder of shares of Jefferson Federal common stock who receives cash in lieu of a fractional share of Jefferson Bancshares common stock will recognize gain or loss equal to the difference between the amount of cash received and the portion of such holder’s tax basis of the shares of Jefferson Federal allocable to the fractional share; such gain or loss will be capital gain or loss if such shares were held as a capital asset as of the date of the bank merger, and will be long-term capital gain or loss if such holder’s holding period in the shares of Jefferson Federal common stock is more than one year on the date of the bank merger;

(8) no gain or loss will be recognized by Jefferson Bancshares upon the sale of shares of common stock in the offering;

(9) no gain or loss will be recognized by members of Jefferson Bancshares, M.H.C. upon the issuance to them of interests in the liquidation account in Jefferson Federal pursuant to the merger of Jefferson Bancshares, M.H.C. into Jefferson Federal;

(10) it is more likely than not that the fair market value of the non-transferable subscription rights to purchase shares of common stock of Jefferson Bancshares to be issued to eligible account holders, supplemental eligible account holders and other members is zero and, accordingly, that no income will be recognized by eligible account holders, supplemental eligible account holders and other members upon the issuance to them of the subscription rights or upon the exercise of the subscription rights;

(11) it is more likely than not that the tax basis to the holders of shares of common stock purchased in the offering pursuant to the exercise of the subscription rights will be the amount paid therefor, and that the holding period for such shares of common stock will begin on the date of completion of the offering; and

(12) the holding period for shares of common stock purchased in the community offering or syndicated community offering will begin on the day after the date of the purchase.

The opinions set forth in (10) and (11) above are based on the position that the subscription rights do not have any market value at the time of distribution or at the time they are exercised. Whether subscription rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. According to our counsel, the IRS will not issue rulings on whether subscription rights have a market value. Counsel has also advised us that they are unaware of any instance in which the IRS has taken the position that nontransferable subscription rights issued by a converting financial institution have a market value. Counsel also noted that the subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration, and will afford the recipients the right only to purchase Jefferson Bancshares common stock at a price equal to its estimated fair market value, which will be the same price as the purchase price for the unsubscribed shares of common stock. Counsel believes that it is more likely than not (i.e., that there is a more than a 50% likelihood) that the subscription rights have no market value for federal income tax purposes. If the subscription rights are found to have market value greater than zero, income may be recognized by various recipients of the subscription rights (whether or not the rights are exercised) and we may be taxed on the distribution of the subscription rights. Participants are encouraged to consult with their own tax advisor as to the tax consequences in the event that the subscription rights are deemed to have an ascertainable value.

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Unlike a private letter ruling issued by the Internal Revenue Service, an opinion of counsel is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with the conclusions reached in the opinion. If there is a disagreement, no assurance can be given that the conclusions reached in an opinion of counsel would be sustained by a court if contested by the Internal Revenue Service.

Jefferson Federal has also received an opinion from Craine, Thompson & Jones, P.C., Morristown, Tennessee, that, assuming the conversion does not result in any federal income tax liability to Jefferson Federal, its account holders, or Jefferson Bancshares, implementation of the plan of conversion will not result in any Tennessee income tax liability to those entities or persons.

The opinions of Muldoon Murphy & Faucette LLP and Craine, Thompson & Jones, P.C. are filed as exhibits to the registration statement that Jefferson Bancshares has filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”

Liquidation Rights

In the unlikely event of a complete liquidation of Jefferson Bancshares, M.H.C. before the conversion, each depositor in Jefferson Federal would receive a pro rata share of any assets of Jefferson Bancshares, M.H.C. remaining after payment of claims of all creditors. Each depositor’s pro rata share of the remaining assets would be in the same proportion as the value of his or her deposit account to the total value of all deposit accounts in Jefferson Federal at the time of liquidation. In the event of a complete liquidation of Jefferson Federal after the conversion, each depositor would have a claim as a creditor of the same general priority as the claim of all other general creditors of Jefferson Federal. However, except as described below, his claim would be solely in the amount of the balance in his deposit account plus accrued interest. He would not have an interest in the value of the assets or Jefferson Federal or Jefferson Bancshares above that amount.

The plan of conversion provides for the establishment, upon the completion of the conversion, of a special “liquidation account” for the benefit of eligible account holders and supplemental eligible account holders in an amount equal to the greater of (1) Jefferson Federal’s retained earnings of $11.2 million at December 31, 1993, the date of the latest statement of financial condition contained in the final offering circular utilized in the mutual holding company reorganization, or (2) 82.64% of Jefferson Federal’s total stockholders’ equity as reflected in its latest statement of financial condition contained in the final prospectus utilized in the offerings. As of the date of this prospectus, the initial balance of the liquidation account would be approximately $             million. Each eligible account holder and supplemental eligible account holder, if he were to continue to maintain his deposit account at Jefferson Federal, would be entitled, upon a complete liquidation of Jefferson Federal after the conversion, to an interest in the liquidation account prior to any payment to Jefferson Bancshares as the sole shareholder of Jefferson Federal. Each eligible account holder and supplemental eligible account holder would have an initial interest in such liquidation account for each deposit account, including passbook accounts, transaction accounts such as checking accounts, money market deposit accounts and certificates of deposit, held in Jefferson Federal at the close of business on December 31, 2001 or March 31, 2003, as the case may be. Each eligible account holder and supplemental eligible account holder will have a pro rata interest in the total liquidation account for each of his deposit accounts based on the proportion that the balance of each such deposit account on the December 31, 2001 eligibility record date (or the March 31, 2003 supplemental eligibility record date, as the case may be) bore to the balance of all deposit accounts in Jefferson Federal on such date.

If, however, on any June 30 annual closing date of Jefferson Federal, commencing June 30, 2004, the amount in any deposit account is less than the amount in such deposit account on December 31, 2001 or March 31, 2003, as the case may be, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Any assets remaining after the above liquidation rights of eligible account holders and supplemental eligible account holders are satisfied would be distributed to Jefferson Bancshares as the sole shareholder of Jefferson Federal.

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No merger, consolidation, bulk purchase of assets with assumptions of savings accounts and other liabilities or similar transactions with another federally insured institution in which Jefferson Federal is not the surviving institution will be considered to be a complete liquidation. In any of these transactions, the liquidation account will be assumed by the surviving institution.

Subscription Offering and Subscription Rights

Under the plan of conversion, we have granted rights to subscribe for Jefferson Bancshares common stock to the following persons in the following order of priority:

1. Persons with deposits in Jefferson Federal with balances aggregating $50 or more (“qualifying deposits”) as of December 31, 2001 (“eligible account holders”). For this purpose, deposit accounts include all savings, time, and demand accounts.

2. Our tax-qualified benefit plans, including our employee stock ownership plan.

3. Persons with qualifying deposits in Jefferson Federal as of March 31, 2003 (“supplemental eligible account holders”), other than Jefferson Federal’s officers, directors and their associates.

4. Persons with deposits in Jefferson Federal as of                      and borrowers of Jefferson Federal who had loans outstanding on May 13, 1994 that continue to be outstanding as of                      (“other members”).

The amount of common stock that any person may purchase will depend on the availability of the common stock after satisfaction of all subscriptions having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of conversion. See “—Limitations on Purchases of Shares.” All persons on a joint account will be counted as a single depositor for purposes of determining the maximum amount that may be subscribed for by owners of a joint account.

Category 1: Eligible Account Holders. Each eligible account holder has the right to subscribe for up to the greater of:

• $500,000 of common stock (which equals 50,000 shares);

• one-tenth of one percent of the total offering of common stock; or

• 15 times the product, rounded down to the next whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction of which the numerator is the amount of qualifying deposits of the eligible account holder and the denominator is the total amount of qualifying deposits of all eligible account holders.

If there are not sufficient shares to satisfy all subscriptions by eligible account holders, shares first will be allocated so as to permit each subscribing eligible account holder, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining subscribing eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to the total qualifying deposits of all remaining eligible account holders whose subscriptions remain unfilled. Subscription rights of eligible account holders who are also executive officers or directors of Jefferson Federal or their associates will be subordinated to the subscription rights of other eligible account holders to the extent attributable to increased deposits in Jefferson Federal in the one year period preceding December 31, 2001.

To ensure a proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which such eligible account holder had an ownership interest at December 31, 2001. Failure to list an account, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.

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Category 2: Tax-Qualified Employee Benefit Plans. Our tax-qualified employee benefit plans have the right to purchase up to 10% of the shares of common stock issued in the conversion, including shares contributed to the Jefferson Federal Charitable Foundation. As a tax-qualified employee benefit plan, our employee stock ownership plan intends to purchase 8% of the shares of common stock issued in the conversion, including shares contributed to the Jefferson Federal Charitable Foundation. Subscriptions by the employee stock ownership plan will not be aggregated with shares of common stock purchased by any other participants in the offering, including subscriptions by the officers and directors of Jefferson Federal, for the purpose of applying the purchase limitations in the plan of conversion. If Jefferson Bancshares increases the number of shares offered in the conversion above the maximum of the offering range, the employee stock ownership plan will have a first priority right to purchase any shares exceeding that amount up to 8% of the common stock. If the plan’s subscription is not filled in its entirety, the employee stock ownership plan may purchase shares in the open market or may purchase shares directly from Jefferson Bancshares with the approval of the Office of Thrift Supervision.

Category 3: Supplemental Eligible Account Holders. Each supplemental eligible account holder has the right to subscribe for up to the greater of:

• $500,000 of common stock (which equals 50,000 shares);

• one-tenth of one percent of the total offering of common stock; or

• 15 times the product, rounded down to the next whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction of which the numerator is the amount of qualifying deposits of the supplemental eligible account holder and the denominator is the total amount of qualifying deposits of all supplemental eligible account holders.

If eligible account holders and Jefferson Federal’s employee stock ownership plan subscribe for all of the shares being sold by Jefferson Bancshares, no shares will be available for supplemental eligible account holders. If shares are available for supplemental eligible account holders but there are not sufficient shares to satisfy all subscriptions by supplemental eligible account holders, shares first will be allocated so as to permit each subscribing supplemental eligible account holder, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining subscribing supplemental eligible account holders whose subscriptions remain unfilled in the proportion that the amounts of their respective qualifying deposits bear to the total qualifying deposits of all remaining supplemental eligible account holders whose subscriptions remain unfilled.

To ensure a proper allocation of stock, each supplemental eligible account holder must list on his or her stock order form all deposit accounts in which such supplemental eligible account holder had an ownership interest at March 31, 2003. Failure to list an account, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.

Category 4: Other Members. Each other member of Jefferson Federal has the right to purchase up to the greater of $500,000 of common stock (which equals 50,000 shares) or one-tenth of one percent of the total offering of common stock. If eligible account holders, Jefferson Federal’s employee stock ownership plan and supplemental eligible account holders subscribe for all of the shares being sold by Jefferson Bancshares, no shares will be available for other members. If shares are available for other members but there are not sufficient shares to satisfy all subscriptions by other members, shares first will be allocated so as to permit each subscribing other member, if possible, to purchase a number of shares sufficient to make the person’ s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining subscribing other members in the proportion that each other member’s subscription bears to the total subscriptions of all such subscribing other members whose subscriptions remain unfilled.

To ensure a proper allocation of stock, each other member must list on his or her stock order form all deposit accounts in which such other member had an ownership interest at                      or each loan from Jefferson Federal that was outstanding on May 13, 1994 that continues to be outstanding as of

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                            . Failure to list an account or loan, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.

Expiration Date for the Subscription Offering. The subscription offering and all subscription rights under the plan of conversion will expire at 12:00 Noon, Eastern time, on                     , 2003. We will not accept orders for common stock in the subscription offering received after that time. We may extend the subscription offering to up to                     , 2003 without regulatory approval. We will make reasonable attempts to provide a prospectus and related offering materials to holders of subscription rights, however all subscription rights will expire on the expiration date, as extended, whether or not we have been able to locate each person entitled to subscription rights.

Office of Thrift Supervision regulations require that we complete the sale of common stock within 45 days after the close of the subscription offering. If the sale of the common stock is not completed within that period, all funds received will be returned promptly with interest at Jefferson Federal’s passbook rate and all withdrawal authorizations will be canceled unless we receive approval of the Office of Thrift Supervision to extend the time for completing the offering. If regulatory approval of an extension of the time period has been granted, all subscribers will be notified of the extension and of the duration of any extension that has been granted, and will be given the right to confirm, increase, decrease or rescind their orders. If we do not receive an affirmative response from a subscriber to any resolicitation, the subscriber’s order will be rescinded and all funds received will be returned promptly with interest, or withdrawal authorizations will be canceled. No single extension can exceed 90 days, and all extensions in the aggregate may not last beyond                         , 2003.

Persons in Non-Qualified States. We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock under the plan of conversion reside. However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country or who resides in a state of the United States in which (1) only a small number of persons otherwise eligible to subscribe for shares of common stock reside; (2) the granting of subscription rights or the offer or sale of shares to such person would require that we or our officers or directors register as a broker, dealer, salesman or selling agent under the securities laws of the state, or register or otherwise qualify the subscription rights or common stock for sale or qualify as a foreign corporation or file a consent to service of process; or (3) we determine that compliance with that state’s securities laws would be impracticable for reasons of cost or otherwise.

Restrictions on Transfer of Subscription Rights and Shares. Subscription rights are nontransferable. You may not transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of your subscription rights issued under the plan of conversion or the shares of common stock to be issued upon exercise of your subscription rights. Your subscription rights may be exercised only by you and only for your own account. If you exercise your subscription rights, you will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding regarding the sale or transfer of such shares. Federal regulations also prohibit any person from offering, or making an announcement of an offer or intent to make an offer, to purchase such subscription rights or shares of common stock prior to the completion of the conversion.

If you sell or otherwise transfer your rights to subscribe for common stock in the subscription offering or subscribe for common stock on behalf of another person, you may forfeit those rights and face possible further sanctions and penalties imposed by the Office of Thrift Supervision or another agency of the U.S. Government. We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights and will not honor orders known by us to involve the transfer of such rights.

Community Offering

To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, we may offer shares pursuant to the plan of conversion in a community offering to the following persons in the following order of priority:

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1. Current shareholders of Jefferson Federal.

2. Natural persons and trusts of natural persons who are residents of Cocke, Grainger, Greene, Hamblen, Hawkins, Jefferson, Knox or Sevier County, Tennessee.

3. Other persons to whom Jefferson Federal delivers a prospectus.

We will consider persons to reside in one of the specified counties if they occupy a dwelling in the county and establish an ongoing physical presence in the county that is not merely transitory in nature. We may utilize depositor or loan records or other evidence provided to us to make a determination as to whether a person is a resident. In all cases, the determination of residence status will be made by us in our sole discretion.

Purchasers in the community offering are eligible to purchase up to $500,000 of common stock (which equals 50,000 shares). If not enough shares are available to fill orders in the community offering, the available shares will be allocated first to each subscriber whose order we accept in an amount equal to the lesser of 100 shares or the number of shares subscribed for by each such subscriber, if possible. After that, unallocated shares will be allocated among such subscribers whose orders remain unsatisfied in the same proportion that the unfilled order of each such subscriber bears to the total unfilled orders of all such subscribers.

The community offering, if held, may commence concurrently with or subsequent to the subscription offering and will terminate no later than 45 days after the close of the subscription offering unless extended by us, with approval of the Office of Thrift Supervision. If we receive regulatory approval of an extension of time, all subscribers will be notified of the extension and of the duration of any extension that has been granted, and will be given the right to confirm, increase, decrease or rescind their orders. If we do not receive an affirmative response from a subscriber to any resolicitation, the subscriber’s order will be rescinded and all funds received will be promptly returned with interest.

The opportunity to subscribe for shares of common stock in the community offering is subject to our right to reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.

Syndicated Community Offering

The plan of conversion provides that, if necessary, all shares of common stock not purchased in the subscription offering and community offering may be offered for sale to the general public in a syndicated community offering through a syndicate of registered broker-dealers to be formed and managed by Keefe, Bruyette & Woods acting as our agent. Alternatively, we may sell any remaining shares in an underwritten public offering. Neither Keefe, Bruyette & Woods nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, Keefe, Bruyette & Woods has agreed to use its best efforts in the sale of shares in the syndicated community offering. We have not selected any particular broker-dealers to participate in a syndicated community offering. The syndicated community offering will terminate no later than 45 days after the expiration of the subscription offering, unless extended by us, with approval of the Office of Thrift Supervision. See “—Community Offering” above for a discussion of rights of subscribers in the event an extension is granted.

The opportunity to subscribe for shares of common stock in the syndicated community offering is subject to our right to reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.

Stock sold in the syndicated community offering also will be sold at the $10.00 purchase price. Purchasers in the syndicated community offering are eligible to purchase up to $500,000 of common stock (which equals 50,000 shares). See “—Stock Pricing and Number of Shares to Be Issued.”

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If we are unable to find purchasers from the general public for all unsubscribed shares, we will make other purchase arrangements, if feasible. Other purchase arrangements must be approved by the Office of Thrift Supervision and may provide for purchases for investment purposes by directors, officers, their associates and other persons in excess of the limitations provided in the plan of conversion and in excess of the proposed director purchases discussed earlier, although no purchases are currently intended. If other purchase arrangements cannot be made, the plan of conversion will terminate.

Marketing Arrangements

We have retained Keefe, Bruyette & Woods to consult with and advise and assist us, on a best efforts basis, in the distribution of shares in the offering. Keefe, Bruyette & Woods is a broker-dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers, Inc. Keefe, Bruyette & Woods will assist us in the conversion by acting as marketing advisor with respect to the subscription offering and will represent us as placement agent on a best efforts basis in the sale of the common stock in the community offering if one is held. The services that Keefe, Bruyette & Woods will provide include, but are not limited to:

• training our employees who will perform ministerial functions in the subscription offering and community offering regarding the mechanics and regulatory requirements of the stock offering process;

• managing the stock information center by assisting interested stock subscribers and by keeping records of all stock orders;

• preparing marketing materials; and

• assisting in the solicitation of proxies from Jefferson Federal’s shareholders and Jefferson Bancshares, M.H.C.’s members for use at the special meetings.

Keefe, Bruyette & Woods will receive (1) a management fee of $50,000 and (2) a success fee of $600,000. The management fee will be credited against the success fee. We will pay Keefe, Bruyette & Woods’s success fee upon completion of the conversion. We will reimburse Keefe, Bruyette & Woods for its legal fees.

Keefe, Bruyette & Woods has not prepared any report or opinion constituting a recommendation or advice to us or to persons who subscribe for stock, nor has it prepared an opinion as to the fairness to us of the purchase price or the terms of the stock to be sold. Keefe, Bruyette & Woods expresses no opinion as to the prices at which common stock to be issued may trade. Keefe, Bruyette & Woods and selected dealers participating in the syndicated community offering may receive a commission in the syndicated community offering in a maximum amount to be agreed upon by us to reflect market requirements at the time of the allocation of shares in the syndicated community offering.

With certain limitations, we have also agreed to indemnify Keefe, Bruyette & Woods against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon the performance of Keefe, Bruyette & Woods of its services in connection with the conversion.

Description of Sales Activities

Jefferson Bancshares will offer the common stock in the subscription offering and community offering principally by the distribution of this prospectus and through activities conducted at our stock information center. The stock information center is expected to operate during normal business hours throughout the subscription offering and community offering. It is expected that at any particular time one or more Keefe, Bruyette & Woods employees will be working at the stock information center. Employees of Keefe, Bruyette & Woods will be responsible for mailing materials relating to the offering, responding to questions regarding the conversion and the offering and processing stock orders.

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Sales of common stock will be made by registered representatives affiliated with Keefe, Bruyette & Woods or by the selected dealers managed by Keefe, Bruyette & Woods. Our officers and employees may participate in the offering in clerical capacities, providing administrative support in effecting sales transactions or, when permitted by state securities laws, answering questions of a mechanical nature relating to the proper execution of the order form. Our officers may answer questions regarding our business when permitted by state securities laws. Other questions of prospective purchasers, including questions as to the advisability or nature of the investment, will be directed to registered representatives. Our officers and employees have been instructed not to solicit offers to purchase common stock or provide advice regarding the purchase of common stock.

None of our officers, directors or employees will be compensated, directly or indirectly, for any activities in connection with the offer or sale of securities issued in the conversion.

None of our personnel participating in the offering is registered or licensed as a broker or dealer or an agent of a broker or dealer. Our personnel will assist in the above-described sales activities under an exemption from registration as a broker or dealer provided by Rule 3a4-1 promulgated under the Securities Exchange Act of 1934. Rule 3a4-1 generally provides that an “associated person of an issuer” of securities will not be deemed a broker solely by reason of participation in the sale of securities of the issuer if the associated person meets certain conditions. These conditions include, but are not limited to, that the associated person participating in the sale of an issuer’s securities not be compensated in connection with the offering at the time of participation, that the person not be associated with a broker or dealer and that the person observe certain limitations on his or her participation in the sale of securities. For purposes of this exemption, “associated person of an issuer” is defined to include any person who is a director, officer or employee of the issuer or a company that controls, is controlled by or is under common control with the issuer.

Procedure for Purchasing Shares in the Subscription and Community Offerings

Use of Order Forms. To purchase shares in the subscription offering, you must submit a properly completed and executed order form to Jefferson Federal by 12:00 Noon, Eastern time, on                         . Your order form must be accompanied by full payment for all of the shares subscribed for or include appropriate authorization in the space provided on the order form for withdrawal of full payment from a deposit account with Jefferson Federal. In order to purchase shares in the community offering, you must submit a properly completed and executed order form to Jefferson Federal, accompanied by the required payment for each share subscribed for, before the community offering terminates, which may be on, or at any time after, the end of the subscription offering.

In order to ensure that your stock purchase eligibility and priority are properly identified, you must list all accounts on the order form, giving all names in each account, the account number and the approximate account balance as of the appropriate eligibility date.

We need not accept order forms that are received after the expiration of the subscription offering or community offering, as the case may be, or that are executed defectively or that are received without full payment or without appropriate withdrawal instructions. In addition, we are not obligated to accept orders submitted on photocopied or facsimilied stock order forms. We have the right to waive or permit the correction of incomplete or improperly executed order forms, but do not represent that we will do so. Under the plan of conversion, our interpretation of the terms and conditions of the plan of conversion and of the order form will be final. Once received, an executed order form may not be modified, amended or rescinded without our consent unless the conversion has not been completed within 45 days after the end of the subscription offering, unless extended.

The reverse side of the order form contains a regulatorily mandated certification form. We will not accept order forms on which the certification form is not executed. By executing and returning the certification form, you will be certifying that you received this prospectus and acknowledging that the common stock is not a deposit account and is not insured or guaranteed by the federal government. You also will be acknowledging that you received disclosure concerning the risks involved in this offering. The certification form could be used as support to show that you understand the nature of this investment.

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To ensure that each purchaser receives a prospectus at least 48 hours before the end of the offering, as required by Rule 15c2-8 under the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days before that date or hand delivered any later than two days before that date. Execution of the order form will confirm receipt or delivery under Rule 15c2-8. Order forms will be distributed only when preceded or accompanied by a prospectus.

Payment for Shares. Payment for subscriptions may be made by cash, check or money order, or by authorization of withdrawal from deposit accounts maintained with Jefferson Federal. Appropriate means by which withdrawals may be authorized are provided on the order form. No wire transfers or third party checks will be accepted. Interest will be paid on payments made by cash, check or money order at our passbook rate from the date payment is received at the stock information center until the completion or termination of the conversion. If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will continue to accrue interest at the contractual rates until completion or termination of the conversion, unless the certificate matures after the date of receipt of the order form but before closing, in which case funds will earn interest at the passbook rate from the date of maturity until the conversion is completed or terminated, but a hold will be placed on the funds, making them unavailable to the depositor until completion or termination of the conversion. When the conversion is completed, the funds received in the offering will be used to purchase the shares of common stock ordered. The shares of common stock issued in the conversion cannot and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. If the conversion is not consummated for any reason, all funds submitted will be promptly refunded with interest as described above.

If a subscriber authorizes us to withdraw the amount of the purchase price from his or her deposit account, we will do so as of the effective date of conversion, though the account must contain the full amount necessary for payment at the time the subscription order is received. We will waive any applicable penalties for early withdrawal from certificate accounts. If the remaining balance in a certificate account is reduced below the applicable minimum balance requirement at the time funds are actually transferred under the authorization, the certificate will be canceled at the time of the withdrawal, without penalty, and the remaining balance will earn interest at our passbook rate.

The employee stock ownership plan will not be required to pay for the shares subscribed for at the time it subscribes, but rather may pay for shares of common stock subscribed for upon the completion of the conversion; provided that there is in force from the time of its subscription until that time, a loan commitment from an unrelated financial institution or Jefferson Bancshares to lend to the employee stock ownership plan, at that time, the aggregate purchase price of the shares for which it subscribed.

Individual retirement accounts (IRA) maintained in Jefferson Federal do not permit investment in the common stock. A depositor interested in using his or her IRA funds to purchase common stock must do so through a self-directed IRA. Since we do not offer those accounts, we will allow a depositor to make a trustee-to-trustee transfer of the IRA funds to a trustee offering a self-directed IRA program with the agreement that the funds will be used to purchase Jefferson Bancshares’ common stock in the offering. There will be no early withdrawal or Internal Revenue Service interest penalties for transfers. The new trustee would hold the common stock in a self-directed account in the same manner as Jefferson Federal now holds the depositor’s IRA funds. An annual administrative fee may be payable to the new trustee. Depositors interested in using funds in an IRA at Jefferson Federal to purchase common stock should contact the stock information center as soon as possible so that the necessary forms may be forwarded for execution and returned before the subscription offering ends. In addition, federal laws and regulations require that officers, directors and 10% shareholders who use self-directed IRA funds to purchase shares of common stock in the subscription offering, make purchases for the exclusive benefit of IRAs.

How We Determined the Offering Range and the $10.00 Purchase Price

Federal regulations require that the aggregate purchase price of the securities sold in connection with the conversion be based upon an estimated pro forma value of Jefferson Bancshares and Jefferson Federal as converted (i.e., taking into account the expected receipt of proceeds from the sale of securities in the conversion), as determined by an independent appraisal. We have retained RP Financial, LC., which is experienced in the evaluation and appraisal of business entities, to prepare the independent appraisal and to assist us in preparing a business plan. RP Financial will receive a fees totaling $65,000 for its appraisal services and assistance in the

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preparation of a business plan, plus reasonable out-of-pocket expenses incurred in connection with the appraisal. We have agreed to indemnify RP Financial under certain circumstances against liabilities and expenses, including legal fees, arising out of, related to, or based upon the conversion.

RP Financial prepared the appraisal taking into account the pro forma impact of the offering. For its analysis, RP Financial undertook substantial investigations to learn about our business and operations. We supplied financial information, including annual financial statements, information on the composition of assets and liabilities, and other financial schedules. In addition to this information, RP Financial reviewed Jefferson Bancshares, M.H.C.’s conversion application as filed with the Office of Thrift Supervision and Jefferson Bancshares’ registration statement as filed with the Securities and Exchange Commission. Furthermore, RP Financial visited our facilities and had discussions with our management. RP Financial did not perform a detailed individual analysis of the separate components of our assets and liabilities. We did not impose any limitations on RP Financial in connection with its appraisal.

In connection with its appraisal, RP Financial reviewed the following factors, among others:

• the economic make-up of our primary market area;

• our financial performance and condition in relation to publicly traded institutions that RP Financial, LC. deemed comparable to Jefferson Federal;

• the specific terms of the offering of Jefferson Bancshares’ common stock;

• the pro forma impact of the additional capital raised in the conversion;

• our proposed dividend policy;

• conditions of securities markets in general; and

• the market for thrift institution common stock in particular.

Consistent with Office of Thrift Supervision appraisal guidelines, RP Financial’s analysis utilized three selected valuation procedures, the price/book method, the price/earnings method, and price/assets method, all of which are described in its report. RP Financial placed the greatest emphasis on the price/earnings and price/book methods in estimating pro forma market value. RP Financial compared the pro forma price/book and price/earnings ratios for Jefferson Bancshares to the same ratios for a peer group of comparable companies. The peer group consisted of ten thrift holding companies based in the Southeast and Midwest United States. The peer group included companies with:

• average assets of $208 million;

• non-performing assets averaging 0.44% of total assets;

• loans averaging 59.5% of total assets;

• equity averaging 15.8% of total assets; and

• net income averaging 0.93% of average assets.

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The following table compares the mean and median price/earnings multiple and price/tangible book ratio of Jefferson Bancshares, after giving effect to the offering, with the same ratios for the peer group used by RP Financial and all publicly traded thrifts. For the peer group and other publicly traded, thrifts, stock prices were as of March 7, 2003, book value was as of December 31, 2002 or September 30, 2002 and earnings were for the four quarters ended December 31, 2002 or September 2002.

	Price/Earnings Multiple		Price/Tangible Book Ratio
Jefferson Bancshares(1):
Minimum	13.99	x	77.79	%
Maximum	17.37		87.42
Maximum, as adjusted	19.12		91.72
Peer group
Average	17.83		98.75
Median(2)	17.72		102.29
All publicly traded thrifts(3)
Average	14.59		141.80
Median(2)	13.41		128.99

(1) The pro forma price/earnings multiples for Jefferson Bancshares are based on earnings for the trailing twelve months, as required by regulatory appraisal guidelines. As a result, these ratios differ from those presented in the tables under “Pro Forma Data” on page             .

(2) The median is the number in the middle of all the numbers in each respective category. Half the numbers are greater than the median and half are less than the median.

(3) Includes only companies that are listed on a national securities exchange or the Nasdaq Stock Market.

RP Financial did not consider the historical price/book ratios indicated by Jefferson Federal’s stock trading history in determining its valuation because the price/book ratio of Jefferson Federal in the mutual holding company structure is not comparable to the price/book ratios of fully converted companies. Although the shares held by Jefferson Bancshares, M.H.C. are outstanding for purposes of calculating book value per share, there has been no capital raised from the issuance of shares to Jefferson Bancshares, M.H.C. As a result, Jefferson Federal has a lower book value per share and a higher price/book value per share in the mutual holding company structure compared to what it would have as a fully converted company. In addition, Jefferson Federal’s earnings in the mutual holding company structure are lower than what they would be as a fully converted company because Jefferson Federal did not generate any investable proceeds from the issuance of shares to Jefferson Bancshares, M.H.C. Because historical price/book ratios and price/earnings multiples for Jefferson Federal are not comparable to similar measurements for fully converted companies, they have not been included in the presentation above nor utilized by RP Financial.

RP Financial’s analysis provides an approximation of our pro forma market value, as converted, based on the valuation methods applied and the assumptions outlined in its report. Included in its report were certain assumptions as to our pro forma earnings after the conversion that were utilized in determining the appraised value. These assumptions included estimated expenses and an assumed after-tax rate of return on the net conversion proceeds as described under “Pro Forma Data,” purchases by the employee stock ownership plan of an amount equal to 8% of the common stock issued in the conversion and purchases in the open market by the stock-based incentive plan of a number of shares equal to 4% of the common stock sold in the conversion at the $10.00 purchase price. See “Pro Forma Data” for additional information concerning these assumptions. The use of different assumptions may yield different results.

On the basis of the analysis in its report, RP Financial has advised us that, in its opinion, as of March 7, 2003, the estimated pro forma market value of Jefferson Bancshares and Jefferson Federal, as converted, was within the valuation range of $55,175,000 to $73,325,000 with a midpoint of $64,250,000. The public shareholders of Jefferson Federal common stock will own approximately the same percentage of new common stock in Jefferson Bancshares after the conversion as they held in Jefferson Federal immediately prior to the conversion, before giving effect to (1) the receipt of cash in lieu of fractional shares, (2) their purchase of additional shares in the offering, and

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(3) the contribution of shares to the Jefferson Federal Charitable Foundation. As a result, we established the offering range of $42,500,000 to $57,500,000, with a midpoint of $50,000,000, to give effect to Jefferson Bancshares, M.H.C.’s 82.64% interest in Jefferson Federal. Our Boards of Directors reviewed RP Financial’s appraisal report, including the methodology and the assumptions used by RP Financial, and determined that the offering range was reasonable and adequate. Assuming that the shares are sold at $10.00 per share in the conversion, the estimated number of shares would be between 4,250,000 and 5,750,000 with a midpoint of 5,000,000. The purchase price of $10.00 was determined by discussion among us and Keefe, Bruyette & Woods, taking into account, among other factors, the requirement under Office of Thrift Supervision regulations that the common stock be offered in a manner that will achieve the widest distribution of the stock and desired liquidity in the common stock after the conversion.

Since the outcome of the offering relates in large measure to market conditions at the time of sale, it is not possible to determine the exact number of shares that will be issued by Jefferson Bancshares at this time. The offering range may be amended, with the approval of the Office of Thrift Supervision, if necessitated by developments following the date of the appraisal in, among other things, market conditions, our financial condition or operating results, regulatory guidelines or national or local economic conditions. RP Financial’s appraisal report is filed as an exhibit to the registration statement that Jefferson Bancshares has filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”

If, upon completion of the subscription offering, at least the minimum number of shares are subscribed for, RP Financial, after taking into account factors similar to those involved in its prior appraisal, will determine its estimate of our pro forma market value as of the close of the subscription offering.

No shares will be sold unless RP Financial confirms that, to the best of its knowledge and judgment, nothing of a material nature has occurred that would cause it to conclude that the actual total purchase price of the shares on an aggregate basis was materially incompatible with its appraisal. If, however, the facts do not justify that statement, the offering may be canceled, a new offering range and price per share set and new subscription, community and syndicated community offerings held. Under those circumstances, subscribers would have the right to modify or rescind their subscriptions and to have their subscription funds returned promptly with interest, and holds on funds authorized for withdrawal from deposit accounts would be released or reduced.

Depending upon market and financial conditions, the number of shares sold may be more than 6,612,500 shares or less than 4,250,000 shares. If the total amount of shares sold is less than 4,250,000 or more than 6,612,500 (15% above the maximum of the offering range), for aggregate gross proceeds of less than $44,250,000 or more than $66,125,000, subscription funds will be returned promptly with interest to each subscriber unless he or she indicates otherwise. If RP Financial establishes a new valuation range, it must be approved by the Office of Thrift Supervision.

In formulating its appraisal, RP Financial relied upon the truthfulness, accuracy and completeness of all documents we furnished to it. RP Financial also considered financial and other information from regulatory agencies, other financial institutions, and other public sources, as appropriate. While RP Financial believes this information to be reliable, RP Financial does not guarantee the accuracy or completeness of the information and did not independently verify the financial statements and other data provided by us or independently value our assets or liabilities. The appraisal is not intended to be, and must not be interpreted as, a recommendation of any kind as to the advisability of voting to approve the plan of conversion or of purchasing shares of common stock. Moreover, because the appraisal must be based on many factors that change periodically, there is no assurance that purchasers of shares in the conversion will be able to sell shares after the conversion at prices at or above the purchase price.

Copies of the appraisal report of RP Financial, including any amendments to the report, and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at the main office of Jefferson Federal and the other locations specified under “Where You Can Find More Information.”

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Limitations on Purchases of Shares

The plan of conversion imposes limitations upon the purchase of common stock by eligible subscribers and others in the conversion. In addition to the purchase limitations described above under “—Subscription Offering and Subscription Rights,”
“—Community Offering” and “—Syndicated Community Offering ,” the plan of conversion provides for the following purchase limitations:

• Except for our tax-qualified employee benefit plans, no person, either alone or together with associates of or persons acting in concert with such person, may purchase in the aggregate more than $750,000 of the common stock (which equals 75,000 shares), subject to increase as described below.

• Our directors and executive officers, together with their associates, may purchase in the aggregate up to 30% of the common stock sold in the offering.

• Each subscriber must subscribe for a minimum of 25 shares.

• Except for our tax-qualified employee benefit plans and certain eligible account holders and supplement eligible account holders whose subscription rights are based upon the amount of their deposits, the maximum amount of Jefferson Bancshares common stock that any person, together with associates or group of persons acting in concert, may subscribe for or purchase in the conversion, when combined with the shares of Jefferson Bancshares common stock to be received in exchange for shares of Jefferson Federal common stock, may not exceed 2% of the total number of shares issued in the conversion.

Notwithstanding the overall limit on the number of shares that may be acquired in the conversion, except as may be required by the Office of Thrift Supervision, current shareholders of Jefferson Federal will not have to sell any shares of Jefferson Federal or be limited in receiving exchange shares even if their current ownership of Jefferson Federal common stock when converted into shares of Jefferson Bancshares common stock exceeds an applicable purchase limitation, including the overall purchase limitation; provided, however, that a current shareholder who would exceed the overall purchase limitation will be precluded from purchasing additional shares of common stock in the offering.

We may, in our sole discretion, increase the individual or aggregate purchase limitation to up to 5% of the shares of common stock sold in the offering. We do not intend to increase the maximum purchase limitation unless market conditions warrant an increase in the maximum purchase limitation and the sale of a number of shares in excess of the minimum of the offering range. If we decide to increase the purchase limitations, persons who subscribed for the maximum number of shares of common stock will be given the opportunity to increase their subscriptions accordingly, subject to the rights and preferences of any person who has priority subscription rights. We, in our discretion, also may give other large subscribers the right to increase their subscriptions. If we increase the maximum purchase limitation above 2% of the shares sold in the offering, orders for shares in the community offering and/or the syndicated community offering will first be filled to a maximum of 2% of the number of shares sold in the offering in order to obtain a wider distribution of the shares.

The plan of conversion defines “acting in concert” to mean knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not by an express agreement or understanding; or a combination or pooling of voting or other interests in the securities of an issuer for a common purpose under any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. In general, a person who acts in concert with another party will also be deemed to be acting in concert with any person who is also acting in concert with that other party. We may presume that certain persons are acting in concert based upon, among other things, joint account relationships and the fact that persons may have filed joint Schedules 13D or 13G with the Securities and Exchange Commission with respect to other companies. For purposes of the plan of conversion, our directors are not deemed to be acting in concert solely by reason of their Board membership.

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The plan of conversion defines “associate,” with respect to a particular person, to mean:

1. any corporation or organization other than Jefferson Federal or a majority-owned subsidiary of Jefferson Federal of which a person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities;

2. any trust or other estate in which a person has a substantial beneficial interest or as to which a person serves as trustee or in a similar fiduciary capacity; and

3. any relative or spouse of a person, or any relative of a spouse, who either has the same home as a person or who is a director or officer of Jefferson Bancshares or Jefferson Federal or any of their subsidiaries.

For example, a corporation of which a person serves as an officer would be an associate of that person and, therefore, all shares purchased by the corporation would be included with the number of shares that the person could purchase individually under the purchase limitations described above. We have the right in our sole discretion to reject any order submitted by a person whose representations we believe to be false or who we otherwise believe, either alone or acting in concert with others, is violating or circumventing, or intends to violate or circumvent, the terms and conditions of the plan of conversion. Directors and officers are not treated as associates of each other solely by virtue of holding such positions.

We have the sole discretion to determine whether prospective purchasers are “associates” or “acting in concert.”

Delivery and Exchange of Certificates

Shares Purchased in the Offering. Certificates representing Jefferson Bancshares common stock sold in the offering will be mailed by our transfer agent to the persons whose subscriptions or orders are filled at the addresses of such persons appearing on the stock order form as soon as practicable following completion of the conversion. Any certificates returned as undeliverable will be held by us until claimed by the persons legally entitled to the certificates or otherwise disposed of in accordance with applicable law. Until certificates for common stock are available and delivered to subscribers, subscribers may not be able to sell their shares, even though trading of the common stock may have commenced.

Shares Received in Exchange for Jefferson Federal Common Stock. After completion of the conversion, each holder of a certificate or certificates evidencing shares of Jefferson Federal common stock (other than Jefferson Bancshares, M.H.C.), upon surrender of the certificate to our transfer agent, which is anticipated to serve as the exchange agent for the conversion, will receive a certificate or certificates representing the number of full shares of Jefferson Bancshares common stock into which the holder’s shares have been converted based on the exchange ratio. Promptly following the consummation of the conversion, the exchange agent will mail to each such holder of record of an outstanding certificate evidencing shares of Jefferson Federal common stock a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to such certificate shall pass, only upon delivery of such certificate to the exchange agent) advising such holder of the terms of the exchange and of the procedure for surrendering to the exchange agent such certificate in exchange for a certificate or certificates evidencing Jefferson Bancshares common stock. Jefferson Federal shareholders should not forward their certificates to Jefferson Federal or the exchange agent until they have received the transmittal letter. If you hold shares of Jefferson Federal common stock in street name, your account should automatically be credited with shares of Jefferson Bancshares common stock following consummation of the conversion. No transmittal forms will be mailed relating to shares held in street name.

We will not issue any fractional shares of Jefferson Bancshares common stock. For each fractional share that would otherwise be issued as a result of the exchange of Jefferson Bancshares common stock for Jefferson Federal common stock, we will pay an amount equal to the product obtained by multiplying the fractional share interest to which the former Jefferson Federal shareholder would otherwise be entitled by $10.00. Payment for

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fractional shares will be made as soon as practicable after receipt by the exchange agent of surrendered Jefferson Federal stock certificates. If you hold shares of Jefferson Federal common stock in street name, your account should automatically be credited with cash in lieu of fractional shares.

No holder of a certificate representing shares of Jefferson Federal common stock will be entitled to receive any dividends on Jefferson Bancshares common stock until the certificate representing such holder’s shares of Jefferson Federal common stock is surrendered in exchange for certificates representing shares of Jefferson Bancshares common stock. In the event that we declare dividends after the conversion but prior to surrender of certificates representing shares of Jefferson Federal common stock, dividends payable on shares of Jefferson Bancshares common stock not then issued shall accrue (without interest). Any such dividends shall be paid (without interest) upon surrender of the certificates representing shares of Jefferson Federal common stock. We will be entitled, after the completion of the conversion, to treat certificates representing shares of Jefferson Federal common stock as evidencing ownership of the number of full shares of Jefferson Bancshares common stock into which the shares of Jefferson Federal common stock represented by such certificates shall have been converted, notwithstanding the failure on the part of the holder thereof to surrender such certificates.

We will not be obligated to deliver a certificate or certificates representing shares of Jefferson Bancshares common stock to which a holder of Jefferson Federal common stock would otherwise be entitled as a result of the conversion until such holder surrenders the certificate or certificates representing the shares of Jefferson Federal common stock for exchange as provided above, or provides an appropriate affidavit of loss and indemnity agreement and/or a bond. If any certificate evidencing shares of Jefferson Bancshares common stock is to be issued in a name other than that in which the certificate evidencing Jefferson Federal common stock surrendered in exchange therefor is registered, it shall be a condition of the issuance that the certificate so surrendered shall be properly endorsed and otherwise be in proper form for transfer and that the person requesting such exchange pay to the exchange agent any transfer or other tax required by reason of the issuance of a certificate for shares of common stock in any name other than that of the registered holder of the certificate surrendered or otherwise establish to the satisfaction of the exchange agent that such tax has been paid or is not payable.

Restrictions on Repurchase of Stock

Under Office of Thrift Supervision regulations, savings associations and their holding companies may not for a period of one year from the date of an institution’s mutual-to-stock conversion repurchase any of its common stock from any person, except (1) in an offer made to all of its shareholders to repurchase the common stock on a pro rata basis, approved by the Office of Thrift Supervision, (2) the repurchase of qualifying shares of a director, or (3) repurchases to fund restricted stock plans or tax-qualified employee stock benefit plans. Where extraordinary circumstances exist, the Office of Thrift Supervision may approve the open market repurchase of up to 5% of a savings association’s or its holding company’s capital stock during the first year following the conversion. To receive such approval, the savings association must establish compelling and valid business purposes for the repurchase to the satisfaction of the Office of Thrift Supervision. Furthermore, repurchases of any common stock are prohibited if they would cause the association’s regulatory capital to be reduced below the amount required for the liquidation account or the regulatory capital requirements imposed by the Office of Thrift Supervision.

Restrictions on Transfer of Shares After the Conversion Applicable to Officers, Directors and NASD Members

Common stock purchased in the conversion will be freely transferable, except for shares purchased by our directors and executive officers and by NASD members.

Shares of common stock purchased by our directors and executive officers may not be sold for a period of one year following the conversion, except upon the death of the shareholder or unless approved by the Office of Thrift Supervision. Shares purchased by these persons after the conversion will be free of this restriction. Shares of common stock issued to directors and executive officers will bear a legend giving appropriate notice of the restriction and, in addition, we will give appropriate instructions to our transfer agent with respect to the restriction

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on transfers. Any shares issued to directors and executive officers as a stock dividend, stock split or otherwise with respect to restricted common stock will be similarly restricted.

Purchases of outstanding shares of Jefferson Bancshares common stock by directors, officers, or any person who becomes an executive officer or director of Jefferson Federal after adoption of the plan of conversion, and their associates, during the three-year period following the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of Jefferson Bancshares’ outstanding common stock or to the purchase of stock under stock benefit plans.

Jefferson Bancshares has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the common stock to be issued in the conversion. This registration does not cover the resale of the shares. Shares of common stock purchased by persons who are not affiliates of Jefferson Bancshares’ may be resold without registration. Shares purchased by an affiliate of Jefferson Bancshares will have resale restrictions under Rule 144 of the Securities Act. If Jefferson Bancshares meets the current public information requirements of Rule 144, each affiliate of Jefferson Bancshares who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of certain other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Jefferson Bancshares or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future by Jefferson Bancshares to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances.

Under guidelines of the National Association of Securities Dealers, Inc., members of that organization and their associates face restrictions on the transfer of securities purchased with subscription rights and reporting requirements upon purchase of the securities.

Interpretation, Amendment and Termination

To the extent permitted by law, all interpretations by us of the plan of conversion will be final; however, such interpretations have no binding effect on the Office of Thrift Supervision. The plan of conversion provides that, if deemed necessary or desirable, we may substantively amend the plan of conversion as a result of comments from regulatory authorities or otherwise, without the further approval of Jefferson Bancshares, M.H.C.’s members or Jefferson Federal’s shareholders.

Completion of the conversion requires the sale of all shares of the common stock within 24 months following approval of the plan of conversion by Jefferson Bancshares, M.H.C.’s members and Jefferson Federal’s shareholders. If this condition is not satisfied, the plan of conversion will be terminated and Jefferson Federal will continue its business in the mutual holding company form of organization. We may terminate the plan of conversion at any time.

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Comparison of Shareholders’ Rights

As a result of the conversion, current holders of Jefferson Federal common stock will become shareholders of Jefferson Bancshares. There are certain differences in shareholder rights arising from distinctions between the federal stock charter and bylaws of Jefferson Federal and the charter and bylaws of Jefferson Bancshares and from distinctions between laws with respect to federally-chartered savings associations and Tennessee law.

In some instances, the rights of shareholders of Jefferson Bancshares will be less than the rights shareholders of Jefferson Federal currently have. The decrease in shareholder rights under the Tennessee charter and bylaws are not mandated by Tennessee law but have been chosen by management as being in the best interests of Jefferson Bancshares. In some instances, the differences in shareholder rights may increase management rights. We believe that the provisions described below are prudent and will enhance our ability to remain an independent financial institution and reduce our vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by our Board of Directors. These provisions also will assist us in the orderly deployment of the conversion proceeds into productive assets and allow us to implement our business plan during the initial period after the conversion. We believe these provisions are in the best interests of Jefferson Bancshares and its shareholders.

The following discussion is not intended to be a complete statement of the differences affecting the rights of shareholders, but rather summarizes the more significant differences and certain important similarities. The discussion herein is qualified in its entirety by reference to the charter and bylaws of Jefferson Bancshares and Tennessee law.

Authorized Capital Stock. The authorized capital stock of Jefferson Bancshares consists of 30,000,000 shares of common stock, par value $.01 per share and 10,000,000 shares of preferred stock, par value $.01 per share. The current authorized capital stock of Jefferson Federal consists of 20,000,000 shares of common stock, par value $1.00 per share and 10,000,000 shares of preferred stock, par value $1.00 per share.

The charters of both Jefferson Federal and Jefferson Bancshares authorize the Board of Directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, conversion rates and liquidation preferences. Although neither Board of Directors has any intention at the present time of doing so, it could issue a series of preferred stock that could, depending on its terms, impede a merger, tender offer or other takeover attempt.

Issuance of Capital Stock. Currently, pursuant to applicable laws and regulations, Jefferson Bancshares, M.H.C. is required to own not less than a majority of the outstanding common stock of Jefferson Federal. There will be no such restriction applicable to Jefferson Bancshares following consummation of the conversion, as Jefferson Bancshares, M.H.C. will cease to exist.

Jefferson Bancshares’ charter does not contain restrictions on the issuance of shares of capital stock to the directors, officers or controlling persons of Jefferson Bancshares, whereas the current federal stock charter of Jefferson Federal restricts such issuance to general public offerings, or if qualifying shares, to directors, unless the share issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting. Thus, Jefferson Bancshares could adopt stock-related compensation plans such as stock option plans without shareholder approval and shares of the capital stock of Jefferson Bancshares could be issued directly to directors or officers without shareholder approval. The rules of the NASD, however, generally require corporations with securities that are quoted on the Nasdaq Stock Market, like Jefferson Bancshares will be, to obtain shareholder approval of most compensation plans for directors, officers and key employees of the corporation. Moreover, although generally not required, shareholder approval of stock-related compensation plans may be sought in certain instances in order to qualify such plans for favorable federal income tax law treatment under current laws and regulations. We plan to submit the stock compensation plans discussed in this prospectus to shareholders for their approval.

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Neither the federal stock charter and bylaws of Jefferson Federal nor the charter and bylaws of Jefferson Bancshares provide for preemptive rights to shareholders in connection with the issuance of capital stock.

Voting Rights. The federal stock charter of Jefferson Federal permits cumulative voting in the election of directors. The charter and bylaws of Jefferson Bancshares do not provide for cumulative voting by shareholders in the election of directors.

Payment of Dividends. The ability of Jefferson Federal to pay dividends on its capital stock is restricted by Office of Thrift Supervision regulations and by tax considerations related to savings and loan associations. Jefferson Federal will continue to be subject to these restrictions after the conversion, and such restrictions will indirectly affect Jefferson Bancshares because dividends from Jefferson Federal will be a primary source of funds for the payment of dividends to the shareholders of Jefferson Bancshares.

The Tennessee Business Corporation Act generally provides that, unless otherwise restricted in a corporation’s charter, a corporation’s board of directors may authorize and a corporation may pay dividends to shareholders. However, a distribution may not be made if, after giving effect thereto:

• the corporation would be not be able to pay its debts as they become due in the usual course of business; or

• the total assets of the corporation would be less than the sum of its total liabilities plus (unless otherwise provided in its charter) the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Board of Directors. The federal stock charter and bylaws of Jefferson Federal and the charter and bylaws of Jefferson Bancshares each require the Board of Directors to be divided into three classes as nearly equal in number as possible and that the members of each class be elected for a term of three years and until their successors are elected and qualified, with one class being elected annually. Under both the bylaws of Jefferson Federal and the bylaws of Jefferson Bancshares, any vacancy occurring in the Board of Directors, however caused, may be filled by an affirmative vote of the majority of the directors then in office, whether or not a quorum is present, and any director so chosen shall hold office only until the next annual meeting of shareholders at which directors are elected.

The bylaws of Jefferson Bancshares provide that to be eligible to serve on the Board of Directors a person must reside in a county in which an office of Jefferson Federal is located or in an adjacent county. The bylaws also provide that no person will be eligible to serve on the Board of Directors who has, in the past 10 years, been subject to a supervisory action by a financial regulatory agency that involved fraud or other bad actions, has been convicted of a crime involving dishonesty or breach of trust that is punishable by a year or more in prison, or is currently charged with such a crime. These provisions may prevent shareholders from nominating themselves or persons of their choosing for election to the Board of Directors. The bylaws of Jefferson Federal do not contain similar qualification requirements.

Under the bylaws of Jefferson Federal, any director may be removed only for cause by vote of the holders of a majority of the outstanding voting shares at a meeting of shareholders called for such purpose. The charter of Jefferson Bancshares provides that any director may be removed by shareholders only for cause at a duly constituted meeting of shareholders called expressly for that purpose upon the affirmative vote of the holders of not less than 80% of the outstanding voting shares. The higher vote threshold will make it more difficult for shareholders to remove directors and replace them with their own nominees.

Limitations on Liability. The charter of Jefferson Bancshares provides that directors of Jefferson Bancshares will not be personally liable to Jefferson Bancshares or its shareholders for monetary damages for breach of duty as a director, except for liability:

• for any breach of the director’s duty of loyalty to the Corporation or its shareholders;

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• for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; and

• for unlawful distributions under Section 48-18-304 of the Tennessee Business Corporation Act.

This provision would absolve directors of personal liability for monetary damages for negligence in the performance of their duties, including gross negligence, and it would not affect the availability of injunctive or other equitable relief as a remedy.

Currently, federal law does not permit federally-chartered savings and loan associations like Jefferson Federal to limit the personal liability of directors in the manner provided by the Tennessee Business Corporation Act and the laws of many other states.

Indemnification of Directors, Officers, Employees and Agents. The federal stock charter and bylaws of Jefferson Federal do not contain any provision relating to indemnification of directors and officers. Under present Office of Thrift Supervision regulations, however, Jefferson Federal must indemnify its directors, officers and employees for any costs incurred in connection with any litigation involving any such person’s activities as a director, officer or employee if such person obtains a final judgment on the merits in his or her favor. In addition, indemnification is permitted in the case of a settlement, a final judgment against such person or final judgement other than on the merits, if a majority of disinterested directors determines that such person was acting in good faith within the scope of his or her employment as he or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interest of Jefferson Federal or its shareholders. Jefferson Federal also is permitted to pay ongoing expenses incurred by a director, officer or employee if a majority of disinterested directors concludes that such person may ultimately be entitled to indemnification. Before making any indemnification payment, Jefferson Federal is required to notify the Office of Thrift Supervision of its intention and such payment cannot be made if the Office of Thrift Supervision objects thereto.

The charter of Jefferson Bancshares provides that Jefferson Bancshares shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he or she is or was a director or officer of Jefferson Bancshares, or is or was serving at the request of Jefferson Bancshares as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against all expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by him or her in connection with the action or proceeding if he or she:

(1) acted in good faith;

(2) reasonably believed (A) in the case of conduct in his or her official capacity with Jefferson Bancshares that his or her conduct was in the best interests of Jefferson Bancshares and; (B) in all other cases, that his or her conduct was at least not opposed to Jefferson Bancshares’ best interests; and

(3) in the case of any criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful.

Indemnification shall not be made with respect to an action by or in the right of Jefferson Bancshares as to which the person has been adjudged to be liable to Jefferson Bancshares unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. The charter of Jefferson Bancshares further provides that to the extent that the representative of Jefferson Bancshares has been successful on the merits or otherwise in defense of any action or proceeding or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys’ fees) reasonably incurred by him in connection therewith. Unless otherwise ordered by a court, any indemnification shall be made by Jefferson

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Bancshares only as authorized in the specific case upon a determination that indemnification is proper in the circumstance because such person has met the applicable standard of conduct set forth in the Tennessee Business Corporation Act. Expenses (including attorney’s fees) incurred in defending any action or proceeding shall be paid by Jefferson Bancshares in advance of the final disposition of the action or proceeding upon:

• delivery to Jefferson Bancshares of an undertaking to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such individual is not entitled to be indemnified for such expenses;

• delivery to Jefferson Bancshares of a written affirmation of his or her good faith belief that he or she has met the standard of conduct set forth in the Tennessee Business Corporation Act; and

• a determination that the facts would not preclude indemnification.

Special Meetings of Shareholders. The bylaws of Jefferson Federal provide that special meetings of the shareholders of Jefferson Federal may be called by the Chairman, President, a majority of the Board of Directors or the holders of not less than one-tenth of the outstanding capital stock of Jefferson Federal entitled to vote at the meeting. The charter of Jefferson Bancshares contains a provision pursuant to which, subject to the rights of any holders of preferred stock, special meetings of the shareholders of Jefferson Bancshares may only be called by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which Jefferson Bancshares would have if there were no vacancies on the Board of Directors.

Shareholder Nominations and Proposals. The bylaws of Jefferson Federal generally provide that shareholders may submit new business to be taken up at the annual meeting. Any shareholder may make any proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least 5 days before the meeting, such proposal will be laid over for action at an adjourned special or annual meeting of the shareholders taking place 30 days or more thereafter.

Jefferson Bancshares’ bylaws establish an advance notice procedure for shareholders to nominate directors or bring other business before an annual meeting of shareholders of Jefferson Bancshares. A person may not be nominated for election as a director unless that person is nominated by or at the direction of the Jefferson Bancshares Board or by a shareholder who has given appropriate notice to Jefferson Bancshares before the meeting. Similarly, a shareholder may not bring business before an annual meeting unless the shareholder has given Jefferson Bancshares appropriate notice of its intention to bring that business before the meeting. Jefferson Bancshares’ secretary must receive notice of the nomination or proposal not less than 90 days prior to the annual meeting; provided, however, that in the event that less than 100 days’ notice of prior public disclosure of the date of the meeting is given or made to the shareholders, notice by the shareholder to be timely must be received not later than the close of business on the 10^th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder who desires to raise new business must provide certain information to Jefferson Bancshares concerning the nature of the new business, the shareholder and the shareholder’s interest in the business matter. Similarly, a shareholder wishing to nominate any person for election as a director must provide Jefferson Bancshares with certain information concerning the nominee and the proposing shareholder.

Advance notice of nominations or proposed business by shareholders gives Jefferson Bancshares’ Board of Directors time to consider the qualifications of the proposed nominees, the merits of the proposals and, to the extent deemed necessary or desirable by the Board of Directors, to inform shareholders and make recommendations about those matters.

Shareholder Action Without a Meeting. The bylaws of Jefferson Federal provide that any action to be taken at a meeting of the shareholders may be taken without a meeting if consent in writing, setting forth the action so taken, is given by the holders of all outstanding shares entitled to vote. Under the Tennessee Business Corporation Act, action may be taken by shareholders without a meeting if all shareholders entitled to vote on the action consent to taking such action without a meeting.

Shareholder’s Right to Examine Books and Records. A federal regulation which is currently applicable to Jefferson Federal provides that shareholders may inspect and copy specified books and records of a

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federally-chartered savings and loan associations after proper written notice for a proper purpose. The Tennessee Business Corporation Act similarly provides that a shareholder may inspect books and records for any proper purpose upon written verified demand stating the purpose of the inspection.

Limitations on Voting Rights. The charter of Jefferson Bancshares provides that in no event shall any person, who directly or indirectly beneficially owns in excess of 10% of the then-outstanding shares of common stock as of the record date for the determination of shareholders entitled or permitted to vote on any matter (the “10% limit”), be entitled or permitted to any vote in respect of the shares held in excess of the 10% limit. Beneficial ownership is determined pursuant to the federal securities laws and includes, but is not limited to, shares as to which any person and his or her affiliates (1) have the right to acquire upon the exercise of conversion rights, exchange rights, warrants or options and (2) have or share investment or voting power (but shall not be deemed the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of shareholders, and that are not otherwise beneficially, or deemed by Jefferson Bancshares to be beneficially, owned by such person and his or her affiliates.

The foregoing restriction does not apply to:

• any underwriter or member of an underwriting or selling group involving a public sale or resale of securities of Jefferson Bancshares or any subsidiary; provided, however, that upon completion of the sale of such securities, no such underwriter or member of such selling group is a beneficial owner of more than 10% of any class of equity security of Jefferson Bancshares;

• any proxy granted to one or more disinterested directors by a shareholder of Jefferson Bancshares;

• any employee benefit plans of Jefferson Bancshares or any subsidiary; and

• any transaction approved in advance by a majority of such disinterested directors.

The charter and bylaws of Jefferson Federal do not contain an equivalent or similar provision.

Mergers, Consolidations and Sales of Assets. Federal regulation currently requires the approval of two-thirds of the Board of Directors of Jefferson Federal and the holders of two-thirds of the outstanding stock of Jefferson Federal entitled to vote thereon for mergers, consolidations and sales of all or substantially all of its assets. Such regulation permits Jefferson Federal to merge with another corporation without obtaining the approval of its shareholders if:

• it does not involve an interim savings institution;

• the charter of Jefferson Federal is not changed;

• each share of Jefferson Federal stock outstanding immediately prior to the effective date of the transaction is to be an identical outstanding share or a treasury share of Jefferson Federal after such effective date; and

• either: (a) no shares of voting stock of Jefferson Federal and no securities convertible into such stock are to be issued or delivered under the plan of combination or (b) the authorized unissued shares or the treasury shares of voting stock of Jefferson Federal to be issued or delivered under the plan of combination, plus those initially issuable upon conversion of any securities to be issued or delivered under such plan, do not exceed 15% of the total shares of voting stock of Jefferson Federal outstanding immediately prior to the effective date of the transaction.

The Tennessee Business Corporation Act requires the approval of the Board of Directors and the affirmative vote of a majority of the votes entitled to be cast by all shareholders entitled to vote thereon. The Tennessee Business Corporation Act further provides that unless otherwise required by Jefferson Bancshares’ governing instruments, a plan of merger or consolidation shall not require the approval of the shareholders if:

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(1)    In a merger, Jefferson Bancshares’ separate corporate existence does not cease as a result of the merger and its charter will not differ from the charter before the merger; and

(2)    In a merger or exchange:

(A)    each shareholder of Jefferson Bancshares whose shares were outstanding immediately before the effective date of the merger or exchange will hold the same number of shares, with identical designations, preferences, limitations and relative rights, immediately after the effective date of the merger or exchange;

(B)    the voting power of the shares outstanding immediately after the merger or exchange, plus the voting power of the shares issuable as a result of the merger or exchange (either by the conversion of securities issued pursuant to the merger or exchange or by the exercise of rights and warrants issued pursuant to the merger or exchange), will not exceed by more than 20% the voting power of the total shares of Jefferson Bancshares outstanding immediately before the merger or exchange; and

(C)    the number of participating shares outstanding immediately after the merger or exchange, plus the number of participating shares issuable as a result of the merger or exchange (either by the conversion of securities issued pursuant to the merger or exchange by the exercise of rights and warrants issued pursuant to the merger or exchange), will not exceed more than 20% the total number of participating shares outstanding immediately before the merger or exchange.

Business Combinations with Interested Shareholders. The charter of Jefferson Bancshares requires the approval of the holders of at least 80% of Jefferson Bancshares’ outstanding shares of voting stock entitled to vote to approve certain “business combinations” with an “interested shareholder.” This supermajority voting requirement will not apply in cases where the proposed transaction has been approved by a majority of disinterested directors or where various fair price and procedural conditions have been met.

Under Jefferson Bancshares’ charter, the term “interested shareholder” means any person who or which is:

• the beneficial owner, directly or indirectly, of more than 10% of the voting power of the then outstanding voting stock of Jefferson Bancshares;

• an affiliate of Jefferson Bancshares and at any time in the two-year period prior to the date in question was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the Jefferson Bancshares; or

• an assignee of or has otherwise succeeded to any shares of voting stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any interested shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended.

A “business combination” includes, but is not limited to:

1. any merger or consolidation of Jefferson Bancshares or of its subsidiaries with (a) any interested shareholder; or (b) any other corporation which is, or after such merger or consolidation would be, an affiliate of an interested shareholder; or

2. any sale, lease, exchange or other disposition to or with any interested shareholder, or any affiliate of any interested shareholder, of any assets of Jefferson Bancshares or any of its subsidiaries having an aggregate fair market value equaling or exceeding 25% or more of the combined assets of the Jefferson Bancshares and its subsidiaries; or

3. the issuance or transfer by Jefferson Bancshares or any of its subsidiaries of any securities of Jefferson Bancshares or any of its subsidiaries to any interested shareholder or any affiliate of any

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interested shareholder in exchange for cash, securities or other property having an aggregate fair market value equaling or exceeding 25% of the combined fair market value of the outstanding common stock of Jefferson Bancshares, except for any issuance or transfer pursuant to an employee benefit plan of Jefferson Bancshares or any of its subsidiaries; or

4. the adoption of any plan for the liquidation or dissolution of Jefferson Bancshares proposed by or on behalf of any interested shareholder or any affiliate or associate of such interested shareholder; or

5. any reclassification of securities, or recapitalization of Jefferson Bancshares, or any merger or consolidation of Jefferson Bancshares with any of its subsidiaries or any other transaction (whether or not with or into or otherwise involving an interested shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of Jefferson Bancshares or any of its subsidiaries which is directly or indirectly owned by any interested shareholder or any affiliate of any interested shareholder;

Neither the charter and bylaws of Jefferson Federal nor the federal laws and regulations applicable to Jefferson Federal contain a provision which restricts business combinations between Jefferson Federal and any interested shareholder in the manner set forth above.

Dissenters’ Rights of Appraisal. A federal regulation that is applicable to Jefferson Federal generally provides that a shareholder of a federally-chartered savings and loan association that engages in a merger, consolidation or sale of all or substantially all of its assets shall have the right to demand from such institution payment of the fair or appraised value of his or her stock in the institution, subject to specified procedural requirements. This regulation also provides, however, that the shareholders of a federally-chartered savings and loan association that is listed on a national securities exchange or quoted on Nasdaq are not entitled to dissenters’ rights in connection with a merger if the shareholder is required to accept only “qualified consideration” for his or her stock, which is defined to include cash, shares of stock of any institution or corporation which at the effective date of the merger will be listed on a national securities exchange or quoted on the Nasdaq or any combination of such shares of stock and cash. This exception does not currently apply to Jefferson Federal because its stock is not listed on a national securities exchange or quoted on the Nasdaq.

After the conversion, the rights of appraisal of the dissenting shareholders of Jefferson Bancshares will be governed by Tennessee law. Pursuant to the Tennessee Business Corporation Act, a shareholder of a Tennessee corporation generally has the right to dissent from any merger involving the corporation, plan of share exchange, sale of all or substantially all of the corporation’s assets or an amendment of the charter that materially adversely affects shareholder rights, and to obtain fair value for his or her shares, subject to specified procedural requirements. However, no such appraisal rights are generally available for shares which are listed on a national securities exchange or on the Nasdaq National Market.

Evaluation of Offers. The charter of Jefferson Bancshares provides that the Board of Directors of Jefferson Bancshares, when evaluating an offer to (1) make a tender or exchange offer for any equity security of Jefferson Bancshares, (2) merge or consolidate Jefferson Bancshares with another corporation or entity or (3) purchase or otherwise acquire all or substantially all of the properties and assets of Jefferson Bancshares, may, in connection with the exercise of its judgment in determining what is in the best interest of Jefferson Bancshares and the shareholders of Jefferson Bancshares, give consideration to the following factors:

• social and economic effects of the transaction on Jefferson Bancshares, its subsidiaries, employees, customers and creditors and elements of the community where Jefferson Bancshares is located;

• business and financial condition and earnings prospects of the acquiring person or entity; and

• the competence, experience and integrity of the acquiring person or entity and its or their management.

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By having these standards in the charter of Jefferson Bancshares, the Board of Directors may be in a stronger position to oppose such a transaction if the Board concludes that the transaction would not be in the best interest of Jefferson Bancshares, even if the price offered is significantly greater than the then market price of any equity security of Jefferson Bancshares.

Amendment of Governing Instruments. No amendment of the charter of Jefferson Federal may be made unless it is first proposed by the Board of Directors, then preliminarily approved by the Office of Thrift Supervision, and thereafter approved by the holders of a majority of the total votes eligible to be cast at a legal meeting. The charter of Jefferson Bancshares generally may be amended by the holders of a majority of the shares entitled to vote generally in an election of directors, voting together as a single class; provided, however, that any amendment of Articles VIII (Directors), IX (Removal of Directors), X (Elimination of Directors’ Liability), XI (Indemnification), XII (Limitation of Voting Common Stock), XIII (Approval of Business Combinations), XIV (Evaluations of Business Combinations), XV (Control Share Acquisitions), XVI (Special Meetings of Shareholders) and XVIII (Amendment of Bylaws) must be approved by the affirmative vote of the holders of at least 80% of the outstanding shares entitled to vote generally in the election of directors, voting together as a single class, cast at a meeting of the shareholders called for that purpose; except that such repeal, alteration or amendment may be made by the affirmative vote of the majority of the outstanding shares if the same is first approved by a majority of disinterested directors.

The bylaws of Jefferson Federal may be amended in a manner consistent with regulations of the Office of Thrift Supervision and shall be effective after (1) approval of the amendment by a majority vote of the authorized Board of Directors, or by a majority of the votes cast by the shareholders of Jefferson Federal at any legal meeting, and (2) receipt of applicable regulatory approval. The bylaws of Jefferson Bancshares may be amended by the majority vote of the Board of Directors at any legal meeting. The bylaws may be amended by the shareholders only by a vote of at least 80% of the outstanding shares of capital stock entitled to vote generally in the election of directors, cast at a meeting of the shareholders called for that purpose.

Anti-Takeover Effects of Jefferson Bancshares’ Charter and Bylaws and Management Remuneration Adopted in Conversion

The provisions described above are intended to reduce Jefferson Bancshares’ vulnerability to takeover attempts and other transactions that have not been negotiated with and approved by members of our Board of Directors. Provisions of the stock-based incentive plan will provide for accelerated benefits to participants if a change in control of Jefferson Bancshares or Jefferson Federal occurs or a tender or exchange offer for our stock is made. We have also entered into an employment agreement with our chief executive officer and intend to establish a severance compensation plan, which will provide such eligible officers and employees with additional payments and benefits on the individual’s termination in connection with a change in control of Jefferson Bancshares or Jefferson Federal. The foregoing provisions and limitations may make it more difficult for companies or persons to acquire control of Jefferson Bancshares. Additionally, the provisions could deter offers to acquire the outstanding shares of Jefferson Bancshares that might be viewed by shareholders to be in their best interests.

Our Board of Directors believes that the provisions of the charter and bylaws are in the best interest of Jefferson Bancshares and its shareholders. An unsolicited non-negotiated takeover proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the Board of Directors believes it is in the best interests of Jefferson Bancshares and its shareholders to encourage potential acquirors to negotiate directly with management and that these provisions will encourage such negotiations and discourage non-negotiated takeover attempts.

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Restrictions on Acquisition of Jefferson Bancshares

and Jefferson Federal

Tennessee Corporate Law

The Tennessee Business Corporation Act contains several provisions, described below, which may be applicable to Jefferson Bancshares upon consummation of the conversion.

Business Combination Act. The Tennessee Business Combination Act generally prohibits a “business combination” (generally defined to include mergers, share exchanges, sales and leases of assets, issuances of securities and similar transactions) by a “resident domestic corporation” (as defined below) or a subsidiary with an “interested shareholder” (generally defined as any person or entity which beneficially owns 10% or more of the voting power of any class or series of the corporation’s stock then outstanding) for a period of five years after the date the person becomes an interested shareholder unless, prior to such date, the board of directors approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder and the business combination satisfies any other applicable requirements imposed by law or by the corporation’s charter or bylaws. The Tennessee Business Combination Act also limits the extent to which a “resident domestic corporation” which has a class of voting stock traded on any national securities exchange or registered pursuant to Section 12(g) of the Exchange Act or any of its officers or directors could be held liable for resisting any business combination.

For purposes of the Tennessee Business Combination Act, the term “resident domestic corporation” is defined as an issuer of voting stock which, as of the share acquisition date in question, is organized under the laws of Tennessee and meets two or more of the following requirements:

• the corporation has more than 10,000 shareholders or 10% of its shareholders reside in Tennessee or more than 10% of its shares are held by shareholders who are Tennessee residents;

• the corporation has its principal office or place of business in Tennessee;

• the corporation has the principal office or place of business of a significant subsidiary, representing not less than 25% of the corporation’s consolidated net sales located in Tennessee;

• the corporation employs more than 250 individuals in Tennessee or has a combined annual payroll paid to Tennessee residents which is in excess of $5.0 million;

• the corporation produces goods and services in Tennessee which result in annual gross receipts in excess of $10.0 million; or

• the corporation has physical assets and/or deposits, including those of any subsidiary located within Tennessee which exceed $10.0 million in value.

Control-Share Acquisitions. The Tennessee Control Share Acquisition Act generally requires that shareholders of a corporation approve a “control-share acquisition.” A “control share acquisition” is defined by Tennessee law as the acquisition by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. All shares acquired within 90 days and all shares acquired pursuant to a plan to make a control share acquisition are deemed to have been acquired in the same acquisition.

The Tennessee Control Share Acquisition Act generally provides that any person or group that acquires the power to vote more than certain specified levels (one-fifth, one-third or a majority) of the shares of certain Tennessee corporations will not have the right to vote such shares unless granted voting rights by the holders of a majority of the votes entitled to be cast, excluding “interested shares.” Interested shares are those shares held by the acquiring person, officers of the corporation and persons who are both employees and directors of the corporation. If approval of voting power for the shares is obtained at one of the specified levels, additional shareholder approval is required

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when a shareholder seeks to acquire the power to vote shares at the next level. In the absence of such approval, the additional shares acquired by the shareholder may not be voted until they are transferred to another person in a transaction other than a control share acquisition. The statutory provisions will only apply to a Tennessee corporation if its charter or bylaws so provides and that has:

1. 100 or more shareholders;

2. its principal place of business, its principal office or substantial assets within Tennessee; and

3. either (A) more than 10% of its shareholders resident in Tennessee, (B) more than 10% of its shares owned by shareholders resident in Tennessee, or (C) 10,000 or more shareholders resident in Tennessee.

The charter of Jefferson Bancshares provides that the control share acquisition provisions of the Tennessee Business Corporation Act shall be applicable to Jefferson Bancshares.

Neither the charter or bylaws of Jefferson Federal nor federal law contain provisions equivalent or similar to the control-share acquisition provision described above.

Greenmail Act. The Tennessee Greenmail Act prohibits a Tennessee corporation having a class of voting stock registered or traded on a national securities exchange or registered pursuant to Section 12(g) of the Securities Exchange Act from purchasing, directly or indirectly, any of its shares at a price above the market value of such shares from any person who holds more than 3% of the class of securities to be purchased if such person has held such shares for less than two years, unless: (1) such purchase has been approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock issued by such corporation or (2) the corporation makes an offer, at least equal value per share, to all holders of shares of such class. Market value is defined as the average of the highest and lowest closing market price of such shares during the 30 trading days preceding the purchase or preceding the commencement or announcement of a tender offer if the seller of such shares has commenced a tender offer or announced an intention to seek control of the corporation.

Because the common stock will be registered pursuant to Section 12(g) of the Exchange Act, Jefferson Bancshares will be subject to the restrictions of the Greenmail Act upon consummation of the conversion.

Regulatory Restrictions

Office of Thrift Supervision Conversion Regulations. Regulations of the Office of Thrift Supervision provide that for a period of three years following the date of the completion of the conversion, no person, acting singly or together with associates in a group of persons acting in concert, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of any equity security of Jefferson Bancshares without the prior written approval of the Office of Thrift Supervision. Where any person, directly or indirectly, acquires beneficial ownership of more than 10% of any class of any equity security of Jefferson Bancshares without the prior written approval of the Office of Thrift Supervision, the securities beneficially owned by such person in excess of 10% may not be voted by any person or counted as voting shares in connection with any matter submitted to the shareholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the shareholders for a vote.

Change in Bank Control Act. The acquisition of 10% or more of the common stock outstanding may trigger the provisions of the Change in Bank Control Act. The Office of Thrift Supervision has also adopted a regulation under the Change in Bank Control Act that generally requires persons who at any time intend to acquire control of a federally chartered savings association to provide 60 days prior written notice and certain financial and other information to the Office of Thrift Supervision.

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The 60-day notice period does not commence until the information is deemed to be substantially complete. Control for the purpose of this Act exists in situations in which the acquiring party has voting control of at least 25% of any class of Jefferson Bancshares’ voting stock or the power to direct the management or policies of Jefferson Bancshares. However, under Office of Thrift Supervision regulations, control is presumed to exist where the acquiring party has voting control of at least 10% of any class of Jefferson Bancshares’ voting securities if specified “control factors” are present. The statute and underlying regulations authorize the Office of Thrift Supervision to disapprove a proposed acquisition on certain specified grounds.

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Description of Jefferson Bancshares Capital Stock

The common stock of Jefferson Bancshares will represent nonwithdrawable capital, will not be an account of any type, and will not be insured by the Federal Deposit Insurance Corporation or any other government agency.

General

Jefferson Bancshares is authorized to issue 30,000,000 shares of common stock having a par value of $.01 per share and 10,000,000 shares of preferred stock having a par value of $.01 per share. Each share of Jefferson Bancshares’ common stock will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the purchase price for the common stock, as required by the plan of conversion, all stock will be duly authorized, fully paid and nonassessable. Jefferson Bancshares will not issue any shares of preferred stock in the conversion.

Common Stock

Dividends. Jefferson Bancshares can pay dividends if, as and when declared by its Board of Directors. The payment of dividends by Jefferson Bancshares is limited by law and applicable regulation. See “Our Dividend Policy.” The holders of common stock of Jefferson Bancshares will be entitled to receive and share equally in dividends as may be declared by the Board of Directors of Jefferson Bancshares out of funds legally available for dividends. If Jefferson Bancshares issues preferred stock, the holders of the preferred stock may have a priority over the holders of the common stock with respect to dividends.

Voting Rights. After the conversion, the holders of common stock of Jefferson Bancshares will possess exclusive voting rights in Jefferson Bancshares. They will elect Jefferson Bancshares’ Board of Directors and act on other matters as are required to be presented to them under Tennessee law or as are otherwise presented to them by the Board of Directors. Except as discussed in “Comparison of Shareholders’ Rights—Limitations on Voting Rights,” each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If Jefferson Bancshares issues preferred stock, holders of Jefferson Bancshares preferred stock may also possess voting rights. Certain matters require a vote of 80% of the outstanding shares entitled to vote. See “Comparison of Shareholders’ Rights.”

Liquidation. If there is any liquidation, dissolution or winding up of Jefferson Federal, Jefferson Bancshares, as the holder of Jefferson Federal ‘s capital stock, would be entitled to receive all of Jefferson Federal’s assets available for distribution after payment or provision for payment of all debts and liabilities of Jefferson Federal, including all deposit accounts and accrued interest, and after distribution of the balance in the special liquidation account to eligible account holders and supplemental eligible account holders. Upon liquidation, dissolution or winding up of Jefferson Bancshares, the holders of its common stock would be entitled to receive all of the assets of Jefferson Bancshares available for distribution after payment or provision for payment of all its debts and liabilities. If Jefferson Bancshares issues preferred stock, the preferred stock holders may have a priority over the holders of the common stock upon liquidation or dissolution.

Preemptive Rights; Redemption. Holders of the common stock of Jefferson Bancshares will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock cannot be redeemed.

Preferred Stock

Jefferson Bancshares will not issue any preferred stock in the conversion and it has no current plans to issue any preferred stock after the conversion. Preferred stock may be issued with designations, powers, preferences and rights as the Board of Directors may from time to time determine. The Board of Directors can, without shareholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting

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strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.

Transfer Agent and Registrar

The transfer agent and registrar for Jefferson Bancshares’ common stock will be Registrar and Transfer Company, Cranford, New Jersey.

Registration Requirements

Jefferson Bancshares has registered its common stock with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended, and will not deregister its common stock for a period of at least three years following the conversion. As a result of registration, the proxy and tender offer rules, insider trading reporting and restrictions, annual and periodic reporting and other requirements of that statute will apply.

Legal and Tax Opinions

The legality of the common stock has been passed upon for us by Muldoon Murphy & Faucette LLP, Washington, D.C. The federal tax consequences of the conversion have been opined upon by Muldoon Murphy & Faucette LLP and the state tax consequences of the conversion have been opined upon by Craine, Thompson & Jones, P.C., Morristown, Tennessee. Muldoon Murphy & Faucette LLP and Craine, Thompson & Jones, P.C. have consented to the references to their opinions in this prospectus. Certain legal matters will be passed upon for Keefe, Bruyette & Woods by Silver, Freedman & Taff, L.L.P.

Experts

The financial statements of Jefferson Federal as of June 30, 2002, and for the three years then ended are included in this prospectus and in the registration statement in reliance upon the report of Craine, Thompson & Jones, P.C., Morristown, Tennessee, independent certified public accountants, included elsewhere in this prospectus, and upon the authority of said firm as experts in accounting and auditing.

RP Financial, LC. has consented to the summary in this prospectus of its report to Jefferson Federal setting forth its opinion as to the estimated pro forma market value of Jefferson Bancshares and Jefferson Federal, as converted, and to the use of its name and statements with respect to it appearing in this prospectus.

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Where You Can Find More Information

Jefferson Bancshares has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, that registers the common stock offered in the conversion, including the shares to be issued in exchange for shares of Jefferson Federal common stock and the shares that are to be contributed to the Jefferson Federal Charitable Foundation. The registration statement, including the exhibits, contains additional relevant information about Jefferson Bancshares and Jefferson Bancshares common stock. The rules and regulations of the SEC allow us to omit certain information included in the registration statement from this prospectus. You may read and copy the registration statement at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the SEC’s public reference rooms. The registration statement also is available to the public from commercial document retrieval services and at the Internet World Wide Website maintained by the SEC at “http://www.sec.gov.”

Jefferson Bancshares, M.H.C. has filed an application for approval of conversion with the Office of Thrift Supervision, which includes proxy materials for Jefferson Federal’s special meeting of stockholders, proxy materials for Jefferson Bancshares, M.H.C.’s special meeting of members and certain other information. This prospectus omits certain information contained in that application. The application may be inspected, without charge, at the offices of the Office of Thrift Supervision, 1700 G Street, NW, Washington, D.C. 20552 and at the offices of the Regional Director of the Office of Thrift Supervision at the Midwest Regional Office of the Office of Thrift Supervision, 225 East John Carpenter Freeway, Suite 500, Irving, Texas 75062-2326.

A copy of the plan of conversion and Jefferson Bancshares’ charter and bylaws are available without charge from Jefferson Federal.

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Index to Financial Statements

Jefferson Federal Savings and Loan Association of Morristown

	Page
Report of Independent Auditors	F-1
Balance Sheets as of December 31, 2002 (unaudited), June 30, 2002 and 2001	F-2
Statements of Earnings for the Six Months Ended December 31, 2002 and 2001 (unaudited) and the Years Ended June 30, 2002, 2001 and 2000	F-3
Statements of Changes in Stockholders’ Equity for the Six Months Ended December 31, 2002 (unaudited) and the Years Ended June 30, 2002 and 2000	F-4
Statements of Cash Flows for the Six Months Ended December 31, 2002 and 2001 (unaudited) and the Years Ended June 30, 2002, 2001 and 2000	F-6
Notes to Financial Statements	F-7

* * *

All schedules are omitted as the required information either is not applicable or is included in the financial statements or related notes.

Separate financial statements for Jefferson Bancshares have not been included in this prospectus because Jefferson Bancshares, which has engaged only in organizational activities to date, has no significant assets, contingent or other liabilities, revenues or expenses.

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CRAINE, THOMPSON, & JONES, P.C.

CERTIFIED PUBLIC ACCOUNTANTS

225 WEST FIRST NORTH STREET

P.O. BOX 1779

SUITE 300, MILLENNIUM SQUARE

MORRISTOWN, TENNESSEE 37816-1779

423-586-7650

REPORT OF INDEPENDENT AUDITORS

Board of Directors

Jefferson Federal Savings and Loan Association of Morristown

Morristown, Tennessee

We have audited the accompanying balance sheets of Jefferson Federal Savings and Loan Association of Morristown as of June 30, 2002 and 2001, and the related statements of earnings, changes in stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Association’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jefferson Federal Savings and Loan Association of Morristown as of June 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

Morristown, Tennessee

September 18, 2002

JAMES W. CRAINE, CPA GLENN B. THOMPSON, CPA, CFP, PFS MIRA J. CRAINE, CPA THOMAS M. JONES, CPA HIRAM H JONES, CPA

F-1

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Balance Sheets

(Dollars in Thousands)

	December 31, 2002		June 30,
			2002	2001
	(Unaudited)
Assets
Cash and cash equivalents	$	2,310	2,412	1,565
Interest-bearing deposits		13,397	4,571	7,340
Investment securities classified as available for sale, net		47,955	60,215	54,151
Federal Home Loan Bank stock		1,489	1,455	1,379
Loans receivable, net		186,351	190,032	181,191
Premises and equipment, net		4,230	4,200	3,978
Foreclosed real estate, net		1,775	978	1,070
Accrued interest receivable:
Investments		399	505	654
Loans receivable, net		1,583	1,611	1,605
Deferred tax asset		379	616	691
Other assets		575	745	840
Total assets	$	260,443	267,340	254,464
Liabilities and Stockholders’ Equity
Deposits	$	223,038	231,849	222,061
Federal Home Loan Bank advances		2,000	2,000	2,000
Other liabilities		465	516	458
Accrued income taxes		—	74	53
Total liabilities		225,503	234,439	224,572
Commitments and contingent liabilities		—	—	—
Stockholders’ equity:
Preferred stock, $1.00 par value; 10,000,000 shares authorized; shares issued and outstanding—none		—	—	—
Common stock, $1.00 par value; 20,000,000 shares authorized; 1,875,500 shares issued and outstanding		1,876	1,876	1,864
Additional paid-in capital		1,167	1,167	982
Unearned compensation		—	—	(24	)
Accumulated other comprehensive income		906	537	(49	)
Retained earnings		30,991	29,321	27,119
Total stockholders’ equity		34,940	32,901	29,892
Total liabilities and stockholders’ equity	$	260,443	267,340	254,464

See accompanying notes to financial statements.

F-2

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Statements of Earnings

(Dollars in Thousands Except Per Share Amounts)

	Six Months Ended December 31,				Years Ended June 30,
	2002		2001		2002		2001		2000
	(Unaudited)
Interest income:
Interest on loans receivable	$	7,595	8,080		15,988		15,879		14,629
Interest on investment securities		1,253	1,668		3,224		3,198		2,820
Other interest		96	147		168		177		197
Total interest income		8,944	9,895		19,380		19,254		17,646
Interest expense:
Deposits		3,526	5,895		10,165		11,567		9,872
Advances from FHLB		50	51		102		173		186
Total interest expense		3,576	5,946		10,267		11,740		10,058
Net interest income		5,368	3,949		9,113		7,514		7,588
Provision for loan losses		547	480		1,221		960		1,270
Net interest income after provision for loan losses		4,821	3,469		7,892		6,554		6,318
Noninterest income:
Service charges and fees		338	331		669		658		707
Gain on sale of securities, net		81	16		141		11		—
Gain on sale of fixed assets		—	—		—		—		9
Gain (loss) on sale of foreclosed real estate, net		40	(32	)	45		33		325
Other		60	76		166		208		181
Total noninterest income		519	391		1,021		910		1,222
Noninterest expense:
Compensation and benefits		1,177	1,067		2,351		1,769		1,575
Occupancy expense		135	112		244		219		225
Equipment and data processing expenses		417	410		832		778		788
SAIF deposit insurance premium		20	20		41		40		76
Advertising		79	70		130		107		89
REO expense		147	101		285		69		77
Other		559	586		1,186		1,011		902
Total noninterest expense		2,534	2,366		5,069		3,993		3,732
Earnings before income taxes		2,806	1,494		3,844		3,471		3,808
Income taxes (benefits):
Current		1,042	611		1,702		1,401		1,410
Deferred		12	(32	)	(284	)	(118	)	15
Total income taxes		1,054	579		1,418		1,283		1,425
Net earnings	$	1,752	915		2,426		2,188		2,383
Net earnings per common share—basic	$	0.93	0.49		1.30		1.17		1.28
Net earnings per common share—diluted	$	0.93	0.49		1.29		1.17		1.28

See accompanying notes to financial statements

F-3

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Statement of Changes in Stockholders’ Equity

(Dollars in Thousands)

	Common Stock		Additional Paid-in Capital			Unearned Comprehensive			Accumulated Other Comprehensive Income			Retained Earnings			Total Stockholders’ Equity
Balance at June 30, 1999	$	1,863	$	968		$	(95	)	$	(518	)	$	22,987		$	25,205
Comprehensive income:
Net earnings		—		—			—			—			2,383			2,383
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $300		—		—			—			(488	)		—			(488	)
Total comprehensive income		—		—			—			—			—			1,895
Dividends		—		—			—			—			(219	)		(219	)
Earned portion of MRP		—		—			38			—			—			38
Tax benefit from vesting of MRP shares		—		2			—			—			—			2
Tax benefit from exercise of nonqualified stock options		—		1			—			—			—			1
Stock options exercised		1		13			—			—			—			14
Balance at June 30, 2000		1,864		984			(57	)		(1,006	)		25,151			26,936
Comprehensive income:
Net earnings		—		—			—			—			2,188			2,188
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $585		—		—			—			957			—			957
Total comprehensive income		—		—			—			—			—			3,145
Dividends		—		—			—			—			(220	)		(220	)
Earned portion of MRP		—		—			33			—			—			33
Tax benefit from vesting of MRP shares		—		(2	)		—			—			—			(2	)
Tax benefit from exercise of nonqualified stock options		—		—			—			—			—			—
Stock options exercised		—		—			—			—			—			—
Balance at June 30, 2001		1,864		982			(24	)		(49	)		27,119			29,892

(Continued)

F-4

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Statements of Changes in Stockholders’ Equity

(Dollars in Thousands)

(Continued)

	Common Stock		Additional Paid-in Capital	Unearned Comprehensive		Accumulated Other Comprehensive Income		Retained Earnings		Total Stockholders’ Equity
Balance at June 30, 2001	$	1,864	982	(24	)	(49	)	27,119		29,892
Comprehensive income:
Net earnings		—	—	—		—		2,426		2,426
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $358		—	—	—		586		—		586
Total comprehensive income		—	—	—		—		—		3,012
Dividends		—	—	—		—		(224	)	(224	)
Award of MRP shares		1	11	—		—		—		12
Earned portion of MRP		—	—	24		—		—		24
Tax benefit from vesting of MRP shares		—	10	—		—		—		10
Tax benefit from exercise of nonqualified stock options		—	2	—		—		—		2
Stock options exercised		11	162	—		—		—		173
Balance at June 30, 2002		1,876	1,167	—		537		29,321		32,901
(Unaudited)
Comprehensive income:
Net earnings		—	—	—		—		1,752		1,752
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $225		—	—	—		369		—		369
Total comprehensive income		—	—	—		—		—		2,121
Dividends		—	—	—		—		(82	)	(82	)
Balance at December 31, 2002	$	1,876	1,167	—		906		30,991		34,940

See accompanying notes to financial statements.

F-5

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Statements of Cash Flows

(Dollars in Thousands)

	Six Months Ended December 31,
						Years Ended June 30,
	2002			2001		2002		2001		2000
	(Unaudited)
Cash flows from operating activities:
Net earnings	$	1,752		915		2,426		2,188		2,383
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation and amortization expense		147		133		289		274		339
Amortization of premiums (discounts), net investment securities		77		41		106		50		21
Provision for loan losses		547		480		1,221		960		1,270
Gain on sale of premises and equipment		—		—		—		—		(9	)
Gain (loss) on sale of investment securities, net		(81	)	(16	)	(141	)	(11	)	—
FHLB stock dividends		(34	)	(43	)	(76	)	(97	)	(88	)
Amortization of deferred loan fees, net		(79	)	(76	)	(138	)	(127	)	(94	)
Loss (gain) on foreclosed real estate, net		(40	)	32		(45	)	(32	)	(325	)
Earned portion of MRP		—		16		24		33		38
Tax benefits from stock options and MRP		—		—		(12	)	(2	)	(4	)
Decrease (increase) in:
Accrued interest receivable		134		(250	)	143		(195	)	(436	)
Other assets		170		28		95		86		212
Deferred tax asset		237		308		75		467		(283	)
Increase (decrease) in other liabilities		(166	)	(111	)	79		(89	)	(15	)
Net cash provided by (used for) operating activities		2,664		1,457		4,046		3,505		3,009
Cash flows from investing activities:
Loan originations, net of principal collections		2,021		(9,119	)	(9,668	)	(13,355	)	(4,980	)
Purchase of available-for-sale securities		—		(24,033	)	(44,977	)	(40,972	)	(11,214	)
Proceeds from sale of available-for-sale securities		3,725		7,347		22,013		4,011		—
Proceeds from maturities, calls, and prepayments		9,133		9,885		17,380		30,868		2,756
Proceeds from sale of premises and equipment		—		—		—		—		97
Purchase of premises and equipment		(177	)	(447	)	(511	)	(71	)	(285	)
Proceeds from sale of (additions to) foreclosed real estate, net		316		93		34		199		2,327
Net cash provided by (used for) investing activities		15,018		(16,274	)	(15,729	)	(19,320	)	(11,299	)
Cash flows from financing activities:
Net increase (decrease) in deposits		(8,811	)	9,506		9,308		22,920		4,802
Repayment of FHLB advances		—		(1,500	)	(4,000	)	(13,000	)	(14,500	)
Proceeds from advances from FHLB		—		1,500		4,000		11,000		18,500
Proceeds from exercise of stock options		—		3		173		—		14
Dividends paid		(147	)	(141	)	(220	)	(219	)	(219	)
Net cash provided by (used for) financing activities		(8,958	)	9,368		9,261		20,701		8,597
Net increase (decrease) in cash and cash equivalents, and interest-bearing deposits		8,724		(5,449	)	(2,422	)	4,886		307
Cash, cash equivalents, and interest-bearing deposits at beginning of period		6,983		8,905		9,405		4,519		4,212
Cash and cash equivalents at end of year	$	15,707		3,456		6,983		9,405		4,519
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and advances	$	3,576		5,946		10,285		11,740		10,057
Income taxes	$	1,259		845		1,615		1,314		1,528
Real estate acquired in settlement of loans	$	1,510		1,455		2,418		2,464		2,904

See accompanying notes to financial statements.

F-6

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

June 30, 2002, 2001 and 2000 and Six Months Ended December 31, 2002 and 2001

(Information as of December 31, 2002 and for the Six Months Ended

December 31, 2002 and 2001 is Unaudited)

(Dollars in Thousands)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

On May 13, 1994, the Association completed a reorganization from a mutual savings and loan association into a Federal mutual holding company, Jefferson Bancshares, M.H.C. (Company). The Association is a subsidiary of the Company. The Company engages in no business activity other than its ownership of 1,550,000 shares, or 82.64% of the Association’s common stock. The Association is a financial institution providing banking related services to customers in the Upper East Tennessee Area.

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

Significant Group Concentrations of Credit Risk—The Association originates residential real estate loans and, to a lesser extent, commercial real estate and consumer loans primarily to customers located in Upper East Tennessee. The ability of the Association’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

The following comprise the significant accounting policies, which the Association follows in preparing and presenting its financial statements:

a. For purposes of reporting cash flows, cash and cash equivalents include cash and due from depository institutions and interest-bearing deposits in other depository institutions with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $13,397, $4,571, and $7,340 at December 31, 2002, and June 30, 2002 and 2001, respectively.

b. Investments in debt securities are classified as “held-to-maturity” or “available-for-sale” according to the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Standard (SFAS) No. 115. Investments classified as “held-to-maturity” are carried at cost while those identified as “available-for-sale” are carried at fair value. All securities are adjusted for amortization of premiums and accretion of discounts over the term of the security using the interest method. Management has the positive intent and ability to carry those securities classified as “held-to-maturity” to maturity for long-term investment purposes and, accordingly, such securities are not adjusted for temporary declines in market value. “Available-for-sale” securities are adjusted for changes in fair value through a direct entry to a separate component of stockholders’ equity (i.e. other comprehensive income). Investments in equity securities, consisting of capital stock of the Federal Home Loan Bank, are carried at the lower of cost or market. The cost of securities sold is determined by specific identification.

c. Loans receivable, net, that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, are generally carried at unpaid principal balances less loans in process, net deferred loan fees, unearned discount on loans and allowance for losses. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized to interest income over the contractual life of the loan using the interest method.

F-7

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

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

d. Allowances for losses are available to absorb losses incurred on loans receivable and represent additions charged to expense, less net charge-offs. The allowances are based on management’s assessment of current economic conditions, past loss and collection experience and risk characteristics of the loan portfolio. Management believes that allowances for losses on loans are adequate. The Association is subject to periodic examination by regulatory agencies, which may require the Association to record increases in the allowances based on their evaluation of available information. There can be no assurance that the Association’s regulators will not require further increases to the allowances.

Specific valuation allowances are established for impaired loans for the difference between the loan amount and the fair value of collateral less estimated selling costs. The Association considers a loan to be impaired when, based on current information and events, it is probable that the Association will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. The type of loans for which impairment is measured include non-accrual income property loans (excluding those loans included in the homogeneous portfolio which are collectively reviewed for impairment), large non-accrual single-family loans and troubled debt restructuring. Such loans are placed on non-accrual status at the point deemed uncollectible. Impairment losses are recognized through an increase in the allowance for loan losses.

e. Credit related financial instruments arising in the ordinary course of business consists primarily of commitments to extend credit.

f. Premises and equipment are carried at cost, less accumulated depreciation. Depreciation of premises and equipment is computed using the straight-line and accelerated methods based on the estimated useful lives of the related assets. Estimated lives are five to forty years for building and improvements, and three to ten years for furniture and equipment.

g. Foreclosed real estate is initially recorded, and subsequently carried, at the lower of cost or fair value less estimated selling costs. Costs related to improvement of foreclosed real estate are capitalized.

h. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

i. Effective April 1, 1997, the grant date, the Association adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock Based Compensation”. SFAS No. 123 requires that compensation cost for stock-based employee compensation plans be measured at the grant date based on the fair value of the award and recognized over the service period, which is usually the vesting period. However, SFAS No. 123 also allows an institution to use the intrinsic value based method under Accounting Principles Board (APB) Opinion No. 25. The Association has adopted the disclosure requirements under SFAS No. 123, but has continued to recognize compensation expense for stock based employee compensation plans under APB Opinion No. 25 (See Note 11).

j. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

F-8

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

Cash and due from banks and interest-bearing deposits with banks - For cash and related instruments, the carrying amount is a reasonable estimate of fair value.

Available-for-sale and held-to-maturity securities - Fair values for securities, excluding restricted equity securities, are based on quoted market prices. The carrying values of restricted equity securities approximate fair value.

Loans receivable - The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Accrued interest receivable - The carrying amount is a reasonable estimate of fair value for accrued interest receivable.

Deposit liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Short-term borrowings - The carrying amount of short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analysis based on the Association’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance-sheet instruments - Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter-parties’ credit standings.

k. The Association adopted SFAS No. 130, “Reporting Comprehensive Income,” as of July 1, 1998. Accordingly, the separate components of comprehensive income have been identified in the Statements of Changes In Stockholders’ Equity. The Association’s only component is unrealized gains and losses on securities.

l. The financial statements as of December 31, 2002 and for the six months ended December 31, 2002 and 2001, are unaudited. In the opinion of management, such statements reflect all adjustments, consisting only of normal recurring items necessary for fair presentation.

NOTE 2 – EARNINGS PER SHARE

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

	Weighted-Average Shares Outstanding For The Six Months Ended December 31,		Weighted-Average Shares Outstanding For The Years Ended
Shares used for	2002	2001	2002	2001	2000
Earnings per common share	1,875,500	1,863,900	1,865,011	1,863,700	1,863,058
Earnings per common share—assuming dilution	1,882,712	1,867,828	1,876,020	1,863,700	1,866,400

F-9

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 3 – IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Goodwill and Other Intangible Assets—In June 2001, the FASB issued SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets.” This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. Primarily, SFAS 142 stipulates that goodwill and intangible assets having indefinite useful lives will no longer be amortized but rather will be tested at least annually for impairment. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. The Association does not have any intangible assets affected by this pronouncement.

NOTE 4 – INVESTMENT SECURITIES ARE SUMMARIZED AS FOLLOWS:

	December 31, 2002
Securities Available-for-Sale	Amortized Cost			Unrealized Gains		Unrealized Losses		Fair Value
Debt securities:
Federal agency	$	22,843		$	908	$	—	$	23,751
Mortgage-backed		23,652			552		—		24,204
Total securities available-for-sale	$	46,495		$	1,460	$	—	$	47,955
Weighted-average rate		4.91	%
Federal Home Loan Bank of Cincinnati stock	$	1,489		$	—	$	—	$	1,489
Weighted-average rate		4.50	%
	June 30, 2002
Securities Available-for-Sale	Amortized Cost			Unrealized Gains		Unrealized Losses		Fair Value
Debt securities:
Federal agency	$	27,933		$	531	$	—	$	28,464
Mortgage-backed		31,416			349		14		31,751
Total securities available-for-sale	$	59,349		$	880	$	14	$	60,215
Weighted-average rate		5.17	%
Federal Home Loan Bank of Cincinnati stock	$	1,455		$	—	$	—	$	1,455
Weighted-average rate		4.75	%
	June 30, 2001
Securities Available-for-Sale	Amortized Cost			Unrealized Gains		Unrealized Losses		Fair Value
Debt securities:
Federal agency	$	32,979		$	—	$	25	$	32,954
Mortgage-backed		21,251			—		54		21,197
Total securities available-for-sale	$	54,230		$	—	$	79	$	54,151
Weighted-average rate		6.34	%
Federal Home Loan Bank of Cincinnati stock	$	1,379		$	—	$	—	$	1,379
Weighted-average rate		7.25	%

F-10

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 4 – INVESTMENT SECURITIES (CONTINUED)

Investment securities in the amount of $2,725, $2,725, and $2,025, were pledged to secure public funds and/or advances from the Federal Home Loan Bank at December 31, 2002, and June 30, 2002 and 2001, respectively.

Maturities of debt securities at December 31, 2002, are summarized as follows:

	Available-for-Sale Classification
	Amortized Cost		Fair Value
Within 1 year	$	—	$	—
Over 1 year through 5 years		17,343		18,083
After 5 years through 10 years		5,500		5,668
		22,843		23,751
Mortgage backed securities		23,652		24,204
	$	46,495	$	47,955

Proceeds from sale of debt securities and gross realized gains and losses on these sales are summarize as follows:

	Six Months Ended December 31,					Year Ended June 30,
	2002		2001			2002			2001			2000
Proceeds from sales	$	3,725	$	7,347		$	22,013		$	4,011		$	—
Gross realized gains	$	81	$	26		$	151		$	16		$	—
Gross realized losses		—		(10	)		(10	)		(5	)		—
Net gains (losses)	$	81	$	16		$	141		$	11		$	—

F-11

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 5 – LOANS RECEIVABLE, NET

Loans receivable, net are summarized as follows:

	December 31, 2002			June 30,
				2002			2001
Real estate loans:
Residential 1-4 family	$	90,975		$	94,595		$	97,270
Home equity lines of credit		799			253			—
Multi-family		12,558			13,163			8,670
Construction		8,509			11,226			8,854
Commercial		44,107			46,672			41,145
Land		16,576			13,011			12,750
		173,524			178,920			168,689
Commercial business loans		9,956			7,759			6,055
Non-real estate loans:
Automobile loans		3,468			4,243			6,012
Mobile home loans		806			954			1,384
Loans secured by deposits		2,237			2,787			3,818
Other consumer loans		1,986			2,249			2,273
Total consumer loans		8,497			10,233			13,487
Sub-total		191,977			196,912			188,231
Less:
Loans in process		(2,532	)		(3,761	)		(4,330	)
Deferred loan fees, net		(389	)		(387	)		(335	)
Unearned discount on loans		(15	)		(36	)		(166	)
Allowance for losses		(2,690	)		(2,696	)		(2,209	)
Loans, net	$	186,351		$	190,032		$	181,191
Weighted-average rate		7.79	%		8.11	%		8.76	%

Impairment of loans having recorded investments of $147, $114, and $52, at December 31, 2002, and June 30, 2002 and 2001, respectively, has been recognized in conformity with FASB Statement No. 114, as amended by FASB Statement No, 118. The total allowance for loan losses related to these loans was $35, $17, and $16, for December 31, 2002, and June 30, 2002 and 2001, respectively. Other nonaccrual loans at December 31, 2002, and June 30, 2002 and 2001, were approximately $2.4 million, $2.1 million, and $2.8 million, respectively. For the six months ended December 31, 2002 and 2001, and for the years ended June 30, 2002, 2001 and 2000, gross income which would have been recognized had impaired and nonaccrual loans been current in accordance with their original terms amounted to approximately $70, $126, $160, $152, and $356, respectively. The amount of interest income from impaired loans included in the Association’s net income for the six months ended December 31, 2002 and 2001, and for the years ended June 30, 2002, 2001 and 2000, and was approximately $39, $52, $86, $8, and $171, respectively.

F-12

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 5 – LOANS RECEIVABLE, NET (CONTINUED)

Commercial real estate loans are secured principally by office buildings, shopping centers, churches and a hotel. Real estate construction loans are secured principally by single-family dwellings.

Following is a summary of activity in allowance for losses:

	Six Months Ended December 31,						Years Ended June 30,
	2002			2001			2002			2001			2000
Balance, Beginning of period	$	2,696		$	2,209		$	2,209		$	2,030		$	1,981
Loans charged-off		(831	)		(810	)		(1,416	)		(1,387	)		(1,977	)
Recoveries		278			373			682			606			756
Provision charged to expense		547			480			1,221			960			1,270
Balance, end of period	$	2,690		$	2,252		$	2,696		$	2,209		$	2,030

Following is a summary of loans to directors, executive officers and associates of such persons:

Balance, June 30, 2001	$744
Additions	312
Repayment	(272	)
Balance, June 30, 2002	784
Additions	155
Repayment	(46	)
Balance, December 31, 2002	$893

These loans were made on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons.

NOTE 6 – MORTGAGE SERVICING

Mortgage loans serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of mortgage loans serviced for others were $12, $18, $40, and $77, at December 31, 2002, and June 30, 2002, 2001 and 2000, respectively.

Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $-0-, $-0-, ($1), and ($1), at December 31, 2002, and June 30, 2002, 2001, and 2000, respectively.

F-13

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 7 – PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:

	December 31, 2002		June 30,
			2002		2001
Land	$	646	$	521	$	509
Office building		3,723		3,706		3,431
Leasehold improvements		74		74		70
Furniture and equipment		1,771		1,736		1,513
		6,214		6,037		5,523
Less accumulated depreciation and amortization		1,984		1,837		1,545
	$	4,230	$	4,200	$	3,978

Depreciation and amortization expenses for the six months ended December 31, 2002 and 2001, was $148 and $133, respectively, and for the years ended June 30, 2002, 2001 and 2000, was $289, $274 and $339, respectively.

NOTE 8 – DEPOSITS

Deposits are summarized as follows:

	December 31, 2002			June 30,
Description and Interest Rate				2002			2001
Noninterest-bearing NOW accounts	$	4,870		$	4,809		$	3,955
NOW accounts, 1.00%, 1.50%, and 0.75%, respectively		13,851			13,358			10,917
Passbook accounts, 1.51%, 3.00%, and 0.75%, respectively		13,484			14,375			12,000
Money market deposit accounts, 2.00%, 3.25%, and 1.42%, respectively		22,855			16,569			7,792
Total transactions accounts		55,060			49,111			34,664
Certificates:
1.00—2.00%		25,880			—			—
2.01—3.00%		71,123			59,947			—
3.01—4.00%		28,954			62,599			866
4.01—5.00%		24,772			31,452			38,381
5.01—6.00%		5,556			10,091			62,490
6.01—7.00%		11,693			18,649			85,660
Total certificates, 3.75% and 5.90%, respectively		167,978			182,738			187,397
Total deposits	$	223,038		$	231,849		$	222,061
Weighted-average rate—deposits		2.78	%		3.34	%		5.47	%

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2002 was $38,867, and $43,007 and $32,826, respectively, at June 30, 2002 and 2001.

Deposits are insured up to applicable limits by the Savings Association Insurance Fund, as administrated by the Federal Deposit Insurance Corporation.

F-14

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 8 – DEPOSITS (CONTINUED)

Certificate maturities at December 31, 2002, are summarized as follows:

January 1, 2003 to December 31, 2003	$	105,820
January 1, 2004 and thereafter		62,158
	$	167,978

Jumbo certificates of deposits at December 31, 2002, are summarized by maturity as follows:

January 1, 2003 to December 31, 2003	$	20,117
January 1, 2004 and thereafter		18,750
	$	38,867

Following is a summary of interest on deposits:

	Six Months Ended December 31,				Years Ended June 30,
	2002		2001		2002		2001		2000
NOW	$	68	$	73	$	137	$	204	$	215
Passbook accounts		84		154		262		337		348
Money market deposit accounts		224		113		237		187		235
Certificates		3,152		5,559		9,536		10,852		9,083
		3,528		5,899		10,172		11,580		9,881
Less – early withdrawal penalties		2		4		7		13		9
	$	3,526	$	5,895	$	10,165	$	11,567	$	9,872

NOTE 9 – FHLB ADVANCE

Pursuant to collateral agreements with the Federal Home Loan Bank (“FHLB”), advances are secured by a Blanket Mortgage Collateral Agreement. The Agreement pledges the entire one-to-four family residential mortgage portfolio and allows a maximum advance of $52,455 at December 31, 2002. Outstanding advances were $2,000, $2,000, and $2,000 at December 31, 2002, and June 30, 2002 and 2001, respectively.

NOTE 10 – INCOME TAXES

In computing federal income tax, savings institutions treated as small banks for tax years beginning before 1996, were allowed a statutory bad debt deduction based on specified experience formulas or 8% of otherwise taxable income, subject to limitations based on aggregate loans and savings balances. For tax years after 1996, financial institutions meeting the definition of a small bank can use either the “experience method” or the “specific charge-off method” in computing their bad debt deduction. The Association qualifies as a small bank and is using the experience method. As of June 30, 2002, the end of the most recent tax year, the Association’s tax bad debt reserves were approximately $1,519. If these tax bad debt reserves are used for other than loan losses, the amount used will be subject to federal income taxes at the then prevailing corporate rates. Beginning in the year ended June 30, 1999, the Association must recapture $622 of tax loss reserves over six years (i.e. $104 per year).

F-15

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 10 – INCOME TAXES (CONTINUED)

Income taxes are summarized as follows:

	Six Months Ended December 31,					Years Ended June 30,
	2002		2001			2002			2001			2000
Current taxes:
Federal income	$	921	$	539		$	1,509		$	1,237		$	1,230
State excise		121		72			193			164			180
		1,042		611			1,702			1,401			1,410
Deferred taxes
Federal income		11		(30	)		(270	)		(109	)		10
State excise		1		(2	)		(14	)		(9	)		5
		12		(32	)		(284	)		(118	)		15
	$	1,054	$	579		$	1,418		$	1,283		$	1,425

The provisions of SFAS No. 109 require the Association to establish a deferred tax liability for the tax effect of the tax bad debt reserves over the base year amounts. The recorded deferred tax liability for the excess reserves were $53, $70, and $106 at December 31, 2002, and June 30, 2002 and 2001, respectively. The Association’s base year tax bad debt reserve is $1,312. The estimated deferred tax liability on the base year amount is approximately $498, which has not been recorded in the accompanying financial statements.

The provision for income taxes differs from the federal statutory corporate rate as follows:

	Percentage of Earnings Before Income Taxes
	Six Months Ended December 31,				Years Ended June 30,
	2002		2001		2002		2001		2000
Tax at statutory rate	34.0	%	34.0	%	34.0	%	34.0	%	34.0	%
Increase (decrease) in taxes:
State income taxes, net of federal tax benefit	2.9		3.2		3.3		3.1		3.1
Other, net	0.7		1.6		(0.4	)	(0.1	)	(0.3	)
Effective tax rate	37.6	%	38.8	%	36.9	%	37.0	%	37.4	%

F-16

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 10 – INCOME TAXES (CONTINUED)

The components of the net deferred tax asset are summarized as follows:

	December 31,			June 30,
	2002			2002			2001
Deferred tax liabilities:
FHLB stock dividends	$	(365	)	$	(352	)	$	(323	)
Allowance for “available-for-sale” securities		(554	)		(329	)		—
		(919	)		(681	)		(323	)
Deferred tax assets:
Deferred loan fees, net		148			147			127
Accrued sick pay		43			43			34
Deferred compensation		5			4			—
Management Recognition Plan compensation		—			—			3
Allowance for losses on loans		1,008			1,017			798
Allowance for “available-for-sale” securities		—			—			30
REO writedowns		31			23			—
Unearned profit on sale of REO		63			63			22
Gross deferred tax assets		1,298			1,297			1,014
Valuation allowance		—			—			—
Deferred tax asset		1,298			1,297			1,014
Net deferred tax asset	$	379		$	616		$	691

NOTE 11 – EMPLOYEE BENEFIT PLANS

401 (K) RETIREMENT PLAN.    The Association has a defined contribution pension plan covering all employees having attained the age of twenty and a half and completing six months of service. Normal retirement date is the participant’s sixty-fifth birthday.

The plan is funded by annual employer contributions of 10% of the total plan compensation of all participants in the plan. The amount contributed by the employer is divided among the participants in the same proportion that each participant’s compensation bears to the aggregate compensation of all participants. Employer contributions vest to employees over a seven-year period. Employees are permitted to make contributions of up to 5% of their compensation. Total pension plan expense for the six months ended December 31, 2002 and 2001 was $102 and $86, respectively, and for the years ended June 30, 2002, 2001 and 2000, was $192, $164 and $148, respectively.

STOCK INCENTIVE PLANS.    As of April 1, 1997, the Association implemented both a Management Recognition and Development Plan (MRP) and a Stock Option Plan. Under the plans, certain employees and directors of the Association are eligible to receive restricted stock grants or options. A maximum of 42,000 shares of the Association’s Common Stock may be issued through the exercise of nonstatutory or incentive stock options and as restricted stock awards.

Restricted stock grants aggregating 11,500 shares were awarded on April 1, 1997, having a fair value of $172 thousand. Restrictions on the grants lapse in annual increments over five years. The market value as of the grant date of the restricted stock grants is charged to expense as the restrictions lapse. Compensation expense for grants vesting in 2002, 2001 and 2000, was $24, $33 and $38, respectively. The grants were fully vested as of June 30, 2002.

F-17

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 11 – EMPLOYEE BENEFIT PLANS (CONTINUED)

Under the Stock Option Plan, the option price is the fair value of the Association’s shares at the date of grant. The 24,000 options granted on April 1, 1997, become exercisable in installments of 20% each year beginning one year from date of grant. On March 28, 2002, the Board of Directors awarded the remaining 6,000 shares under the stock option plan and the remaining 500 shares under the MRP to certain officers, directors, and employees. The Association has estimated the fair value of its stock option plan as required under SFAS 123 utilizing the Black-Scholes option-pricing model. The pro-forma effect on compensation expense for the six months ended December 31, 2002 and 2001, and the years ended June 30, 2002, 2001 and 2000, was considered immaterial and therefore has not been disclosed. There were no options exercised during the six months ended December 31, 2002. Eleven thousand three hundred options were exercised during the year ended June 30, 2002, leaving 16,500 options outstanding of which 16,500 are exercisable currently.

NOTE 12 – MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Association is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Association’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the Association to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and core and tangible capital (as defined) to tangible assets (as defined). Management believes as of December 31, 2002, and June 30, 2002 and 2001, that the Association met all capital adequacy requirements to which it is subject.

As of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Association as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Association’s category. The Association’s actual capital amounts and ratios as of December 31, 2002, and June 30, 2002 and 2001 are also presented in the table.

OTS regulations permit a mutual holding company to waive receipt of dividends from its subsidiary savings association with the prior approval of the OTS. The OTS approved a request by the MHC to waive the receipt of dividends from the Association during the fiscal year 2002.

F-18

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 12 – MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

The following table presents the Association’s capital position relative to its regulatory capital requirements as of December 31, 2002 and June 30, 2002 and 2001:

	Actual				Minimum Capital Requirements						Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio			Amount			Ratio
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)		35,649	22.4	%		12,743		³	8.0	%		15,928		³	10	%
Core Capital (to Tangible Assets)		33,650	13.0	%		10,347		³	4.0	%		12,934		³	5	%
Tangible Capital (to Tangible Assets)		33,650	13.0	%		3,880		³	1.5	%			N/A
Tier 1 Capital (to Risk Weighted Assets)		33,650	13.0	%			N/A					9,557		³	6	%
As of June 30, 2002:
Total capital (to Risk Weighted Assets)	$	33,844	21.1	%	$	12,835		³	8.0	%	$	16,044		³	10	%
Core Capital (to Tangible Assets)		31,830	12.0	%		10,638		³	4.0	%		13,298		³	5	%
Tangible Capital (to Tangible Assets)		31,830	12.0	%		3,989		³	1.5	%			N/A
Tier 1 Capital (to Risk Weighted Assets)		31,830	19.8	%			N/A					9,626		³	6	%
As of June 30, 2001:
Total Capital (to Risk Weighted Assets)		31,204	20.2	%		12,337		³	8.0	%		15,422		³	10	%
Core Capital (to Tangible Assets)		29,273	11.5	%		10,155		³	4.0	%		12,694		³	5	%
Tangible Capital (to Tangible Assets)		29,273	11.5	%		3,808		³	1.5	%			N/A
Tier 1 Capital (to Risk Weighted Assets)		29,273	19.0	%			N/A					9,253		³	6	%

F-19

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 13 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

The estimated fair value of the Association’s financial instruments are as follows:

	December 31, 2002						June 30, 2002						June 30, 2001
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and due from banks and interest–bearing deposits with banks	$	15,707		$	15,707		$	6,983		$	6,983		$	8,905		$	8,905
Available-for-sale and held-to maturity securities		49,444			49,444			61,670			61,670			55,530			55,530
Loans receivable		186,351			186,601			190,032			190,054			181,191			181,293
Accrued interest receivable		1,982			1,982			2,117			2,117			2,259			2,259
Financial liabilities:
Deposits		(223,038	)		(222,030	)		(231,849	)		(230,002	)		(222,061	)		(223,951	)
FHLB Advance		(2,000	)		(2,235	)		(2,000	)		(2,104	)		(2,000	)		(2,000	)
Off-balance-sheet assets (liabilities):
Commitments to extend credit		—			(1,892	)		—			(5,000	)		—			(11,170	)
Letters of credit		—			(90	)		—			(55	)		—			(179	)
Unused lines of credit		—			(1,757	)		—			(2,869	)		—			(925	)

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Commitments to originate mortgage loans are legally binding agreements to lend to the Association’s customers and generally expire in ninety days or less. Commitments at December 31, 2002 to originate adjustable-rate loans were approximately $1.7 million. Commitments at December 31, 2002 to originate fixed-rate loans were approximately $166 with a term of fifteen years or less and interest rates of 6.50% to 8.50%.

The Association has entered into an employment agreement with its President and Chief Executive Officer Anderson L. Smith. The agreement stipulates the terms, duties and compensation and provides remedies for both parties upon certain events occurring. Furthermore, the agreement provides for a performance bonus and deferred compensation upon CEO Smith attaining age 65.

The Association has executed various leases of real property for branch operations. Generally the lease terms provide for monthly payments and expirations beginning in 2002. Lease expense was $7 and $7 for the six months ended December 31, 2002 and 2001, respectively, and $15, $14 and $22 for the years ended June 30, 2002, 2001 and 2000, respectively.

F-20

JEFFERSON FEDERAL SAVINGS AND LOAN ASSOCIATION OF MORRISTOWN

Notes to Financial Statements

(Dollars in Thousands)

NOTE 15 – RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Association obtains products and services from directors or affiliates thereof. In the opinion of management, such transactions are made on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons.

NOTE 16 – SUBSEQUENT EVENTS

On March 3, 2003, the Boards of Directors of the Association and the Company adopted a Plan of Conversion pursuant to which the Association will convert from the mutual holding company form of organization into the stock holding company form of organization. The Plan of Conversion involves the formation of a newly organized Tennessee corporation, Jefferson Bancshares, Inc., to become the holding company for the Association. Pursuant to the Plan of Conversion, Jefferson Bancshares, Inc. will offer for sale shares of its common stock to the Association’s depositors, members of the community, current stockholders of the Company and the Association’s employee stock ownership plan. The Plan of Conversion further provides for the exchange of shares of the Association for shares of Jefferson Bancshares, Inc. The transaction is subject to approval by regulatory authorities and members of the Company and shareholders of the Association.

At the completion of the conversion, the Association will establish a liquidation account in the amount equal to the greater of the Company’s ownership interest in the retained earnings of the Association as of the date of its latest balance sheet contained in the prospectus or the retained earnings of the Association at the time it reorganized into the mutual holding company form in 1994. The liquidation account will be maintained for the benefit of certain account holders who maintain deposit accounts in the Association after conversion. Following completion of the conversion, the Association may not declare, pay a cash dividend on, or repurchase any of its common stock, if the effect thereof would cause retained earnings to be reduced below the amount required for the liquidation account.

The costs of issuing the common stock will be deferred and deducted from the sale proceeds of the offering. If the conversion is unsuccessful, all deferred costs will be charged to operations. Through December 31, 2002 (unaudited), the Association had incurred no costs associated with the offering.

F-21

You should rely only on the information contained in this prospectus. Neither Jefferson Bancshares nor Jefferson Federal Savings and Loan Association has authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered by this prospectus to any person or in any jurisdiction in which an offer or solicitation is not authorized or in which the person making an offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make an offer or solicitation in those jurisdictions. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Jefferson Bancshares common stock.

[LOGO]

(Holding Company for Jefferson Federal Savings and Loan Association of Morristown,

to become Jefferson Federal Bank)

Up to 5,750,000 Shares

(Anticipated Maximum)

COMMON STOCK

Par Value $0.01 per share

PROSPECTUS

KEEFE, BRUYETTE & WOODS, INC.

[date]

These securities are not deposits or accounts and are not federally insured or guaranteed.

Until             , 2003 or 25 days after commencement of the syndicated community offering, if any, whichever is later, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus when acting as underwriters and with respect to their unsold allotments of subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

SEC filing fee (1)	$	6,776
OTS filing fee		8,400
NASD filing fee (1)		8,877
Stock Market listing fee		100,000
EDGAR, printing, postage and mailing		150,000
Legal fees and expenses (including underwriter’s counsel fees)		485,000
Accounting fees and expenses		70,000
Appraiser’s fees and expenses (including business plan)		65,000
Marketing fees and expenses		625,000
Conversion agent fees and expenses		26,500
Transfer agent and registrar fees and expenses		20,000
Certificate printing		5,000
Miscellaneous		29,447
Total	$	1,600,000

⁽¹⁾ Estimated expenses based on the registration of 83,765,730 shares at $10.00 per share.

Item 14. Indemnification of Directors and Officers.

In accordance with the General Corporation Law of the State of Tennessee (being Part 5, Chapter 18 of Title 48 of the Tennessee Code), Articles X and XI of the registrant’s charter provide as follows:

Article X of Jefferson Bancshares’ charter provides that directors of Jefferson Bancshares will not be personally liable to Jefferson Bancshares or its shareholders for monetary damages for breach of duty as a director, except for liability:

(1) for any breach of the director’s duty of loyalty to the Corporation or its shareholders;

(2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; and

(3) for unlawful distributions under Section 48-18-304 of the Tennessee Business Corporation Act.

This provision would absolve directors of personal liability for monetary damages for negligence in the performance of their duties, including gross negligence, and it would not affect the availability of injunctive or other equitable relief as a remedy.

Article XI of Jefferson Bancshares’ charter provides that Jefferson Bancshares shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he or she is or was a director or officer of Jefferson Bancshares, or is or was serving at the request of Jefferson Bancshares as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against all expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by him or her in connection with the action or proceeding if he or she:

(1) acted in good faith;

(2) reasonably believed (A) in the case of conduct in his or her official capacity with Jefferson Bancshares that his or her conduct was in the best interests of Jefferson Bancshares and; (B) in all other cases, that his or her conduct was at least not opposed to Jefferson Bancshares’ best interests; and

(3) in the case of any criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful.

Indemnification shall not be made with respect to an action by or in the right of Jefferson Bancshares as to which the person has been adjudged to be liable to Jefferson Bancshares unless and only to the extent that the proper court determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for the expenses that the court deems proper. The charter of Jefferson Bancshares further provides that to the extent that the representative of Jefferson Bancshares has been successful on the merits or otherwise in defense of any action or proceeding or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys’ fees) reasonably incurred by him in connection therewith. Unless otherwise ordered by a court, any indemnification shall be made by Jefferson Bancshares only as authorized in the specific case upon a determination that indemnification is proper in the circumstance because such person has met the applicable standard of conduct set forth in the Tennessee Business Corporation Act. Expenses (including attorney’s fees) incurred in defending any action or proceeding shall be paid by Jefferson Bancshares in advance of the final disposition of the action or proceeding upon:

(1) delivery to Jefferson Bancshares of an undertaking to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such individual is not entitled to be indemnified for such expenses;

(2) delivery to Jefferson Bancshares of a written affirmation of his or her good faith belief that he or she has met the standard of conduct set forth in the Tennessee Business Corporation Act; and

(3) a determination that the facts would not preclude indemnification.

Item 15. Recent Sales of Unregistered Securities

None.

Item 16. Exhibits and Financial Statement Schedules.

The exhibits and financial statement schedules filed as a part of this registration statement are as follows:

(a) List of Exhibits (filed herewith unless otherwise noted)

1.1	Engagement Letter between Jefferson Federal Savings and Loan Association of Morristown and Keefe, Bruyette & Woods, Inc.
1.2	Draft Form of Agency Agreement*
2.1	Plan of Conversion
3.1	Charter of Jefferson Bancshares, Inc.
3.2	Bylaws of Jefferson Bancshares, Inc.
4.1	Specimen Stock Certificate of Jefferson Bancshares, Inc.
5.1	Form of Opinion of Muldoon Murphy & Faucette LLP re: Legality
8.1	Form of Opinion of Muldoon Murphy & Faucette LLP re: Federal Tax Matters
8.2	Form of Opinion of Craine, Thompson & Jones, P.C. re: State Tax Matters
10.1	Form of Jefferson Federal Bank Employee Stock Ownership Plan and Trust
10.2	Form of ESOP Loan Commitment Letter and ESOP Loan Documents
10.3	Employment Agreement between Anderson L. Smith, Jefferson Bancshares, M.H.C. and Jefferson Federal Savings and Loan Association of Morristown
10.4	Form of Jefferson Federal Savings and Loan Association of Morristown Employee Severance Compensation Plan
10.5	1995 Jefferson Federal Savings and Loan Association of Morristown Stock Option Plan
10.6	1995 Jefferson Federal Savings and Loan Association of Morristown Management Recognition and Development Plan
10.7	Jefferson Federal Savings and Loan Association of Morristown 401(k) Plan*
10.8	Form of Jefferson Federal Bank Supplemental Executive Retirement Plan
21.1	Subsidiaries of the Registrant
23.1	Consent of Muldoon Murphy & Faucette LLP (included in Exhibits 5.1 and 8.1)
23.2	Consent of Craine, Thompson & Jones, P.C.
23.3	Consent of RP Financial, LC.
24.1	Powers of Attorney
99.1	Appraisal Report of RP Financial, LC.**
99.2	Draft of Jefferson Federal Charitable Foundation Gift Instrument
99.3	Marketing Materials
99.4	Subscription Order Form and Instructions

* To be filed by amendment

** Supporting financial schedules filed pursuant to Rule 202 of Regulation S-T.

(b) Financial Statement Schedules

All schedules have been omitted as not applicable or not required under the rules of Regulation S-X.

Item 17. Undertakings.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement;

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Morristown, State of Tennessee, on March 21, 2003.

Jefferson Bancshares, Inc.

By:	/s/     ANDERSON L. SMITH
	Anderson L. Smith President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

Name	Title	Date
/s/    ANDERSON L. SMITH         Anderson L. Smith	President, Chief Executive Officer and Director (principal executive officer)	March 21, 2003
/s/    JANE P. HUTTON         Jane P. Hutton	Treasurer and Secretary (principal accounting and financial officer)	March 21, 2003
/s/    JOHN F. MCCRARY, JR.         John F. McCrary, Jr.	Director	March 21, 2003
/s/    H. SCOTT REAMS         H. Scott Reams	Director	March 21, 2003
/s/    DR. JACK E. CAMPBELL         Dr. Jack E. Campbell	Director	March 21, 2003
/s/    WILLIAM T. HALE         William T. Hale	Director	March 21, 2003
/s/    DR. TERRY M. BRIMER         Dr. Terry M. Brimer	Director	March 21, 2003
/s/    WILLIAM F. YOUNG         William F. Young	Director	March 21, 2003

As filed with the Securities and Exchange Commission on March 21, 2003

Registration No. 333-        

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

EXHIBITS

TO THE

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

TABLE OF CONTENTS

List of Exhibits (filed herewith unless otherwise noted)

1.1	Engagement Letter between Jefferson Federal Savings and Loan Association of Morristown and Keefe, Bruyette & Woods, Inc.
1.2	Draft Form of Agency Agreement*
2.1	Plan of Conversion
3.1	Charter of Jefferson Bancshares, Inc.
3.2	Bylaws of Jefferson Bancshares, Inc.
4.1	Specimen Stock Certificate of Jefferson Bancshares, Inc.
5.1	Form of Opinion of Muldoon Murphy & Faucette LLP re: Legality
8.1	Form of Opinion of Muldoon Murphy & Faucette LLP re: Federal Tax Matters
8.2	Form of Opinion of Craine, Thompson & Jones, P.C. re: State Tax Matters
10.1	Form of Jefferson Federal Bank Employee Stock Ownership Plan and Trust
10.2	Form of ESOP Loan Commitment Letter and ESOP Loan Documents
10.3	Employment Agreement between Anderson L. Smith, Jefferson Bancshares, M.H.C. and Jefferson Federal Savings and Loan Association of Morristown
10.4	Form of Jefferson Federal Savings and Loan Association of Morristown Employee Severance Compensation Plan
10.5	1995 Jefferson Federal Savings and Loan Association of Morristown Stock Option Plan
10.6	1995 Jefferson Federal Savings and Loan Association of Morristown Management Recognition and Development Plan
10.7	Jefferson Federal Savings and Loan Association of Morristown 401(k) Plan*
10.8	Form of Jefferson Federal Bank Supplemental Executive Retirement Plan
21.1	Subsidiaries of the Registrant
23.1	Consent of Muldoon Murphy & Faucette LLP (included in Exhibits 5.1 and 8.1)
23.2	Consent of Craine, Thompson & Jones, P.C.
23.3	Consent of RP Financial, LC.
24.1	Powers of Attorney
99.1	Appraisal Report of RP Financial, LC.**
99.2	Draft of Jefferson Federal Charitable Foundation Gift Instrument
99.3	Marketing Materials
99.4	Subscription Order Form and Instructions

* To be filed by amendment

** Supporting financial schedules filed pursuant to Rule 202 of Regulation S-T.

EX-1.1

                                                                     Exhibit 1.1

                 [Letterhead of Keefe, Bruyette & Woods, Inc.]

February 27, 2003




Mr. Anderson L. Smith
President and Chief Executive Officer
Jefferson Federal Savings and Loan Association of Morristown
120 Evans Avenue
Morristown, TN 37814

Dear Mr. Smith:

This proposal is in connection with Jefferson Federal Savings & Loan's
("Jefferson") intention to have the mutual holding company component of its
organization reorganize from a mutual to a capital stock form of organization
(the "Conversion"). In order to effect the Conversion, it is contemplated that
all of Jefferson's common stock to be outstanding pursuant to the Conversion
will be issued to a holding company (the "Company") to be formed by Jefferson,
and that the Company will offer and sell shares of its common stock first to
eligible persons (pursuant to Jefferson's Plan of Conversion) in a Subscription
and Community Offering.

Keefe, Bruyette & Woods, Inc. ("KBW") will act as Jefferson's and the Company's
exclusive financial advisor and marketing agent in connection with the
Conversion. This letter sets forth selected terms and conditions of our
engagement.

1.  Advisory/Conversion Services. As Jefferson's and Company's financial advisor
and marketing agent, KBW will provide Jefferson and the Company with a
comprehensive program of conversion services designed to promote an orderly,
efficient, cost-effective and long-term stock distribution. KBW will provide
financial and logistical advice to Jefferson and the Company concerning the
offering and related issues. KBW will assist in providing conversion enhancement
services intended to meet the directors' objectives in the Subscription Offering
and to residents of Jefferson's market area, if necessary, in the Community
Offering.

KBW shall provide financial advisory services to Jefferson which are typical in
connection with an equity offering and include, but are not limited to, overall
financial analysis of the client with a focus on identifying factors which
impact the valuation of the common stock and provide the appropriate
recommendations for the betterment of the equity valuation.

Additionally, post conversion financial advisory services will include advice on
shareholder relations, NASDAQ listing, dividend policy (for both regular and
special dividends), stock repurchase strategy and communication with market
makers. Prior to the closing of the offering, KBW shall furnish to client a
Post-Conversion reference manual which will include specifics



Mr. Anderson L. Smith
February 27, 2003
Page 2 of 5

relative to these items. (The nature of the services to be provided by KBW as
Jefferson's and the Company's financial advisor and marketing agent are further
described in Exhibit A attached hereto.)

2.  Preparation of Offering Documents. Jefferson, the Company and their counsel
will draft the Registration Statement, Application for Conversion, Prospectus
and other documents to be used in connection with the Conversion. KBW will
attend meetings to review these documents and advise you on their form and
content. KBW and its counsel will draft appropriate agency agreement and related
documents as well as marketing materials other than the Prospectus.

3.  Due Diligence Review. Prior to filing the Registration Statement,
Application for Conversion or any offering or other documents naming KBW as
Jefferson's and the Company's financial advisor and marketing agent, KBW and
their representatives will undertake substantial investigations to learn about
Jefferson's business and operations ("due diligence review") in order to confirm
information provided to us and to evaluate information to be contained in
Jefferson's and/or the Company's offering documents. Jefferson agrees that it
will make available to KBW all relevant information, whether or not publicly
available, which KBW reasonably requests, and will permit KBW to discuss with
management the operations and prospects of Jefferson. KBW will treat all
material non-public information as confidential. Jefferson acknowledges that KBW
will rely upon the accuracy and completeness of all information received from
Jefferson, its officers, directors, employees, agents and representatives,
accountants and counsel including this letter to serve as Jefferson's and the
Company's financial advisor and marketing agent.

4.  Regulatory Filings. Jefferson and/or the Company will cause appropriate
offering documents to be filed with all regulatory agencies, including the
Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD"), Office of Thrift Supervision ("OTS") and such state
securities commissioners as may be determined by Jefferson.

5.  Agency Agreement. The specific terms of the conversion services, conversion
offering enhancement and syndicated offering services contemplated in this
letter shall be set forth in an Agency Agreement between KBW and Jefferson and
the Company to be executed prior to commencement of the offering, and dated the
date that the Company's Prospectus is declared effective and/or authorized to be
disseminated by the appropriate regulatory agencies, the SEC, the NASD, the OTS
and such state securities commissioners and other regulatory agencies as
required by applicable law.

6.  Representations, Warranties and Covenants. The Agency Agreement will provide
for customary representations, warranties and covenants by Jefferson and KBW,
and for the Company to indemnify KBW and their controlling persons (and, if
applicable, the members of



Mr. Anderson L. Smith
February 27, 2003
Page 3 of 5

the selling group and their controlling persons), and for KBW to indemnify
Jefferson and the Company against certain liabilities, including, without
limitation, liabilities under the Securities Act of 1933.

7.  Fees. For the services hereunder, Jefferson and/or Company shall pay the
following fees to KBW at closing unless stated otherwise:

    (a)  A Management Fee of $50,000 payable in four consecutive monthly
         installments of $12,500 commencing with the signing of this letter.
         Such fees shall be deemed to have been earned when due. Should the
         Conversion be terminated for any reason not attributable to the action
         or inaction of KBW, KBW shall have earned and be entitled to be paid
         fees accruing through the stage at which point the termination
         occurred. This Management Fee shall be applied against the Success Fee
         described below.

    (b)  A Flat fee of $600,000 to be reduced by the Management fee described in
         (a) above.

    (c)  If any shares of the Company's stock remain available after the
         Subscription Offering and Community Offering, at the request of
         Jefferson, KBW will seek to form a syndicate of registered
         broker-dealers to assist in the sale of such common stock on a best
         efforts basis, subject to the terms and conditions set forth in the
         selected dealers agreement. KBW will endeavor to distribute the common
         stock among dealers in a fashion which best meets the distribution
         objectives of Jefferson and the Plan of Conversion. KBW will be paid a
         fee not to exceed 5.5% of the aggregate Purchase Price of the shares of
         common stock sold by them. KBW will pass onto selected broker-dealers,
         who assist in the syndicated offering, an amount competitive with gross
         underwriting discounts charged at such time for comparable amounts of
         stock sold at a comparable price per share in a similar market
         environment. Fees with respect to purchases affected with the
         assistance of a broker/dealer other than KBW shall be transmitted by
         KBW to such broker/dealer. The decision to utilize selected
         broker-dealers will be made by Jefferson upon consultation with KBW. In
         the event, with respect to any stock purchases, fees are paid pursuant
         to this subparagraph 7(c), such fees shall be in lieu of, and not in
         addition to, payment pursuant to subparagraph 7(a) and 7(b).



Mr. Anderson L. Smith
February 27, 2003
Page 4 of 5


8.  Additional Services. KBW further agrees to provide financial advisory
assistance to the Company and Jefferson for a period of one year following
completion of the Conversion, including formation of a dividend policy and share
repurchase program, assistance with shareholder reporting and shareholder
relations matters, general advice on mergers and acquisitions and other related
financial matters, without the payment by the Company and Jefferson of any fees
in addition to those set forth in Section 7 hereof. Nothing in this Agreement
shall require the Company and Jefferson to obtain such services from KBW.
Following this initial one year term, if both parties wish to continue the
relationship, a fee may be negotiated and an agreement entered into at that
time.

9.  Expenses. Jefferson will bear those expenses of the proposed offering
customarily borne by issuers, including, without limitation, regulatory filing
fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of
Jefferson's accountants, attorneys, appraiser, transfer agent and registrar,
printing, mailing and marketing and syndicate expenses associated with the
Conversion; the fees set forth in Section 7; and fees for "Blue Sky" legal work.
If KBW incurs expenses on behalf of Client, Client will reimburse KBW for such
expenses.

KBW's reasonable out-of-pocket expenses, including costs of travel, meals and
lodging, photocopying, telephone, facsimile and couriers, shall not exceed
$25,000, and reasonable fees and expenses of counsel shall not exceed $35,000.
The selection of such counsel will be done by KBW, with the approval of
Jefferson.

10. Conditions. KBW's willingness and obligation to proceed hereunder shall be
subject to, among other things, satisfaction of the following conditions in
KBW's opinion, which opinion shall have been formed in good faith by KBW after
reasonable determination and consideration of all relevant factors: (a) full and
satisfactory disclosure of all relevant material, financial and other
information in the disclosure documents and a determination by KBW, in its sole
discretion, that the sale of stock on the terms proposed is reasonable given
such disclosures; (b) no material adverse change in the condition or operations
of Jefferson subsequent to the execution of the agreement; and (c) no adverse
market conditions at the time of offering which in KBW's opinion make the sale
of the shares by the Company inadvisable.

11. Benefit. This Agreement shall inure to the benefit of the parties hereto and
their respective successors and to the parties indemnified pursuant to the terms
and conditions of the Agency Agreement and their successors, and the obligations
and liabilities assumed hereunder by the parties hereto shall be binding upon
their respective successors; provided, however, that this Agreement shall not be
assignable by KBW.

12. Definitive Agreement. This letter reflects KBW's present intention of
proceeding to work with Jefferson on its proposed Conversion. It does not create
a binding obligation on the



Mr. Anderson L. Smith
February 27, 2003
Page 5 of 5


part of Jefferson, the Company or KBW except as to the agreement to maintain the
confidentiality of non-public information set forth in Section 3, the payment of
certain fees as set forth in Section 7(a) and the assumption of expenses as set
forth in Section 9, all of which shall constitute the binding obligations of the
parties hereto and which shall survive the termination of this letter or the
completion of the services furnished hereunder and shall remain operative and in
full force and effect. You further acknowledge that any report or analysis
rendered by KBW pursuant to this engagement is rendered for use solely by the
management of Jefferson and its agents in connection with the Conversion.
Accordingly, you agree that you will not provide any such information to any
other person without our prior written consent.

KBW acknowledges that in offering the Company's stock no person will be
authorized to give any information or to make any representation not contained
in the offering prospectus and related offering materials filed as part of a
registration statement to be declared effective in connection with the offering.
Accordingly, KBW agrees that in connection with the offering it will not give
any unauthorized information or make any unauthorized representation. We will be
pleased to elaborate on any of the matters discussed in this letter at your
convenience.

If the foregoing correctly sets forth our mutual understanding, please so
indicate by signing and returning the original copy of this letter to the
undersigned.

Sincerely,
/s/ Harold T. Hanley III
Harold T. Hanley III
Managing Director


ACCEPTED AND AGREED TO THIS 4/th/ DAY OF March, 2003.

Jefferson Federal Savings and Loan Association of Morristown


By:   /s/ Anderson L. Smith
      ---------------------
      Anderson L. Smith
      President and CEO



                                    EXHIBIT A

                          CONVERSION SERVICES PROPOSAL
                       TO JEFFERSON FEDERAL SAVINGS & LOAN


KBW provides thrift institutions converting from mutual to stock form of
ownership with a comprehensive program of conversion services designed to
promote an orderly, efficient, cost-effective and long-term stock distribution.
The following list is representative of the conversion services, if appropriate,
we propose to perform on behalf of Jefferson.

General Services

Assist management and legal counsel with the design of the transaction
structure.

Analyze and make recommendations on bids from printing, transfer agent, and
appraisal firms.

Assist officers and directors in obtaining Bank loans to purchase stock, if
requested.

Assist in drafting and distribution of press releases as required or
appropriate.

Conversion Offering Enhancement Services

Establish and manage Stock Information Center at Jefferson. Stock Information
Center personnel will track prospective investors; record stock orders; mail
order confirmations; provide Jefferson's senior management with daily reports;
answer customer inquiries; and handle special situations as they arise.

Assign KBW's personnel to be at Jefferson through completion of the Subscription
and Community Offerings to manage the Stock Information Center, meet with
prospective shareholders at individual and community information meetings,
solicit local investor interest through a tele-marketing campaign, answer
inquiries, and otherwise assist in the sale of stock in the Subscription and
Community Offerings. This effort will be lead by a Principal of KBW.

Create target investor list based upon review of Jefferson's depositor base.

Provide intensive financial and marketing input for drafting of the prospectus.



Conversion Offering Enhancement Services- Continued


Prepare other marketing materials, including prospecting letters and brochures,
and media advertisements.

Arrange logistics of community information meeting(s) as required.

Prepare audio-visual presentation by senior management for community information
meeting(s).

Prepare management for question-and-answer period at community information
meeting(s).

Attend and address community information meeting(s) and be available to answer
questions.

Broker-Assisted Sales Services.

Arrange for broker information meeting(s) as required.

Prepare audio-visual presentation for broker information meeting(s).

Prepare script for presentation by senior management at broker information
meeting(s).

Prepare management for question-and-answer period at broker information
meeting(s).

Attend and address broker information meeting(s) and be available to answer
questions.

Produce confidential broker memorandum to assist participating brokers in
selling Jefferson's common stock.

EX-2.1

                                                                     Exhibit 2.1

                               PLAN OF CONVERSION

                                       OF

                          JEFFERSON BANCSHARES, M.H.C.



                                TABLE OF CONTENTS



                                                                                          PAGE
                                                                                          ----
                                                                                       
1.     Introduction ....................................................................     1

2.     Definitions .....................................................................     3

3.     General Procedure for Conversion and Reorganization .............................     9

4.     Total Number of Shares and Purchase Price of Conversion Stock ...................    11

5.     Subscription Rights of Eligible Account Holders (First Priority) ................    12

6.     Subscription Rights of Tax-qualified Employee Stock Benefit Plans (Second
        Priority) ......................................................................    13

7.     Subscription Rights of Supplemental Eligible Account Holders (Third
        Priority) ......................................................................    13

8.     Subscription Rights of Other Members (Fourth Priority) ..........................    14

9.     Community Offering, Syndicated Community Offering and Other Offerings ...........    14

10.    Limitations on Subscriptions and Purchases of Conversion Stock ..................    16

11.    Timing of Subscription Offering; Manner of Exercising Subscription Rights
        and Order Forms ................................................................    18

12.    Payment for Conversion Stock ....................................................    20

13.    Account Holders in Nonqualified States or Foreign Countries .....................    21

14.    Voting Rights of Shareholders ...................................................    22

15.    Liquidation Account .............................................................    22

16.    Transfer of Deposit Accounts ....................................................    23

17.    Requirements Following Conversion for Registration, Making and Stock
        Exchange Listing ...............................................................    24

18.    Directors and Officers of the Association .......................................    24

19.    Requirements for Stock Purchases by Directors and Officers the Conversion
        and Reorganization .............................................................    24


                                       i



                                                                                         
20.    Establishment and Funding of Charitable Foundation ................................. 24

21.    Restrictions on Transfer of Stock .................................................. 25

22.    Restrictions on Voting Holding Company Common Stock ................................ 26

23.    Tax Rulings or Opinions ............................................................ 26

24.    Stock Compensation Plans ........................................................... 26

25.    Dividend and Repurchase Restrictions on Stock ...................................... 26

26.    Payment of Fees to Brokers ......................................................... 27

27.    Effective Date ..................................................................... 27

28.    Amendment or Termination of the Plan ............................................... 27

29.    Interpretation of the Plan ......................................................... 27



ANNEX A    Agreement and Plan of Merger by and between Jefferson Bancshares,
           M.H.C. and Jefferson Federal Savings and Loan Association of
           Morristown

ANNEX B    Agreement and Plan of Merger by and among Jefferson Federal Savings
           and Loan Association of Morristown, Jefferson Bancshares, Inc. and
           Jefferson Interim Savings Association

                                       ii




1.       INTRODUCTION.

         For purposes of this section, all capitalized terms have the meanings
ascribed to them in Section 2.

         On May 13, 1994, Jefferson Federal Savings and Loan Association of
Morristown, a federally chartered mutual savings association ("Jefferson
Federal"), reorganized into the mutual holding company form of organization. To
accomplish this transaction, Jefferson Federal organized a federally chartered,
stock-form savings association known as Jefferson Federal Savings and Loan
Association of Morristown (the "Association"). The Association simultaneously
issued 1,550,000 shares of its common stock to a newly formed federally
chartered mutual holding company known as Jefferson Bancshares, M.H.C. (the
"Mutual Holding Company") and sold 300,000 of its shares of common stock to
depositors of the Association, including directors, officers and employees of
the Association.

         The Boards of Directors of the Mutual Holding Company and the
Association believe that a conversion of the Mutual Holding Company to stock
form and reorganization of the Association pursuant to this Plan of Conversion
is in the best interests of the Mutual Holding Company and the Association, as
well as the best interests of their respective Members and Shareholders. The
Boards of Directors determined that this Plan of Conversion equitably provides
for the interests of Members through the granting of subscription rights and the
establishment of a liquidation account. The Conversion and Reorganization will
result in the raising of additional capital for the Association and the Holding
Company and is expected to result in a more active and liquid market for the
Holding Company Common Stock than currently exists for the Association Common
Stock. In addition, the Conversion and Reorganization have been structured to
re-unite the accumulated earnings and profits tax attribute retained by the
Mutual Holding Company with the retained earnings of the Association through a
tax-free reorganization. Finally, the Conversion and Reorganization is designed
to enable the Association and the Holding Company to more effectively compete in
the financial services marketplace.

         If the Association had undertaken a standard conversion involving the
formation of a stock holding company in 1994, applicable OTS regulations would
have required a greater amount of stock to be sold than the amount raised in
connection with the formation of the Mutual Holding Company. In addition, if a
standard conversion had been conducted in 1994, management of the Association
believed that it may have been difficult to invest prudently in a timely manner
the larger amount of capital that would have been raised, when compared to the
net proceeds raised in connection with the formation of the Mutual Holding
Company. A standard conversion in 1994 also would have immediately eliminated
all aspects of the mutual form of organization.

         The Association recognized $2.6 million in net proceeds from the sale
of its common stock in 1994 in connection with the formation of the Mutual
Holding Company. The Association has pursued a plan of controlled growth since
the formation of the Mutual Holding Company and total assets have increased from
$151.1 million at December 31, 1994 to $260.4 million at December 31, 2002. Such
growth reflects the Association's efforts to become a full-service community
financial institution. The Association remains committed to controlled growth
and diversification. The

                                       1



additional funds received in a Conversion will facilitate the Association's
ability to continue to grow in accordance with its business plan, through both
internal growth and acquisitions of other institutions or branch offices. The
Association believes that its current mutual holding company form has impeded,
and may continue to impede, its ability to undertake certain of such
acquisitions. Given the current consolidation efforts in the banking industry in
general and in the Association's market area in particular, the Association
believes that there will be significant acquisition opportunities in the future.
The Association believes that a Conversion will enhance its ability to continue
its growth through acquisitions and will support its ability to more fully serve
the borrowing and other financial needs of the communities it serves. The
Association also has gained experience in meeting the filing requirements of the
Securities Exchange Act of 1934 and in conducting shareholder meetings and
attending to other shareholder matters, such as communications, press releases,
and dividend payments. In light of the foregoing, the Boards of Directors of the
Mutual Holding Company and the Association believe that it is in the best
interests of such companies and their respective Members and Shareholders to
raise additional capital at this time, and that the most feasible way to do so
is through the Conversion and Reorganization.

         In connection with the Conversion and Reorganization, the Association
will form a new first-tier, wholly-owned subsidiary known as Jefferson
Bancshares, Inc., a Tennessee corporation, which will become the Holding Company
upon consummation of the Conversion and Reorganization. The Holding Company will
in turn form a federally chartered interim savings association ("Interim") as a
wholly-owned subsidiary. As described in more detail in Section 3, the Mutual
Holding Company will convert from the mutual form to a federal interim stock
savings association and simultaneously merge with and into the Association
pursuant to the Agreement and Plan of Merger included as Annex A hereto,
pursuant to which the Mutual Holding Company will cease to exist and a
liquidation account will be established by the Association for the benefit of
depositor Members as of specified dates, and Interim will then merge with and
into the Association pursuant to the Agreement and Plan of Merger included as
Annex B hereto, pursuant to which the Association will become a wholly owned
subsidiary of the Holding Company. In connection therewith, each share of
Association Common Stock outstanding immediately prior to the effective time
thereof shall be automatically converted, without further action by the holder
thereof, into and become the right to receive shares of Holding Company Common
Stock based on the Exchange Ratio, plus cash in lieu of any fractional share
interest. In connection with the Conversion and Reorganization, the Holding
Company will offer shares of Conversion Stock in the Offerings as provided
herein. Shares of Conversion Stock will be offered in a Subscription Offering in
descending order of priority to Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders and Other Members.
The Subscription Rights granted in connection with the Subscription Offering are
non-transferrable. Any shares of Conversion Stock remaining unsold after the
Subscription Offering will be offered for sale to the public through a Community
Offering and/or Syndicated Community Offering, as determined by the Boards of
Directors of the Holding Company and the Association in their sole discretion.

         In furtherance of the Association's commitment to its community, this
Plan of Conversion provides for the establishment of a charitable foundation as
part of the Conversion and Reorganization. The charitable foundation is intended
to complement the Association's existing community reinvestment activities in a
manner that will allow the Association's local community

                                       2



to share in the growth and profitability of the Holding Company and the
Association over the long term. Consistent with the Association's goal, the
Holding Company intends to donate to the charitable foundation immediately
following the Conversion and Reorganization a number of shares of its authorized
but unissued common stock in an amount up to 8% of the Holding Company Common
Stock issued in the Conversion and Reorganization.

         This Plan was adopted by the Boards of Directors of the Mutual Holding
Company and the Association on March 3, 2003.

         This Plan and the formation of the Foundation are subject to the
approval of the OTS and each must be adopted by (1) at least a majority of the
total number of votes eligible to be cast by Voting Members of the Mutual
Holding Company at the Special Meeting and (2) holders of at least two-thirds of
the outstanding Association Common Stock at the Shareholders' Meeting. In
addition, the Primary Parties have conditioned the consummation of the
Conversion and Reorganization on the approval of the Plan and the formation of
the Foundation by at least a majority of the votes cast, in person or by proxy,
by the Public Shareholders at the Shareholders' Meeting.

         After the Conversion and Reorganization, the Association will continue
to be regulated by the OTS, as its chartering authority, and by the FDIC, which
insures the Association's deposits. In addition, the Association will continue
to be a member of the Federal Home Loan Bank System and all insured savings
deposits will continue to be insured by the FDIC up to the maximum provided by
law.

2.       DEFINITIONS.

         As used in this Plan, the terms set forth below have the following
meaning:

         ACTING IN CONCERT means (i) knowing participation in a joint activity
or interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement or understanding; or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. A person or company which acts
in concert with another Person or company ("other party") shall also be deemed
to be acting in concert with any Person who is also acting in concert with that
other party, except that any Tax-Qualified Employee Stock Benefit Plan will not
be deemed to be acting in concert with its trustee or a person who serves in a
similar capacity solely for the purpose of determining whether stock held by the
trustee and stock held by the plan will be aggregated and participants or
beneficiaries of any such Tax- Qualified Employee Stock Benefit Plan will not be
deemed to be acting in concert solely as a result of their common interests as
participants or beneficiaries. When Persons act together for such purpose, their
group is deemed to have acquired their stock. The determination of whether a
group is Acting in Concert shall be made solely by the Board of Directors of the
Association or Officers delegated by such Board and may be based on any evidence
upon which the Board or such delegatee chooses to rely, including, without
limitation, joint account relationships or the fact that such Persons have filed
joint Schedules 13D or Schedules 13G with the SEC with respect to other
companies. Directors of

                                       3



the Holding Company, the Association, and the Mutual Holding Company shall not
be deemed to be Acting in Concert solely as a result of their membership on any
such board or boards.

         ACTUAL PURCHASE PRICE means the price per share at which the Conversion
Stock is ultimately sold by the Holding Company in the Offerings in accordance
with the terms hereof.

         AFFILIATE means a Person who, directly or indirectly, through one or
more intermediaries, controls or is controlled by or is under common control
with the Person specified.

         ASSOCIATE, when used to indicate a relationship with any Person, means
(i) a corporation or organization (other than the Mutual Holding Company, the
Association or a majority-owned subsidiary of the Association or the Holding
Company) of which such Person is a senior officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities, (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity, provided, however, that such term shall not
include any Tax-Qualified Employee Stock Benefit Plan of the Holding Company or
the Association in which such Person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and (iii) any relative
or spouse of such Person, or any relative of such spouse, who has the same home
as such Person or who is a director or officer of the Holding Company or the
Association or any of their subsidiaries.

         ASSOCIATION means Jefferson Federal Savings and Loan Association of
Morristown, a federally chartered savings association.

         ASSOCIATION COMMON STOCK means the common stock of the Association, par
value $1.00 per share, which stock is not and will not be insured by the FDIC or
any other governmental authority, a majority of which is currently held by the
Mutual Holding Company and subsequent to the Conversion and Reorganization, all
of which will be held by the Holding Company.

         BANK MERGER means the merger of Interim with and into the Association
pursuant to the Agreement and Plan of Merger included as Annex B hereto.

         CODE means the Internal Revenue Code of 1986, as amended.

         COMMUNITY OFFERING means the offering for sale by the Holding Company
of any shares of Conversion Stock not subscribed for in the Subscription
Offering to such Persons within or without the State of Tennessee as may be
selected by the Holding Company and the Association in their sole discretion and
to whom a copy of the Prospectus is delivered by or on behalf of the Holding
Company.

         CONTROL (including the terms "controlling," "controlled by," and "under
common control with") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.

                                       4



         CONVERSION AND REORGANIZATION means (i) the conversion of the Mutual
Holding Company from mutual form to a federal interim stock savings association
and the subsequent Mutual Holding Company Merger, pursuant to which the Mutual
Holding Company will cease to exist, (ii) the Bank Merger, pursuant to which the
Association will become a wholly owned subsidiary of the Holding Company and, in
connection therewith, each share of Association Common Stock outstanding
immediately prior to the effective time thereof shall automatically be
converted, without further action by the holder thereof, into and become the
right to receive shares of Holding Company Common Stock based on the Exchange
Ratio, plus cash in lieu of any fractional share interest, and (iii) the
issuance of Conversion Stock by the Holding Company in the Offerings as provided
herein, which will increase the number of shares of Holding Company Common Stock
outstanding and the capitalization of the Holding Company and the Association.
All such transactions shall occur substantially simultaneously.

         CONVERSION STOCK means the Holding Company Common Stock to be issued
and sold in the Offerings pursuant to the Plan of Conversion.

         DEPOSIT ACCOUNT means with any withdrawable account as defined in
Section 561.42 of the Rules and Regulations of the OTS, including a demand
account as defined in Section 561.16 of the Rules and Regulations of the OTS.

         ELIGIBLE ACCOUNT HOLDER means any Person holding a Qualifying Deposit
on the Eligibility Record Date for purposes of determining Subscription Rights
and establishing subaccount balances in the liquidation account to be
established pursuant to Section 15 hereof.

         ELIGIBILITY RECORD DATE means the date for determining Qualifying
Deposits of Eligible Account Holders and is the close of business on December
31, 2001.

         ESTIMATED PRICE RANGE means the range of the estimated aggregate pro
forma market value of the total number of shares of Conversion Stock to be
issued in the Offerings, as determined by the Independent Appraiser in
accordance with Section 4 hereof.

         EXCHANGE RATIO means the rate at which shares of Holding Company Common
Stock will be exchanged for shares of Association Common Stock held by the
Public Shareholders in connection with the Bank Merger. The exact rate (which
shall be rounded to the nearest ten-thousandth) shall be determined by the
Mutual Holding Company and the Association in order to ensure that upon
consummation of the Conversion and Reorganization the Public Shareholders will
own in the aggregate approximately the same percentage of the Holding Company
Common Stock to be outstanding upon completion of the Conversion and
Reorganization as the percentage of Association Common Stock owned by them in
the aggregate immediately prior to consummation of the Conversion and
Reorganization, before giving effect to (a) cash paid in lieu of any fractional
interests of Holding Company Common Stock, (b) any shares of Conversion Stock
purchased by the Public Shareholders or Tax-Qualified Employee Stock Benefit
Plans in the Offerings and (c) any shares of Holding Company Common Stock
contributed to the Foundation.

                                       5



         EXCHANGE SHARES mean the shares of Holding Company Common Stock to be
issued to the Public Shareholders in connection with the Bank Merger.

         FDIC means the Federal Deposit Insurance Corporation or any successor
thereto.

         FOUNDATION means the charitable foundation that will qualify as an
exempt organization under Section 501(c)(3) of the Code that will be established
by the Holding Company and the Association immediately following consummation of
the Conversion and Reorganization.

         HOLDING COMPANY means Jefferson Bancshares, Inc., a stock corporation
to be organized under the laws of the State of Tennessee. Such corporation will
be initially formed as a first-tier, wholly owned subsidiary of the Association.
Upon completion of the Conversion and Reorganization, the Holding Company shall
hold all of the outstanding capital stock of the Association.

         HOLDING COMPANY COMMON STOCK means the common stock of the Holding
Company, par value $.01 per share, which stock cannot and will not be insured by
the FDIC or any other governmental authority.

         INDEPENDENT APPRAISER means the independent investment banking or
financial consulting firm retained by the Holding Company and the Association to
prepare an appraisal of the estimated pro forma market value of the Conversion
Stock.

         INITIAL PURCHASE PRICE means the price per share to be paid initially
by Participants for shares of Conversion Stock subscribed for in the
Subscription Offering and by Persons for shares of Conversion Stock ordered in
the Community Offering and/or Syndicated Community Offering.

         INTERIM means Jefferson Interim Savings Association, which will be
formed as a first-tier, wholly-owned subsidiary of the Holding Company to
facilitate the Bank Merger.

         MEMBER means any Person qualifying as a member of the Mutual Holding
Company in accordance with its mutual charter and bylaws and the laws of the
United States.

         MUTUAL HOLDING COMPANY means Jefferson Bancshares, M.H.C.

         MUTUAL HOLDING COMPANY MERGER means the merger of the Mutual Holding
Company (following its conversion into a federal interim stock savings
association) with and into the Association pursuant to the Agreement and Plan of
Merger included as Annex A hereto.

         OFFERINGS mean the Subscription Offering, the Community Offering and
the Syndicated Community Offering.

         OFFICER means the chairman of the board of directors, president, chief
executive officer, vice-president, secretary, treasurer or principal financial
officer, comptroller or principal accounting

                                       6



officer and any other person performing similar functions with respect to any
organization whether incorporated or unincorporated.

         ORDER FORM means the form or forms to be provided by the Holding
Company, containing all such terms and provisions as set forth in Section 11
hereof, to a Participant or other Person by which Conversion Stock may be
ordered in the Offerings.

         OTHER MEMBER means a Voting Member who is not an Eligible Account
Holder or a Supplemental Eligible Account Holder.

         OTS means the Office of Thrift Supervision or any successor thereto.

         PARTICIPANT means any Eligible Account Holder, Tax-Qualified Employee
Stock Benefit Plan, Supplemental Eligible Account Holder or Other Member.

         PERSON means an individual, a corporation, a partnership, an
association, a joint stock company, a limited liability company, a limited
liability partnership, a trust, an unincorporated organization or a government
or any political subdivision thereof.

         PLAN and PLAN OF CONVERSION mean this Plan of Conversion as adopted by
the Boards of Directors of the Mutual Holding Company and the Association and
any amendment hereto approved as provided herein. The Board of Directors of the
Holding Company shall adopt this Plan as soon as practicable following its
organization, and the Board of Directors of Interim shall adopt the Agreement
and Plan of Merger included as Annex B hereto as soon as practicable following
its organization.

         PRIMARY PARTIES mean the Mutual Holding Company, the Association and
the Holding Company.

         PROSPECTUS means the one or more documents to be used in offering the
Conversion Stock in the Offerings.

         PUBLIC OFFERING means an underwritten firm commitment offering to the
public through one or more underwriters.

         PUBLIC SHAREHOLDERS mean those Persons who own shares of Association
Common Stock, excluding the Mutual Holding Company, as of the Voting Record
Date.

         QUALIFYING DEPOSIT means the aggregate balance of all Deposit Accounts
in the Association of (i) an Eligible Account Holder at the close of business on
the Eligibility Record Date, provided such aggregate balance is not less than
$50, and (ii) a Supplemental Eligible Account Holder at the close of business on
the Supplemental Eligibility Record Date, provided such aggregate balance is not
less than $50.

         SEC means the Securities and Exchange Commission.

                                       7



         SPECIAL MEETING means the Special Meeting of Members of the Mutual
Holding Company called for the purpose of submitting this Plan and the formation
of the Foundation to the Members for their approval, including any adjournments
of such meeting.

         SHAREHOLDERS mean those Persons who own shares of Association Common
Stock.

         SHAREHOLDERS' MEETING means the annual or special meeting of
Shareholders of the Association called for the purpose of submitting this Plan
and the formation of the Foundation to the Shareholders for their approval,
including any adjournments of such meeting.

         SUBSCRIPTION OFFERING means the offering of the Conversion Stock to
Participants.

         SUBSCRIPTION RIGHTS mean nontransferable rights to subscribe for
Conversion Stock granted to Participants pursuant to the terms of this Plan.

         SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER means any Person, except directors
and Officers of the Association and their Associates, holding a Qualifying
Deposit at the close of business on the Supplemental Eligibility Record Date.

         SUPPLEMENTAL ELIGIBILITY RECORD DATE, if applicable, means the date for
determining Qualifying Deposits of Supplemental Eligible Account Holders and
shall be required if the Eligibility Record Date is more than 15 months prior to
the date of the latest amendment to the Application for Conversion filed by the
Mutual Holding Company prior to approval of such application by the OTS. If
applicable, the Supplemental Eligibility Record Date shall be the last day of
the calendar quarter preceding OTS approval of the Application for Conversion
submitted by the Mutual Holding Company pursuant to this Plan of Conversion.

         SYNDICATED COMMUNITY OFFERING means the offering for sale by a
syndicate of broker-dealers to the general public of shares of Conversion Stock
not purchased in the Subscription Offering and the Community Offering.

         TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN means any defined benefit
plan or defined contribution plan, such as an employee stock ownership plan,
stock bonus plan, profit-sharing plan or other plan, which is established for
the benefit of the employees of the Holding Company and/or the Association and
which, with its related trust, meets the requirements to be "qualified" under
Section 401 of the Code as from time to time in effect. A "Non-Tax-Qualified
Employee Stock Benefit Plan" is any defined benefit plan or defined contribution
stock benefit plan which is not so qualified.

         VOTING MEMBER means a Person who at the close of business on the Voting
Record Date is entitled to vote as a Member of the Mutual Holding Company in
accordance with its mutual charter and bylaws.

                                       8



         VOTING RECORD DATE means the date or dates for determining the
eligibility of Members to vote at the Special Meeting and of Shareholders to
vote at the Shareholders' Meeting, as applicable.

3.       GENERAL PROCEDURE FOR CONVERSION AND REORGANIZATION.

         (a)   After the Association's organization of the Holding Company and
the receipt of all requisite regulatory approvals, the Holding Company will form
Interim as a first-tier, wholly owned subsidiary of the Holding Company, and the
Board of Directors of Interim shall adopt the Agreement and Plan of Merger
included as Annex B hereto by at least a two-thirds vote. In addition, the
Holding Company shall approve such Agreement and Plan of Merger in its capacity
as the sole shareholder of Interim.

         (b)   An application for the Conversion and Reorganization, including
the Plan and all other requisite material (the "Application for Conversion"),
shall be submitted to the OTS for approval. The Mutual Holding Company and the
Association also will cause notice of the adoption of the Plan by the Boards of
Directors of the Mutual Holding Company and the Association to be given by
publication in a newspaper having general circulation in each community in which
an office of the Association is located and will cause copies of the Plan to be
made available at each office of the Mutual Holding Company and the Association
for inspection by Members and Shareholders. The Mutual Holding Company and the
Association will again cause to be published, in accordance with the
requirements of applicable regulations of the OTS, a notice of the filing with
the OTS of an application to convert the Mutual Holding Company from mutual to
stock form and will post the notice of the filing for the Application for
Conversion in each of their offices.

         (c)   Promptly following receipt of requisite approval of the OTS, this
Plan and the formation of the Foundation will be submitted to the Members for
their consideration and approval at the Special Meeting. The Mutual Holding
Company may, at its option, mail to all Members as of the Voting Record Date, at
their last known address appearing on the records of the Mutual Holding Company
and the Association, a proxy statement in either long or, to the extent
permitted by applicable law and regulation, summary form describing the Plan
which will be submitted to a vote of the Members at the Special Meeting. The
Holding Company also shall mail to all such Members (as well as other
Participants) either a Prospectus and Order Form for the purchase of Conversion
Stock or, to the extent permitted by applicable law and regulation, a letter
informing them of their right to receive a Prospectus and Order Form and a
postage prepaid card to request such materials, subject to the provisions of
Section 13 hereof. In addition, all such Members will receive, or be given the
opportunity to request by returning a postage-prepaid card which will be
distributed with the proxy statement, letter or other written communication, a
copy of the articles of incorporation and bylaws of the Holding Company. The
Plan and the formation of the Foundation each must be approved by the
affirmative vote of at least a majority of the total number of votes eligible to
be cast by Voting Members at the Special Meeting.

         (d)   Subscription Rights to purchase shares of Conversion Stock will
be issued without payment therefor to Eligible Account Holders, Tax-Qualified
Employee Stock Benefit Plans,

                                       9



Supplemental Eligible Account Holders, if any, and Other Members, as set forth
in Sections 5, 6, 7 and 8 hereof.

         (e)   The Association shall file preliminary proxy materials with the
OTS in order to seek the approval of the Plan by its Shareholders. Promptly
following clearance of such proxy materials and the receipt of any other
requisite approval of the OTS, the Association will mail definitive proxy
materials to all Shareholders as of the Voting Record Date, at their last known
address appearing on the records of the Association, for their consideration and
approval of this Plan at the Shareholders' Meeting. The Plan and the formation
of the Foundation each must be approved by the holders of at least two-thirds of
the outstanding Association Common Stock as of the Voting Record Date. In
addition, the Primary Parties have conditioned the consummation of the
Conversion and Reorganization on the approval of the Plan and the formation of
the Foundation by at least a majority of the votes cast, in person or by proxy,
by the Public Shareholders at the Shareholders' Meeting.

         (f)   The Holding Company shall submit or cause to be submitted a
holding company application to the OTS for approval of the acquisition of the
Association. Such application also shall include an application to form Interim.
In addition, an application to merge the Mutual Holding Company (following its
conversion into a federal interim stock savings association) and the
Association, and an application to merge Interim and the Association shall be
filed with the OTS, either as exhibits to the holding company application or
separately. All notices required to be published in connection with such
applications shall be published at the times required.

         (g)   The Holding Company shall file a Registration Statement with the
SEC to register the Holding Company Common Stock to be issued in the Conversion
and Reorganization under the Securities Act of 1933, as amended, and shall
register such Holding Company Common Stock under any applicable state securities
laws. Upon registration and after the receipt of all required regulatory
approvals, the Conversion Stock shall be first offered for sale in a
Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders, if any, and Other Members.
It is anticipated that any shares of Conversion Stock remaining unsold after the
Subscription Offering will be sold through a Community Offering and/or a
Syndicated Community Offering. The purchase price per share for the Conversion
Stock shall be a uniform price determined in accordance with Section 4 hereof.
The Holding Company shall contribute to the Association an amount of the net
proceeds received by the Holding Company from the sale of Conversion Stock as
shall be determined by the Boards of Directors of the Holding Company and the
Association and as shall be approved by the OTS.

         (h)   The effective date of the Conversion and Reorganization shall be
the date set forth in Section 27 hereof. Upon the effective date, the following
transactions shall occur:

               (i)    The Mutual Holding Company shall convert into a federal
interim stock savings association and simultaneously merge with and into the
Association in the Mutual Holding Company Merger, with the Association being the
surviving institution. As a result of the Mutual Holding Company Merger, (x) the
shares of Association Common Stock held by the Mutual Holding Company (following
its conversion to a federal interim stock savings association) shall be

                                       10



extinguished and (y) Members of the Mutual Holding Company will be granted
interests in the liquidation account to be established by the Association
pursuant to Section 15 hereof.

               (ii)   Interim shall merge with and into the Association pursuant
to the Bank Merger, with the Association being the surviving institution. As a
result of the Bank Merger, (x) the shares of Holding Company Common Stock held
by the Association shall be extinguished; (y) the shares of Association Common
Stock held by the Public Shareholders shall be converted into the right to
receive shares of Holding Company Common Stock based upon the Exchange Ratio,
plus cash in lieu of any fractional share interest based upon the Actual
Purchase Price; and (z) the shares of common stock of Interim held by the
Holding Company shall be converted into shares of Bank Common Stock on a
one-for-one basis, with the result that the Association shall become a wholly
owned subsidiary of the Holding Company. In addition, as a result of the Bank
Merger, options to purchase shares of Association Common Stock which are
outstanding immediately prior to consummation of the Conversion and
Reorganization shall be converted into options to purchase shares of Holding
Company Common Stock, with the number of shares subject to the option and the
exercise price per share to be adjusted based upon the Exchange Ratio so that
the aggregate exercise price remains unchanged, and with the duration of the
option remaining unchanged.

               (iii)  The Holding Company shall sell the Conversion Stock in the
Offerings, as provided herein.

         (i)   The Primary Parties may retain and pay for the services of
financial and other advisors and investment bankers to assist in connection with
any or all aspects of the Conversion and Reorganization, including in connection
with the Offerings the payment of fees to brokers and investment bankers for
assisting Persons in completing and/or submitting Order Forms. All fees,
expenses, retainers and similar items shall be reasonable.

4.       TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK.

         (a)   The aggregate price at which shares of Conversion Stock shall be
sold in the Offerings shall be based on a pro forma valuation of the aggregate
market value of the Conversion Stock prepared by the Independent Appraiser. The
valuation shall be based on financial information relating to the Primary
Parties, market, financial and economic conditions, a comparison of the Primary
Parties with selected publicly-held financial institutions and holding companies
and with comparable financial institutions and holding companies and such other
factors as the Independent Appraiser may deem to be important. The valuation
shall be stated in terms of an Estimated Price Range, the maximum of which shall
generally be no more than 15% above the average of the minimum and maximum of
such price range and the minimum of which shall generally be no more than 15%
below such average. The valuation shall be updated during the Conversion and
Reorganization as market and financial conditions warrant and as may be required
by the OTS.

         (b)   Based upon the independent valuation, the Boards of Directors of
the Primary Parties shall fix the Initial Purchase Price and the number (or
range) of shares of Conversion Stock to be offered in the Subscription Offering,
Community Offering and/or Syndicated Community Offering.

                                       11



The Actual Purchase Price and the total number of shares of Conversion Stock to
be issued in the Offerings shall be determined by the Boards of Directors of the
Primary Parties upon conclusion of the Offerings in consultation with the
Independent Appraiser and any financial advisor or investment banker retained by
the Primary Parties in connection therewith.

         (c)   Subject to the approval of the OTS, the Estimated Price Range may
be increased or decreased to reflect market, financial and economic conditions
prior to completion of the Conversion and Reorganization, and under such
circumstances the Primary Parties may increase or decrease the total number of
shares of Conversion Stock to be issued in the Conversion and Reorganization to
reflect any such change. Notwithstanding anything to the contrary contained in
this Plan, no resolicitation of subscribers shall be required and subscribers
shall not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Conversion Stock issued in the Conversion and
Reorganization are less than the minimum or more than 15% above the maximum of
the Estimated Price Range set forth in the Prospectus. In the event of an
increase in the total number of shares offered in the Conversion and
Reorganization due to an increase in the Estimated Price Range, the priority of
share allocation shall be as set forth in this Plan.

5.       SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY).

         (a)   Each Eligible Account Holder shall receive, without payment,
Subscription Rights to purchase up to the greater of (i) $500,000 of Conversion
Stock (or such maximum purchase limitation as may be established for the
Community Offering and/or Syndicated Community Offering), (ii) one-tenth of 1%
of the total offering of shares in the Subscription Offering and (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered in the Subscription Offering
by a fraction, of which the numerator is the amount of the Qualifying Deposits
of the Eligible Account Holder and the denominator is the total amount of all
Qualifying Deposits of all Eligible Account Holders, in each case subject to
Sections 10 and 13 hereof.

         (b)   In the event of an oversubscription for shares of Conversion
Stock pursuant to Section 5(a), available shares shall be allocated among
subscribing Eligible Account Holders so as to permit each such Eligible Account
Holder, to the extent possible, to purchase a number of shares which will make
his or her total allocation equal to the lesser of the number of shares
subscribed for or 100 shares. Any available shares remaining after each
subscribing Eligible Account Holder has been allocated the lesser of the number
of shares subscribed for or 100 shares shall be allocated among the subscribing
Eligible Account Holders in the proportion which the Qualifying Deposit of each
such subscribing Eligible Account Holder bears to the total Qualifying Deposits
of all such subscribing Eligible Account Holders whose orders are unfilled,
provided that no fractional shares shall be issued. Subscription Rights of
Eligible Account Holders who are also directors or Officers of the Holding
Company or the Association and their Associates shall be subordinated to those
of other Eligible Account Holders to the extent that they are attributable to
increased deposits during the one-year period preceding the Eligibility Record
Date.

                                       12



6.       SUBSCRIPTION RIGHTS OF TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS
         (SECOND PRIORITY).

         Tax-Qualified Employee Stock Benefit Plans shall receive, without
payment, Subscription Rights to purchase in the aggregate up to 10% of the
Holding Company Common Stock issued in the Conversion and Reorganization,
including (i) any shares of Holding Company Common Stock to be issued in the
Conversion and Reorganization as a result of an increase in the Estimated Price
Range after commencement of the Subscription Offering and prior to completion of
the Conversion and Reorganization and (ii) any shares of Holding Company Common
Stock contributed to the Foundation. The subscription rights granted to
Tax-Qualified Employee Stock Benefit Plans shall be subject to the availability
of shares of Conversion Stock after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders; provided, however, that in the
event that the total number of shares of Conversion Stock is increased to any
amount greater than the number of shares representing the maximum of the
Estimated Price Range as set forth in the Prospectus ("Maximum Shares"), the
ESOP shall have a priority right to purchase any such shares exceeding the
Maximum Shares up to an aggregate of 8% of Holding Company Common Stock issued
in the Conversion and Reorganization, including any shares of Holding Company
Common Stock contributed to the Foundation. Shares of Conversion Stock purchased
by any individual participant ("Plan Participant") in a Tax-Qualified Employee
Stock Benefit Plan using funds therein pursuant to the exercise of subscription
rights granted to such Participant in his individual capacity as a Participant
and/or purchases by such Plan Participant in the Community Offering shall not be
deemed to be purchases by a Tax-Qualified Employee Stock Benefit Plan for
purposes of calculating the maximum amount of Conversion Stock that
Tax-Qualified Employee Stock Benefit Plans may purchase pursuant to the first
sentence of this Section 6 if the individual Plan Participant controls or
directs the investment authority with respect to such account or subaccount.
Consistent with applicable laws and regulations and policies and practices of
the OTS, the Tax-Qualified Employee Stock Benefit Plans may use funds
contributed by the Holding Company or the Association and/or borrowed from an
independent financial institution to exercise such Subscription Rights, and the
Holding Company and the Association may make scheduled discretionary
contributions thereto, provided that such contributions do not cause the Holding
Company or the Association to fail to meet any applicable regulatory capital
requirement.

7.       SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD
         PRIORITY).

         (a)   In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment to the Application for
Conversion filed prior to OTS approval, then, and only in that event, a
Supplemental Eligibility Record Date shall be set and each Supplemental Eligible
Account Holder shall receive, without payment, Subscription Rights to purchase
up to the greater of (i) $500,000 of Conversion Stock in the Subscription
Offering (or such maximum purchase limitation as may be established for the
Community Offering and/or Syndicated Community Offering), (ii) one-tenth of 1%
of the total offering of shares in the Subscription Offering and (iii) 15 times
the product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion Stock offered in the Subscription Offering
by a fraction, of which the numerator is the amount of the Qualifying Deposits
of the Supplemental Eligible Account

                                       13



Holder and the denominator is the total amount of all Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case subject to Sections 10 and
13 hereof and the availability of shares of Conversion Stock for purchase after
taking into account the shares of Conversion Stock purchased by Eligible Account
Holders and Tax-Qualified Employee Stock Benefit Plans through the exercise of
Subscription Rights under Sections 5 and 6 hereof.

         (b)   In the event of an oversubscription for shares of Conversion
Stock pursuant to Section 7(a), available shares shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit each such
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation (including the
number of shares, if any, allocated in accordance with Section 5(a)) equal to
the lesser of the number of shares subscribed for or 100 shares. Any remaining
available shares shall be allocated among subscribing Supplemental Eligible
Account Holders in the proportion that the amount of their respective Qualifying
Deposits bears to the total amount of the Qualifying Deposits of all such
subscribing Supplemental Eligible Account Holders whose orders are unfilled,
provided that no fractional shares shall be issued.

8.       SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY).

         (a)   Each Other Member shall receive, without payment, Subscription
Rights to purchase up to the greater of (i) $500,000 of Conversion Stock in the
Subscription Offering (or such maximum purchase limitation as may be established
for the Community Offering and/or Syndicated Community Offering) and (ii)
one-tenth of 1% of the total offering of shares in the Subscription Offering,
subject to Sections 10 and 13 hereof and the availability of shares of
Conversion Stock for purchase after taking into account the shares of Conversion
Stock purchased by Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans and Supplemental Eligible Account Holders, if any, through the
exercise of Subscription Rights under Sections 5, 6 and 7 hereof.

         (b)   If, pursuant to this Section 8, Other Members subscribe for a
number of shares of Conversion Stock in excess of the total number of shares of
Conversion Stock remaining, available shares shall be allocated among
subscribing Other Members so as to permit each such Other Member, to the extent
possible, to purchase a number of shares which will make his or her total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Any remaining shares shall be allocated among subscribing Other Members
on a pro rata basis in the same proportion as each such Other Member's
subscription bears to the total subscriptions of all such subscribing Other
Members, provided that no fractional shares shall be issued.

9.       COMMUNITY OFFERING, SYNDICATED COMMUNITY OFFERING AND OTHER OFFERINGS.

         (a)   If less than the total number of shares of Conversion Stock are
sold in the Subscription Offering, it is anticipated that all remaining shares
of Conversion Stock shall, if practicable, be sold in a Community Offering.
Subject to the requirements set forth herein, the manner in which the Conversion
Stock is sold in the Community Offering shall have as the objective the
achievement of the widest possible distribution of such stock.

                                       14



         (b)   In the event of a Community Offering, all shares of Conversion
Stock which are not subscribed for in the Subscription Offering shall be offered
for sale by means of a direct community marketing program, which may provide for
the use of brokers, dealers or investment banking firms experienced in the sale
of financial institution securities. Any available shares in excess of those not
subscribed for in the Subscription Offering will be available for purchase by
members of the general public to whom a Prospectus is delivered by the Holding
Company or on its behalf, with preference given first to Public Shareholders and
second to natural persons and trusts of natural persons residing in Cocke,
Grainger, Greene, Hamblen, Hawkins, Jefferson, Knox or Sevier County, Tennessee
("Preferred Subscribers").

         (c)   A Prospectus and Order Form shall be furnished to such Persons as
the Primary Parties may select in connection with the Community Offering, and
each order for Conversion Stock in the Community Offering shall be subject to
the absolute right of the Primary Parties to accept or reject any such order in
whole or in part either at the time of receipt of an order or as soon as
practicable following completion of the Community Offering. Available shares
will be allocated first to each Preferred Subscriber whose order is accepted in
an amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares shall be allocated among the Preferred Subscribers whose accepted orders
remain unsatisfied in the same proportion that the unfilled order of each bears
to the total unfilled orders of all Preferred Subscribers whose accepted orders
remain unsatisfied, provided that no fractional shares shall be issued. If there
are any shares remaining after all accepted orders by Preferred Subscribers have
been satisfied, such remaining shares shall be allocated to other members of the
general public who purchase in the Community Offering, applying the same
allocation described above for Preferred Subscribers.

         (d)   The amount of Conversion Stock that any Person may purchase in
the Community Offering shall not exceed $500,000 of Conversion Stock, provided,
however, that this amount may be increased to up to 5% of the total offering of
shares of Conversion Stock, subject to any required regulatory approval but
without the further approval of Members of the Mutual Holding Company or the
Shareholders of the Association; and provided further that, to the extent
applicable, and subject to the preferences set forth in Section 9(b) and (c) of
this Plan and the limitations on purchases of Conversion Stock set forth in this
Section 9(d) and Section 10 of this Plan, orders for Conversion Stock in the
Community Offering shall first be filled to a maximum of 2% of the total number
of shares of Conversion Stock sold in the Offerings and thereafter any remaining
shares shall be allocated on an equal number of shares basis per order until all
orders have been filled. The Primary Parties may commence the Community Offering
concurrently with, at any time during, or as soon as practicable after the end
of, the Subscription Offering, and the Community Offering must be completed
within 45 days after the completion of the Subscription Offering, unless
extended by the Primary Parties with any required regulatory approval.

         (e)   Subject to such terms, conditions and procedures as may be
determined by the Primary Parties, all shares of Conversion Stock not subscribed
for in the Subscription Offering or ordered in the Community Offering may be
sold by a syndicate of broker-dealers to the general public in a Syndicated
Community Offering. Each order for Conversion Stock in the Syndicated Community
Offering shall be subject to the absolute right of the Primary Parties to accept
or reject

                                       15



any such order in whole or in part either at the time of receipt of an order or
as soon as practicable after completion of the Syndicated Community Offering.
The amount of Conversion Stock that any Person may purchase in the Syndicated
Community Offering shall not exceed $500,000 of Conversion Stock, provided,
however, that this amount may be increased to up to 5% of the total offering of
shares of Conversion Stock, subject to any required regulatory approval but
without the further approval of Members of the Mutual Holding Company or the
Shareholders of the Association; and provided further that, to the extent
applicable, and subject to the limitations on purchases of Conversion Stock set
forth in this Section 9(e) and Section 10 of this Plan, orders for Conversion
Stock in the Syndicated Community Offering shall first be filled to a maximum of
2% of the total number of shares of Conversion Stock sold in the Offerings and
thereafter any remaining shares shall be allocated on an equal number of shares
basis per order until all orders have been filled. The Primary Parties may
commence the Syndicated Community Offering concurrently with, at any time
during, or as soon as practicable after the end of, the Subscription Offering
and/or Community Offering, and the Syndicated Community Offering must be
completed within 45 days after the completion of the Subscription Offering,
unless extended by the Primary Parties with any required regulatory approval.

         (f)   The Holding Company and the Association may sell any shares of
Conversion Stock remaining following the Subscription Offering, Community
Offering and/or the Syndicated Community Offering in a Public Offering. The
provisions of Section 10 hereof shall not be applicable to the sales to
underwriters for purposes of the Public Offering but shall be applicable to
sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the Actual Purchase Price
less an underwriting discount to be negotiated among such underwriters and the
Association and the Holding Company, subject to any required regulatory approval
or consent.

         (g)   If for any reason a Syndicated Community Offering or public
offering of shares of Conversion Stock not sold in the Subscription Offering and
the Community Offering cannot be effected, or in the event that any
insignificant residue of shares of Conversion Stock is not sold in the
Subscription Offering, Community Offering or Syndicated Community Offering, the
Primary Parties shall use their best efforts to obtain other purchasers for such
shares in such manner and upon such conditions as may be satisfactory to the
OTS.

10.      LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF CONVERSION STOCK.

         The following limitations shall apply to all purchases of Holding
Company Common Stock in the Conversion:

         (a)   The maximum amount of Conversion Stock that may be subscribed for
or purchased in all categories in the Offerings by any Person, together with any
Associate or group of Persons Acting in Concert, shall not exceed $750,000,
except for Tax-Qualified Employee Stock Benefit Plans.

                                       16



         (b)   The maximum number of shares of Conversion Stock which may be
purchased in the Conversion and Reorganization by the ESOP shall not exceed 8%
and all Tax-Qualified Employee Stock Benefit Plans shall not exceed 10% of the
total number of shares of Holding Company Common Stock issued in the Conversion
and Reorganization, in each instance, including (i) any shares which may be
issued in the event of an increase in the maximum of the Estimated Price Range
to reflect changes in market, financial and economic conditions after
commencement of the Subscription Offering and prior to completion of the
Offerings and (ii) any shares of Holding Company Common Stock contributed to the
Foundation; provided, however, that purchases of Conversion Stock which are made
by Plan Participants pursuant to the exercise of subscription rights granted to
such Plan Participant in his or her individual capacity as a Participant or
purchases by a Plan Participant in the Community Offering using the funds
thereof held in Tax-Qualified Employee Stock Benefit Plans shall not be deemed
to be purchases by a Tax-Qualified Employee Stock Benefit Plan for purposes of
this Section 10(b).

         (c)   Except in the case of Tax-Qualified Employee Stock Benefit Plans
in the aggregate, as set forth in Section 10(b) hereof, and certain Eligible
Account Holders and Supplemental Eligible Account Holders, as set forth in
Sections 5(a)(ii) and (iii) and 7(a)(ii) and (iii) hereof, and in addition to
the other restrictions and limitations set forth herein, the maximum amount of
Holding Company Common Stock that any Person together with any Associate or
group of Persons Acting in Concert may, directly or indirectly, subscribe for or
purchase in the Conversion and Reorganization, when combined with Exchange
Shares received (which, for this purpose, shall not include any shares held in
any of the Tax Qualified Employee Stock Benefit Plans or Non-Tax Qualified Stock
Benefit Plans of the Holding Company or the Association), shall not exceed 2% of
the total number of shares of Holding Company Common Stock issued in the
Conversion and Reorganization.

         (d)   The number of shares of Conversion Stock that directors and
Officers of the Holding Company or the Association and their Associates may
purchase in the aggregate in the Offerings shall not exceed 30% of the total
number of shares of Conversion Stock sold in the Offerings, including any shares
which may be issued in the event of an increase in the maximum of the Estimated
Price Range to reflect changes in market, financial and economic conditions
after commencement of the Subscription Offering and prior to completion of the
Offerings.

         (e)   No Person may purchase fewer than 25 shares of Conversion Stock
in the Offerings, to the extent such shares are available; provided, however,
that if the Actual Purchase Price is greater than $20.00 per share, such minimum
number of shares shall be adjusted so that the aggregate Actual Purchase Price
for such minimum shares will not exceed $500.00.

         (f)   For purposes of the foregoing limitations and the determination
of Subscription Rights, (i) directors, Officers and employees of the Holding
Company, the Association or their subsidiaries shall not be deemed to be
Associates or a group Acting in Concert solely as a result of their capacities
as such, (ii) shares purchased by Tax-Qualified Employee Stock Benefit Plans
shall not be attributable to the individual trustees or beneficiaries of any
such plan for purposes of determining compliance with the limitations set forth
in Section 10(c) or Section 10(d) hereof, (iii) Exchange Shares shall be valued
at the Actual Purchase Price, and (iv) shares purchased by a Tax-Qualified
Employee Stock Benefit Plan pursuant to instructions of an individual in an
account in

                                       17



such plan in which the individual has the right to direct the investment,
including any plan of the Association qualified under Section 401(k) of the
Code, shall be aggregated and included in that individual's purchases and not
attributed to the Tax-Qualified Employee Stock Benefit Plan.

         (g)   Subject to any required regulatory approval and the requirements
of applicable laws and regulations, but without further approval of the Members
of the Mutual Holding Company or the Shareholders of the Association, the
Primary Parties may increase or decrease any of the individual or aggregate
purchase limitations set forth herein to a percentage which does not exceed 5%
of the total offering of shares of Holding Company Common Stock in the
Conversion and Reorganization whether prior to, during or after the Subscription
Offering, Community Offering and/or Syndicated Community Offering. In the event
that an individual purchase limitation is increased after commencement of the
Subscription Offering or any other offering, the Primary Parties shall permit
any Person who subscribed for the maximum number of shares of Conversion Stock
to purchase an additional number of shares, so that such Person shall be
permitted to subscribe for the then maximum number of shares permitted to be
subscribed for by such Person, subject to the rights and preferences of any
Person who has priority Subscription Rights. In the event that any of the
individual or aggregate purchase limitations are decreased after commencement of
the Subscription Offering or any other offering, the orders of any Person who
subscribed for more than the new purchase limitation shall be decreased by the
minimum amount necessary so that such Person shall be in compliance with the
then maximum number of shares permitted to be subscribed for by such Person.

         (h)   The Primary Parties shall have the right to take all such action
as they may, in their sole discretion, deem necessary, appropriate or advisable
in order to monitor and enforce the terms, conditions, limitations and
restrictions contained in this Section 10 and elsewhere in this Plan and the
terms, conditions and representations contained in the Order Form, including,
but not limited to, the absolute right (subject only to any necessary regulatory
approvals or concurrences) to reject, limit or revoke acceptance of any
subscription or order and to delay, terminate or refuse to consummate any sale
of Conversion Stock which they believe might violate, or is designed to, or is
any part of a plan to, evade or circumvent such terms, conditions, limitations,
restrictions and representations. Any such action shall be final, conclusive and
binding on all persons, and the Primary Parties and their respective Boards
shall be free from any liability to any Person on account of any such action.

         (i)   Notwithstanding anything to the contrary contained in this Plan
and except as may otherwise be required by the OTS, the Public Shareholders will
not have to sell any Association Common Stock or be limited in receiving
Exchange Shares even if their ownership of Association Common Stock when
converted into Exchange Shares would exceed an applicable purchase limitation;
provided, however, that a Public Shareholder who would exceed an applicable
purchase limitation may be precluded from purchasing Conversion Stock in the
Offerings.

11.      TIMING OF SUBSCRIPTION OFFERING; MANNER OF EXERCISING SUBSCRIPTION
         RIGHTS AND ORDER FORMS.

         (a)   The Subscription Offering may be commenced concurrently with or
at any time after the mailing to Voting Members of the Mutual Holding Company
and Shareholders of the

                                       18



Association of the proxy statement(s) to be used in connection with the Special
Meeting and the Shareholders' Meeting. The Subscription Offering may be closed
before the Special Meeting and the Shareholders' Meeting, provided that the
offer and sale of the Conversion Stock shall be conditioned upon the approval of
the Plan by the Voting Members of the Mutual Holding Company and the
Shareholders of the Association at the Special Meeting and the Shareholders'
Meeting, respectively.

         (b)   The exact timing of the commencement of the Subscription Offering
shall be determined by the Primary Parties in consultation with the Independent
Appraiser and any financial or advisory or investment banking firm retained by
them in connection with the Conversion. The Primary Parties may consider a
number of factors, including, but not limited to, their current and projected
future earnings, local and national economic conditions, and the prevailing
market for stocks in general and stocks of financial institutions in particular.
The Primary Parties shall have the right to withdraw, terminate, suspend, delay,
revoke or modify any such Subscription Offering, at any time and from time to
time, as they in their sole discretion may determine, without liability to any
Person, subject to compliance with applicable securities laws and any necessary
regulatory approval or concurrence.

         (c)   The Primary Parties shall, promptly after the SEC has declared
the Registration Statement, which includes the Prospectus, effective and all
required regulatory approvals have been obtained, distribute or make available
the Prospectus, together with Order Forms for the purchase of Conversion Stock,
to all Participants for the purpose of enabling them to exercise their
respective Subscription Rights, subject to Section 13 hereof. To the extent
permitted by applicable law and regulation, the Primary Parties may elect to
mail a Prospectus and Order Form only to those Participants who request such
materials by returning a postage-paid card to the Primary Parties by a date
specified in the letter informing them of their Subscription Rights. Under such
circumstances, the Subscription Offering shall not be closed prior to the
expiration of 30 days after the mailing by the Primary Parties of the
postage-paid card to Participants.

         (d)   A single Order Form for all Deposit Accounts maintained with the
Association by an Eligible Account Holder and any Supplemental Eligible Account
Holder may be furnished, irrespective of the number of Deposit Accounts
maintained with the Association on the Eligibility Record Date and Supplemental
Eligibility Record Date, respectively. No person holding a subscription right
may exceed any otherwise applicable purchase limitation by submitting multiple
orders for Conversion Stock. Multiple orders are subject to adjustment, as
appropriate, on a pro rata basis and deposit balances will be divided equally
among such orders in allocating shares in the event of an oversubscription.

         (e)   The recipient of an Order Form shall have no less than 20 days
and no more than 45 days from the date of mailing of the Order Form (with the
exact termination date to be set forth on the Order Form) to properly complete
and execute the Order Form and deliver it to the Primary Parties. The Primary
Parties may extend such period by such amount of time as they determine is
appropriate. Failure of any Participant to deliver a properly executed Order
Form to the Primary Parties, along with full payment (or authorization for full
payment by withdrawal) for the shares of Conversion Stock subscribed for, within
the time limits prescribed, shall be deemed a waiver and

                                       19



release by such person of any rights to subscribe for shares of Conversion
Stock. Each Participant shall be required to confirm to the Primary Parties by
executing an Order Form that such Person has fully complied with all of the
terms, conditions, limitations and restrictions in the Plan.

         (f)   The Primary Parties shall have the absolute right, in their sole
discretion and without liability to any Participant or other Person, to reject
any Order Form, including, but not limited to, any Order Form that is (i)
improperly completed or executed; (ii) not timely received; (iii) not
accompanied by the proper and full payment (or authorization of withdrawal for
full payment) or, in the case of institutional investors in the Community
Offering, not accompanied by an irrevocable order together with a legally
binding commitment to pay the full amount of the purchase price prior to 48
hours before the completion of the Offerings; or (iv) submitted by a Person
whose representations the Primary Parties believe to be false or who they
otherwise believe, either alone, or Acting in Concert with others, is violating,
evading or circumventing, or intends to violate, evade or circumvent, the terms
and conditions of the Plan. Furthermore, in the event Order Forms (i) are not
delivered and are returned to the Association or the Mutual Holding Company by
the Untied States Postal Service or the Association or the Mutual Holding
Company is unable to locate the addressee, or (ii) are not mailed pursuant to a
"no mail" order placed in effect by the account holder, the subscription rights
of the person to which such rights have been granted will lapse as though such
person failed to return the contemplated Order Form within the time period
specified thereon. The Primary Parties may, but will not be required to, waive
any irregularity on any Order Form or may require the submission of corrected
Order Forms or the remittance of full payment for shares of Conversion Stock by
such date as they may specify. The interpretation of the Primary Parties of the
terms and conditions of the Order Forms shall be final and conclusive.

12.      PAYMENT FOR CONVERSION STOCK.

         (a)   Payment for shares of Conversion Stock subscribed for by
Participants in the Subscription Offering and payment for shares of Conversion
Stock ordered by Persons in the Community Offering shall be equal to the Initial
Purchase Price multiplied by the number of shares which are being subscribed for
or ordered, respectively. Such payment may be made in cash, if delivered in
person, or by check or money order at the time the Order Form is delivered to
the Primary Parties. The Primary Parties, in their sole and absolute discretion,
may also elect to receive payment for shares of Conversion Stock by wire
transfer. In addition, the Primary Parties may elect to provide Participants
and/or other Persons who have a Deposit Account with the Association the
opportunity to pay for shares of Conversion Stock by authorizing the Association
to withdraw from such Deposit Account an amount equal to the aggregate Initial
Purchase Price of such shares. If the Actual Purchase Price is less than the
Initial Purchase Price, the Primary Parties shall refund the difference to all
Participants and other Persons, unless the Primary Parties choose to provide
Participants and other Persons the opportunity on the Order Form to elect to
have such difference applied to the purchase of additional whole shares of
Conversion Stock. If the Actual Purchase Price is more than the Initial Purchase
Price, the Primary Parties shall reduce the number of shares of Conversion Stock
ordered by Participants and other Persons and refund any remaining amount which
is attributable to a fractional share interest, unless the Primary Parties
choose to provide Participants and other Persons the opportunity to increase the
Actual Purchase Price submitted by them.

                                       20



         (b)   Consistent with applicable laws and regulations and policies and
practices of the OTS, payment for shares of Conversion Stock subscribed for by
Tax-Qualified Employee Stock Benefit Plans may be made with funds contributed by
the Holding Company and/or the Association and/or funds obtained pursuant to a
loan from an unrelated financial institution pursuant to a loan commitment which
is in force from the time that any such plan submits an Order Form until the
closing of the transactions contemplated hereby.

         (c)   If a Participant or other Person authorizes the Association to
withdraw the amount of the Initial Purchase Price from his or her Deposit
Account, the Association shall have the right to make such withdrawal or to
freeze funds equal to the aggregate Initial Purchase Price upon receipt of the
Order Form. Notwithstanding any regulatory provisions regarding penalties for
early withdrawals from certificate accounts, the Association may allow payment
by means of withdrawal from certificate accounts without the assessment of such
penalties. In the case of an early withdrawal of only a portion of such account,
the certificate evidencing such account shall be canceled if any applicable
minimum balance requirement ceases to be met. In such case, the remaining
balance will earn interest at the regular passbook rate. However, where any
applicable minimum balance is maintained in such certificate account, the rate
of return on the balance of the certificate account shall remain the same as
prior to such early withdrawal. This waiver of the early withdrawal penalty
applies only to withdrawals made in connection with the purchase of Conversion
Stock and is entirely within the discretion of the Primary Parties.

         (d)   The Association shall pay interest, at not less than the passbook
rate, for all amounts paid in cash, by check or money order to purchase shares
of Conversion Stock in the Subscription Offering and the Community Offering from
the date payment is received until the date the Conversion and Reorganization is
completed or terminated.

         (e)   The Association shall not knowingly loan funds or otherwise
extend credit to any Participant or other Person to purchase Conversion Stock.

         (f)   Each share of Conversion Stock shall be non-assessable upon
payment in full of the Actual Purchase Price.

13.      ACCOUNT HOLDERS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES.

         The Primary Parties shall make reasonable efforts to comply with the
securities laws of all jurisdictions in the United States in which Participants
reside. However, no Participant will be offered or receive any Conversion Stock
under the Plan if such Participant resides in a foreign country or resides in a
jurisdiction of the United States with respect to which all of the following
apply: (a) there are few Participants otherwise eligible to subscribe for shares
under this Plan who reside in such jurisdiction; (b) the granting of
Subscription Rights or the offer or sale of shares of Conversion Stock to such
Participants would require any of the Primary Parties or their respective
directors and Officers, under the laws of such jurisdiction, to register as a
broker-dealer, salesman or selling agent or to register or otherwise qualify the
Conversion Stock for sale in such jurisdiction, or any of the Primary Parties
would be required to qualify as a foreign corporation or file a consent to
service of process in such jurisdiction; and (c) such registration,
qualification or filing in the

                                       21



judgment of the Primary Parties would be impracticable or unduly burdensome for
reasons of cost or otherwise.

14.      VOTING RIGHTS OF SHAREHOLDERS.

         Following consummation of the Conversion and Reorganization, voting
rights with respect to the Association shall be held and exercised exclusively
by the Holding Company as holder of all of the Association's outstanding voting
capital stock, and voting rights with respect to the Holding Company shall be
held and exercised exclusively by the holders of the Holding Company's voting
capital stock.

15.      LIQUIDATION ACCOUNT.

         (a)   At the time of the Mutual Holding Company Merger, the Association
shall establish a liquidation account in an amount equal to the greater of (i)
$11,153,000, which is equal to 100% of the retained earnings of the Association
as of December 31, 1993, the date of the latest statement of financial condition
contained in the final offering circular utilized in the formation of the Mutual
Holding Company, or (ii) the percentage of the outstanding shares of the common
stock of the Association owned by the Mutual Holding Company prior to the Bank
Merger, multiplied by the Association total shareholders' equity as reflected in
its latest statement of financial condition contained in the final Prospectus
utilized in the Conversion and Reorganization. The function of the liquidation
account will be to preserve the rights of certain holders of Deposit Accounts in
the Association who maintain such accounts in the Association following the
Conversion and Reorganization to a priority to distributions in the unlikely
event of a liquidation of the Association subsequent to the Conversion and
Reorganization.

         (b)   The liquidation account shall be maintained for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders, if any, who
maintain their Deposit Accounts in the Association after the Conversion and
Reorganization. Each such account holder will, with respect to each Deposit
Account held, have a related inchoate interest in a portion of the liquidation
account balance, which interest will be referred to in this Section 15 as the
"subaccount balance." All Deposit Accounts having the same social security
number will be aggregated for purposes of determining the initial subaccount
balance with respect to such Deposit Accounts, except as provided in Section
15(d) hereof.

         (c)   In the event of a complete liquidation of the Association
subsequent to the Conversion and Reorganization (and only in such event), each
Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall
be entitled to receive a liquidation distribution from the liquidation account
in the amount of the then current subaccount balances for Deposit Accounts then
held (adjusted as described below) before any liquidation distribution may be
made with respect to the capital stock of the Association. No merger,
consolidation, sale of bulk assets or similar combination transaction with
another FDIC-insured institution in which the Association is not the surviving
entity shall be considered a complete liquidation for this purpose. In any such
transaction, the liquidation account shall be assumed by the surviving entity.

                                       22



         (d)   The initial subaccount balance for a Deposit Account held by an
Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall
be determined by multiplying the opening balance in the liquidation account by a
fraction, of which the numerator is the amount of the Qualifying Deposits of
such account holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders, if any. For Deposit Accounts in existence at both the Eligibility
Record Date and the Supplemental Eligibility Record Date, if any, separate
initial subaccount balances shall be determined on the basis of the Qualifying
Deposits in such Deposit Accounts on each such record date. Initial subaccount
balances shall not be increased, and shall be subject to downward adjustment as
provided below.

         (e)   If the aggregate deposit balance in the Deposit Account(s) of any
Eligible Account Holder or Supplemental Eligible Account Holder, if any, at the
close of business on any June 30 annual closing date, commencing on or after the
effective date of the Conversion and Reorganization, is less than the lesser of
(a) the aggregate deposit balance in such Deposit Account(s) at the close of
business on any other annual closing date subsequent to such record dates or (b)
the aggregate deposit balance in such Deposit Account(s) as of the Eligibility
Record Date or the Supplemental Eligibility Record Date, if any, the subaccount
balance for such Deposit Account(s) shall be adjusted by reducing such
subaccount balance in an amount proportionate to the reduction in such deposit
balance. In the event of such a downward adjustment, the subaccount balance
shall not be subsequently increased, notwithstanding any subsequent increase in
the deposit balance of the related Deposit Account(s). The subaccount balance of
an Eligible Account Holder or Supplemental Eligible Account Holder, if any, will
be reduced to zero if the Account Holder ceases to maintain a Deposit Account at
the Association that has the same social security number as appeared on his
Deposit Account(s) at the Eligibility Record Date or, if applicable, the
Supplemental Eligibility Record Date.

         (f)   Subsequent to the Conversion and Reorganization, the Association
may not pay cash dividends generally on deposit accounts and/or capital stock of
the Association, or repurchase any of the capital stock of the Association, if
such dividend or repurchase would reduce the Association's regulatory capital
below the aggregate amount of the then current subaccount balances for Deposit
Accounts then held; otherwise, the existence of the liquidation account shall
not operate to restrict the use or application of any of the net worth accounts
of the Association.

         (g)   For purposes of this Section 15, a Deposit Account includes a
predecessor or successor account which is held by an Account Holder with the
same social security number.

16.      TRANSFER OF DEPOSIT ACCOUNTS.

         Each Deposit Account in the Association at the time of the consummation
of the Conversion and Reorganization shall become, without further action by the
holder, a Deposit Account in the Association equivalent in withdrawable amount
to the withdrawal value (as adjusted to give effect to any withdrawal made for
the purchase of Conversion Stock), and subject to the same terms and conditions
(except as to voting and liquidation rights) as such Deposit Account in the
Association immediately preceding consummation of the Conversion and
Reorganization. Holders of Deposit Accounts in the Association shall not, as
such holders, have any voting rights.

                                       23



17.      REQUIREMENTS FOLLOWING CONVERSION FOR REGISTRATION, MAKING AND STOCK
         EXCHANGE LISTING.

         In connection with the Conversion and Reorganization, the Holding
Company shall register the Holding Company Common Stock pursuant to Section 12
of the Securities Exchange Act of 1934, as amended, and shall undertake not to
deregister such stock for a period of three years thereafter. The Holding
Company also shall use its best efforts to (i) encourage and assist a market
maker to establish and maintain a market for the Holding Company Common Stock
and (ii) list the Holding Company Common Stock on a national or regional
securities exchange or to have quotations for such stock disseminated on the
Nasdaq Stock Market.

18.      DIRECTORS AND OFFICERS OF THE ASSOCIATION.

         Each person serving as a director or Officer of the Association at the
time of the Conversion and Reorganization shall continue to serve as a director
or Officer of the Association for the balance of the term for which the person
was elected prior to the Conversion and Reorganization, and until a successor is
elected and qualified. The number, names, business addresses and terms of the
directors of the Association are set forth in the Plans of Merger included as
Annexes A and B hereto.

19.      REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS THE
         CONVERSION AND REORGANIZATION.

         For a period of three years following the Conversion and
Reorganization, the directors and Officers of the Holding Company and the
Association and their Associates may not purchase, without the prior written
approval of the OTS, Holding Company Common Stock except from a broker-dealer
registered with the SEC. This prohibition shall not apply, however, to (i) a
negotiated transaction arrived at by direct negotiation between buyer and seller
and involving more than 1% of the outstanding Holding Company Common Stock and
(ii) purchases of stock made by and held by any Tax-Qualified Employee Stock
Benefit Plan (and purchases of stock made by and held by any Non-Tax-Qualified
Employee Stock Benefit Plan following the receipt of shareholder approval of
such plan) which may be attributable to individual Officers or directors. The
foregoing restriction on purchases of Holding Company Common Stock shall be in
addition to any restrictions that may be imposed by federal and state securities
laws.

20.      ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION.

         As part of the Conversion and Reorganization, the Holding Company and
the Association intend to establish the Foundation and donate to the Foundation
from authorized but unissued shares of Holding Company Common Stock, an amount
up to 8% of the number of shares of Holding Company Common Stock issued in the
Conversion and Reorganization. The Foundation is being formed in connection with
the Conversion and Reorganization in order to complement the Association's
existing community reinvestment activities and to share with the Association's
local community a part of the Association's financial success as a locally
headquartered, community minded, financial services institution. The funding of
the Foundation with Holding Company

                                       24



Common Stock accomplishes this goal as it enables the community to share in the
growth and profitability of the Holding Company and the Association over the
long-term.

         The Foundation will be dedicated to the promotion of charitable
purposes including grants or donations to support housing, not-for-profit
community groups and other types of organizations or civic-minded projects. The
Foundation annually will distribute total grants to assist charitable
organizations or to fund charitable projects within its local community of not
less than 5% of the average fair value of Foundation assets each year, less
certain expenses. In order to serve the purposes for which it was formed and
maintain its Section 501(c)(3) qualification, the Foundation may sell, on an
annual basis, a limited portion of the Holding Company Common Stock contributed
to it by the Holding Company.

         The board of directors of the Foundation will be comprised of
individuals who are Officers and/or directors of the Holding Company or the
Association and, for at least five years after its organization, at least one
member of the Association's community who is not an Officer or director of the
Holding Company or the Association. The board of directors of the Foundation
will be responsible for establishing the policies of the Foundation with respect
to grants or donations, consistent with the stated purposes of the Foundation.

21.      RESTRICTIONS ON TRANSFER OF STOCK.

         All shares of Conversion Stock which are purchased by Persons other
than directors and Officers of the Holding Company or the Association shall be
transferable without restriction. Shares of Conversion Stock purchased by
directors and Officers of the Holding Company or the Association on original
issue from the Holding Company (by subscription or otherwise) shall be subject
to the restriction that such shares shall not be sold or otherwise disposed of
for value for a period of one year following the date of purchase, except for
any disposition of such shares following the death of the original purchaser or
pursuant to any merger or similar transaction approved by the OTS. The shares of
Conversion Stock issued by the Holding Company to such directors and Officers
shall bear the following legend giving appropriate notice of such one-year
restriction:

         "The shares of stock evidenced by this Certificate are restricted as to
         transfer for a period of one year from the date of this Certificate
         pursuant to Part 563b of the Rules and Regulations of the Office of
         Thrift Supervision. These shares may not be transferred during such
         one-year period without a legal opinion of counsel for the Company that
         said transfer is permissible under the provisions of applicable law and
         regulation. This restrictive legend shall be deemed null and void after
         one year from the date of this Certificate."

In addition, the Holding Company shall give appropriate instructions to the
transfer agent for the Holding Company Common Stock with respect to the
applicable restrictions relating to the transfer of restricted stock. Any shares
issued at a later date as a stock dividend, stock split or otherwise with
respect to any such restricted stock shall be subject to the same holding period
restrictions as may then be applicable to such restricted stock. The foregoing
restriction on transfer shall be in addition to any restrictions on transfer
that may be imposed by federal and state securities laws.

                                       25



22.      RESTRICTIONS ON VOTING HOLDING COMPANY COMMON STOCK.

         The articles of incorporation of the Holding Company shall provide that
in no event shall any record owner of any outstanding shares of Holding Company
Common Stock who beneficially owns in excess of 10% of such outstanding shares
be entitled or permitted to any vote in respect to any shares held in excess of
10%.

23.      TAX RULINGS OR OPINIONS.

         Consummation of the Conversion and Reorganization is conditioned upon
prior receipt by the Primary Parties of either a ruling or an opinion of counsel
with respect to federal tax laws, and either a ruling or an opinion with respect
to Tennessee tax laws, to the effect that consummation of the transactions
contemplated hereby will not result in a taxable reorganization under the
provisions of the applicable codes or otherwise result in any adverse tax
consequences to the Primary Parties or to account holders receiving Subscription
Rights before or after the Conversion and Reorganization, except in each case to
the extent, if any, that Subscription Rights are deemed to have fair market
value on the date such rights are issued.

24.      STOCK COMPENSATION PLANS.

         (a)   The Holding Company and the Association are authorized to adopt
Tax-Qualified Employee Stock Benefit Plans in connection with the Conversion and
Reorganization, including without limitation an employee stock ownership plan.

         (b)   The Holding Company and the Association also are authorized to
adopt stock option plans, restricted stock grant plans and other
Non-Tax-Qualified Employee Stock Benefit Plans, provided that no stock options
shall be granted, and no shares of Conversion Stock shall be purchased, pursuant
to any of such plans prior to the earlier of (i) the one-year anniversary of the
consummation of the Conversion and Reorganization or (ii) the receipt of
shareholder approval of such plans at either an annual or special meeting of
shareholders of the Holding Company held no earlier than six months following
the Conversion and Reorganization.

         (c)   Existing as well as any newly-created Tax-Qualified Employee
Stock Benefit Plans may purchase shares of Conversion Stock in the Offerings, to
the extent permitted by the terms of such benefit plans and this Plan.

         (d)   The Holding Company and the Association are authorized to enter
into employment or severance agreements with their executive officers.

25.      DIVIDEND AND REPURCHASE RESTRICTIONS ON STOCK.

         (a)   Following consummation of the Conversion and Reorganization, any
repurchases of shares of capital stock by the Holding Company will be made in
accordance with then applicable laws and regulations.

                                       26



         (b)   The Association may not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause the
regulatory capital of the Association to be reduced below the amount required
for the liquidation account. Any dividend declared or paid on, or repurchase of,
the Association's capital stock also shall be in compliance with Section 563.146
of the Rules and Regulations of the OTS, or any successor thereto.

26.      PAYMENT OF FEES TO BROKERS.

         The Primary Parties may elect to offer to pay fees on a per share basis
to securities brokers who assist purchasers of Conversion Stock in the
Offerings.

27.      EFFECTIVE DATE.

         The effective date of the Conversion and Reorganization shall be the
date upon which the last of the following actions occurs: (i) the filing of
Articles of Combination with the OTS with respect to the Mutual Holding Company
Merger, (ii) the filing of Articles of Combination with the OTS with respect to
the Bank Merger and (iii) the closing of the issuance of the shares of
Conversion Stock in the Offerings. The filing of Articles of Combination
relating to the Mutual Holding Company Merger and the Bank Merger and the
closing of the issuance of shares of Conversion Stock in the Offerings shall not
occur until all requisite regulatory, Member and Shareholder approvals have been
obtained, all applicable waiting periods have expired and sufficient
subscriptions and orders for the Conversion Stock have been received. It is
intended that the closing of the Mutual Holding Company Merger, the Bank Merger
and the sale of shares of Conversion Stock in the Offerings shall occur
consecutively and substantially simultaneously.

28.      AMENDMENT OR TERMINATION OF THE PLAN.

         If deemed necessary or desirable by the Boards of Directors of the
Primary Parties, this Plan may be substantively amended, as a result of comments
from regulatory authorities or otherwise, at any time prior to the solicitation
of proxies from Members and Shareholders to vote on the Plan and at any time
thereafter with the concurrence of the OTS. Any amendment to this Plan made
after approval by the Members and Shareholders with the concurrence of the OTS
shall not necessitate further approval by the Members or Shareholders unless
otherwise required by the OTS. This Plan shall terminate if the sale of all
shares of Conversion Stock is not completed within 24 months from the date of
the Special Meeting. Prior to the earlier of the Special Meeting and the
Shareholders' Meeting, this Plan may be terminated by the Boards of Directors of
the Primary Parties without approval of the OTS; after the Special Meeting or
the Shareholders' Meeting, the Boards of Directors may terminate this Plan only
with the approval of the OTS.

29.      INTERPRETATION OF THE PLAN.

         All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of each of the Boards of Directors of the
Primary Parties shall be final, subject to the authority of the OTS.

                                       27



                                                                         ANNEX A

                                  AGREEMENT AND
                                 PLAN OF MERGER

         This Agreement and Plan of Merger, dated as of __________ ___, 2003, is
made by and between Jefferson Bancshares, M.H.C. ("MHC"), a federally chartered
mutual holding company, and Jefferson Federal Savings and Loan Association of
Morristown ("Association" or "Surviving Corporation"), a federally chartered
savings association (collectively, the "Constituent Corporations").

                                   WITNESSETH:

         WHEREAS, the MHC and the Association have adopted a Plan of Conversion
("Plan of Conversion") pursuant to which (i) the MHC will convert to a
federally-chartered interim stock savings bank and simultaneously merge with and
into the Association, with the Association as the surviving entity ("MHC
Merger"), (ii) the Association and a newly-formed interim federal savings bank
will merge, pursuant to which the Association will become a wholly-owned
subsidiary of a newly formed stock corporation ("Holding Company") ("Bank
Merger"), and (iii) the Holding Company will offer shares of its common stock in
the manner set forth in the Plan of Conversion (collectively, the "Conversion
and Reorganization"); and

         WHEREAS, the MHC and the Association desire to provide for the terms
and conditions of the MHC Merger;

         NOW, THEREFORE, the MHC and the Association hereby agree as follows:

         1.   EFFECTIVE DATE. The MHC Merger shall become effective on the date
specified in the endorsement of the Articles of Combination relating to the MHC
Merger by the Secretary of the Office of Thrift Supervision ("OTS") pursuant to
12 C.F.R. 552.13(k), or any successor thereto ("Effective Date").

         2.   THE MHC MERGER AND EFFECT THEREOF. Subject to the terms and
conditions set forth herein and the prior approval of the OTS of the Conversion
and Reorganization and the expiration of all applicable waiting periods, the MHC
shall convert from the mutual form to a federal interim stock savings bank and
simultaneously merge with and into the Association, which shall be the Surviving
Corporation. Upon consummation of the MHC Merger, the Surviving Corporation
shall be considered the same business and corporate entity as each of the
Constituent Corporations and the Surviving Corporation shall be subject to and
be deemed to have assumed all of the property, rights, privileges, powers,
franchises, debts, liabilities, obligations, duties and relationships of each of
the Constituent Corporations and shall have succeeded to all of each of their
relationships, fiduciary or otherwise, as fully and to the same extent as if
such property, rights, privileges, powers, franchises, debts, obligations,
duties and relationships had been originally

                                    Annex A-1



acquired, incurred or entered into by the Surviving Corporation. In addition,
any reference to either of the Constituent Corporations in any contract or
document, whether executed or taking effect before or after the Effective Date,
shall be considered a reference to the Surviving Corporation if not inconsistent
with the other provisions of the contract or document; and any pending action or
other judicial proceeding to which either of the Constituent Corporations is a
party shall not be deemed to have abated or to have been discontinued by reason
of the MHC Merger, but may be prosecuted to final judgment, order or decree in
the same manner as if the MHC Merger had not occurred or the Surviving
Corporation may be substituted as a party to such action or proceeding, and any
judgment, order or decree may be rendered for or against it that might have been
rendered for or against either of the Constituent Corporations if the MHC Merger
had not occurred.

         3.    CANCELLATION OF ASSOCIATION COMMON STOCK HELD BY THE MUTUAL
HOLDING COMPANY AND MEMBER INTERESTS; LIQUIDATION ACCOUNT.

         (a)   On the Effective Date: (i) each share of common stock, $1.00 par
value per share, of the Association ("Association Common Stock") issued and
outstanding immediately prior to the Effective Date and held by the MHC shall,
by virtue of the MHC Merger and without any action on the part of the holder
thereof, be canceled, (ii) the interests in the MHC of any person, firm or
entity who or which qualified as a member of the MHC in accordance with its
mutual charter and bylaws and the laws of the United States prior to the MHC's
conversion from mutual to stock form ("Members") shall, by virtue of the MHC
Merger and without any action on the part of any Member, be canceled, and (iii)
the Association shall establish a liquidation account on behalf of each
depositor member of the MHC as provided for in the Plan of Conversion.

         (b)   At or after the Effective Date and prior to the Bank Merger, each
certificate or certificates theretofore, evidencing issued and outstanding
shares of Association Common Stock, other than any such certificate or
certificates held by the MHC, which shall be canceled, shall continue to
represent issued and outstanding shares of Association Common Stock.

         4.    RIGHTS OF DISSENT AND APPRAISAL ABSENT. No holder of Association
Common Stock shall have any dissenter or appraisal rights in connection with the
MHC Merger.

         5.    NAME OF SURVIVING CORPORATION. The name of the Surviving
Corporation shall be "Jefferson Federal Savings and Loan Association of
Morristown."

         6.    DIRECTORS OF THE SURVIVING CORPORATION. Upon and after the
Effective Date, until changed in accordance with the Charter and Bylaws of the
Surviving Corporation and applicable law, the number of directors of the
Surviving Corporation shall be seven. The names of those persons who, upon and
after the Effective Date, shall be directors of the Surviving Corporation are
set forth below. Each such director shall serve for the term which expires at
the annual meeting of stockholders of the Surviving Corporation in the year set
forth after his respective name, and until a successor is elected and qualified.

                                    Annex A-2





                Name                                   Term Expires
                ----                                   ------------
                                                    
         Dr. Terry M. Brimer                               2004
         Dr. Jack E. Campbell                              2003
         Willliam T. Hale                                  2005
         John F. McCrary, Jr.                              2005
         H. Scott Reams                                    2004
         Anderson L. Smith                                 2003
         William F. Young                                  2003


         The address of each director is 120 Evans Avenue, Morristown, Tennessee
37814.

         7.    OFFICERS OF THE SURVIVING CORPORATION. Upon and after the
Effective Date, until changed in accordance with the Charter and Bylaws of the
Surviving Corporation and applicable law, the officers of the Association
immediately prior to the Effective Date shall be the officers of the Surviving
Corporation.

         8.    OFFICES. Upon the Effective Date, all offices of the Association
shall be offices of the Surviving Corporation. As of the Effective Date, the
home office of the Surviving Corporation shall remain at 120 Evans Avenue,
Morristown, Tennessee.

         9.    CHARTER AND BYLAWS. On and after the Effective Date, the Charter
of the Association as in effect immediately prior to the Effective Date shall be
the Charter of the Surviving Corporation until amended in accordance with the
terms thereof and applicable law, except that the Charter shall be amended to
provide for the establishment of a liquidation account in accordance with
applicable law and the Plan of Conversion. On and after the Effective Date, the
Bylaws of the Association as in effect immediately prior to the Effective Date
shall be the Bylaws of the Surviving Corporation until amended in accordance
with the terms thereof and applicable law.

         10.   STOCKHOLDER AND MEMBER APPROVALS. The affirmative votes of the
holders of Association Common Stock and of the Members as set forth in the Plan
of Conversion shall be required to approve the Plan of Conversion, of which this
Agreement and Plan of Merger is a part, on behalf of the Association and the
MHC, respectively.

         11.   ABANDONMENT OF PLAN. This Agreement and Plan of Merger may be
abandoned by either the MHC or the Association at any time before the Effective
Date in the manner set forth in the Plan of Conversion.

         12.   AMENDMENTS. This Agreement and Plan of Merger may be amended in
the manner set forth in the Plan of Conversion by a subsequent writing signed by
the parties hereto upon the approval of the Boards of Directors of the
Constituent Corporations.

                                    Annex A-3




         13.   SUCCESSORS. This Agreement shall be binding on the successors of
the Constituent Corporations.

         14.   GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Tennessee, except to the extent
superseded by the laws of the United States.

                                    Annex A-4



         IN WITNESS WHEREOF, the MHC and the Association have caused this
Agreement and Plan of Merger to be executed by their duly authorized officers as
of the day and year first above written.

Attest:                               JEFFERSON BANCSHARES, M.H.C.




_____________________________         By:  _____________________________________
Dr. Jack E. Campbell                       Anderson L. Smith
Corporate Secretary                        President and Chief Executive Officer


Attest:                               JEFFERSON FEDERAL SAVINGS AND
                                      LOAN ASSOCIATION OF MORRISTOWN



_____________________________         By:  _____________________________________
Dr. Jack E. Campbell                       Anderson L. Smith
Corporate Secretary                        President and Chief Executive Officer

                                    Annex A-5



                                                                         ANNEX B

                                  AGREEMENT AND
                                 PLAN OF MERGER

         This Agreement and Plan of Merger, dated as of _____________ ___, 2003,
is made by and among Jefferson Federal Savings and Loan Association of
Morristown ("Association" or the "Surviving Corporation"), a federally chartered
savings bank, Jefferson Bancshares, Inc. ("Holding Company"), a Tennessee
corporation, and Jefferson Interim Savings Association ("Interim"), an interim
federal stock savings bank.

                                   WITNESSETH:

         WHEREAS, the Association has organized the Holding Company as a
first-tier, wholly owned subsidiary for the purpose of becoming the stock
holding company of the Association upon completion of the Conversion and
Reorganization as defined in the Plan of Conversion adopted by the Boards of
Directors of Jefferson Bancshares, M.H.C. ("Mutual Holding Company") and the
Association; and

         WHEREAS, the Mutual Holding Company, which owns a majority of the
outstanding common stock of the Association, par value $1.00 per share
("Association Common Stock"), will convert to a federally-chartered interim
stock savings bank and simultaneously merge with and into the Association
pursuant to the Plan of Conversion and the Agreement and Plan of Merger included
as Annex A thereto, pursuant to which all shares of Association Common Stock
held by the Mutual Holding Company will be canceled; and

         WHEREAS, the formation of a stock holding company by the Association
will be facilitated by causing the Holding Company to become the sole
stockholder of a newly-formed interim stock savings bank ("Interim") and then
merge Interim with and into the Association, pursuant to which the Association
will reorganize as a wholly-owned subsidiary of the Holding Company
("Reorganization") and, in connection therewith, all outstanding shares of
Association Common Stock will be converted automatically into and become shares
of common stock of the Holding Company, par value $0.01 per share ("Holding
Company Common Stock"); and

         WHEREAS, Interim is being organized by the officers of the Association
as an interim Federal stock savings association with the Holding Company as its
sole stockholder in order to effect the Reorganization; and

         WHEREAS, the Association and Interim ("Constituent Corporations") and
the Holding Company desire to provide for the terms and conditions of the
Reorganization.

         NOW, THEREFORE, the Association, Interim and the Holding Company hereby
agree as follows:

                                    Annex B-1



         1.    EFFECTIVE DATE. The Reorganization shall become effective on the
date specified in the endorsement of the articles of combination relating to the
Reorganization by the Office of Thrift Supervision ("OTS") pursuant to 12 C.F.R.
ss.552.13(k), or any successor thereto ("Effective Date").

         2.    THE MERGER AND EFFECT THEREOF. Subject to the terms and
conditions set forth herein and the prior approval of the OTS of the Conversion
and the Reorganization, as defined in the Plan of Conversion, and the expiration
of all applicable waiting periods, Interim shall merge with and into the
Association, with the Association as the Surviving Corporation. Upon
consummation of the Reorganization, the Surviving Corporation shall be
considered the same business and corporate entity as each of the Constituent
Corporations and thereupon and thereafter all the property, rights, powers and
franchises of each of the Constituent Corporations shall vest in the Surviving
Corporation and the Surviving Corporation shall be subject to and be deemed to
have assumed all of the property, rights, privileges, powers, franchises, debts,
liabilities, obligations and duties of each of the Constituent Corporations and
shall have succeeded to all of each of their relationships, fiduciary or
otherwise, fully and to the same extent as if such property, rights, privileges,
powers, franchises, debts, obligations, duties and relationships had been
originally acquired, incurred or entered into by the Surviving Corporation. In
addition any reference to either of the Constituent Corporations in any contract
or document, whether executed or taking effect before or after the Effective
Date, shall be considered a reference to the Association if not inconsistent
with the other provisions of the contract or document; and any pending action or
other judicial proceeding of which either of the Constituent Corporations is a
party shall not be deemed to have abated or to have been discontinued by reason
of the Reorganization, but may be prosecuted to final judgment, order or decree
in the same manner as if the Reorganization had not occurred or the Surviving
Corporation may be substituted as a party to such action or proceeding, and any
judgment, order or decree may be rendered for or against it that might have been
rendered for or against either of the Constituent Corporations if the
Reorganization had not occurred.

         3.    CONVERSION OF STOCK.

         (a)   On the Effective Date, (i) each share of Association Common Stock
issued and outstanding immediately prior to the Effective Date shall, by virtue
of the Reorganization and without any action on the part of the holder thereof,
be converted into the right to receive Holding Company Common Stock based on the
Exchange Ratio, as defined in the Plan of Conversion, plus the right to receive
cash in lieu of any fractional share interest, as determined in accordance with
Section 3(c) hereof, (ii) each share of common stock, par value $1.00 per share,
of Interim ("Interim Common Stock") issued and outstanding immediately prior to
the Effective Date shall, by virtue of the Reorganization and without any action
on the part of the holder thereof, be converted into one share of Association
Common Stock, and (iii) each share of Holding Company Common Stock issued and
outstanding immediately prior to the Effective Date shall, by virtue of the
Reorganization and without any action on the part of the holder thereof, be
canceled. By voting in favor of this Plan of Reorganization, the Holding
Company, as the sole stockholder of Interim, shall have agreed (i) to issue
shares of Holding Company Common Stock in accordance with the terms hereof and
(ii) to

                                    Annex B-2



cancel all previously issued and outstanding shares of Holding Company Common
Stock upon the effectiveness of the Reorganization.

         (b)   On and after the Effective Date, there shall be no registrations
of transfers on the stock transfer books of Interim or the Association of shares
of Interim Common Stock or Association Common Stock which were outstanding
immediately prior to the Effective Date.

         (c)   Notwithstanding any other provision hereof, no fractional shares
of Holding Company Common Stock shall be issued to holders of Association Common
Stock. In lieu thereof, the holder of shares of Association Common Stock
entitled to a fraction of a share of Holding Company Common Stock shall, at the
time of surrender of the certificate or certificates representing such holder
shares, receive an amount of cash equal to the product arrived at by multiplying
such fraction of a share of Holding Company Common Stock by the Actual Purchase
Price, as defined in the Plan of Conversion. No such holder shall be entitled to
dividends, voting rights or any other rights in respect of any fractional share.

         4.    EXCHANGE OF SHARES.

         (a)   At or after the Effective Date, each holder of a certificate or
certificates theretofore evidencing issued and outstanding shares of Association
Common Stock, upon surrender of the same to an agent, duly appointed by the
Holding Company ("Exchange Agent"), shall be entitled to receive in exchange
therefor certificate(s) representing the number full shares of Holding Company
Common Stock for which the shares of Association Common Stock theretofore
represented by the certificate or certificates so surrendered shall have been
converted as provided in Section 3(a) hereof. The Exchange Agent shall mail to
each holder of record of an outstanding certificate which immediately prior to
the Effective Date evidenced shares of Association Common Stock, and which is to
be exchanged for Holding Company Common Stock as provided in Section 3(a)
hereof, a form of letter of transmittal which shall specify that delivery shall
be effected, and risk of loss and title to such certificate shall pass, only
upon delivery of such certificate to the Exchange Agent advising such holder of
the terms of the exchange effected by the Reorganization and of the procedure
for surrendering to the Exchange Agent such certificate in exchange for
certificate or certificates evidencing Holding Company Common Stock.

         (b)   No holder of a certificate theretofore representing shares of
Association Common Stock shall be entitled to receive any dividends in respect
of the Holding Company Common Stock into which such shares shall have been
converted by virtue of the Bank Merger until the certificate representing such
shares of Association Common Stock is surrendered in exchange for certificates
representing shares of Holding Company Common Stock. In the event that dividends
are declared and paid by the Holding Company in respect of Holding Company
Common Stock after the Effective Date but prior to surrender of certificates
representing shares of Association Common Stock, dividends payable in respect of
shares of Holding Company Common Stock not then issued shall accrue (without
interest). Any such dividends shall be paid (without interest) upon surrender of
the certificates representing such shares of Association Common Stock. The
Holding Company shall

                                    Annex B-3



be entitled, after the Effective Date, to treat certificates representing shares
of Association Common Stock as evidencing ownership of the number of full shares
of Holding Company Common Stock into which the shares of Association Common
Stock represented by such certificates shall have been converted,
notwithstanding the failure on the part of the holder thereof to surrender such
certificates.

         (c)   The Holding Company shall not be obligated to deliver a
certificate or certificates representing shares of Holding Company Common Stock
to which a holder of Association Common Stock would otherwise be entitled as a
result of the Reorganization until such holder surrenders the certificate or
certificates representing the shares of Association Common Stock for exchange as
provided in this Section 4, or, in default thereof, an appropriate affidavit of
loss and indemnification agreement and/or an indemnity bond as may be required
in each case by the Holding Company. If any certificate evidencing shares of
Holding Company Common Stock is to be issued in a name other than that in which
the Certificate evidencing Association Common Stock surrendered in exchanged
therefor is registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange pay to the
Exchange Agent any transfer or other tax required by reason of the issuance of a
certificate for shares of Holding Company Common Stock in any name other than
that of the registered holder of the certificate surrendered or otherwise
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.

         (d)   If, between the date hereof and the Effective Date, the shares of
Association Common Stock shall be changed into a different number or class of
shares by reason of any reclassification, recapitalization, split-up,
combination, exchange of shares or readjustment or a stock dividend thereon
shall be declared with a record date within said period, the Exchange Ratio
specified in Section 3(a) hereof shall be adjusted accordingly.

         5.    RIGHTS OF DISSENT AND APPRAISAL ABSENT. Holders of Association
Common Stock shall dissenter or appraisal rights in connection with the
Reorganization to the extent required by 12 C.F.R. ss.552.14, or any successor
thereto.

         6.    NAME OF SURVIVING CORPORATION. The name of the Surviving
Corporation shall be "Jefferson Federal Bank."

         7.    DIRECTORS OF THE SURVIVING CORPORATION. Upon and after the
Effective Date, until changed in accordance with the Charter and Bylaws of the
Surviving Corporation and applicable law, the number of directors of the
Surviving Corporation shall be seven. The names of those persons who, upon and
after the Effective Date, shall be directors of the Surviving Corporation are
set forth below. Each such director shall serve for the term which expires at
the annual meeting of stockholders of the Surviving Corporation in the year set
forth after his respective name, and until a successor is elected and qualified.

                                    Annex B-4





               Name                                    Term Expires
               ----                                    ------------
                                                    
         Dr. Terry M. Brimer                                2004
         Dr. Jack E. Campbell                               2003
         Willliam T. Hale                                   2005
         John F. McCrary, Jr.                               2005
         H. Scott Reams                                     2004
         Anderson L. Smith                                  2003
         William F. Young                                   2003


         The address of each director is 120 Evans Avenue, Morristown, Tennessee
37814.

         8.    OFFICERS OF THE SURVIVING CORPORATION. Upon and after the
Effective Date, until changed in accordance with the Charter and Bylaws of the
Surviving Corporation and applicable law, the officers of the Association
immediately prior to the Effective Date shall be the officers of the Surviving
Corporation.

         9.    OFFICES. Upon the Effective Date, all offices of the Association
shall be offices of the Surviving Corporation. As of the Effective Date, the
home office of the Surviving Corporation shall remain at 120 Evans Avenue,
Morristown, Tennessee 37814.

         10.   CHARTER AND BYLAWS. On and after the Effective Date, the Charter
and Bylaws of the Association as in effect immediately prior to the Effective
Date shall be the Charter and Bylaws of the Surviving Corporation until amended
in accordance with the terms thereof and applicable law.

         11.   SAVINGS ACCOUNTS. Upon the Effective Date, any savings accounts
of Interim, without reissue, shall be and become savings accounts of the
Surviving Corporation without change in their respective terms, including,
without limitation, maturity minimum required balances or withdrawal value.

         12.   STOCK COMPENSATION PLANS. By voting in favor of this Agreement,
the Holding Company shall have approved adoption of the Association's 1995 Stock
Option Plan and 1995 Management Development and Recognition Plan (collectively,
the "Plans") as plans of the Holding Company and shall have agreed to issue
Holding Company Common Stock in lieu of Association Common Stock pursuant to the
terms of such Plans. As of the Effective Date, rights outstanding under the
Plans shall be assumed by the Holding Company and thereafter shall be rights
only for shares of Holding Company Common Stock, with each such right being for
a number of shares of Holding Company Common Stock equal to the number of shares
of Savings Bank Common Stack that were available thereunder immediately prior to
the Effective Date times the Exchange Ratio, as defined in the plan of
conversion, and the price of each such right shall be adjusted to reflect the
Exchange Ratio and so that the aggregate purchase price of the right is
unaffected, but with no change in any other term or condition of such right. The
Holding Company

                                    Annex B-5




shall make appropriate amendments to the Plans to reflect the adoption of the
Plans by the Holding Company without adverse effect upon the rights outstanding
thereunder.

         13.   STOCKHOLDER APPROVAL. The affirmative votes of the holders of
Association Common Stock set forth in the Plan of Conversion shall be required
to approve the Plan of Conversion, of which this Agreement and Plan of Merger is
a part, on behalf of the Association. The approval of the Holding Company, as
the sole holder of the Interim Common Stock, shall be required to approve the
Plan of Conversion, of which this Agreement and Plan of Merger is a part, on
behalf of Interim.

         14.   REGISTRATION; OTHER APPROVALS. In addition to the approvals set
forth in Sections 1 and 13 hereof and in the Plan of Conversion, the obligations
of the parties hereto to consummate the Reorganization shall be subject to the
Holding Company Common Stock to be issued hereunder in exchange for Association
Common Stock being registered under the Securities Act of 1933, as amended, and
registered or qualified under applicable state securities laws, as well as the
receipt of all other approvals, consents or waivers as the parties may deem
necessary or advisable.

         15.   ABANDONMENT OF PLAN. This Plan of Reorganization may be abandoned
by either the Association or Interim at any time before the Effective Date in
the manner set forth in the Plan of Conversion.

         16.   AMENDMENTS. This Plan of Reorganization may be amended in the
manner set forth in the Plan of Conversion by a subsequent writing signed by the
parties hereto upon the approval of the Board of Directors of each of the
parties hereto.

         17.   SUCCESSORS. This Plan of Reorganization shall be binding on the
successors of the parties hereto.

         18.   GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Tennessee, except to the extent
superseded by the laws of the United States.

                                    Annex B-6



         IN WITNESS WHEREOF, the Parties hereto have cause this Plan of
Reorganization to be duly executed on its behalf by its officers thereunto duly
authorized, all as of the date first above written.

Attest:                               JEFFERSON FEDERAL SAVINGS AND LOAN
                                      ASSOCIATION OF MORRISTOWN



__________________________            By:  _____________________________________
Dr. Jack E. Campbell                       Anderson L. Smith
Corporate Secretary                        President and Chief Executive Officer



Attest:                               JEFFERSON BANCSHARES, INC.



__________________________            By:  _____________________________________
                                           Anderson L. Smith
Corporate Secretary                        President and Chief Executive Officer



Attest:                               JEFFERSON INTERIM SAVINGS
                                      ASSOCIATION



__________________________            By:  _____________________________________
                                           Anderson L. Smith
Corporate Secretary                        President and Chief Executive Officer

                                    Annex B-7

EX-3.1

                                                                     Exhibit 3.1

                                   CHARTER FOR
                           JEFFERSON BANCSHARES, INC.

                                    ARTICLE I
                                 Corporate Name

         The name of the corporation is Jefferson Bancshares, Inc. (the
"Corporation").

                                   ARTICLE II
                                Registered Agent

         The street address and zip code of the registered office of the
Corporation are 120 Evans Avenue, Morristown, Tennessee 37814. The registered
office of the Corporation is located in Hamblen County. The name of the initial
registered agent of the Corporation at its registered office is Anderson L.
Smith.

                                   ARTICLE III
                                Principal Office

         The street address and zip code of the principal office of the
Corporation are 120 Evans Avenue, Morristown, Tennessee 37814.

                                   ARTICLE IV
                               Purpose and Powers

         The Corporation is for profit. The purpose or purposes for which the
Corporation is organized are to act as a holding company for a financial
institution or institutions and to engage in any lawful business for which
corporations may be incorporated pursuant to the laws of Tennessee. The
Corporation shall have all the powers of a corporation organized under such
laws.

                                    ARTICLE V
                                  Capital Stock

         The total number of shares of all classes of capital stock which the
Corporation has authority to issue is forty million (40,000,000) of which thirty
million (30,000,000) shares shall be common stock, par value $0.01 per share,
and of which 10,000,000 shares shall be preferred stock, par value $0.01 per
share. The shares may be issued from time to time as authorized by the

                                       1



Board of Directors without the approval of the Corporation's shareholders except
as otherwise provided in this Article V or the rules of a national securities
exchange or automated quotation system, if applicable. The consideration for the
issuance of the shares shall be paid in full before their issuance and shall not
be less than the par value per share. The adequacy of the consideration for the
shares shall be determined by the Board of Directors in accordance with the
provisions of the Tennessee Business Corporation Act. In the absence of actual
fraud in the transaction, the judgment of the Board of Directors as to the value
of such consideration shall be conclusive. Upon payment of such consideration,
such shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, that part of the surplus of the Corporation which is transferred
to stated capital upon the issuance of shares as a share dividend shall be
deemed to be the consideration for their issuance.

         A description of the different classes and series (if any) of the
Corporation's capital stock and a statement of the relative powers,
designations, preferences and rights of the shares of each class of and series
(if any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:

         (A)   Preferred Stock. The Board of Directors of the Corporation is
authorized to amend this Charter, by adoption of articles of amendment effective
without shareholder approval, to provide for the issuance of serial preferred
stock in series, by filing a certificate pursuant to the applicable law of the
State of Tennessee (such certificate being hereinafter referred to as a
"Preferred Stock Designation"), and to fix the preferences, limitations and
relative rights of each such series, including, but not limited to,
determination of any of the following:

               (1)    the distinctive designation for each series and the number
of shares constituting such series;

               (2)    whether or not shares of such class or series shall have
voting rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights;

               (3)    whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable and the
amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates; and whether or not there
shall be any sinking fund or purchase account in respect thereof and, if so, the
terms thereof;

               (4)    whether or not and, if so, the rates, amounts, and times
at which, and the conditions under which, dividends shall be payable on shares
of such class or series, whether any such dividends shall rank senior or junior
to or on a parity with the dividends payable on any other class or series of
stock, and the status of any such dividends as cumulative, cumulative to a
limited extent or non-cumulative, and as participating or non-participating;

                                       2



               (5)    the rights of the holders of shares of such class or
series upon the liquidation, dissolution, or winding up of the affairs of, or
upon any distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution, or winding up is voluntary
or involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of stock;

               (6)    whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price(s) at which such shares may be
redeemed or purchased through the application of such fund;

               (7)    whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Corporation
and, if so convertible or exchangeable, the conversion price(s) or the rate(s)
of exchange, and the adjustments thereof, if any, at which such conversion or
exchange may be made, and any other terms and conditions of such conversion or
exchange;

               (8)    the price or other consideration for which the shares of
such series shall be issued;

               (9)    whether the shares of such series that are redeemed or
converted shall have the status of authorized but unissued shares of serial
preferred stock and whether such shares may be reissued as shares of the same or
any other series of serial preferred stock; and

               (10)   any other designations, preferences, limitations or rights
that are now or hereafter permitted by applicable law and are not inconsistent
with the provisions of this Charter.

         Each share of each series of serial preferred stock shall have the same
preferences and relative rights as, and be identical in all respects with, all
other shares of the same series.

         (B)   Common Stock. Subject to all the rights of preferred stock as
expressly provided in this Charter, by law or by the Board of Directors in a
resolution or resolutions pursuant to this Article V, the common stock of the
Corporation shall exclusively possess all voting power and all such rights and
privileges as are afforded to capital stock by Tennessee law in the absence of
any express grant of rights and privileges in the Corporation's Charter,
including, but not limited to, the following:

               (1)    Holders of common stock shall be entitled to one (1) vote
for each share held by such holder;

                                       3



               (2)    Whenever there shall have been paid, or declared and set
aside for payment, to the holders of the outstanding shares of any class of
stock having preference over the common stock as to the payment of dividends,
the full amount of dividends and of sinking fund, retirement fund or other
retirement payments, if any, to which such holders are respectively entitled in
preference to the common stock, then dividends may be paid on the common stock
and on any class or series of stock entitled to participate therewith as to
dividends out of any assets legally available for the payment of dividends, but
only when and as declared by the Board of Directors.

               (3)    In the event of any liquidation, dissolution or winding up
of the Corporation, after there shall have been paid, or declared and set aside
for payment, to the holders of the outstanding shares of any class having
preferences over the common stock in any such event the full preferential
amounts to which they are respectively entitled, the holders of the common stock
and of any class or series of stock entitled to participate therewith, in whole
or in part, as to distribution of assets shall be entitled, after payment or
provision for payment of all debts and liabilities of the Corporation, to
receive the remaining assets of the Corporation available for distribution, in
cash or in kind.

               (4)    Each share of common stock shall have the same relative
powers, preferences and rights as, and shall be identical in all respects with,
all the other shares of common stock of the Corporation.


                                   ARTICLE VI
                                Preemptive Rights

         No shareholder of the Corporation shall have, as a matter of right, the
preemptive right to purchase or subscribe for shares of any class, now or
hereafter authorized, or to purchase or subscribe for securities or other
obligations convertible into or exchangeable for such shares or which by
warrants or otherwise entitled the holders thereof to subscribe for or purchase
any such shares.


                                   ARTICLE VII
                              Repurchase of Shares

         The Corporation may from time to time, pursuant to authorization by the
Board of Directors of the Corporation and without action by the shareholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
Board of Directors shall determine, subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by law.

                                        4



                                  ARTICLE VIII
                                    Directors

         The business affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. In addition to the powers and authority
expressly conferred upon them by statute or by this Charter or the bylaws of the
Corporation, the directors are hereby empowered to exercise all such powers and
do all such things as may be exercised or done by the Corporation.

         The number of directors of the Corporation shall be no less than 5 and
not more than 15 (exclusive of directors, if any, to be elected by holders of
preferred stock of the Corporation, voting separately as a class), as shall be
provided from time to time in or in accordance with the bylaws.

         At the first meeting of shareholders of the Corporation, the Board of
Directors of the Corporation shall be divided into three classes as nearly equal
in number as the then total number of directors constituting the entire Board of
Directors shall permit, which classes shall be designated Class I, Class II and
Class III. At such meeting of shareholders, directors assigned to Class I shall
be elected to hold office for a term expiring at the first succeeding annual
meeting of shareholders thereafter, directors assigned to Class II shall be
elected to hold office for a term expiring at the second succeeding annual
meeting thereafter, and directors assigned to Class III shall be elected to hold
office for a term expiring at the third succeeding annual meeting thereafter.
Thereafter, at each annual meeting of shareholders of the corporation, directors
of classes the terms of which expire at such annual meeting shall be elected for
terms of three years. Notwithstanding the foregoing, a director whose term shall
expire at any annual meeting shall continue to serve until such time as his
successor shall have been duly elected and shall have been qualified unless his
position on the Board of Directors shall have been abolished by action taken to
reduce the size of the Board of Directors prior to said meeting.

         Should the number of directors of the Corporation be reduced, the
directorship(s) eliminated shall be allocated among classes as appropriate so
that the number of directors in each class is as specified in the immediately
preceding paragraph. The Board of Directors shall designate, by the name of the
incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no
decrease in the number of directors shall have the effect of shortening the term
of any incumbent director. Should the number of directors of the Corporation be
increased, the additional directorships shall be allocated among classes as
appropriate so that the number of directors in each class is as specified in the
immediately preceding paragraph.

         Whenever the holders of any one or more series of preferred stock of
the Corporation shall have the right, voting separately as a class, to elect one
or more directors of the Corporation, the Board of Directors shall consist of
said directors so elected in addition to the number of directors fixed as
provided above in this Article VIII. Notwithstanding the foregoing, and except
as otherwise may be required by law, whenever the holders of any one or more
series of preferred

                                       5



stock of the Corporation shall have the right, voting separately as a class, to
elect one or more directors of the Corporation, the terms of the director or
directors elected by such holders shall expire at the next succeeding annual
meeting of shareholders.

         The names of the initial directors who will serve until their
successors are duly elected and qualified are as follows:

                                Anderson L. Smith
                                 William T. Hale
                              John F. McCrary, Jr.
                               Dr. Terry M. Brimer
                                 H. Scott Reams
                              Dr. Jack E. Campbell
                                William F. Young

                                   ARTICLE IX
                              Removal of Directors

         Notwithstanding any other provision of this Charter or the bylaws of
the Corporation, no director of the Corporation may be removed at any time
unless for cause and upon the affirmative vote of the holders of at least 80% of
the outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose, except as
otherwise required by law.

                                    ARTICLE X
                       Elimination of Directors' Liability

         A director of this Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability: (i) for any breach of the director's
duty of loyalty to the Corporation or its shareholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; or (iii) for unlawful distributions under Section 48-18-304 of
the Tennessee Business Corporation Act. If the Tennessee Business Corporation
Act is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Tennessee Business Corporation Act, as so amended.

         Any repeal or modification of the foregoing paragraph by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.

                                       6



                                   ARTICLE XI
                                 Indemnification

         (A)   Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director or an
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan, and (1) he or she conducted himself in
good faith, (2) he or she reasonably believed, (a) in the case of conduct in his
official capacity with the Corporation, that his or her conduct was in the
Corporation's best interest and, (b) in all other cases, that his or her conduct
was at least not opposed to the Corporation's best interest, and (3) in the case
of any criminal proceeding, he or she had no reasonable cause to believe that
his conduct was unlawful (hereinafter an "indemnitee"), whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Tennessee Business
Corporation Act, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however, that,
except as provided in Section (C) hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
Directors of the Corporation.

         (B)   The right to indemnification conferred in Section A of this
Article XI shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Tennessee Business Corporation Act requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, services to an employee benefit plan) shall be
made upon (1) delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise, (2) delivery to the Corporation, by or on behalf of
such indemnitee, of a written affirmation of his or her good faith belief that
he or she has met the standard of conduct set forth in Section A of this Article
XI, and (3) a determination that the facts would not preclude indemnification
under this Article XI.

                                       7



         The determination shall be made (a) by the Board of Directors by
majority vote of a quorum consisting of directors not at the time parties to the
proceeding, (b) if a quorum cannot be obtained under the preceding clause, by
majority vote of a committee duly designated by the Board of Directors (in which
designation directors who are parties may participate), consisting solely of two
(2) or more directors not at the time party to the proceeding, (c) by
independent special legal counsel, (i) selected by the Board of Directors or its
committee in the manner described in clause (a) or (b) of this paragraph, (ii)
if a quorum of the board cannot be obtained under clause (a) or (b) of this
paragraph, selected by a majority vote of the full Board of Directors (in which
selection directors who are parties may participate) or; (d) by the
shareholders, but shares owned by or voted under the control of directors who
are at the time parties to the proceeding may not be voted on the determination.

         The rights to indemnification and to the advancement of expenses
conferred in Sections (A) and (B) of this Article XI shall be contract rights
and such rights shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.

         (C)   If a claim under Section (A) or (B) of this Article XI is not
paid in full by the Corporation within sixty (60) days after a written claim has
been received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
(20) days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expenses of prosecuting or defending such
suit. In (1) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that, and
(2) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
any applicable standard for indemnification set forth in the Tennessee Business
Corporation Act. Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled to select counsel
under clause (c) of the second paragraph of Section (B). In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article XI or otherwise shall be on the Corporation.

         (D)   The rights to indemnification and to the advancement of expenses
conferred in this Article XI shall not be exclusive of any other right which any
person may have or hereafter

                                       8



acquire under any statute, this Charter, bylaws, agreement, vote of shareholders
or Disinterested Directors, as defined in Article XIII of this Charter, or
otherwise.

         (E)   The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or subsidiary or affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Tennessee Business Corporation Act.

         (F)   The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article XI with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.

                                   ARTICLE XII
                        Limitation on Voting Common Stock

         (A)   Notwithstanding any other provision of this Charter, in no event
shall any record owner of any outstanding common stock which is beneficially
owned, directly or indirectly, by a person who, as of any record date for the
determination of shareholders entitled to vote on any matter, beneficially owns
in excess of 10% of the then-outstanding shares of common stock (the "Limit"),
be entitled, or permitted to any vote in respect of the shares held in excess of
the Limit. The number of votes which may be cast by any record owner by virtue
of the provisions hereof in respect of common stock beneficially owned by such
person beneficially owning shares in excess of the Limit shall be a number equal
to the total number of votes which a single record owner of all common stock
beneficially owned by such person would be entitled to cast, (subject to the
provisions of this Article XII) multiplied by a fraction, the numerator of which
is the number of shares of such class or series which are both beneficially
owned by such person and owned of record by such record owner and the
denominator of which is the total number of shares of common stock beneficially
owned by such person owning shares in excess of the Limit.

         (B)   Definitions. The following definitions apply to this Article XII:

               (1)   "Affiliate" shall have the meaning ascribed to it in Rule
12b-2 of the General Rules and Regulations under the Securities Exchange Act of
1934, as amended, as in effect on the date of filing of this Charter.

               (2)   "Beneficial ownership" shall be determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Securities Exchange Act of
1934, as amended, (or any successor rule or statutory provision), or, if said
Rule 13d-3 shall be rescinded and there shall be no successor rule or provision
thereto, pursuant to said Rule 13d-3 as in effect on the date of

                                       9



filing of this Charter; provided, however, that a person shall, in any event,
also be deemed the "beneficial owner" of any common stock:

                     (a)   which such person or any of its Affiliates
beneficially owns, directly or indirectly; or

                     (b)   which such person or any of its Affiliates has: (i)
the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding (but shall not be deemed to be the beneficial owner of any voting
shares solely by reason of an agreement, contract, or other arrangement with
this Corporation to effect any transaction which is described in Article XIII of
this Charter, or upon the exercise of conversion rights, exchange rights,
warrants, or options or otherwise, or (ii) sole or shared voting or investment
power with respect thereto pursuant to any agreement, arrangement,
understanding, relationship or otherwise (but shall not be deemed to be the
beneficial owner of any voting shares solely by reason of a revocable proxy
granted for a particular meeting of shareholders, pursuant to a public
solicitation of proxies for such meeting, with respect to shares of which
neither such person nor any such Affiliate is otherwise deemed the beneficial
owner); or

                     (c)   which are beneficially owned, directly or indirectly,
by any other person with which such first mentioned person or any of its
Affiliates acts as a partnership, limited partnership, syndicate or other group
pursuant to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of capital stock of this
Corporation; and provided further, however, that: (i) no director or officer of
this Corporation (or any Affiliate of any such director or officer) shall,
solely by reason of any or all of such directors or officers acting in their
capacities as such, be deemed, for any purposes hereof, to beneficially own any
common stock beneficially owned by any other such director or officer (or any
Affiliate thereof); and (ii) neither any employee stock ownership or similar
plan of this Corporation or any subsidiary of this Corporation, nor any trustee
with respect thereto or any Affiliate of such trustee (solely by reason of such
capacity of such trustee), shall be deemed, for any purposes hereof, to
beneficially own any common stock held under any such plan. For purposes only of
computing the percentage of beneficial ownership of common stock of a person,
the outstanding common stock shall include shares deemed owned by such person
through application of this subsection but shall not include any other shares of
common stock which may be issuable by this Corporation pursuant to any
agreement, or upon exercise of conversion rights, warrants or options, or
otherwise. For all other purposes, the outstanding common stock shall include
only shares of common stock then outstanding and shall not include any shares of
common stock which may be issuable by this Corporation pursuant to any
agreement, or upon the exercise of conversion rights, warrants or options, or
otherwise.

               (3)   The "Limit" shall mean 10% of the then-outstanding shares
of common stock.

                                       10



               (4)   A "person" shall include an individual, a firm, a group
acting in concert, a corporation, a partnership, an association, a joint
venture, a pool, a joint stock company, a trust, an unincorporated organization
or similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities or any other entity.

         (C)   The Board of Directors shall have the power to construe and apply
the provisions of this Article and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to: (1) the number of shares of common stock beneficially owned by
any person; (2) whether a person is an Affiliate of another; (3) whether a
person has an agreement, arrangement, or understanding with another as to the
matters referred to in the definition of beneficial ownership; (4) the
application of any other definition or operative provision of the section to the
given facts; or (5) any other matter relating to the applicability or effect of
this Article XII.

         (D)   The Board of Directors shall have the right to demand that any
person who is reasonably believed to beneficially own shares of common stock in
excess of the Limit (or holds of record common stock beneficially owned by any
person in excess of the Limit) supply the Corporation with complete information
as to: (1) the record owner(s) of all shares beneficially owned by such person
who is reasonably believed to own shares in excess of the Limit; and (2) any
other factual matter relating to the applicability or effect of this Section as
may reasonably be requested of such person.

         (E)   Except as otherwise provided by law or expressly provided in this
Article XII, the presence, in person or by proxy, of the holders of record of
shares of capital stock of the Corporation entitling the holders thereof to cast
a majority of the votes (after giving effect, if required, to the provisions of
this Article XII) entitled to be cast by the holders of shares of capital stock
of the Corporation entitled to vote shall constitute a quorum at all meetings of
the shareholders, and every reference in this Charter to a majority or other
proportion of capital stock (or the holders thereof) for purposes of determining
any quorum requirement or any requirement for shareholder consent or approval
shall be deemed to refer to such majority or other proportion of the votes (or
the holders thereof) then entitled to be cast in respect of such capital stock.

         (F)   Any constructions, applications, or determinations made by the
Board of Directors pursuant to this Article in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Corporation and its
shareholders.

         (G)   In the event any provision (or portion thereof) of this Article
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this Article shall remain in full
force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of this Corporation and its shareholders that
each such remaining

                                       11



provision (or portion thereof) of this Article XII remain, to the fullest extent
permitted by law, applicable and enforceable as to all shareholders, including
shareholders owning an amount of stock over the Limit, notwithstanding any such
finding.

         (H)   Exclusion for Underwriters, Employee Benefit Plans and Certain
Proxies. The restrictions contained in this Article XII shall not apply to (1)
any underwriter or member of an underwriting or selling group involving a public
sale or resale of securities of the Corporation or a subsidiary thereof;
provided, however, that upon completion of the sale or resale of such
securities, no such underwriter or member of such selling group is a beneficial
owner of more than 10% of any class of equity security of the Corporation; (2)
any proxy granted to one or more Disinterested Directors, as defined in Article
XIII of this Charter, by a shareholder of the Corporation; (3) any employee
benefit plans of the Corporation or a subsidiary thereof; or (4) any transaction
approved in advance by a majority of such Disinterested Directors. In addition,
the Disinterested Directors, as defined in Article XIII of this Charter, the
officers and employees of the Corporation and its subsidiaries, the directors of
subsidiaries of the Corporation, the employee benefit plans of the Corporation
and its subsidiaries, entities organized or established by the Corporation or
any subsidiary thereof pursuant to the terms of such plans and trustees and
fiduciaries with respect to such plans acting in such capacity shall not be
deemed to be a group with respect to their beneficial ownership of voting stock
of the Corporation solely by virtue of their being directors, officers or
employees of the Corporation or a subsidiary thereof or by virtue of the
Disinterested Directors, as defined in Article XIII of this Charter, the
officers and employees of the Corporation and its subsidiaries and the directors
of subsidiaries of the Corporation being fiduciaries or beneficiaries of an
employee benefit plan of the Corporation or a subsidiary of the Corporation.
Notwithstanding the foregoing, no director, officer or employee of the
Corporation or any of its subsidiaries, or group of any of them, shall be exempt
from the provisions of this Article XII should any such person or group become a
beneficial owner of more than 10% of any class of equity security of the
Corporation.

                                  ARTICLE XIII
                        Approval of Business Combinations

         (A)   In addition to any affirmative vote required by law or this
Charter, and except as otherwise expressly provided in this Article XIII:

               (1)    any merger or consolidation of the Corporation or any
                      Subsidiary (as hereinafter defined) with: (a) any
                      Interested Shareholder (as hereinafter defined); or (b)
                      any other corporation (whether or not itself an Interested
                      Shareholder) which is, or after such merger or
                      consolidation would be, an Affiliate (as hereinafter
                      defined) of an Interested Shareholder; or

               (2)    any sale, lease, exchange, mortgage, pledge, transfer or
                      other disposition (in one transaction or a series of
                      transactions) to or with any Interested

                                       12



                      Shareholder, or any Affiliate of any Interested
                      Shareholder, of any assets of the Corporation or any
                      Subsidiary having an aggregate Fair Market Value (as
                      hereinafter defined) equaling or exceeding 25% or more of
                      the combined assets of the Corporation and its
                      Subsidiaries; or

               (3)    the issuance or transfer by the Corporation or any
                      Subsidiary (in one transaction or a series of
                      transactions) of any securities of the Corporation or any
                      Subsidiary to any Interested Shareholder or any Affiliate
                      of any Interested Shareholder in exchange for cash,
                      securities or other property (or a combination thereof)
                      having an aggregate Fair Market Value (as hereinafter
                      defined) equaling or exceeding 25% of the combined Fair
                      Market Value of the outstanding common stock of the
                      Corporation and its Subsidiaries, except for any issuance
                      or transfer pursuant to an employee benefit plan of the
                      Corporation or any Subsidiary thereof; or

               (4)    the adoption of any plan or proposal for the liquidation
                      or dissolution of the Corporation proposed by or on behalf
                      of an Interested Shareholder or any Affiliate of any
                      Interested Shareholder; or

               (5)    any reclassification of securities (including any reverse
                      stock split), or recapitalization of the Corporation, or
                      any merger or consolidation of the Corporation with any of
                      its Subsidiaries or any other transaction (whether or not
                      with or into or otherwise involving an Interested
                      Shareholder) which has the effect, directly or indirectly,
                      of increasing the proportionate share of the outstanding
                      shares of any class of equity or convertible securities of
                      the Corporation or any Subsidiary which is directly or
                      indirectly owned by any Interested Shareholder or any
                      Affiliate of any Interested Shareholder;

shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of directors (the "Voting Stock") (after giving effect to
the provisions of Article XII), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or by any other
provisions of this Charter or any Preferred Stock Designation, in any agreement
with any national securities exchange or otherwise.

         The term "Business Combination" as used in this Article XIII shall mean
any transaction which is referred to in any one or more of paragraphs (1)
through (5) of Section (A) of this Article XIII.

                                       13



         (B)   The provisions of Section (A) of this Article XIII shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only the affirmative vote of the majority of the outstanding
shares of capital stock entitled to vote after giving effect to the provisions
of Article XII, or such vote (if any), as is required by law or by this Charter,
if, in the case of any Business Combination that does not involve any cash or
other consideration being received by the Shareholders of the Corporation solely
in their capacity as Shareholders of the Corporation, the condition specified in
the following paragraph (1) is met or, in the case of any other Business
Combination, all of the conditions specified in either of the following
paragraphs (1) or (2) are met:

               (1)   The Business Combination shall have been approved by a
majority of the Disinterested Directors (as hereinafter defined).

               (2)   All of the following conditions shall have been met:

                     (a)   The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by the holders of common
stock in such Business Combination shall at least be equal to the higher of the
following:

                           (i)   (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions, transfer taxes and
soliciting dealers' fees, paid by the Interested Shareholder or any of its
Affiliates for any shares of Common Stock acquired by it: (x) within the
two-year period immediately prior to the first public announcement of the
proposal of the Business Combination (the "Announcement Date"); or (y) in the
transaction in which it became an Interested Shareholder, whichever is higher;
or

                           (ii)  the Fair Market Value per share of Common Stock
on the Announcement Date or on the date on which the Interested Shareholder
became an Interested Shareholder (such latter date is referred to in this
Article XIII as the "Determination Date"), whichever is higher.

                     (b)   The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of shares of
any class of outstanding Voting Stock other than common stock shall be at least
equal to the highest of the following (it being intended that the requirements
of this subparagraph (b) shall be required to be met with respect to every such
class of outstanding Voting Stock, whether or not the Interested Shareholder has
previously acquired any shares of a particular class of Voting Stock):

                           (i)   (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions, transfer taxes and
soliciting dealers' fees, paid by

                                       14



the Interested Shareholder for any shares of such class of Voting Stock acquired
by it: (x) within the two-year period immediately prior to the Announcement
Date; or (y) in the transaction in which it became an Interested Shareholder,
whichever is higher; or

                          (ii)   (if applicable) the highest preferential amount
per share to which the holders of shares of such class of Voting Stock are
entitled in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation; or

                          (iii)  the Fair Market Value per share of such class
of Voting Stock on the Announcement Date or on the Determination Date, whichever
is higher.

               (c)   The consideration to be received by holders of a particular
class of outstanding Voting Stock (including common stock) shall be in cash or
in the same form as the Interested Shareholder has previously paid for shares of
such class of Voting Stock. If the Interested Shareholder has paid for shares of
any class of Voting Stock with varying forms of consideration, the form of
consideration to be received per share by holders of shares of such class of
Voting Stock shall be either cash or the form used to acquire the largest number
of shares of such class of Voting Stock previously acquired by the Interested
Shareholder. The price determined in accordance with subparagraph (B)(2) of this
Article XIII shall be subject to appropriate adjustment in the event of any
stock dividend, stock split, combination of shares or similar event.

               (d)   After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination: (i)
except as approved by a majority of the Disinterested Directors (as hereinafter
defined), there shall have been no failure to declare and pay at the regular
date therefor any full quarterly dividends (whether or not cumulative) on any
outstanding stock having preference over the common stock as to dividends or
liquidation; (ii) there shall have been: (x) no reduction in the annual rate of
dividends paid on the common stock (except as necessary to reflect any
subdivision of the common stock), except as approved by a majority of the
Disinterested Directors; and (y) an increase in such annual rate of dividends as
necessary to reflect any reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which has the effect
of reducing the number of outstanding shares of the Common Stock, unless the
failure to so increase such annual rate is approved by a majority of the
Disinterested Directors, and (iii) neither such Interested Shareholder or any of
its Affiliates shall have become the beneficial owner of any additional shares
of Voting Stock except as part of the transaction which results in such
Interested Shareholder becoming an Interested Shareholder.

               (e)   After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a Shareholder), of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided, directly or indirectly, by the

                                       15



Corporation, whether in anticipation of or in connection with such Business
Combination or otherwise.

               (f)   A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (or
any subsequent provisions replacing such Act, and the rules or regulations
thereunder) shall be mailed to shareholders of the Corporation at least thirty
(30) days prior to the consummation of such Business Combination (whether or not
such proxy or information statement is required to be mailed pursuant to such
Act or subsequent provisions).

         (C)   For the purposes of this Article XIII:

               (1)   A "Person" shall include an individual, a firm, a group
acting in concert, a corporation, a partnership, an association, a joint
venture, a pool, a joint stock company, a trust, an unincorporated organization
or similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities or any other entity.

               (2)   "Interested Shareholder" shall mean any person (other than
the Corporation or any holding company or Subsidiary thereof) who or which:

                     (a)    is the beneficial owner, directly or indirectly, of
                            more than 10% of the voting power of the outstanding
                            Voting Stock; or

                     (b)    is an Affiliate of the Corporation and at any time
                            within the two-year period immediately prior to the
                            date in question was the beneficial owner, directly
                            or indirectly, of 10% or more of the voting power of
                            the then outstanding Voting Stock; or

                     (c)    is an assignee of or has otherwise succeeded to any
                            shares of Voting Stock which were at any time within
                            the two-year period immediately prior to the date in
                            question beneficially owned by any Interested
                            Shareholder, if such assignment or succession shall
                            have occurred in the course of a transaction or
                            series of transactions not involving a public
                            offering within the meaning of the Securities Act of
                            1933, as amended.

               (3)   For purposes of this Article XIII, "beneficial ownership"
shall be determined in the manner provided in Article XII hereof.

                                       16



               (4)   "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on the date
of filing of this Charter.

               (5)   "Subsidiary" means any corporation of which a majority of
any class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the definition of
Interested Shareholder set forth in Paragraph (2) of this Section (C), the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by the Corporation.

               (6)   "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested Shareholder and was a member
of the Board of Directors prior to the time that the Interested Shareholder
became an Interested Shareholder, and any Director who is thereafter chosen to
fill any vacancy on the Board of Directors or who is elected and who, in either
event, is unaffiliated with the Interested Shareholder and in connection with
his or her initial assumption of office is recommended for appointment or
election by a majority of Disinterested Directors then on the Board of
Directors.

               (7)   "Fair Market Value" means:

                     (a)    in the case of stock, the highest closing sales
                            price of the stock during the 30-day period
                            immediately preceding the date in question of a
                            share of such stock on the National Association of
                            Securities Dealers Automated Quotation System or any
                            system then in use, or, if such stock is admitted to
                            trading on a principal United States securities
                            exchange registered under the Securities Exchange
                            Act of 1934, as amended, Fair Market Value shall be
                            the highest sale price reported during the 30-day
                            period preceding the date in question, or, if no
                            such quotations are available, the Fair Market Value
                            on the date in question of a share of such stock as
                            determined by the Board of Directors in good faith,
                            in each case with respect to any class of stock,
                            appropriately adjusted for any dividend or
                            distribution in shares of such stock or any stock
                            split or reclassification of outstanding shares of
                            such stock into a greater number of shares of such
                            stock or any combination or reclassification of
                            outstanding shares of such stock into a smaller
                            number of shares of such stock; and

                     (b)    in the case of property other than cash or stock,
                            the Fair Market Value of such property on the date
                            in question as determined by the Board of Directors
                            in good faith.

                                       17



               (8)   Reference to "Highest Per Share Price" shall in each case
with respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such stock.

               (9)   In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be received"
as used in Subparagraphs (a) and (b) of paragraph (2) of Section (B) of this
Article XIII shall include the shares of common stock and/or the shares of any
other class of outstanding Voting Stock retained by the holders of such shares.

         (D)   A majority of the Disinterested Directors of the Corporation
shall have the power and duty to determine for the purposes of this Article
XIII, on the basis of information known to them after reasonable inquiry: (1)
whether a person is an Interested Shareholder; (2) the number of shares of
Voting Stock beneficially owned by any person; (3) whether a person is an
Affiliate or Associate of another; and (4) whether the assets which are the
subject of any Business Combination have, or the consideration to be received
for the issuance or transfer of securities by the Corporation or any Subsidiary
in any Business Combination has an aggregate Fair Market Value equaling or
exceeding 25% of the combined Fair Market Value of the Common Stock of the
Corporation and its Subsidiaries. A majority of the Disinterested Directors
shall have the further power to interpret all of the terms and provisions of
this Article XIII

         (E)   Nothing contained in this Article XIII shall be construed to
relieve any Interested Shareholder from any fiduciary obligation imposed by law.

                                   ARTICLE XIV
                      Evaluations of Business Combinations

         In connection with the exercise of its judgment in determining what is
in the best interests of the Corporation and of the shareholders, when
evaluating any offer of another Person (as defined in Article XIII hereof) to:
(A) make a tender or exchange offer for any equity security of the Corporation;
(B) merge or consolidate the Corporation with another corporation or entity; or
(C) purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, the Board of Directors of the Corporation shall, in
addition to considering the adequacy of the amount to be paid in connection with
any such transaction, consider all of the following factors and any other
factors which it deems relevant: (A) the social and economic effects of the
transaction on the Corporation, its subsidiaries, employees, depositors, loan
and other customers and creditors and the other elements of the communities in
which the Corporation and its subsidiaries operate or are located; (B) the
business and financial condition and earnings prospects of the acquiring person
or entity, including, but not limited to, debt

                                       18



service and other existing financial obligations, financial obligations to be
incurred in connection with the acquisition and other likely financial
obligations of the acquiring person or entity, and the possible effect of such
conditions upon the Corporation and its subsidiaries and the other elements of
the communities in which the Corporation and its subsidiaries operate or are
located; and (C) the competence, experience and integrity of the acquiring
person or entity and its or their management.

                                   ARTICLE XV
                           Control Share Acquisitions

         "Control share acquisitions," as defined in Section 48-103-302 of the
Tennessee Code, respecting the shares of the Corporation shall be governed by
and subject to the provisions of the Tennessee Control Share Acquisition Act,
and Sections 48-103-308 and 48-103-309 of the Tennessee Control Share
Acquisition Act shall apply to the Corporation.

                                   ARTICLE XVI
                        Special Meetings of Shareholders

         Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of the shareholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors.

                                  ARTICLE XVII
                                  Incorporator

         The name, address and zip code of the incorporator of the Corporation
are Anderson L. Smith,120 Evans Avenue, Morristown, Tennessee 37814.

                                  ARTICLE XVIII
                               Amendment of Bylaws

         To the extent permitted by the Tennessee Business Corporation Act, the
Board of Directors of the Corporation is expressly authorized to repeal, alter,
amend or rescind the bylaws of the Corporation by vote of a majority of the
Board of Directors at a legal meeting held in accordance with the bylaws.
Notwithstanding any other provision of this Charter or the bylaws of the
Corporation (and notwithstanding the fact that some lesser percentage may be
specified by law), the bylaws shall be repealed, altered, amended or rescinded
by the shareholders of the Corporation only by vote of at least 80% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the shareholders called for that purpose (provided
that notice of

                                       19



such proposed repeal, alteration, amendment or rescission is included in the
notice of such meeting).

                                   ARTICLE XIX
                              Amendment of Charter

         The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Charter in the manner now or hereafter
prescribed by law, and all rights conferred on shareholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles VIII, IX, X, XI, XII, XIII, XIV, XV, XVI and XVIII of this
Charter and this Article XIX may not be repealed, altered, amended or rescinded
in any respect unless the same is approved by the affirmative vote of the
holders at least 80% of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as a single class) cast at a meeting of the shareholders called
for that purpose (provided that notice of such proposed repeal, alteration,
amendment or rescission is included in the notice of such meeting); except that
such repeal, alteration, amendment or rescission may be made by the affirmative
vote of the holders of a majority of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as a single class) if the same is first approved by
a majority of the Disinterested Directors, as defined in Article XIII of this
Charter.

                                       20



         I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Tennessee, do make, file and record
this Charter and do certify that the facts herein stated are true, and
accordingly, have hereto set my hand this 11/th/ day of March 2003.

                                               /s/ Anderson L. Smith
                                               ---------------------
                                               Anderson L. Smith
                                               Incorporator

                                       21

EX-3.2

                                                                     Exhibit 3.2

                                    BYLAWS OF
                           JEFFERSON BANCSHARES, INC.



                                    ARTICLE I
                                  Shareholders


         SECTION 1.  Place of Meetings.

         All annual and special meetings of shareholders shall be held at the
principal office of the Corporation or at such other place within or without the
State of Tennessee as the Board of Directors may determine and as designated in
the notice of such meeting.

         SECTION 2.  Annual Meeting.

         A meeting of the shareholders of the Corporation for the election of
directors and for the transaction of any other business of the Corporation shall
be held annually at such date and time as the Board of Directors may determine.

         SECTION 3.  Special Meetings.

         Special meetings of the shareholders of the Corporation may be called
by persons authorized to do so by the Corporation's Charter. Business transacted
at any special meeting shall be confined to the purpose or purposes stated in
the notice of such meeting.

         SECTION 4.  Organization.

         The Chairman of the Board of the Corporation or, in his or her absence,
the President of the Corporation or, in his or her absence, such person as the
Board of Directors may have designated or, in the absence of such a person, such
person as may be chosen by the holders of a majority of the shares entitled to
vote who are present, in person or by proxy, shall call to order any meeting of
the shareholders and act as chairman of the meeting. In the absence of the
Secretary of the Corporation, the Secretary of the meeting shall be such person
as the chairman of the meeting appoints.

         SECTION 5.  Conduct of Meetings.

         (a)   The chairman of any meeting of shareholders shall determine the
order of business and the procedures at the meeting, including such regulation
of the manner of voting and the conduct of discussion as seem to him or her in
order. The date and time of the opening and closing of the polls for each matter
upon which the shareholders will vote at the meeting shall be announced at the
meeting.

         (b)   At any annual meeting of the shareholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors



or (ii) by any shareholder of the Corporation who is entitled to vote with
respect thereto and who complies with the notice procedures set forth in this
Section 5. For business to be properly brought before an annual meeting by a
shareholder, the business must relate to a proper subject matter for shareholder
action and the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered or mailed to and received at the principal executive office of the
Corporation not less than ninety (90) days prior to the date of the annual
meeting; provided, however, that in the event that less than one hundred (100)
days' notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A shareholder's notice to the Secretary shall set forth as
to each matter such shareholder proposes to bring before the annual meeting (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such shareholder,
(iv) a statement disclosing (A) whether such shareholder is acting with or on
behalf of any other person and (B) if applicable, the identity of such person,
and (v) any material interest of such shareholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 5. The Chairman of the Board or other person
presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 5 and, if he or she should so
determine, he or she shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.

         At any special meeting of the shareholders, only such business shall be
conducted as shall have been brought before the meeting in accordance with
Article I, Section 3.

         (c)   Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of shareholders at which directors are to be elected
only (i) by or at the direction of the Board of Directors or (ii) by any
shareholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section 5.
Such nominations, other than those made by or at the direction of the Board of
Directors, shall be made by timely notice in writing to the Secretary of the
Corporation. To be timely, a shareholder's notice shall be delivered or mailed
to and received at the principal executive office of the Corporation not less
than ninety (90) days prior to the date of the meeting; provided, however, that
in the event that less than one hundred (100) days' notice or prior disclosure
of the date of the meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the

                                       2



meeting was mailed or such public disclosure was made. Such shareholder's notice
shall set forth (i) as to each person whom such shareholder proposes to nominate
for election or re-election as a director, all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); and (ii) as to the shareholder giving the
notice (A) the name and address, as they appear on the Corporation's books, of
such shareholder, (B) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such shareholder, and (C) a
statement disclosing (1) whether such shareholder or any nominee thereof is
acting with or on behalf of any other person and (2) if applicable, the identity
of such person.

         SECTION 6.  Notice of Meetings; Waiver of Notice.

         Not less than ten (10) days nor more than two (2) months before the
date of every shareholder meeting, written notice stating the place, day and
time of the meeting shall be given to each shareholder entitled to vote at such
meeting, either by mail to his or her address as it appears on the records of
the Corporation or by presenting it to him or her personally or by leaving it at
his or her residence or usual place of business. If mailed, such notice shall be
deemed to be delivered when deposited in the mail with postage prepaid.

         When any shareholders' meeting, either annual or special, is adjourned
to a different date, time or place, it shall not be necessary to give any notice
of the new date, time or place, other than an announcement of the new date, time
or place at the meeting at which such adjournment is taken. If a meeting is
adjourned to a date more than four (4) months after the date fixed for the
original meeting, a new record date for the adjourned meeting must be fixed, and
notice of the adjourned meeting must be given to shareholders as of the new
record date.

         A shareholder may waive any notice required hereunder provided the
waiver is in writing, signed by him or her and delivered to the Corporation for
inclusion in the minutes or filing with the corporate records. Attendance of a
person entitled to notice at a meeting in person or by proxy shall constitute a
waiver of notice of such meeting, except when such person attends the meeting
for the purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.

         SECTION 7.  Fixing of Record Date.

         For the purpose of determining shareholders entitled to notice of or to
vote at any meeting of shareholders, or any adjournment thereof, or shareholders
entitled to receive payment of any dividend, or in order to make a determination
of shareholders for any other proper purpose, the Board of Directors shall fix
in advance a date as the record date for any such determination of shareholders.
Such date in any case shall be not more than seventy (70) days prior to the date
on which the particular action, requiring such determination of shareholders, is
to be taken. When a

                                       3



determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination shall apply to any
adjournment, except adjournment to a date more than four (4) months after the
date fixed for the original meeting, in which case a new record date shall be
set.

         SECTION 8.  Voting Lists.

         A complete list of shareholders entitled to vote at any meeting of
shareholders, arranged in alphabetical order for each class of stock and showing
the address of each such shareholder and the number of shares registered in his
or her name, shall be kept on file at the home office of the Corporation. Such
list shall be subject to inspection by any shareholder, upon written demand by
such shareholder, his or her agent or his or her attorney, beginning two (2)
business days after notice of the meeting is given for which the list was
prepared and continuing through the meeting. If the right to vote at any meeting
is challenged, this list shall presumptively determine the identity of the
shareholders entitled to vote at the meeting and the number of shares held by
him or her.

         SECTION 9.  Quorum.

         At any meeting of shareholders, the holders of a majority of the stock
entitled to vote, present in person or by proxy, shall constitute a quorum,
unless or except to the extent that the presence of a larger number may be
required by law.

         If a quorum fails to attend any meeting, the chairman of the meeting or
the holders of a majority of the shares of stock entitled to vote who are
present in person or by proxy may adjourn the meeting to any place, date and
time, subject to the notice requirements of Section 6 of this Article I. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally called. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.

         SECTION 10. Proxies.

         At all meetings of shareholders, a shareholder may vote in person or by
proxy. Proxies solicited on behalf of management shall be voted as directed by
the shareholder or, in the absence of such direction, as determined by a
majority of the Board of Directors or by a majority of a committee of the Board
of Directors, whose members will be designated from time to time by the Board of
Directors, and which committee will have been delegated the power and authority
to act on behalf of the Board of Directors. No proxy shall be valid after eleven
(11) months from the date of its execution unless otherwise provided in the
proxy.

                                       4



         SECTION 11  Voting.

         Unless the Charter provides for a greater or lesser number of votes per
share or limits or denies voting rights, each outstanding share of stock,
regardless of class, is entitled to one (1) vote on each matter submitted to a
vote at a meeting of shareholders.

         Directors shall be elected by a plurality of the votes cast by the
shares present in person or present by proxy at the meeting and entitled to vote
on the election of directors. There shall be no cumulative voting by
shareholders of any class or series in the election of directors of the
Corporation. Action on a matter (other than the election of directors) by a
voting group is approved if the votes cast within the voting group favoring the
action exceed the votes cast opposing the action, unless the Corporation's
Charter or applicable law requires a greater number of affirmative votes.

         SECTION 12. Voting of Shares in the Name of Two or More Persons.

         When ownership of stock stands in the name of two or more persons, in
the absence of written directions to the Corporation to the contrary, at any
meeting of the shareholders of the Corporation, any one or more of such
shareholders may cast, in person or by proxy, all votes to which such ownership
is entitled. In the event an attempt is made to cast conflicting votes, in
person or by proxy, by the several persons in whose names shares of stock stand,
the vote or votes to which these persons are entitled shall be cast as directed
by a majority of those holding such stock and present in person or by proxy at
such meeting, but no votes shall be cast for such stock if a majority cannot
agree.

         SECTION 13. Voting of Shares by Certain Holders.

         Shares standing in the name of another corporation may be voted by any
officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in
the absence of such provision, as the board of directors of such corporation may
determine. Shares held by an administrator, executor, guardian, trustee, or
conservator may be voted by such person, either in person or by proxy, without a
transfer of such shares into such person's name. Shares standing in the name of
a receiver may be voted by such receiver, and shares held by or under the
control of a receiver may be voted by such receiver without the transfer thereof
into such receiver's name if authority to do so is contained in an appropriate
order of the court or other public authority by which such receiver was
appointed.

         A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter, the pledgee shall be entitled to vote the shares so transferred.

         Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation if a majority of the shares entitled to vote
for the election of directors of such

                                       5



other corporation are held by the Corporation, shall be voted at any meeting or
counted in determining the total number of outstanding shares at any given time
for purposes of any meeting.

         SECTION 14. Inspectors of Election.

         In advance of any meeting of shareholders, the Board of Directors may
appoint any persons, other than nominees for office, as inspectors of election
to act at such meeting or any adjournment thereof. The number of inspectors
shall be either one (1) or three (3). If the Board of Directors so appoints
either one (1) or three (3) inspectors, that appointment shall not be altered at
the meeting. If inspectors of election are not so appointed, the Chairman of the
Board of Directors or the President may make such appointment at the meeting. In
case any person appointed as inspector fails to appear or fails or refuses to
act, the vacancy may be filled by appointment by the Board of Directors in
advance of the meeting or at the meeting by the chairman of the meeting or the
President.

         Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all shareholders.

                                   ARTICLE II
                               Board of Directors

         SECTION 1.  General Powers.

         The business and affairs of the Corporation shall be managed by its
Board of Directors. The Board of Directors may exercise all the powers of the
Corporation, except those conferred on or reserved to the shareholders by
statute or by the Charter or these Bylaws. The Board of Directors may adopt such
rules and regulations for the conduct of its meetings and the management of the
Corporation as it may deem proper, and which are not inconsistent with these
Bylaws and with the Tennessee Business Corporation Act. The Board of Directors
shall annually elect a Chairman of the Board from among its members who shall,
when present, preside at its meetings.

         SECTION 2.  Number, Term, and Election.

         The Board of Directors shall initially consist of seven (7) members and
shall be divided into three classes as nearly equal in number as possible. The
members of each class shall be elected for a term of three (3) years and until
their successors are elected or qualified, in

                                       6



accordance with the provisions of the Corporation's Charter. The number of
directors who shall constitute the Board of Directors shall be such number as
the Board of Directors shall from time to time have designated, but in no event
shall the number of directors be increased or decreased beyond the range
established in the Corporation's charter.

         SECTION 3.  Qualifications.

         Each director shall at all times be the beneficial owner of not less
than 100 shares of capital Stock of the Corporation. To be eligible for
election, reelection, appointment or reappointment to the Board of Directors, a
person must reside within a county in which an office of the Corporation or one
of its depository institution subsidiaries is located or any adjacent county. No
person shall be eligible for election or appointment to the board of directors
if such person (i) has, within the previous 10 years, been the subject of
supervisory action by a financial regulatory agency that resulted in a cease and
desist order or an agreement or other written statement subject to public
disclosure under 12 U.S.C. 1818(u), or any successor provision, that involved
fraud, moral turpitude, dishonesty, breach of trust or fiduciary duties,
organized crime or racketeering or violation of depository institution laws or
regulations, (ii) has been convicted of a crime involving dishonesty or breach
of trust which is punishable by imprisonment for a term exceeding one (1) year
under state or federal law, or (iii) is currently charged in any information,
indictment, or other complaint with the commission of or participation in such a
crime.

         SECTION 4.  Place of Meetings.

         All regular and special meetings of the Board of Directors shall be
held at the principal office of the Corporation or at such other place within or
without the State of Tennessee as the Board of Directors may determine and as
designated in the notice of such meeting, if necessary.

         SECTION 5.  Regular Meetings.

         Regular meetings of the Board of Directors may be held without notice
of the date, time, place or purpose of the meeting as the Board of Directors may
determine and publicize among the directors.

         SECTION 6.  Special Meetings.

         Special meetings of the Board of Directors may be called by the
President, the Chairman of the Board, or by one-third of the directors. The
persons authorized to call special meetings of the Board of Directors may fix
any place within or without the State of Tennessee as the place for holding any
special meeting of the Board of Directors called by such persons.

         SECTION 7.  Telephonic Participation.

         Members of the Board of Directors, or any committee thereof, may
participate in a meeting of such board or committee by means of a conference
telephone or similar

                                       7



communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 7 shall constitute presence in person at such meeting.

         SECTION 8.  Notice.

         A notice of a regular meeting shall not be required. The Secretary
shall give written notice of any special meeting to each director at least two
(2) days previous thereto delivered personally or by telegram or facsimile or at
least five (5) days previous thereto delivered by mail at the address at which
the director is most likely to be reached. Notice shall be deemed to be
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid if mailed or when delivered to the telegraph company if sent by
telegram or when transmitted via facsimile to the number provided by the
director for such communications if sent by facsimile. Any director may waive
notice of any meeting either before or after the holding thereof by written
waiver filed with the records of the meeting. The attendance of a director at a
meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Directors need be specified in the notice or waiver of
notice of such meeting.

         SECTION 9.  Quorum.

         A majority of the number of directors in office immediately before the
meeting begins shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors, but if less than such majority is present at
a meeting, a majority of the directors present may adjourn the meeting from time
to time. Notice of any adjourned meeting shall be given in the same manner as
prescribed by Section 8 of this Article II.

         SECTION 10. Manner of Acting.

         The vote of the majority of the directors present at a meeting at which
a quorum is present shall be the act of the entire Board of Directors, unless a
greater number is prescribed by these Bylaws, the Charter, or the laws of
Tennessee.

         SECTION 11. Action Without a Meeting.

         Any action required or permitted to be taken by the Board of Directors
at a meeting may be taken without a meeting. If all directors consent to taking
such action without a meeting, the affirmative vote of the number of directors
that would be necessary to authorize or take such action at a meeting is the act
of the board. The action must be evidenced by one (1) or more written consents
describing the action taken, signed by each director in one (1) or more
counterparts, indicating each signing director's vote or abstention on the
action, and shall be

                                       8



included in the minutes or filed with the corporate records reflecting the
action taken. Action taken under this section is effective when the last
director signs the consent, unless the consent specifies a different effective
date. A consent signed under this section has the effect of a meeting vote and
may be described as such in any document.

         SECTION 12. Resignation.

         Any director may resign at any time by sending a written notice of such
resignation to the principal office of the Corporation addressed to the Board of
Directors, the Chairman of the Board or the President. Such resignation shall
take effect upon delivery, unless the notice specifies a later effective date.

         SECTION 13. Vacancies.

         Vacancies in the Board of Directors of the Corporation, however caused,
and newly created directorships shall be filled only by a vote of at least
majority of the directors then in office, whether or not a quorum, and any
director so chosen shall hold office for a term expiring at the next meeting of
shareholders at which directors are elected.

         SECTION 14. Removal of Directors.

         Any director or the entire Board of Directors may be removed for cause
and then only in accordance with the provisions of the Corporation's Charter.

         SECTION 15. Compensation.

         Directors, as such, may receive a stated fee for their services and a
reasonable fixed sum, and reasonable expenses of attendance, if any, for actual
attendance at each regular or special meeting of the Board of Directors. Members
of either standing or special committees may be allowed such compensation as the
Board of Directors may determine.

         SECTION 16. Presumption of Assent.

         A director of the Corporation who is present at a meeting of the Board
of Directors at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless the director's dissent or abstention
shall be entered in the minutes of the meeting or unless the director shall file
a written dissent to such action with the person acting as the Secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who votes in favor of such action.

                                       9



                                   ARTICLE III
                      Committees of the Board of Directors

         The Board of Directors, by a vote of a majority of the Board of
Directors then in office, may from time to time designate committees of the
Board, with such lawfully delegable powers and duties as it thereby confers, to
serve at the pleasure of the Board and shall, for these committees and any
others provided for herein, elect a director or directors to serve as the member
or members, designating, if it desires, other directors as alternate members who
may replace any absent or disqualified member at any meeting of the committee.
Any such committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it; provided, however, that any such committee shall have no power
or authority with reference to (i) authorizing distributions, except according
to a formula or method prescribed by the Board of Directors, (ii) filling
vacancies on the Board of Directors or on any of its committees, (iii) adopting,
amending or repealing these Bylaws, (iv) authorizing the reacquisition of
shares, except according to a formula or method prescribed by the Board of
Directors, and (v) authorizing or approving the issuance or sale or contract for
sale of shares, or determining the designation and relative rights, preferences
and limitations of a class or series of shares, except that the Board of
Directors may authorize a committee to do so within the limits specifically
prescribed by the Board of Directors.

         Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings. The quorum requirements for each such
committee shall be a majority of the members of such committee unless otherwise
determined by the Board of Directors by a majority vote of the Board of
Directors, and all matters considered by such committees shall be determined by
a majority vote of the members present. Action may be taken by any committee
without a meeting if all members thereof consent thereto in writing, and the
writing or writings are filed with the minutes of the proceedings of such
committee.

                                   ARTICLE IV
                                    Officers


         SECTION 1.  Generally.

         (a)   The Board of Directors, as soon as may be practicable after the
annual meeting of the shareholders, shall choose a President and Chief Executive
Officer, a Secretary and a Treasurer and from time to time may choose one or
more Vice Presidents or such other officers as it may deem proper. A person may
hold more than one office in the Corporation but may not serve concurrently as
both President and Secretary of the Corporation.

                                       10



         (b)   All officers chosen by the Board of Directors shall have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or any committee thereof.

         SECTION 2.  Election and Term of Office.

         An officer serves for one (1) year or until his or her successor is
elected and qualified. If the Board of Directors in its judgement finds that the
best interests of the Corporation will be served, it may remove any officer or
agent in accordance with Section 3 of this Article IV.

         SECTION 3.  Removal.

         Any officer may be removed by the vote of the majority of the Board of
Directors whenever, in its judgment, the best interests of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed.

         SECTION 4.  Vacancies.

         A vacancy in any office because of death, resignation, removal,
disqualification, or otherwise, may be filled by the Board of Directors for the
unexpired portion of the term.

         SECTION 5.  Remuneration.

         The Board of Directors shall have the power to fix the salaries and
other compensation and remuneration, by employment contract or otherwise, of all
officers of the Corporation.

         SECTION 6.  President and Chief Executive Officer.

         The President and Chief Executive Officer may sign and execute, in the
name of the Corporation, all authorized deeds, mortgages, bonds, contracts or
other instruments, except in cases in which the signing and execution thereof
shall have been expressly delegated to some other office or agent of the
Corporation; and, in general, he or she shall perform all duties usually
performed by a president and principal executive officer of a corporation and
such other duties as may from time to time be assigned to him or her by the
Board of Directors.

         SECTION 7.  Vice President(s).

         The Vice President(s) shall perform the duties of the President in his
or her absence or during his or her inability to act. In addition, the Vice
President(s) shall perform the duties and exercise the powers usually incident
to their respective offices and/or such other duties and powers as may be
properly assigned to them by the Board of Directors, the Chairman of the

                                       11



Board or the President. A Vice President(s) may be designated as Executive Vice
President or Senior Vice President.

         SECTION 8.  Secretary.

         The Secretary shall keep the minutes of the meetings of the
shareholders, of the Board of Directors and of any committees, in books provided
for the purpose; he or she shall see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; he or she
shall be custodian of the records of the Corporation; he or she shall witness
all documents on behalf of the Corporation, the execution of which is duly
authorized, see that the corporate seal is affixed where such document is
required to be under its seal, and, when so affixed, may attest the same; and,
in general, he or she shall perform all duties incident to the office of a
secretary of a corporation, and such other duties as may from time to time be
assigned to him or her by the Board of Directors.

         SECTION 9.  Treasurer.

         The Treasurer shall have charge of and be responsible for all funds,
securities, receipts and disbursements of the Corporation, and shall deposit, or
cause to be deposited, in the name of the Corporation, all monies or other
valuable effects in such banks, trust companies or other depositories as shall,
from time to time, be selected by the Board of Directors. In general, he or she
shall perform all the duties incident to the office of a treasurer of a
corporation, and such other duties as may from time to time be assigned to him
or her by the Board of Directors.


                                    ARTICLE V
                      Contracts, Loans, Checks and Deposits

         SECTION 1.  Contracts.

         To the extent permitted by applicable law, and except as otherwise
prescribed by the Corporation's Charter or these Bylaws with respect to
certificates for shares, the Board of Directors may authorize any officer,
employee, or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.

                                       12



         SECTION 2.  Loans.

         No loans shall be contracted on behalf of the Corporation and no
evidence of indebtedness shall be issued in its name unless authorized by the
Board of Directors. Such authority may be general or confined to specific
instances. The Corporation shall not lend money to, or guarantee the obligation
of, any officer or director unless the Board of Directors determines that the
loan or guarantee benefits the Corporation and is permissible under applicable
laws and regulations and either approves the specific loan or guarantee or a
general plan authorizing loans and guarantees.

         SECTION 3.  Checks, Drafts, Etc.

         All checks, drafts or other orders for the payment of money, notes, or
other evidences of indebtedness issued in the name of the Corporation shall be
signed by one (1) or more officers, employees, or agents of the Corporation in
such manner as shall from time to time be determined by resolution of the Board
of Directors.

         SECTION 4.  Deposits.

         All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation in any of its duly authorized
depositories as the Board of Directors may select.

                                   ARTICLE VI
                   Certificates for Shares and their Transfer

         SECTION 1.  Certificates for Shares and their Transfer.

         Each shareholder shall be entitled to certificates which represent and
certify the shares of stock he or she holds in the Corporation. Each stock
certificate shall include on its face the name of the Corporation, the name of
the shareholder and the class of stock and number of shares represented by the
certificate and be in such form, not inconsistent with law or with the Charter,
as shall be approved by the Board of Directors or any officer or officers
designated for such purpose by resolution of the Board of Directors. Each stock
certificate shall be signed by the President and Chief Executive Officer,
countersigned by the Secretary, and sealed with the corporate seal or a
facsimile thereof. The signature of such officers upon a certificate may be
facsimiles if the certificate is manually signed on behalf of a transfer agent
or a registrar other than the Corporation itself or one (1) of its employees.
Each certificate for shares of capital stock shall be consecutively numbered or
otherwise identified.

         Any restrictions imposed on the transfer or registration of transfer of
shares of the Corporation shall be noted conspicuously on the front or back of
each certificate representing such shares.

                                       13



         SECTION 2.  Payment for Shares.

         No certificate shall be issued for any share until such share is fully
paid.

         SECTION 3.  Form of Payment for Shares.

         The consideration for the issuance of shares shall be paid in
accordance with the provisions of Tennessee law.

         SECTION 4.  Transfer of Shares.

         Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 1 of this Article VI, an
outstanding certificate for the number of shares involved shall be surrendered
for cancellation before a new certificate is issued therefor, except that in the
case of a lost or destroyed certificate a new certificate may be issued upon
such terms and indemnity to the Corporation as the Board of Directors may
prescribe.

         SECTION 5.  Stock Ledger.

         The Corporation shall maintain a stock ledger which contains the name
and address of each shareholder and the number of shares of stock of each class
registered in the name of each shareholder. The stock ledger may be in written
form or in any other form which may be converted within a reasonable time into
written form for visual inspection. The stock ledger of the Corporation shall be
the only evidence as to who are the shareholders entitled to examine the stock
ledger, the list required by Section 8 of Article I, or the books of the
Corporation, or to vote in person or by proxy at any meeting of shareholders.

         SECTION 6.  Lost Certificates.

         The Board of Directors may direct a new certificate to be issued in
place of any certificate theretofore issued by the Corporation alleged to have
been lost, stolen, or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate of stock to be lost, stolen, or destroyed.
When authorizing such issue of a new certificate, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate, or the owner's legal
representative, to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.

                                       14



                                   ARTICLE VII
                                   Fiscal Year

         The fiscal year of the Corporation shall end on the 30/st/ day of June
of each year.

                                  ARTICLE VIII
                                 Corporate Seal

         The corporate seal of the Corporation shall be in such form as the
Board of Directors shall prescribe.

                                   ARTICLE IX
                                   Amendments

         The Bylaws may be altered, amended, or repealed or new Bylaws may be
adopted in the manner set forth in the Corporation's Charter.

                                       15



         IN WITNESS WHEREOF, these Bylaws are hereby certified as the duly
adopted Bylaws of the Corporation on March 19, 2003.


                                                /s/ Jane P. Hutton
                                                ------------------------
                                                Jane P. Hutton
                                                Corporate Secretary

                                       16

EX-4.1

                                                                     Exhibit 4.1

COMMON STOCK                                             COMMON STOCK
PAR VALUE $.01                               SEE REVERSE FOR CERTAIN DEFINITIONS
                                                             CUSIP


                           JEFFERSON BANCSHARES, INC.

              INCORPORATED UNDER THE LAWS OF THE STATE OF TENNESSEE

THIS CERTIFIES THAT

                                 S P E C I M E N

is the owner of:

 FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE,
                         OF JEFFERSON BANCSHARES, INC.


The shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, or by his duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the Charter
of the Corporation and any amendments thereto (copies of which are on file with
the Transfer Agent), to all of which provisions the holder by acceptance hereof,
assents.

        This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar. The shares represented by this Certificate are not
insured by the Federal Deposit Insurance Corporation or any other government
agency.

                  IN WITNESS THEREOF, Jefferson Bancshares, Inc. has caused this
certificate to be executed by the facsimile signatures of its duly authorized
officers and has caused a facsimile of its corporate seal to be hereunto
affixed.

Dated:                                               [SEAL]

                             President                                 Secretary



                           Jefferson Bancshares, Inc.

         The shares represented by this certificate are subject to a limitation
contained in the Charter to the effect that in no event shall any record owner
of any outstanding common stock which is beneficially owned, directly or
indirectly, by a person who beneficially owns in excess of 10% of the
outstanding shares of common stock (the "Limit") be entitled or permitted to any
vote in respect of shares held in excess of the Limit.

         The Board of Directors of the Corporation is authorized by
resolution(s), from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences and relative, participating, optional, or other special rights of
the shares of each such series and the qualifications, limitations and
restrictions thereof. The Corporation will furnish to any shareholder upon
request and without charge a full description of each class of stock and any
series thereof.

         The shares represented by this certificate may not be cumulatively
voted on any matter. The affirmative vote of the holders of at least 80% of the
voting stock of the Corporation, voting together as a single class, shall be
required to approve certain business combinations and other transactions,
pursuant to the Charter or to amend certain provisions of the Charter.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

                                                              
TEN COM - as tenants in common                                   UNIF GIFTS MIN ACT - __________ custodian __________
                                                                                        (Cust)               (Minor)

TEN ENT - as tenants by the entireties                                              under Uniform Gifts to Minors Act
                                                                                          _______________________
                                                                                                   (State)
JT TEN - as joint tenants with right
         of survivorship and not as
         tenants in common



     Additional abbreviations may also be used though not in the above list.

For value received, __________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
 IDENTIFICATION NUMBER OF ASSIGNEE

________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee

_______________________________________________ shares of the common stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint_________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.

                                               
DATED ________________________                    _____________________________________________________
                                                  NOTICE:  THE SIGNATURE TO THIS ASSIGNMENT MUST
                                                  CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF
                                                  THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
                                                  ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.



SIGNATURE GUARANTEED: ___________________________________________________
                      THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
                      GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
                      AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
                      MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
                      MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15

EX-5.1

                                                                     Exhibit 5.1

                                      DRAFT


                                __________, 2003

Board of Directors
Jefferson Bancshares, Inc.
120 Evans Avenue
Morristown, Tennessee 37814

         Re:   Registration Statement on Form S-1

Gentlemen:

         We have acted as special counsel for Jefferson Bancshares, Inc., a
Tennessee corporation (the "Company"), in connection with the registration
statement on Form S-1 (the "Registration Statement") initially filed on
____________, 2003, by the Company with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act"), and the regulations
promulgated thereunder.

         The Registration Statement relates to the proposed issuance by the
Company of (i) up to 6,612,500 shares ("Offered Shares") of common stock, $0.01
par value per share, of the Company ("Common Stock") in a subscription offering,
a community offering and a syndicated community offering (the "Offerings")
pursuant to the Plan of Conversion adopted by Jefferson Bancshares, M.H.C.,
Jefferson Federal Savings and Loan Association of Morristown (the "Association")
and the Company, (ii) up to 1,389,073 shares ("Exchange Shares") of Common Stock
to be exchanged for outstanding shares of common stock, $1.00 par value per
share, of the Association pursuant to the Plan of Conversion and the Agreement
and Plan of Merger by and among the Association, the Company and Jefferson
Interim Savings Association attached as Annex B to the Plan of Conversion, which
provides for the merger of Jefferson Interim Savings Association with and into
the Association (the "Merger"), with the Association as the surviving entity and
(iii) 375,000 shares ("Foundation Shares") of Common Stock to the Jefferson
Federal Charitable Foundation (the "Foundation"), a privately-owned charitable
foundation formed by the Company, pursuant to a gift instrument.

         We understand that the Company will lend to the trust for the
Association's Employee Stock Ownership Plan (the "ESOP") the funds the ESOP
trust will use to purchase shares of Common Stock for which the ESOP trust
subscribes pursuant to the Offerings and, for purposes of rendering the opinion
set forth in paragraph 1 below, we assume that: (a) the Board of Directors of
the



Board of Directors
Jefferson Bancshares, Inc.
_____________, 2003
Page 2


Company has duly authorized the loan to the ESOP trust (the "Loan"); (b) the
ESOP serves a valid corporate purpose for the Company; (c) the Loan will be made
at an interest rate and on other terms that are fair to the Company; (d) the
terms of the Loan will be set forth in customary and appropriate documents
including, without limitation, a promissory note representing the indebtedness
of the ESOP trust to the Company as a result of the Loan; and (e) the closing
for the Loan and for the sale of Common Stock to the ESOP trust will be held
after the closing for the sale of the other shares of Common Stock sold in the
Offerings and the receipt by the Company of the proceeds thereof.

         In the preparation of this opinion, we have examined originals or
copies identified to our satisfaction of: (i) the Company's charter filed with
the Tennessee Secretary of State on March 12, 2003 (the "Charter"); (ii) the
Company's Bylaws; (iii) the Registration Statement, including the prospectus
contained therein and the exhibits thereto; (iv) certain resolutions of the
Board of Directors of the Company relating to the issuance of the Common Stock
being registered under the Registration Statement; (v) the Plan of Conversion;
(vi) the gift instrument whereby shares of Common Stock will be granted to the
Foundation; (vii) the ESOP trust agreement and the ESOP Loan agreement; and
(viii) the form of stock certificate approved by the Board of Directors of the
Company to represent shares of Common Stock. We have also examined originals or
copies of such documents, corporate records, certificates of public officials
and other instruments, and have conducted such other investigations of law and
fact, as we have deemed necessary or advisable for purposes of our opinion.

         In our examination, we have assumed, without verification, the
genuineness of all signatures, the authenticity of all documents and instruments
submitted to us as originals, the conformity to the originals of all documents
and instruments submitted to us as certified or conformed copies, the
correctness of all certificates, and the accuracy and completeness of all
records, documents, instruments and materials made available to us by the
Company.

         Our opinion is limited to the matters set forth herein, and we express
no opinion other than as expressly set forth herein. In rendering the opinion
set forth below, we do not express any opinion concerning law other than the
corporate law of the State of Tennessee. Our opinion is expressed as of the date
hereof and is based on laws currently in effect. Accordingly, the conclusions
set forth in this opinion are subject to change in the event that any laws
should change or be enacted in the future. We are under no obligation to update
this opinion or to otherwise communicate with you in the event of any such
change.

         For purposes of this opinion, we have assumed that, prior to the
issuance of any shares, (i) the Registration Statement, as finally amended, will
have become effective under the Act and (ii) the Merger will have become
effective.



Board of Directors
Jefferson Bancshares, Inc.
____________ , 2003
Page 3


         Based upon and subject to the foregoing, it is our opinion that:

         (1)  upon the due adoption by the Board of Directors of the Company (or
              authorized committee thereof) of a resolution fixing the number of
              shares of Common Stock to be sold in the Offerings, the Offered
              Shares (including the shares to be issued to the ESOP trust), when
              issued and sold in the manner described in the Registration
              Statement, will be validly issued, fully paid and nonassessable;

         (2)  the Exchange Shares, when issued in accordance with the terms of
              the Plan of Conversion upon consummation of the Merger
              contemplated therein, will be validly issued, fully paid and
              nonassessable; and

         (3)  the Foundation Shares, when granted in accordance with the gift
              instrument, will be validly issued, fully paid and nonassessable.

         The following provisions of the Company's charter may not be given
effect by a court applying Tennessee law, but in our opinion the failure to give
effect to such provisions will not affect the duly authorized, validly issued,
fully paid and nonassessable status of the Common Stock:

         A.   Subsections C and G of Article XII, which grant the Board of
              Directors the authority to construe and apply the provisions of
              that Article, subsection D of Article XII, to the extent that
              subsection obligates any person to provide to the Board of
              Directors the information such subsection authorizes the Board of
              Directors to demand, and the provision of Subsection D of Article
              XIII empowering the Board of Directors to determine the Fair
              Market Value of property offered or paid for the Company's stock
              by an Interested Stockholder, in each case to the extent, if any,
              that a court applying Tennessee law were to impose equitable
              limitations upon such authority; and

         B.   Article XIV, which authorizes the Board of Directors to consider
              the effect of any offer to acquire the Company on constituencies
              other than stockholders in evaluating any such offer.

         We consent to the filing of this opinion as an exhibit to the
Registration Statement and to Jefferson Bancshares, M.H.C.'s Application on Form
AC to the Office of Thrift Supervision (the "OTS Application"), and to the
reference to our firm under the heading "Legal Matters" in the prospectus which
is part of such registration statement as such may be amended or supplemented,
or incorporated by reference in any Registration Statement covering additional
shares of Common Stock to be issued or sold under the Plan of Conversion that is
filed pursuant to Rule 462(b) of the Act, and to the reference to our firm in
the OTS Application. In giving such consent, we do not



Board of Directors
Jefferson Bancshares, Inc.
_______________, 2003
Page 4


hereby admit that we are experts or are otherwise within the category of persons
whose consent is required under Section 7 of the Act or the rules or regulations
of the Securities and Exchange Commission thereunder.

                                             Very truly yours,

                                             DRAFT

                                             MULDOON MURPHY & FAUCETTE LLP

EX-8.1

                                                                     Exhibit 8.1
                                      DRAFT


                               _____________, 2003


Jefferson Bancshares, Inc.
Jefferson Bancshares, M.H.C.
Jefferson Federal Savings and Loan Association
 of Morristown
120 Evans Avenue
Morristown, Tennessee 37814

Ladies and Gentlemen:

         You have asked our opinion regarding certain federal income tax
consequences of the proposed conversion of Jefferson Bancshares, M.H.C. to stock
form pursuant to the Plan of Conversion of Jefferson Bancshares, M.H.C. We are
rendering this opinion pursuant to Section 23 of the Plan of Conversion. All
capitalized terms used but not defined in this letter shall have the meanings
assigned to them in the Plan of Conversion.

         In connection with the opinions expressed below, we have examined and
relied upon originals, or copies certified or otherwise identified to our
satisfaction, of the Plan of Conversion and of such corporate records of the
parties to the Conversion and Reorganization as we have deemed appropriate. We
have also relied upon, without independent verification, the representations of
the Primary Parties contained in their letter to us dated ____________, 2003. We
have assumed that such representations are true and that the parties to the
Conversion and Reorganization will act in accordance with the Plan of
Conversion. In addition, we have made such investigations of law as we have
deemed appropriate to form a basis for the opinions expressed below.

         We have assumed that the Conversion and Reorganization contemplated by
the Plan of Conversion will be consummated in accordance therewith and as
described in the prospectus included as part of the registration statement on
Form S-1 filed by Jefferson Bancshares, Inc.

         In issuing the opinions set forth below, we have referred solely to
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Treasury Regulations and similar guidance issued by the
Internal Revenue Service ("IRS") thereunder. Changes in the tax laws could
affect the continued validity of the opinions expressed herein. Furthermore,
there can be no assurance that the opinions expressed herein would be adopted by
the IRS or a court of



Jefferson Bancshares, Inc.
Jefferson Bancshares, M.H.C.
Jefferson Federal Savings and
 Loan Association of Morristown
______________, 2003
Page 2


law. We assume no obligation to revise or supplement this opinion should the
present federal income tax laws be changed by any legislation, judicial
decisions or otherwise.

       Based on and subject to the foregoing, it is our opinion that for
federal income tax purposes, under current law:

      (1)  the conversion of Jefferson Bancshares, M.H.C. from mutual form to a
           federal interim stock savings institution will qualify as a
           reorganization within the meaning of Section 368(a)(1)(F) of the
           Code, and no gain or loss will be recognized by Jefferson Bancshares,
           M.H.C. by reason of such conversion;

      (2)  the merger of Jefferson Bancshares, M.H.C. into Jefferson Federal
           Savings and Loan Association of Morristown ("Jefferson Federal") will
           qualify as a reorganization within the meaning of Section
           368(a)(1)(A) of the Code, and no gain or loss will be recognized by
           Jefferson Bancshares, M.H.C. or Jefferson Federal by reason of such
           merger;

      (3)  the merger of Jefferson Interim Savings Association with and into
           Jefferson Federal ("Bank Merger") will qualify either as a
           reorganization within the meaning of Section 368(a)(2)(E) of the Code
           or as an exchange under Section 351 of the Code, and no gain or loss
           will be recognized by Jefferson Interim Savings Association,
           Jefferson Federal or Jefferson Bancshares, Inc. by reason of the Bank
           Merger;

      (4)  no gain or loss will be recognized by the current stockholders of
           Jefferson Federal upon the receipt of shares of common stock of
           Jefferson Bancshares, Inc. pursuant to the Bank Merger, except to the
           extent of any cash received in lieu of a fractional share interest in
           Jefferson Bancshares, Inc.;

      (5)  the aggregate tax basis of the shares of Jefferson Bancshares, Inc.
           common stock to be received by the current stockholders of Jefferson
           Federal will be the same as the aggregate tax basis of the Jefferson
           Federal common stock surrendered in exchange therefore reduced by any
           amount allocable to a fractional share interest in Jefferson Federal
           for which cash is received;

      (6)  the holding period of the shares of Jefferson Bancshares, Inc. common
           stock to be received by the current stockholders of Jefferson Federal
           will include the holding



Jefferson Bancshares, Inc.
Jefferson Bancshares, M.H.C.
Jefferson Federal Savings and
  Loan Association of Morristown
____________, 2003
Page 3


           period of the shares of Jefferson Federal common stock, provided that
           the Jefferson Federal common stock was held as a capital asset on the
           date of the Bank Merger;

      (7)  a holder of shares of Jefferson Federal who receives cash in lieu of
           a fractional share of Jefferson Bancshares, Inc. common stock will
           recognize gain or loss equal to the difference between the amount of
           cash received and the portion of such holder's tax basis of the
           shares of Jefferson Federal allocable to the fractional share; such
           gain or loss will be capital gain or loss if such shares were held as
           a capital asset of the date of the Bank Merger, and will be long-term
           capital gain or loss if such holder's holding period in the shares of
           Jefferson Federal common stock is more than one year on the date of
           the Bank Merger;

      (8)  no gain or loss will be recognized by Jefferson Bancshares, Inc. upon
           the sale of shares of common stock in the Offerings;

      (9)  no gain or loss will be recognized by members of Jefferson
           Bancshares, M.H.C. upon the issuance to them of interests in the
           liquidation account in Jefferson Federal pursuant to the merger of
           Jefferson Bancshares, M.H.C. into Jefferson Federal;

      (10) it is more likely than not that the fair market value of the
           nontransferable subscription rights to purchase shares of common
           stock of Jefferson Bancshares to be issued to Eligible Account
           Holders, Supplemental Eligible Account Holders and Other Members (the
           "Subscription Rights") is zero and, accordingly, that no income will
           be recognized by Eligible Account Holders, Supplemental Eligible
           Account Holders and Other Members upon the issuance to them of the
           Subscription Rights or upon the exercise of the Subscription Rights;

      (11) it is more likely than not that the tax basis to the holders of
           shares of common stock purchased in the Offerings pursuant to the
           exercise of the Subscription Rights will be the amount paid therefor,
           and that the holding period for such shares of common stock will
           begin on the date of completion of the offerings; and

      (12) the holding period for shares of common stock purchased in the
           Community Offering or Syndicated Community Offering will begin on the
           day after the date of purchase.



Jefferson Bancshares, Inc.
Jefferson Bancshares, M.H.C.
Jefferson Federal Savings and
  Loan Association of Morristown
_____________, 2003
Page 4


         The opinions set forth in (10) and (11), above, are based on the
position that the Subscription Rights do not have any market value. Although the
IRS will not issue rulings on whether subscription rights have a market value,
we are unaware of any instance in which the IRS has taken the position that
nontransferable subscription rights issued by a converting financial institution
have a market value. We understand that the Subscription Rights will be granted
at no cost to the recipients, will be nontransferable and of short duration, and
will afford the recipients the right only to purchase shares of common stock of
Jefferson Bancshares, Inc. at a price equal to its estimated fair market value,
which will be the same price as the purchase price for the unsubscribed shares
of such common stock. Based on the foregoing, we believe that it is more likely
than not (i.e., that there is a more than a 50% likelihood) that the
Subscription Rights have no market value for federal income tax purposes.

         Except as set forth above, we express no opinion to any party as to the
tax consequences, whether federal, state, local or foreign, of the Conversion
and Reorganization or of any transaction related thereto or contemplated by the
Plan of Conversion. This opinion is given solely for the benefit of the Primary
Parties and Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members who receive Subscription Rights, and may not be relied upon by any
other party or entity or otherwise referred to in any document without our
express written consent. We consent to the filing of this opinion as an exhibit
to the Forms AC and H-(e)1-S filed with the Office of Thrift Supervision, and as
an exhibit to the registration statement on Form S-1 filed by Jefferson
Bancshares, Inc. with the Securities and Exchange Commission in connection with
the Conversion and Reorganization, and to the reference thereto in the
prospectus included in the registration statement on Form S-1 under the headings
"The Conversion- Tax Aspects" and "Legal and Tax Opinions." In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.

                                                  Very truly yours,

                                                  DRAFT

                                                  MULDOON MURPHY & FAUCETTE LLP

EX-8.2

                                                                     Exhibit 8.2

                [Letterhead of Craine, Thompson, and Jones, P.C]
                                     DRAFT

__________, 2003


Jefferson Bancshares, Inc.
Jefferson Bancshares, M.H.C.
Jefferson Federal Savings and Loan Association
 Of Morristown
120 Evans Avenue
Morristown, Tennessee 37814

Ladies and Gentlemen:

You have asked that we provide our opinion as to the State of Tennessee income
and franchise tax consequences, that will result from the conversion of
Jefferson Bancshares, M.H.C. to stock form pursuant to the Plan of Conversion of
Jefferson Bancshares, M.H.C. Presently, Jefferson Bancshares, M.H.C. is a
federally chartered mutual holding company that will be converted into the stock
form of organization as more fully described in a Federal Tax Opinion letter
delivered to you by Muldoon Murphy & Faucette LLP dated _________, 2003.

In forming our opinion, we have reviewed the aforementioned Federal Tax Opinion
letter, the Prospectus included in the Registration Statement on Form S-1 filed
by Jefferson Bancshares, Inc. and other documents, as we have considered
necessary. Our opinion is based on the facts of the transaction as described in
the Federal Tax Opinion letter and may be different if the facts differ from
this description. Our opinion expressed herein is limited solely to the matters
expressly set forth herein and no opinion should be inferred as to any other
matters or as to the tax treatment of the transaction discussed herein under the
provisions of any section of the Tennessee Code Annotated not specifically
covered herein that may also be applicable to this transaction. If there is a
change in the applicable law or interpretations of the law or regulations, any
opinion expressed herein may become inapplicable. In addition, any such change
may in certain cases be applied retroactively, with adverse effect.

In our opinion, as long as the Jefferson Bancshares, M.H.C. reorganization into
a federal interim stock savings institution falls under Section 368(a)(1)(F) of
the Internal Revenue Code (Code) and the merger of Jefferson Bancshares, M.H.C.
into Jefferson Federal Savings and Loan Association falls under Section
368(a)(1)(A) of the Code and the merger of Jefferson Interim Savings Association
with and into Jefferson Federal falls



Page 2

under Section 368(a)(2)(E) or Section 351 of the Code there will be no taxable
income generated for purposes of the State of Tennessee.

This opinion is given solely for the benefit of the Primary Parties and Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members who
receive Subscription Rights (terms as defined in the Plan of Conversion), and
may not be relied upon by any other party or entity or otherwise referred to in
any document without our express written consent. We consent to the filing of
this opinion as an exhibit to the Forms AC and H-(e)1-S filed with the Office of
Thrift Supervision, and as an exhibit to the registration statement on Form S-1
filed by Jefferson Bancshares, Inc. with the Securities and Exchange Commission
in connection with the Conversion and Reorganization, and to the reference
thereto in the prospectus included in the registration statement on Form S-1
under the headings "The Conversion-Tax Aspects" and "Legal and Tax Opinions."


Very truly yours,


Craine, Thompson & Jones, P.C.

EX-10.1

                                                                    Exhibit 10.1

                             JEFFERSON FEDERAL BANK

                          EMPLOYEE STOCK OWNERSHIP PLAN

                            Effective January 1, 2003



                             JEFFERSON FEDERAL BANK
                          EMPLOYEE STOCK OWNERSHIP PLAN
                                  CERTIFICATION

         I, Anderson L. Smith, President and Chief Executive Officer of
Jefferson Federal Bank, hereby certify that the attached Jefferson Federal Bank
Employee Stock Ownership Plan, effective January 1, 2003 was adopted at a duly
held meeting of the Board of Directors of the Bank.

ATTEST:                               JEFFERSON FEDERAL BANK

___________________                   By:_______________________________________
                                      Anderson L. Smith
                                      President and Chief Executive Officer



                             Jefferson Federal Bank
                          Employee Stock Ownership Plan

                                Table of Contents

                                                                          
Section 1 - Introduction ...................................................  1

Section 2 - Definitions ....................................................  2

Section 3 - Eligibility and Participation .................................. 10

Section 4 - Contributions .................................................. 12

Section 5 - Plan Accounting ................................................ 15

Section 6 - Vesting and Forfeitures ........................................ 24

Section 7 - Distributions .................................................. 27

Section 8 - Voting of Company Stock and Tender Offers ...................... 32

Section 9 - The Committee and Plan Administration .......................... 33

Section 10 - Rules Governing Benefit Claims ................................ 37

Section 11 - The Trust ..................................................... 38

Section 12 - Adoption, Amendment and Termination ........................... 40

Section 13 - General Provisions ............................................ 42

Section 14 - Top-Heavy Provisions .......................................... 44





                             JEFFERSON FEDERAL BANK
                          EMPLOYEE STOCK OWNERSHIP PLAN

                                    SECTION 1
                                  Introduction

Section 1.01  Nature of the Plan.

Effective as of January 1, 2003, (the "Effective Date"), Jefferson Federal Bank,
a federally-chartered savings bank (the "Bank"), hereby establishes the
Jefferson Federal Bank Employee Stock Ownership Plan (the "Plan") to enable
Eligible Employees (as defined in Section 2.01(o) of the Plan) to acquire stock
ownership interests in Jefferson Bancshares, Inc. (the "Company"). The Bank
intends this Plan to be a tax-qualified stock bonus plan under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and an employee stock
ownership plan within the meaning of Section 407(d)(6) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and Sections 409
and 4975(e)(7) of the Code. The Plan is designed to invest primarily in the
common stock of the Company, which stock constitutes "qualifying employer
securities" within the meaning of Section 407(d)(5) of ERISA and Sections 409(l)
and 4975(e)(8) of the Code. Accordingly, the Plan and Trust Agreement (as
defined in Section 2.01(oo) of the Plan) shall be interpreted and applied in a
manner consistent with the Bank's intent for it to be a tax-qualified plan
designed to invest primarily in qualifying employer securities.

The Plan reflects certain provisions of the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA). The provisions related to EGTRRA are
intended as a goal for the compliance with EGTRRA and guidance issued
thereunder. To the extent any provision of the Plan was operated according to an
effective date earlier than as required by law, then such date shall be the
effective date with respect to that provision of the Plan.

Section 1.02  Employers and Affiliates.

The Bank and each of its Affiliates (as defined in Section 2.01(c) of the Plan)
which, with the consent of the Bank, adopts the Plan pursuant to the provisions
of Section 12.01 of the Plan are collectively referred to as the "Employers" and
individually as an "Employer." The Plan shall be treated as a single plan with
respect to all participating Employers.



                                    SECTION 2
                                   Definitions

Section 2.01  Definitions.

In this Plan, whenever the context so indicates, the singular or the plural
number and the masculine or feminine gender shall be deemed to include the
other, the terms "he," "his," and "him," shall refer to a Participant or
Beneficiary, as the case may be, and, except as otherwise provided, or unless
the context otherwise requires, the capitalized terms shall have the following
meanings:

(a)      "Account" or "Accounts" mean a Participant's or Beneficiary's Company
         Stock Account and/or his Other Investments Account, as the context so
         requires.

(b)      "Acquisition Loan" means a loan (or other extension of credit,
         including an installment obligation to a "party in interest" (as
         defined in Section 3(14) of ERISA)) incurred by the Trustee in
         connection with the purchase of Company Stock.

(c)      "Affiliate" means any corporation, trade or business, which, at the
         time of reference, is together with the Bank, a member of a controlled
         group of corporations, a group of trades or businesses (whether or not
         incorporated) under common control, or an affiliated service group, as
         described in Sections 414(b), 414(c), and 414(m) of the Code,
         respectively, or any other organization treated as a single employer
         with the Bank under Section 414(o) of the Code; provided, however,
         that, where the context so requires, the term "Affiliate" shall be
         construed to give full effect to the provisions of Sections 409(l)(4)
         and 415(h) of the Code.

(d)      "Bank" means Jefferson Federal Bank, and any entity which succeeds to
         the business of Jefferson Federal Bank and which adopts this Plan in
         accordance with the provisions of Section 12.02 of the Plan or by
         written agreement assuming the obligations of the Plan.

(e)      "Beneficiary" means the person(s) entitled to receive benefits under
         the Plan following a Participant's death, pursuant to Section 7.03 of
         the Plan.

(f)      "Change in Control." means any one of the following events occurs:

         (i)   Merger: Company merges into or consolidates with another
               corporation, or merges another corporation into the Company, and
               as a result less than a majority of the combined voting power of
               the resulting corporation immediately after the merger or
               consolidation is held by persons who were stockholders of the
               Company immediately before the merger or consolidation;

                                       2



         (ii)     Acquisition of Significant Share Ownership: a report on
                  Schedule 13D or another form or schedule (other than Schedule
                  13G) is filed or is required to be filed under Sections 13(d)
                  or 14(d) of the Securities Exchange Act of 1934, if the
                  schedule discloses that the filing person or persons acting in
                  concert has or have become the beneficial owner of 25% or more
                  of a class of the Company's voting securities, but this clause
                  (b) shall not apply to beneficial ownership of Company voting
                  shares held in a fiduciary capacity by an entity of which
                  Company directly or indirectly beneficially owns 50% or more
                  of its outstanding voting securities;

         (iii)    Change in Board Composition: during any period of two
                  consecutive years, individuals who constitute the Company's
                  Board of Directors at the beginning of the two-year period
                  cease for any reason to constitute at least a majority of the
                  Company's Board of Directors; provided, however, that for
                  purposes of this clause (iii) each director who is first
                  elected by the board (or first nominated by the board for
                  election by stockholders) by a vote of at least two-thirds of
                  the directors who were directors at the beginning of the
                  period shall be deemed to have been a director at the
                  beginning of the two-year period; or

         (iv)     Sale of Assets: Company sells to a third party all or
                  substantially all of the Company's assets.

(g)      "Code" means the Internal Revenue Code of 1986, as amended.

(h)      "Committee" means the individual(s) responsible for the administration
         of the Plan in accordance with Section 9 of the Plan.

(i)      "Company" means Jefferson Bancshares, Inc. and any entity which
         succeeds to the business of Jefferson Bancshares, Inc.

(j)      "Company Stock" means shares of the voting common stock or preferred
         stock, meeting the requirements of Section 409 of the Code and Section
         407(d)(5) of ERISA, issued by the Bank or its Affiliates.

(k)      "Company Stock Account" means the account established and maintained in
         the name of each Participant or Beneficiary to reflect his share of the
         Trust Fund invested in Company Stock.

(l)      "Compensation" means

         (i)   an Employee's wages as defined in Section 3401(a) of the Code
               (exclusive of any compensation deferred from a prior year)
               together with all other compensatory payments to an Employee by
               the Employer with respect to which the Employer must furnish to
               the Employee a written statement pursuant to Sections 6041(d)

                                       3



               and 6051(a) of the Code, but determined without regard to any
               rules which limit the remuneration included in wages based on the
               nature or location of the employment or services performed,
               excluding reimbursements or other expense allowances, moving
               expenses, fringe benefits and welfare benefits.

         (ii)  Notwithstanding the above, Compensation shall include any amount
               which is contributed by the Employer pursuant to a salary
               reduction agreement and which is not includible in the gross
               income of the employee under Sections 125, 132(f) and 402(e)(3).

A Participant's Compensation shall not exceed $200,000 (as periodically adjusted
pursuant to Section 401(a)(17) of the Code). If a Participant's Compensation is
determined on a basis of a period of less than twelve (12) calendar months, then
the compensation limit for such Participant shall be the Compensation Limit in
effect for the Plan Year in which the period begins multiplied by a ratio
obtained by dividing the number of full months in the period by twelve (12).

Notwithstanding the foregoing, to the extent this definition of Compensation
does not satisfy the requirements of Section 414(s) of the Code for any
particular Plan Year, then, for that Plan Year, Compensation shall have the
meaning provided in Section 1.415.2(d)(2) and (3) of the Treasury Regulations.

(m)      "Disability" means permanent and total disability as defined in Section
         22(e)3 of the Code.

(n)      "Early Retirement Age" means age 55.

(o)      "Effective Date" means January 1, 2003.

(p)      "Eligible Employee" means any Employee who is not precluded from
         participating in the Plan by reason of the provisions of Section 3.02
         of the Plan.

(q)      "Employee" means any person, who is actually performing services for
         the Employer or an Affiliate in a common-law, employer-employee
         relationship as determined under Sections 31.3121(d)-1, 31.3306(i)-1,
         or 31.3401(c)-1 of the Treasury Regulations and any "leased employee",
         who pursuant to an agreement between the Employer and any other person,
         including a leasing organization, has performed services for the
         Employer (or for the Employer and related persons determined in
         accordance with Section 414(n)(6) of the Code) on a substantially
         full-time basis for a period of a least one (1) year, and such services
         are performed under the primary direction and control of the Employer.

(r)      "Employer" or "Employers" means the Bank and its Affiliates, which
         adopt the Plan in accordance with the provisions of Section 12.01 of
         the Plan, and any entity which succeeds to the business of the Bank or
         its Affiliates and which adopts the Plan in

                                       4



         accordance with the provisions of Section 12.02 of the Plan or by
         written agreement assumes the obligations under the Plan.

(s)      "Entry Date" means the first day of each January and July coinciding
         with or next following the date the Employee satisfies the requirements
         under Section 3.01 of the Plan.

(t)      "ERISA" means the Employee Retirement Income Security Act of 1974, as
         amended.

(u)      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(v)      "Financed Shares" means shares of Company Stock acquired by the Trustee
         with the proceeds of an Acquisition Loan, which shall constitute
         "qualifying employer securities" under Section 409(l) of the Code and
         any shares of Company Stock received upon conversion or exchange of
         such shares.

(w)      "Highly Compensated Employee" means an Employee who, for a particular
         Plan Year, satisfies one of the following conditions:

         (i)   was a "5-percent owner" (as defined in Section 414(q)(2) of the
               Code) during the year or the preceding year, or

         (ii)  for the preceding year, had "compensation" (as defined in Section
               414(q)(4) of the Code) from the Bank and its Affiliates exceeding
               $90,000 (as periodically adjusted pursuant to Section 414(q)(1)
               of the Code).

(x)      "Hours of Service" means:

         (i)   Each hour for which an Employee is paid, or entitled to payment,
               for performing duties for the Employer during the applicable
               computation period.

         (ii)  Each hour for which an Employee is paid, or entitled to payment,
               for a period during which no duties are performed (irrespective
               of whether the employment relationship has terminated) due to
               vacation, holiday, illness, incapacity (including disability),
               layoff, jury duty, military duty or leave of absence.
               Notwithstanding the preceding sentence, no credit shall be given
               to the Employee for:

               (A)  more than 501 hours under this clause (ii) because of any
                    single continuous period in which the Employee performs no
                    duties (whether or not such period occurs in a single
                    computation period);

               (B)  an hour for which the Employee is directly or indirectly
                    paid, or entitled to payment, because of a period in which
                    no duties are performed if such payment is made or due under
                    a plan maintained solely for the purpose of

                                       5



                    complying with applicable worker's or workmen's
                    compensation, or unemployment, or disability insurance laws;
                    or

               (C)  an hour or a payment which solely reimburses the Employee
                    for medical or medically-related expenses incurred by the
                    Employee.

         (iii) Each hour for which back pay, irrespective of mitigation of
               damages, is either awarded or agreed to by the Employer;
               provided, however, that hours credited under either clause (i) or
               (ii) above shall not also be credited under this clause (iii).
               Crediting of hours for back pay awarded or agreed to with respect
               to periods described in clause (ii) above will be subject to the
               limitations set forth in that clause.

The crediting of Hours of Service shall be determined by the Committee in
accordance with the rules set forth in Section 2530.200b-3 of the regulations
prescribed by the Department of Labor, which rules shall be consistently applied
with respect to all Employees within the same job classification. Hours of
Service will be credited for employment with an Affiliate.

(y)      "Loan Suspense Account" means that portion of the Trust Fund consisting
         of Company Stock acquired with an Acquisition Loan which has not yet
         been allocated to the Participants' Accounts.

(z)      "Normal Retirement Age" means age 65.

(aa)     "One Year Period of Severance" means a twelve (12) consecutive month
         period following an Employee's Termination of Service with the Employer
         during which the Employee did not perform an Hour of Service.
         Notwithstanding the foregoing, if an Employee is absent from employment
         for maternity or paternity reasons, such absence during the twenty-four
         (24) month period commencing on the first date of such absence shall
         not constitute a One Year Period of Severance. An absence from
         employment for maternity or paternity reasons means an absence:

         (i)   by reason of pregnancy of the Employee,

         (ii)  by reason of a birth of a child of the Employee,

         (iii) by reason of the placement of a child with the Employee in
               connection with the adoption of such child by such Employee, or

         (iv)  for purposes of caring for such child for a period beginning
               immediately following such birth or placement.

                                       6



(bb)     "Other Investments Account" means the account established and
         maintained in the name of each Participant or Beneficiary to reflect
         his share of the Trust Fund, other than Company Stock.

(cc)     "Participant" means any Eligible Employee who has become a Participant
         in accordance with Section 3.01 of the Plan or any other person with an
         Account balance under the Plan.

(dd)     "Plan" means this Jefferson Federal Bank Employee Stock Ownership Plan,
         as amended from time to time.

(ee)     "Plan Year" means the calendar year.

(ff)     "Recognized Absence" means a period for which:

         (i)   an Employer grants an Employee a leave of absence for a limited
               period of time, but only if an Employer grants such leaves of
               absence on a nondiscriminatory basis to all Eligible Employees;
               or

         (ii)  an Employee is temporarily laid off by an Employer because of a
               change in the business conditions of the Employer; or

         (iii) an Employee is on active military duty, but only to the extent
               that his employment rights are protected by the Military
               Selective Service Act of 1967 (38 U.S.C. (S) 2021).

(gg)     "Retirement Date" means a Participant's date of Retirement following
         his attainment of his Normal Retirement Age or Early Retirement Age.

(hh)     "Service" means employment with the Bank or an Affiliate.

(ii)     "Termination of Service" means the earlier of (a) the date on which an
         Employee's service is terminated by reason of his resignation,
         retirement, discharge, death or Disability or (b) the first anniversary
         of the date on which such Employee's service is terminated for
         disability of a short-term nature or any other reason. Service in the
         Armed Forces of the United States shall not constitute a Termination of
         Service but shall be considered to be a period of employment by the
         Employer provided (i) such military service is caused by war or other
         emergency or the Employee is required to serve under the laws of
         conscription in time of peace, (ii) the Employee returns to employment
         with the Employer within six (6) months following discharge from such
         military service and (iii) such Employee is reemployed by the Employer
         at a time when the Employee had a right to reemployment at his former
         position or substantially similar position upon separation from such
         military duty in accordance with seniority rights as protected under
         the laws of the United States. A leave of absence granted to an
         Employee by the

                                       7



         Employer shall not constitute a Termination of Service provided that
         the Participant returns to the active service of the Employer at the
         expiration of any such period for which leave has been granted.
         Notwithstanding the foregoing, an Employee who is absent from service
         with the Employer beyond the first anniversary of the first date of
         his absence for maternity or paternity reasons set forth in Section
         2.01(cc) of the Plan shall incur a Termination of Service for purposes
         of the Plan on the second anniversary of the date of such absence.

(jj)     "Treasury Regulations" means the regulations promulgated by the
         Department of Treasury under the Code.

(kk)     "Trust" means the Jefferson Federal Bank Employee Stock Ownership Plan
         Trust created in connection with the establishment of the Plan.

(ll)     "Trust Agreement" means the trust agreement establishing the Trust.

(mm)     "Trust Fund" means the assets held in the Trust for the benefit of
         Participants and their Beneficiaries.

(nn)     "Trustee" means the trustee or trustees from time to time in office
         under the Trust Agreement.

(oo)     "Valuation Date" means the last day of the Plan Year and each other
         date as of which the Committee shall determine the investment
         experience of the Trust Fund and adjust the Participants' Accounts
         accordingly.

(pp)     "Valuation Period" means the period following a Valuation Date and
         ending with the next Valuation Date.

(qq)     "Year of Service" is defined as a Plan Year in which an Employee
         performs 1,000 Hours of Service.

                                       8




                                    SECTION 3
                          Eligibility and Participation

Section 3.01   Participation.

     An Eligible Employee shall enter the Plan upon satisfying the following
requirements:

          (i)  The Eligible Employee is at least 20 1/2 years of age and

          (ii) The Eligible Employee has completed six (6) consecutive calendar
               months (computed from the date an Employee performs his first
               Hour of Service for the Employer) during which he has performed
               at least 500 Hours of Service.

An Eligible Employee who has satisfied the above-noted eligibility requirements
shall enter the Plan and become a Participant on the earlier of the Effective
Date or the Entry Date coincident with or next following the date he satisfies
such requirements.

Section 3.02   Certain Employees Ineligible.

The following Employees are ineligible to participate in the Plan:

(a)  Employees covered by a collective bargaining agreement between the Employer
     and the Employee's collective bargaining representative if:

     (i)  retirement benefits have been the subject of good faith bargaining
          between the Employer and the representative, and

     (ii) the collective bargaining agreement does not expressly provide that
          Employees of such unit be covered under the Plan;

(b)  Employees who are "leased employees" (as defined in Section 414(n) of the
     Code);

(c)  Employees who are nonresident aliens and who receive no earned income from
     an Employer which constitutes income from sources within the United States;
     and

(d)  Employees of an Affiliate of the Bank that has not adopted the Plan
     pursuant to Sections 12.01 or 12.02 of the Plan.

Section 3.03  Transfer to Eligible Employment.

If an Employee ineligible to participate in the Plan by reason of Section 3.02
of the Plan transfers to employment as an Eligible Employee, he shall enter the
Plan as of the later of:

                                        9



(a)  the first Entry Date after the date of transfer, or

(b)  the first Entry Date on which he could have become a Participant pursuant
     to Section 3.01 of the Plan if his prior employment with the Employer or
     Affiliate had been as an Eligible Employee.

Section 3.04   Participation after Reemployment.

Any former Employee who is re-employed by an Employer and has previously
satisfied the eligibility requirements of Section 3.01 of the Plan, and is not
otherwise excluded from participation by reason of Section 3.02 of the Plan,
shall re-enter the Plan and become a Participant as of his date of
re-employment. Any former Employee who is re-employed by an Employer and has not
previously satisfied the eligibility requirements of Section 3.01 of the Plan,
and is not otherwise excluded from participation by reason of Section 3.02 of
the Plan, shall enter the Plan and become a Participant as of the Entry Date
following his completion of the eligibility requirements of Section 3.01 of the
Plan.

Section 3.05   Participation Not Guarantee of Employment.

Participation in the Plan does not constitute a guarantee or contract of
employment and will not give any Employee the right to be retained in the employ
of the Bank or any of its Affiliates nor any right or claim to any benefit under
the terms of the Plan unless such right or claim has specifically accrued under
the Plan.

                                       10



                                    SECTION 4
                                  Contributions

Section 4.01  Employer Contributions.

(a)  Discretionary Contributions. Each Plan Year, each Employer, in its
     discretion, may make a contribution to the Trust. Each Employer making a
     contribution for any Plan Year under this Section 4.01(a) will contribute
     to the Trustee cash equal to, or Company Stock or other property having an
     aggregate fair market value equal to, such amount as the Board of Directors
     of the Employer shall determine by resolution. Notwithstanding the
     Employer's discretion with respect to the medium of contribution, an
     Employer shall not make a contribution in any medium which would make such
     contribution a prohibited transaction (for which no exemption is provided)
     under Section 406 of ERISA or Section 4975 of the Code.

(b)  Employer Contributions for Acquisition Loans. Each Plan Year, the Employers
     shall, subject to the provisions of the Bank's "Plan of Reorganization" (as
     filed with the appropriate governmental agencies in connection with the
     Bank's reorganization into a mutual holding company form of organization)
     and any related regulatory prohibitions, contribute an amount of cash
     sufficient to enable to the Trustee to discharge any indebtedness incurred
     with respect to an Acquisition Loan pursuant to the terms of the
     Acquisition Loan. The Employers' obligation to make contributions under
     this Section 4.01(b) shall be reduced to the extent of any investment
     earnings attributable to such contributions and any cash dividends paid
     with respect to Company Stock held by the Trustee in the Loan Suspense
     Account. If there is more than one Acquisition Loan, the Employers shall
     designate the one to which any contribution pursuant to this Section
     4.01(b) is to be applied.

Section 4.02  Limitations on Contributions.

In no event shall an Employer's contribution(s) made under Section 4.01 of the
Plan for any Plan Year exceed the lesser of:

(a)  The maximum amount deductible under Section 404 of the Code by that
     Employer as an expense for Federal income tax purposes; and

(b)  The maximum amount which can be credited for that Plan Year in accordance
     with the allocation limitation provisions of Section 5.05 of the Plan.

Section 4.03  Acquisition Loans.

The Trustee may incur Acquisition Loans from time to time to finance the
acquisition of Company Stock for the Trust or to repay a prior Acquisition Loan.
An Acquisition Loan shall be for a specific term, shall bear a reasonable rate
of interest, and shall not be payable in demand

                                       11



except in the event of default and shall be primarily for the benefit of
Participants and Beneficiaries of the Plan. An Acquisition Loan may be secured
by a collateral pledge of the Financed Shares so acquired and any other Plan
assets which are permissible security within the provisions of Section
54.4975-7(b) of the Treasury Regulations. No other assets of the Plan or Trust
may be pledged as collateral for an Acquisition Loan, and no lender shall have
recourse against any other Trust assets. Any pledge of Financed Shares must
provide for the release of shares so pledged on a basis equal to the principal
and interest (or if the requirements of Section 54.4975-7(b)(8)(ii) of the
Treasury Regulations are met and the Employer so elects, principal payments
only), paid by the Trustee on the Acquisition Loan. The released Financed Shares
shall be allocated by Participants' Accounts in accordance with the provisions
of Sections 5.04 or 5.08 of the Plan, whichever is applicable. Payment of
principal and interest on any Acquisition Loan shall be made by the Trustee only
from the Employer contributions paid in cash to enable the Trustee to repay such
loan in accordance with Sections 4.01(b) or 4.01(c) of the Plan, from earnings
attributable to such contributions, and any cash dividends received by the
Trustee on Financed Shares acquired with the proceeds of the Acquisition Loan
(including contributions, earnings and dividends received during or prior to the
year of repayment less such payments in prior years), whether or not allocated.
Financed Shares shall initially be credited to the Loan Suspense Account and
shall be transferred for allocation to the Company Stock Account of Participants
only as payments of principal and interest (or, if the requirements of Section
54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so
elects, principal payments only), on the Acquisition Loan are made by the
Trustee. The number of Financed Shares to be released from the Loan Suspense
Account for allocation to Participants' Company Stock Account for each Plan Year
shall be based on the ratio that the payments of principal and interest (or, if
the requirements of Section 54.4975-7(b)(8)(ii) of the Treasury Regulations are
met and the Employer so elects, principal payments only), on the Acquisition
Loan for that Plan Year bears to the sum of the payments of principal and
interest on the Acquisition Loan for that Plan Year plus the total remaining
payment of principal and interest projected (or, if the requirements of Section
54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so
elects, principal payments only), on the Acquisition Loan over the duration of
the Acquisition Loan repayment period, subject to the provisions of Section 5.05
of the Plan.

Section 4.04. Conditions as to Contributions.

In addition to the provisions of Section 12.03 of the Plan for the return of an
Employer's contributions in connection with a failure of the Plan to qualify
initially under the Code, any amount contributed by an Employer due to a good
faith mistake of fact, or based upon a good faith but erroneous determination of
its deductibility under Section 404 of the Code, shall be returned to the
Employer within one year after the date on which the Employer originally made
such contribution, or within one year after its nondeductibility has been
finally determined. However, the amount to be returned shall be reduced to take
account of any adverse investment experience within the Trust in order that the
balance credited to each Participant's Accounts is not less that it would have
been if the contribution had never been made by the Employer.

Section 4.05  Employee Contributions.

                                       12




Employee contributions are neither required nor permitted under the Plan.

Section 4.06  Rollover Contributions.

Rollover contributions of assets from other tax-qualified retirement plans are
not permitted under the Plan.

Section 4.07  Trustee-to-Trustee Transfers.

Trustee-to-trustee transfer of assets from other tax-qualified retirement plans
are not permitted under the Plan.

                                       13



                                    SECTION 5
                                 Plan Accounting

Section 5.01  Accounting for Allocations.

The Committee shall establish the Accounts (and sub-accounts, if deemed
necessary) for each Participant, and the accounting procedures for the purpose
of making the allocations to the Participants' Accounts provided for in this
Section 5. The Committee shall maintain adequate records of the cost basis of
shares of Company Stock allocated to each Participant's Company Stock Account.
The Committee also shall keep separate records of Financed Shares attributable
to each Acquisition Loan and of contributions made by the Employers (and any
earnings thereon) made for the purpose of enabling the Trustee to repay any
Acquisition Loan. From time to time, the Committee may modify its accounting
procedures for the purpose of achieving equitable and nondiscriminatory
allocations among the Accounts of Participants, in accordance with the
provisions of this Section 5 and the applicable requirements of the Code and
ERISA. In accordance with Section 9 of the Plan, the Committee may delegate the
responsibility for maintaining Accounts and records.

Section 5.02  Maintenance of Participants' Company Stock Accounts.

As of each Valuation Date, the Committee shall adjust the Company Stock Account
of each Participant to reflect activity during the Valuation Period as follows:

(a)  First, charge to each Participant's Company Stock Account all distributions
     and payments made to him that have not been previously charged;

(b)  Next, credit to each Participant's Company Stock Account the shares of
     Company Stock, if any, that have been purchased with amounts from his Other
     Investments Account, and adjust such Other Investments Account in
     accordance with the provisions of Section 5.03 of the Plan; and

(c)  Finally, credit to each Participant's Company Stock Account the shares of
     Company Stock representing contributions made by the Employers in the form
     of Company Stock and the number of Financed Shares released from the Loan
     Suspense Account under Section 4.03 of the Plan that are to be allocated
     and credited as of that date in accordance with the provisions of Section
     5.04 of the Plan.

                                       14



Section 5.03  Maintenance of Participants' Other Investments Accounts.

As of each Valuation Date, the Committee shall adjust the Other Investments
Account of each Participant to reflect activity during the Valuation Period as
follows:

(a)  First, charge to each Participant's Other Investments Account all
     distributions and payments made to him that have not previously been
     charged;

(b)  Next, if Company Stock is purchased with assets from a Participant's Other
     Investments Account, the Participant's Other Investments Account shall be
     charged accordingly;

(c)  Next, subject to the dividend provisions of Section 5.08 of the Plan,
     credit to the Other Investments Account of each Participant any cash
     dividends paid to the Trustee on shares of Company Stock held in that
     Participant's Company Stock Account (as of the record date for such cash
     dividends) and dividends paid on shares of Company Stock held in the Loan
     Suspense Account that have not been used to repay any Acquisition Loan.
     Cash dividends that have not been used to repay an Acquisition Loan and
     have been credited to a Participant's Other Investments Account shall be
     applied by the Trustee to purchase shares of Company Stock, which shares
     shall then be credited to the Company Stock Account of such Participant.
     The Participant's Other Investments Account shall then be charged by the
     amount of cash used to purchase such Company Stock or used to repay any
     Acquisition Loan. In addition, any earnings on:

     (i)  Other Investments Accounts will be allocated to Participants' Other
          Investments Accounts, pro rata, based on such Other Investments
          Accounts balances as of the first day of the Valuation Period, and

     (ii) the Loan Suspense Account, other than dividends used to repay the
          Acquisition Loan, will be allocated to Participants' Other Investments
          Accounts, pro rata, based on their Other Investments Accounts balances
          as of the first day of the Valuation Period.

(d)  Next, allocate and credit the Employer contributions made pursuant to
     Section 4.01(b) of the Plan for the purpose of repaying any Acquisition
     Loan in accordance with Section 5.04 of the Plan. Such amount shall then be
     used to repay any Acquisition Loan and such Participant's Other Investments
     Account shall be charged accordingly; and

(e)  Finally, allocate and credit the Employer contributions (other than amounts
     contributed to repay an Acquisition Loan) that are made in cash (or
     property other than Company Stock) for the Plan Year to the Other
     Investments Account of each Participant in accordance with Section 5.04 of
     the Plan.

                                       15




Section 5.04  Allocation and Crediting of Employer Contributions.

(a)  Except as otherwise provided for in Section 5.08 of the Plan, as of the
     Valuation Date for each Plan Year:

     (i)  Company Stock released from the Loan Suspense Account for that year
          and shares of Company Stock contributed directly to the Plan shall be
          allocated and credited to each Active Participant's (as defined in
          paragraph (b) of this Section 5.04) account based on the ratio that
          each Active Participant's Compensation bears to the aggregate
          Compensation of all Active Participants for the Plan Year, and then

     (ii) The cash contributions not used to repay an Acquisition Loan and any
          other property contributed for that year shall be allocated and
          credited to each Active Participant's Other Investment Account based
          on the ratio determined by comparing each Active Participant's
          Compensation while a Participant to the aggregate Compensation of all
          Active Participants for the Plan Year.

(b)  For purposes of this Section 5.04, the term "Active Participant" means
     those Eligible Employees who:

          (A)  were employed by that Employer, including Eligible Employees on a
               Recognized Absence, on the last day of the Plan Year and
               completed 1,000 Hours of Service during the Plan Year, or

          (B)  terminated employment during the Plan Year by reason of death,
               Disability, or attainment of their Retirement Date.

Section 5.05  Limitations on Allocations.

(a)  In General. Subject to the provisions of this Section 5.05, Section 415 of
     the Code shall be incorporated by reference into the terms of the Plan. No
     allocation shall be made under Section 5.04 of the Plan that would result
     in a violation of Section 415 of the Code.

(b)  Code Section 415 Compensation. For purposes of this Section 5.05,
     Compensation shall be adjusted to reflect the general rule of Section
     1.415-2(d) of the Treasury Regulations.

(c)  Limitation Year. The "limitation year" (within the meaning of Section 415
     of the Code) shall be the calendar year.

(d)  Multiple Defined Contribution Plans. In any case where a Participant also
     participates in another defined contribution plan of the Bank or its
     Affiliates, the appropriate committee of such other plan shall first reduce
     the after-tax contributions under any such plan, shall then reduce any
     elective deferrals under any such plan subject to Section

                                       16



     401(k) of the Code, shall then reduce all other contributions under any
     other such plan and, if necessary, shall then reduce contributions under
     this Plan.

(e)  Excess Allocations. If, after applying the allocation provisions under
     Section 5.04 of the Plan, allocations under Section 5.04 of the Plan would
     otherwise result in a violation of Section 415 of the Code, the Committee
     shall allocate and reallocate employer contributions to other Participants
     in the Plan for the limitation year or, if such allocation and reallocation
     causes the limitations of Section 415 of the Code to be exceeded, shall
     hold excess amounts in an unallocated suspense account for allocation in a
     subsequent Plan Year in accordance with Section 1.415-6(b)(6)(i) of the
     Treasury Regulations. Such suspense account, if permitted, will be credited
     before any allocation of contributions for subsequent limitation years.

Section 5.06  Other Limitations.

Aside from the limitations set forth in Sections 5.05 of the Plan, in no event
shall more than one-third of the Employer contributions to the Plan (including
Matching Contributions) be allocated to the Accounts of Highly Compensated
Employees. In order to ensure such allocations are not made, the Committee
shall, beginning with the Participants whose Compensation exceeds the limit then
in effect under Section 401(a)(17) of the Code, reduce the amount of
Compensation of such Highly Compensated Employees on a pro-rata basis per
individual that would otherwise be taken into account for purposes of allocating
benefits under Section 5.04 of the Plan. If, in order to satisfy this Section
5.06, any such Participant's Compensation must be reduced to an amount that is
lower than the Compensation amount of the next highest paid (based on such
Participant's Compensation) Highly Compensated Employee (the "breakpoint
amount"), then, for purposes of allocating benefits under Section 5.04 of the
Plan, the Compensation of all concerned Participants shall be reduced to an
amount not to exceed such breakpoint amount.

Section 5.07  Limitations as to Certain Section 1042 Transactions.

To the extent that a shareholder of Company Stock sell qualifying Company Stock
to the Plan and elects (with the consent of the Bank) nonrecognition of gain
under Section 1042 of the Code, no portion of the Company Stock purchased in
nonrecognition transaction (or other dividends or other income attributable
thereto) may accrue or be allocated during the nonallocation period (the ten
(10) year period beginning on the later of the date of the sale of the qualified
Company Stock, or the date of the Plan allocation attributable to the final
payment of an Acquisition Loan incurred in connection with such sale) for the
benefit of:

(a)  the selling shareholder;

(b)  the spouse, brothers or sisters (whether by the whole or half blood),
     ancestors or lineal descendants of the selling shareholder or descendant
     referred to in (a) above; or

                                       17



(c)  any other person who owns, after application of Section 318(a) of the Code,
     more than twenty-five percent (25%) of:

     (i)  any class of outstanding stock of the Bank or any Affiliate, or

     (ii) the total value of any class of outstanding stock of the Bank or any
          Affiliate.

     For purposes of this Section 5.07, Section 318(a) of the Code shall be
     applied without regard to the employee trust exception of Section
     318(a)(2)(B)(i) of the Code.

Section 5.08  Change in Control Provisions.

(a)  Upon a Change in Control, the Committee shall direct the Trustee to sell or
     otherwise dispose of a sufficient number of shares of Company Stock held in
     the Loan Suspense Account, and the proceeds of such sale of disposition
     shall be used to repay in full any outstanding Acquisition Loan of the
     Plan. After repayment of the Acquisition Loan, all remaining shares of
     Company Stock held in the Loan Suspense Account and any cash proceeds from
     the sale or other disposition of any shares of Company Stock held in the
     Loan Suspense shall be allocated among the Accounts of all Participants who
     were employed by an Employer immediately preceding the date on which the
     Change in Control occurs. Such allocation of shares or cash proceeds shall
     be credited as of the date on which the Change in Control occurs to the
     Accounts of each Participant who is either in active Service with an
     Employer immediately preceding the date on which the Change in Control
     occurs or is on a Recognized Absence immediately preceding the date on
     which the Change in Control occurs (each an "Affected Participant"), in
     proportion to the opening balances in their Company Stock Accounts as of
     the first day of the current Valuation Period. If any amount cannot be
     allocated to an Affected Participant's Account in the limitation year
     during which a Change in Control occurs as a result of the limitations of
     Section 415 of the Code, the amounts will be allocated in subsequent years
     to those persons who were Affected Participants and who continue to be
     Participants in the Plan until such amounts are finally allocated to
     Affected Participants.

(b)  Notwithstanding any other provision of the Plan, this Section 5.08 may not
     be amended on or after a Change in Control has occurred, unless required by
     the Internal Revenue Service as a condition of the continued treatment of
     the Plan as a tax-qualified plan under Section 401(a) of the Code.

(c)  This Section 5.08 shall have no force and effect unless the price paid for
     the Company Stock in connection with the Change in Control is greater than
     the average basis of the unallocated Company Stock held in the Loan
     Suspense Account as of the date of the Change in Control.

                                       18



Section 5.09  Dividends.

(a)  Stock Dividends. Dividends on Company Stock which are received by the
     Trustee in the form of additional Company Stock shall be retained in the
     portion of the Trust Fund consisting of Company Stock, and shall be
     allocated among the Participants' Accounts and the Loan Suspense Account in
     accordance with their holdings of the Company Stock on which the dividends
     have been paid.

(b)  Cash Dividends on Allocated Shares. Dividends on Company Stock credited to
     Participants' Accounts which are received by the Trustee in the form of
     cash shall, at the direction of the Bank, either:

     (i)     be credited to Participants' Accounts in accordance with Section
             5.03 of the Plan and invested as part of the Trust Fund;

     (ii)    be distributed immediately to the Participants;

     (iii)   be distributed to the Participants within ninety (90) days of the
             close of the Plan Year in which paid; or

     (iv)    be used to repay principal and interest on the Acquisition Loan
             used to acquire Company Stock on which the dividends were paid.

In addition to the alternatives specified in the preceding paragraph regarding
the treatment of cash dividends paid with respect to shares of Company Stock
credited to Participants' Accounts, if authorized by the Committee for the Plan
Year, a Participant may elect that cash dividends paid on Company Stock credited
to the Participant's Account shall either be:

     (i)     paid to the Plan, reinvested in Company Stock and credited to the
             Participant's Account;

     (ii)    distributed in cash to the Participant; or

     (iii)   distributed to the Participant within ninety (90) days of the close
             of the Plan Year in which paid.

Dividends subject to an election under this paragraph (and any Company Stock
acquired therewith pursuant to a Participant's election) shall at all times be
fully vested. To the extent the Committee authorizes elections pursuant to this
paragraph, the Committee shall establish policies and procedures relating to
Participant elections and, if applicable, the reinvestment of cash dividends in
Company Stock, which are consistent with guidance issued under Section 404(k) of
the Code or which the Committee believes is consistent with the provisions of
Section 404(k) of the Code in the absence of any regulatory guidance.

                                       19



(c)  Cash Dividends on Unallocated Shares. Dividends on Company Stock held in
     the Loan Suspense Account which are received by the Trustee in the form of
     cash shall be applied as soon as practicable to payments of principal and
     interest under the Acquisition Loan incurred with the purchase of the
     Company Stock.

(d)  Financed Shares. Financed Shares released from the Loan Suspense Account by
     reason of dividends paid with respect to such Company Stock shall be
     allocated under Sections 5.03 and 5.04 of the Plan as follows:

     (i)     First, Financed Shares with a fair market value at least equal to
             the dividends paid with respect to the Company Stock allocated to
             Participants' Accounts shall be allocated among and credited to the
             Accounts of such Participants, pro rata, according to the number of
             shares of Company Stock held in such accounts on the date such
             dividend is declared by the Company; and

     (ii)    Then, any remaining Financed Shares released from the Loan Suspense
             Account by reason of dividends paid with respect to Company Stock
             held in the Loan Suspense Account shall be allocated among and
             credited to the Accounts of all Participants, pro rata, according
             to each Participant's Compensation.

                                       20



                                    SECTION 6
                             Vesting and Forfeitures

Section 6.01  Deferred Vesting in Accounts.

(d)  A Participant shall vest in his Accounts in accordance with the following
     schedule:

                     Years of Service             Vested Percentage

                     1 Year                             0%
                     2 Years                           20%
                     3 Years                           40%
                     4 Years                           60%
                     5 Years                           80%
                     6 Years                          100%

(b)  For purposes of determining a Participant's Years of Service under this
     Section 6.01, employment with the Bank or an Affiliate shall be deemed
     employment with the Employer. For purposes of determining a Participant's
     vested percentage in his Accounts, all Years of Service shall be included.

Section 6.02  Immediate Vesting in Certain Situations.

(c)  Notwithstanding Section 6.01(a) of the Plan, a Participant shall become
     fully vested in his Accounts upon the earlier of:

     (i)     termination of the Plan or upon the permanent and complete
             discontinuance of contributions by his Employer to the Plan;
             provided, however, that in the event of a partial termination, the
             interest of each Participant shall fully vest only with respect to
             that part of the Plan which is terminated;

     (ii)    the Participant's attainment of his Normal or Early Retirement Age;

     (iii)   a "Change in Control" (as defined in Section 2.01 of the Plan); or

     (iv)    termination of employment by reason of death, Disability or
             reaching his Retirement Date.

                                       21



Section 6.03  Treatment of Forfeitures.

(a)  If a Participant who is not fully vested in his Accounts terminates
     employment, that portion of his Accounts in which he is not vested shall be
     forfeited upon the earlier of:

     (i)     the date the Participant receives a distribution of his entire
             vested benefits under the Plan, or

     (ii)    the date at which the Participant incurs five (5) consecutive One
             Year Periods of Severance.

(b)  If a Participant who has terminated employment and has received a
     distribution of his entire vested benefits under the Plan is subsequently
     reemployed by an Employer prior to incurring five (5) consecutive One Year
     Periods of Severance, he shall have the portion of his Accounts which was
     previously forfeited restored to his Accounts, provided he repays to the
     Trustee within five (5) years of his subsequent employment date an amount
     equal to the distribution. The amount restored to the Participant's Account
     shall be credited to his Account as of the last day of the Plan Year in
     which the Participant repays the distributed amount to the Trustee and the
     restored amount shall come from other Employees' forfeitures and, if such
     forfeitures are insufficient, from a special contribution by his Employer
     for that year. If a Participant's employment terminates prior to his
     Account having become vested, such Participant shall be deemed to have
     received a distribution of his entire vested interest as of the Valuation
     Date next following his termination of employment.

(c)  If a Participant who has terminated employment but has not received a
     distribution of his entire vested benefits under the Plan is subsequently
     reemployed by an Employer subsequent to incurring five (5) consecutive One
     Year Periods of Severance, any undistributed balance of his Accounts from
     his prior participation which was not forfeited shall be maintained as a
     fully vested subaccount with his Account.

(d)  If a portion of a Participant's Account is forfeited, assets other than
     Company Stock must be forfeited before any Company Stock may be forfeited.

(e)  Forfeitures shall be reallocated among the other Participants in the Plan.

Section 6.04  Accounting for Forfeitures.

A forfeiture shall be charged to the Participant's Account as of the first day
of the first Valuation Period in which the forfeiture becomes certain pursuant
to Section 6.03 of the Plan. Except as otherwise provided in Section 6.03 of the
Plan, a forfeiture shall be added to the contributions of the terminated
Participant's Employer which are to be credited to other Participants pursuant
to Section 4 as of the last day of the Plan Year in which the forfeiture becomes
certain.

                                       22



Section 6.05  Vesting Upon Reemployment.

(a)  If an Employee is not vested in his Accounts, incurs a One Year Period of
     Severance and again performs an Hour of Service, such Employee shall
     receive credit for his Years of Service prior to his One Year Period of
     Severance only if the number of consecutive One Year Periods of Severance
     is less than the greater of: (i) five (5) years or (ii) the aggregate
     number of his Years of Service credited before his One Year Period of
     Severance.

(b)  If a Participant is partially vested in his Accounts, incurs a One Year
     Period of Severance and again performs an Hour of Service, such Participant
     shall receive credit for his Periods of Service prior to his One Year
     Period of Severance; provided, however, that after five (5) consecutive One
     Year Periods of Severance, a former Participant's vested interest in his
     Accounts attributable to Years of Service prior to his One Year Period of
     Severance shall not be increased as a result of his Years of Service
     following his reemployment date.

(c)  If a Participant is fully vested in his Accounts, incurs a One Year Period
     of Severance and again performs an Hour of Service, such Participant shall
     receive credit for all his Years of Service prior to his One Year Period of
     Severance.

                                       23



                                    SECTION 7
                                  Distributions

Section 7.01  Distribution of Benefit Upon a Termination of Employment.

(a)  A Participant whose employment terminates for any reason shall receive the
     entire vested portion of his Accounts in a single payment on a date
     selected by the Committee; provided, however, that such date shall be on or
     before the 60th day after the end of the Plan Year in which the
     Participant's employment terminated. The benefits from that portion of the
     Participant's Other Investments Account shall be calculated on the basis of
     the most recent Valuation Date before the date of payment. Subject to the
     provisions of Section 7.05 of the Plan, if the Committee so provides, a
     Participant may elect that his benefits be distributed to him in the form
     of either Company Stock, cash, or some combination thereof.

(b)  Notwithstanding paragraph (a) of this Section 7.01, if the balance credited
     to a Participant's Accounts exceeds, at the time such benefit was
     distributable, $5,000, his benefits shall not be paid before the latest of
     his 65th birthday or the tenth anniversary of the year in which he
     commenced participation in the Plan, unless he elects an early payment date
     in a written election filed with the Committee. Such an election is not
     valid unless it is made after the Participant has received the required
     notice under Section 1.411(a)-11(c) of the Treasury Regulations that
     provides a general description of the material features of a lump sum
     distribution and the Participant's right to defer receipt of his benefits
     under the Plan. The notice shall be provided no less than 30 days and no
     more than 90 days before the first day on which all events have occurred
     which entitle the Participant to such benefit. Written consent of the
     Participant to the distribution generally may not be made within 30 days of
     the date the Participant receives the notice and shall not be made more
     than 90 days from the date the Participant receives the notice. However, a
     distribution may be made less than 30 days after the notice provided under
     Section 1.411(a)-11(c) of the Treasury Regulations is given, if:

     (i)  the Committee clearly informs the Participant that he has a right to a
          period of at least 30 days after receiving the notice to consider the
          decision of whether or not to elect a distribution (and if applicable,
          a particular distribution option), and

     (ii) the Participant, after receiving the notice, affirmatively elects a
          distribution.

A Participant may modify such an election at any time, provided any new benefit
payment date is at least 30 days after a modified election is delivered to the
Committee.

                                       24



Section 7.02  Minimum Distribution Requirements.

With respect to all Participants, other than those who are "5% owners" (as
defined in Section 416 of the Code), benefits shall be paid no later than the
April 1st of the later of:

     (i)     the calendar year following the calendar year in which the
             Participant attains age 70-1/2, or

     (ii)    the calendar year in which the Participant retires.

With respect to all Participants who are 5% owners within the meaning of Section
416 of the Code, such Participants' benefits shall be paid no later than the
April 1st of the calendar year following the calendar year in which the
Participant attains age 70-1/2.

Section 7.03  Benefits on a Participant's Death.

(a)  If a Participant dies before his benefits are paid pursuant to Section 7.01
     of the Plan, the balance credited to his Accounts shall be paid to his
     Beneficiary in a single distribution on or before the 60th day after the
     end of the Plan Year in which the Participant died. If the Participant has
     not named a Beneficiary or his named Beneficiary should not survive him,
     then the balance in his Accounts shall be paid to his estate. The benefits
     from that portion of the Participant's Other Investments Account shall be
     calculated on the basis of the most recent Valuation Date before the date
     of payment.

(b)  If a married Participant dies before his benefit payments begin, then,
     unless he has specifically elected otherwise, the Committee shall cause the
     balance in his Accounts to be paid to his spouse, as Beneficiary. A married
     Participant may name an individual other than his spouse as Beneficiary
     provided that such election is accompanied by the spouse's written consent
     which must:

     (i)     acknowledge the effect of the election;

     (ii)    explicitly provide either that the designated Beneficiary may not
             subsequently be changed by the Participant without the spouse's
             further consent or that it may be changed without such consent; and

     (iii)   must be witnessed by the Committee, its representative, or a notary
             public.

This requirement shall not apply if the Participant establishes to the
Committee's satisfaction that the spouse may not be located.

(c)  The Committee shall from time to time take whatever steps it deems
     appropriate to keep informed of each Participant's marital status. Each
     Employer shall provide the Committee with the most reliable information in
     the Employer's possession regarding its Participants' marital status, and
     the Committee may, in its discretion, require a notarized

                                       25



     affidavit from any Participant as to his marital status. The Committee, the
     Plan, the Trustee, and the Employers shall be fully protected and
     discharged from any liability to the extent of any benefit payments made as
     a result of the Committee's good faith and reasonable reliance upon
     information obtained from a Participant as to the Participant's marital
     status.

Section 7.04  Delay in Benefit Determination.

If the Committee is unable to determine the benefits payable to a Participant or
Beneficiary on or before the latest date prescribed for payment pursuant to this
Section 7, the benefits shall in any event be paid within 60 days after they can
first be determined, with whatever makeup payments may be appropriate in view of
the delay.

Section 7.05  Options to Receive and Sell Stock.

(a)  Unless ownership of virtually all Company Stock is restricted to active
     Employees and qualified retirement plans for the benefit of Employees
     pursuant to the certificates of incorporation or by-laws of the Employers
     issuing Company Stock, a terminated Participant or the Beneficiary of a
     deceased Participant may instruct the Committee to distribute the
     Participant's entire vested interest in his Accounts in the form of Company
     Stock. In that event, the Committee shall apply the Participant's vested
     interest in his Other Investments Account to purchase sufficient Company
     Stock to make the required distribution.

(b)  Any Participant who receives Company Stock pursuant to this Section 7.05,
     and any person who has received Company Stock from the Plan or from such a
     Participant by reason of the Participant's death or incompetency, by reason
     of divorce or separation from the Participant, or by reason of a rollover
     distribution described in Section 402(c) of the Code, shall have the right
     to require the Employer which issued the Company Stock to purchase the
     Company Stock for its current fair market value (hereinafter referred to as
     the "put right"). The put right shall be exercisable by written notice to
     the Committee during the first 60 days after the Company Stock is
     distributed by the Plan, and, if not exercised in that period, during the
     first 60 days in the following Plan Year after the Committee has
     communicated to the Participant its determination as to the Company Stock's
     current fair market value. If the put right is exercised, the Trustee may,
     if so directed by the Committee in its sole discretion, assume the
     Employer's rights and obligations with respect to purchasing the Stock.
     However, the put right shall not apply to the extent that the Company
     Stock, at the time the put right would otherwise be exercisable, may be
     sold on an established market in accordance with federal and state
     securities laws and regulations.

(c)  With respect to a put right, the Employer or the Trustee, as the case may
     be, may elect to pay for the Company Stock in equal periodic installments,
     not less frequently than annually, over a period not longer than five (5)
     years from the 30th day after the put right is exercised pursuant to
     paragraph (b) of this Section 7.05, with adequate security and

                                       26



     interest at a reasonable rate on the unpaid balance, all such terms to be
     set forth in a promissory note delivered to the seller with normal terms as
     to acceleration upon any uncured default.

(d)  Nothing contained in this Section 7.05 shall be deemed to obligate any
     Employer to register any Company Stock under any federal or state
     securities law or to create or maintain a public market to facilitate the
     transfer or disposition of any Company Stock. The put right described in
     this Section 7.05 may only be exercised by a person described in the
     paragraph (b) of this Section 7.05, and may not be transferred with any
     Company Stock to any other person. As to all Company Stock purchased by the
     Plan in exchange for any Acquisition Loan, the put right must be
     nonterminable. The put right for Company Stock acquired through an
     Acquisition Loan shall continue with respect to such Company Stock after
     the Acquisition Loan is repaid or the Plan ceases to be an employee stock
     ownership plan. Except as provided above, in accordance with the provisions
     of Sections 54.4975-7(b)(4) of the Treasury Regulations, no Company Stock
     acquired with the proceeds of an Acquisition Loan may be subject to any
     put, call or other option or buy-sell or similar arrangement while held by,
     and when distributed from, the Plan, whether the Plan is then an employee
     stock ownership plan.

Section 7.06  Restrictions on Disposition of Stock.

Except in the case of Company Stock which is traded on an established market, a
Participant who receives Company Stock pursuant to this Section 7, and any
person who has received Company Stock from the Plan or from such a Participant
by reason of the Participant's death or incompetency, by reason of divorce or
separation from the Participant, or by reason of a rollover distribution
described in Section 402(c) of the Code, shall, prior to any sale or other
transfer of the Company Stock to any other person, first offer the Company Stock
to the issuing Employer and to the Plan at its current fair market value. This
restriction shall apply to any transfer, whether voluntary, involuntary, or by
operation of law, and whether for consideration or gratuitous. Either the
Employer or the Trustee may accept the offer within 14 days after it is
delivered. Any Company Stock distributed by the Plan shall bear a conspicuous
legend describing the right of first refusal under this Section 7.06, as
applicable, as well as any other restrictions upon the transfer of the Company
Stock imposed by federal and state securities laws and regulations.

Section 7.07  Direct Transfer of Eligible Plan Distributions.

(a)  Notwithstanding any provision of the Plan to the contrary that would
     otherwise limit a distributee's election under this Section, a distributee
     (as defined below) may elect to have any portion of an eligible rollover
     distribution (as defined below) paid directly to an eligible retirement
     plan (as defined below) specified by the distributee in a direct rollover
     (as defined below). A "distributee" includes a Participant or former
     Participant. In addition, the Participant's or former Participant's
     surviving spouse and the Participant's or former Participant's spouse or
     former spouse who is the alternate payee under a qualified domestic
     relations order, as defined in Section 414(p) of the Code, are

                                       27



     distributees with regard to the interest of the spouse or former spouse.
     For purposes of this Section 7.07 a "direct rollover" is a payment by the
     Plan to the eligible retirement plan specified by the distributee.

(b)  To effect such a direct transfer, the distributee must notify the Committee
     that a direct transfer is desired and provide to the Committee the eligible
     retirement plan to which the payment is to be made. Such notice shall be
     made in such form and at such time as the Committee may prescribe. Upon
     receipt of such notice, the Committee shall direct the Trustee to make a
     trustee-to-trustee transfer of the eligible rollover distribution to the
     eligible retirement plan so specified.

(c)  For purposes of this Section 7.07, an "eligible rollover distribution"
     shall have the meaning set forth in Section 402(c)(4) of the Code and any
     Treasury Regulations promulgated thereunder. To the extent such meaning is
     not inconsistent with the above references, an eligible rollover
     distribution shall mean any distribution of all or any portion of the
     Participant's Account, except that such term shall not include any
     distribution which is one of a series of substantially equal periodic
     payments (not less frequently than annually) made (i) for the life (or life
     expectancy) of the Participant or the joint lives (or joint life
     expectancies) of the Participant and a designated Beneficiary, or (ii) for
     a period of ten years or more. Further, the term "eligible rollover
     distribution" shall not include any distribution required to be made under
     Section 401(a)(9) of the Code or, the portion of any distribution that is
     not includible in gross income (determined without regard to the exclusions
     for net unrealized appreciation with respect to Company Stock). To the
     extent applicable under the Plan, "eligible rollover distributions shall
     also not include any hardship distribution described in Section
     401(k)(2)(B)(i)(IV) of the Code.

(d)  For purposes of this Section 7.07, "an "eligible retirement plan" shall
     have the meaning set forth in Section 402(c)(8) of the Code and any
     Treasury Regulations promulgated thereunder. To the extent such meaning is
     not consistent with the above references, an eligible retirement plan shall
     mean: (i) an individual retirement account described in Section 408(a) of
     the Code, (ii) an individual retirement annuity described in Section 408(b)
     of the Code, (iii) an annuity plan described in Section 403(a) of the Code,
     or (iv) a qualified trust described in Section 401(a) of the Code that
     accepts the distributee's eligible rollover distribution. However, in the
     case of an eligible rollover distribution to the surviving spouse, an
     eligible retirement plan is an individual retirement account or individual
     retirement annuity.

                                       28




                                    SECTION 8
                    Voting of Company Stock and Tender Offers

Section 8.01  Voting of Company Stock.

(a)  In General. The Trustee shall generally vote all shares of Company Stock
     held in the Trust in accordance with the provisions of this Section 8.01.

(b)  Allocated Shares. Shares of Company Stock which have been allocated to
     Participants' Accounts shall be voted by the Trustee in accordance with the
     Participants' written instructions.

(c)  Uninstructed and Unallocated Shares. Shares of Company Stock which have
     been allocated to Participants' Accounts but for which no written
     instructions have been received by the Trustee regarding voting shall be
     voted by the Trustee in a manner calculated to most accurately reflect the
     instructions the Trustee has received from Participants regarding voting
     shares of allocated Company Stock. Shares of unallocated Company Stock
     shall also be voted by the Trustee in a manner calculated to most
     accurately reflect the instructions the Trustee has received from
     Participants regarding voting shares of allocated Company Stock.
     Notwithstanding the preceding two sentences, all shares of Company Stock
     which have been allocated to Participants' Accounts and for which the
     Trustee has not timely received written instructions regarding voting and
     all unallocated shares of Company Stock must be voted by the Trustee in a
     manner determined by the Trustee to be solely in the best interests of the
     Participants and Beneficiaries.

(d)  Voting Prior to Allocation. In the event no shares of Company Stock have
     been allocated to Participants' Accounts at the time Company Stock is to be
     voted, each Participant shall be deemed to have one share of Company Stock
     allocated to his Accounts for the sole purpose of providing the Trustee
     with voting instructions.

(e)  Procedure and Confidentiality. Whenever such voting rights are to be
     exercised, the Employers, the Committee, and the Trustee shall see that all
     Participants and Beneficiaries are provided with the same notices and other
     materials as are provided to other holders of the Company Stock, and are
     provided with adequate opportunity to deliver their instructions to the
     Trustee regarding the voting of Company Stock allocated to their Accounts
     or deemed allocated to their Accounts for purposes of voting. The
     instructions of the Participants with respect to the voting of shares of
     Company Stock shall be confidential.

Section 8.02  Tender Offers.

In the event of a tender offer, Company Stock shall be tendered by the Trustee
in the same manner set forth in Section 8.01 of the Plan regarding the voting of
Company Stock.

                                       29



                                    SECTION 9
                      The Committee and Plan Administration

Section 9.01  Identity of the Committee.

The Committee shall consist of three or more individuals selected by the Bank.
Any individual, including a director, trustee, shareholder, officer, or Employee
of an Employer, shall be eligible to serve as a member of the Committee. The
Bank shall have the power to remove any individual serving on the Committee at
any time without cause upon ten (10) days' written notice to such individual and
any individual may resign from the Committee at any time without reason upon ten
(10) days' written notice to the Bank. The Bank shall notify the Trustee of any
change in membership of the Committee.

Section 9.02  Authority of Committee.

(a)  The Committee shall be the "plan administrator" within the meaning of ERISA
     and shall have exclusive responsibility and authority to control and manage
     the operation and administration of the Plan, including the interpretation
     and application of its provisions, except to the extent such responsibility
     and authority are otherwise specifically:

     (i)      allocated to the Bank, the Employers, or the Trustee under the
              Plan and Trust Agreement;

     (ii)     delegated in writing to other persons by the Bank, the Employers,
              the Committee, or the Trustee; or

     (iii)    allocated to other parties by operation of law.

(b)  The Committee shall have exclusive responsibility regarding decisions
     concerning the payment of benefits under the Plan.

(c)  The Committee shall have full investment responsibility with respect to the
     Investment Fund except to the extent, if any, specifically provided in the
     Trust Agreement.

(d)  In the discharge of its duties, the Committee may employ accountants,
     actuaries, legal counsel, and other agents (who also may be employed by an
     Employer or the Trustee in the same or some other capacity) and may pay
     such individuals reasonable compensation and expenses for their services
     rendered with respect to the operation or administration of the Plan to the
     extent such payments are not otherwise prohibited by law.

Section 9.03  Duties of Committee.

(a)  The Committee shall keep whatever records may be necessary in connection
     with the maintenance of the Plan and shall furnish to the Employers
     whatever reports may be required from time to time by the Employers. The
     Committee shall furnish to the Trustee

                                       30



     whatever information may be necessary to properly administer the Trust. The
     Committee shall see to the filing with the appropriate government agencies
     of all reports and returns required with respect to the Plan under ERISA
     and the Code and other applicable laws.

(b)  The Committee shall have exclusive responsibility and authority with
     respect to the Plan's holdings of Company Stock and shall direct the
     Trustee in all respects regarding the purchase, retention, sale, exchange,
     and pledge of Company Stock and the creation and satisfaction of any
     Acquisition Loan to the extent such responsibilities are not set forth in
     the Trust Agreement.

(c)  The Committee shall at all times act consistently with the Bank's long-term
     intention that the Plan, as an employee stock ownership plan, be invested
     primarily in Company Stock. Subject to the direction of the Committee with
     respect to any Acquisition Loan pursuant to the provisions of Section 4.03
     of the Plan, and subject to the provisions of Sections 7.05 and 11.04 of
     the Plan as to Participants' rights under certain circumstances to have
     their Accounts invested in Company Stock or in assets other than Company
     Stock, the Committee shall determine, in its sole discretion, the extent to
     which assets of the Trust shall be used to repay any Acquisition Loan, to
     purchase Company Stock, or to invest in other assets selected by the
     Committee or an investment manager. No provision of the Plan relating to
     the allocation or vesting of any interests in the Company Stock or
     investments other than Company Stock shall restrict the Committee from
     changing any holdings of the Trust Fund, whether the changes involve an
     increase or a decrease in the Company Stock or other assets credited to
     Participants' Accounts. In determining the proper extent of the Trust
     Fund's investment in Company Stock, the Committee shall be authorized to
     employ investment counsel, legal counsel, appraisers, and other agents and
     to pay their reasonable compensation and expenses to the extent such
     payments are not prohibited by law.

(d)  If the valuation of any Company Stock is not established by reported
     trading on a generally recognized public market, then the Committee shall
     have the exclusive authority and responsibility to determine value of the
     Company Stock for all purposes under the Plan. Such value shall be
     determined as of each Valuation Date and on any other date as of which the
     Trustee purchases or sells Company Stock in a manner consistent with
     Section 4975 of the Code and the Treasury Regulations thereunder. The
     Committee shall use generally accepted methods of valuing stock of similar
     corporations for purposes of arm's length business and investment
     transactions, and in this connection the Committee shall obtain, and shall
     be protected in relying upon, the valuation of Company Stock as determined
     by an independent appraiser (as defined in Section 401(a)(28)(c) of the
     Code).

                                       31



Section 9.04  Compliance with ERISA and the Code.

The Committee shall perform all acts necessary to ensure the Plan's compliance
with ERISA and the Code. Each individual member of the Committee shall discharge
his duties in good faith and in accordance with the applicable requirements of
ERISA and the Code.

Section 9.05  Action by Committee.

All actions of the Committee shall be governed by the affirmative vote of a
number of the members of the Committee which is a majority of the total number
of the members of the Committee. The members of the Committee may meet
informally and may take any action without meeting as a group.

Section 9.06  Execution of Documents.

Any instrument executed by the Committee may be signed by any member of the
Committee.

Section 9.07  Adoption of Rules.

The Committee shall adopt such rules and regulations of uniform applicability as
it deems necessary or appropriate for the proper operation, administration and
interpretation of the Plan.

Section 9.08  Responsibilities to Participants.

The Committee shall determine which Employees qualify to participate in the
Plan. The Committee shall furnish to each Eligible Employee whatever summary
plan descriptions, summary annual reports, and other notices and information
which may be required under ERISA. The Committee also shall determine when a
Participant or his Beneficiary qualifies for the payment of benefits under the
Plan. The Committee shall furnish to each such Participant or Beneficiary
whatever information is required under ERISA or the Code (or is otherwise
appropriate) to enable the Participant or Beneficiary to make whatever elections
may be available pursuant to Section 7, and the Committee shall provide for the
payment of benefits in the proper form and amount from the Trust. The Committee
may decide in its sole discretion to permit modifications of elections and to
defer or accelerate benefits to the extent consistent with the terms of the
Plan, applicable law, and the best interests of the individuals concerned.

Section 9.09  Alternative Payees in Event of Incapacity.

If the Committee finds at any time that an individual qualifying for benefits
under this Plan is a minor or is incompetent, the Committee may direct the
benefits to be paid, in the case of a minor, to his parents, his legal guardian,
a custodian for him under the Uniform Transfers to Minors Act, or the person
having actual custody of him, or, in the case of an incompetent, to his spouse,
his legal guardian, or the person having actual custody of him. The Committee
and the Trustee shall not be obligated to inquire as to the actual use of the
funds by the person receiving them under

                                       32



this Section 9.09, and any such payment shall completely discharge the
obligations of the Plan, the Trustee, the Committee, and the Employers to the
extent of the payment.

Section 9.10  Indemnification by Employers.

Except as separately agreed in writing, the Committee, and any member or
employee of the Committee, shall be indemnified and held harmless by the
Employers, jointly and severally, to the fullest extent permitted by law against
any and all costs, damages, expenses, and liabilities reasonably incurred by or
imposed upon the Committee or such individual in connection with any claim made
against the Committee or such individual or in which the Committee or such
individual may be involved by reason of being, or having been, the Committee, or
a member or employee of the Committee, to the extent such amounts are not paid
by insurance.

Section 9.11  Abstention by Interested Member.

Any member of the Committee who also is a Participant in the Plan shall take no
part in any determination specifically relating to his own participation or
benefits under the Plan, unless his abstention would render the Committee
incapable of acting on the matter.

                                       33



                                   SECTION 10
                         Rules Governing Benefit Claims

Section 10.01  Claim for Benefits.

Any Participant or Beneficiary who qualifies for the payment of benefits shall
file a claim for his benefits with the Committee on a form provided by the
Committee. The claim, including any election of an alternative benefit form,
shall be filed at least 30 days before the date on which the benefits are to
begin. If a Participant or Beneficiary fails to file a claim by the 30th day
before the date on which benefits become payable, he shall be presumed to have
filed a claim for payment for the Participant's benefits in the standard form
prescribed by Section 7 of the Plan.

Section 10.02  Notification by Committee.

Within 90 days after receiving a claim for benefits (or within 180 days, if
special circumstances require an extension of time and written notice of the
extension is given to the Participant or Beneficiary within 90 days after
receiving the claim for benefits), the Committee shall notify the Participant or
Beneficiary whether the claim has been approved or denied. If the Committee
denies a claim in any respect, the Committee shall set forth in a written notice
to the Participant or Beneficiary:

(a)  each specific reason for the denial;

(b)  specific references to the pertinent Plan provisions on which the denial is
     based;

(c)  a description of any additional material or information which could be
     submitted by the Participant or Beneficiary to support his claim, with an
     explanation of the relevance of such information; and

(d)  an explanation of the claims review procedures set forth in Section 10.03
     of the Plan.

Section 10.03  Claims Review Procedure.

Within 60 days after a Participant or Beneficiary receives notice from the
Committee that his claim for benefits has been denied in
any respect, he may file with the Committee a written notice of appeal setting
forth his reasons for disputing the Committee's determination. In connection
with his appeal, the Participant or Beneficiary or his representative may
inspect or purchase copies of pertinent documents and records to the extent not
inconsistent with other Participants' and Beneficiaries' rights of privacy.
Within 60 days after receiving a notice of appeal from a prior determination (or
within 120 days, if special circumstances require an extension of time and
written notice of the extension is given to the Participant or Beneficiary and
his representative within 60 days after receiving the notice of appeal), the
Committee shall furnish to the Participant or Beneficiary and his
representative, if any, a written statement of the Committee's final decision
with respect to his claim, including the reasons for such decision and the
particular Plan provisions upon which it is based.

                                       34



                                   SECTION 11
                                    The Trust

Section 11.01  Creation of Trust Fund.

All amounts received under the Plan from an Employer and investments shall be
held in a Trust Fund pursuant to the terms of this Plan and the Trust Agreement.
The benefits described in this Plan shall be payable only from the assets of the
Trust Fund. Neither the Bank, any other Employer, its board of directors or
trustees, its stockholders, its officers, its employees, the Committee, nor the
Trustee shall be liable for payment of any benefit under this Plan except from
the Trust Fund.

Section 11.02  Company Stock and Other Investments.

The Trust Fund held by the Trustee shall be divided into Company Stock and
investments other than Company Stock. The Trustee shall have no investment
responsibility for the portion of the Trust Fund consisting of Company Stock,
but shall accept any Employer contributions made in the form of Company Stock,
and shall acquire, sell, exchange, distribute, and otherwise deal with and
dispose of Company Stock in accordance with the instructions of the Committee.

Section 11.03  Acquisition of Company Stock.

From time to time the Committee may, in its sole discretion, direct the Trustee
to acquire Company Stock from the issuing Employer or from shareholders,
including shareholders who are or have been Employees, Participants, or
fiduciaries with respect to the Plan. The Trustee shall pay for such Company
Stock no more than its fair market value, which shall be determined conclusively
by the Committee pursuant to Section 9.03(d) of the Plan. The Committee may
direct the Trustee to finance the acquisition of Company Stock through an
Acquisition Loan subject to the provisions of Section 4.03 of the Plan.

Section 11.04  Participants' Option to Diversify.

The Committee shall provide for a procedure under which each Participant may,
during the first five years of a certain six-year period, elect to have up to 25
percent of the value of his Accounts committed to alternative investment options
within an "Investment Fund." For the sixth year in this period, the Participant
may elect to have up to 50 percent of the value of his Accounts committed to
other investments. The six-year period shall begin with the Plan Year following
the first Plan Year in which the Participant has both reached age 55 and
completed 10 years of participation in the Plan; a Participant's election to
diversify his Accounts must be made within the 90-day period immediately
following the last day of each of the six Plan Years. The Committee shall see
that the Investment Fund includes a sufficient number of investment options to
comply with Section 401(a)(28)(B) of the Code. The Committee may, in its
discretion, permit a transfer of a portion of the Participant's Accounts to the
Savings Plan in order to satisfy this Section 11.04, provided such investments
comply with Section 401(a)(28)(B) of the Code and such transfer is not otherwise
prohibited under the Code or ERISA. The Trustee shall comply

                                       35



with any investment directions received from Participants in accordance with the
procedures adopted from time to time by the Committee under this Section 11.04.

                                       36



                                   SECTION 12
                       Adoption, Amendment and Termination

Section 12.01  Adoption of Plan by Other Employers.

With the consent of the Bank, any entity may become a participating Employer
under the Plan by:

(a)  taking such action as shall be necessary to adopt the Plan;

(b)  becoming a party to the Trust Agreement establishing the Trust Fund; and

(c)  executing and delivering such instruments and taking such other action as
     may be necessary or desirable to put the Plan into effect with respect to
     the entity's Employees.

Section 12.02  Adoption of Plan by Successor.

In the event that any Employer shall be reorganized by way of merger,
consolidation, transfer of assets or otherwise, so that an entity other than an
Employer shall succeed to all or substantially all of the Employer's business,
the successor entity may be substituted for the Employer under the Plan by
adopting the Plan and becoming a party to the Trust Agreement. Contributions by
the Employer shall be automatically suspended from the effective date of any
such reorganization until the date upon which the substitution of the successor
entity for the Employer under the Plan becomes effective. If, within 90 days
following the effective date of any such reorganization, the successor entity
shall not have elected to become a party to the Plan, or if the Employer shall
adopt a plan of complete liquidation other than in connection with a
reorganization, the Plan shall be automatically terminated with respect to
Employees of the Employer as of the close of business on the 90th day following
the effective date of the reorganization, or as of the close of business on the
date of adoption of a plan of complete liquidation, as the case may be.

Section 12.03  Plan Adoption Subject to Qualification.

Notwithstanding any other provision of the Plan, the adoption of the Plan and
the execution of the Trust Agreement are conditioned upon their being determined
initially by the Internal Revenue Service to meet the qualification requirements
of Section 401(a) of the Code, so that the Employers may deduct currently for
federal income tax purposes their contributions to the Trust and so that the
Participants may exclude the contributions from their gross income and recognize
income only when they receive benefits. In the event that this Plan is held by
the Internal Revenue Service not to qualify initially under Section 401(a) of
the Code, the Plan may be amended retroactively to the earliest date permitted
by the Code and the applicable Treasury Regulations in order to secure
qualification under Section 401(a) of the Code. If this Plan is held by the
Internal Revenue Service not to qualify initially under Section 401(a) of the
Code either as originally adopted or as amended, each Employer's contributions
to the Trust under this Plan (including any earnings thereon) shall be returned
to it and this Plan shall be terminated. In the event that this Plan is amended
after its initial qualification and the Plan as amended is held by the Internal
Revenue Service not to qualify under Section 401(a) of the Code, the amendment

                                       37



may be modified retroactively to the earliest date permitted by the Code and the
applicable Treasury Regulations in order to secure approval of the amendment
under Section 401(a) of the Code.

Section 12.04  Right to Amend or Terminate.

The Bank intends to continue this Plan as a permanent program. However, each
participating Employer separately reserves the right to suspend, supersede, or
terminate the Plan at any time and for any reason, as it applies to that
Employer's Employees, and the Bank reserves the right to amend, suspend,
supersede, merge, consolidate, or terminate the Plan at any time and for any
reason, as it applies to the Employees of all Employers. No amendment,
suspension, supersession, merger, consolidation, or termination of the Plan
shall reduce any Participant's or Beneficiary's proportionate interest in the
Trust Fund, or shall divert any portion of the Trust Fund to purposes other than
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan. Except as is required for
purposes of compliance with the Code or ERISA, the provisions of Section 4.04
relating to the crediting of contributions, forfeitures and shares of Company
Stock released from the Loan Suspense Account, nor any other provision of the
Plan relating to the allocation of benefits to Participants, may be amended more
frequently than once every six months. Moreover, there shall not be any transfer
of assets to a successor plan or merger or consolidation with another plan
unless, in the event of the termination of the successor plan or the surviving
plan immediately following such transfer, merger, or consolidation, each
participant or beneficiary would be entitled to a benefit equal to or greater
than the benefit he would have been entitled to if the plan in which he was
previously a participant or beneficiary had terminated immediately prior to such
transfer, merger, or consolidation. Following a termination of this Plan by the
Bank, the Trustee shall continue to administer the Trust and pay benefits in
accordance with the Plan and the Committee's instructions.

                                       38



                                   SECTION 13
                               General Provisions

Section 13.01   Nonassignability of Benefits.

The interests of Participants and other persons entitled to benefits under the
Plan shall not be subject to the claims of their creditors and may not be
voluntarily or involuntarily assigned, alienated, pledged, encumbered, sold, or
transferred. The prohibitions set forth in this Section 13.01 shall also apply
any judgement, decree, or order (including approval of a property or settlement
agreement) which relates to the provision of child support, alimony, or property
rights to a present or former spouse, child, or other dependent of a Participant
pursuant to a domestic relations order, unless such judgement, decree or order
is determined to be a "qualified domestic relations order" as defined in Section
414(p) of the Code.

Section 13.02   Limit of Employer Liability.

The liability of the Employers with respect to Participants and other persons
entitled to benefits under the Plan shall be limited to making contributions to
the Trust from time to time, in accordance with Section 4 of the Plan.

Section 13.03   Plan Expenses.

All expenses incurred by the Committee or the Trustee in connection with
administering the Plan and Trust shall be paid by the Trustee from the Trust
Fund to the extent the expenses have not been paid or assumed by the Employer.

Section 13.04   Nondiversion of Assets.

Except as provided in Sections 5.05 and 12.03 of the Plan, under no
circumstances shall any portion of the Trust Fund be diverted to or used for any
purpose other than the exclusive benefit of the Participants and their
Beneficiaries prior to the satisfaction of all liabilities under the Plan.

Section 13.05   Separability of Provisions.

If any provision of the Plan is held to be invalid or unenforceable, the other
provisions of the Plan shall not be affected but shall be applied as if the
invalid or unenforceable provision had not been included in the Plan.

Section 13.06   Service of Process.

The agent for the service of process upon the Plan shall be the president of the
Bank and the Trustee, or such other person as may be designated from time to
time by the Bank.

                                       39



Section 13.07   Governing Law.

The Plan is established under, and its validity, construction and effect shall
be governed by the laws of the State of Connecticut to the extent those laws are
not preempted by federal law, including the provisions of ERISA.

Section 13.08   Special Rules for Persons Subject to Section 16(b) Requirements.

Notwithstanding anything herein to the contrary, any former Participant who is
subject to the provisions of Section 16(b) of the Securities Exchange Act of
1934, who becomes eligible to again participate in the Plan, may not become a
Participant prior to the date that is six months from the date such former
Participant terminated participation in the Plan. In addition, any person
subject to the provisions of Section 16(b) of the 1934 Act receiving a
distribution of Company Stock from the Plan must hold such Company Stock for a
period of six months commencing with the date of distribution. However, this
restriction will not apply to Company Stock distributions made in connection
with death, retirement, disability or termination of employment, or made
pursuant to the terms of a qualified domestic relations order.

Section 13.09   Military Service.

Notwithstanding any other provision of this Plan to the contrary, contributions,
benefits and Service credit with respect to qualified military service will be
provided in accordance with Section 414(u) of the Code.

                                       40



                                   SECTION 14
                              Top-Heavy Provisions

Section 14.01   Top-Heavy Provisions.

If, as of the last day of the first Plan Year, or thereafter, if as of the day
next preceding the beginning of any Plan Year (the "Determination Date"), the
Plan is a "top-heavy plan" (determined in accordance with the provisions of
Section 416(g) of the Code); that is, the aggregate present value of the accrued
benefits and account balances of all "Key Employees" (within the meaning of
Section 416(i) of the Code, and for this purpose using the definition of
Compensation, as modified under Section 5.05(b) of the Plan) and their
Beneficiaries, exceeds sixty percent (60%) of the aggregate present value of the
accrued benefits and account balances of all employees and their beneficiaries,
the provision specified in this Section 14 will automatically become effective
as of the first day of the Plan Year. For purposes of the above sentence, the
aggregate present value of the accrued benefits and account balances of a
Participant who has not performed any services for the Bank or any of its
Affiliates during the five-year period ending on the Determination Date shall
not be taken into account. This calculation shall be made in accordance with
Section 416(g) of the Code, taking into consideration plans which are considered
part of the Aggregation Group. The term "Aggregation Group" shall include each
plan of the Bank or any of its Affiliates that includes a Key Employee and each
plan of the Bank or any of its Affiliates that allows the Plan to meet the
requirements of Section 401(a)(4) of the Code or Section 410 of the Code and may
include any other plan of the Bank or any of its Affiliates, if the Aggregation
Group would continue to meet the requirements of Sections 401(a)(4) and 410 of
the Code. For Plan Years beginning after December 31, 2002, the present values
of accrued benefits and the amounts of Account balances of a Participant as of
the Determination Date shall be increased by the distributions made with respect
to the Participant under the Plan and any Plan aggregated with the Plan under
Section 416(g)(2) of the Code during the one-year period ending on the
Determination Date. The preceding sentence shall also apply to distributions
under a terminated plan, which had it not been terminated, would have been
aggregated with the Plan under Section 416(g)(2)(A)(i) of the Code. In the case
of a distribution made for a reason other than separation from Service, death or
Disability, this provision shall be applied by substituting "five-year period"
for "one-year period."

Section 14.02   Plan Modifications Upon Becoming Top-Heavy.

(a)  Minimum Accruals. Section 5.04 of the Plan will be modified to provide that
     the aggregate amount of Employer contributions allocated in each Plan Year
     to the Accounts of each Participant who is a Non-Key Employee (within the
     meaning of Section 416(i)(1) of the Code), and who is employed by an
     Employer as of the last day of the Plan Year, may not be less than the
     lesser of:

     (i)     three percent of his Compensation for the Plan Year; and

     (ii)    a percentage of his Compensation equal to the largest percentage
             obtained by dividing the sum of the amount credited to the Accounts
             of any Key Employee by that Key Employee's Compensation

                                       41



If a Participant's vested interest in his Accounts is to be determined in a year
during which the Plan is a top-heavy plan, then it shall be based on the
following schedule:

                  Years of Service                   Vested Percentage

                  Fewer than 3 years                          0%
                  3 or more years                           100%

The preceding provisions will remain in effect for the period in which the Plan
is top-heavy. If, for any particular year thereafter, the Plan is no longer
top-heavy, the provisions contained in this Section 14.02 shall cease to apply,
except that any previously vested portion of any Account balance shall remain
nonforfeitable.

                                       42



                                 TRUST AGREEMENT

                                     BETWEEN

                             JEFFERSON FEDERAL BANK

                                       AND
                        _______________________________

                                     FOR THE

                             JEFFERSON FEDERAL BANK
                       EMPLOYEE STOCK OWNERSHIP PLAN TRUST



                                    CONTENTS



                                                                      Page No.
                                                                   
Section 1    Creation of Trust                                                1

Section 2    Investment of Trust Fund and
             Administrative Powers of the Trustee                             2

Section 3    Compensation and Indemnification
             of Trustee and Payment of Expenses
             and Taxes                                                        7

Section 4    Records and Valuation                                            9

Section 5    Instructions from Committee                                     10

Section 6    Change of Trustee                                               11

Section 7    Miscellaneous                                                   11


                                        2



         This TRUST AGREEMENT dated___________, 2003 BETWEEN Jefferson Federal
Bank, with its administrative office at 120 Evans Avenue, Morristown, Tennessee
(hereinafter called the "Company"), and ____________________________

                          W I T N E S S E T H  T H A T:

         WHEREAS, the Company has approved and adopted an employee stock
ownership plan for the benefit of its employees, the Jefferson Federal Bank
Employee Stock Ownership Plan of Morristown, (hereinafter called the "Plan");
and

         WHEREAS, the Company has authorized the execution of this Trust
Agreement and has appointed_______________________ as Trustee of the Trust Fund
created pursuant to the Plan; and

         WHEREAS,______________________________ has agreed to act as Trustee and
to hold and administer the assets of the Plan in accordance with the terms of
this Trust Agreement.

         NOW, THEREFORE, the Company and the Trustee agree as follows:

         Section 1. Creation of Trust.

         1.1 Trustee._____________________ shall serve as Trustee of the Trust
Fund created in accordance with and in furtherance of the Plan, and shall serve
as Trustee until their removal or resignation in accordance with Section 6.

         1.2 Trust Fund. The Trustee hereby agrees to accept contributions from
the Employer as defined in the Plan and amounts transferred from other qualified
retirement plans from time to time in accordance with the terms of the Plan. All
such property and contributions, together with income thereon and increments
thereto, shall constitute the "Trust Fund" to be held in accordance with the
terms of the Trust Agreement.

         1.3 Incorporation of Plan. An instrument entitled "Jefferson Federal
Bank Employee Stock Ownership Plan" is incorporated herein by reference, and
this Trust Agreement shall be interpreted consistently with that Plan. All words
and phrases defined in that Plan shall have the same meaning when used in this
Trust Agreement.

         1.4 Name. The name of this trust shall be " Jefferson Federal Bank
Employee Stock Ownership Plan Trust."

         1.5 Nondiversion of Assets. In no event shall any part of the corpus or
income of the Trust Fund be used for, or diverted to, purposes other than for
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan, except to the extent that assets
may be returned to the Employer in accordance with the Plan where the Plan fails
to qualify initially under Section 401(a) of the Internal Revenue Code (the
"Code"), or



where they are attributable to contributions made by mistake of fact or in
excess of the deductibility allowed under the Code.

         Section 2. Investment of Trust Fund and Administrative Powers of the
Trustee.

         2.1 Stock and Other Investments. The basic investment policy of the
Plan shall be to invest primarily in Stock of the Employer for the exclusive
benefit of the Participants and their Beneficiaries. The Committee shall have
full and complete investment authority and responsibility with respect to the
purchase, retention, sale, exchange, and pledge of Stock and the payment of
Stock Obligations, and the Trustee shall not deal in any way with Stock except
in accordance with their obligations pursuant to this Trust Agreement and the
written instructions of the Committee. The Trustee shall invest, or keep
invested, all or a portion of the Trust Fund in Stock, and shall pay Stock
Obligations out of assets of the Trust Fund, as instructed from time to time by
the Committee. The Trustee shall invest any balance of the Trust Fund (the
"Investment Fund") in such other property as the Committee, in its sole
discretion, shall deem advisable, subject to any delegation of such investment
responsibility pursuant to Section 2.2. Nothing contained herein shall provide
investment discretion authority or any like kind responsibility in regard to the
assets of the Trust Fund.

         In connection with instructions to acquire Stock, the Trustee may
purchase newly issued or outstanding Stock from the Employer or any other
holders of Stock, including Participants, Beneficiaries, and Plan fiduciaries.
All purchases and sales of Stock shall be made by the Trustee at fair market
value as determined by the Committee in good faith and in accordance with any
applicable requirements under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Such purchases may be made with assets of the Trust
Fund, with funds borrowed for this purpose (with or without guarantees of
repayment to the lender by the Employer), or by any combination of the
foregoing.

         Notwithstanding any other provision of this Trust Agreement or the
Plan, neither the Committee nor Trustee shall make any purchase, sale, exchange,
investment, pledge, valuation, or loan, or take any other action involving those
assets for which they are responsible which (i) is inconsistent with the policy
of the Plan and Trust, (ii) is inconsistent with the prudence and
diversification requirements set forth in Sections 404(a)(1)(B) and (C) of ERISA
(to the extent such requirements apply to an employee stock ownership plan and
trust), (iii) is prohibited by Section 406 or 407 of ERISA, or (iv) would impair
the qualification of the Plan or the exemption of the Trust under Sections 401
and 501, respectively, of the Code.

         2.2 Delegation of Investment Responsibility. The Committee may, by
written notice and in accordance with the Plan, direct the Trustee to segregate
any portion or all of the Investment Fund into one or more separate accounts for
each of which full investment responsibility will be delegated to an investment
manager appointed in such notice pursuant to Section 402(c)(3) of ERISA
(hereinafter a "Manager"). For any separate account where the Trustee is to
maintain custody of the assets, the Trustee and the Manager shall agree upon
procedures for the transmittal

                                       2



of investment instructions from the Manager to the Trustee, and the Trustee may
provide the Manager with such documents as may be necessary to authorize the
Manager to effect transactions directly on behalf of the segregated account.

         Further, the Committee may, by written notice and in accordance with
the Plan, direct the Trustee to segregate any portion or all of the Investment
Fund into one or more separate accounts for each of which full investment
responsibility will be delegated to an insurance company through one or more
group annuity contracts, deposit administration contracts, or similar contracts,
which may provide for investments in any commingled separate accounts
established under such contracts. An insurance company shall be a Manager with
respect to any amounts held under such a contract except to the extent the
insurer's assets are not deemed assets of the Plan and Trust Fund pursuant to
Section 401(b)(2) of ERISA. The allocation of amounts held under such a contract
among the insurer's general account and one or more individual or commingled
separate accounts shall be determined by the Committee except as otherwise
agreed by the Committee and the insurer.

         Any Manager shall have all of the powers given to the Trustee pursuant
to Section 2.3 with respect to the portion of the Trust Fund committed to its
investment discretion and control. The Trustee shall be responsible for the
safekeeping of any assets which remain in their custody, but in no event shall
the Trustee be under any duty to question or make any inquiry or suggestion
regarding the action or inaction of a Manager or an insurer or the advisability
of acquiring, retaining, or disposing of any asset of a segregated account. The
Employer shall indemnify and hold the Trustee harmless from any and all costs,
damages, expenses, and liabilities which the Trustee may incur by reason of any
action taken or omitted to be taken by the Trustee upon directions from the
Committee, a Manager, or an insurer pursuant to this Section 2.2.

         2.3 Trustee Powers. In addition to and not by way of limitation upon
the fiduciary powers granted to it by law, the Trustee shall have the following
specific powers, subject to the limitations set forth in Section 2.1:

         2.3-1 to receive, hold, manage, invest and reinvest the money or other
property which constitutes the Trust Fund, without distinction between principal
and income;

         2.3-2 to hold funds uninvested temporarily, provided it is a period of
time that is not unreasonable, without liability for interest thereon, and to
deposit funds in one or more savings or similar accounts with any banks and
savings and loan associations which are insured by an instrumentality of the
federal government, including the Trustee if it is such an institution.

         2.3-3 at the direction of the Committee, to invest or reinvest the
whole or any portion of the money or other property which constitutes the Trust
Fund in such common or preferred stocks, investment trust shares, mutual funds,
commingled trust funds, partnership interests, bonds, notes, or other evidences
of indebtedness, and real and personal property as the Trustee in their absolute
judgment and discretion may deem to be for the best interests of the Trust Fund,

                                       3



regardless of nondiversification to the extent that such nondiversification is
clearly prudent, and regardless of whether any such investment or property is
authorized by law regarding the investment of trust funds, of a wasting asset
nature, temporarily nonincome producing, or within or without the United States;

         2.3-4 to invest in common and preferred stocks, bonds, notes, or other
obligations of any corporation or business enterprise in which an Employer or
its owners may own an interest;

         2.3-5 at the direction of the Committee, to exchange any investment or
property, real or personal, for other investments or properties at such time and
upon such terms as the Trustee shall deem proper;

         2.3-6 at the direction of the Committee, to sell, transfer, convey or
otherwise dispose of any investment or property, real or personal, for cash or
on credit, in such manner and upon such terms and conditions as the Trustee
shall deem advisable, and no person dealing with the Trustee shall be under any
duty to inquire as to the validity, expediency, or propriety of any such sale or
as to the application of the purchase money paid to the Trustee;

         2.3-7 to hold any investment or property in the name of the Trustee,
with or without the designation of any fiduciary capacity, or in the name of a
nominee, or unregistered, or in such other form that title may pass by delivery;
provided, however, that the Trustee's records always show that such investment
or property belongs to the Trust Fund and the Trustee shall not be relieved
hereby of its responsibility to maintain safe custody of such investment or
property;

         2.3-8 to organize one or more corporations to hold, manage, or
liquidate any property, including real estate, owned or acquired by the Trust
Fund if in the sole discretion of the Trustee the organization of such
corporation or corporations is for the best interests of the Trust and the Plan
Participants and Beneficiaries;

         2.3-9 to extend the time for payment of, to modify, to renew, or to
release security from any mortgage, note or other evidence of indebtedness, or
to take advantage of or waive any default; to foreclose mortgages and bid on
property under foreclosure or to take title to property by conveyance in lieu of
foreclosure, either with or without the payment of additional consideration;

         2.3-10 to vote in person or by proxy all stocks and other securities
having voting privileges; to exercise or refrain from exercising any option or
privilege with respect to stocks and other securities, including any right or
privilege to subscribe for or otherwise to acquire stocks and other securities;
or to sell any such right or privilege; to assent to and join in any plan of
refinance, merger, consolidation, reorganization or liquidation of any
corporation or other enterprise in which this Trust may have an interest, to
deposit stocks and other securities with any committee formed to effectuate the
same, to pay any expense incidental thereto, to exchange stocks and other
securities for those which may be issued pursuant to any such plan, and to
retain

                                       4



as an investment the stocks and other securities received by the Trustee; and to
deposit any investment in a voting trust; notwithstanding the preceding,
Participants and Beneficiaries shall be entitled to direct the manner in which
stock allocated to their respective accounts are to be voted on all matters. All
stock which has been allocated to Participants' Accounts for which the Trustee
has received no written direction and all unallocated Employer securities will
be voted by the Trustee in direct proportion to any Participant's directions
received and solely in the interest of the Participants and Beneficiaries.
Whenever such voting rights are to be exercised, the Employer, the Committee and
the Trustee shall see that all Participants and Beneficiaries are provided with
adequate opportunity to deliver their instructions to the Trustee regarding
voting of stock allocated to their accounts. The instructions of the
Participants with respect to the voting of allocated shares hereunder shall be
confidential;

         2.3-11 to abandon any property, real or personal, which the Trustee
shall consider to be worthless or not of sufficient value to warrant its keeping
or protecting; to abstain from the payment of taxes, water rents, assessments,
repairs, maintenance, and upkeep of any such property; to permit any such
property to be lost by tax sale or other proceedings, and to convey any such
property for a nominal consideration or without consideration;

         2.3-12 to borrow money from the Employer or from others (including the
Trustee), and to enter into installment contracts, for the purchase of Stock
upon such terms and conditions and at such reasonable rates of interest as the
Committee may deem to be advisable, to issue its promissory notes as Trustee to
evidence such debt, to secure the payment of such notes by pledging any property
of the Trust Fund, and to authorize the holders of any such notes to pledge them
to secure obligations of the holders and in connection therewith to repledge any
assets of the Trust as security therefor; provided that, with respect to any
extension of credit to the Trust involving, as a lender or guarantor, the
Employer or other "disqualified person" within the meaning of Section 4975(e)(2)
of the Code --

         (a)  each loan or installment contract is primarily for the benefit of
              Participants and Beneficiaries of the Plan;
         (b)  any interest on a loan or installment contract does not exceed a
              reasonable rate;
         (c)  the proceeds of any loan shall be used only to acquire Stock, to
              repay the loan, or to repay a previous loan meeting these
              conditions, and the subject of any installment contract shall be
              only the Trust's purchase of Stock;
         (d)  any collateral pledged to a creditor by the Trustee shall consist
              only of qualifying employer securities as that term is defined
              under Section 4975(e)(8) of the Code and the creditor shall have
              no recourse against the Trust Fund except with respect to the
              collateral (although the creditor may have recourse against an
              Employer as guarantor);
         (e)  payments with respect to a loan or installment contract shall be
              made only from those amounts contributed by the Employer to the
              Trust Fund, from amounts earned on such contributions, and from
              cash dividends received on unallocated Stock held by the Trust as
              collateral for such an obligation; and

                                       5



         (f)   upon the payment of any portion of balance due on a loan or upon
               any installment payment, a proportionate part of any qualified
               employer securities originally pledged as collateral for such
               indebtedness shall be released from encumbrance in accordance
               with Section 4.2 of the Plan and the Committee shall at least
               annually advise the Trustee of the number of shares of Stock so
               released and the proper allocation of such shares under the terms
               of the Plan;

         2.3-13 to manage and operate any real property which shall at any time
constitute an asset of the Trust Fund; to make repairs, alterations, and
improvements thereto; to insure such property against loss by fire or other
casualty; to lease or grant options for the sale of such property, which lease
or option may be for a period of time which may extend beyond the life of this
Trust; and to take any other action or enter into any other contract respecting
such property which is consistent with the best interests of the Trust;

         2.3-14 to pay any and all reasonable and normal expenses incurred in
connection with the exercise of any power, right, authority or discretion
granted herein, and, upon prior notice to the Company, to employ and compensate
agents, investment counsel, custodians, actuaries, attorneys, and accountants in
such connection;

         2.3-15 to employ and consult with any legal counsel, who also may be
counsel to an Employer or the Administrator, with respect to the meaning or
construction of this Trust Agreement, the extent of the Trustee's obligations
and duties hereunder, and whether the Trustee should take or decline to take a
particular action hereunder, and the Trustee shall be fully protected with
respect to any action taken or omitted by such Trustee in good faith pursuant to
such advice;

         2.3-16 to defend any action or proceeding instituted against the Trust
Fund, to institute any action on behalf of the Trust Fund, and to compromise or
submit to arbitration any dispute concerning the Trust Fund;

         2.3-17 to make, execute, acknowledge and deliver any and all documents
of transfer and conveyance and any and all other instruments that may be
necessary or appropriate to carry out the powers herein granted;

         2.3-18 to commingle the Trust Fund created pursuant hereto, in whole or
in part, in a single trust with all or any portion of any other trust fund,
assigning an undivided interest to each such commingled trust fund, provided
that such commingled trust is itself exempt from taxation pursuant to Section
501(a) of the Code, or its successor Section; and provided further that the
trust agreement governing such commingled trust shall be deemed incorporated by
reference in the Plan;

         2.3-19 where two or more trusts governed by this Trust Agreement have
an undivided interest in any property, to credit the income from such property
to such trusts in proportion to

                                        6



their undivided interests, and when non pro rata distributions of property or
money are made from such trusts, to make appropriate adjustments to the
undivided fractional interests of such trusts;

         2.3-20 to invest all or any portion of the Trust Fund in one or more
group annuity contracts, deposit administration contracts, and other such
contracts with insurance companies, including any commingled separate accounts
established under such contracts;

         2.3-21 generally, with respect to all cash, stocks and other
securities, and property, both real and personal, received or held in the Trust
Fund by the Trustee, to exercise all the same rights and powers as are or may be
lawfully exercised by persons owning cash, or stocks and other securities, or
such property in their own right; and to do all other acts, whether or not
expressly authorized, which it may deem necessary or proper for the protection
of the Trust Fund; and

         2.3-22 whenever more than two persons shall qualify to act as
co-Trustee, to exercise and perform every power (including discretionary
powers), authority or duty by the concurrence of a majority of them the same
effect as if all had joined therein, except that the unanimous vote of such
persons shall be necessary to determine the number (one or more) and identity of
persons who may sign checks, make withdrawals from financial institutions, have
access to safe deposit boxes, or direct the sale of trust assets and the
disposition of the proceeds.

         2.4 Brokerage. If permitted in writing by the Committee the Trustee
shall have the power and authority, to be exercised in their sole discretion at
any time and from time to time, to issue and place orders for the purchase or
sale of securities with qualified brokers and dealers. Such orders may be placed
with such qualified brokers and/or dealers who also provide investment
information or other research or statistical services to the Trustee in its
capacity as a fiduciary or investment manager for other clients.

         Section 3. Compensation and Indemnification of Trustee and Payment of
Expenses and Taxes.

         3.1 Fees and Expenses from Fund. In consideration for rendering
services pursuant to this Trust Agreement the Trustee shall be paid fees in
accordance with the Trustee's fee schedule as in effect from time to time. Fee
changes resulting in fee increases shall be effective upon not less than 30
days' notice to the Company. In addition, the Trustee shall be reimbursed for
any reasonable expenses, including reasonable attorneys' fees, incurred in the
administration of the Trust created hereby. Fees and expenses shall be allocated
to Participants' Accounts, if any, unless paid directly by the Employer. All
compensation and expenses of the Trustee shall be paid out of the Trust Fund or
by the Employer as specified in the Plan. If and to the extent the Trust Fund
shall not be sufficient, such compensation and expenses shall be paid by the
Employer upon demand. If payment is due but not paid by the Employer, such
amount shall be paid from the assets of the Trust Fund. The Trustee is hereby
empowered to withdraw all such

                                       7



compensation and expenses which are 60 days past due from the Trust Fund, and,
in furtherance thereof, liquidate any assets of the Trust Fund, without further
authorization or direction from or by any person. Notwithstanding the foregoing,
in the event any officer or director of Enfield Federal Savings Bank serves as
trustee of the Plan, no compensation shall be paid to the officer or director in
exchange for his or her services as trustee.

         3.2 Indemnification. Notwithstanding any other provision of this Trust
Agreement, any individual designated as a trustee hereunder shall be indemnified
and held harmless by the Employer to the fullest extent permitted by law against
any and all costs, damages, expenses and liabilities including, but not limited
to attorneys' fees and disbursements reasonably incurred by or imposed upon such
individual in connection with any claim made against him or in which he may be
involved by reason of his being, or having been, a trustee hereunder, to the
extent such amounts are not satisfied by insurance maintained by the Employer,
except liability which is adjudicated to have resulted from the gross negligence
or willful misconduct of the Trustee by reason of any action so taken. Further,
any corporate trustee and its officers, directors and agents may be indemnified
and held harmless by the Employer to the fullest extent permitted by law against
any and all costs, damages, expenses and liabilities including, but not limited
to, attorneys' fees and disbursements reasonably incurred by or imposed upon
such persons and/or corporation in connection with any claim made against it or
them or in which such persons and/or corporation may be involved by reason of
its being, or having been, a trustee hereunder as may be agreed between the
Employer and such trustee, except liability which is adjudicated to have
resulted from the gross negligence or willful misconduct of the Trustee by
reason of any action so taken.

         3.3 Expenses. All expenses of administering the Trust and the Plan,
whether incurred by the Trustee or the Committee, shall be paid by the Trustee
from the Trust Fund to the extent such expenses shall not have been assumed by
the Employer.

         3.4 Taxes. All taxes that may be levied or assessed upon or in respect
of the Trust Fund shall be paid from the Trust Fund. The Trustee shall notify
the Committee of any proposed or final assessments of taxes and may assume that
any such taxes are lawfully levied or assessed unless the Committee advises it
in writing to the contrary within fifteen days after receiving the above notice
from the Trustee. In such case, the Trustee, if requested by the Committee in
writing, shall contest the validity of such taxes in any manner deemed
appropriate by the Committee; the Employer may itself contest the validity of
any such taxes, in which case the Committee shall so notify the Trustee and the
Trustee shall have no responsibility or liability respecting such contest. If
either party to this Agreement contests any such proposed levy or assessments,
the other party shall provide such information and cooperation as the party
conducting the contest shall reasonably request.

                                       8



         Section 4.  Records and Valuation.

         4.1 Records. The Trustee, and any investment manager appointed pursuant
to Section 2.2, shall maintain accurate and detailed records and accounts of all
investments, receipts, disbursements and other transactions made by it with
respect to the Trust Fund, and all accounts, books and records relating thereto
shall be open at all reasonable time to inspection and audit by the Committee
and the Employer.

         4.2 Valuation. From time to time upon the request of the Committee, but
at least annually as of the last day of each Plan Year, the Trustee shall
prepare a balance sheet of the Investment Fund in accordance with the Plan and
shall deliver copies of the balance sheet to the Committee and the Employer.

         4.3 Discharge of Trustee. Ninety days after the filing of any balance
sheet under Section 4.2 or any accounting under Section 6, the Trustee shall be
forever released and discharged from any liability or accountability other than
for gross negligence or wilful misconduct on the part of the Trustee to anyone
with respect to the transactions shown or reflected in such balance sheet or
accounting, except with respect to any acts or transactions as to which the
Committee, within such ninety-day period, files written objections with the
Trustee. The written approval of the Committee of any balance sheet or
accounting so filed by the Trustee, or the Committee's failure to file written
objections within ninety days, shall be a settlement of such balance sheet or
accounting as against all persons, and shall forever release and discharge the
Trustee from any liability of accountability to anyone with respect to the
transactions shown or reflected in such balance sheet or accounting other than
liability arising out of the Trustee's gross negligence or wilful misconduct. If
a statement of objections is filed by the Committee and the Committee is
satisfied that its objections should be withdrawn or if the balance sheet or
accounting is adjusted to its satisfaction, the Committee shall indicate its
approval of the balance sheet or accounting in a written statement filed with
the Trustee and the Trustee shall be forever released and discharged from any
liability of accountability to anyone in accordance with the immediately
preceding sentence. If an objection is not settled by the Committee and the
Trustee, the Trustee may start a proceeding for a judicial settlement of the
balance sheet or accounting in any court of competent jurisdictions; the only
parties that need be joined in such a proceeding are the Trustee, the Committee,
the Employer and any other parties whose participation is required by law.

         4.4 Right to Judicial Settlement. Nothing in this Agreement shall
prevent the Trustee from having its account settled by a court of competent
jurisdiction at any time. The only parties that need be joined in any such
proceeding are the Employer, the Committee, the Trustee and any other parties
whose participation is required by law.

                                       9



         Section 5. Instructions from Committee.

         5.1 Certification of Members of the Committee. From time to time the
Company shall certify to the Trustee in writing the names of the individuals
comprising the Committee and shall furnish to the Trustee specimens of their
signatures and the signatures of their agents, if any. The Trustee shall be
entitled to presume that the identities of such individuals and their agents are
unchanged until it receives a certification from the Company notifying it of any
changes.

         5.2  Instructions to Trustee.

         (a) The Trustee shall pay benefits and administrative expenses under
the Plan only when it receives (and in accordance with) written instructions of
the Committee indicating the amount of the payment and the name and address of
the recipient in accordance with the terms of the Plan. The Trustee need not
inquire into whether any payment the Committee instructs the Trustee to make is
consistent with the terms of the Plan or applicable law or otherwise proper. Any
payment made by the Trustee in accordance with such instructions shall be a
complete discharge and acquittance to the Trustee. If the Committee advises the
Trustee that benefits have become payable with respect to a Participant's
interest in the Trust Fund but does not instruct the Trustee as to the manner of
payment, the Trustee shall hold the Participant's interest in the Trust until
the Trustee receives written instructions from the Committee as to the manner of
payment. The Trustee shall not pay benefits from the Trust Fund without such
instructions, even though it may be informed from other sources, including,
without limitation, a Participant or Beneficiary, that benefits are payable
under the Plan. The Trustee shall have no responsibility to determine when, to
whom or in what amount benefits and expenses are payable under the Plan.
Further, the Trustee shall have no power, authority or duty to interpret the
Plan or inquire into the decisions or determinations of the Committee, or to
question the instructions given to it by the Committee. If the Committee so
directs, the Trustee shall segregate amounts payable with respect to the
interest in the Plan of any Participant and administer them separately from the
rest of the Trust Fund in accordance with the Committee's instructions.

         (b) The Trustee may require the Committee to certify in writing that
any payment of benefits or expenses it instructs the Trustee to make pursuant to
Section 5.2(a) above is: (i) in accordance with the terms of the Plan and/or
(ii) one which the Committee is authorized by the Plan and any other applicable
instruments to direct and/or (iii) made for the exclusive purpose of providing
benefits to Participants and Beneficiaries, or defraying reasonable expenses of
Plan administration and/or (iv) not made to a party in interest (within the
meaning of ERISA Section 3(14)), and/or (v) not a prohibited transaction (within
the meaning of Code Section 4975 and ERISA Section 406). If the Trustee
requests, instructions to pay benefits shall be made by the Committee on forms
prepared by the Trustee to include any or all of the above representations. The
Trustee shall be fully protected in relying on the truth of any such
representation by the Committee and shall have no duty to investigate whether
such representations are correct or to see to the application of any amounts
paid to and received by the recipient.

                                       10



         5.3 Plan Change. In the event of an amendment, merger, division, or
termination of the Plan, the Trustee shall continue to disburse funds and to
take other proper actions in accordance with the instructions of the Committee.

         Section 6. Change of Trustee.

         The Company may at any time remove any person or entity serving as a
Trustee hereunder by giving to such person or entity written notice of removal
and, if applicable, the name and address of the successor trustee. Any person or
entity serving as a Trustee hereunder may resign at any time by giving written
notice to the Company. Any such removal or resignation shall take effect within
30 days after notice has been given by the Trustee or by the Company, as the
case may be. Within those 30 days, the removed or resigned Trustee shall
transfer, pay over and deliver any portion of the Trust Fund in its possession
or control (less an appropriate reserve for any unpaid fees, expenses, and
liabilities) and all pertinent records to the successor or remaining trustee;
provided, however, that any assets which are invested in a collective fund or in
some other manner which prevents their immediate transfer shall be transferred
and delivered to the successor trustee as soon as may be practicable.
Thereafter, the removed or resigned Trustee shall have no liability for the
Trust Fund or for its administration by the successor or remaining trustee, but
shall render an accounting to the Committee of its administration of the Trust
Fund through the date on which its Trusteeship shall have been terminated. The
Company may also, upon 30 days' notice to each person currently serving as a
trustee, appoint one or more persons to serve as co-Trustee hereunder.

         Section 7. Miscellaneous.

         7.1 Right to Amend. This Trust Agreement may be amended from time to
time by an instrument executed by the Company; provided, however, that any
amendment affecting the powers, duties or liabilities of the Trustee must be
approved by the Trustee, and provided, further, that no amendment may divert any
portion of the Trust Fund to purposes other than the exclusive benefit of the
Participants and their Beneficiaries prior to the satisfaction of all
liabilities for benefits. Any amendment shall apply to the Trust Fund as
constituted at the time of the amendment as well as to that portion of the Trust
Fund which is subsequently acquired.

         7.2 Compliance with ERISA. In the exercise of its powers and the
performance of its duties, the Trustee shall act in good faith and in accordance
with the applicable requirements under ERISA. Except as may be otherwise
required by ERISA, the Trustee shall not be required to furnish any bond in any
jurisdiction for the performance of their duties and, if a bond is required
despite this provision, no surety shall be required on it.

         7.3 Nonresponsibility for Funding. The Trustee shall be under no duty
to enforce the payment of any contributions and shall not be responsible for the
adequacy of the Trust Fund to satisfy any obligations for benefits, expenses,
and liabilities under the Plan.

                                       11



         7.4 Reports. The Trustee shall file any report which they are required
by law to file with any governmental authority with respect to this Trust, and
the Committee shall furnish to the Trustee whatever information is necessary to
prepare the report.

         7.5 Dealings with the Trustee. Persons dealing with the Trustee,
including but not limited to banks, brokers, dealers, and insurers, shall be
under no obligation to inquire concerning the validity of anything which the
Trustee purports to do, nor need any person see to the proper application of any
money paid or any property transferred upon the order of the Trustee or to
inquire into the Trustee's authority as to any transaction.

         7.6 Limitation Upon Responsibilities. The Trustee shall have no
responsibilities with respect to the Plan or Trust other than those specifically
enumerated or explicitly allocated to it under this Trust Agreement or the
provisions of ERISA. All other responsibilities are retained and shall be
performed by one or more of the Employer, the Committee, and such advisors or
agents as they choose to engage.

         The Trustee may execute any of the trusts or powers hereof and perform
any of its duties by or through attorneys, agents, receivers or employees and
shall not be answerable for the conduct of the same if chosen with reasonable
care and shall be entitled to advice of counsel concerning all matters of trust
hereof and the duties hereunder, and may in all cases pay such reasonable
compensation to all such attorneys, agents, receivers and employees as may
reasonably be employed in connection with the trusts hereof. The Trustee may act
upon the opinion or advice of any attorney (who may be the attorney for the
Trustee or attorney for the Committee), approved by the Trustee in the exercise
of reasonable care. The Trustee shall not be responsible for any loss or damage
resulting from any action or non-action in good faith in reliance upon such
opinion or advice.

         The Trustee shall be protected in acting upon any notice, request,
consent, certificate, order, affidavit, letter, telegram or other paper or
document believed to be genuine and correct and to have been signed or sent by
the proper person or persons, and the Trustee shall be under no duty to make any
investigation or inquiry as to any statement contained in any such writing but
may accept the same as conclusive evidence of the truth and accuracy of the
statements therein contained.

         The Trustee shall not be liable for other than their gross negligence
or willful misconduct. Except in the case of gross negligence or wilful
misconduct on the part of the Trustee, the Trustee in its corporate capacity
shall not be liable for claims of any persons in any manner regarding the Plan;
such claims shall be limited to the Trust Fund. Unless the Trustee participates
knowingly in, or knowingly undertakes to conceal, an act or omission of the
Committee or any other fiduciary, knowing such act or omission to be a breach of
fiduciary responsibility, the Trustee shall be under no liability for any loss
of any kind which may result by reason of such act or omission.

                                       12



         Before taking any action hereunder at the request or direction of the
Committee, the Trustee may require that indemnity in form and amount
satisfactory to the Trustee be furnished for the reimbursement of any and all
costs and expenses to which they may be put including, without limitation,
reasonable attorneys' fees and to protect them against all liability, except
liability which is adjudicated to have resulted from the gross negligence or
willful misconduct of the Trustee by reason of any action so taken.

         No provision of this Trust Agreement shall require the Trustee to
expend or risk their own funds or otherwise incur any financial liability in the
performance of any of their duties hereunder, or in the exercise of any of their
rights or powers, if they shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to them.

         7.7 Qualification of the Plan and Trust. The Trustee shall be fully
protected in assuming that the Plan and Trust meet the requirements of Code
Sections 401 and 501, respectively, and all the applicable provisions of ERISA
unless they are advised to the contrary in writing by the Committee or a
governmental agency.

         7.8 Party in Interest Information. The Employer shall provide the
Trustee with such information concerning the relationship between any person or
organization and the Plan as the Trustee reasonably requests in order to
determine whether such person or organization is a party in interest with
respect to the Plan within the meaning of ERISA Section 3(14).

         7.9 Disputes. If a dispute arises as to the payment of any funds or
delivery of any assets by the Trustee, the Trustee may withhold such payment or
delivery until the dispute is determined by a court of competent jurisdiction or
finally settled in writing by the parties concerned.

         7.10 Successor Trustee. This Trust Agreement shall apply to any person
who shall be appointed to succeed the person currently appointed as the Trustee;
and any reference herein to the Trustee shall be deemed to include any one or
more individuals or corporations or any combination thereof who or which have at
any time acted as a co-trustee or as the sole trustee.

         7.11 Governing State Law. This Trust Agreement shall be interpreted in
accordance with the laws of the State of Tennessee to the extent those laws may
be applicable under the provisions of ERISA.

                                       13



         IN WITNESS WHEREOF, the parties hereto have executed this Trust
Agreement as of the day and year first above written.

ATTEST:                               JEFFERSON FEDERAL BANK


_____________________                 By:______________________________________
                                           For the Entire Board of Directors

ATTEST:                                    __________________, as TRUSTEE

_____________________                      ____________________________________

                                       14

EX-10.2

                                                                    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



         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

                                       2



         (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.

                                       3



         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

                                       4



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

                                       5



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

                                       6



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.

                                       7



                                   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.

                                       8



         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.

                                       9



         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.

                                       10



         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

                                       11



         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



                                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



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



         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



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



                  (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



         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



                                 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



                                        ______________________________

EX-10.3

                                                                    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.



     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



     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



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



               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



     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



                    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



                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



          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



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



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



          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



     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

EX-10.4

                                                                    Exhibit 10.4

                                     FORM OF
                        CHANGE IN CONTROL SEVERANCE PLAN
                                       OF
                             JEFFERSON FEDERAL BANK

         1. Plan Purpose. The purpose of the Jefferson Federal Bank Employee
Severance Compensation Plan is to assure for Jefferson Federal Bank (the "Bank")
the services of Eligible Employees of the Bank in the event of a Change in
Control (capitalized terms are defined in section 2 of this Plan) of Jefferson
Bancshares, Inc. (the "Holding Company") or the Bank. The benefits contemplated
by the Plan recognize the value to the Bank of the services and contributions of
Eligible Employees of the Bank and the effect upon the Bank resulting from the
uncertainties of continued employment, reduced employee benefits, management
changes and relocations that may arise in the event of a Change in Control of
the Bank or the Company. The Board of Directors of the Bank believes that it is
in the best interests of the Bank and the Company to provide Eligible Employees
of the Bank and the Company with such benefits in order to defray the costs and
changes in employee status that could follow a Change in Control. The Board of
Directors of the Bank believes that the Plan will also aid the Bank in
attracting and retaining highly qualified individuals who are essential to its
success and the Plan's assurance of fair treatment of the Bank's Eligible
Employees will reduce the distractions and other adverse effects on Eligible
Employees' performance in the event of a Change in Control.

         2. Definitions. Whenever used herein, the following terms shall have
the meanings set forth below:

                    a.     "Affiliate" means any corporation, trade or business,
                           which, at the time of reference, is together with the
                           Bank, a member of a controlled group of corporations,
                           a group of trades or businesses (whether or not
                           incorporated) under common control, or an affiliated
                           service group, as described in Sections 414(b),
                           414(c), and 414(m) of the Code, respectively, or any
                           other organization treated as a single employer with
                           the Bank under Section 414(o) of the Code; provided,
                           however, that, where the context so requires, the
                           term "Affiliate" shall be construed to give full
                           effect to the provisions of Sections 409(l)(4) and
                           415(h) of the Code.

                    b.     "Bank" means Jefferson Federal Bank, or any successor
                           thereto.

                    c.     "Change in Control" means any one of the following
                           events occurs:

                           (i)     Merger: The Company merges into or
                                   consolidates with another corporation, or
                                   merges another corporation into the Company,
                                   and as a result less than a majority of the
                                   combined voting power of the resulting
                                   corporation immediately after the merger or
                                   consolidation is held by persons who were
                                   stockholders of the Company immediately
                                   before the merger or consolidation;



                           (ii)    Acquisition of Significant Share Ownership: a
                                   report on Schedule 13D or another form or
                                   schedule (other than Schedule 13G) is filed
                                   or is required to be filed under Sections
                                   13(d) or 14(d) of the Securities Exchange Act
                                   of 1934, if the schedule discloses that the
                                   filing person or persons acting in concert
                                   has or have become the beneficial owner of
                                   25% or more of a class of the Company's
                                   voting securities, but this clause (b) shall
                                   not apply to beneficial ownership of Company
                                   voting shares held in a fiduciary capacity by
                                   an entity of which Company directly or
                                   indirectly beneficially owns 50% or more of
                                   its outstanding voting securities;

                           (iii)   Change in Board Composition: during any
                                   period of two consecutive years, individuals
                                   who constitute the Company's Board of
                                   Directors at the beginning of the two-year
                                   period cease for any reason to constitute at
                                   least a majority of the Company.'s Board of
                                   Directors; provided, however, that for
                                   purposes of this clause (iii) each director
                                   who is first elected by the board (or first
                                   nominated by the board for election by
                                   stockholders) by a vote of at least
                                   two-thirds of the directors who were
                                   directors at the beginning of the period
                                   shall be deemed to have been a director at
                                   the beginning of the two-year period; or

                           (iv)    Sale of Assets: Company sells to a third
                                   party all or substantially all of the
                                   Company's assets.

                    d.     "Company" means Jefferson Bancshares, Inc. or any
                           successor thereto.

                    e.     "Eligible Employee" means any Employee who, as of the
                           effective date of the Change in Control has or would
                           have been employed by the Bank for at least one year,
                           and whose employment, within three months prior to a
                           Change in Control, or within one year thereafter is
                           either (i) involuntarily terminated by the Company or
                           any Affiliate, other than for Just Cause, (ii)
                           voluntarily terminated by an Eligible Employee
                           following (A) a relocation of an Eligible Employee's
                           principal place of employment to a location that is
                           more than thirty-five (35) miles from its location
                           immediately prior to the Change in Control, without
                           his or her consent or (B) a reduction in the base
                           salary of the Eligible Employee from the amount being
                           paid as of the date immediately preceding the earlier
                           of their termination date (but only if it occurs
                           within three months of the Change in Control) or the
                           effective date of the Change in Control; or (iii)
                           voluntarily terminated by an Eligible Employee as a
                           result of the failure to offer or employ the Eligible
                           Employee in a "comparable position." For purposes of
                           this Plan, a "comparable position" shall mean a
                           position which (A) requires skills and knowledge
                           similar to those required in the Eligible Employee's
                           position immediately prior to the Change in Control
                           and (B) involves a work



                           schedule that is substantially similar to the work
                           schedule followed by the Eligible Employee
                           immediately prior to the Change in Control. A
                           position shall not fail to be a comparable position
                           solely as a result of a change following a Change in
                           Control in the Eligible Employee's (A) title, (B)
                           supervisory authority or (C) reporting
                           responsibilities.

                    f.     "Employee" means any person who has been employed by
                           the Company or any Affiliate for at least 120 days,
                           on a full-time salaried basis, immediately prior to
                           the Change in Control, excluding any person who is
                           covered by an employment contract, change in control
                           or severance agreement with the Company or any
                           Affiliate.

                    g.     "Just Cause," with respect to termination of
                           employment, means an act or acts of personal
                           dishonesty, incompetence, willful misconduct, breach
                           of fiduciary duty involving personal profit, failure
                           to perform stated duties, willful violation of any
                           law, rule, or regulation (other than traffic
                           violations or similar offenses) or final
                           cease-and-desist order. In determining incompetence,
                           acts or omissions shall be measured against standards
                           generally prevailing in the banking industry, as
                           determined by the Board of Directors of the Bank or
                           the Company in its sole discretion.

                    h.     "Year of Service" means each consecutive 12 month
                           period, beginning with an employee's date of hire and
                           running without a termination of employment in which
                           an employee is credited with at least one hour of
                           service in each of the 12 calendar months in such
                           period. The taking of an leave of absence shall not
                           eliminate a period of time from being a Year of
                           Service if such period of time otherwise qualifies as
                           such. Further if a particular 12 month period of time
                           would not otherwise qualify under the Plan as a Year
                           of Service because one hour of service is not
                           credited during each month of such period due to the
                           taking of a leave of absence, then such period of
                           time shall be deemed to be a Year of Service for all
                           other sections of this Plan. For purposes of
                           determining a severance benefit under this Plan,
                           partial years will be rounded up to the nearest whole
                           Year of Service.

             3.     Severance Benefit to Eligible Employees.

                    a.     Each Eligible Employee shall be entitled to receive a
                           severance benefit equal to one (1) month's base pay
                           for each Year of Service with the Bank or the
                           Company. Notwithstanding the foregoing, an Eligible
                           Employee shall be entitled to a minimum severance
                           benefit equal to one (1) month base pay and a maximum
                           severance benefit equal to twelve (12) month's base
                           pay. For purposes of this Plan, "base pay" shall mean
                           1/12th of an Eligible Employee's monthly average cash
                           compensation during the



                           twelve (12) months preceding the Eligible Employee's
                           termination of employment.

                    b.     All severance payments shall be made in a single lump
                           sum payment, without discount, payable within 10 days
                           of termination of employment.

                    c.     Notwithstanding the provisions of paragraph (a)
                           above, if a severance benefit payment to an Eligible
                           Employee who is a "Disqualified Individual" shall be
                           in an amount which includes an "Excess Parachute
                           Payment," when taken together with any other payments
                           or benefits that are paid or provided to the Eligible
                           Employee, the payment to that Eligible Employee shall
                           be reduced to the maximum amount which does not
                           include an Excess Parachute Payment. The terms
                           "Disqualified Individual" and "Excess Parachute
                           Payment" shall have the same meanings as defined in
                           Section 280G of the Internal Revenue Code of 1986, as
                           amended, or any successor provision thereto.

                    d.     The Eligible Employee shall not be required to
                           mitigate damages on the amount of their severance
                           benefits by seeking other employment or otherwise,
                           nor shall the amount of such severance benefit be
                           reduced by any compensation earned by the Eligible
                           Employee as a result of employment after termination
                           of employment hereunder.

             4.     Written Acknowledgment. As a condition to receiving any
payments pursuant to paragraph 3 of this Plan, the Eligible Employee shall
deliver to the Company or any applicable Affiliate on the date of his or her
employment termination a written Acknowledgment signed by the Eligible Employee
stating (i) that the severance payment to be made to the Eligible Employee
pursuant to paragraph 3 above is in full and complete satisfaction of all
liabilities and obligations of the Company and its Affiliates, directors,
officers, employees and agents, except for any tax-qualified plan benefits that
may be due and owing and except for any liabilities or obligations that may be
required by law, and (ii) that the Company or any Affiliate shall not have any
other liabilities or obligation to the Eligible Employee relating to the
Eligible Employee's employment by the Company or any Affiliate.

             5.     Legal Fees and Expenses. All reasonable legal fees and other
expenses paid or incurred by a party hereto pursuant to any dispute or question
of interpretation relating to this Plan shall be paid or reimbursed by the
prevailing party in any legal judgment, arbitration or settlement.

             6.     Required Provisions.

                    a.   The Company or any of its Affiliates may terminate an
                         employee's employment at any time, but any termination
                         by the Company or any of its Affiliates, other than
                         termination for Just Cause, shall not prejudice
                         employee's right to compensation under this Plan.
                         Employee shall not



                           have the right to receive compensation for any period
                           after termination for Just Cause as defined in
                           Section 2(g) of this Plan.

                    b.     If an Employee is suspended and/or temporarily
                           prohibited from participating in the conduct of the
                           Bank'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 Bank's
                           obligations under this Plan shall be suspended as of
                           the date of service, unless stayed by appropriate
                           proceedings. If the charges in the notice are
                           dismissed, the Bank may in its discretion (i) pay the
                           Employee all or part of the compensation withheld
                           while their contract obligations were suspended and
                           (ii) reinstate (in whole or in part) any of the
                           obligations which were suspended.

                    c.     If an employee is removed and/or permanently
                           prohibited from participating in the conduct of the
                           Bank'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 Bank 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 Bank 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 Bank
                           under this Plan shall terminate as of the date of
                           default, but this paragraph shall not affect any
                           vested rights of the contracting parties.

                    e.     Any payments made to an Eligible Employee pursuant to
                           this Plan, or otherwise, are subject to and
                           conditioned upon their compliance with 12 U.S.C.
                           (S)1828(k) and any regulations promulgated
                           thereunder.

             7.     Administrative Provisions.

                    a.     The administrator of the Plan shall be under the
                           supervision of the Board of Directors of the Bank or
                           a committee appointed by the Board of Directors of
                           the Bank (the "Board"). It shall be a principal duty
                           of the Board to see that the Plan is carried out in
                           accordance with its terms, for the exclusive benefit
                           of persons entitled to participate in the Plan
                           without discrimination among them. The Board will
                           have full power to administer the Plan in all of its
                           details subject, however, to the requirements of
                           ERISA. For this purpose, the Board's powers will
                           include, but will not be limited to, the following
                           authority, in addition to all other powers provided
                           by this Plan: (i) to make and enforce such rules and
                           regulations as it deems necessary or proper for the
                           efficient administration of the Plan; (ii) to
                           interpret the Plan, its interpretation thereof in
                           good faith to be final and conclusive on all persons
                           claiming benefits under the Plan; (iii) to decide all
                           questions concerning the Plan and the eligibility of
                           any person to



                           participate in the Plan; (iv) to compute the amount
                           of severance benefits payable to any Eligible
                           Employee or other person in accordance with the
                           provisions of the Plan, and to determine the person
                           or persons to whom such benefits will be paid; (v) to
                           authorize severance benefits; (vi) to appoint such
                           agents, counsel, accountants, consultants and
                           actuaries as may be required to assist in
                           administering the Plan; and (vii) to allocate and
                           delegate its responsibilities under the Plan and to
                           designate other persons to carry out any of its
                           responsibilities under the Plan, any such allocation,
                           delegation or designation to be by written instrument
                           and in accordance with Section 405 of ERISA, if
                           applicable.

                    b.     The Board will be a "named fiduciary" for purposes of
                           Section 402(a)(1) of ERISA with authority to control
                           and manage the operation and administration of the
                           Plan, and will be responsible for complying with all
                           of the reporting and disclosure requirements of Part
                           1 of Subtitle B of Title I of ERISA.

             8.     Claims and Review Procedures.

                    a.     If any person believes he is being denied any rights
                           or benefits under the Plan, such person may file a
                           claim in writing with the Board. If any such claim is
                           wholly or partially denied, the Board will notify
                           such person of its decision in writing. Such
                           notification will be written in a manner calculated
                           to be understood by such person and will contain (i)
                           specific reasons for the denial, (ii) specific
                           reference to pertinent Plan provisions, (iii) a
                           description of any additional material or information
                           necessary for such person to perfect such claim and
                           an explanation of why such material or information is
                           necessary and (iv) information as to the steps to be
                           taken if the person wishes to submit a request for
                           review. Such notification will be given within 90
                           days after the claim is received by the Board (or
                           within 180 days, if special circumstances require an
                           extension of time for processing the claim, and if
                           written notice of such extension and circumstances is
                           given to such person within the initial 90 day
                           period). If such notification is not given within
                           such period, the claim will be considered denied as
                           of the last day of such period and such person may
                           request a review of his claim.

                    b.     Within 60 days after the date on which a person
                           receives a written notice of a denied claim (or, if
                           applicable, within 60 days after the date on which
                           such denial is considered to have occurred) such
                           person (or his duly authorized representative) may
                           (i) file a written request with the Board for a
                           review of his denied claim and of pertinent documents
                           and (ii) submit written issues and comments to the
                           Board. The Board will notify such person of its
                           decision in writing. Such notification will be
                           written in a manner calculated to be understood by
                           such person and will contain



                           specific reasons for the decision as well as specific
                           references to pertinent Plan provisions. The decision
                           on review will be made within 60 days after the
                           request for review is received by the Board (or
                           within 120 days, if special circumstances require an
                           extension of time for processing the requests such as
                           an election by the Board to hold a hearing, and if
                           written notice of such extension and circumstances is
                           given to such person within the initial 60 day
                           period). If the decision on review is not made within
                           such period, the claim will be considered denied.

             9.     Governing Law. This plan shall be governed by the laws of
the State of Tennessee.

             10.    Termination or Amendment. This plan may be amended or
terminated at any time, in the full discretion of the Board of Directors of the
Bank, prior to the Change in Control. This plan may not be terminated or amended
at the time of or after the occurrence of the Change in Control.

             Having been duly adopted by the Board of Directors of the Bank,
this Plan is executed by a duly authorized officer of the Bank on this _____ day
of ______________________, 2003.

ATTEST:                             JEFFERSON FEDERAL BANK


________________________________    By:_________________________________________
                                       For the Entire Board of Directors

EX-10.5

                                                                    Exhibit 10.5


                              Amended and Restated
          Jefferson Federal Savings and Loan Association of Morristown

                             1995 Stock Option Plan

SECTION 1. Purpose. The purposes of the Jefferson Federal Savings and Loan
Association 1995 Stock Option Plan are to promote the interests of Jefferson
Bancshares, M.H.C., its affiliates, and its stockholders by (i) attracting and
retaining exceptional executive personnel and other key employees and directors
of the Association and its affiliates; (ii) motivating such employees and
Eligible Directors by means of performance-related incentives to achieve
longer-range performance goals; and (iii) enabling such employees and Eligible
Directors to participate in the long-term growth and financial success of the
Association.

SECTION 2. Definitions. As used in the Plan, the following terms shall have the
meanings set forth below:

         "Affiliate" shall mean Jefferson Bancshares, M.H.C. or any "subsidiary"
corporation of the Association as defined in Sections 424(f) of the Code.

         "Association" shall mean Jefferson Federal Savings and Loan Association
of Morristown, Morristown, Tennessee.

         "Award" shall mean any grant of Options.

         "Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant.

         "Board" shall mean the Board of Directors of the Association.

         "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

         "Effective Date" shall mean the date of shareholder approval of the
Plan.

         "Eligible Director" shall mean, on any date, a person who is serving as
a member of the Board but shall not include a person who is an Employee.

         "Employee" shall mean an employee of the Association or an Affiliate.

         "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

         "Fair Market Value" shall mean a value determined as follows:

         (a)      If the Shares are traded or quoted a national securities
                  exchange market at the time of grant of the Award, then the
                  Fair Market Value shall be the average of the highest and
                  lowest selling price on such exchange on the date such Award
                  is granted or, if there were no sales on such date, then on
                  the next prior business day on which there was a sale.

         (b)      If the Shares are not traded or quoted on a national
                  securities exchange, then the Fair Market Value shall be a
                  value determined by the Committee in good faith on such basis
                  as it deems appropriate.

         "Incentive Stock Option" shall mean a right to purchase Shares from the
Association that is granted under Section 6 of the Plan and that is intended to
meet the requirements of Section 422 of the Code or any successor provision
thereto.

         "Non-Qualified Stock Option" shall mean a right to purchase Shares from
the Association that is granted under Section 6 of the Plan and that is not
intended to be an Incentive Stock Option.

         "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.

         "OTS" shall mean the Office of Thrift Supervision.

         "Participant" shall mean any Employee or Eligible Director selected by
the Committee to receive an Award under the Plan.



         "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, government
or political subdivision thereof or other entity.

         "Plan" shall mean the Jefferson Federal Savings and Loan Association of
Morristown 1995 Stock Option Plan.

         "Shares" shall mean common shares of the Association, or such other
securities of the Association as may be designated by the Committee from time to
time.

         "Ten Percent Stockholder" shall mean any stockholder who, at the time
an Incentive Stock Option is granted to such stockholder, owns (within the
meaning of Section 424(d) of the Code) more than ten percent of the voting power
of all classes of stock of the Association.

SECTION 3.  Administration.

         (a) The Plan shall be administered by the Committee. Subject to the
terms of the Plan, applicable law and compliance with OTS regulations, and in
addition to other express powers and authorizations conferred on the Committee
by the Plan, the Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the type or types of Awards to be granted to an
eligible Employee; (iii) determine the number of Shares to be covered by, or
with respect to which payments, rights, or other matters are to be calculated in
connection with, Awards; (iv) determine the terms and conditions of any Award;
(v) determine whether, to what extent, and under what circumstances Awards may
be settled or exercised in cash, Shares, other securities, other Awards or other
property, or canceled, forfeited, or suspended; (vi) determine whether, to what
extent, and under what circumstances cash, Shares, other securities, other
Awards, other property, and other amounts payable with respect to an Award shall
be deferred either automatically or at the election of the holder thereof or of
the Committee; (vii) interpret and administer the Plan and any instrument or
agreement relating to, or Award made under, the Plan; (viii) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan; and (ix) make any
other determination and take any other action that the Committee deems necessary
or desirable for the administration of the Plan.

         (b)   Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations, and other decisions under or with
respect to the Plan or any Award shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive, and binding
upon all Persons, including the Association, and Participant, any holder or
beneficiary of any Award, any shareholder and any Employee.

SECTION 4.  Shares Available for Awards.

         (a)   Shares Available. Subject to adjustment as provided in Section
4(b), the number of Shares with respect to which Options may be granted under
the Plan shall be 30,000. If, after the effective date of the Plan, any Shares
covered by an Option granted under the Plan, or to which such an Option relates,
are forfeited, or if an Option otherwise terminates or is canceled without the
delivery of Shares, then the Shares covered by such Option, or to which such
Option relates, or the number of Shares otherwise counted against the aggregate
number of Shares with respect to which Options may be granted, to the extent of
any such settlement, forfeiture, termination or cancellation, shall again be, or
shall become, Shares with respect to which Options may be granted. In the event
that any Option is exercised through the delivery of Shares, the number of
Shares available for Awards under the plan shall be increased by the number of
Shares surrendered.

         (b)   Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Shares, other securities, or other property),
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Shares or other securities of the Association, issuance of warrants or other
rights to purchase Shares or other securities of the Association, or other
similar corporate transaction or event affects the Shares such that an
adjustment is necessary in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee shall proportionately adjust any or all (as necessary) of (i)
the number of Shares or other securities of the Association (or number and kind
of other securities or property) with respect to which Awards may be granted,
including an Award pursuant to Section 6(e), (ii) the number of Shares or other
securities of the Association (or number and kind of other securities or
property) subject to outstanding Awards, and (iii) the grant or exercise price
with respect to any Award; provided, in each case, that with respect to Awards
of Incentive Stock Option no such adjustment shall be authorized to the extent
that such authority would cause the Plan to violate Section 422(b)(1) of the
Code, as from time to time amended. In the event that the Association converts
to stock form through the formation of a stock holding company or otherwise
("Conversion"), any Options outstanding pursuant to an Award, to the extent such
Options are not exercised prior to the Conversion, shall be converted into
options for common stock of the successor stock holding company or bank with
appropriate adjustments to the number of shares or price of such option;
provides, however, that, with respect to Awards of Incentive

                                       2



Stock Options, such exchange and any adjustments related to the exchange shall
be authorized only to the extent consistent with Section 422(b)(1) of the Code,
as from time to time amended.

         (c)   Sources of Shares. Any Shares delivered pursuant to an Option may
consist, in whole or in part, of authorized and unissued Shares or of treasury
Shares.

SECTION 5. Eligibility. An Employee or Eligible Director shall be eligible to be
designated a Participant.

SECTION 6.  Options.

         (a)   Grant. Subject to the provisions of the Plan and compliance with
OTS regulations, the Committee shall have sole and complete authority to
determine the Employees or Eligible Directors to whom Options shall be granted,
the number of Shares to be covered by each Option, the option price therefor and
the conditions and limitations applicable to the exercise of the option. The
Committee shall have the authority to grant Incentive Stock Options, or to grant
Non-Qualified Stock Options, or to grant both types of options; provided,
however, that the grant of Options to Eligible Directors shall be limited to
Non-Qualified Stock Options. In such case of Incentive Stock Options, the terms
and conditions of such grants shall be subject to and comply with such rules as
may be prescribed by Section 422 of the Code, as from time to time amended, and
any regulations implementing such statute, including without limitation, the
requirements of Code Section 422(d), which limits the aggregate fair market
value of Shares of which Incentive Stock Options are exercisable for the first
time to $100,000 per calendar year. Each provision of the Plan and of each
written option agreement relating to an Option designated an Incentive Stock
Option shall be construed so that such Option qualifies as an Incentive Stock
Option, and any provision that cannot be so construed shall be disregarded.
Notwithstanding anything herein to the contrary, no Employee may receive an
Award(s) covering in excess of twenty-five (25) percent of the Shares available
reserved pursuant to Section 4(a), no Eligible Director may receive an Award in
excess of five (5) percent of the Shares reserved pursuant to Section 4(a), and
the Eligible Directors, as a group, may not receive in excess of thirty (30)
percent of the Shares received for issuance pursuant to Section 4(a).

         (b)   Exercise Price. The Committee shall establish the exercise price
at the time each Option is granted, which price shall not be less than one
hundred (100) percent of the per Share Fair Market Value on the date of grant.
Notwithstanding any provision contained herein, in the case of an Incentive
Stock Option, the exercise price at the time such Incentive Stock Option is
granted to any Employee who, at the time of such grant, is a Ten Percent
Stockholder, shall not be less than one hundred ten (110) percent of the per
Share Fair Market Value on the date of grant.

         (c)   Exercise. Each Option shall exercisable over a five (5) year
period whereby twenty (20) percent of the Award shall vest on each of the first
through the fifth anniversaries of the date of grant and shall remain
exercisable over the period specified in the applicable Award Agreement, in the
case of an Incentive Stock Option, a Participant may not exercise such Option as
an Incentive Stock Option after the earlier of (i) the date which is ten years
(five years in the case of a Participant who is a Ten Percent Stockholder) after
the date on which such Incentive Stock Option is granted, or (ii) the date which
is three months (twelve months in the case of a Participant who becomes
disabled, as defined in Section 22(e)(3) of the Code, or who dies) after the
date on which he ceases to be an employee of the Association or an Affiliate.
The Committee may impose such conditions with respect to the exercise of
Options, including without limitation, any relating to the application of
federal or state securities laws, as it may deem necessary or advisable.

         (d)   Payment. No Shares shall be delivered pursuant to any exercise of
an Option until payment in full of the option price therefor is received by the
Association. Such payment may be made in cash or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging Shares owned by the
optionee (which are not the subject of any pledge or other security interest),
or by a combination of the foregoing, provided that the combined value of all
cash and cash equivalents and the Fair Market Value of any such Shares so
tendered to the Association as of the date of such tender is at least equal to
such option price.

SECTION 7.  Amendment and Termination.

         (a)   Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time; provided
that no such amendment, alteration, suspension, discontinuation or termination
shall be made without stockholder approval if such approval is necessary to
comply with any tax or regulatory requirement.

         (b)   Amendments to Awards. Except as provided under Section 3, the
Committee may waive any conditions or rights under, amend any terms of, or
alter, suspend, discontinue, cancel or terminate, any Award theretofore granted,
prospectively or retroactively; provided that any such waiver, amendment,
alteration, suspension, discontinuance, cancellation or termination that would
impair the rights of any Participant or any holder or beneficiary

                                       3



of any Award theretofore granted shall not to that extent be effective without
the consent of the affected Participant, holder or beneficiary.

         (c)   Cancellation. Any provision of this Plan or any Award Agreement
to the contrary notwithstanding, the Committee may cause any Award of Options
granted hereunder to be canceled in consideration of the granting to the holder
of an alternative Award of Options having a Fair Market Value equal to the Fair
Market Value of such canceled Award.

SECTION 8.  General Provisions.

         (a)   Nontransferability.

               (i)    Each Award, and each right under any Award, shall be
exercisable only by the Participant's lifetime, or, if permissible under
applicable law, by the Participant's guardian or legal representative or a
transferee receiving such Award pursuant to a domestic relations order, as
determined by the Committee.

               (ii)   No Award may be assigned, alienated, pledged, attached,
sold or otherwise transferred or encumbered by a Participant otherwise than by
will or by the laws of descent and distribution or pursuant to a domestic
relations order, and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Association; provided that the designation of a beneficiary shall
not constitute an assignment, alienation, pledge, attachment, sale, transfer or
encumbrance.

         (b)   No Rights to Awards. No Employee, Participant or other Person
shall have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with respect
to each recipient.

         (c)   Share Certificates. All Shares or other securities of the
Association delivered under the Plan pursuant to any Award or the exercise
thereof shall be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the Plan or the rules, regulations, and
other requirements of any regulatory agency, any stock exchange or national
securities association upon which such Shares or other securities are then
listed, and any applicable Federal or state laws, and the Committee may cause a
legend or legends to be put on any certificates representing such Shares or
other securities to make appropriate reference to such restrictions.

         (d)   Delegation. Subject to the terms of the Plan and applicable law,
the Committee may delegate to one or more officers or managers of the
Association, or to a committee of such officers or managers, the authority,
subject to such terms and limitations as the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to alter,
discontinue, suspend, or terminate Awards held by.

         (e)   Withholding. A Participant may be required to pay to the
Association and the Association shall have the right and is hereby authorized to
withhold from any Award, from any payment due or transfer made under any Award
or from any compensation or other amount owing to a Participant the amount of
any applicable withholding taxes in respect of an Award, its exercise, or any
payment or transfer under an Award and take such other action as may be
necessary in the opinion of the Association to satisfy all obligations for the
payment of such taxes.

         (f)   Award Agreements. Each Award hereunder shall be evidenced by an
Award Agreement which shall be delivered to the Participant and shall specify
the terms and conditions of the Award and any rules applicable thereto.

         (g)   No Limit on Other Compensation Arrangements. Nothing contained in
the Plan shall prevent the Association or any Affiliate from adopting or
continuing in effect other compensation arrangements, which may, but need not,
provide for the grant of options, restricted stock, Shares and other types of
Awards provided for hereunder (subject to shareholder approval if such approval
is required), and such arrangements may be either generally applicable or
applicable only in specific cases.

         (h)   No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ of the
Association or an Affiliate. Further, the Association may at any time dismiss a
Participant from employment, free from any liability or any claim under the
Plan, unless otherwise expressly provide in the Plan or in any Award Agreement.

         (i)   No Rights as Stockholder. Subject to the provisions of the
applicable Award, no Participant or holder or beneficiary of any Award shall
have any rights as a stockholder with respect to any Shares to be distributed
under the Plan until he or she has become the holder of such Shares.

                                       4



         (j)   Governing Law. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan and any Award Agreement shall
be determined in accordance with the laws of the State of Tennessee.

         (k)   Severability. If any provisions of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to the applicable laws, or if it cannot
be construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.

         (l)   Other Laws. The Committee may refuse to issue or transfer any
Shares or other consideration under an Award if, acting in its sole discretion,
it determines that the issuance or transfer of such Shares or such other
consideration might violate any applicable law or regulation, and any payment
tendered to the Association by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary. Without limiting the generality of
the foregoing, no Award granted hereunder shall be construed as an offer to sell
securities of the Association, and no such offer shall be outstanding, unless
and until the Committee in its sole discretion has determined that any such
offer, if made, would be in compliance with all applicable requirements of the
federal securities laws.

         (m)   No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Association and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Association pursuant to an Award, such rights shall be no greater than the
right of any unsecured general creditor of the Association.

         (n)   Headings. Heading are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.

         (o)   No Impact on Benefits. Unless specifically provided under any
other benefit plan of the Association or its Affiliates, Awards shall not be
treated as compensation for purposes of calculating an Employee's or Eligible
Director's rights under such benefit plans.

         (p)   Indemnification. Each person who is or shall have been a member
of the Committee or of the Board shall be indemnified and held harmless by the
Association against and from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him in connection with or resulting from
any claim, action, suit, or proceeding to which he may be made a party or in
which he may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him in settlement
thereof, with the Association's approval, or paid by him in satisfaction of any
judgement in any such action, suit, or proceeding against him, provided he shall
give the Association an opportunity, at its own expense, to handle and defend
the same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such persons may be
entitled under the Association's articles of incorporation or bylaws, by
contract, as a matter of law, or otherwise.

SECTION 9.  Term of the Plan.

         (a)   Effective Date. The Plan shall be effective on the date of
shareholder approval of the Plan.

         (b)   Expiration Date. The Plan shall terminate on and no Award shall
be granted under the Plan after the tenth anniversary of the Effective Date.
Unless otherwise expressly provided in the Plan or in an applicable Award
Agreement, any Award granted hereunder may, and the authority of the Board or
the Committee to amend, alter, adjust, suspend, discontinue, or terminate any
such Award or to waive any conditions or rights under any such Award shall,
continue after the tenth anniversary of the effective date of the Conversion.

         (c)   Shareholder Approval. Notwithstanding anything herein to the
contrary, this Plan shall automatically terminate and shall be of no further
force or effect in the event that a majority of the stockholders of the
Association (determined without regard to Shares held by Jefferson Bancshares,
M.H.C.) do not approve this Plan within 12 months of the date of adoption of the
Plan by the Board.

                                       5

EX-10.6

                                                                    Exhibit 10.6

                              Amended and Restated
          Jefferson Federal Savings and Loan Association of Morristown

                1995 Management Recognition and Development Plan

         1.    Purpose; Definitions.

         The purpose of the Plan is to increase the proprietary and vested
interest of the key Employees of the Association and its Affiliates and Eligible
Directors in the growth, development and financial success of the Association by
granting them awards of Restricted Shares.

         Whenever the following terms are used in the Plan, they shall have the
meaning specified below unless the context clearly indicated to the contrary.

         "Affiliate" shall mean Jefferson Bancshares, M.H.C. and any
"subsidiary" of the Association as defined in Section 424(f) of the Code.

         "Association" shall mean Jefferson Federal Savings and Loan Association
of Morristown, Morristown, Tennessee.

         "Award" shall mean an award of Restricted Shares under the Plan.

         "Board" shall mean the Board of Directors of the Association.

         "Code" shall mean the Internal Revenue Code of 1986, as amended.

         "Designated Beneficiary" shall have the meaning set forth in Section
2.2 hereof.

         "Effective Date" shall have the meaning set forth in Section 5.1
hereof.

         "Eligible Director" shall mean a member of the Board who is not also an
Employee.

         "Employee" shall mean any person who is currently employed by the
Association or an Affiliate, including officers and officers who are members of
the Board.

         "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

         "Participant" shall mean an Employee or Eligible Director to whom an
award of Restricted Shares is granted pursuant to the Plan.

         "Plan" shall mean this Jefferson Federal Savings and Loan Association
of Morristown 1995 Management Recognition and Development Plan, as hereinafter
amended from time to time.

         "Restricted Shares" shall mean Shares which are awarded to an Eligible
Director or Employee that are subject to the transfer and forfeitability
restrictions described in Section 4.2.

         "Share" shall mean a share of the Association's common stock, par value
$1.00 per share.

         2.    Administration.

         2.1   Administration

         The Plan shall be administered by the Board, which shall have the power
to interpret the Plan and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent with its terms and
provisions and to interpret, amend or revoke any such rules. All actions taken
and all interpretations and determinations made by the Board shall be binding
upon all persons, including the



Association, stockholders, directors, Participants and Designated Beneficiaries.
The Secretary of the Association shall be authorized to implement the Plan in
accordance with its terms, and to take such actions of a ministerial nature as
shall be necessary to effectuate the intent and purposes thereof. No member of
the Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the awards
hereunder, and all members of the Board shall be fully protected by the
Association in respect to any such action, determination or interpretation.

         2.2   Designated Beneficiaries

         If a Participant dies prior to receiving any payment due under the
Plan, such payment shall be made to his Designated Beneficiary. A Participant's
Designated Beneficiary shall be the beneficiary specifically designated by a
Participant in writing to receive amounts due the Participant in the event of
the Participant's death. In the absence of an effective designation by the
Participant, Designated Beneficiary shall mean the Participant's surviving
spouse or, if none, his estate.

         3.    Shares Subject To The Plan.

         3.1   Shares Subject to the Plan

         The maximum number of Shares that may be the subject of Awards under
this Plan shall be 12,000. The Association shall reserve such number of Shares
for the purposes of the Plan, out of its authorized but unissued Shares or out
of Shares held in the Association's treasury, or partly out of each. In the
event that a trust is established in connection with the Plan pursuant to
Section 5.4, the Association may authorize the trustees of the trust to purchase
Shares in the open market and such shares shall be included in the number of
shares that may be the subject of Awards. In the event that Restricted Shares
are forfeited for any reason, such Shares shall thereafter again be available
for award pursuant to the Plan.

         3.2   Changes in the Association's Shares

         In the event that the Board shall determine that any recapitalization,
reorganization, merger, consolidation, stock split, spin-off, combination, or
exchange of Shares, or other similar corporate event affects the Shares such
that an adjustment is required in order to preserve the benefits or potential
benefits intended under this Plan, the Board shall, in its sole discretion, and
in such manner as it may deem equitable, adjust any or all of the number and
kind of Shares which thereafter may be awarded under the Plan, or the number and
kind of Shares subject to outstanding awards; provided, however, that the number
of Shares subject to any award shall always be a whole number.

         4.    Restricted Shares

         4.1   Eligibility; Awards Under the Plan

         (a) Employees. Employees (including officers and employee directors of
the Association) shall be eligible to participate in the Plan upon designation
by the Board; provided, however, that no Employee may receive an Award covering
in excess of twenty-five (25) percent of the number of Shares reserved for
issuance under the Plan. To the extent that Shares are available for grant under
the Plan, the Board may determine which of the Employees shall be granted an
Award and the number of Restricted Shares covered by each Award. In selecting
those Employees to whom Awards will be granted and the number of Shares covered
by such Awards, the Board shall consider the position and responsibilities of
the eligible Employees, the length and value of their services to the
Association and its Affiliates, the compensation paid to the Employees and any
other factors the Board may deem relevant, and the Committee may request the
written recommendation of the Chief Executive Officer and other senior executive
officers of the Association and its Affiliates.

         (b) Eligible Directors. Eligible Directors shall be eligible to receive
Awards upon designation by the Board; provided, however, that no Eligible
Director may receive an Award covering in excess of five (5) percent of the
number of Shares reserved for issuance under the Plan and all Eligible
Directors, as a group,

                                       2



may not receive in excess of thirty (30) percent of the number of shares
received for issuance under the Plan.

         (c) Fractions of Shares. Whenever under the terms of the Plan a
fractional share would be required to be issued, the fractional share shall be
rounded up to the next full share.

         4.2   Terms of Awards

         The Restricted Shares awarded hereunder shall be awarded only pursuant
to a written agreement, which shall be executed by the Participant and a duly
authorized officer of the Association and which shall contain the following
terms and conditions:

         (a)   Acceptance of Award. An award of Restricted Shares must be
accepted by the Participant within a period of sixty (60) days (or such other
period as the Board may specify at grant) after the award date by the execution
of a Restricted Share award agreement in the form provided by the Association.

         (b)   Restrictions and Conditions. The Restricted Shares awarded to a
Participant pursuant to this Section 4 shall be subject to the following
restrictions and conditions:

               (i)    A Participant shall not be permitted to sell, transfer,
pledge, assign, vote or otherwise encumber Restricted Shares awarded under the
Plan prior to the date on which such shares vest in accordance with clause,
(iii), except in accordance with the laws of descent and distribution.

               (ii)   Except as provided in clause (i) and this clause (ii), the
Participant shall have, with respect to the Restricted Shares, all of the rights
of a stockholder of the Association, including the right to receive any cash
dividends declared on them; provided, however, that cash dividends shall be paid
to a Participant only when the Shares on which such dividends were paid become
fully vested and nonforfeitable. Stock dividends, if any, issued with respect to
Restricted Shares shall be treated as additional Restricted Shares that are
subject to the same restrictions and other terms and conditions that apply with
respect to the Restricted Shares with respect to which such dividends are paid.

               (iii)  Subject to the applicable provisions of the Restricted
Share award agreement and this Section, a Participant's interest in Shares shall
immediately become fully vested and nonforfeitable, and the restrictions set
forth in this Section 4.2 shall lapse (x) ratably over a five (5) year period
whereby twenty (20) percent of the Award shall vest on each of the first through
the fifth anniversaries of the date of grant or, (y) upon the Participant's
death or total disability,. All determinations as to whether a Participant has
become totally disabled shall be made by a majority of the Board (or, in the
case of an Eligible Director, a majority of the remaining members of the Board)
upon the basis of such evidence as its deems necessary or desirable, and shall
be final and binding on all interested persons.

         4.3   Stock Certificates

         A stock certificate registered in the name of each Participant
receiving a Restricted Share award (or in the name of a trustee for the benefit
of each Participant) shall be issued in respect of such shares. Such certificate
shall bear whatever appropriate legend referring to the terms, conditions, and
restrictions applicable to such award as the Board shall determine. The Board
may, in its sole discretion, require that the stock certificates evidencing
Restricted Shares be held in custody by the Association (or in trust by a
trustee) until the restrictions thereon shall have lapsed.

5.       Miscellaneous.

         5.1   Shareholder Approval; Effective Date.

         The Plan shall become effective only upon approval by a majority of the
Association's stockholders (determined without regard to Shares held by
Jefferson Bancshares, M.H.C.) at a meeting held within twelve (12) months of the
adoption of the Plan by the Board and shall continue in effect until the tenth
anniversary of the Effective Date.

                                       3



         5.2   Amendment, Suspension or Termination of the Plan

         The Plan may be wholly or partially amended or otherwise modified,
suspends or terminated at any time or from time to time by the Board; provided,
however, that amendments to the Plan shall not be effective unless approved by
the affirmative vote of the stockholders of the Association owning a majority of
the outstanding shares of the Association at a meeting of stockholders of the
Association held within twelve (12) months of the date of adoption of such
amendment, where such amendment will:

         (a)   increase the total number of Shares reserved for the purposes of
the Plan;

         (b)   change in any respect the class of persons who are eligible to be
Participants;

         (c)   extend the maximum period for granting awards as provided herein;
or

         (d)   otherwise materially increase the benefits accruing to
Participants under the Plan.

         Notwithstanding the foregoing, Section 4.1(b) may not be amended more
than once in any six-month period other than to conform with changes in the Code
or the Employee Retirement Security Act of 1974, as amended.

         From and after the Effective Date, neither the amendment, suspension
nor termination of the Plan shall, without the consent of the Participant, alter
or impair any rights or obligations under any award theretofore granted. No
awards may be granted during any period of suspension nor after termination or
expiration of the Plan.

         5.3   Regulations and Other Approvals

         (a)   The obligation of the Association to deliver Shares with respect
to any award granted under the Plan shall be subject to all applicable laws,
rules and regulations, including all applicable federal and state securities
laws, and the obtaining of all such approvals by governmental agencies as may be
deemed necessary or appropriate by the Board.

         (b)   The Board may make such changes as may be necessary or
appropriate to comply with the rules or requirements of any governmental
authority.

         (c)   Each award of Shares is subject to the requirement that, if at
any time the Board determines, in its sole discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any United States, state or federal
law, or the consent or approval of any governmental regulatory body is necessary
or desirable as a condition of, or in connection with, issuance of Shares, no
Shares shall be issued, in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of any
conditions as acceptable to the Board.

         (d)   In the event that the disposition of Shares acquired pursuant to
the Plan is not covered by a then current registration statement under the
Securities Act of 1933, and is not otherwise exempt from such registration, such
Shares shall be restricted against transfer to the extent required by the
Securities Act of 1933 or regulations thereunder, and the Board may require any
individual receiving Shares pursuant to the Plan, as a condition precedent to
receipt of such Shares, to represent to the Association in writing that the
Shares acquired by such individual are acquired for investment only and not with
a view to distribution. The certificate for any Shares acquired pursuant to the
Plan shall include any legend that the Board deems appropriate to reflect any
restrictions on transfer.

                                       4



         5.4   Trust Arrangement

               All benefits under the Plan represent an unsecured promise to pay
by the Association. The Plan shall be unfunded and the benefits hereunder shall
be paid only from the general assets of the Association resulting in the
Participants having no greater rights than the Association's general creditors;
provided, however, that nothing herein shall prevent or prohibit the Association
from establishing a trust or other arrangement for the purpose of providing for
the payment of the benefits payable under the Plan.

         5.5   Governing Law

               The Plan and the rights of all persons claiming hereunder shall
be construed and determined in accordance with the laws of the State of
Tennessee without giving effect to the choice of law principles thereof.

         5.6   Titles; Construction

               Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of the Plan. The masculine
pronoun shall include the feminine and neuter and the singular shall include the
plural, when the context so indicates.

                                       5

EX-10.8

                                                                    Exhibit 10.8

                                     FORM OF
                             JEFFERSON FEDERAL BANK
                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN



                                     Form of
                             Jefferson Federal Bank
                     Supplemental Executive Retirement Plan

                                Table of Contents


                                                                          
Article I - Introduction ...................................................  1

Article II - Definitions ...................................................  2

Article III - Eligibility and Participation ................................  5

Article IV - Benefits ......................................................  6

Article V - Accounts .......................................................  8

Article VII - Claims Procedures ............................................ 10

Article VIII - Amendment and Termination ................................... 12

Article IX - General Provisions ............................................ 13

Article X - Required Regulatory Provisions ................................. 16



                                        i



                                    Article I
                                  Introduction

Section 1.01 Purpose, Design and Intent.

(a)  The purpose of the Jefferson Federal Bank Supplemental Executive Retirement
     Plan (the "Plan") is to assist Jefferson Federal Bank (the "Bank") and its
     affiliates in retaining the services of key employees until their
     retirement, to induce such employees to use their best efforts to enhance
     the business of the Bank and its affiliates, and to provide certain
     supplemental retirement benefits to such employees.

(b)  The Plan, in relevant part, is intended to constitute an unfunded "excess
     benefit plan" as defined in Section 3(36) of the Employee Retirement Income
     Security Act of 1974, as amended. The Plan is specifically designed to
     provide certain key employees with retirement benefits that would have been
     payable under the various tax-qualified retirement plans sponsored by the
     Bank but for the limitations placed on the benefits and contribution under
     such plans by various provisions of the Internal Revenue Code of 1986, as
     amended.

                                       -1-



                                   Article II
                                   Definitions

Section 2.01 Definitions. In this Plan, whenever the context so indicates, the
singular or the plural number and the masculine or feminine gender shall be
deemed to include the other, the terms "he," "his," and "him," shall refer to a
Participant or Beneficiary, as the case may be, and, except as otherwise
provided, or unless the context otherwise requires, the capitalized terms shall
have the following meanings:

(a) "Affiliate" means any "parent corporation" or any "subsidiary corporation"
of the Bank, as such terms are defined in Sections 424(e) and 424(f),
respectively, of the Code.

(b) "Applicable Limitations" means one of the following:

     (i)   the maximum limitation on annual benefits payable by a qualified
           defined benefit plan under Section 415(b) of the Code;

     (ii)  the maximum limitations on annual additions to a qualified defined
           contribution plan under Section 415(c) of the Code;

     (iii) the maximum limitation on the aggregate projected annual benefits
           payable by qualified defined benefit plans and the annual additions
           to qualified defined contribution plans under Section 415(e) of the
           Code; and

     (iv)  the maximum limitation on the annual amount of compensation that may,
           under Section 401(a)(17) of the Code, be taken into account in
           determining contributions to and benefits under qualified plans.

(c) "Bank" means Jefferson Federal Bank, and its successors.

(d) "Board of Directors" means the Board of Directors of the Bank.

(e) "Change in Control" means any one of the following events occurs:

     (i)   Merger: Company merges into or consolidates with another corporation,
           or merges another corporation into the Company, and as a result less
           than a majority of the combined voting power of the resulting
           corporation immediately after the merger or consolidation is held by
           persons who were stockholders of the Company immediately before the
           merger or consolidation;

     (ii)  Acquisition of Significant Share Ownership: a report on Schedule 13D
           or another form or schedule (other than Schedule 13G) is filed or is
           required to be filed under Sections 13(d) or 14(d) of the Securities
           Exchange Act of 1934, if the schedule

                                       -2-



           discloses that the filing person or persons acting in concert has or
           have become the beneficial owner of 25% or more of a class of the
           Company's voting securities, but this clause (b) shall not apply to
           beneficial ownership of Company voting shares held in a fiduciary
           capacity by an entity of which Company directly or indirectly
           beneficially owns 50% or more of its outstanding voting securities;

     (iii) Change in Board Composition: during any period of two consecutive
           years, individuals who constitute the Company's Board of Directors at
           the beginning of the two-year period cease for any reason to
           constitute at least a majority of the Company's Board of Directors;
           provided, however, that for purposes of this clause (iii) each
           director who is first elected by the board (or first nominated by the
           board for election by stockholders) by a vote of at least two-thirds
           of the directors who were directors at the beginning of the period
           shall be deemed to have been a director at the beginning of the
           two-year period; or

     (iv)  Sale of Assets: Company sells to a third party all or substantially
           all of the Company's assets.

(f) "Code" means the Internal Revenue Code of 1986, as amended.

(g) "Committee" means the person(s) designated by the Board of Directors,
pursuant to Section 9.02 of the Plan, to administer the Plan.

(h) "Common Stock" means the common stock of the Company.

(i) "Company" means Jefferson Bancshares, Inc. and its successors.

(j) "Eligible Individual" means any Employee of the Bank or an Affiliate who
participates in the ESOP, as the case may be, and whom the Board of Directors
determines is one of a "select group of management or highly compensated
employees," as such phrase is used for purposes of Sections 101, 201, and 301 of
ERISA.

(k) "Employee" means any person employed by the Bank or an Affiliate.

(l) "Employer" means the Bank or Affiliate that employs the Employee.

(m) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

(n) "ESOP" means the Jefferson Federal Bank Employee Stock Ownership Plan, as
amended from time to time.

(o) "ESOP Acquisition Loan" means a loan or other extension of credit incurred
by the trustee of the ESOP in connection with the purchase of Common Stock on
behalf of the ESOP.

                                       -3-



(p) "ESOP Valuation Date" means any day as of which the investment experience of
the trust fund of the ESOP is determined and individuals' accounts under the
ESOP are adjusted accordingly.

(q) "Effective Date" means January 1, 2003.

(r) "Participant" means an Eligible Employee who is entitled to benefits under
the Plan.

(s) "Plan" means this Jefferson Federal Bank Supplemental Executive Retirement
Plan.

(t) "Retirement" means termination of employment at any time following the
satisfaction the requirements for early or normal retirement under the ESOP.

(u) "Supplemental ESOP Account" means an account established by an Employer,
pursuant to Section 5.01 of the Plan, with respect to a Participant's
Supplemental ESOP Benefit.

(v) "Supplemental ESOP Benefit" means the benefit credited to a Participant
pursuant to Section 4.01 of the Plan.

(w) "Supplemental Stock Ownership Account" means an account established by an
Employer, pursuant to Section 5.02 of the Plan, with respect to a Participant's
Supplemental Stock Ownership Benefit.

(x) "Supplemental Stock Ownership Benefit" means the benefit credited to a
Participant pursuant to Section 4.02 of the Plan.

                                       -4-



                                   Article III
                          Eligibility and Participation

Section 3.01 Eligibility.

     Only Eligible Individuals may participate in the Plan. An Eligible
Individual shall become a Participant if:

(a)  he or she holds the office of Chief Executive Officer of the Bank, or

(b)  he or she is designated by the Board of Directors of the Bank to
     participate in the Plan.


Section 3.02 Commencement of Participation

     An Eligible Individual who becomes a Participant in the Plan under Section
3.01(a) of the Plan shall commence participation in the Plan on the effective
date of the Plan or such other date as determined by the Board of Directors of
the Bank. Eligible Individuals who become Participants under Section 3.01(b) of
the Plan shall commence participation in the Plan on such date as determined by
the Board of Directors of the Bank.

                                      -5-



                                   Article IV
                                    Benefits

Section 4.01 Supplemental ESOP Benefit.

As of the last day of each plan year of the ESOP, the Employer shall credit the
Participant's Supplemental ESOP Account with a Supplemental ESOP Benefit equal
to the excess of (a) over (b), where:

(a)  Equals the annual contributions made by the Employer and/or the number of
     shares of Common Stock released for allocation in connection with the
     repayment of an ESOP Acquisition Loan that would otherwise be allocated to
     the accounts of the Participant under the ESOP for the applicable plan year
     if the provisions of the ESOP were administered without regard to and of
     the Applicable Limitations; and

(b)  Equals the annual contributions made by the Employer and/or the number of
     shares of common stock released for allocation in connection with the
     repayment of an ESOP Acquisition Loan that are actually allocated to the
     accounts of the Participant under the provisions of the ESOP for that
     particular plan year after giving effect to any reduction of such
     allocation required by the limitations imposed by any of the Applicable
     Limitations.

Section 4.02 Supplemental Stock Ownership Benefit.

(a)  Upon a Participant's Retirement from the Employer, the Employer shall
     credit to the Participant's Supplemental Stock Ownership Account a
     Supplemental Stock Ownership Benefit equal to (i) less (ii), the result of
     which is multiplied by (iii), where:

     (i)   Equals the total number of shares of Common Stock acquired with the
           proceeds of all ESOP Acquisition Loans (together with any dividends,
           cash proceeds, or other medium related to such ESOP Acquisition
           Loans) that would have been allocated or credited for the benefit of
           the Participant under the ESOP and/or this Plan, as the case may be,
           had the Participant continued in the employ of the Employer through
           the first ESOP Valuation Date following the last scheduled payment of
           principal and interest on all ESOP Acquisition Loans outstanding at
           the time of the Participant's Retirement; and

     (ii)  Equals the total number of shares of Common Stock acquired with the
           proceeds of all ESOP Acquisition Loans (together with any dividends,
           cash proceeds, or other medium related to such ESOP acquisition
           Loans) and allocated for the benefit of the Participant under the
           ESOP/and or this Plan as of the first ESOP Valuation Date following
           the Participant's Retirement; and

     (iii) Equals the higher of the closing price of the Common Stock as of:

                                      -6-



          (A)  The first ESOP Valuation Date following the Participant's
               Retirement, or

          (B)  The last day of the Participant's employment with the Employer.

(b)  For purposes of clause (i) of subsection (a) of this Section 4.02, the
     total number of shares of Common Stock shall be determined by multiplying
     the sum of (i) and (ii) by (iii), where:

     (i)   equals the average of the total shares of Common Stock acquired with
           the proceeds of an ESOP Acquisition Loan and allocated for the
           benefit of the Participant under the ESOP as of three most recent
           ESOP Valuation Dates preceding the Participant's Retirement (or
           lesser number if the Participant has not participated in the ESOP for
           three full years),

     (ii)  equals the average number of shares of Common Stock credited to the
           Participant's Supplemental ESOP Account for the three most recent
           plan years of the ESOP (such that the three recent plan years
           coincide with the three most recent ESOP Valuation Dates referred to
           in (i) above); and

     (iii) equals the original number of scheduled payments on the ESOP
           Acquisition Loan.

(c)  In the event of a Change in Control:

     (i)   A Participant's Retirement shall be deemed to have occurred as of the
           effective date of the Change in Control, as determined by the Board
           of Directors, regardless of whether the Participant continues in the
           employ of the Employer following the Change in Control; and

     (ii)  The determination of fair market value of the Common Stock shall be
           made as the effective date of the Change in Control.

                                       -7-



                                    Article V
                                    Accounts

Section 5.01 Supplemental ESOP Benefit Account.

For each Participant who is credited with a benefit pursuant to Section 4.01 of
the Plan, the Employer shall establish, as a memorandum account on its books, a
Supplemental ESOP Account. Each year, the Committee shall credit to the
Participant's Supplemental ESOP Account the amount of benefits determined under
Section 4.01 of the Plan for that year. The Committee shall credit the account
with an amount equal to the appropriate number of shares of Common Stock or
other medium of contribution that would have otherwise been made to the
Participant's accounts under the ESOP but for the limitations imposed by the
Code. Shares of Common Stock shall be valued under this Plan in the same manner
as under the ESOP. Cash contributions credited to a Participant's Supplemental
ESOP Account shall be credited annually with interest at a rate equal to the
combined weighted return provided to the Participant's non-stock accounts under
the ESOP.

Section 5.02 Supplemental Stock Ownership Account.

The Employer shall establish, as a memorandum account on its books, a
Supplemental Stock Ownership Account. Upon a Participant's Retirement or in the
event of a Change in Control, the Committee shall credit to the Participant's
Supplemental Stock Ownership Account the amount of benefits determined under
Section 4.02 of the Plan. The Committee shall credit the account with an amount
equal to the appropriate number of shares of Common Stock or other medium of
contribution that would have otherwise been made to the Participant's accounts
under the ESOP. Shares of Common Stock shall be valued under this Plan in the
same manner as under the ESOP. Cash contributions credited to a Participant's
Supplemental ESOP Account shall be credited annually with interest at a rate
equal to the combined weighted return provided to the Participant's non-stock
accounts under the ESOP.

                                     -8-



                                   Article VI
                          Supplemental Benefit Payments

Section 6.01 Payment of Supplemental ESOP Benefit.

(a)  A Participant's Supplemental ESOP Benefit shall be paid to the Participant
     or in the event of the Participant's death, to his beneficiary in the same
     form, time and medium as his benefits are paid under the ESOP.

(b)  A Participant shall have a non-forfeitable right to the Supplemental ESOP
     Benefit credited to him under this Plan in the same percentage as he has to
     benefits allocated to him under the ESOP at the time the benefits become
     distributable to him under the ESOP.

Section 6.02 Payment of Supplemental Stock Ownership Benefit.

(a)  A Participant's Supplemental Stock Ownership Benefit shall be paid to the
     Participant or in the event of the Participant's death, to his beneficiary
     in the same form, time and medium as his benefits are paid under the ESOP.

(b)  A Participant shall always have a fully non-forfeitable right to the
     Supplemental Stock Ownership Benefit credited to him under this Plan.

Section 6.03 Alternative Payment of Benefits

Notwithstanding the other provisions of this Article VI, a Participant may, with
prior written consent of the Committee and upon such terms and conditions as the
Committee may impose, request that the Supplemental ESOP Benefit and/or the
Supplemental Stock Ownership Benefit to which he is entitled, be paid commencing
at a different time, over a different period, in a different form, or to
different persons, other than the benefit to which he or his beneficiary may be
entitled under the ESOP.

                                      -9-



                                   Article VII
                               Claims Procedures

Section 7.01 Claims Reviewer.

For purposes of handling claims with respect to this Plan, the "Claims Reviewer"
shall be the Committee, unless the Committee designates another person or group
of persons as Claims Reviewer.

Section 7.02 Claims Procedure.

(a)  An initial claim for benefits under the Plan must be made by the
     Participant or his or her beneficiary or beneficiaries in accordance with
     the terms of this Section 7.02.

(b)  Not later than ninety (90) days after receipt of such a claim, the Claims
     Reviewer will render a written decision on the claim to the claimant,
     unless special circumstances require the extension of such 90-day period.
     If such extension is necessary, the Claims Reviewer shall provide the
     Participant or the Participant's beneficiary or beneficiaries with written
     notification of such extension before the expiration of the initial 90-day
     period. Such notice shall specify the reason or reasons for the extension
     and the date by which a final decision can be expected. In no event shall
     such extension exceed a period of ninety (90) days from the end of the
     initial 90-day period.

(c)  In the event the Claims Reviewer denies the claim of a Participant or any
     beneficiary in whole or in part, the Claims Reviewer's written notification
     shall specify, in a manner calculated to be understood by the claimant, the
     reason for the denial; a reference to the Plan or other document or form
     that is the basis for the denial; a description of any additional material
     or information necessary for the claimant to perfect the claim; an
     explanation as to why such information or material is necessary; and an
     explanation of the applicable claims procedure.

(d)  Should the claim be denied in whole or in part and should the claimant be
     dissatisfied with the Claims Reviewer's disposition of the claimant's
     claim, the claimant may have a full and fair review of the claim by the
     Committee upon written request submitted by the claimant or the claimant's
     duly authorized representative and received by the Committee within sixty
     (60) days after the claimant receives written notification that the
     claimant's claim has been denied. In connection with such review, the
     claimant or the claimant's duly authorized representative shall be entitled
     to review pertinent documents and submit the claimant's views as to the
     issues, in writing. The Committee shall act to deny or accept the claim
     within sixty (60) days after receipt of the claimant's written request for
     review unless special circumstances require the extension of such 60-day
     period. If such extension is necessary, the Committee shall provide the
     claimant with written notification of such extension before the expiration
     of such initial 60-day period. In all events, the Committee shall act to
     deny or accept the claim within 120 days of the receipt of the claimant's
     written request for review. The action of the

                                      -10-



     Committee shall be in the form of a written notice to the claimant and its
     contents shall include all of the requirements for action on the original
     claim.

(e)  In no event may a claimant commence legal action for benefits the claimant
     believes are due the claimant until the claimant has exhausted all of the
     remedies and procedures afforded the claimant by this Article VII.

                                      -11-



                                  Article VIII
                           Amendment and Termination

Section 8.01 Amendment of the Plan.

The Bank may from time to time and at any time amend the Plan; provided,
however, that such amendment may not adversely affect the rights of any
Participant or beneficiary with respect to any benefit under the Plan to which
the Participant or beneficiary may have previously become entitled prior to the
effective date of such amendment without the consent of the Participant or
beneficiary. The Committee shall be authorized to make minor or administrative
changes to the Plan, as well as amendments required by applicable federal or
state law (or authorized or made desirable by such statutes); provided, however,
that such amendments must subsequently be ratified by the Board of Directors.

Section 8.02 Termination of the Plan.

The Bank may at any time terminate the Plan; provided, however, that such
termination may not adversely affect the rights of any Participant or
beneficiary with respect to any benefit under the Plan to which the Participant
or beneficiary may have previously become entitled prior to the effective date
of such termination without the consent of the Participant or beneficiary. Any
amounts credited to the supplemental accounts of any Participant shall remain
subject to the provisions of the Plan and no distribution of benefits shall be
accelerated because of termination of the Plan.

                                      -12-



                                   Article IX
                               General Provisions

Section 9.01 Unfunded, Unsecured Promise to Make Payments in the Future.

The right of a Participant or any beneficiary to receive a distribution under
this Plan shall be an unsecured claim against the general assets of the Bank or
its Affiliates and neither a Participant nor his designated beneficiary or
beneficiaries shall have any rights in or against any amount credited to any
account under this Plan or any other assets of the Bank or an Affiliate. The
Plan at all times shall be considered entirely unfunded both for tax purposes
and for purposes of Title I of ERISA. Any funds invested hereunder shall
continue for all purposes to be part of the general assets of the Bank or an
Affiliate and available to its general creditors in the event of bankruptcy or
insolvency. Accounts under this Plan and any benefits which may be payable
pursuant to this Plan are not subject in any manner to anticipation, sale,
alienation, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of a Participant or a Participant's beneficiary. The
Plan constitute a mere promise by the Bank or Affiliate to make benefit payments
in the future. No interest or right to receive a benefit may be taken, either
voluntarily or involuntarily, for the satisfaction of the debts of, or other
obligations or claims against, such Participant or beneficiary, including claims
for alimony, support, separate maintenance and claims in bankruptcy proceedings.

Section 9.02 Committee as Plan Administrator.

(a)  The Plan shall be administered by the Committee designated by the Board of
     Directors.

(b)  The Committee shall have the authority, duty and power to interpret and
     construe the provisions of the Plan as it deems appropriate. The Committee
     shall have the duty and responsibility of maintaining records, making the
     requisite calculations and disbursing the payments hereunder. In addition,
     the Committee shall have the authority and power to delegate any of its
     administrative duties to employees of the Bank or Affiliate, as they may
     deem appropriate. The Committee shall be entitled to rely on all tables,
     valuations, certificates, opinions, data and reports furnished by any
     actuary, accountant, controller, counsel or other person employed or
     retained by the Bank with respect to the Plan. The interpretations,
     determination, regulations and calculations of the Committee shall be final
     and binding on all persons and parties concerned.

Section 9.03 Expenses.

Expenses of administration of the Plan shall be paid by the Bank or an
Affiliate.

Section 9.04 Statements.

The Committee shall furnish individual annual statements of accrued benefits to
each Participant, or current beneficiary, in such form as determined by the
Committee or as required by law.

                                      -13-



Section 9.05 Rights of Participants and Beneficiaries.

(a)  The sole rights of a Participant or beneficiary under this Plan shall be to
     have this Plan administered according to its provisions, to receive
     whatever benefits he or she may be entitled to hereunder.

(b)  Nothing in the Plan shall be interpreted as a guaranty that any funds in
     any trust which may be established in connection with the Plan or assets of
     the Bank or an Affiliate will be sufficient to pay any benefit hereunder.

(c)  The adoption and maintenance of this Plan shall not be construed as
     creating any contract of employment or service between the Bank or an
     Affiliate and any Participant or other individual. The Plan shall not
     affect the right of the Bank or an Affiliate to deal with any Participants
     in employment or service respects, including their hiring, discharge,
     compensation, and conditions of employment or other service.

Section 9.06 Incompetent Individuals.

The Committee may from time to time establish rules and procedures which it
determines to be necessary for the proper administration of the Plan and the
benefits payable to a Participant or beneficiary in the event that such
Participant or beneficiary is declared incompetent and a conservator or other
person legally charged with that Participant's or beneficiary's care is
appointed. Except as otherwise provided herein, when the Committee determines
that such Participant or beneficiary is unable to manage his or her financial
affairs, the Committee may pay such Participant's or beneficiary's benefits to
such conservator, person legally charged with such Participant's or
beneficiary's care, or institution then contributing toward or providing for the
care and maintenance of such Participant or beneficiary. Any such payment shall
constitute a complete discharge of any liability of the Bank or an Affiliate and
the Plan for such Participant or beneficiary.

Section 9.06 Sale, Merger, or Consolidation of the Bank.

The Plan may be continued after a sale of assets of the Bank, or a merger or
consolidation of the Bank into or with another corporation or entity only if and
to the extent that the transferee, purchaser or successor entity agrees to
continue the Plan. Additionally, upon a merger, consolidation or other change in
control any amounts credited to Participant's deferral accounts shall be placed
in a grantor trust to the extent not already in such a trust. In the event that
the Plan is not continued by the transferee, purchaser or successor entity, then
the Plan shall be terminated subject to the provisions of Section 7.2 of the
Plan. Any legal fees incurred by a Participant in determining benefits to which
such Participant is entitled under the Plan following a sale, merger, or
consolidation of the Bank or an Affiliate of which the Participant is an
Employee or, if applicable, a member of the Board of Directors, shall be paid by
the resulting or succeeding entity.

                                      -14-



Section 9.08 Location of Participants.

Each Participant shall keep the Bank informed of his or her current address and
the current address of his or her designated beneficiary or beneficiaries. The
Bank shall not be obligated to search for any person. If such person is not
located within three (3) years after the date on which payment of the
Participant's benefits payable under this Plan may first be made, payment may be
made as though the Participant or his or her beneficiary had died at the end of
such three-year period.

Section 9.09 Liability of the Bank and its Affiliates.

Notwithstanding any provision herein to the contrary, neither the Bank nor any
individual acting as an employee or agent of the Bank shall be liable to any
Participant, former Participant, beneficiary, or any other person for any claim,
loss, liability or expense incurred in connection with the Plan, unless
attributable to fraud or willful misconduct on the part of the Bank or any such
employee or agent of the Bank.

Section 9.10 Governing Law.

All questions pertaining to the construction, validity and effect of the Plan
shall be determined in accordance with the laws of the United States and to the
extent not preempted by such laws, by the laws of Tennessee.

                                      -15-



                                    Article X
                         Required Regulatory Provisions

Section 10.01 Required Regulatory Provisions.

     (a)  The Employer may terminate an Employee's employment at any time, but
any termination by the Employer, other than termination for cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. An Employee shall not have the right to receive compensation or other
benefits for any period after a termination for cause as otherwise provided
hereunder.

     (b)  If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank'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 Bank'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 Bank may in its discretion (i)
pay the Employee all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.

     (c)  If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank'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 Bank under this Plan shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.

     (d)  If the Bank 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 Bank under
this Plan shall terminate as of the date of default, but this paragraph shall
not affect any vested rights of the Participants.

     (e)  All obligations of the Bank under this Plan 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 her 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 Bank
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 her designee)
at the time the Director (or her designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank 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 Participants pursuant to this Plan, or otherwise,
are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k),
12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and regulations
promulgated thereunder.

                                      -16-



     Having been adopted by its Board of Directors on ____________,2003, this
Plan is executed by its duly authorized officers this     day of         , 2003.


                                          JEFFERSON FEDERAL BANK



Attest:



_____________________                     By: __________________________________
                                              For the Entire Board of Directors

                                      -17-

EX-21.1

                                   Exhibit 21

                         Subsidiaries of the Registrant

Parent
- ------

Jefferson Bancshares, Inc.

                                       Percentage            Jurisdiction or
Subsidiaries                          of Ownership        State of Incorporation
- ------------                          ------------        ----------------------

Jefferson Federal Savings and
  Loan Association                    100%                       Federal

Jefferson Service Corporation
  of Morristown, Tennessee, Inc.      100%                       Tennessee

EX-23.2

                                                                    Exhibit 23.2

               [Letterhead of Craine, Thompson, and Jones, P.C.]

                         CONSENT OF INDEPENDENT AUDITOR

We consent to the use in the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission and the Application for Conversion on Form AC
filed with the Office of Thrift Supervision of our report dated September 18,
2002 on the financial statements of Jefferson Federal Savings and Loan
Association of Morristown as of June 30, 2002 and 2001 and the three years ended
June 30, 2002.

Craine, Thompson & Jones, P.C.

/s/ Craine, Thompson & Jones, P.C.

Morristown, Tennessee
March 21, 2003

EX-23.3

                                                                    Exhibit 23.3

                        [LETTERHEAD OF RP FINANCIAL, LC.]

                                                                  March 19, 2003

Board of Directors
Jefferson Bancshares, M.H.C.
Jefferson Federal Savings and Loan Association
120 Evans Avenue
Morristown, Tennessee  37814

Members of the Boards:

     We hereby consent to the use of our firm's name in the Form AC Application
for Conversion, the Form H-(e)1-s holding company application, and in the Form
S-1 Registration Statement for Jefferson Bancshares, Inc., in each case as
amended and supplemented.

                                                          Sincerely,



                                                          Sincerely,

                                                          RP FINANCIAL, LC.

                                                          /s/ RP Financial, LC.

EX-24.1

                                                                    Exhibit 24.1

CONFORMED

                               POWERS OF ATTORNEY

     Each person whose signature appears below hereby constitutes and appoints
Anderson L. Smith as the true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for them and in their name, place and
stead, in any and all capacities to sign any or all amendments to the Form AC
Application for Conversion by Jefferson Bancshares, M.H.C., and the Registration
Statement on Form S-1 by Jefferson Bancshares, Inc. and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Office of Thrift Supervision (the "OTS") or the U.S. Securities and Exchange
Commission, respectively, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as they might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitute or substitute may lawfully do or cause to be done by
virtue hereof.

     Pursuant to the requirements of Part 563b of the OTS Rules and Regulations
and the Securities Act of 1933, as amended, and any rules and regulations
promulgated thereunder, the foregoing Powers of Attorney prepared in conjunction
with the Application and the Registration Statement on Form S-1 have been duly
signed by the following persons in the capacities and on the dates indicated.

         NAME                                              DATE
         ----                                              -----

/s/ Anderson L. Smith                                      March 21, 2003
- ----------------------------
Anderson L. Smith
President, Chief Executive Officer and Director
(principal executive officer)
Jefferson Bancshares, Inc.

President, Chief Executive Officer and Director
(principal executive officer)
Jefferson Bancshares, M.H.C.


/s/ Jane P. Hutton                                         March 21, 2003
- ----------------------------
Jane P. Hutton
Treasurer and Secretary
(principal accounting and financial officer)
Jefferson Bancshares, Inc.

Vice President and Comptroller
(principal accounting and financial officer)
Jefferson Bancshares, M.H.C.



/s/ John F. McCrary                                        March 21, 2003
- ----------------------------
John F. McCrary
Director
Jefferson Bancshares, Inc.

Chairman of the Board
Jefferson Bancshares, M.H.C.


/s/ H. Scott Reams                                         March 21, 2003
- ----------------------------
H. Scott Reams
Director
Jefferson Bancshares, Inc.

Director
Jefferson Bancshares, M.H.C.


/s/ Dr. Jack E. Campbell                                   March 21, 2003
- ----------------------------
Dr. Jack E. Campbell
Director
Jefferson Bancshares, Inc.

Director
Jefferson Bancshares, M.H.C.


/s/ William T. Hale                                        March 21, 2003
- ----------------------------
William T. Hale
Director
Jefferson Bancshares, Inc.

Director
Jefferson Bancshares, M.H.C.


/s/ Dr. Terry M. Brimer                                    March 21, 2003
- ----------------------------
Dr. Terry M. Brimer
Director
Jefferson Bancshares, Inc.

Director
Jefferson Bancshares, M.H.C.


s/ William F. Young                                        March 21, 2003
- ----------------------------
William F. Young
Director
Jefferson Bancshares, Inc.

Director
Jefferson Bancshares, M.H.C.

EX-99.1

                                                                    Exhibit 99.1


- --------------------------------------------------------------------------------
                           CONVERSION APPRAISAL REPORT
                               IN CONJUNCTION WITH
                             SECOND STEP CONVERSION

                           JEFFERSON BANCSHARES, INC.

                          PROPOSED HOLDING COMPANY FOR
                             JEFFERSON FEDERAL BANK
                              Morristown, Tennessee


                                  Dated As Of:
                                  March 7, 2003
- --------------------------------------------------------------------------------











                                  Prepared By:

                                RP Financial, LC.
                             1700 North Moore Street
                                   Suite 2210
                            Arlington, Virginia 22209



                        [LETTERHEAD OF RP FINANCIAL, LC]

                                                          March 7, 2003

Board of Directors
Jefferson Bancshares, M.H.C.
Jefferson Federal Savings and Loan Association
120 Evans Avenue
Morristown, Tennessee  37814

Members of the Board of Directors:

     At your request, we have completed and hereby provide an independent
appraisal ("Appraisal") of the estimated pro forma market value of the common
stock to be issued by Jefferson Bancshares, Inc, Morristown, Tennessee
("Jefferson Bancshares" or the "Company") in connection with the mutual-to-stock
conversion of Jefferson Bancshares, M.H.C. (the "MHC"). In conjunction with the
conversion transaction discussed herein, Jefferson Federal Savings and Loan
Association, Morristown, Tennessee will change its name to Jefferson Federal
Bank, and will hereinafter be referenced to as "Jefferson Federal" or the
"Bank".

     The MHC currently has a majority ownership interest in, and its principal
asset consists of Jefferson Federal. In this regard, the MHC owns 1,875,500
shares of the Bank's common stock outstanding, or 17.36%, with the remaining
325,500 shares, or 82.64%, owned by public shareholders. It is our understanding
that Jefferson Bancshares will offer its stock, representing the majority
ownership interest of Jefferson Federal, to depositors of the Bank, the Bank's
ESOP, borrowers of the Bank, directors officers and employees, current
stockholders of Jefferson Federal, members of the local community, and the
public at large (the Subscription and Community offerings).

     This Appraisal is furnished pursuant to the requirements of the Code of
Federal Regulations 563b.7 and has been prepared in accordance with the
"Guidelines for Appraisal Reports for the Valuation of Savings and Loan
Associations Converting from Mutual to Stock Form of Organization" of the Office
of Thrift Supervision ("OTS"), which have been adopted in practice by the
Federal Deposit Insurance Corporation ("FDIC"), including the most recent
revisions as of October 21, 1994, and applicable interpretations thereof.

Plan of Conversion

     On March 4, 2003, the Board of Directors of the MHC adopted the plan of
conversion pursuant to which the MHC will convert from the partially public
mutual holding company form of ownership to the fully public stock holding
company structure (the "conversion" or the



Boards of Directors
March 7, 2003
Page 2

"second step conversion). As a result of the conversion and offering, the MHC
will be merged into the Bank and the MHC will cease to exist. As part of the
conversion, Jefferson Bancshares will sell shares of common stock in an offering
that will represent the ownership interest in Jefferson Federal currently owned
by the MHC. As of March 7, 2003, the MHC's ownership interest in Jefferson
Bancshares approximated 82.64%. Jefferson Bancshares will also issue shares of
its common stock to the public stockholders of Jefferson Bancshares pursuant to
an exchange ratio that will result in the public shareholders owning the same
aggregate percentage of the newly issued Jefferson Bancshares common stock as
owned immediately prior to the conversion, but before the issuance of shares to
the charitable foundation as noted below.

     Concurrent with the Reorganization, Jefferson Bancshares will form a
charitable foundation called the Jefferson Federal Charitable Foundation
("Foundation"). The Foundation will be funded with 375,000 shares of conversion
stock with a value of $3.75 million based on an issue price of $10.00 per share
and $250,000 of cash.

RP Financial, LC.

     RP Financial, LC. ("RP Financial") is a financial consulting firm serving
the financial services industry nationwide that, among other things, specializes
in financial valuations and analyses of business enterprises and securities,
including the pro forma valuation for savings institutions converting from
mutual-to-stock form. The background and experience of RP Financial is detailed
in Exhibit V-1. We believe that, except for the fee we will receive for our
appraisal and assisting the Bank and Jefferson Bancshares in the preparation of
the post-conversion business plan, we are independent of Jefferson Bancshares,
the Bank, the MHC and the other parties engaged by the Bank or Jefferson
Bancshares to assist in the stock conversion process.

Valuation Methodology

     In preparing our Appraisal, we have reviewed the regulatory applications of
Jefferson Bancshares, the Bank and the MHC, including the prospectus as filed
with the OTS and the Securities and Exchange Commission ("SEC"). We have
conducted a financial analysis of Jefferson Bancshares, the Bank and the MHC,
that has included a review of audited financial information for fiscal years
ended June 30, 1998 through 2002 and interim financial results through December
31, 2002, a review of various unaudited information and internal financial
reports through December 31, 2002, and due diligence related discussions with
the Bank's management; Craine Thompson & Jones, the Bank's independent auditor;
Muldoon Murphy & Faucette LLP, the Bank's conversion counsel; and Keefe,
Bruyette & Woods, Inc., the marketing advisor in connection with the stock
offering. All assumptions and conclusions set forth in the Appraisal were
reached independently from such discussions. In addition, where appropriate, we
have considered information based on other available published sources that we
believe are reliable. While we believe the information and data gathered from
all these sources are reliable, we cannot guarantee the accuracy and
completeness of such information.



Boards of Directors
March 7, 2003
Page 3

     We have investigated the competitive environment within which Jefferson
Federal operates and have assessed Jefferson Federal's relative strengths and
weaknesses. We have kept abreast of the changing regulatory and legislative
environment for financial institutions and analyzed the potential impact on
Jefferson Federal and the industry as a whole. We have analyzed the potential
effects of the stock conversion on Jefferson Bancshares' operating
characteristics and financial performance as they relate to the pro forma market
value of Jefferson Bancshares. We have analyzed the assets held by the MHC,
which will be consolidated with Jefferson Federal's assets and equity pursuant
to the completion of the conversion. We have reviewed the overall conditions in
Jefferson Federal's primary market area as set forth in demographic, economic
and competitive information prepared by CACI, SNL Securities and other third
party private and governmental sources. We have compared Jefferson Bancshares'
financial performance and condition with selected publicly-traded thrifts in
accordance with the OTS valuation guidelines, as well as all publicly-traded
thrifts and thrift holding companies. We have reviewed the current conditions in
the securities markets in general and in the market for thrift stocks in
particular, including the market for existing thrift issues, initial public
offerings by thrifts and thrift holding companies, and second step conversion
offerings. We have excluded from such analyses thrifts subject to announced or
rumored acquisition, and/or institutions that exhibit other unusual
characteristics.

     The Appraisal is based on Jefferson Federal's representation that the
information contained in the regulatory applications and additional information
furnished to us by Jefferson Federal and their respective independent auditors,
legal counsel and other authorized agents are truthful, accurate and complete.
We did not independently verify the financial statements and other information
provided by Jefferson Federal, or their respective independent auditors, legal
counsel and other authorized agents nor did we independently value the assets or
liabilities of Jefferson Federal. The valuation considers Jefferson Federal only
as a going concern and should not be considered as an indication of Jefferson
Federal's liquidation value.

     Our appraised value is predicated on a continuation of the current
operating environment for Jefferson Bancshares and for all thrifts and their
holding companies. Changes in the local, state and national economy, the
legislative and regulatory environment for financial institutions and mutual
holding companies, the stock market, interest rates, and other external forces
(such as natural disasters or significant world events) may occur from time to
time, often with great unpredictability and may materially impact the value of
thrift stocks as a whole or the value of Jefferson Bancshares' stock alone. It
is our understanding that there are no current plans for selling control of
Jefferson Bancshares following completion of the second step stock offering. To
the extent that such factors can be foreseen, they have been factored into our
analysis.

     The estimated pro forma market value is defined as the price at which
Jefferson Bancshares' common stock, immediately upon completion of the second
step stock offering, would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts.



Boards of Directors
March 7, 2003
Page 4

Valuation Conclusion

     It is our opinion that, as of March 7, 2003, the estimated aggregate pro
forma valuation of the shares to be issued in the conversion of the MHC,
including: (1) newly-issued shares representing the MHC's ownership interest in
Jefferson Bancshares, (2) exchange shares to be issued to existing public
shareholders of Jefferson Bancshares, and (3) shares issued to the Jefferson
Federal Foundation was $64,250,000 at the midpoint, equal to 6,425,000 shares at
a per share value of $10.00. Based on this valuation and taking into account the
ownership interest represented by the shares owned by the MHC and the shares
issued to the Jefferson Federal Charitable Foundation, the midpoint of the
offering range was $50,000,000, equal to 5,000,000 shares at $10.00 per share.
The resulting offering range includes a minimum value of $42,500,000, equal to
4,250,000 shares at $10.00 per share (85.0% of the midpoint) and a maximum value
of $57,500,000, equal to 5,750,000 shares at $10.00 per share (115.0% of the
midpoint). In the event the appraised value is subject to an increase, the
offering range may be increased up to a supermaximum value of $66,125,000, equal
to 6,612,500 shares at $10.00 per share, without requiring a resolicitation.

Establishment of the Exchange Ratio

     OTS regulations provide that, in a conversion of a mutual holding company,
the minority stockholders are entitled to exchange the public shares for newly
issued shares of the fully converted company. The Board of Directors of the MHC
has independently established a formula to determine the exchange ratio, based
on an offering price of $10.00 per share. The exchange ratio preserves the
current aggregate percentage ownership in Jefferson Bancshares equal to 82.64%
as of March 7, 2003. Accordingly, the exchange ratio to be received by the
existing minority shareholders will be determined at the end of the offering,
based on the total number of shares sold in the Subscription and Community
offerings. Based upon the valuation conclusion and offering range concluded
herein, the indicated exchange ratio is 2.7419 shares, 3.2258 shares, 3.7097
shares and 4.2661 shares of newly issued shares of Jefferson Bancshares stock
for each share of stock held by the public shareholders at the minimum,
midpoint, maximum and supermaximum of the offering range, respectively. RP
Financial expresses no opinion on the proposed exchange of newly issued
Jefferson Bancshares shares for the shares held by the public stockholders or on
the proposed exchange ratio.

Limiting Factors and Considerations

     Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the estimated pro
forma market value thereof. The appraisal does not take into account any trading
activity with respect to the



Boards of Directors
March 7, 2003
Page 5

purchase and sale of common stock in the secondary market, and reflects only a
valuation range as of this date for the pro forma market value of Jefferson
Bancshares immediately upon issuance of the stock.

          RP Financial's valuation was determined based on the financial
condition, operations and shares outstanding of Jefferson Federal as of December
31, 2002 date of the financial data included in the prospectus. The proposed
exchange ratio to be received by the current public stockholders of Jefferson
Bancshares and the exchange of the public shares for newly issued shares of
Jefferson Bancshares common stock as a full public company was determined
independently by the Boards of Directors of the MHC and the Bank. RP Financial
expresses no opinion on the proposed exchange ratio to public stockholders or
the exchange of public shares for newly issued shares.

          RP Financial is not a seller of securities within the meaning of any
federal and state securities laws and any report prepared by RP Financial shall
not be used as an offer or solicitation with respect to the purchase or sale of
any securities. RP Financial maintains a policy which prohibits RP Financial,
its principals or employees from purchasing stock of its client institutions.

          This valuation will be updated as provided for in the conversion
regulations and guidelines. These updates will consider, among other things, any
developments or changes in the financial performance and condition of Jefferson
Bancshares, management policies, and current conditions in the equity markets
for thrift shares, both existing issues and new issues. These updates may also
consider changes in other external factors which impact value including, but not
limited to: various changes in the legislative and regulatory environment for
financial institutions, the stock market and the market for thrift stocks, and
interest rates. Should any such new developments or changes be material, in our
opinion, to the valuation of the shares, appropriate adjustments to the
estimated pro forma market value will be made. The reasons for any such
adjustments will be explained in the update at the date of the release of the
update. The valuation will also be updated at the completion of Jefferson
Bancshares' stock offering.

                                                Respectfully submitted,
                                                RP FINANCIAL, LC.

                                                /s/ Ronald S. Riggins

                                                Ronald S. Riggins
                                                President and Managing Director

                                                /s/ James P. Hennessey

                                                James P. Hennessey
                                                Senior Vice President



RP Financial, LC.

                                TABLE OF CONTENTS
                           JEFFERSON BANCSHARES, INC.
                              Morristown, Tennessee

                                                                           PAGE
 DESCRIPTION                                                              NUMBER
 -----------                                                              ------

CHAPTER ONE              OVERVIEW AND FINANCIAL ANALYSIS
- -----------

  Introduction                                                             1.1
  Plan of Conversion                                                       1.1
  Strategic Overview                                                       1.4
  Balance Sheet Trends                                                     1.6
  Income and Expense Trends                                                1.9
  Interest Rate Risk Management                                            1.15
  Lending Activities and Strategy                                          1.16
  Asset Quality                                                            1.19
  Funding Composition and Strategy                                         1.20
  Subsidiary                                                               1.21
  Legal Proceedings                                                        1.21

CHAPTER TWO              MARKET AREA
- -----------

  Introduction                                                             2.1
  Market Area Demographics                                                 2.2
  Local Economy                                                            2.4
  Market Area Deposit Characteristics/Competition                          2.6

CHAPTER THREE            PEER GROUP ANALYSIS
- -------------

  Peer Group Selection                                                     3.1
  Financial Condition                                                      3.7
  Income and Expense Components                                            3.9
  Loan Composition                                                         3.13
  Credit Risk                                                              3.13
  Interest Rate Risk                                                       3.16
  Summary                                                                  3.16



RP Financial, LC.

                                TABLE OF CONTENTS
                           JEFFERSON BANCSHARES, INC.
                              Morristown, Tennessee
                                   (continued)

                                                                           PAGE
 DESCRIPTION                                                              NUMBER
 -----------                                                              ------

CHAPTER FOUR                   VALUATION ANALYSIS
- ------------

  Introduction                                                             4.1
  Appraisal Guidelines                                                     4.1
  RP Financial Approach to the Valuation                                   4.1
  Valuation Analysis                                                       4.2
       1.  Financial Condition                                             4.3
       2.  Profitability, Growth and Viability of Earnings                 4.4
       3.  Asset Growth                                                    4.5
       4.  Primary Market Area                                             4.6
       5.  Dividends                                                       4.6
       6.  Liquidity of the Shares                                         4.8
       7.  Marketing of the Issue                                          4.9
               A. The Public Market                                        4.9
               B. The New Issue Market                                     4.13
               C. The Acquisition Market                                   4.16
               D. Trading in Jefferson Federal's Stock                     4.17
       8.  Management                                                      4.18
       9.  Effect of Government Regulation and Regulatory Reform           4.18
  Summary of Adjustments                                                   4.19
  Valuation Approaches                                                     4.19
  Comparison to Recent Conversions and Second-Step Offerings               4.24
  Valuation Conclusion                                                     4.25
  Establishment of the Exchange Ratio                                      4.26




                                 LIST OF TABLES
                           JEFFERSON BANCSHARES, INC.
                              Morristown, Tennessee



  TABLE
 NUMBER                DESCRIPTION                                                               PAGE
 ------                -----------                                                               ----
                                                                                            
   1.1          Historical Balance Sheets                                                         1.7
   1.2          Historical Income Statements                                                      1.10

   2.1          Summary Demographic Information                                                   2.3
   2.2          Major Employers in Hamblen County                                                 2.5
   2.3          Market Area Unemployment Trends                                                   2.5
   2.4          Deposit Summary                                                                   2.7
   2.5          Competitor Analysis                                                               2.8

   3.1          Peer Group of Publicly-Traded Insurance Thrifts                                   3.3
   3.2          Balance Sheet Composition and Growth Rates                                        3.8
   3.3          Income as a Percent of Average Assets and Yields, Costs, Spreads                  3.10
   3.4          Loan Portfolio Composition and Related Information                                3.14
   3.5          Credit Risk Measures and Related Information                                      3.15
   3.6          Interest Rate Risk Measures and Net Interest Income Volatility                    3.17

   4.1          Peer Group Market Area Comparative Analysis                                       4.7
   4.2          Pricing Characteristics and After-Market Trends of Recent
                  Conversions Completed                                                           4.15
   4.3          Public Market Pricing                                                             4.23






RP Financial, LC.
Page 1.1

                       I. OVERVIEW AND FINANCIAL ANALYSIS

Introduction

     Jefferson Federal Savings and Loan Association of Morristown is a
federally-chartered savings and loan association which conducts operations
through its main office and two drive-through office facilities, in Morristown,
Tennessee. The Bank's northeast Tennessee market is centered in Hamblen County,
located approximately 40 miles to the northeast of Knoxville. In conjunction
with the stock conversion, Jefferson Federal will change its name to Jefferson
Federal Bank ("Jefferson Federal" or the "Bank").

     The Bank was organized in 1963. The Bank is a member of the Federal Home
Loan Bank ("FHLB") system, and its deposits insured up to the regulatory
maximums by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The Bank's primary regulator is the Office
of Thrift Supervision ("OTS"). As of December 31, 2002, the Bank maintained
$260.4 million in assets, $223.0 million in deposits and $34.9 million in
equity, or 13.4% of assets. The Bank's audited financial statements are included
by reference as Exhibit I-1. The Bank reorganized into the mutual holding
company ("MHC") structure in May 1994 and sold a minority interest of its common
stock to the public at that time. The MHC, as of December 31, 2002, owned an
82.64% ownership interest in Jefferson Federal.

Plan of Conversion

     Jefferson Federal has 1,875,500 shares of common stock issued and
outstanding. The MHC owns 1,550,000 shares, and the remaining 325,000 shares are
held by the public, or 82.64% and 17.36%, respectively. In conjunction with the
Plan of Conversion, Jefferson Bancshares, Inc. ("Jefferson Bancshares"), a
Tennessee stock chartered holding company, will own 100% of the shares of the
Bank following the conversion and reorganization. In the reorganization, the
Company will publicly issue the MHC's 82.64% ownership interest to members and
the public through concurrent Subscription and Community offerings (the
"Offering"). The current publicly-held shares of Jefferson Federal will be
exchanged for shares



RP Financial, LC.
Page 1.2

of Jefferson Bancshares. The proceeds of the Subscription and Community
offerings will be retained as capital by Jefferson Federal and Jefferson
Banchsares. Following the second step conversion, the MHC will cease to exist
and 100% of the shares will be owned by public shareholders.

     Jefferson Bancshares will retain up to 50% of the net second step offering
proceeds, and the balance will be downstreamed to the Bank. The net proceeds at
Jefferson Bancshares and the Bank will initially be invested into short-term
investments (Jefferson Bancshares may deposit a substantial portion of its funds
with the Bank) pending longer-term deployment. Further details of the stock
conversion are set forth in the Bank's conversion application, plan of
conversion, notice and information statement and holding company application.

     The Bank is pursuing the second step conversion based on several sound
business and competitive reasons, including: to increase the capital level to
support further expansion, improve its overall competitive position in the local
market area, enhance profitability and reduce interest rate risk. The additional
equity capital raised in the conversion will provide a larger capital cushion
for continued growth and diversification in the regional area. Also, the higher
level of capital will enable the Bank to actively pursue larger loan
relationships with an increased loans-to-one borrower limitations. The Bank
anticipates expanding its branch network through de novo branching within the
primary market area. The increased capital should facilitate the ability of the
Bank to pursue further diversification of products and services as well as
support recent diversification efforts, particularly in the area of the
development of high quality commercial relationships.

     The conversion to a full stock company structure enhances the Bank's
ability to pursue acquisitions of other financial institutions (there are no
current plans). The conversion will increase the public ownership, which is
expected to improve the liquidity of the common stock. The conversion will
enhance the Bank's ability to attract and retain qualified management through
stock based compensation plans. Also, the Bank will increase its local
philanthropic endeavors through funding the Jefferson Federal Charitable
Foundation (the "Foundation"), as described more fully below.



RP Financial, LC.
Page 1.3

     The Foundation will be a private charitable foundation established in
connection with the conversion. The Foundation will be funded with 400,000 newly
issued shares of common stock of the Company, equal to $4 million with the form
of funding to be $3.75 million of conversion stock and $250,000 of cash, which
will be dilutive to pro forma book value and earnings per share. The Foundation
will make grants and donations to non-profit and community groups and projects
within the Bank's primary market area. The Foundation's common stock ownership
of Jefferson Bancshares will enable the local community served to share in the
anticipated growth and the profitability over the long term through dividends
and price appreciation. The Foundation is expected to generate favorable
publicity regarding the Company, thereby strengthening the community banking
franchise.

     Management believes that the stock offering will support Jefferson
Federal's efforts to broaden its product line and pursue long term growth. The
near-term deployment of the net offering proceeds is as follows:

     Jefferson Bancshares, Inc. Jefferson Bancshares is expected to retain up to
     50% of the net conversion proceeds. Funds retained by Jefferson Bancshares,
     net of the loan to the ESOP, are expected to be invested initially into
     short- and intermediate-term maturities; a substantial portion of the
     proceeds may be placed on deposit with the Bank. Over time, Bank funds are
     anticipated to be utilized for various corporate purposes, possibly
     including acquisitions, infusing additional equity into the Bank,
     repurchases of common stock, and the payment of regular and/or special cash
     dividends.

     The Bank. The remainder of the net conversion proceeds will be infused into
     the Bank. The increase in the Bank's capital will be diminished by the
     contra-equity amount to be borrowed by the ESOP to fund the 8% stock
     purchase. The net cash proceeds (i.e., net proceeds less deposits withdrawn
     to fund stock purchases) are anticipated to become part of general
     operating funds, and are expected to initially (1) be invested in
     short-term investments, and (2) to fund loan commitments or loans in the
     pipeline.

     Overall, it is the Bank's objective to pursue growth that will serve to
increase returns, while, at the same time, growth will not be pursued that could
potentially compromise the overall risk associated with Jefferson Federal's
operations. The Bank has acknowledged that it will operate with excess capital
in the near term, operating with a below market return on equity, until



RP Financial, LC.
Page 1.4

such time as the new capital can be leveraged in a safe and sound manner over a
reasonable period of time.

Strategic Overview

     Throughout much of its corporate history, Jefferson Federal's strategic
focus has been that of a community oriented financial institution with a primary
focus on meeting the borrowing, savings and other financial needs of the
community in northeast Tennessee. In this regard, Jefferson Federal has
historically pursued a portfolio residential lending strategy typical, with a
moderate level of diversification into construction lending, commercial real
estate lending and some secondary market loan sales. The Bank has historically
sought to serve the local community by offering relatively flexible loan terms
and underwriting standards in comparison to the local competition,
differentiating itself from the competition primarily consisting of local or
regional commercial banks. A historical lending niche for the Bank has been the
origination of subprime loans in the regional area, which recently exceeded more
than one-fourth of total loans but has since declined to 17.2%. Further decline
in subprime loans is expected as the lending focus has shifted under new
management. The subprime loans have been a large contributor to the Bank's
higher delinquency and foreclosure rates in the residential and consumer loan
portfolios.

     In recent years, the Bank has emphasized originating adjustable rate
mortgage ("ARM") loans secured by single family residential properties. In this
regard, the Bank's comparatively rural market, where many residents possess low
income to moderate income levels, has historically presented lending
opportunities for the Bank. In this regard, Jefferson Federal has been
successful at originating ARMs at premium rates (current rates offered range
between 6.00% and 8.75%) and with floor rates. Given the decline in interest
rates over the last several years, many portfolio loans are at their contractual
lower limit and, in effect, have become fixed rate loans in the prevailing
interest rate environment. In order to limit interest rate risk, the Bank's
fixed rate mortgage loan offerings have a maximum maturity of 15 years.

     The Bank's past success in originating residential ARMs with premium and
floor rates, without the inducement of a teaser rate, is attributable to several
key factors. First, the Bank has offered ARMs without discount points and with
relatively small origination fees, generally



RP Financial, LC.
Page 1.5

approximating $200 per loan. Low origination and closing costs enhanced the
attractiveness of the Bank's ARMs to low- to moderate-income borrowers. Also, as
a portfolio lender, the time required to issue a commitment and to close a loan
was shortened relative to many competitors, leading to strong referrals to the
Bank from local realtors. Overall, this lending strategy was an important factor
in providing the strong loan portfolio yields for Jefferson Federal today.

     Similarly, the Bank has historically served a similar market niche in
commercial and multi-family mortgage lending and consumer lending. Specifically,
the Bank has historically been more flexible with respect to its underwriting
standards than much of the local competition.

     While the foregoing lending strategy has facilitated asset growth and
higher yields, the Bank's earnings levels were relatively flat through the
fiscal 1997 to 2002, owing in part to the relatively high level of
non-performing assets ("NPAs") and loan chargeoffs during this period. Asset
quality problems have been exacerbated by weak economic conditions in Jefferson
Federal's markets in recent periods.

     Jefferson Federal's lending strategy and operations significantly shifted
as a result of the October 2001 employment of a new Chief Executive Officer,
Anderson L. Smith, who has approximately 30 years of regional banking and
lending experience. The Bank has significantly restructured its policies and
procedures, specifically tightening loan underwriting standards with the
objective of reducing the level of NPAs as well as the overall level of credit
risk exposure. Additionally, management has increased intensified efforts to
reduce the level of NPAs through improved collections efforts. In the future,
management will also be seeking to expand the portfolio of commercial loans to
capitalize on the current CEO's commercial lending experience and contacts.

     Jefferson Federal has funded operations primarily with retail deposits and
capital, and borrowed funds have been relatively limited. While the Bank has
maintained deposit rates above the market average historically, the Bank has
recently reduced its rates relative to the competition with the objective of
reducing funding costs as loan volume slowed due to high refinancing activity
and tightened underwriting standards.



RP Financial, LC.
Page 1.6

Balance Sheet Trends

     Growth Trends

          Over the last five years, Jefferson Federal has realized moderate
balance sheet growth through the existing branch office network (see Table 1.1).
Total assets increased 6.7% annually from $194.3 million at the end of fiscal
1998 to $260.4 million as of December 31, 2002. The Bank's total asset growth
has varied from year to year, and declined during the last six months due to a
decline in loans (reflecting high refinancing activity and the Bank's shift in
lending focus) and a decline in deposits (as management reduced its competitive
pricing given the build-up of liquidity). The Bank's earnings power has
diminished over this period as loan growth has lagged asset growth, resulting in
a pronounced increase in lower yielding cash and investments. While the loan
portfolio has increased at a 3.5% annual pace over this period, the recent shift
in lending strategy and high refinancing led to a decline in total loans. As a
result, loans decreased from 82.1% of assets in fiscal 1998 to 71.6% as of
December 31, 2002. The Bank anticipates that loan growth will resume as
refinancing activity slows and as the revised lending emphasis under new
management gains momentum.

          Jefferson Federal's balance sheet is funded through a combination of
deposits, borrowings and retained earnings. Deposits have always comprised the
majority of funding liabilities, and have increased at an annual rate of 6.2%
since 1998. Borrowings have been at comparatively modest levels and totaled only
$2.0 million as of December 31, 2002.

          Equity has increased at a 9.2% annual rate since the end of fiscal
1998, primarily reflecting retained earnings. The equity/assets ratio has
increased since fiscal 1998 as asset growth outstripped the rate of equity
growth and, as of December 31, 2002, the equity/assets ratio approximated
13.42%. The Bank's equity consisted entirely of tangible equity as of December
31, 2002.

     Loans Receivable

          Loans receivable totaled $186.4 million, or 71.6% of total assets, as
of December 31, 2002, and 1-4 family mortgage loans comprised the largest
segment of the loan portfolio, equal to 47.4% of total loans. The residential
mortgage loan portfolio consists primarily of ARM loans



RP Financial, LC.
Page 1.7

                                    Table 1.1
                             Jefferson Federal Bank
                            Historical Balance Sheets



                                                                   For the Fiscal Year Ended June 30,
                                                -------------------------------------------------------------------------
                                                        1998                     1999                        2000
                                                ---------------------   -----------------------   -----------------------
                                                  Amount        Pct       Amount          Pct       Amount          Pct
                                                  ------        ---       ------          ---       ------          ---
                                                  ($000)        (%)       ($000)          (%)       ($000)          (%)
                                                                                                
Total Amount of:
  Assets                                        $  194,298    100.00%   $  220,075      100.00%   $  230,589      100.00%
  Loans Receivable (net)                           159,532     82.11%      167,984       76.33%      170,172       73.80%
  Cash and Cash Equivalents                          4,923      2.53%        4,212        1.91%        4,519        1.96%
  Investment Securities - HTM                        2,150      1.11%            0        0.00%            0        0.00%
  Investment Securities - AFS                       19,388      9.98%       38,404       17.45%       46,054       19.97%
  FHLB Stock                                         1,113      0.57%        1,194        0.54%        1,282        0.56%
  Deposits                                         170,355     87.68%      194,339       88.31%      199,141       86.36%
  Borrowed Funds                                         0      0.00%            0        0.00%        4,000        1.73%
  Total Equity                                      23,489     12.09%       25,205       11.45%       26,936       11.68%

  Equity/Assets                                                12.09%                    11.45%                    11.68%
  Loans/Deposits                                               93.65%                    86.44%                    85.45%
  IEA/IBL (Average)                                             1.13                      1.13                      1.12

  Non-Performing Assets/Assets                                  2.06%                     2.55%                     1.91%
  Allow. for Loan Losses as a % of Loans                        1.00%                     1.14%                     1.15%

  Number of Full Service Offices                                   1                         1                         1
  Drive-Through Facilities                                         2                         2                         2


                                                     For the Fiscal Year Ended June 30,                                  Compounded
                                                -----------------------------------------------          As of             Annual
                                                        2001                     2002              December 31, 2002     Growth Rate
                                                ---------------------   -----------------------   -------------------    -----------
                                                  Amount        Pct       Amount          Pct       Amount      Pct          Pct
                                                  ------        ---       ------          ---       ------      ---          ---
                                                  ($000)        (%)       ($000)          (%)       ($000)      (%)          (%)
                                                                                                    
Total Amount of:
  Assets                                        $  254,464    100.00%   $  267,340      100.00%   $ 260,443    100.00%       6.73%
  Loans Receivable (net)                           181,191     71.20%      190,032       71.08%     186,351     71.55%       3.51%
  Cash and Cash Equivalents                          8,905      3.50%        6,983        2.61%      15,707      6.03%      29.41%
  Investment Securities - HTM                            0      0.00%            0        0.00%           0      0.00%    -100.00%
  Investment Securities - AFS                       54,151     21.28%       60,215       22.52%      47,955     18.41%      22.29%
  FHLB Stock                                         1,379      0.54%        1,455        0.54%       1,489      0.57%       6.68%
  Deposits                                         222,061     87.27%      231,849       86.72%     223,038     85.64%       6.17%
  Borrowed Funds                                     2,000      0.79%        2,000        0.75%       2,000      0.77%        N.A.
  Total Equity                                      29,892     11.75%       32,901       12.31%      34,940     13.42%       9.23%

  Equity/Assets                                                11.75%                    12.31%                 13.42%
  Loans/Deposits                                               81.60%                    81.96%                 83.55%
  IEA/IBL (Average)                                             1.13                      1.13                   1.14

  Non-Performing Assets/Assets                                  1.54%                     1.16%                  1.62%
  Allow. for Loan Losses as a % of Loans                        1.17%                     1.37%                  1.40%

  Number of Full Service Offices                                   1                         1                      1
  Drive-Through Facilities                                         2                         2                      2


Source: Jefferson Federal's audited and unaudited financial statements.



RP Financial, LC.
Page 1.8

and shorter term fixed rate loans. Overall, mortgage loans (including 1-4
family, multi-family, commercial, and construction) comprise 90.4% of total
loans. The balance of the loan portfolio is comprised of a mixture of consumer
installment loans, including loans secured by automobiles, mobile homes and
deposits.

     Investment and Mortgage Backed Securities

          As of December 31, 2002, cash and cash equivalents totaled $15.7
million, equal to 6.0% of assets. Investment securities, primarily designated
available for sale ("AFS"), totaled $48.0 million, equal to 18.4% of assets. The
majority of the Bank's investments consist primarily of U.S. agency securities
and mortgage-backed securities ("MBS"). The Bank anticipates initially
reinvesting the net conversion proceeds into investments with shorter
maturities, pending longer-term deployment into other investments and loans.

     Funding Structure

          Retail deposits have consistently met the substantial portion of
balance sheet funding. Since fiscal year-end 1998, deposits have grown at a 6.2%
annual rate. During the most recent six months, given the build-up of cash and
equivalents and declining yields on investments, management reduced deposit
rates in order to reduce funding costs, which led to deposit withdrawals and a
3.8% decline in total deposits. The largest proportion of deposits is in
certificates of deposit ("CDs"), at 75.3% of total deposits at December 31,
2002. The proportion of CDs to total deposits has declined from 83.1% at fiscal
year end 2000, as NOW, passbook and money market accounts reflect a growing
portion of the deposit base, reflecting national trends as CD rates have been
relatively low so depositors have increased their funds in more liquid accounts.

          Jefferson Federal has utilized FHLB borrowings in the recent past on a
limited basis. As of December 31, 2002, borrowed funds consisted solely of FHLB
advances and totaled $2.0 million.

     Equity

          Retained earnings and a favorable interest rate environment (which led
to positive valuation adjustments on the AFS investment portfolio) supported
annual equity growth of 9.2%



RP Financial, LC.
Page 1.9

since fiscal 1998. The Bank's equity growth reflects the payment of cash
dividends to minority shareholders, as the MHC waived its right to receive a
dividend. Unrealized gains and losses in the AFS investment portfolio, net of
taxes, are reflected as an adjustment to stockholder's equity. As shown below,
the AFS adjustment has increased in the last couple of years, due to declining
interest rates and the Bank's limited sale of investments, but the overall
impact has been limited.

                                                       AFS        AFS Adjustment
                                                    Adjustment       as % of
                                                      Amount      Total Equity
                                                      ------      ------------
                                                      ($000)           (%)

                 At June 30, 2001                      $ 49           1.64%
                 At June 30, 2002                      $537           1.63%
                 At December 31, 2002                  $906           2.59%


          The Bank maintained capital surpluses relative to all of its
regulatory capital requirements at December 31, 2002, qualifying as a "well
capitalized" institution. The addition of conversion proceeds will serve to
further strengthen Jefferson Federal's capital position. The equity growth is
expected to slow on a post-conversion basis as the equity increases,
reinvestment yields are anticipated to fall below portfolio yields and as
dividends will be paid on all shares.

Income and Expense Trends

          Table 1.2 shows Bank's historical income statements for the fiscal
years ended June 30, 1998 to 2002, and for the 12 months ended December 31,
2002. Jefferson Federal's net income ranged from a low of $2.2 million, equal to
0.90% of average assets, to a high of $3.3 million, equal to 1.23% of average
assets for the 12 months ended December 31, 2002. During the last five fiscal
years, earnings ranged from $2.2 to $2.4 million, before surging during the last
12 months. Thus, until the last 12 months, the Bank's profitability ratio
steadily declined as total assets continued to grow. The profitability ratio for
the most recent 12 months spiked due to the unique convergence of declining
interest rates, strategy shifts and portfolio composition during this period.
The principal factor leading to the strengthened earnings levels for the most
recent 12 months was a declining interest rate environment and management's
decision to reduce its



RP Financial, LC.
Page 1.10

                                    Table 1.2
                             Jefferson Federal Bank
                          Historical Income Statements



                                                             -----------------------------------------------------
                                                                      1998                           1999
                                                             --------------------           ----------------------
                                                              Amount       Pct(1)            Amount         Pct(1)
                                                             --------      ------            ------         ------
                                                              ($000)         (%)             ($000)           (%)
                                                                                                
Interest Income                                              $ 15,102        8.30%          $ 16,535          7.91%
Interest Expense                                               (8,517)      -4.68%            (9,427)        -4.51%
                                                             --------      ------            -------        ------
  Net Interest Income                                        $  6,585        3.62%          $  7,108          3.40%
Provision for Loan Losses                                        (700)      -0.38%              (764)        -0.37%
                                                             --------      ------           --------        ------
  Net Interest Income after Provisions                       $  5,885        3.23%          $  6,344          3.04%

Other Operating Income                                            739        0.41%               734          0.35%
Operating Expense                                              (3,094)      -1.70%            (3,314)        -1.59%
                                                             --------      ------           --------        ------
  Net Operating Income                                       $  3,530        1.94%          $  3,764          1.80%

Non-Operating Items
- -------------------
Gain on the Sale of Fixed Assets                             $    116        0.06%          $      0          0.00%
Gain on the Sale of Foreclosed Real Estate                         23        0.01%                26          0.01%
Gain on the Sale of Investment Securities                           -        0.00%                 -          0.00%
                                                             --------      ------           --------        ------
  Total Non-Operating Income/(Expense)                       $    139        0.08%          $     26          0.01%

Net Income Before Tax                                        $  3,669        2.02%          $  3,790          1.81%
Income Taxes                                                   (1,357)      -0.75%            (1,387)        -0.66%
                                                             --------      ------            -------        ------
 Net Income Before Change in Acct. Principle                 $  2,312        1.27%          $  2,403          1.15%
Cumulative Effect of Change in Acct. Principle                      -        0.00%                 -          0.00%
                                                             --------      ------           --------        ------
 Net Income                                                  $  2,312        1.27%          $  2,403          1.15%

Estimated Core Net Income
- -------------------------
Net Income (Before Cum. Effect of Acct. Change)              $  2,312        1.27%          $  2,403          1.15%
Addback(Deduct): Non-Recurring (Inc)/Exp                         (139)      -0.08%               (26)        -0.01%
Tax Effect (1)                                                     51        0.03%                10          0.00%
                                                             --------      ------           --------        ------
  Estimated Core Net Income                                  $  2,224        1.22%          $  2,387          1.14%

Memo:
      Expense Coverage Ratio (2)                               212.83%                        214.48%
      Efficiency Ratio (3)                                      42.24%                         42.26%
      Effective Tax Rate                                        36.99%                         36.60%
      Return on Average Equity                                  10.28%                          9.77%


                                                                       For the Fiscal Year Ended June 30,
                                                             -----------------------------------------------------
                                                                       2000                           2001
                                                             ----------------------         ----------------------
                                                              Amount         Pct(1)          Amount         Pct(1)
                                                              ------         ------          ------         ------
                                                              ($000)           (%)           ($000)           (%)
                                                                                                
Interest Income                                              $ 17,646        7.78%          $ 19,254          7.92%
Interest Expense                                              (10,058)      -4.43%           (11,740)        -4.83%
                                                             --------      ------           --------        ------
  Net Interest Income                                        $  7,588        3.34%          $  7,514          3.09%
Provision for Loan Losses                                      (1,270)      -0.56%              (960)        -0.39%
                                                              -------      ------           --------        ------
  Net Interest Income after Provisions                       $  6,318        2.78%          $  6,554          2.70%

Other Operating Income                                            888        0.39%               877          0.36%
Operating Expense                                              (3,732)      -1.64%            (3,993)        -1.64%
                                                             --------      ------           --------        ------
  Net Operating Income                                       $  3,474        1.53%          $  3,438          1.41%

Non-Operating Items
- -------------------
Gain on the Sale of Fixed Assets                             $      9        0.00%          $      0          0.00%
Gain on the Sale of Foreclosed Real Estate                        325        0.14%                33          0.01%
Gain on the Sale of Investment Securities                           -        0.00%                 -          0.00%
                                                             --------      ------           --------        ------
  Total Non-Operating Income/(Expense)                       $    334        0.15%          $     33          0.01%

Net Income Before Tax                                        $  3,808        1.68%          $  3,471          1.43%
Income Taxes                                                   (1,425)      -0.63%            (1,283)        -0.53%
                                                             --------      ------           --------        ------
 Net Income Before Change in Acct. Principle                 $  2,383        1.05%          $  2,188          0.90%
Cumulative Effect of Change in Acct. Principle                      -        0.00%                 -          0.00%
                                                             --------      ------          ---------        ------
 Net Income                                                  $  2,383        1.05%          $  2,188          0.90%

Estimated Core Net Income
- -------------------------
Net Income (Before Cum. Effect of Acct. Change)              $  2,383        1.05%          $  2,188          0.90%
Addback(Deduct): Non-Recurring (Inc)/Exp                         (334)      -0.15%               (33)        -0.01%
Tax Effect (1)                                                    124        0.05%                12          0.01%
                                                             --------      ------           --------        ------
  Estimated Core Net Income                                  $  2,173        0.96%          $  2,167          0.89%

Memo:
      Expense Coverage Ratio (2)                               203.32%                        188.18%
      Efficiency Ratio (3)                                      44.03%                         47.59%
      Effective Tax Rate                                        37.42%                         36.96%
      Return on Average Equity                                   9.19%                          7.60%



                                                                 For the Fiscal
                                                              Year Ended June 30,            For the Twelve Months
                                                             --------------------
                                                                      2002                  Ended December 31, 2002
                                                             --------------------           -----------------------
                                                              Amount        Pct(1)           Amount         Pct(1)
                                                              ------       ------            ------         ------
                                                              ($000)         (%)             ($000)           (%)
                                                                                                
Interest Income                                              $ 19,380        7.27%          $ 18,429          6.94%
Interest Expense                                              (10,267)      -3.85%            (7,897)        -2.97%
                                                             --------      ------           --------        ------
  Net Interest Income                                        $  9,113        3.42%          $ 10,532          3.96%
Provision for Loan Losses                                      (1,221)      -0.46%            (1,288)        -0.48%
                                                             --------      ------           --------        ------
  Net Interest Income after Provisions                       $  7,892        2.96%          $  9,244          3.48%

Other Operating Income                                            976        0.37%               967          0.36%
Operating Expense                                              (5,069)      -1.90%            (5,237)        -1.97%
                                                             --------      ------           --------        ------
Net Operating Income                                         $  3,799        1.43%          $  4,974          1.87%
Non-Operating Items
- -------------------
Gain on the Sale of Fixed Assets                             $      0        0.00%          $      0          0.00%
Gain on the Sale of Foreclosed Real Estate                         45        0.02%               117          0.04%
Gain on the Sale of Investment Securities                           -        0.00%                65          0.02%
                                                             --------      ------           --------        ------
  Total Non-Operating Income/(Expense)                       $     45        0.02%          $    182          0.07%

Net Income Before Tax                                        $  3,844        1.44%          $  5,156          1.94%
Income Taxes                                                   (1,418)      -0.53%            (1,893)        -0.71%
                                                             --------      ------           --------        ------
 Net Income Before Change in Acct. Principle                 $  2,426        0.91%          $  3,263          1.23%
Cumulative Effect of Change in Acct. Principle                      -        0.00%                 -          0.00%
                                                             --------      ------           --------        ------
 Net Income                                                  $  2,426        0.91%          $  3,263          1.23%

Estimated Core Net Income
- -------------------------
Net Income (Before Cum. Effect of Acct. Change)              $  2,426        0.91%          $  3,263          1.23%
Addback(Deduct): Non-Recurring (Inc)/Exp                          (45)      -0.02%              (182)        -0.07%
Tax Effect (1)                                                     17        0.01%                67          0.03%
                                                             --------      ------           --------        -------
  Estimated Core Net Income                                  $  2,398        0.90%          $  3,148          1.18%

Memo:

      Expense Coverage Ratio (2)                               179.78%                        201.11%
      Efficiency Ratio (3)                                      50.24%                         45.54%
      Effective Tax Rate                                        36.89%                         36.71%
      Return on Average Equity                                   7.68%                          9.85%


(1)  Reflects an estimated 37 percent effective tax rate for each period.
(2)  Net interest income divided by operating expenses.
(3)  Operating expenses as a percent of the sum of net interest income and other
     operating income (excludes provisions and non-operating income).

Source:  Jefferson Federal's audited and unaudited financial statements.



RP Financial, LC.
Page 1.11

deposit pricing versus the competition, which caused the Bank's cost of funds to
decline more rapidly than the yield on interest-earning assets. Despite the
concentration in ARMs and the increased liquidity, asset yields declined slowly
due in part to the five year repricing periods on ARMs, reaching the floor rates
on many ARMs and the lesser ability of its lower income borrowers to refinance
their loans during the low rate environment in recent months. Additionally, the
preponderance of loans to low-to-moderate income borrowers which have relatively
small loan balances also tend to refinance at lower rates given the costs
involved in a refinancing transaction. Thus, Jefferson Federal's most recent
earnings have benefited from rather unique circumstances. Going forward,
earnings are expected to be under pressure, particularly if interest rate rise
as the floor rates on ARMs are above current market rates and as yields on new
originations under the new lending focus will be well below portfolio yields.
The components of profitability are explored below.

     Net Interest Income

          Jefferson Federal's net interest income has increased over the last
five fiscal years, primarily reflecting balance sheet growth. The ratio of net
interest income to average assets declined from fiscal 1998 to fiscal 2001,
largely as a result of spread compression as short-term interest rates increased
and the yield curve flattened, particularly in fiscal 2001. The net interest
income ratio compression is evidenced by the net interest spread decline from
2.92% in fiscal 2000 to 2.56% in fiscal 2001. During fiscal 2002 and the most
recent 12 months, the numerous interest rate reductions by the Federal Reserve
Board ("FRB") coupled with the adoption of a more conservative deposit pricing
strategy led the Bank's cost of funds to decline more rapidly than the yield on
interest-earning assets. The yield on interest-earning assets has been supported
by several characteristics of the Bank's loan portfolio which limit the changes
in yields in response to changing interest rates and the increased liquidity
including: (1) the majority of the Bank's adjustable rate loans are indexed to
the National Average Contract Rate for the Purchase of Previously Occupied Homes
by Combined Lenders, which is a lagging market index; and (2) Jefferson
Federal's loan portfolio includes many ARM loans with floor rates. Given the
reduction in interest rates over the last several years, many portfolio loans
are at their contractual lower limit and, in effect, have become fixed rate
loans in the prevailing interest rate environment. Further, since a number of
these loans were subprime loans to cover income



RP Financial, LC.
Page 1.12

borrowers, the borrower appears to have a lower propensity to refinance in a
current low interest rate environment.

          Thus, notwithstanding the de minimis increase in total assets over the
most recent periods, net interest income increased since fiscal 2001 as the
Bank's interest rate spread increased from 2.56% in fiscal 2001, to 3.02% in
fiscal 2002 and 3.79% during the six months ended December 31, 2002. Details
regarding Bank's yields, costs and spreads are included as Exhibit I-4.

          As noted earlier, asset yields are expected to come under pressure as
the lending strategy has shifted, the proportion of higher yielding subprime
loans are declining and new loan originations are at market rates that are
substantially lower than portfolio yields. The reinvestment of the offering
proceeds should increase net interest income, although the initial reinvestment
yields are expected to depress asset yields and the net interest income ratio.

     Loan Loss Provisions

          Loan loss provisions have been relatively high by industry standards
as the Bank's past lending philosophy has historically reflected a willingness
to accept a relatively higher level of credit risk exposure (including subprime
loans) if such loans could provide sufficient yields and other favorable terms,
i.e., adjustable rate or shorter terms. As a result, loan loss provisions were
inflated due to the relatively high level of loan delinquencies, foreclosures
and chargeoffs, particularly given the weakness in the economy. Specifically,
loan loss provisions totaled $700,000 in fiscal 1998, equal to 0.38% of assets,
and have increased to equal $1.3 million, equal to 0.48% of average assets for
the 12 months ended December 31, 2002.

          However, as previously discussed, Jefferson Federal has recently
restructured the loan underwriting policies and procedures with the objective of
improving asset quality and the overall risk profile. Going forward, management
of Bank intends to continue to evaluate the adequacy of the level of general
valuation allowances ("GVAs") on a regular basis, establishing additional loan
loss provisions in accordance with Bank's asset classification and loss reserve
policies. In this regard, management believes that the level of loan loss
provisions may continue to trend higher over the near term given the current
focus on aggressive collections and the



RP Financial, LC.
Page 1.13

higher level of personal and commercial bankruptcies in the market owing to the
prevailing weak economic environment.

     Other Operating Income

       Other operating income has shown an upward trend since fiscal 1998,
increasing from $799,000 to $967,000 for the 12 months ended December 31, 2002,
primarily reflecting general growth, fees on loans and deposits and late charges
on loans. The other operating income ratio remains moderate in comparison to
industry averages, due in part to competitive conditions prevailing locally and
historically limited revenue diversification. More recently, the Bank's
operations have become more diversified and management has indicated that it
will be seeking to expand non-interest income by expanding fee generating
commercial loan and deposit relationships. The Bank may also evaluate offering
non-traditional products and services in the future with the objective of
increasing fee income. However, growth in the level of non-interest operating
income is expected to be gradual.

     Operating Expenses

       After several years of emphasizing operating expense containment,
Jefferson Federal's operating expenses experienced a sharp increase with the
strategy shift under the new CEO. Overall compensation expense increased by $0.7
million to $2.5 million for the 12 months ended December 31, 2002, reflecting
the employment of the new CEO and additional staffing, in part due to more
aggressive loan collection. Real estate owned ("REO") expense has grown in
recent periods, particularly as the Bank has accelerated collections and been
less willing to accommodate chronically delinquent borrowers. Accordingly REO
expense increased by $263,000 for the 12 months ended December 31, 2002,
relative to the level reported in fiscal 2001. As a result, since fiscal 1998,
operating expenses have increased from $3.1 million, or 1.70% of average assets,
to $5.2 million, or 1.97% of average assets, for the 12 months ended December
31, 2002. The Bank's operating expenses are expected to continue to increase
given the expansion and diversification plans and the incremental costs of
additional stock-related benefit plans in conjunction with the second step
conversion. Continued growth and reinvestment of the conversion proceeds should
increase revenues sufficiently to offset the anticipated expense increase.



RP Financial, LC.
Page 1.14

     Non-Operating Items

       Non-operating income and expenses have had a relatively modest impact on
earnings in recent years, and have primarily consisted of gains on the sale of
fixed assets, REO, and investment securities. During fiscal 2001 and 2002, small
net non-operating gains from the sale of REO equaled $33,000 and $45,000,
respectively. For the 12 months ended December 31, 2002, non-operating income
totaled $182,000, equal to 0.07% of average assets, comprised of gains on the
sale of REO and investment securities.

     Taxes

       The Bank is in a fully taxable position with regard to federal and state
corporate income taxes and, as a result, the Bank's tax rate has ranged from a
low of 36.6% to a high of 37.42% equaled 37.7% for the 12 months ended December
31, 2002.

     Efficiency Ratio

       Jefferson Federal's efficiency ratio increased from 1998 to fiscal 2002
largely due to (1) the increase in operating expenses and (2) limited increases
in a concurrent net interest income. Specifically, the efficiency ratio
increased from 42.2% in fiscal 1998 to 50.2% for fiscal 2002. The efficiency
ratio improved in the most recent 12 months, diminishing to 45.5% for the 12
months ended December 31, 2002, reflecting the benefits of the declining
interest rate environment despite the rise in operating expenses.

     Return on Equity

       The Bank's return on average equity steadily declined from 10.28% in
fiscal 1998 to 7.68% in fiscal 2002 as equity grew while earnings remained
relatively stable. The return on equity increased sharply to 9.85% in the most
recent 12 months as the Bank's earnings increased due to the unique convergence
of declining interest rates, strategy shifts and portfolio composition. The
Bank's return on equity will decline sharply on a post-conversion basis as the
pro forma equity will increase substantially while the reinvestment of proceeds
will be at a lower market rate than current portfolio yields.



RP Financial, LC.
Page 1.15

Interest Rate Risk Management

     The primary aspects of the Bank's interest rate risk management include::

       .  Maintaining a lending focus on adjustable rate residential mortgage
          loans with repricing frequencies of up to five years;

       .  Limiting new fixed rate residential mortgage loan originations to
          maturities of 15 years or less;

       .  Maintaining a diversified loan portfolio which includes loans secured
          by commercial real estate and multi-family properties as well as
          non-mortgage loans which carry short terms to maturity and/or variable
          interest rates;

       .  Improving asset quality with the objective of increasing the ratio of
          interest-earning assets to interest-bearing liabilities;

       .  Maintaining a moderate balance of cash or short-term investments with
          relatively short-to-intermediate terms and designating all investments
          in the current rate environment as AFS; and

       .  Maintaining strong capital, which provides a favorable level of
          interest-earning assets relative to interest-bearing liabilities.

     These strategies have generally served to increase the sensitivity of
Bank's assets to changes in interest rates and lengthen the duration of
liabilities. The Board of Directors on an on-going basis assesses the Bank's
interest rate risk by examining factors such as asset/liability repricing,
investments, capital and liquidity. Jefferson Federal primarily utilizes
interest rate risk reports prepared by OTS on a quarterly basis to review the
level of interest rate risk. As of December 31, 2002, Jefferson Federal's
expected change in net portfolio value ("NPV") under a 200 basis point increase
in interest rates was a negative 120 basis points and the post-shock NPV ratio
equaled 14.49%. Moreover, the Bank's interest rate risk exposure is projected to
be further reduced following the completion of the second step conversion and
reinvestment of the net conversion proceeds into interest-earning assets.

     Overall, the data suggests Bank's earnings would be negatively impacted by
rising interest rates, although Bank has been somewhat successful in reducing
its exposure to interest rate risk. At the same time, there are numerous
limitations inherent in such analyses, such as the credit risk of Bank's
adjustable rate loans in a rising interest rate environment. In this regard,



RP Financial, LC.
Page 1.16

there are two characteristics of the asset portfolio have provided Jefferson
Federal with substantial spread benefits in the declining interest rate
environment as follows: (1) many of the Bank's ARM loans reached their
contractual floor levels; and (2) most of the Bank's ARM loans are repriced
based on a lagging market index. Of course in a higher or rising interest rate
environment, these same factors may likely result in lower earnings levels,
notwithstanding the fact that the majority of Jefferson Federal's assets are
short term or variable rate.

Lending Activities and Strategy

       The Bank originates permanent first mortgage loans for portfolio and, as
such, focuses its origination efforts on ARMs and shorter term fixed rate loans
(generally with maturities of no more than 15 years). At December 31, 2002, 1-4
family residential mortgage loans (including home equity loans and lines of
credit), represented the single largest component of the loan portfolio totaling
$90.9 million, or 47.4% of loans receivable (see Exhibit I-6). Generally, all
loans are originated by the Bank by in-house lending officers and are
underwritten and processed in-house.

       Residential ARMs primarily consist of a one-year ARMs indexed to the
National Average Contract Rate for the Purchase of Previously Occupied Homes by
Combined Lenders as published by the Federal Housing Finance Board, with an
annual repricing cap of 2.0%, and an interest rate ceiling which is generally
5.0% above the initial rate. Typically, the rate on residential ARMs originated
by Jefferson Federal is fixed for the first five years of the loan and adjust
annually thereafter.

       The Bank's continued ability to originate high yielding ARM loans has
been an important factor contributing to the strong net interest margin and net
earnings levels. In this regard, the Bank has been effective in marketing ARM
loans to low-to-moderate income borrowers by maintaining low fees and
eliminating origination points, and by providing timely loan processing and
approval of loan applications. The Bank generally originates ARMs without the
inducement of a teaser rate, which further supports ARM yields.

       To a much lesser extent, Jefferson Federal also makes fixed rate
residential mortgage loans. However, the maturity of such loans is generally
limited to a maximum of 15 years so as



RP Financial, LC.
Page 1.17

to limit interest rate risk. The Bank is a portfolio lender and loan sales have
not been a significant factor in Jefferson's operations historically.

       As a complement to the 1-4 family permanent mortgage lending activities,
Jefferson Federal also offers home equity loans in the form of a variable rate
lines of credit ("HELOCs"). The Bank offered this product commencing in fiscal
2002, and as a result, the outstanding balance remains modest ($799,000, equal
to 0.4% of total loans).

       Commercial real estate and multi-family loans totaled $44.1 million
(23.0% of loans) and $12.6 million (6.5% of loans), respectively. Commercial
real estate and multi-family loans originated by Jefferson Federal are extended
up to a loan-to-value ("LTV") ratio of 80% and carry adjustable rates with
amortization periods generally ranging from 10 to 25 years. The Bank uses the
same ARM repricing index for multi-family and commercial real estate loans as
for 1-4 family loans, although a higher repricing margin is generally applied to
the commercial real estate and multi-family loans. Commercial real estate and
multi-family loans originated by the Bank are collateralized by local
properties, consisting primarily of small office buildings, family-type business
establishments and apartment buildings. The Bank's commercial real estate and
multi-family loan portfolio has exhibited relatively strong growth in recent
years, and has grown proportionally to total loans. As of December 31, 2002, the
largest commercial real estate or multi-family loan in the Bank's portfolio had
a principal balance of $4.3 million, in comparison to the current loans to one
borrower regulatory limit of $5.5 million. Given the competition for mortgage
financing in the secondary market, commercial real estate lending provides the
Bank with an opportunity to replace some of the residential mortgage business
being refinanced in the secondary market with these larger projects.

       Construction and land loans comprised the balance of the Bank's mortgage
loan portfolio, amounting to $8.5 million and $16.6 million, respectively, at
December 31, 2002. Construction loans offered are generally for the construction
of pre-sold homes, which typically convert into permanent loans at the end of
the construction period. The Bank requires an 85% LTV ratio for construction
loans on owner occupied homes. To a more limited extent, the Bank will lend to
builders for "spec" homes or for commercial construction, but in such cases the
Bank requires a LTV ratio of 80% or less. At present, Jefferson lends to
approximately 3 or 4 builders who construct spec homes.



RP Financial, LC.
Page 1.18

       The balance of the Bank's loan portfolio consisted of non-mortgage loans,
which totaled $18.4 million, or 9.6% of gross loans receivable at December 31,
2002. Loans collateralized by automobiles and commercial business loans were the
largest components of the non-mortgage portfolio. The balance of the
non-mortgage loan portfolio is secured by recreational vehicles and boats, debt
consolidation loans and personal unsecured debt and other similar types of
consumer installment credit. The Bank also markets education loans as "Team
Lender" through the Educational Funding of the South, Inc. ("EdSouth"), whereby
EdSouth funds the loan and pays a marketing fee to Jefferson Federal for the
loan referral. All non-mortgage loans funded by Jefferson Federal, including
auto loans, are underwritten and originated directly by the Bank. The Bank
expects to continue to originate non-mortgage loans in order to present a broad
line of products to customers although the lending emphasis will remain fixed on
real estate based mortgage lending.

     Subprime Lending

       The Bank's lending activities described in the foregoing section include
subprime loans. The Bank uses Beacon credit scores to predict the likelihood
that an existing borrower or potential customer will become a serious credit
risk. Beacon credit scores range from 400 to 850. Jefferson Federal has defined
subprime loans to be those loans made to borrowers with a Beacon credit score of
less than 600. Subprime loans are particularly susceptible to delinquencies and
losses, and have been an important factor in the Bank's relatively high rate of
loan delinquency and loan losses in relation to industry averages.

       The Bank has recently adopted more stringent loan underwriting standards
with the objective of reducing the level of NPAs and loan losses and overall
risk exposure. Accordingly, the origination of subprime loans has diminished
since fiscal 2000. Specifically, subprime loans have decreased from $45.5
million, equal to 25.9% of total loans at June 30, 2000, to $33.0 million, equal
to 17.2% of total loans at December 31, 2002. The majority of the Bank's
subprime loans are mortgage loans at $31.6 million. Notwithstanding the recent
reduction, subprime loans represent an area of heightened credit risk exposure,
particularly in the current weakened economic environment.



RP Financial, LC.
Page 1.19

       Exhibit I-9, which shows Bank's loan originations/purchases, repayments
and sales over the past three fiscal years, highlighting the residential
mortgage lending emphasis. In this regard, mortgage loan originations totaled
$62.4 million, equal to 79.4% of total loan originations in fiscal 2002, and
$18.5 million, equal to 72.1% of loan originations for the six months ended
December 31, 2002.

       Loan originations and purchases have fluctuated based primarily on market
factors including the interest rate environment. For the fiscal 2000, 2001 and
2002, total loan originations equaled $77.8 million, $82.7 million and $78.6
million, respectively. For the six months ended December 31, 2002, loan
originations and purchases equaled $25.7 million. Loan volume has diminished
during the six months ended December 31, 2002 (annualized basis) as a result of
the shift in the lending strategy, the early stages of the commercial lending
focus and the cautious approach to commercial lending in the current weakened
economic environment.

Asset Quality

       The Bank has traditionally been relatively flexible in its underwriting
relative to the local competition, which provided Jefferson Federal with a
market niche where it could generate loans with relatively high yields and short
terms to maturity and/or adjustable rates. The Bank's prior lending strategy
focused on the collateral value underlying a mortgage loan and thus was willing
to engage in subprime lending in the local market. However, this strategy led to
the Bank's relatively high rate of loan delinquencies, loan loss provisions and
loan chargeoffs historically.

       Specifically, as reflected in Exhibit I-10, the balance of NPAs
diminished from a high of $5.6 million, equal to 2.55% of assets at the end of
fiscal 1999, to a low of $3.1 million, equal to 1.16% of assets as of the end of
fiscal 2002. As of December 31, 2002, non-performing loans totaled $2.4 million,
or 0.91% of loans, while REO equaled $1.8 million. Total NPAs equaled $4.2
million as of December 31, 2002, which equaled 0.75% of assets. Many of the
Bank's residential loans are non-conforming to secondary market standards,
reducing the marketability of such loans, particularly the subprime loans.

       As of December 31, 2002, Bank's loan loss reserves equaled $2.69 million,
or 1.40% of the loan portfolio; the reserve coverage ratio as a percent of
non-performing loans ("NPLs") was



RP Financial, LC.
Page 1.20

113.1%. While loss reserves as a percent of loans outstanding and NPLs have been
increasing in recent years, the reserve coverage diminished in the most recent
six months as the balance of NPLs increased and chargeoffs were relatively high.
The Bank reviews and classifies assets on a quarterly basis and establishes loan
loss provisions based on the overall quality, size and composition of the loan
portfolio, as well other factors such as historical loss experience, industry
trends and local real estate market and economic conditions.

       The Bank's market has a number of large manufacturing employers which are
particularly susceptible to national economic trends. Management believes it is
addressing the credit risk exposure in the loan portfolio by implementing more
stringent loan underwriting standards and aggressively pursuing collections.
However, any change in the overall risk profile of the loan portfolio is
expected to be gradual.

       The increased collection policies and weakened economic environment are
evident in nearly doubling of REO during the most recent six months to nearly
$1.8 million, or 0.68% of assets.

Funding Composition and Strategy

       Deposits have consistently been Jefferson Federal's primary source of
balance sheet funding. As of December 31, 2002, deposits totaled $223.0 million,
which reflects 6.2% compounded annual growth since the end of fiscal 1998. As
discussed previously, Jefferson Federal has historically been at the upper end
of the competitive range in terms of its deposit pricing, but management has
revamped the deposit pricing structure during the past year to remain
competitive but more in line with the market averages. The shift in deposit
pricing led to deposit withdrawals during the past six months and less deposit
inflows.

       CDs constituted the largest portion of the deposit base, in aggregate
equal to 75.3% of total deposits as of December 31, 2002. Savings accounts
comprised 6.0% of total deposits, while transaction accounts, consisting of
checking, NOW and MMDAs, comprised the balance of deposits at 18.7%. The
majority of customers have deposit balances of less than $100,000, and the
balance of jumbo CDs, as of December 31, 2002, totaled $38.9 million, or 17.4%
of total deposits. Typically, the Bank does not solicit brokered CDs and
currently has none in portfolio.



RP Financial, LC.
Page 1.21

       Borrowings generally have been limited, as deposit growth has been
adequate to meet the Bank's funding needs. As of December 31, 2002, the Bank's
borrowings consisted of $2.0 million in advances from the FHLB of Cincinnati.

Subsidiary

       Jefferson Federal currently has only one subsidiary, Jefferson Service
Corporation of Morristown, Tennessee, Inc. ("JSC"), which owns stock of
Intrieve, Inc., a computer service bureau which provides off-site on-line
computer services to the Bank. The value of the Intrieve, Inc. stock was $15,000
as of December 31, 2002. In April 2002, JSC purchased a membership interest in
Bankers Title of East Tennessee, LLC ("Bankers Title"), a title insurance
company. Bankers Title provides title insurance on mortgage loans originated by
the Bank and other financial institution members. In this regard, while all
mortgage borrowers are required to obtain title insurance, they are not required
to purchase such insurance from Bankers Title.

Legal Proceedings

       Other than the routine legal proceedings that occur in the Bank's
ordinary course of business, the Bank is not involved in litigation which is
expected to have a material impact on the Bank's financial condition or
operations.



RP Financial, LC.
Page 2.1

                                 II. MARKET AREA

Introduction

     Jefferson Federal conducts operations out of its main office in Morristown,
Tennessee (Hamblen County) which is situated approximately 40 miles to the
northeast of Knoxville, Tennessee, in the northeastern section of the state. The
Bank's market is within an area of fertile farmland, and has abundant recreation
opportunities offered by nearby rivers, lakes and mountains. Hamblen County has
approximately 59,000 residents and is also the home of over 120 industries of
local, national, and international origin and one of Tennessee's leading
community colleges. Local industries are supported by a good transportation
system, including rail connections and two interstate highways - the main line
of the Norfolk Southern Railroad between Chattanooga and Washington, D.C. runs
through Morristown providing convenient access to both Atlantic and Gulf of
Mexico ports. The location in the southeast U.S. also provides ready ground
transportation to destinations within southeast, midwest and mid-atlantic
regions of the country.

     The economy of the Bank's market is primarily oriented to manufacturing and
agriculture. In terms of the manufacturing sector, the local economy is focused
on three product types as follows: (1) automotive and heavy equipment
components; (2) plastics, paper and corrugated products; and (3) furniture. Also
contributing to employment are transportation-related companies and wholesale
distributors which result from the presence of local manufacturers and the areas
central location between east coast, southern and midwestern markets.

     Competition from other financial institutions operating in the area is
significant and includes regionally-based financial institutions that compete
directly with the Bank both in terms of deposits and lending. However, the Bank
has remained highly competitive in the market which it serves by placing an
emphasis on its local orientation (i.e., most of the commercial bank competitors
are subsidiaries of larger institutions headquartered outside its market) and by
providing its customers with quality and efficient service. Currently, the Bank
does not compete with many regional bank competitors in terms of offering a
broad array of financial services such



RP Financial, LC.
Page 2.2

as insurance and investment products. The long term transition of the Bank to a
broader financial services orientation should enhance the ability to offer such
products profitably while also improving Jefferson Federal's customer
demographics.

     Future growth opportunities for Jefferson Federal depend on the future
growth and stability of the regional economy, demographic growth trends, and the
nature and intensity of the competitive environment. These factors have been
briefly examined in the following pages to help determine the growth potential
that exists for the Bank and the relative economic health of Jefferson Federal's
market area. The growth potential and the stability provided by the market area
have a direct bearing on the market value of the Bank, and will be factored into
our valuation analysis accordingly.

Market Area Demographics

     Table 2.1 presents information regarding the demographic and economic
trends for the Bank's market area from 1990 to 2001 and projected through 2006.
Data for the nation and the State of Tennessee is included for comparative
purposes. The data reflects that the Bank operates in a relatively small market
which is rural to semi-rural in character. Most recent population estimates as
of the end of 2001 indicate that Hamblen County possessed a total population of
approximately 59,000, which reflects 1.5% annual growth since 1990. The related
demographic trends (projected through 2006) show Hamblen County continuing to
expand at a moderate pace equal to 1.0% annually.

     Examination of another characteristic of the Bank's market area, median
household income and per capita income, revealed that per capita income levels
in Jefferson Federal were somewhat below statewide averages (95% of the state
average), reflecting, in part, the more rural character of the local market.
Importantly, median household income growth rates for Hamblen County
approximated the state average while per capita income growth rates exceeded the
state average.



RP Financial, LC.
Page 2.3

                                    Table 2.1
                             Jefferson Federal Bank
                         Summary Demographic Information



                                                                                  Growth      Growth
                                                     Year                          Rate        Rate
                                   -----------------------------------------
                                       1990          2001           2006         1990-2001   2001-2006
                                       ----          ----           ----         ---------   ---------
                                                                                    (%)         (%)
                                                                              
Population(000)
- ---------------
United States                        248,710        285,412        302,195          1.3%        1.1%
Tennessee                              4,877          5,774          6,143          1.5%        1.2%
Hamblen County                            50             59             62          1.5%        1.0%

Households(000)
- ---------------
United States                         91,947        107,079        113,737          1.4%        1.2%
Tennessee                              1,854          2,279          2,485          1.9%        1.7%
Hamblen County                            19             24             26          2.0%        1.6%

Median Household Income($)
- --------------------------
United States                       $ 29,199       $ 41,368       $ 46,878          3.2%        2.5%
Tennessee                             23,604         36,128         41,287          3.9%        2.7%
Hamblen County                        22,414         34,557         37,783          4.0%        1.8%

Per Capita Income($)
- --------------------
United States                       $ 13,179       $ 21,033           N.A.          4.3%        N.M.
Tennessee                             11,096         18,949           N.A.          5.0%        N.M.
Hamblen County                        10,235         17,932           N.A.          5.2%        N.M.

2001 Age Distribution(%)            0-14 Yrs.     15-24 Yrs.     25-44 Yrs.   45-64 Yrs.    65+ Yrs.   Median Age
- ------------------------            ---------     ----------     ----------   ----------    --------   ----------
United States                           21.1%          14.0%          29.8%        22.6%       12.5%         35.6
Tennessee                               20.3%          13.8%          29.7%        23.8%       12.4%         36.2
Hamblen County                          19.2%          12.9%          29.1%        25.5%       13.3%         37.5

                                    Less Than      $15,000 to     $25,000 to  $50,000 to $100,000 to
2001 HH Income Dist.(%)              $15,000         24,999        $49,999      $99,999    $149,999     $150,000+
- -----------------------              -------         ------        -------      -------    --------     ---------
United States                           16.3%          13.4%          29.1%        29.1%        7.8%          4.4%
Tennessee                               19.5%          14.8%          30.7%        26.7%        5.4%          2.8%
Hamblen County                          20.7%          15.5%          30.7%        26.5%        4.6%          1.9%

Source: ESBI




RP Financial, LC.
Page 2.4

Local Economy

     The City of Morristown aggressively seeks to attract new business and
markets itself as a business-friendly jurisdiction. Expansion of a highly
diversified industrial base is evidenced by two existing industrial parks (East
Tennessee Valley Industrial District and Morristown Airport Industrial District)
and the development of a third industrial park, East Tennessee Progress Center
(900 acres located in South Hamblen County) which is now coming on line. The
historical dominance of furniture and textiles has been supplemented with a
broad base of other industries making the local economy less susceptible to
downturns in the U.S. economy and providing higher income levels. Automotive and
heavy equipment parts are produced in Morristown by Mahle, Inc., a manufacturer
of precision pistons for gas and diesel engines. ArvinMetitor (formerly Rockwell
International) has an on-road axle plant in Morristown, Toyota TRW Automotive
manufactures pumps and hoses for power steering systems, BOS Automotive, Inc. is
an original equipment manufacturer of interior trim components and seating for
the industry is built by the Lear Corporation. Other companies which have
located operations in Morristown include the Howmet Corporation, where jet
turbine components are molded and MacDermid Graphic Arts, a producer of printing
blankets. The furniture industry is represented through institutional/contract
seating manufacturer Shelby Williams, upholstered furniture by the Berkline
Corporation, bedroom furniture by Lea Industries, various foam products from
Foamex International, Inc. and numerous second tier providers. Diversity in
size, market and product creates a healthy base for the economy of Morristown
and makes the community a vital part of the health of all of eastern Tennessee.
Table 2.2 provides a sampling of the largest employers operating in its markets.



RP Financial, LC.
Page 2.5

                                    Table 2.2
                             Jefferson Federal Bank
                        Major Employers in Hamblen County

                                         2002
  Company                             Employees              Product/Service
  -------                             ---------              ---------------

  Berkline Corp.                        1,590                Furniture/Veneer
  MAHLE, Inc.                           1,500                Aluminum Pistons
  Shelby Williams                         750                Contract Sewing
  Lear Corp.                              750                Auto Seat Frames
  Koch Foods                              690                Process Poultry
  Toyota TRW Automotive                   550                Pumps & Hoses

  Sources: Hamblen County Chamber of Commerce; Tennessee Department of Economic
           and Community Development.

     As shown in Table 2.3 below, the unemployment rates for Tennessee have
compared favorably to the national rate as well as the rate in Hamblen County.
In this regard, the average unemployment rate in Hamblen County has decreased
from 2001 to 2002, but remained above the state average and slightly below the
national average. Importantly, the slow economy in the Bank's market has been
evidenced in other ways such as through diminished hours worked for hourly
employees in the manufacturing sector which is the largest component of the
local economy.

                                    Table 2.3
                             Jefferson Federal Bank
                         Market Area Unemployment Trends

                                       December 2001    December 2002
                                        Unemployment     Unemployment

        United States                       5.8%             6.0%
        Tennessee                           5.2%             4.9%
        Hamblen County                      6.2%(1)          5.6%(1)

        (1) Reflects the annual average rate.
        Source: Bureau of Labor Statistics.

     Although eclipsed by manufacturing as Hamblen County's number one industry,
agriculture is still an important component of the local economy. The county's
600+ farms



RP Financial, LC.
Page 2.6

average 78 acres with an average dollar value of land and building per farm of
about $261,000. The most important cash crops of Hamblen County are soybeans,
tobacco, wheat and corn. The raising of animals, including cattle and hogs, is
the number one livestock activity followed by dairy farming and poultry
breeding.

     The Hamblen County school system currently has a combined enrollment of
about 9,000 students in grades K-12, including special education. A
comprehensive building program, including both construction and renovation, is
greatly improving school facilities. A county-wide transportation system is
available to all students. The system is governed by a seven-member board of
education and an appointed Director of Schools. A vocational program within the
system develops skills for post-school employment. A number of specific courses
are offered that complement local industry. Post-secondary education is provided
by Walters State Community College, a two-year facility serving over 4,000 East
Tennessee students from surrounding counties. Modern facilities, a top faculty
and administrators and a wide range of programs make Walters State a model for
the community college system in Tennessee.

Market Area Deposit Characteristics/Competition

     Table 2.4 displays deposit market trends and deposit market share,
respectively, for commercial banks and savings institutions in the market area
from June 2000 to June 2002. Deposit growth trends are important indicators of a
market area's current and future prospect's for growth. The table indicates that
overall deposit growth in Tennessee and Hamblen County was moderate for the
period from June 30, 2000 to June 30, 2002, equaling 3.5% and 3.3% annually. The
deposit data also indicates that while the state experienced a shift in deposits
away from savings institutions and into commercial banks, Hamblen County
experienced higher growth in thrift deposits, reflecting the success of
Jefferson Federal's marketing efforts.



RP Financial, LC.
Page 2.7

                                    Table 2.4
                             Jefferson Federal Bank
                                 Deposit Summary



                                                          As of June 30,
                                ---------------------------------------------------------------
                                           2000                               2002
                                -----------------------------     -----------------------------    Deposit
                                             Market   # of                     Market    # of    Growth Rate
                                Deposits     Share   Branches     Deposits     Share   Branches   2000-2002
                                --------     -----   --------     --------     -----   --------   ---------
                                                    (Dollars in Thousands)                           (%)
                                                                            
State of Tennessee           $ 72,159,190    100.0%   1,976     $ 77,308,143   100.0%    2,008       3.5%
 Commercial Banks              68,437,892     94.8%   1,878       73,550,074    95.1%    1,917       3.7%
 Savings Institutions           3,721,298      5.2%      98        3,758,069     4.9%       91       0.5%

Hamblen County               $    693,808    100.0%      17     $    739,684   100.0%       18       3.3%
 Commercial Banks                 494,667     71.3%      16          507,835    68.7%       17       1.3%
 Savings Institutions             199,141     28.7%       1          231,849    31.3%        1       7.9%
 Jefferson FS&LA                  199,141     28.7%       1          231,849    31.3%        1       7.9%



Source: FDIC

     Jefferson Federal holds the largest share of the Hamblen County deposit
market, with approximately 31.0% of total deposits. As is evidenced in the data
showing competitor deposits (see Table 2.5), the most significant competitors
for the Bank consist of three large regional and superregional banks, including
SunTrust, First Tennessee, and Union Planters, which have market shares ranging
between 16.6% to 20.1% of the deposit market. The Bank plans to compete with
these larger institutions over the long term by emphasizing its local roots, and
providing a consistently high level of service. Additionally, to the extent
possible, product offering will be expanded on a gradual basis so as to be more
competitive as well.



RP Financial, LC.
Page 2.8

                                    Table 2.5
                             Jefferson Federal Bank
                               Competitor Analysis



                                                                   Total    Market
Rank             Institution                 Charter  Branches   Deposits   Share
- ----             -----------                 -------  --------   --------   -----
                                                             
 1    Jefferson Bancshares M.H.C. (TN)        Thrift     3 (1)   $231,849   30.99%
 2    SunTrust Banks Inc. (GA)                Bank       3        150,016   20.05
 3    First Tennessee National Corp. (TN)     Bank       4        129,018   17.24
 4    Union Planters Corp. (TN)               Bank       3        123,800   16.55
 5    National Commerce Fin. Corp. (TN)       Bank       2         35,209    4.71
 6    Andrew Johnson Bankshares, Inc. (TN)    Bank       1         33,447    4.47
 7    Greene County Bancshares Inc. (TN)      Bank       2         32,459    4.34
 8    NBN Corp. (TN)                          Bank       2         12,368    1.65
                                                         -         ------    ----

        Totals                                          20       $748,166  100.00%


 (1) Includes drive-throughs.

     With regard to lending competition in the local market area, the Bank
believes that the most significant competition from the same institutions
providing deposit services, most of whom have placed an emphasis on real estate
lending as a line of business, in addition to competition with other local and
regional mortgage companies, independent mortgage brokers and credit unions in
originating mortgage and non-mortgage loans. To remain competitive, Jefferson
Federal focuses on providing commercial mortgage loans, commercial business
loans, residential mortgage loans, consumer loans and retail and commercial
deposit services to existing customers and the new customers attracted to the
Bank.

                             * * * * * * * * * * * *

     The conversion proceeds will enhance the Bank's competitiveness by
providing increased operating flexibility, including de novo branching, expanded
loans-to-one borrower limits which will enhance the ability to market to strong
commercial accounts.



RP Financial, LC.
Page 3.1

                            III. PEER GROUP ANALYSIS

     This chapter presents an analysis of Jefferson Federal's operations versus
a group of comparable savings institutions (the "Peer Group") selected from the
universe of all publicly-traded savings institutions in a manner consistent with
the regulatory valuation guidelines. The basis of the pro forma market valuation
of Jefferson Federal is derived from the pricing ratios of the Peer Group
institutions, incorporating valuation adjustments for key differences in
relation to the Peer Group. Since no Peer Group can be exactly comparable to
Jefferson Federal, key areas are examined to determine if the comparative
differences warrant valuation adjustments. Such key areas examined include:
financial condition; profitability, growth and viability of earnings; asset
growth; primary market area; dividends; liquidity of the shares; marketing of
the issue; management; and effect of government regulations and regulatory
reform.

Peer Group Selection

     The Peer Group selection process is governed by the general parameters set
forth in the regulatory valuation guidelines. Accordingly, the Peer Group is
comprised of only those publicly-traded savings institutions whose common stock
is either listed on a national exchange (NYSE or AMEX), or is NASDAQ listed,
since their stock trading activity is regularly reported and generally more
frequent than non-publicly traded and closely-held institutions. Non-listed
institutions are inappropriate since the trading activity for thinly-traded or
closely-held stocks is typically highly irregular in terms of frequency and
price and thus may not be a reliable indicator of market value. We have also
excluded from the Peer Group those companies under acquisition or subject to
rumored acquisition and mutual holding companies since their pricing ratios may
be subject to unusual distortion. A recent listing of the universe of all
publicly-traded savings institutions is included as Exhibit III-1.

     Ideally, the Peer Group, which must have at least 10 members to comply with
the regulatory valuation guidelines, should be comprised of locally or
regionally-based savings institutions with comparable resources, strategies and
financial characteristics. There are approximately 230 publicly-traded
institutions nationally and, thus, it is typically the case that



RP Financial, LC.
Page 3.2

the Peer Group will be comprised of institutions with relatively comparable
characteristics, however there will likely be a number of differences as well.
To the extent that differences exist between the converting institution and the
Peer Group, valuation adjustments will be applied to the converting institution
to account for the differences. Since Jefferson Federal will be a full stock
public company upon completion of the offering, we considered only full stock
public companies to be viable candidates for inclusion in the Peer Group (in
other words, we exclude public institutions in mutual holding company form).
From the universe of publicly-traded thrifts, we selected 10 institutions with
characteristics similar to those of Jefferson Federal. In the selection process,
we applied two "screens" to the universe of all public companies, subject to the
exclusions noted above:

     .    Screen #1. Southeast institutions with total assets less than $500
          million and equity-to-assets ratios of at least 12.0%. Six full stock
          companies met the criteria for Screen #1 and all were included in the
          Peer Group: Citizens South Banking, Dutchfork Bancshares, Inc., GS
          Financial Corp., Great Pee Dee Bancorp, Southern Banc Company and
          United Tennessee Bancshares.

     .    Screen #2. Midwest based institutions with assets between $100 million
          and $400 million in total assets and equity-to-assets ratios of at
          least 12.0%. Additionally, the Peer Group selection emphasized the
          selection of thrifts located in comparatively rural markets. Four
          seasoned full stock companies met the criteria for Screen #2 and all
          were included in the Peer Group: FFD Financial Corp., First BancTrust
          Corp, First Bancorp of Indiana, and Union Community Bancorp of
          Indiana.

     Table 3.1 shows the general characteristics of each of the 10 Peer Group
members. While there are expectedly some differences between the Peer Group
companies and Jefferson Federal, we believe that the Peer Group companies, on
average, provide a good basis for valuation subject to valuation adjustments.
The following sections present a comparison of Jefferson Federal's financial
condition, income and expense trends, loan composition, interest rate risk and
credit risk versus the Peer Group as of the most recent publicly available date.
A summary description of the key characteristics of each of the Peer Group
companies is detailed below.



RP FINANCIAL, LC.
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700

                                    Table 3.1
                      Peer Group of Publicly-Traded Thrifts
                                March 14, 2003(1)


                                                     Primary          Operating Total            Fiscal   Conv.  Stock    Market
 Ticker Financial Institution               Exchg.   Market           Strat.(2) Assets   Offices  Year    Date   Price    Value
 ------ ---------------------               ------   ------           --------- ------   -------  ----    ----   -----    -----
                                                                                                                  ($)     ($Mil)
                                                                                               
 CSBC   Citizens South Banking of NC        OTC      Southwest NC      Thrift     492         9   12-31   10/02  10.77     98
 UCBC   Union Community Bancorp of IN       OTC      W.Central IN      Thrift     272 S       7   12-31   12/97  16.40     37
 DFBS   Dutchfork Bancshares Inc of SC      OTC      Central SC        Thrift     224         3   09-30   07/00  29.76     37
 GSLA   GS Financial Corp. of LA            OTC      New Orleans LA    Thrift     210         3   12-31   04/97  18.99     29
 FBTC   First BancTrust Corp of IL          OTC      Eastcentral IL    Thrift     203         2   12-31   04/01  17.90     24
 FBEI   First Bancorp of Indiana of IN      OTC      Evansville IN     Thrift     180         7   06-30   04/99  17.23     29
 PEDE   Great Pee Dee Bancorp of SC         OTC      Northeast SC      Thrift     139         2   06-30   12/97  14.44     25
 FFDF   FFD Financial Corp of Dover OH      OTC      Northeast OH      Thrift     133         2   06-30   04/96  13.39     16
 SRN    Southern Banc Company of AL         AMEX     Northeast AL      Thrift     113         4   06-30   10/95  13.90     13
 UTBI   United Tenn. Bancshares of TN       OTC      Eastern TN        Thrift     112         3   12-31   01/98  13.19     17


 NOTES: (1) Or most recent date available (M=March, S=September, D=December,
            J=June, E=Estimated, and P=Pro Forma)
        (2) Operating strategies are: Thrift=Traditional Thrift, M.B.=Mortgage
            Banker, R.E.=Real Estate Developer, Div.=Diversified, and Ret.
            =Retail Banking.
        (3) FDIC savings bank institution.

 Source: Corporate offering circulars, data derived from information published
         in SNL Securities Quarterly Thrift Report, and financial reports of
         publicly-traded thrifts.

 Date of Last Update: 03/14/03



RP Financial, LC.
Page 3.4

     .    Citizens South Banking Corporation of NC. Citizens South Banking
          Corp., the largest member of the Peer Group with $492 million in
          assets, operates through a total of nine offices in North Carolina.
          The balance sheet composition is relatively similar to the Peer Group,
          particularly with respect to the overall composition of assets with a
          similar loans/assets ratio. The assets are principally funded with
          deposits and equity, although borrowings comprise a modest portion of
          funding liabilities. Profitability levels are also relatively
          comparable to the Peer Group average. The loan portfolio reflects a
          moderate level of diversification into high risk-weight loans
          consistent with the Peer Group, while the asset quality ratios are
          relatively good and the coverage ratios are strong.

     .    Union Community Bancorp of IN. Union Community is a $272 million
          institution operating through seven offices located in west-central
          Indiana. Union Community reported a modestly higher ratio of loans and
          lower percentage of investments than the Peer Group. Union Community's
          funding ratio with deposits was consistent with the Peer Group
          average. Profitability was relatively strong, supported by a
          relatively high net interest margin and favorable operating expense
          ratio. Union Community operates with a relatively high level of single
          family residential assets, including permanent 1-4 family loans and
          MBS.

     .    Dutchfork Bancshares, Inc. of SC. Dutchfork Bancshares is a $224
          million thrift operating in the northern portion of South Carolina
          through three offices. Dutchfork Bancshares maintains a high level of
          investments and mortgage-backed securities, while having a relatively
          low ratio of loans as a percent of assets. Dutchfork Bancshares has
          utilized borrowed funds to a greater extent than the average Peer
          Group member. ROA is slightly higher than the Peer Group average,
          notwithstanding its comparatively thin net interest margin, as the
          average tax rate was comparatively lower given the composition of
          interest-earning assets ("IEA").

     .    GS Financial Corp. of LA. GS Financial, with an asset base of $210
          million, operates through three retail branches within the New Orleans
          metropolitan area. GS Financial maintains a high level of investments
          and borrowings, reflecting a wholesale leveraging strategy.
          Accordingly, GS Financial's loans/assets ratio falls well below the
          Peer Group average. Profitability is below the Peer Group average
          owing to a comparatively lower net interest margin, given the narrow
          spreads from its wholesale leveraging activities. Non-performing loans
          are higher than the Peer Group average while its reserve coverage
          ratio is lower, despite the relatively low loans/assets ratio.

     .    First BancTrust Corp of IL. First BancTrust has $203 million in assets
          and operates out of two offices in a relatively rural area of central
          Illinois.



RP Financial, LC.
Page 3.5

          The level of loans is comparatively moderate in comparison to the Peer
          Group average, offset by a higher ratio of investments. The funding
          structure is relatively similar to the Peer Group overall in terms of
          the mix of deposits and borrowings. Profitability levels are below the
          Peer Group average owing to the relatively high operating expense
          ratio. Loan portfolio diversification was comparatively greater,
          reflecting First BancTrust's emphasis on multi-family and commercial
          mortgage lending, as well as non-mortgage business lending.

     .    First Bancorp of IN. First Bancorp has $180 million in assets and
          operates out of seven offices in the Evansville, Indiana area. First
          Bancorp operates with a relatively high level of loans while
          operations are funded with a slightly higher level of borrowings and
          lower ratio of deposits in comparison to the Peer Group average.
          Profitability levels are below the Peer Group average ratios, largely
          as a result of First Bancorp's higher operating expense ratio. Loan
          portfolio diversification was comparatively greater than the Peer
          Group reflecting a high level of non-mortgage business lending. Asset
          quality ratios reflect relatively good asset quality and the coverage
          ratios are strong.

     .    Great Pee Dee Bancorp of SC. maintains $139 million in total assets
          and operates through a total of two branches in South Carolina. Great
          Pee Dee Bancorp reported a modestly higher ratio of loans and deposits
          in comparison to the Peer Group average. Great Pee Dee Bancorp
          operates with a relatively high level of single family residential
          assets including permanent 1-4 family loans. Profitability levels are
          above the Peer Group average owing to a relatively strong net interest
          margin supported by the comparatively higher ratio of loans. Asset
          quality figures were less favorable than the Peer Group average, both
          in terms of the level of NPAs overall and reserve coverage ratio.

     .    FFD Financial Corp. of OH. is a $133 million institution operating
          through two offices located in Ohio. FFD Financial reported a modestly
          higher ratio of loans and lower percentage of investments than the
          Peer Group while the ratio of deposits was also modestly above the
          Peer Group average. Profitability fell below the Peer Group average,
          primarily as a result of a relatively thin net interest margin. FFD
          Financial is primarily a mortgage lender, with 1-4 family mortgage and
          multi-family/commercial mortgages both exceeding the Peer Group
          average. NPAs exceeded the Peer Group average while reserve coverage
          fell below the Peer Group average.

     .    Southern Banc Company of AL. Southern Banc Company is a $113 million
          thrift operating in northeast Alabama through a total of four office
          facilities. Southern Banc Company maintains a high level of
          investments and borrowings, reflecting a wholesale leveraging
          strategy. The loan



RP Financial, LC.
Page 3.6

          portfolio composition indicates a modest level of diversification as
          it is primarily a residential mortgage lender. Profitability is below
          the Peer Group average owing to a comparatively lower net interest
          margin, given the narrow spreads available in wholesale leveraging.
          Asset quality reflects a lower level of NPAs while reserve coverage
          falls within the range exhibited by the Peer Group average.

     .    United Tennessee Bancshares, Inc. United Tennessee has $112 million in
          assets and operates out of three offices in eastern Tennessee. United
          Tennessee operates with a relatively high level of loans while
          operations are principally funded with deposits and capital.
          Profitability levels are above the Peer Group average ratios, and was
          higher than any Peer Group company on an individual basis, supported
          by its strong net interest margin. Loan portfolio diversification was
          comparatively modest as United Tennessee is primarily a 1-4 family
          lender. Asset quality ratios are comparable to the Peer Group average
          and thus, reflect relatively favorable asset quality overall.

     In the aggregate, as shown in the table below, the Peer Group companies
maintain a much higher level of capital than the industry average, generate
similar profitability as a percent of average assets, and, as a result, earn a
lower return on equity. Accordingly, as is typical for highly capitalized
thrifts with moderate return on equity ratios, the Peer Group's average P/B
ratio was steeply discounted to the average for all publicly-traded thrifts
while the P/E ratio reflected a market premium. Often such pricing reflects the
market's expectations that these highly capitalized thrifts will either leverage
their equity through growth or will implement capital management strategies.

                                                       All
                                                 Publicly-Traded
                                              Savings Institutions    Peer Group
                                              --------------------    ----------
     Financial Characteristics (Averages)
     ------------------------------------
     Assets ($Mil)                                   $ 2,180            $  208
     Market Capitalization ($Mil)                    $   273            $   33
     Equity/Assets (%)                                 10.59%            15.76%
     Core Return on Assets (%)                          0.79%             0.81%
     Core Return on Equity (%)                          7.64%             5.26%

     Pricing Ratios (Averages)(1)
     ----------------------------
     Core Price/Earnings (x)                           15.91x            20.32x
     Price/Book (%)                                   132.07%            95.16%
     Price/Assets (%)                                  13.71%            14.97%

     (1) Based on market prices as of March 7, 2003.



RP Financial, LC.
Page 3.7

     While there are many financial similarities between Jefferson Federal and
the Peer Group companies, there are a number of differences that lead to
valuation adjustments in the next section.

Financial Condition

     Table 3.2 shows comparative balance sheet measures for Jefferson Federal
(pre-conversion basis) and the Peer Group. Jefferson Federal's equity ratio of
13.4% falls modestly below the Peer Group's average net worth ratio of 15.8%;
however, with the addition of stock proceeds, the pro forma equity position will
exceed the Peer Group's ratio. The Peer Group's equity incorporated a modest
level of intangible assets, equal to 0.6% of assets, which reduced tangible
equity to 15.2% on average. Conversely, Jefferson Federal's equity consisted
entirely of tangible capital. Both the Bank's and the Peer Group's capital
ratios reflected capital surpluses over the regulatory capital requirements,
with the Bank expected to have greater capital surpluses on a post-offering
basis. The pro forma increase in Jefferson Federal's equity will serve to
enhance future earnings potential that may be realized through leverage and
lower funding costs and future growth. However, at the same time, the Bank's
higher pro forma equity position will likely result in a decline in return on
equity.

     Jefferson Federal's asset composition reflects a higher concentration of
loans, as loans comprised 71.6% of assets versus an average of 59.5% of assets
for the Peer Group. Comparatively, the ratio of cash, investments, and MBS for
Jefferson Federal was lower than for the Peer Group (25.0% of assets versus
36.5% for the Peer Group). This balance sheet composition provides the Bank with
an earnings power advantage over the Peer Group which is then enhanced by
comparatively higher yields. Overall, Jefferson Federal's IEA amounted to 96.6%
of assets, which was higher than the comparative Peer Group ratio of 96.0%. The
Bank's advantage reflects its lower ratio of fixed assets and no intangible
assets relative to the Peer Group. On a pro forma basis, the Bank's asset yields
can be expected to decline as the proceeds are initially invested in marketable
securities at market rates below portfolio but the IEA ratio should increase.

     The Bank's deposits equaled 85.6% of assets, which was above the Peer Group
average of 70.5%, as borrowings were utilized to a substantially lesser degree
by Jefferson Federal, at



RP FINANCIAL, LC.
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700

                                    Table 3.2
                   Balance Sheet Composition and Growth Rates
                         Comparable Institution Analysis
                             As of December 31, 2002



                                                                      Balance Sheet as a Percent of Assets
                                        -------------------------------------------------------------------------------------------
                                           Cash &     MBS &                   Borrowed  Subd.   Net   Goodwill  Tng Net     MEMO:
                                        Equivalents  Invest  Loans  Deposits    Funds   Debt   Worth  & Intang   Worth   Pref.Stock
                                        -----------  ------  -----  --------    -----   ----   -----  --------   -----   ----------
                                                                                           
Jefferson Federal Bank
- ----------------------
  December 31, 2002                          6.0      19.0    71.6    85.6       0.8     0.0    13.4     0.0      13.4       0.0



All Public Companies                         5.9      23.3    66.7    67.3      20.1     0.1    10.5     0.6       9.9       0.0
State of TN                                  4.8      22.6    70.3    83.9       0.0     0.0    14.3     0.8      13.5       0.0
Comparable Group Average                     7.8      28.7    59.5    70.5      12.8     0.0    15.8     0.6      15.2       0.0
  Mid-West Companies                         8.5      15.4    71.6    71.1      13.8     0.0    14.3     0.6      13.8       0.0
  South-East Companies                       7.4      37.6    51.4    70.2      12.1     0.0    16.7     0.6      16.1       0.0


Comparable Group
- ----------------

Mid-West Companies
- ------------------
FFDF  FFD Financial Corp of Dover OH        10.0       5.5    82.1    76.4      10.5     0.0    12.6     0.0      12.6       0.0
FBTC  First BancTrust Corp of IL             5.2      37.7    52.2    72.7      13.1     0.0    13.5     0.0      13.5       0.0
FBEI  First Bancorp of Indiana of IN         9.3      16.3    67.4    65.1      16.6     0.0    17.1     1.2      15.9       0.0
UCBC  Union Community Bancorp of IN(1)       9.4       2.0    84.7    70.1      15.1     0.0    14.1     1.0      13.1       0.0

South-East Companies
- --------------------
CSBC  Citizens South Banking of NC           9.5      22.9    60.9    69.2       9.7     0.0    19.6     1.7      17.9       0.0
DFBS  Dutchfork Bancshares Inc of SC         8.7      59.4    26.8    68.9      15.6     0.0    14.9     0.0      14.9       0.0
GSLA  GS Financial Corp. of LA               6.4      54.4    37.3    51.0      31.6     0.0    16.4     0.0      16.4       0.0
PEDE  Great Pee Dee Bancorp of SC            7.7       7.4    81.2    73.6       7.6     0.0    18.6     1.0      17.6       0.0
SRN   Southern Banc Company of AL            7.1      59.2    31.9    74.5       8.1     0.0    16.6     0.0      16.5       0.0
UTBI  United Tenn. Bancshares of TN(3)       4.8      22.6    70.3    83.9       0.0     0.0    14.3     0.8      13.5       0.0


                                                           Balance Sheet Annual Growth Rates                  Regulatory Capital
                                          ---------------------------------------------------------------  -------------------------
                                                  MBS, Cash &                    Borrows.   Net   Tng Net
                                          Assets  Investments  Loans  Deposits  & Subdebt  Worth   Worth   Tangible  Core  Reg. Cap.
                                          ------  -----------  -----  --------  ---------  -----   -----   --------  ----  ---------
                                                                                             
Jefferson Federal Bank
- ----------------------
  December 31, 2002                       -1.83      -2.32     -1.67   -3.68       0.00   11.62   11.62     13.01   13.01    22.38



All Public Companies                       7.84      15.49      5.14    8.86       3.34    4.59    4.23      9.31    9.12    16.81
State of TN                                7.63      11.11      5.64    6.32         NM   13.05   14.54     11.28   11.28    22.70
Comparable Group Average                   4.67      12.71      8.27   10.50      -2.66    3.61    3.02     12.80   12.80    22.61
  Mid-West Companies                       0.01      -6.73     25.87    2.57      -7.20    3.31    1.28     14.22   14.22    23.01
  South-East Companies                     7.01      24.38     -3.47   14.46       0.06    3.86    4.42     12.33   12.33    22.48


Comparable Group
- ----------------

Mid-West Companies
- ------------------
FFDF  FFD Financial Corp of Dover OH      -1.78       1.76     -3.25    9.67     -45.47    2.14    2.14        NM      NM       NM
FBTC  First BancTrust Corp of IL           3.41       4.04      4.47    4.26       3.86   -1.49   -1.49        NM      NM       NM
FBEI  First Bancorp of Indiana of IN      -1.62     -25.98     10.18   -6.21      20.00   -2.19   -1.89     14.22   14.22    23.01
UCBC  Union Community Bancorp of IN(1)       NM         NM     92.09      NM         NM   14.75    6.36        NM      NM       NM

South-East Companies
- --------------------
CSBC  Citizens South Banking of NC         9.83         NM    -10.29   -3.61      13.12      NM      NM     11.92   11.92    19.69
DFBS  Dutchfork Bancshares Inc of SC      -8.49      -8.66    -14.36    3.79     -41.67    1.91    1.91        NM      NM       NM
GSLA  GS Financial Corp. of LA            11.42      24.14     -4.02   49.10     -16.24   -2.89   -2.89     13.79   13.79    25.05
PEDE  Great Pee Dee Bancorp of SC         12.29      79.95      4.87   26.49     -38.24    1.27    2.43        NM      NM       NM
SRN   Southern Banc Company of AL          9.36      15.33     -2.64    4.67      83.34    5.95    6.10        NM      NM       NM
UTBI  United Tenn. Bancshares of TN(3)     7.63      11.11      5.64    6.32         NM   13.05   14.54     11.28   11.28    22.70


(1) Financial information is for the quarter ending September 30, 2002.
(3) Growth rates have been annualized from available financial information.

Source: Audited and unaudited financial statements, corporate reports and
        offering circulars, and RP Financial, LC. calculations. The information
        provided in this table has been obtained from sources we believe are
        reliable, but we cannot guarantee the accuracy or completeness of such
        information.

Copyright (c) 2002 by RP Financial, LC.



RP Financial, LC.
Page 3.9

0.8% versus the Peer Group ratio of 12.8%. Total interest-bearing liabilities
("IBL") maintained by Jefferson Federal and the Peer Group, as a percent of
assets, equaled 86.4% and 83.3%, respectively. On a pro forma basis, this
relationship will be reversed in the Bank's favor.

     A key measure of balance sheet strength is the IEA/IBL ratio. Presently,
the Peer Group's IEA/IBL ratio maintains an advantage to Jefferson Federal's
ratio, based on respective ratios of 115.3% and 111.8%. The additional capital
realized from stock proceeds should reverse this relationship, providing the
Bank with an additional earnings power advantage.

     The growth rate section of Table 3.2 shows growth rates for key balance
sheet items for the most recent 12 months. Jefferson Federal's assets declined
by 1.8% over the last 12 months as compared to the 4.7% average growth of the
Peer Group. Likewise, the Peer Group demonstrated loan growth funded by deposit
growth, while the Bank experienced shrinkage in both categories. The Bank's
shrinkage reflects its recent strategy and tightened underwriting standards
while changing the focus of new originations. While the Bank's moderate
historical growth rate is expected to resume, the potential growth rate under
new management and with a shift in the lending strategy is accompanied with
uncertainty.

     The relatively strong equity growth for the Bank (11.6%) in comparison to
the Peer Group (3.6%) is both the result of Jefferson Federal's higher
profitability and lower capital ratio as well as the capital management
strategies (primarily stock repurchases) implemented by the Peer Group
companies. Also, while Jefferson Federal has paid a dividend on the publicly
held shares, the MHC has waived its right to the dividends while the Peer Group,
in contrast, paid dividends on all the outstanding shares. The increase in the
Bank's equity realized from conversion proceeds, as well as the payment of
dividends on all outstanding shares of common stock, will limit the
post-conversion equity growth rate.

Income and Expense Components

     For the most recent 12 months, Jefferson Federal's net income to average
assets ratios equaled 1.23%, as compared to 0.93% for the Peer Group (see Table
3.3). Jefferson Federal's profitability ratios are more favorable than the Peer
Group in the key areas of net interest income, non-interest income and operating
expenses (all as a percent of average assets) as



RP FINANCIAL, LC.
- -----------------
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700

                                          Table 3.3
              Income as a Percent of Average Assets and Yields, Costs, Spreads
                               Comparable Institution Analysis
                        For the Twelve Months Ended December 31, 2002



                                                       Net Interest Income                    Other Income
                                                 ------------------------------           --------------------
                                                                         Loss     NII                           Total
                                           Net                          Provis.  After    Loan   R.E.   Other   Other
                                         Income  Income  Expense  NII   on IEA   Provis.  Fees   Oper.  Income  Income
                                         ------  ------  -------  ---   ------   -------  ----   -----  ------  ------
                                                                                  
Jefferson Federal Bank
- ----------------------
  December 31, 2002                       1.23    6.94     2.97   3.96   0.48     3.48    0.00   0.00    0.36    0.36



All Public Companies                      0.91    6.12     2.95   3.17   0.20     2.97    0.05   0.00    0.50    0.55
State of TN                               1.61    6.58     1.98   4.59   0.12     4.48    0.15  -0.01    0.21    0.36
Comparable Group Average                  0.93    6.06     2.71   3.35   0.13     3.22   -0.03   0.00    0.42    0.38
  Mid-West Companies                      0.82    6.31     2.85   3.46   0.20     3.26   -0.13   0.00    0.50    0.36
  South-East Companies                    1.01    5.90     2.62   3.28   0.09     3.19    0.03  -0.01    0.37    0.40


Comparable Group
- ----------------

Mid-West Companies
- ------------------
FFDF  FFD Financial Corp of Dover OH      0.66    5.33     2.45   2.89   0.11     2.77    0.00   0.00    0.17    0.17
FBTC  First BancTrust Corp of IL          0.64    6.33     2.71   3.62   0.35     3.26   -0.53   0.02    1.17    0.66
FBEI  First Bancorp of Indiana of IN      0.73    6.18     2.84   3.33   0.30     3.03    0.00   0.00    0.52    0.52
UCBC  Union Community Bancorp of IN(1)    1.24    7.39     3.38   4.00   0.05     3.96    0.00  -0.03    0.13    0.10

South-East Companies
- --------------------
CSBC  Citizens South Banking of NC        0.97    5.30     2.19   3.11   0.05     3.06    0.00  -0.04    0.86    0.83
DFBS  Dutchfork Bancshares Inc of SC      0.99    5.11     2.64   2.47   0.00     2.47    0.03   0.00    0.32    0.35
GSLA  GS Financial Corp. of LA            0.60    6.28     3.44   2.85   0.02     2.82    0.02   0.00    0.02    0.04
PEDE  Great Pee Dee Bancorp of SC         1.15    6.49     2.56   3.93   0.32     3.61    0.00   0.00    0.65    0.65
SRN   Southern Banc Company of AL         0.74    5.64     2.91   2.72   0.01     2.71    0.00   0.00    0.15    0.15
UTBI  United Tenn. Bancshares of TN       1.61    6.58     1.98   4.59   0.12     4.48    0.15  -0.01    0.21    0.36

                                          G&A/Other Exp.    Non-Op. Items    Yields, Costs, and Spreads
                                         ----------------   -------------   ----------------------------
                                                                                                            MEMO:       MEMO:
                                           G&A   Goodwill    Net   Extrao.    Yield      Cost    Yld-Cost  Assets/   Effective
                                         Expense   Amort.   Gains   Items   On Assets  Of Funds   Spread   FTE Emp.   Tax Rate
                                         -------   ------   -----   -----   ---------  --------   ------   --------   --------
                                                                                          
Jefferson Federal Bank
- ----------------------
  December 31, 2002                        1.97     0.00     0.07    0.00      7.14      3.48       3.66    4,414       36.71



All Public Companies                       2.39     0.03     0.19    0.00      6.33      3.34       2.99    4,594       34.36
State of TN                                2.30     0.07     0.04    0.00      6.72      2.35       4.37    3,990       35.68
Comparable Group Average                   2.37     0.05     0.18    0.00      6.30      3.25       3.05    4,367       31.78
  Mid-West Companies                       2.62     0.02     0.24    0.00      6.59      3.39       3.21    3,494       32.33
  South-East Companies                     2.20     0.07     0.14    0.00      6.10      3.16       2.94    4,658       31.42


Comparable Group
- ----------------

Mid-West Companies
- ------------------
FFDF  FFD Financial Corp of Dover OH       2.31     0.00     0.38    0.00      5.44      2.81       2.64    4,298       34.29
FBTC  First BancTrust Corp of IL           3.33     0.00     0.35    0.00      6.68      3.16       3.52       NM       31.79
FBEI  First Bancorp of Indiana of IN       2.92     0.03     0.42    0.00      6.60      3.48       3.12    2,690       28.99
UCBC  Union Community Bancorp of IN(1)     1.93     0.05    -0.18    0.00      7.65      4.10       3.55       NM       34.24

South-East Companies
- --------------------
CSBC  Citizens South Banking of NC         2.23     0.21     0.06    0.00      5.73      2.60       3.13    4,644       35.94
DFBS  Dutchfork Bancshares Inc of SC       2.35     0.00     0.68    0.00      5.28      3.09       2.19    5,087       14.79
GSLA  GS Financial Corp. of LA             2.12     0.00     0.01    0.00      6.42      4.24       2.18    5,251       21.26
PEDE  Great Pee Dee Bancorp of SC          2.40     0.15    -0.13    0.00      6.74      3.18       3.55    4,955       43.97
SRN   Southern Banc Company of AL          1.80     0.02     0.19    0.00      5.71      3.52       2.20    4,023       36.87
UTBI  United Tenn. Bancshares of TN        2.30     0.07     0.04    0.00      6.72      2.35       4.37    3,990       35.68


(1) Financial information is for the quarter ending September 30, 2002.

Source: Audited and unaudited financial statements, corporate reports and
        offering circulars, and RP Financial, LC. calculations. The information
        provided in this table has been obtained from sources we believe are
        reliable, but we cannot guarantee the accuracy or completeness of such
        information.

Copyright (c) 2002 by RP Financial, LC.



RP Financial, LC.
Page 3.11

described below. As will be more fully explained, the Bank's higher
profitability is partially attributable to the unique convergence of interest
rate declines, strategy shifts and portfolio composition. Thus, the Bank's
earnings are expected to experience downward pressure in coming months before
factoring in the benefits of the proceeds reinvestment. The one area where the
Bank is at a significant disadvantage is with respect to loan loss provisions,
which significantly exceed the Peer Group average given Jefferson Federal's
higher credit risk profile.

     One of the principal factors leading to the Bank's substantially
strengthened earnings levels for the most recent 12 months was a declining
interest rate environment and management's decision to reduce its deposit
pricing posture versus the competition, which together caused the Bank's cost of
funds to decline more rapidly than the yield on IEA. Other key factors leading
to Jefferson Federal's comparatively higher yields include the relatively higher
proportion of loans to assets and the higher proportion of higher risk-weight
loans, including subprime loans. Additionally, the majority of the Bank's ARM
loans are at their respective floor rates which have limited the downward
adjustment in the asset portfolio in response to declining interest rates.

     Jefferson Federal's stronger net interest income ratio relative to the Peer
Group resulted primarily from maintaining a higher interest income ratio, which
is partially offset by a comparatively higher interest expense ratio. Jefferson
Federal's higher interest income ratio was supported by its higher IEA level
(96.6% versus 96.0% for the Peer Group) as well as higher asset yields (7.14%
versus 6.30% for the Peer Group). Jefferson Federal's higher interest expense
ratio reflected both the higher IBL level (86.4% versus 83.3% for the Peer
Group) and slightly higher cost of funds (3.48% versus 3.25% for the Peer
Group), even though the Bank has recently reduced its pricing. Jefferson Federal
and the Peer Group reported net interest income ratios of 3.96% and 3.35%,
respectively. The Bank should continue to maintain an advantage on a pro forma
basis, even though interest income is expected to face downward pressure.

     Loan loss provisions were a much larger factor in the Bank's earnings than
for the Peer Group, amounting to 0.48% and 0.13% of average assets,
respectively. Jefferson Federal had higher loan losses, which substantially
diminished its relative strength in the other areas of core earnings. As
discussed in Section One, the Bank's higher loan loss provisions reflect the
impact of prior underwriting, which included significant subprime lending. While
the Bank has



RP Financial, LC.
Page 3.12

tightened its loan underwriting during the past year, loan delinquencies and
NPAs remain relatively high. In the current recessionary economic environment,
and given the Bank's aggressive efforts to collect on delinquent loans, loan
loss provisions for the Bank are expected to remain high in the near term.

     Notwithstanding the recent increases in the Bank's operating expense ratio,
its ratio remains below the Peer Group average at 1.97% and 2.37%, respectively.
The Bank's operating expenses have been trending upward over the last couple of
years and will continue to further escalate as it continues to expand its
commercial account relationships and branch network, while maintaining an
intense effort to improve asset quality and collect on delinquent assets.
Additionally, the implementation of the stock benefit plans in conjunction with
the second step conversion will also increase the Bank's expenses.

     Non-interest operating income is a comparable contributor to Jefferson
Federal's earnings relative to the Peer Group, at 0.36% and 0.38%, respectively.
Taking non-interest operating income into account, Jefferson Federal's
efficiency ratio (operating expenses, net of amortization of intangibles, as a
percent of the sum of non-interest operating income and net interest income) of
45.6% was more favorable than the Peer Group's efficiency ratio of 63.5%. This
advantage is expected to continue on a post-conversion basis, even with higher
expenses and the interest income pressure.

     Non-operating income of 0.07% for Jefferson Federal consisted primarily of
gains on the sale of investments and foreclosed real estate. The Peer Group
reported a modestly higher level on non-operating income, equal to 0.18% of
assets, which were also largely comprised of gains on the sale of loans and
investments. Such gains are subject to notable volatility due to fluctuations in
market and other interest rates, and, thus are not viewed as being a recurring
source of income for Jefferson Federal or the Peer Group, and thus will be
excluded from the calculation of the valuation earnings base.

     Both the Bank and the Peer Group appear to be in a fully taxable position.
The Peer Group's average effective tax rate was 31.78%, which was modestly lower
than Jefferson Federal's tax rate equal to 36.71%, in part due to the Peer
Group's higher asset mix in investments.



RP Financial, LC.
Page 3.13

Loan Composition

     Jefferson Federal's loan portfolio reflects a smaller concentration of
residential mortgage loans and MBS at 44.5%, compared to 56.0% for the Peer
Group (see Table 3.4). Loans secured by 1-4 family residential mortgage loans
equaled 35.2% of assets for Jefferson Federal and 39.9% for the Peer Group.

     Jefferson Federal's lending activities show greater diversification,
specifically commercial and multi-family mortgage loans together with land loans
aggregated to 31.4% of assets versus an average of 10.7% for the Peer Group on
average. Conversely, non-mortgage lending was slightly higher for the Peer Group
as consumer and commercial loans together averaged 9.4% for the Peer Group
versus 7.1% for the Bank.

     Overall, Jefferson Federal maintains a higher level of risk-weighted assets
as a percent of assets relative to the Peer Group, approximating 61.2% and
55.4%, respectively.

Credit Risk

     Overall, Jefferson Federal's credit risk exposure appears to be
comparatively greater, given its higher proportion of assets in loans, greater
diversification into higher risk lending (including subprime lending), the
typically larger size of commercial loans, the higher level of NPAs, the lower
coverage ratios and recent loss experience. In addition to these factors, the
Bank maintains a portfolio of subprime loans, which equaled $33.0 million, or
17.0% of total loans. While detailed comparative information regarding subprime
lending by the Peer Group is not readily available publicly, we believe the Bank
has maintained a greater historical emphasis on subprime lending than the Peer
Group. Furthermore, the majority of the Bank's loans are non-conforming to
secondary market standards limiting their saleability.

     As shown in Table 3.5, Jefferson Federal's NPA ratio was far less favorable
at 1.62% of assets, versus a comparative ratio of 0.44% for the Peer Group.
Similarly, the Bank's non-performing loans to loans ratio was less favorable at
1.28% versus 0.57% for the Peer Group. Jefferson Federal's reserve coverage
ratios were less favorable - for example, reserves to non-performing loans
approximated 113.1% for Jefferson Federal versus 207.8% for the Peer Group. As a
result of the higher level of non-performing loans and NPAs, chargeoffs were
higher for



RP FINANCIAL, LC.
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700



                                                                        Table 3.4
                                                   Loan Portfolio Composition and Related Information
                                                             Comparable Institution Analysis
                                                                 As of December 31, 2002

                                                   Portfolio Composition as a Percent Assets

                                             ------------------------------------------------------
                                                       1-4   Constr.   5+Unit    Commerc.             RWA/     Serviced   Servicing
Institution                                   MBS    Family  & Land    Comm RE   Business  Consumer  Assets   For Others   Assets
- -----------                                   ---    ------  ------    -------   --------  --------  ------   ----------   ------
                                              (%)     (%)      (%)       (%)       (%)       (%)      (%)       ($000)     ($000)
                                                                                               
Jefferson Federal Bank                        9.29    35.24     9.63     21.76       3.82      3.26   61.16       12,000       0

All Public Companies                         12.97    39.54     4.41     14.54       4.40      3.82   59.55      617,559   5,575
State of TN                                   5.34    59.01     6.34      2.90       3.13      0.00   50.57            0       0
Comparable Group Average                     16.18    39.85     2.57      8.15       5.87      3.50   55.42       13,780     185

Comparable Group
- ----------------

CSBC  Citizens South Banking of NC            5.07    42.96     3.78      7.32       3.02      6.65   62.72       33,504     315
DFBS  Dutchfork Bancshares Inc of SC         30.15    14.68     2.26      4.04       3.68      3.08   50.04        1,805       0
FFDF  FFD Financial Corp of Dover OH          2.22    47.55     0.40     21.31       1.29     10.37   65.67            0     358
FBTC  First BancTrust Corp of IL             25.39    20.87     0.28     11.29      13.38      2.87   58.21       80,800     950
FBEI  First Bancorp of Indiana of IN         18.51    39.48     0.78      2.40      22.67      2.96   62.30       20,692     226
GSLA  GS Financial Corp. of LA               24.02    29.37     0.67      7.99       0.22      0.81   54.40            0       0
PEDE  Great Pee Dee Bancorp of SC             0.00    54.45     8.83      8.13       6.13      5.67   64.54        1,001       0
SRN   Southern Banc Company of AL            50.51    26.22     0.00      0.07       4.96      0.22   26.11            0       0
UCBC  Union Community Bancorp of IN(1)        0.63    63.94     2.36     16.05       0.22      2.36   59.66            0       0
UTBI  United Tenn. Bancshares of TN           5.34    59.01     6.34      2.90       3.13      0.00   50.57            0       0


(1) Financial information is for the quarter ending September 30, 2002.

Source: Audited and unaudited financial statements, corporate reports and
        offering circulars, and RP Financial, LC. calculations. The information
        provided in this table has been obtained from sources we believe are
        reliable, but we cannot guarantee the accuracy or completeness of such
        information.

Copyright (c) 2002 by RP Financial, LC.



RP FINANCIAL, LC.
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700



                                                                                  Table 3.5
                                                                 Credit Risk Measures and Related Information
                                                                       Comparable Institution Analysis
                                                             As of December 31, 2002 or Most Recent Date Available


                                                         NPAs &                                  Rsrves/
                                              REO/      90+Del/    NPLs/    Rsrves/    Rsrves/    NPAs &    Net Loan     NLCs/
Institution                                  Assets     Assets     Loans     Loans      NPLs      90+Del    Chargoffs    Loans
- -----------                                  ------     ------     -----     -----      ----     -------    ---------    -----
                                               (%)        (%)       (%)       (%)        (%)        (%)      ($000)       (%)
                                                                                                 
Jefferson Federal Bank                         0.71       1.62      1.28      1.40     113.07      63.65          850     0.46



All Public Companies                           0.10       0.66      0.97      1.01     208.01     182.95          335     0.15
State of TN                                    0.11       0.41        NA      1.01         NA     173.81           21     0.11
Comparable Group Average                       0.06       0.44      0.57      0.89     207.78     137.61           55     0.16


Comparable Group
- ----------------

CSBC  Citizens South Banking of NC             0.27       0.37      0.17      0.99     580.43     164.29          199    -0.01
DFBS  Dutchfork Bancshares Inc of SC           0.00         NA        NA      0.53         NA         NA          106     0.69
FFDF  FFD Financial Corp of Dover OH           0.12       0.62      0.61      0.75     123.03      98.90            0     0.00
FBTC  First BancTrust Corp of IL               0.00         NA        NA      1.83         NA         NA          119     0.44
FBEI  First Bancorp of Indiana of IN           0.02       0.29      0.41      0.81     200.40     188.64           69     0.23
GSLA  GS Financial Corp. of LA                 0.00       0.31      0.83      0.61      74.19      74.19            0     0.00
PEDE  Great Pee Dee Bancorp of SC              0.06       1.04      1.21      1.07      87.79      82.63           22     0.08
SRN   Southern Banc Company of AL              0.00       0.06      0.20      0.37     180.82     180.82            5     0.06
UCBC  Union Community Bancorp of IN(1)         0.00         NA        NA        NA         NA         NA            8     0.00
UTBI  United Tenn. Bancshares of TN            0.11       0.41        NA      1.01         NA     173.81           21     0.11



(1) Financial information is for the quarter ending September 30, 2002.

Source: Audited and unaudited financial statements, corporate reports and
        offering circulars, and RP Financial, LC. calculations. The information
        provided in this table has been obtained from sources we believe are
        reliable, but we cannot guarantee the accuracy or completeness of such
        information.

Copyright (c) 2002 by RP Financial, LC.



RP Financial, LC.
Page 3.16

Jefferson Federal, equal to 0.46% of loans as compared to 0.16% of loans for the
Peer Group. In recognition of the credit risk present in the portfolio, reserve
balances to total loans were higher for the Bank relative to the Peer Group,
equal to 1.40% and 0.89%, respectively.

Interest Rate Risk

     Table 3.6 reflects various key ratios highlighting the relative interest
rate risk exposure. From a balance sheet perspective, Jefferson Federal's
slightly lower pre-conversion capital position but higher IEA/IBL ratio suggest
similar exposure; and post-conversion, Jefferson Federal gains an advantage in
these two areas. In the absence of comparability in timely interest rate risk
reporting and methodology, we reviewed quarterly changes in the net interest
income ratio. In general, the quarterly fluctuations in the Bank's net interest
income ratio exceed the Peer Group average, and reflect the benefits of the
recent declining interest rate environment.

     There are two characteristics of the asset portfolio which are somewhat
unique to the Bank which have provided substantial spread benefits in the
declining interest rate environment relative to the Peer Group as follows: (1)
many of the Bank's ARM loans reached their contractual floor levels; and (2)
most of the Bank's ARM loans are repriced based on a lagging market index. Of
course in a higher or rising interest rate environment, these same factors may
likely result in lower earnings levels, notwithstanding the fact that the
majority of Jefferson Federal's assets are short term or variable rate.

Summary

     Based on the foregoing, the Peer Group appears to provide a reasonable
basis for determining the pro forma market value of Jefferson Federal. Areas
where comparative differences exist will be addressed in the form of valuation
adjustments in the following section.




RP FINANCIAL, LC.
Financial Services Industry Consultants
1700 North Moore Street, Suite 2210
Arlington, Virginia 22209
(703) 528-1700

                                    Table 3.6
         Interest Rate Risk Measures and Net Interest Income Volatility
                         Comparable Institution Analysis
              As of December 31, 2002 or Most Recent Date Available



                                          Balance Sheet Measures
                                          ----------------------
                                                                                    Quarterly Change in Net Interest Income
                                                          Non-Earn.                 ---------------------------------------
                                        Equity/    IEA/    Assets/
Institution                             Assets     IBL     Assets       12/31/02  09/30/02  06/30/02 03/31/02  12/31/01  09/30/01
- -----------                             ------     ---     ------       --------  --------  -------- --------  --------  --------
                                         (%)       (%)       (%)       (change in net interest income is annualized in basis points)
                                                                                              

Jefferson Federal Bank                   13.4     111.8       3.4            -9        14        25        63        17        -9

All Public Companies                      9.9     109.3       4.2            -7        -3         4         3         7         4
State of TN                              13.5     116.4       2.3             5         3        18        NA        NA         9
Comparable Group Average                 15.2     115.3       4.0            -5       -13       -10         5        -3        13

Comparable Group
- ----------------

CSBC  Citizens South Banking of NC       17.9     118.3       6.7           -16       -25         6        NA       -59         5
DFBS  Dutchfork Bancshares Inc of SC     14.9     112.4       5.0            22       -27       -24        29       -85        69
FFDF  FFD Financial Corp of Dover OH     12.6     112.3       2.4            -6       -22         0       -17        -3        11
FBTC  First BancTrust Corp of IL         13.5     110.8       4.9            -7         2         3       -40        58       -10
FBEI  First Bancorp of Indiana of IN     15.9     113.8       7.0             3        16        10        10         7        14
GSLA  GS Financial Corp. of LA           16.4     118.6       2.0           -52        -1        16         6         3        14
PEDE  Great Pee Dee Bancorp of SC        17.6     118.6       3.7            11       -32       -30        16        63        17
SRN   Southern Banc Company of AL        16.5     118.9       1.8            -6       -18         0        32         7        -5
UCBC  Union Community Bancorp of IN(1)   13.1     112.9       3.9            NA       -20       -97        NA       -17         5
UTBI  United Tenn. Bancshares of TN      13.5     116.4       2.3             5         3        18        NA        NA         9


(1) Financial information is for the quarter ending September 30, 2002.
NA=Change is greater than 100 basis points during the quarter.

Source: Audited and unaudited financial statements, corporate reports and
        offering circulars, and RP Financial, LC. calculations. The information
        provided in this table has been obtained from sources we believe are
        reliable, but we cannot guarantee the accuracy or completeness of such
        information.

Copyright (c) 2002 by RP Financial, LC.



RP Financial, LC.
Page 4.1

                             IV. VALUATION ANALYSIS

Introduction

     This chapter presents the valuation analysis and methodology used to
determine the Bank's estimated pro forma market value of the common stock to be
issued in conjunction with the conversion transaction. The valuation
incorporates the appraisal methodology promulgated by the OTS. In this regard,
this section determines the valuation adjustments based on the fundamental
analysis of both the Bank and the Peer Group in the prior section and, utilizing
the market value approach, applies such adjustments in the determination of the
Bank's pro forma market value based on the market pricing characteristics of the
Peer Group.

Appraisal Guidelines

     The OTS written appraisal guidelines, originally released in October 1983
and updated in late-1994, specify the market value methodology for estimating
the pro forma market value of an institution pursuant to a mutual-to-stock
conversion. The valuation methodology provides for: (1) the selection of a peer
group of comparable publicly-traded institutions, excluding from consideration
institutions which have recently converted, subject to acquisition or in MHC
form; (2) a financial and operational comparison of the subject company to the
selected peer group, identifying key differences and similarities; and (3) a
valuation analysis in which the pro forma market value of the subject company is
determined based on the market pricing of the peer group as of the date of
valuation, incorporating valuation adjustments for key differences. In addition,
the pricing characteristics of recent conversions, both at conversion and in the
aftermarket, must be considered.

RP Financial Approach to the Valuation

     The valuation analysis herein complies with such regulatory appraisal
guidelines, i.e., the pro forma market value approach. Accordingly, the
valuation incorporates a detailed analysis based on the Peer Group, discussed in
Chapter III, which constitutes "fundamental analysis" techniques. Additionally,
the valuation incorporates a "technical analysis" of recently completed stock
conversions, including closing pricing and aftermarket trading of such
offerings. It should



RP Financial, LC.
Page 4.2

be noted that such analyses cannot possibly fully account for all the market
forces which impact trading activity and pricing characteristics of a stock on a
given day.

     The pro forma market value determined herein is a preliminary value for the
Bank's to-be-issued stock. Throughout the conversion process, RP Financial will:
(1) review changes in the Bank's operations and financial condition; (2) monitor
the Bank's operations and financial condition relative to the Peer Group to
identify any fundamental changes; (3) monitor the external factors affecting
value including, but not limited to, local and national economic conditions,
interest rates, and the stock market environment, including the market for
thrift stocks; and (4) monitor pending conversion offerings (including those in
the offering phase) both regionally and nationally. If material changes should
occur prior to closing the offering, RP Financial will evaluate if updated
valuation reports should be prepared reflecting such changes and their related
impact on value, if any. RP Financial will also prepare a final valuation update
at the closing of the offering to determine if the prepared valuation analysis
and resulting range of value continues to be appropriate.

     The appraised value determined herein is based on the current market and
operating environment for the Bank and for all thrifts. Subsequent changes in
the local and national economy, the legislative and regulatory environment, the
stock market, interest rates, and other external forces (such as natural
disasters or major world events), which may occur from time to time (often with
great unpredictability) may materially impact the market value of all thrift
stocks, including the Bank's value, or the Bank's value alone. To the extent a
change in factors impacting the Bank's value can be reasonably anticipated
and/or quantified, RP Financial has incorporated the estimated impact into its
analysis.

Valuation Analysis

     A fundamental analysis discussing similarities and differences relative to
the Peer Group was presented in Chapter III. The following sections summarize
the key differences between the Bank and the Peer Group and how those
differences affect the pro forma valuation. Emphasis is placed on the specific
strengths and weaknesses of the Bank relative to the Peer Group in such key
areas as financial condition, profitability, growth and viability of earnings,
asset growth, primary market area, dividends, liquidity of the shares, marketing
of the issue, management, and



RP Financial, LC.
Page 4.3

the effect of government regulations and/or regulatory reform. We have also
considered the market for thrift stocks, in particular new issues, to assess the
impact on value of the Bank's coming to market at this time.

1.   Financial Condition

     The financial condition of an institution is an important determinant in
pro forma market value, because investors typically look to such factors as
liquidity, capital, asset composition and quality, and funding sources in
assessing investment attractiveness. The similarities and differences in
financial strength are noted as follows:

          .    Balance Sheet Composition. While both the Bank and the Peer Group
               are oriented towards mortgage lending funded primarily by retail
               deposits, the Bank's asset composition includes a higher
               proportion of loans overall. Moreover, commercial and
               multi-family mortgage loans and non-conforming and subprime
               residential mortgage loans comprised a greater proportion of
               Jefferson Federal's loan portfolio than is the case for the Peer
               Group. As a result of the higher mix of total loans and the
               higher risk weighted loans, coupled with the presence of rate
               floors on many residential loans, Jefferson Federal's net
               interest income ratio is currently above that of the Peer Group.
               The Peer Group is currently supplementing deposits with higher
               borrowings utilization, while the Bank currently relies more
               heavily on deposits, which is expected to continue on a
               post-offering basis. The Bank's ratio of IEA/IBL is expected to
               exceed the Peer Group's average on a post-offering basis.

          .    Credit Quality. The Bank's credit risk profile is comparatively
               higher as indicated by its higher proportion of assets in loans,
               greater diversification into higher risk lending (including
               subprime lending), the typically larger size of commercial loans,
               the higher level of NPAs, the lower reserve coverage ratios and
               higher chargeoffs. Furthermore, the majority of the Bank's
               residential loans are non-conforming to the standards of the
               major secondary market purchasers, potentially limiting their
               saleability.

          .    Balance Sheet Liquidity. The Bank currently maintains a lower
               level of cash, investments and MBS. Like the Peer Group,
               substantially all of the investments are designated AFS. The
               infusion of the stock proceeds will initially increase the Bank's
               level of liquid assets pending investment of the proceeds into
               loans and other longer-term investments. The Bank appears to have
               greater current borrowings capacity than the Peer Group due to
               the smaller balance of borrowed funds.



RP Financial, LC.
Page 4.4

          .    Equity Capital. The Bank's pro forma equity capital ratio will
               exceed the Peer Group average.


     On balance, we believe a moderate downward adjustment for the Bank is
warranted, primarily for the comparatively higher credit risk profile.

2.   Profitability, Growth and Viability of Earnings

     Earnings are a key factor in determining pro forma market value, as the
level and risk characteristics of an institution's earnings stream and the
prospects and ability to generate future earnings heavily influence the multiple
the investment community will pay for earnings. The major factors considered in
the valuation are described below.

          .    Reported Earnings. The Bank reported higher profitability than
               the Peer Group for the most recent 12 months. Importantly, the
               Bank's profitability was well in excess of its historical average
               for the last five fiscal years. As was more fully explained in
               earlier sections herein, the Bank's higher profitability is
               partially attributable to the unique convergence of interest rate
               declines, strategy shifts and portfolio composition. Thus, the
               Bank's earnings are expected experience downward pressure in
               coming months, before factoring in the benefits of the conversion
               proceeds. In this regard, the Bank ROA averaged 0.95% of average
               assets for the three fiscal years through fiscal 2002, which
               closely approximates the current Peer Group average, equal to
               0.93%.

          .    Core Earnings. On a core basis, adjusting for non-operating items
               for both, the Bank also maintains higher profitability, primarily
               attributable to the unique set of circumstances referenced above.

          .    Interest Rate Risk. The Bank's interest rate risk exposure is
               higher than Peer Group, primarily owing to two characteristics of
               the asset portfolio which are somewhat unique to the Bank, which
               have provided substantial spread benefits in the declining
               interest rate environment relative to the Peer Group, as follows:
               (1) many of the Bank's ARM loans reached their contractual floor
               levels; and (2) most of the Bank's ARM loans are repriced based
               on a lagging market index. In a rising interest rate environment,
               these same characteristics can be detrimental to Jefferson
               Federal's earnings in comparison to the Peer Group.

          .    Credit Risk. Loan loss provisions had a significantly greater
               impact on the Bank's earnings for the past year, as the Bank
               sought to replenish reserves in the face of relatively high loan
               chargeoff rates, reflecting its greater credit risk



RP Financial, LC.
Page 4.5

               exposure. The Bank's credit risk exposure appears to be
               comparatively greater, given its higher proportion of assets in
               loans, greater diversification into higher risk lending, the
               typically larger size of commercial loans and the higher level of
               NPAs. In addition, the Bank has historically engaged in subprime
               lending, which is a factor contributing to the higher rate of
               delinquency and chargeoffs in comparison to the Peer Group.

          .    Earnings Growth Potential. The higher expected pro forma capital
               position is expected to facilitate the Bank's ability to expand
               assets and earnings over the long term. One of the Bank's reasons
               for converting is the opportunity to expand through branching or
               acquisition, while the higher capital will enhance the ability to
               manage larger customer relationships given the Bank's higher
               loans to one borrower limit following the conversion. Moreover,
               the Bank has implemented new more stringent loan underwriting
               policies and procedures, made collections on delinquent loans a
               high priority and restructured the deposit pricing methodology,
               all of which are expected to provide long term earnings benefits.
               At the same time, earnings growth will be subject to the interest
               rate and credit risk factors of Jefferson Federal's operations in
               comparison to the Peer Group discussed above. Furthermore, the
               timing and success of the de novo branching strategy in the
               generally rural market and commercial lending strategy are
               uncertain.

          .    Return on Equity. On a static basis, incorporating the Bank's
               historical profitability and benefits of reinvesting the
               conversion proceeds, the pro forma ROE will be comparable to the
               Peer Group average. Downward pressure on earnings anticipated in
               the coming months may depress the Bank's ROE levels.

     Overall, the Bank's current earnings are believed to be at peak levels
owing to the unique convergence of interest rate declines, strategy shifts and
portfolio composition. In consideration of the foregoing, coupled with Jefferson
Federal's higher interest rate risk and credit risk profile in comparison to the
Peer Group, we concluded with a moderate downward valuation adjustment for
profitability, growth and viability of earnings.

3.   Asset Growth

     The Bank's asset base realized shrinkage during the past year, given the
emphasis on reducing credit risk, shifting the loan origination strategy and
reducing funding costs. By comparison, the Peer Group has achieved positive
asset growth rates on average. New management has indicated that its business
plan is to resume growth, with a greater emphasis on the development of high
quality commercial account relationships given the managing officer's



RP Financial, LC.
Page 4.6

experience locally in this regard. It is uncertain, however, the level of
success in implementing such plans. While the Peer Group companies typically do
not discuss their specific growth plans and targets, based on historical trends
and operating environments of the Peer Group companies, on average, we applied a
slight downward adjustment to the Bank's valuation for this factor.

4.   Primary Market Area

     The general condition of a financial institution's market area has an
impact on value, as future success is in part dependent upon opportunities for
profitable activities in the local market area. Operating in the northeast
Tennessee, the Bank faces significant competition for loans and deposits from a
large number financial institutions, who provide a broader array of services and
have significantly larger branch networks. The depth and breadth of the Bank's
competition is particularly notable given the relatively small size of the
Bank's market. Demographic and economic trends and characteristics in the Bank's
primary market area are relatively favorable to the primary market areas served
by the Peer Group companies (see Table 4.1), as the Jefferson Federal's market
is somewhat smaller but is realizing modestly faster population growth. Income
levels in Jefferson Federal's market are comparable to the market of the Peer
Group, while the Bank's share of the deposit market is stronger, and was roughly
double the Peer Group average. The unemployment rate prevailing in the Bank's
market is relatively comparable to the Peer Group average and median.

     On balance, we concluded that no adjustment was warranted for the Bank's
primary market area.

5.   Dividends

     The Bank has indicated its intention to continue to pay an annual cash
dividend. At this time, the Bank has indicated that the annual dividend payment
will approximate $0.16 per share at the midpoint of the valuation range, which
would provide for a yield of 1.6% based on the $10.00 per share initial offering
price. As set forth in the prospectus, the indicated annual dividend would range
from $0.18 per share at the minimum of the valuation range to $0.12 per share at
the supermaximum of the valuation range. However, future declarations of
dividends by the Board of Directors will depend upon a number of factors,
including investment opportunities,



RP Financial, LC.
Page 4.7

                                    Table 4.1

                   Peer Group Market Area Comparative Analysis



                                                                                               Population % Change
                                                                 Population      Proj.       -----------------------
                                               Primary          ------------     Pop.        2000-2001     2001-2006    Median
Institution                                    County           2000    2001     2006        % Change      % Change      Age
- -----------                                    ------           ----    ----     ----        --------      --------      ---
                                                                (000)   (000)    (000)          (%)           (%)
                                                                                                   
Citizens South Banking of NC                  Gaston              190     192      200          1.1%           4.1%      36.6
Dutchfork Bancshares Inc of SC                Newberry             36      36       37          0.5%           2.7%      37.4
FFD Financial Corp of Dover OH                Tuscarawas           91      92       94          0.7%           2.7%      38.2
First BancTrust Corp of IL                    Edgar                20      19       19         -1.2%          -4.7%      39.8
First Bancorp of Indiana of IN                Vanderburgh         172     172      172         -0.1%           0.0%      37.1
GS Financial Corp of LA                       Jefferson           455     452      444         -0.7%          -2.0%      36.2
Great Pee Dee Bancorp of SC                   Chesterfield         43      44       46          1.8%           6.4%      36.0
Southern Banc Company of AL                   Etowah              103     103      102         -0.6%          -0.7%      38.7
Union Community Bancorp of IN                 Montgomery           38      38       39          0.5%           2.4%      36.8
United Tennessee Bancshares of TN             Cocke                34      34       36          1.6%           6.5%      39.0
                                                                  ---     ---      ---          ----           ----      ----

                                                   Averages:      118     118      119          0.4%           1.8%      37.6
                                                    Medians:       67      68       70          0.5%           2.6%      37.3

Jefferson Federal Bank of TN                  Hamblen              58      59       62          1.1%           5.3%      37.5


                                                                Per Capita Income
                                                                -----------------      Deposit      Unempl.
                                                                          % State       Market        Rate
Institution                                                     Amount    Average      Share(1)     Dec 2002
- -----------                                                     ------    -------      --------     --------
                                                                 ($)        (%)           (%)         (%)
                                                                                        
Citizens South Banking of NC                                    $18,487    105.7%       10.6%        7.1%
Dutchfork Bancshares Inc of SC                                   14,796     79.0%       34.9%        6.4%
FFD Financial Corp of Dover OH                                   17,622     88.1%        9.0%        5.6%
First BancTrust Corp of IL                                       15,707     69.7%       26.0%        6.0%
First Bancorp of Indiana of IN                                   20,991    105.8%        4.0%        4.2%
GS Financial Corp of LA                                          18,079    110.1%        1.2%        4.5%
Great Pee Dee Bancorp of SC                                      13,190     70.4%       15.9%        7.3%
Southern Banc Company of AL                                      16,454     94.1%        4.7%        5.7%
Union Community Bancorp of IN                                    18,135     91.4%       26.3%        3.6%
United Tennessee Bancshares of TN                                13,916     73.4%       26.1%        6.8%
                                                                -------     -----       -----        ----

                                                   Averages:    $16,738     88.8%       15.9%        5.7%
                                                    Medians:    $17,038     89.8%       13.3%        5.9%

Jefferson Federal Bank of TN                                    $17,932     94.6%       31.0%        5.6% (2)



(1) Total institution deposits in headquarters county as percent of total county
deposits.
(2) Reflects the average unemployment rate over the entire calendar
year.

Sources:  2003 ESRI BIS, SNL Securities



RP Financial, LC.
Page 4.8

growth objectives, financial condition, profitability, tax considerations,
minimum capital requirements, regulatory limitations, stock market
characteristics and general economic conditions. The Bank's anticipated payout
ratio will approximate 24% on a pro forma basis, but will increase if the
potential decline in the Bank's earnings is realized.

         Nine out of ten of the Peer Group companies pay regular cash dividends,
with implied dividend yields ranging from 1.12% to 3.66%. The average dividend
yield on the stocks of the Peer Group institutions was 2.50% as of March 7,
2003, representing an average core earnings payout ratio of 25.0%. As of March
7, 2003, approximately 89% of all full stock publicly-traded thrifts had adopted
cash dividend policies (see Exhibit IV-1) exhibiting an average yield of 2.40%
and an average payout ratio of 33.8%. The dividend paying thrifts generally
maintain higher than average profitability ratios, facilitating their ability to
pay cash dividends.

         The Bank's indicated dividend provides for a yield that is modestly
below the Peer Group's average dividend yield. However, the Bank's dividend
capacity will be enhanced by its stronger pro forma capitalization and earnings.
On balance, we concluded that no adjustment was warranted for purposes of
dividends relative to the Peer Group.

6.       Liquidity of the Shares

         The Peer Group is by definition composed of companies that are traded
in the public markets, and all of the Peer Group members trade on the NASDAQ
system. Typically, the number of shares outstanding and market capitalization
provides an indication of how much liquidity there will be in a particular
stock. The market capitalization of the Peer Group companies ranged from $13.4
million to $97.6 million as of March 7, 2003, with an average market value of
$32.3 million. The shares issued and outstanding to the public of the Peer Group
members ranged from approximately 961,000 to 9.1 million, with average shares
outstanding of approximately 2.2 million. The Bank's pro forma market value and
shares outstanding are expected to be in the upper end of the range and above
the comparable averages and medians for the Peer Group. It is anticipated that
the Bank's stock will be quoted on the NASDAQ national market system. Overall,
we anticipate that the Bank's stock will have a modestly greater level of
liquidity based on its greater shares outstanding and market capitalization and,
therefore, concluded with a slight upward adjustment for this factor.



RP Financial, LC.
Page 4.9

7.       Marketing of the Issue

         We believe that four separate markets need to be considered for thrift
stocks in evaluating the potential reception for the Bank's pending second step
conversion offering: (1) the after-market for public companies, in which trading
activity is regular and investment decisions are made based upon financial
condition, earnings, capital, ROE, dividends and future prospects; (2) the new
issue market in which converting thrifts are evaluated on the basis of the same
factors, but on a pro forma basis without the benefit of prior operations as a
fully-converted publicly-held company and stock trading history; (3) the thrift
acquisition market for thrift franchises in Tennessee; and (4) the market for
the public stock of the Bank. All of these markets were considered in the
valuation of the Bank's to-be-issued stock.

         A.   The Public Market

              The value of publicly-traded thrift stocks is easily measurable,
and is tracked by most investment houses and related organizations. Exhibit IV-1
provides pricing and financial data on all publicly-traded thrifts. In general,
thrift stock values react to market stimuli such as interest rates, inflation,
perceived industry health, projected rates of economic growth, regulatory issues
and stock market conditions in general. Exhibit IV-2 displays historical stock
market trends for various indices and includes historical stock price index
values for thrifts and commercial banks. Exhibit IV-3 displays historical stock
price indices for thrifts only.

              In terms of assessing trends in the broader stock market, equities
in general have declined over the past year. The general stock market declined
at the beginning of the second quarter of 2002, reflecting growing concerns
about the Mideast conflict. Stocks continued to falter through most of April,
primarily on the basis of weak first quarter earnings and growing concerns about
the strength of the economic recovery. The extended sell-off prompted a rebound
in blue-chip stocks at the end of April, but the rally sputtered on news of a
sharper than expected increase in the April unemployment rate. The April 2002
unemployment rate rose to 6.0%, its highest level in nearly eight years.

              Stocks were largely unchanged by the Federal Reserve's widely
anticipated decision to leave rates unchanged at its early-May 2002 meeting, but
then rallied sharply higher the day following the meeting on hints from Cisco
about a possible business rebound. Favorable



RP Financial, LC.
Page 4.10

economic data in the form of stronger than expected retail sales in April and
rising hopes of more upbeat earnings forecast by technology firms supported
further advances in stocks during mid-May. The rebound was not sustained in
late-May, as profit taking and more terrorism warnings dampened investor
enthusiasm for stocks. Investor pessimism extended the sell-off in stocks in
early-June 2002, reflecting political turmoil abroad, concerns over corporate
scandals and more disappointing earnings news from market leaders. Stocks jumped
higher on oversold conditions in mid-June, but the rally was brief. Both the Dow
Jones Industrial Average ("DJIA") and NASDAQ Composite Index ("NASDAQ")
established new lows for 2002 during the week ended June 21, 2002, as a fresh
batch of corporate earning warnings and the ongoing conflict in the Middle East
further eroded investor confidence.

              Discovery of a $3.8 billion accounting error by WorldCom and
nervousness about second quarter earnings heightened the sell-off at the close
of the second quarter. In early-July 2002, bargain hunters provided a boost to
stocks following the prolonged sell-off, despite news that the nation's
unemployment rate edged up to 5.9% in June. The rally was not sustained, as
worries about second quarter earnings and corporate accounting practices pushed
market indices to new lows for the year in mid-July. A lack of investor
confidence and indications that the nation's economic recovery was weaker than
previously believed extended the general downward trend through the balance of
July, with July marking the fourth consecutive down month for the DJIA. Weak
economic data provided for further declines in stocks in early-August, but the
downward trend was reversed on growing speculation of a rate cut by the Federal
Reserve and news of a proposed $30 billion bailout for Brazil's financial
crisis. In mid-August, the Federal Reserve's decision to leave interest rates
unchanged prompted a sharp one-day sell-off in the broader market, which was
followed by a sharp one-day increase in the major indexes on technical factors
as investors took profits in bonds and shifted some money into stocks. The DJIA
closed above 9000 in late-August, as stocks continued to rebound from oversold
conditions in July. However, after five consecutive weekly gains in the DJIA,
blue chip stocks declined in the last week of August on profit taking and
cautious comments from bellwether technology stocks.

              The broader stock market experienced heavy selling pressure in
September 2002, which was attributable to third quarter earning warnings from a
broad spectrum of companies,



RP Financial, LC.
Page 4.11

economic data signaling a slowing economic recovery and a growing threat of an
U.S. invasion of Iraq. The sell-off in the broader stock market continued into
the fourth quarter, with looming fears of a war with Iraq and worsening
corporate profits pushing the DJIA to its lowest close in five years in
early-October 2002. Stocks rebounded on technical factors in mid-October, as the
DJIA posted a weekly gain after six consecutive weeks of decline. The rally in
the broader stock market continued through the balance of October, reflecting
more attractive valuations following the third quarter sell-off and some upbeat
third quarter earnings news by some blue chip stocks. After six consecutive
months of decline, the DJIA was up 10.6% for the month of October.

              The rebound in the broader stock market that began in October 2002
continued into early-November, as the Federal Reserve cut short-term interest
rates by a larger-than-expected half a percentage point. However, the rate-cut
did not provide for a sustained rally, as profit taking and nervousness about a
possible war with Iraq pushed stocks lower in mid-November. Bargain hunting for
technology stocks and some positive economic reports pushed the NASDAQ to a five
month high in late-November. Following eight consecutive weeks of gains, the
DJIA declined during the first two weeks of December, as mounting concerns over
geopolitical tensions overshadowed better-than-expected economic data. The
broader market recovered slightly in mid-December, despite growing concerns of
how strongly business will rebound in 2003 and escalating war talk with Iraq.
Downbeat economic data and geopolitical concerns pulled stocks lower at the
close of 2002, with the DJIA positing its worst year since 1977 closing down
16.8% for the year.

              Stocks surged higher at the start of the new year, with data
showing December manufacturing activity stronger than expected. Favorable
expectations for the government's economic stimulus package supported further
gains in the market, although early indications of mixed earnings for the fourth
quarter and ongoing geopolitical concerns served to temper the rally in
mid-January. The strong gains posted at the beginning of 2003 were wiped out in
late-January, as disappointing fourth quarter earnings and the looming war with
Iraq pulled the broader market lower. War fears and the uncertain outlook for
the economy continued to weigh down stocks through most of February and into
early-March, as blue chip stocks dropped to a five month low during the first
week of March. As an indication of the general trends in the nation's stock
markets over the past year, as of March 7, 2003, the DJIA closed at 7740.03, a



RP Financial, LC.
Page 4.12

decline of 26.8% from one year earlier, while the NASDAQ stood at 1305.29, a
decline of 32.4% over the same time period. The Standard & Poors 500 Index
closed at 828.89 on March 7, 2003, a decline of 28.8% from a year ago.

              The market for thrift stocks has been mixed during the past twelve
months, but, in general, thrift stocks have outperformed the broader market.
Thrift issues moved higher in early-April 2002, as investors became more
optimistic about first and second quarter earnings for the thrift sector.
Growing sentiment that the Federal Reserve would not raise rates in May further
contributed to the upswing in thrift prices. The upward momentum in thrift
stocks was sustained through mid-April, with the advance supported by favorable
first quarter earnings, low inflation data and investors dumping technology
stocks in favor of lower risk bank and thrift stocks. Thrift stocks stabilized
in late-April in the face of a downturn experienced in broader stock market, as
traditional spread lenders benefited from generally weak economic news. News of
the increase in the April unemployment rate served to boost thrift prices in
early-May, as the weak employment data lessened expectations of a strong
economic recovery that could lead to higher interest rates. Thrift stocks
stabilized in mid- and late-May, as Citigroup's proposed $5.8 billion
acquisition of Golden State Bancorp had little impact on the broader thrift
market. While the broader market experienced extensive selling pressure in
early-June, the decline in thrift issues was relatively mild as investors
continued to be attracted to the generally more stable performance
characteristics of thrift stocks.

              Thrifts experienced more extensive selling pressure in mid-July
2002, as the downturn in broader market weighed on thrift issues as well. Lower
interest rates, second quarter earnings that generally met expectations and
acquisition speculation in certain regional markets supported a recovery in
thrift prices in late-July. After stabilizing during early-August, thrift issues
eased higher in conjunction with the broader indexes in mid-August. Thrift
issues traded in a narrower range during the balance of August and into
early-September, thereby sustaining solid gains for 2002 and significantly
outperforming the broader market indexes. A third quarter earnings warning by
Astoria Financial Corp had a negative ripple effect throughout the thrift sector
in mid-September 2002, particularly the large-cap issues. Astoria Financial
Corp. warned that third quarter earnings would come in below expectations, which
was attributable to the sustained low interest rate environment that resulted in
higher than expected



RP Financial, LC.
Page 4.13

prepayments in both its mortgage lending and MBS portfolios. Thrift issues
settled into a narrow trading range at the end of third quarter, as a number of
the larger publicly-traded thrifts reaffirmed third quarter earnings targets.
Third quarter earnings warnings by some of the large banks contributed to the
decline in thrift stocks at the beginning of the fourth quarter. However, thrift
stocks bounced back in mid-October, reflecting generally favorable third quarter
earnings reports from the thrift sector.

          The gains recorded in thrift issues in October were sustained
into-early November, which was supported by the rally in the broader stock
market and growing speculation that the Federal Reserve would cut rates in
November. Despite the larger than expected rate cut by the Federal Reserve,
thrift stocks eased lower in mid-November. The downward pressure in thrift
issues was attributable to concerns about potential margin compression and
mortgage servicing rights impairment that may result from the decline in
short-term interest rates, as well as the downturn in the broader market.
However, thrift issues recovered in late-November, as financial issues
participated in the broader market rally. Thrift issues settled into a narrow
trading range in December, reflecting the lack of meaningful news in the
financial sector and an uncertain outlook for 2003. Financial stocks
participated in the broader market rally at the beginning of the new year,
particularly those with relatively high dividend yields in light of the
elimination of dividend taxation set forth in the government's economic stimulus
package. Despite generally favorable fourth quarter earnings, thrift issues
eased lower in late-January. Thrift issues traded in a narrow range throughout
February and into early-March, thereby outperforming the broader market. The
stronger performance exhibited by thrift stock continued to supported by the
relatively low risk characteristics associated with residential lenders as well
as the general earnings benefit of operating in a low interest rate environment
with a relatively steep yield curve. On March 7, 2003, the SNL Index for all
publicly-traded thrifts closed at 1,085.0, an increase of 8.3% from one year
ago.

     B.   The New Issue Market

          In addition to thrift stock market conditions in general, the new
issue market for converting thrifts is also an important consideration in
determining the Bank's pro forma market value. The new issue market is separate
and distinct from the market for seasoned stock thrifts in



RP Financial, LC.
Page 4.14

that the pricing ratios for converting issues are computed on a pro forma basis,
specifically: (1) the numerator and denominator are both impacted by the
conversion offering amount, unlike existing stock issues in which price change
affects only the numerator; and (2) the pro forma pricing ratio incorporates
assumptions regarding source and use of proceeds, effective tax rates, stock
plan purchases, etc. which impact pro forma financials, whereas pricing for
existing issues are based on reported financials. The distinction between
pricing of converting and existing issues is perhaps no clearer than in the case
of the price/tangible book ("P/TB") ratio in that the P/TB ratio of a converting
thrift will typically result in a discount to tangible book value whereas in the
current market for existing thrifts the P/TB ratio often reflects a premium to
tangible book value. Therefore, it is appropriate to also consider the market
for new issues, both at the time of the conversion and in the aftermarket.

          Based on the recent conversion offerings investors have continued to
show interest in converting thrift issues, although interest has cooled somewhat
from offerings completed in the first half of 2002 as fewer of the recent
offerings have been oversubscribed. As shown in Table 4.2, only two standard
conversion offerings have been completed during the past three months and no MHC
offerings have been completed during the past three months. Most of the
conversion activity has been with respect to second step conversion of mutual
holding companies; there were four second step conversion completed at the
beginning of 2003. The average pro forma price/tangible book and price/core
earnings ratios of the four second-step offerings at closing equaled 103.2% and
17.9 times, respectively. However, one of the second step conversion
transactions involved First Niagara Financial which is a much larger institution
than the Bank ($3.3 billion in assets) and which simultaneously acquired another
financial institution as part of its second step transaction. Excluding First
Niagara Financial, the median price/tangible book and price/core earnings of the
second step transactions completed in 2003 equaled 89.4% and 17.7 times,
respectively. The aftermarket performance of the second step offerings completed
recently has been relatively consistent, with the four completed transactions
trading up moderately in the aftermarket, in a range of 7% to 15% after the
first week of trading, and 11% on average.

          In general, second-step conversions tend to be priced (and trade in
the aftermarket) at a higher P/TB ratio than standard conversions. We believe
investors take into



                                    Table 4.2
                 Pricing Characteristics and After-Market Trends
                Recent Conversions Completed (Last Three Months)



- ------------------------------------------------------------------------------------------------------------------------------------
         Institutional Information                               Pre-Conversion Data         Offering Information  Contribution to
                                                       -----------------------------------
                                                          Financial Info.   Asset Quality                          Charitable Found.
- ------------------------------------------------------------------------------------------------------------------------------------

                                   Conversion                      Equity/  NPAs/  Res.    Gross       %    % of Exp./       % of
Institution                  State  Date         Ticker    Assets  Assets  Assets  Cov.    Proc.    Offered Mid. Proc. Form Offering
- -----------                  -----  ----         ------    ------  ------  ------ ------   -----    ------- ---- ----- ---- --------
                                                           ($Mil)   (%)      (%)   (%)     ($Mil.)  (%)     (%)  (%)         (%)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                     
Standard Conversions
- --------------------
Provident Fin. Services, Inc.      NJ  1/16/2003 PFS-NYSE   $3,162 10.11%   0.41%  167%    $596.2     100%  132% 1.5%  C/S   3.9%
CCSB Financial Corp.               MO  1/19/2003 CCFC-OTC   $   78  8.41%   0.06%  210%    $  9.8     100%  132% 5.8%  NA     NA


                           Averages - Standard Conversions: $1,620  9.26%   0.24%  188%    $303.0     100%  132% 3.6%  NA     NA
                           Medians  - Standard Conversions: $1,620  9.26%   0.24%  188%    $303.0     100%  132% 3.6%  NA     NA


Second Step Conversions
- -----------------------
First Niagara Financial Grp, Inc.* NY 1/21/2003 FNFG-NASDAQ $3,291 10.02%   0.42%  102%    $410.0      58%  100% 4.0%  NA     NA
Wayne Savings Bancshares, Inc      OH  1/9/2003 WAYN-NASDAQ $  337  8.02%   0.89%   22%    $ 20.4      52%  100% 7.3%  NA     NA
Sound Federal Bancorp, Inc.        NY  1/7/2003 SFFS-NASDAQ $  673  9.84%   0.16%  268%    $ 77.8      59%  100% 2.3%  NA     NA
Bridge Street Financial, Inc.*(7)  NY  1/6/2003 OCNB-NASDAQ $  179  9.58%   0.45%  133%    $ 15.1      56%  100% 4.2%  NA     NA


                        Averages - Second Step Conversions: $1,120  9.37%   0.48%  131%    $130.8      56%  109% 4.5%  NA     NA
                        Medians  - Second Step Conversions: $  505  9.71%   0.44%  118%    $ 49.1      57%  102% 4.1%  NA     NA


Mutual Holding Companies(6)
- ---------------------------
None to Date


                                Averages - All Conversions: $1,287  9.33%   0.40%  150%    $188.2      71%  117% 4.2%  NA     NA
                                Medians  - All Conversions: $  505  9.71%   0.42%  150%    $ 49.1      58%  118% 4.1%  NA     NA

- ------------------------------------------------------------------------------------------------------------------------------------


- ------------------------------------------------------------------------------------------------------------------------------------
                                                           Insider Purchases                       Pro Forma Data
                                                                                        -----------------------------------
                                                            Benefit Plans                Pricing Ratios(3) Financial Charac.
                                                           --------------               ------------------ ----------------
                                                                               Initial
                                   Conversion                    Recog. Mgmt.& Dividend       Core         Core        Core   IPO
Institution                  State    Date       Ticker    ESOP  Plans  Dirs.   Yield   P/TB  P/E    P/A   ROA   TE/A  ROE   Price
- -----------                  -----    ----       ------    ---   -----  -----   -----   ----  ---    ---   ---   ----  ---   -----
                                                           (%)    (%)   (%)(2)   (%)    (%)   (x)    (%)   (%)    (%)  (%)    ($)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                   
Standard Conversions
- --------------------
Provident Fin. Services, Inc.      NJ  1/16/2003 PFS-NYSE   8.0%  4.0%   0.8%   0.00%  75.3%  18.7x  16.7%  0.9%  22.2% 4.0%  $10.00
CCSB Financial Corp.               MO  1/19/2003 CCFC-OTC   8.0%  4.0%  14.3%   0.00%  67.1%    NM   11.4%  0.1%  17.0% 0.8%  $10.00


                           Averages - Standard Conversions: 8.0%  4.0%   7.6%   0.00%  71.2%  18.7x  14.1%  0.5%  19.6% 2.4%  $10.00
                            Medians - Standard Conversions: 8.0%  4.0%   7.6%   0.00%  71.2%  18.7x  14.1%  0.5%  19.6% 2.4%  $10.00


Second Step Conversions
- -----------------------
First Niagara Financial Grp, Inc.* NY 1/21/2003 FNFG-NASDAQ 5.0%  4.0%   0.3%   1.76%  124.8% 19.5x  19.4%  1.0%  15.5% 6.4%  $10.00
Wayne Savings Bancshares, Inc      OH  1/9/2003 WAYN-NASDAQ 8.0%  4.0%   2.2%   4.50%   89.4% 17.7x  11.0%  0.6%  12.3% 4.6%  $10.00
Sound Federal Bancorp, Inc.        NY  1/7/2003 SFFS-NASDAQ 8.0%  4.0%   0.9%   2.00%  110.9% 16.1x  17.9%  1.1%  16.1% 6.9%  $10.00
Bridge Street Financial, Inc.*(7)  NY  1/6/2003 OCNB-NASDAQ 0.0%  4.0%   1.4%   1.60%   87.4% 18.1x  13.9%  0.8%  16.1% 4.8%  $10.00


                        Averages - Second Step Conversions: 5.3%  4.0%   1.2%   2.47%  103.2% 17.9x  15.5%  0.9%  15.0% 5.7%  $10.00
                        Medians  - Second Step Conversions: 6.5%  4.0%   1.2%   1.88%  100.2% 17.9x  15.9%  0.9%  15.8% 5.6%  $10.00


Mutual Holding Companies(6)
- ---------------------------
None to Date

                                Averages - All Conversions: 6.2%  4.0%   3.3%   1.64%  92.5%  18.0x  15.1%  0.7%  16.5% 4.6%  $10.00
                                 Medians - All Conversions: 8.0%  4.0%   1.2%   1.68%  88.4%  18.1x  15.3%  0.8%  16.1% 4.7%  $10.00

- ------------------------------------------------------------------------------------------------------------------------------------


- ------------------------------------------------------------------------------------------------------------
                                                                      Post-IPO Pricing Trends
                                                           -------------------------------------------------
                                                                            Closing Price:
                                                           -------------------------------------------------
                                                              First            After          After
                                   Conversion                Trading     %     First    %     First      %
Institution                  State  Date         Ticker        Day    Change Week(4) Change  Month(5) Change
- -----------                  -----  ----         ------        ---    ------ ------- ------ --------- ------
                                                               ($)    (%)     ($)       (%)    ($)       (%)
- ------------------------------------------------------------------------------------------------------------
                                                                           
Standard Conversions
- --------------------
Provident Fin. Services, Inc.*     NJ  1/16/2003 PFS-NYSE     $15.50  55.0%  $15.65  56.5%   $15.15   51.5%
CCSB Financial Corp.               MO  1/19/2003 CCFC-OTC     $12.00  20.0%  $12.31  23.1%   $12.50   25.0%


                           Averages - Standard Conversions:   $13.75  37.5%  $13.98  39.8%   $13.83   38.3%
                           Medians  - Standard Conversions:   $13.75  37.5%  $13.98  39.8%   $13.83   38.3%


Second Step Conversions
- -----------------------
First Niagara Financial Grp, Inc.* NY 1/21/2003 FNFG-NASDAQ   $11.27  12.7%  $11.45  14.5%   $11.18   11.8%
Wayne Savings Bancshares, Inc      OH  1/9/2003 WAYN-NASDAQ   $11.20  12.0%  $11.20  12.0%   $11.15   11.5%
Sound Federal Bancorp, Inc.        NY  1/7/2003 SFFS-NASDAQ   $11.00  10.0%  $11.20  12.0%   $11.61   16.1%
Bridge Street Financial, Inc.*(7)  NY  1/6/2003 OCNB-NASDAQ   $10.16   1.6%  $10.70   7.0%   $10.94    9.4%


                        Averages - Second Step Conversions:   $10.91   9.1%  $11.14  11.4%   $11.22   12.2%
                         Medians - Second Step Conversions:   $11.10  11.0%  $11.20  12.0%   $11.17   11.7%


Mutual Holding Companies(6)
- ---------------------------
None to Date


                                Averages - All Conversions:   $11.86  18.6%  $12.09  20.9%   $12.09   20.9%
                                 Medians - All Conversions:   $11.24  12.4%  $11.33  13.3%   $11.40   14.0%

- ------------------------------------------------------------------------------------------------------------


Note: * - Appraisal performed by RP Financial; "NT" - Not Traded; "NA" - Not
Applicable, Not Available; "NM" - Not Meaningful.

(1)  Non-OTS regulated thrift.
(2)  As a percent of MHC offering for MHC transactions.
(3)  Does not take into account the adoption of SOP 93-6.
(4)  Latest price if offering is less than one week old.
(5)  Latest price if offering is more than one week but less than one month old.
(6)  Mutual holding company pro forma data on full conversion basis.
(7)  Simultaneously converted to commercial bank charter.
(8)  Converted to a commercial bank charter.

                                                                   March 7, 2003
- --------------------------------------------------------------------------------



RP Financial, LC.
Page 4.16

consideration the generally more leveraged pro forma balance sheets of
second-step companies, their track records as public companies prior to
conversion, and their generally higher pro forma ROE measures relative to
standard conversions in pricing their common stocks. Importantly, all of the
second step transactions completed in 2003 had minority ownership ratios in the
range of 41% to 48% and average 44% and, thus, were selling 56% of their
remaining shares to the public. Jefferson is somewhat different in this regard
as it maintain a minority ownership ratio approximating 17% and will thus be
selling approximately 83% of the outstanding shares owned by the MHC to the
public. Given the high MHC ownership ratio which will result in a sale of a
relatively greater portion of the Bank's stock to the public in a second step
conversion, we would expect the Bank to have pro forma pricing characteristics
which share some characteristics of the typical second step conversion
transaction and a full conversion offering. Exhibit IV-4 presents historical
offering data for second-step conversions, illustrating the historical trends
and characteristics of second-step offerings.

              Given that the Bank's offering shares is somewhat of a hybrid
between the typical second step conversion and a standard conversion offering
with the high amount of shares to be issued publicly, we have assessed the
market for standard conversion offerings as well. There were two full
conversions completed since the beginning of 2003. The average pro forma
price/tangible book and price/core earnings ratios of these two offerings at
closing equaled 71.2% and 18.7 times (for the one company with a meaningful
earnings multiple), respectively. These two offerings appreciated in the
aftermarket, as Provident Financial's price increased by 55% after the first
week of trading while CCSB Financial Corp. appreciated by 20%.

         C.   The Acquisition Market

              Also considered in the valuation was the potential impact on the
Bank's stock price of recently completed and pending acquisitions of other
savings institutions operating in Tennessee. As shown in Exhibit IV-5, there was
1 thrift acquisition of Tennessee-based savings institutions completed or
announced between the beginning of 2000 through year-to-date 2003, and 15 bank
acquisitions over the same time frame. The recent acquisition activity involving
Tennessee thrifts and banks may imply a certain degree of acquisition
speculation for the Bank's stock. To the extent that acquisition speculation may
impact the Bank's offering, we have



RP Financial, LC.
Page 4.17

largely taken this into account in selecting companies which operate in markets
that have experienced a comparable level of acquisition activity as the Bank's
market and, thus, are subject to the same type of acquisition speculation that
may influence the Bank's trading price.

       D.   Trading in Jefferson Federal's Stock

            Since the Bank's minority stock currently trades under the symbol
"JFSZ" on the Pink Sheets, RP Financial also considered the recent trading
activity in the valuation analysis. the Bank had a total of 1,875,500 shares
issued and outstanding at March 7, 2003, of which 325,500 were held by public
shareholders and were traded as public securities. As of February 25, 2003, the
last day which the stock traded prior to the Bank's announcement of its
intention to complete the second step transaction, the Bank's closing stock
price was $33.50 per share. As of March 7, 2003, the Bank's closing stock price
was $65.00 per share.

            Importantly, Jefferson Federal's stock trades infrequently,
primarily as a result of the small public float (i.e., the majority of the
shares are held by insiders or the MHC). As a result of the limited liquidity
characteristics of the issue, buying and selling activity can dramatically
impact the price as compared to a more actively traded or exchange listed
security. In this regard, based on discussions with Keefe, Bruyette & Woods,
Inc. ("Keefe Bruyette"), the Bank's selling agent retained in connection with
the second step conversion, a portion of the recent trading activity in the
Bank's stock may reflect the covering of short positions which were untenable
with the announcement of the Bank's intention to undertake a second step
transaction.

            There are significant differences between the Bank's minority stock
(currently being traded) and the conversion stock that will be issued by the
Bank. Such differences include different liquidity characteristics (the new
conversion stock will be more liquid owing to larger number of public shares
available to trade), a different return on equity for the conversion stock and
dividend payments will be made on all shares outstanding; thereby, requiring a
higher payout ratio to sustain the current level of dividends paid to non-MHC
shareholders. Since the pro forma impact has not been publicly disseminated to
date, coupled with the very limited liquidity of the issue, it is appropriate to
discount the current trading level. As the pro forma impact is made known
publicly, the trading level may become more informative, but the liquidity



RP Financial, LC.
Page 4.18

of the issue will remain limited pending issuance of the majority of the shares
owned by the MHC.

                              * * * * * * * * * * *

       In determining our valuation adjustment for marketing of the issue, we
considered trends in both the overall market for stocks generally as well as the
thrift market, the new issue market including the new issue market for
second-step conversions, the acquisition market and recent trading activity in
the Bank's minority stock. Taking these factors and trends into account, RP
Financial concluded that a moderate downward adjustment was appropriate in the
valuation analysis for purposes of marketing of the issue.

8.     Management

       The Bank's management team appears to have experience and expertise in
all of the key areas of operations. Although the Bank has a new CEO, he has been
employed with the Bank for more than a year and he maintains extensive regional
banking experience, so no discount was appropriate in this regard. Exhibit IV-6
provides summary resumes of the Bank's Board of Directors and senior management.
The financial characteristics of the Bank suggest that it is effectively managed
and there appears to be a well-defined organizational structure.

       Similarly, the returns, capital positions, and other operating measures
of the Peer Group companies are indicative of well-managed financial
institutions, which have Boards and management teams that have been effective in
implementing competitive operating strategies. Therefore, on balance, we
concluded no valuation adjustment relative to the Peer Group was appropriate for
this factor.

9.     Effect of Government Regulation and Regulatory Reform

       In summary, as a fully-converted SAIF-insured institution, Jefferson
Federal will operate in substantially the same regulatory environment as the
Peer Group members -- all of whom are adequately capitalized institutions and
are operating with no apparent restrictions. Exhibit IV-7 reflects the Bank's
pro forma regulatory capital ratios. On balance, no adjustment has been applied
for the effect of government regulation and regulatory reform.



RP Financial, LC.
Page 4.19

Summary of Adjustments

       Overall, based on the factors discussed above, we concluded that the
Bank's pro forma market value should be discounted relative to the Peer Group as
follows:



       Key Valuation Parameters:                                  Valuation Adjustment
       ------------------------                                   --------------------
                                                               
       Financial Condition                                        Moderate Downward
       Profitability, Growth and Viability of Earnings            Moderate Downward
       Asset Growth                                               Slight Downward
       Primary Market Area                                        No Adjustment
       Dividends                                                  No Adjustment
       Liquidity of the Shares                                    Slight Upward
       Marketing of the Issue                                     Moderate Downward
       Management                                                 No Adjustment
       Effect of Government Regulations and Regulatory Reform     No Adjustment



Valuation Approaches

       In applying the accepted valuation methodology promulgated by the OTS and
adopted by the FDIC, i.e., the pro forma market value approach, including the
fully-converted analysis described above, we considered the three key pricing
ratios in valuing the Bank's to-be-issued stock -- price/earnings ("P/E"),
price/book ("P/B"), and price/assets ("P/A") approaches -- all performed on a
pro forma basis including the effects of the conversion proceeds. In computing
the pro forma impact of the conversion and the related pricing ratios, we have
incorporated the valuation parameters disclosed in the Bank's prospectus for
reinvestment rate, the effective tax rate, offering expenses and stock benefit
plan assumptions (summarized in Exhibits IV-8 and IV-9). In our estimate of
value, we assessed the relationship of the pro forma pricing ratios relative to
the Peer Group, and the recent conversions including second-step conversion
offerings.

       RP Financial's valuation placed an emphasis on the following:

          .  P/E Approach. The P/E approach is generally considered the best
             indicator of long-term value for a stock. Given the similarities
             between the Bank's and the Peer Group's earnings composition and
             overall financial condition, the P/E approach was carefully
             considered in this valuation. At the same time, since reported
             earnings for both the Bank and the Peer Group included certain
             non-recurring items, we also made adjustments to earnings to arrive
             at core earnings estimates for Bank and the Peer Group and
             resulting price/core



RP Financial, LC.
Page 4.20

               earnings ratios. Additionally, consideration was given to the
               unique convergence of events which have led to the Bank's peak
               level of earnings, whereas historical earnings have typically
               more closely approximated the current Peer Group average.

           .   P/B Approach. P/B ratios have generally served as a useful
               benchmark in the valuation of thrift stocks, particularly in the
               context of conversion offerings, as the earnings approach
               involves assumptions regarding the use of proceeds. RP Financial
               considered the P/B approach to be a valuable indicator of pro
               forma value taking into account the pricing ratios under the P/E
               and P/A approaches. We have also modified the P/B approach to
               exclude the impact of intangible assets (i.e., price/tangible
               book value or "P/TB"), in that the investment community
               frequently makes this adjustment in its evaluation of this
               pricing approach.

           .   P/A Approach. P/A ratios are generally a less reliable indicator
               of market value, as investors typically assign less weight to
               assets and attribute greater weight to book value and earnings -
               we have also given less weight to the assets approach.
               Furthermore, this approach as set forth in the regulatory
               valuation guidelines does not take into account the amount of
               stock purchases funded by deposit withdrawals, thus understating
               the pro forma P/A ratio. At the same time, the P/A ratio is an
               indicator of franchise value, and, in the case of highly
               capitalized institutions, high P/A ratios may limit the
               investment community's willingness to pay market multiples for
               earnings or book value when ROE is expected to be low.

           .   Trading of JFSZ Stock. Converting institutions generally do not
               have stock outstanding. The Bank, however, has public shares
               outstanding due to the mutual holding company form of ownership.
               Since JFSZ is currently traded on a limited basis on the Pink
               Sheets, we attribute limited weight to trading price in our
               valuation. Prior to the announcement of the second step
               conversion, the stock closed at a price of $33.50 per share
               whereas the stock closed at $65.00 per share as of March 7, 2003,
               with Keefe Bruyette indicating that at least a portion of the
               increase may reflect the covering of outstanding short positions.
               While some consideration was given to the recent limited trading,
               we have discounted such trading owing to the very limited trading
               volumes which such prices reflect.

           The Bank has adopted Statement of Position ("SOP") 93-6, which causes
earnings per share computations to be based on shares issued and outstanding
excluding unreleased ESOP shares. For purposes of preparing the pro forma
pricing analyses, we have reflected all shares issued in the offering, including
all ESOP shares, to capture the full dilutive impact, particularly



RP Financial, LC.
Page 4.21

since the ESOP shares are economically dilutive, receive dividends and can be
voted. However, we did consider the impact of the adoption of SOP 93-6 in the
valuation.

       Based on the application of the three valuation approaches, taking into
consideration the valuation adjustments discussed herein, RP Financial concluded
that, as of March 7, 2003, the aggregate pro forma market value of the Bank's
conversion stock was $64,250,000 at the midpoint, inclusive of the $4.0 million
contribution to the Foundation (375,000 shares of stock at the $10.00 per share
issue price and $250,000 of cash). The midpoint and resulting valuation range is
based on the sale of an 82.6% ownership interest to the public (before the
issuance of shares to the Foundation out of authorized but unissued shares)
which provides for a $50.0 million public offering at the midpoint value.

       Importantly, as noted above, RP Financial has incorporated the financial
impact of the contribution of 375,000 shares of stock and $250,000 of cash to
the Foundation into Jefferson Federal's pro forma pricing ratios, consistent
with the treatment in the offering prospectus.

       1.  Price-to-Earnings ("P/E"). The application of the P/E valuation
method requires calculating the Bank's pro forma market value by applying a
valuation P/E multiple to the pro forma earnings base. In applying this
technique, we considered both reported earnings and a recurring earnings base,
that is, earnings adjusted to exclude any one-time non-operating items, plus the
estimated after-tax earnings benefit of the reinvestment of the net proceeds. In
deriving the Bank's core earnings, the adjustments made to reported earnings was
to gains on the sale of REO and investment securities, which equaled $182,000
for the 12 months ended December 31, 2002. As shown below, on a tax effected
basis, assuming an effective marginal tax rate of 37% for the gains eliminated,
the Bank's core earnings were determined to equal $3.148 million for the 12
months ended December 31, 2002. We have not made an explicit adjustment to
earnings for the unique convergence of factors that have contributed to the
Bank's peak level of earnings at present. (Note: see Exhibit IV-10 for the
adjustments applied to the Peer Group's earnings in the calculation of core
earnings).



RP Financial, LC.
Page 4.22

                                                                          Amount
                                                                          ------
                                                                          ($000)

       Trailing 12 Month Net Income (12/31/02)                           $3,263
       Less: Net Gains on Sale of REO and Investments                      (182)
       Tax Effect (1)                                                        67
                                                                             --
         Core Earnings Estimate                                          $3,148
       (1)  Reflects a 37% effective tax rate on the adjustments.

       Based on the Bank's reported and estimated core earnings, and
incorporating the impact of the pro forma assumptions discussed previously, the
Bank's pro forma reported and core P/E multiples at the $64.0 million midpoint
value equaled 15.74 times and 16.19 times. In comparison to the Peer Group's
average reported and core earnings multiple of 17.83 times and 20.32 times (see
Table 4.3), the Bank is discounted by 11.2% and 20.3%, respectively. The implied
discounts take into consideration the unique convergence of events for Jefferson
Federal including interest rate declines, strategy shifts and portfolio
composition, which have served to sharply increase the Bank's earnings in recent
periods, notwithstanding the relatively high risk profile in comparison to the
Peer Group. Additionally, the discounted earnings multiple takes into account
the fact that the reinvestment rate assumption we utilized, equal to 5.09% (as
set forth in the conversion prospectus) is more reflective of a long-term
reinvestment rate, and that, initially, the funds received in the second step
conversion will be invested in short-term interest bearing accounts and
securities for which the current yields are much lower (in the range of 1% to
2%).

       At the supermaximum of the offering range, the Bank's pro forma reported
and core P/E multiples at the $64.0 million midpoint value, Jefferson Federal's
reported earnings multiple of 19.12 times was at a premium of 7.2% relative to
the Peer Group average multiple of 17.83 times. Relative to the Peer Group's
average core earnings multiple of 20.32 times, the Bank's pro forma core
earnings multiple of 19.64 times at the supermaximum of the offering range is
discounted by 3.4%.

       2.  Price-to-Book ("P/B"). The application of the P/B valuation method
requires calculating the Bank's pro forma market value by applying a valuation
P/B ratio to the Bank's pro forma book value. Based on the $64.0 million
midpoint valuation, the Bank's pro forma P/B



RP Financial, LC.
Financial Services Industry Consultants

                                   Table 4.3
                              Public Market Pricing
                 Jefferson Bancshares, Inc. and the Comparables
                               As of March 7, 2003



                                              Market
                                         Capitalization    Per Share Data                                              Dividends(4)
                                         ---------------  ----------------                                            --------------
                                                            Core    Book
                                          Price/  Market  12 Month  Value/               Pricing Ratios(3)            Amount/
                                                                            -----------------------------------------
Financial Institution                    Share(1)  Value   EPS(2)   Share     P/E     P/B      P/A     P/TB    P/Core  Share  Yield
- ---------------------                    --------  -----  --------  -----     ---     ---      ---     ----    ------  -----  -----
                                            ($)   ($Mil)    ($)      ($)      (x)     (%)      (%)     (%)      (x)     ($)   (%)
                                                                                            
Jefferson Bancshares, Inc.
- --------------------------
  Supermmaximum                           $10.00  $ 83.76  $0.52   $10.90   19.12x   91.72%   26.44%   91.72%  19.64x  $0.12  1.17%
  Maximum                                 $10.00  $ 73.33  $0.58   $11.44   17.37x   87.42%   23.70%   87.42%  17.86x  $0.13  1.35%
  Midpoint                                $10.00  $ 64.25  $0.64   $12.05   15.74x   83.01%   21.21%   83.01%  16.19x  $0.16  1.55%
  Minimum                                 $10.00  $ 55.18  $0.71   $12.86   13.99x   77.79%   18.61%   77.79%  14.41x  $0.18  1.82%

All Public Companies(7)
- -----------------------
  Averages                                $19.81  $273.70  $1.21   $15.42   14.59x  132.07%   13.71%  141.80%  15.91x  $0.46  2.40%
  Medians                                      -        -      -        -   13.41x  121.54%   12.30%  128.99%  15.00x      -     -

All Non-MHC State of TN(7)
- --------------------------
  Averages                                $13.19  $ 17.29  $1.32   $12.16    9.84x  108.47%   15.48%  114.80%   9.99x  $0.33  2.50%
  Medians                                      -        -      -        -    9.84x  108.47%   15.48%  114.80%   9.99x      -     -

Comparable Group Averages
- -------------------------
  Averages                                $16.60  $ 32.62  $0.81   $17.56   17.83x   95.16%   14.97%   98.75%  20.32x  $0.35  2.37%
  Medians                                      -        -      -        -   17.72x   97.61%   14.61%  102.29%  21.15x      -     -

Comparable Group
- ----------------
CSBC   Citizens South Banking of NC       $10.77  $ 97.61  $0.48   $10.63   21.54x  101.32%   19.83%  110.57%  22.44x  $0.24  2.23%
DFBS   Dutchfork Bancshares Inc. of SC    $29.76  $ 36.58  $1.04   $27.18   15.50x  109.49%   16.34%  109.49%  28.62x  $0.00  0.00%
FFDF   FFD Financial Corp. of Dover OH    $13.39  $ 16.43  $0.44   $13.67   18.86x   97.95%   12.33%   97.95%    N.M.  $0.40  2.99%
FBTC   First BancTrust Corp. of IL        $17.90  $ 24.45  $0.62   $19.99   18.65x   89.54%   12.06%   89.54%  28.87x  $0.20  1.12%
FBEI   First Bancorp of Indiana of IN     $17.23  $ 29.02  $0.49   $18.33   22.09x   94.00%   16.10%  101.00%    N.M.  $0.46  2.67%
GSLA   GS Financial Corp. of LA           $18.99  $ 28.88  $0.77   $22.61   24.66x   83.99%   13.75%   83.99%  24.66x  $0.40  2.11%
PEDE   Great Pee Dee Bancorp of SC        $14.44  $ 25.24  $0.93   $14.74   16.79x   97.96%   18.19%  103.59%  15.53x  $0.56  3.88%
SRN    Southern Banc Company of AL        $13.90  $ 13.36  $0.70   $19.41   16.55x   71.61%   11.86%   71.69%  19.86x  $0.35  2.52%
UCBC   Union Community Bancorp of IN      $16.40  $ 37.36  $1.30   $16.86   13.78x   97.27%   13.74%  104.93%  12.62x  $0.60  3.66%
UTBI   United Tennessee Bancshares of TN  $13.19  $ 17.29  $1.32   $12.16    9.84x  108.47%   15.48%  114.80%   9.99x  $0.33  2.50%


                                          Dividends
                                             (4)                   Financial Characteristics(6)
                                          -------- -----------------------------------------------------------
                                          Payout    Total  Equity/    NPAs/     Reported            Core         Exch.   2nd Step
                                                                              -------------     --------------
Financial Institution                     Ratio(5) Assets  Assets    Assets   ROA    ROE        ROA      ROE     Ratio   Proceeds
- ---------------------                     -------- ------  ------    ------   ---    ---        ---      ---     -----   --------
                                           (%)     ($Mil)    (%)       (%)     (%)    (%)      (%)      (%)       (x)    ($Mil)
                                                                                            
Jefferson Bancshares, Inc.
- --------------------------
  Supermmaximum                           22.41%   $  317   28.82%    1.33%   1.38%  4.80%     1.35%    4.67%    4.27x   $66.125
  Maximum                                 23.41%   $  309   27.11%    1.37%   1.36%  5.03%     1.33%    4.90%    3.71x   $57.500
  Midpoint                                24.39%   $  303   25.55%    1.40%   1.35%  5.27%     1.31%    5.13%    3.23x   $50.000
  Minimum                                 25.51%   $  296   23.93%    1.43%   1.33%  5.56%     1.29%    5.40%    2.74x   $42.500

All Public Companies(7)
- -----------------------
  Averages                                33.75%   $2,180   10.59%    0.66%   0.91%  9.26%     0.79%    7.64%
  Medians                                     -         -       -        -       -      -         -        -

All Non-MHC State of TN(7)
- --------------------------
  Averages                                25.00%   $  112   14.27%    0.41%   1.61% 11.55%     1.59%   11.38%
  Medians                                     -         -       -        -       -      -         -        -

Comparable Group Averages
- -------------------------
  Averages                                39.45%   $  208   15.76%    0.44%   0.93%  6.11%     0.81%    5.26%
  Medians                                     -         -       -        -       -      -         -        -

Comparable Group
- ----------------
CSBC   Citizens South Banking of NC       50.00%   $  492   19.57%    0.37%   0.97%  7.08%     0.93%    6.80%
DFBS   Dutchfork Bancshares Inc. of SC     0.00%   $  224   14.92%     N.A.   0.99%  7.12%     0.54%    3.85%
FFDF   FFD Financial Corp. of Dover OH      N.M.   $  133   12.59%    0.62%   0.66%  5.27%     0.41%    3.27%
FBTC   First BancTrust Corp. of IL        32.26%   $  203   13.47%     N.A.   0.64%  4.76%     0.42%    3.08%
FBEI   First Bancorp of Indiana of IN       N.M.   $  180   17.12%    0.29%   0.72%  4.23%     0.45%    2.66%
GSLA   GS Financial Corp. of LA           51.95%   $  210   16.37%    0.31%   0.59%  3.34%     0.59%    3.34%
PEDE   Great Pee Dee Bancorp of SC        60.22%   $  139   18.57%    1.04%   1.14%  5.89%     1.23%    6.37%
SRN    Southern Banc Company of AL        50.00%   $  113   16.56%    0.06%   0.74%  4.46%     0.62%    3.72%
UCBC   Union Community Bancorp of IN      46.15%   $  272   14.12%     N.A.   1.24%  7.42%     1.36%    8.11%
UTBI   United Tennessee Bancshares of TN  25.00%   $  112   14.27%    0.41%   1.61% 11.55%     1.59%   11.38%


(1) Average of High/Low or Bid/Ask price per share.
(2) EPS (estimate core basis) is based on actual trailing twelve month data,
    adjusted to omit non-operating items (including the SAIF assessment) on a
    tax-effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB =
    Price to tangible book value; and P/Core = Price to core earnings.
(4) Indicated twelve month dividend, based on last quarterly dividend declared.
(5) Indicated twelve month dividend as a percent of trailing twelve month
    estimated core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios based
    on trailing twelve month common earnings and average common equity and total
    assets balances.
(7) Excludes from averages and medians those companies the subject of actual or
    rumored acquisition activities or unusual operating characteristics.

Source: Corporate reports, offering circulars, and RP Financial, LC.
        calculations. The information provided in this report has been
        obtained from sources we believe are reliable, but we cannot guarantee
        the accuracy or completeness of such information.

Copyright(c) 2003 by RP Financial, LC.



RP Financial, LC.
Page 4.24

and P/TB ratios equaled 83.01%. In comparison to the average P/B and P/TB ratios
for the Peer Group of 95.16% and 98.75%, the Bank's ratios reflect a discount of
12.85% on a P/B basis and a discount of 15.9% on a P/TB basis. RP Financial
considered the discounts under the P/B approach to be reasonable in light of the
valuation adjustments referenced earlier, including the more significant
interest rate risk and credit risk characteristics of the Bank in comparison to
the Peer Group. Moreover, while the return on equity will be comparable to the
Peer Group average based on the Bank's current earnings rate, the expected
downward pressure on earnings in the coming months will serve to depress the
Bank's ROE to levels below the Peer Group average.

          3. Price-to-Assets ("P/A"). The P/A valuation methodology determines
market value by applying a valuation P/A ratio to the Bank's pro forma asset
base, conservatively assuming no deposit withdrawals are made to fund stock
purchases. In all likelihood there will be deposit withdrawals, which results in
understating the pro forma P/A ratio which is computed herein. At the midpoint
of the valuation range, the Bank's value equaled 21.21% of pro forma assets.
Comparatively, the Peer Group companies exhibited an average P/A ratio of
14.97%, which implies a 41.7% premium being applied to the Bank's pro forma P/A
ratio.

Comparison to Recent Conversions and Second-Step Offerings

          As indicated at the beginning of this chapter, RP Financial's analysis
of recent standard conversion and second-step offering pricing characteristics
at closing and in the aftermarket has been limited to a "technical" analysis
and, thus, the pricing characteristics of recent standard conversions and
second-step offerings are not the primary determinate of value herein.
Particular focus was placed on the P/TB approach in this analysis, since the P/E
multiples may not reflect the actual impact of reinvestment and the source of
the stock proceeds (i.e., external funds vs. deposit withdrawals). The recent
standard conversions closed at a price/tangible book ratio of 71.2% (see Table
4.2), and both appreciated in aftermarket trading. In comparison, the Bank's
P/TB ratio at the appraised midpoint value reflects a premium of 16.5% relative
to the average closing price of the recent standard conversion offerings.

          The four most recently completed second-step conversion offerings on
average closed at a price/tangible book ratio of 103.2%. However, one of the
second step conversion transactions



RP Financial, LC.
Page 4.25

involved First Niagara Financial which is a much larger institution than the
Bank ($3.3 billion in assets) and which simultaneously acquired another
financial institutions as part of its second step transaction. Excluding First
Niagara Financial, the median price/tangible book of the second step
transactions completed in 2003 equaled 89.4%. On average, the prices of the four
second-step conversion offerings increased by 12.3% during the first week of
trading. In comparison, the Bank's P/TB ratio at the appraised midpoint value
reflects a discount of 7.2% relative to the median closing P/TB ratio of the
recent second-step conversion offerings completed in 2003 (excluding First
Niagara).

     As discussed earlier, given the Jefferson Federal's high MHC ownership
ratio which will result in a sale of a relatively greater portion of the Bank's
stock to the public in a second step conversion (relative to the recent second
step transactions), we would expect the Bank to have pro forma pricing
characteristics to share some characteristics of the typical second step
conversion transaction and a full conversion offering. In this regard, the
Bank's pro forma P/TB ratio at the midpoint, equal to 83.01%, falls within the
range exhibited by the recent standard conversion offerings (71.2% average P/TB)
and the second step conversion transactions (89.4% median P/TB excluding First
Niagara).

Valuation Conclusion

     Based on the foregoing, it is our opinion that, as of March 7, 2003, the
estimated aggregate pro forma valuation of the shares to be issued in the
conversion of the MHC, including (1) newly-issued shares representing the MHC's
ownership interest in Jefferson Bancshares, (2) exchange shares to be issued to
existing public shareholders of Jefferson Bancshares, and (3) shares issued to
the Jefferson Federal Foundation, $64,250,000 at the midpoint, equal to
6,425,000 shares at a per share value of $10.00. Based on this valuation, and
taking into account the ownership interest represented by the shares owned by
the MHC and the shares issued to the Jefferson Federal Charitable Foundation,
the midpoint of the offering range was $50,000,000, equal to 5,000,000 shares at
$10.00 per share. The resulting offering range includes a minimum value of
$42,500,000, equal to 4,250,000 shares at $10.00 per share (85.0% of the
midpoint) and a maximum value of $57,500,000, equal to 5,750,000 shares at
$10.00 per share (115.0% of the midpoint). In the event the appraised value is
subject to an increase, the offering range may be



RP Financial, LC.
Page 4.26

increased up to a supermaximum value of $66,125,000, equal to 6,612,500 shares
at $10.00 per share, without requiring a resolicitation. The pro forma valuation
calculations relative to the Peer Group are shown in Table 4.3 and are detailed
in Exhibit IV-8 and Exhibit IV-9.

Establishment of the Exchange Ratio

     OTS regulations provide that in a conversion of a mutual holding company,
the minority stockholders are entitled to exchange their shares of the Bank's
common stock for newly issued shares of the Bank as a fully converted company.
The Board of Directors has independently established a formula to determine the
exchange ratio. The formula has been designed to preserve the current aggregate
public ownership percentage in the Bank equal to 82.64% as of March 7, 2003. It
is the Bank's intent to issue 375,000 shares to the Foundation out of authorized
but unissued shares, which will dilute the resulting ownership of the current
minority shareholders from 17.36% to 16.34% at the midpoint on a pro forma
basis, following the completion of the second step conversion and establishment
of the Foundation. Pursuant to this formula, the exchange ratio to be received
by the existing minority shareholders of the Bank will be determined at the end
of the offering based on the total number of shares sold in the Subscription and
Community offerings. As shown in Table 4.3, the exchange ratio for the minority
shareholders would be 2.7419 shares, 3.2258 shares, 3.7097 shares and 4.2661
shares of newly issued shares of Jefferson Bancshares stock for each share of
stock held by the public shareholders at the minimum, midpoint, maximum and
supermaximum of the offering range, respectively. RP Financial expresses no
opinion on the proposed exchange of newly issued Jefferson Bancshares shares for
the shares held by the public stockholders or on the proposed exchange ratio.

EX-99.2

                                                                    EXHIBIT 99.2

                                 GIFT INSTRUMENT
                               CHARITABLE GIFT TO
                     JEFFERSON FEDERAL CHARITABLE FOUNDATION

     Jefferson Bancshares, Inc. (the "Company"), desires to make a gift of its
common stock to Jefferson Federal Charitable Foundation (the "Foundation"), a
nonprofit corporation organized under the laws of the State of Tennessee. The
purpose of the donation is to establish a bond between Jefferson Bancshares,
Inc. and the community in which it and its affiliates operate to enable the
community to share in the potential growth and success of the Company and its
affiliates over the long term. To that end, Jefferson Bancshares, Inc. now
gives, transfers, and delivers to the Foundation 375,000 shares of its common
stock and $250,000, subject to the following conditions:

     1.   The Foundation shall use the donation solely for charitable purposes,
including community development, in the communities in which the Company and its
affiliates operate in accordance with the provisions of the Foundation's
Certificate of Incorporation; and

     2.   Consistent with the Company's intent to form a long-term bond between
the Company and the community, the amount of Common Stock that may be sold by
the Foundation in any one year shall not exceed 5% of the market value of the
assets held by the Foundation, except that this restriction shall not prohibit
the board of directors of the Foundation from selling a greater amount of Common
Stock in any one year if the board of directors of the Foundation determines
that the failure to sell a greater amount of the Common Stock held by the
Foundation would: (a) result in a long-term reduction of the value of the
Foundation's assets relative to their then current value that would jeopardize
the Foundation's capacity to carry out its charitable purposes; or (b) otherwise
jeopardize the Foundation's tax-exempt status.

     3.   The Common Stock contributed to the Foundation by the Company shall,
for so long as such shares are held by the Foundation, be voted in the same
ratio as all other shares of Common Stock of the Company which are voted on each
and every proposal considered by the stockholders of the Company.

     4.   For a period of five years from the date of the organization of the
Corporation: (i) one board seat shall be reserved for an individual who has
experience with local community charitable organizations and grant making in
Morristown, Tennessee or its neighboring communities who is not an officer
and/or director of Jefferson Bancshares, Inc. or Jefferson Federal Savings and
Loan Association of Morristown and who is not an associate of any officer or
director of Jefferson Bancshares, Inc. or its affiliates or subsidiaries
("Community Member") and (ii) one board seat shall be reserved for an individual
who is also a member of the board of directors of Jefferson Federal Savings and
Loan Association of Morristown or a member of the board of directors of an
acquiror or resulting institution in the event of a merger or acquisition of the
Association.



     5.   The Foundation shall comply with the following regulatory requirements
imposed by the Office of Thrift Supervision ("OTS"):

     (a)  the OTS may examine the Foundation at the Foundation's expense;

     (b)  the Foundation must comply with all supervisory directives that the
          OTS imposes;

     (c)  the Foundation must submit a copy of its Form 990-PF to the OTS on an
          annual basis;

     (d)  the Foundation must operate in accordance with written policies
          adopted by its Board of Directors, including a conflict of interest
          policy; and

     (e)  the Foundation may not engage in self-dealing, and must comply with
          all laws necessary to maintain its tax exempt status under the
          Internal Revenue Code.

Dated: ___________, 2003                             JEFFERSON BANCSHARES, INC.


                                                     By:________________________

EX-99.3

                                                                    Exhibit 99.3

xxxxxxxx xx, 2003

Dear Friend:

We are pleased to announce that Jefferson Bancshares, MHC is converting to stock
form and Jefferson Federal Savings and Loan Association is reorganizing as a
wholly-owned subsidiary of a newly-formed stock holding company. In conjunction
with the conversion, Jefferson Bancshares, Inc., a newly-formed corporation,
will serve as a holding company for Jefferson Federal, is offering shares of
common stock in a subscription offering and community offering to certain
depositors of the Jefferson Federal, to Jefferson Federal's Employee Stock
Ownership Plan, to current stockholders and to members of the general public,
pursuant to a Plan of Conversion.

Because we believe you may be interested in learning more about Jefferson
Bancshares common stock as a potential investment, we are sending you the
following materials that describe the stock offering. Please read these
materials carefully before you submit a Stock Order and Certification Form.

     .    PROSPECTUS: This document provides detailed information about our
          operations and the proposed stock offering.

     .    STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase
          stock by returning it with your payment in the enclosed business reply
          envelope. The deadline for ordering stock is 12:00 Noon, Eastern Time,
          on xxxxxxxx xx, 2003.

You have the opportunity to buy stock directly from Jefferson Bancshares without
commission or fee. If you have additional questions regarding the Plan of
Conversion and stock offering, please call us at (xxx) xxx-xxxx Monday through
Friday from 8:30 a.m. to 4:30 p.m., or stop by the Stock Information Center
located at 120 Evans Avenue, Morristown, Tennessee.

We are pleased to offer you this opportunity to become a charter shareholder of
Jefferson Bancshares, Inc.

Sincerely,

Anderson L. Smith
President and Chief Executive Officer

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARNTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON FEDERAL
SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



Xxxxxxxx xx, 2003

Dear Member:

We are pleased to announce that Jefferson Bancshares, MHC is converting to stock
form and Jefferson Federal Savings and Loan Association is reorganizing as a
wholly-owned subsidiary of a newly-formed stock holding company. In conjunction
with the conversion, Jefferson Bancshares, Inc., a newly-formed corporation,
will serve as a holding company for the Jefferson Federal, is offering shares of
common stock in a subscription offering and community offering to certain
depositors of the Jefferson Federal, to Jefferson Federal's Employee Stock
Ownership Plan, to current stockholders and to members of the general public,
pursuant to a Plan of Conversion.

To accomplish the conversion, we need your participation in an important vote.
Enclosed is a proxy statement describing the Plan of Conversion and your voting
and subscription rights. The Plan of Conversion has been approved by the Office
of Thrift Supervision and now must be approved by you. YOUR VOTE IS VERY
IMPORTANT.

Enclosed, as part of the proxy material, is your proxy card. This proxy card
should be signed and returned to us prior to the special meeting of members on
Xxxxxxxx xx, 2003. Please take a moment to sign the enclosed proxy card TODAY
and return it to us in the postage-paid envelope provided. FAILURE TO VOTE HAS
THE SAME EFFECT AS VOTING AGAINST THE PLAN OF CONVERSION.

Our Board of Directors believes that the conversion is in the best interests of
our members and the existing public stockholders. Please remember:

     .    Your deposit accounts at Jefferson Federal will continue to be insured
          up to the maximum legal limit by the Federal Deposit Insurance
          Corporation ("FDIC").

     .    There will be no change in the balance, interest rate, or maturity of
          any deposit or loan accounts because of the conversion.

     .    You have a right, but no obligation, to buy stock before it is offered
          to the public.

     .    Like all stock, stock issued in this offering will not be insured by
          the FDIC.

Enclosed are materials describing the stock offering, including a Prospectus. We
urge you to read the Prospectus carefully before submitting your Stock Order and
Certification Form. If you are interested in purchasing common stock, you must
submit your Stock Order and Certification Form and payment prior to 12:00 Noon,
Eastern Time, on Xxxxxxxx xx, 2003.

If you have additional questions regarding the Plan of Conversion and stock
offering, please call us at (xxx) xxx-xxxx Monday through Friday from 8:30 a.m.
to 4:30 p.m., or stop by the Stock Information Center located at 120 Evans
Avenue, Morristown, Tennessee.

Sincerely,

Anderson L. Smith
President and Chief Executive Officer

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



  (Stockholder Letter REGISTERED HOLDERS - Letter 1- Jefferson Bancshares, Inc.
                                   Letterhead)

Xxxxxxxx xx, 2003

Dear Stockholder:

We are pleased to inform you that the Boards of Directors of Jefferson Federal
Savings and Loan Association and Jefferson Bancshares, MHC have adopted a Plan
of Conversion whereby Jefferson Bancshares, MHC will convert to stock form and
Jefferson Federal will be reorganized as a wholly-owned subsidiary of a
newly-formed stock holding company named Jefferson Bancshares, Inc. Pursuant to
the Plan of Conversion, existing public stockholders will be issued shares of
common stock of Jefferson Bancshares in exchange for their current shares of
Jefferson Federal common stock. In addition to the shares of common stock to be
issued to shareholders of Jefferson Federal, Jefferson Bancshares is also
offering shares of common stock to the MHC's members, Jefferson Federal's
stockholders and members of the public. Consummation of the Plan of Conversion
is subject to (i) the approval of the members of the MHC., (ii) the approval of
the stockholders of Jefferson Federal and (iii) regulatory approval.

We are asking stockholders of Jefferson Federal as of Xxxxxxxx xx, 2003, the
voting record date, to vote FOR the Plan of Conversion and FOR the formation of
our charitable foundation. If you and/or members of your family hold stock in
different names, you may receive more than one proxy mailing. Please vote all
proxy cards received and return them today in the enclosed postage-paid
envelope. This will not prevent you from voting in person at the meeting, but
will assure that your vote is counted if you are unable to attend. Your vote FOR
the Plan of Conversion will not obligate you to buy any stock in the conversion.
A proxy statement relating to the conversion is enclosed.

We have enclosed the following materials which will help you learn more about
investing in Jefferson Bancshares common stock. Please read and review the
materials carefully before making an investment decision.

     .    PROSPECTUS: This document provides detailed information about our
          operations and the proposed stock offering.

     .    STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase
          stock by signing and returning it with your payment in the enclosed
          business reply envelope. The deadline for ordering stock is 12:00
          Noon, Eastern Time, on Xxxxxxxx xx, 2003.

We are inviting our customers, existing stockholders, and community members to
become charter stockholders of Jefferson Bancshares. Through this offering you
have the opportunity to buy stock directly from the Jefferson Bancshares without
commission or fee.

Should you have additional questions regarding the conversion and stock
offering, please call us at (xxx) xxx-xxxx Monday through Friday from 8:30 a.m.
to 4:30 p.m, or stop by the Stock Information Center located at 120 Evans
Avenue, Morristown, Tennessee.

Sincerely,

Anderson L. Smith
President and Chief Executive Officer

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



     (Stockholder Letter STREET HOLDERS-letter 2- Jefferson Bancshares, Inc.
                                   Letterhead)

Xxxxxxxx xx, 2003

Dear Stockholder:

We are pleased to inform you that the Boards of Directors of Jefferson Federal
Savings and Loan Association and Jefferson Bancshares, MHC have adopted a Plan
of Conversion whereby Jefferson Bancshares, MHC. will convert to stock form and
Jefferson Federal will be reorganized as a wholly-owned subsidiary of a
newly-formed stock holding company named Jefferson Bancshares, Inc. Pursuant to
the Plan of Conversion, existing public stockholders will be issued shares of
common stock of Jefferson Bancshares in exchange for their current shares of
Jefferson Federal common stock. In addition to the shares of common stock to be
issued to shareholders of Jefferson Federal, Jefferson Bancshares is also
offering shares of common stock to the MHC's members, Jefferson Federal's
stockholders and members of the public. Consummation of the Plan of Conversion
is subject to (i) the approval of the members of the MHC, (ii) the approval of
the stockholders of Jefferson Federal and (iii) regulatory approval.

We are asking stockholders of Jefferson Federal as of Xxxxxxxx xx, 2003, the
voting record date, to vote FOR the Plan of Conversion and FOR the formation of
our charitable foundation. If you and/or members of your family hold stock in
different names, you may receive more than one proxy mailing. Please vote all
proxy cards received and return them today in the enclosed postage-paid
envelope. Your vote FOR the Plan of Conversion will not obligate you to buy any
stock in the conversion. A proxy statement relating to the conversion is
enclosed.

We have enclosed the following materials which will help you learn more about
investing in Jefferson Bancshares common stock. Please read and review the
materials carefully before making an investment decision.

     .    PROSPECTUS: This document provides detailed information about our
          operations and the proposed stock offering.

     .    STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase
          stock by signing and returning it with your payment in the enclosed
          business reply envelope. The deadline for ordering stock is 12:00
          Noon, Eastern Time, on Xxxxxxxx xx, 2003. You may obtain a Stock Order
          and Certification Form from your broker or by contacting the Stock
          Information Center.

We are inviting our depositors, existing stockholders, and community members to
become stockholders of the Jefferson Bancshares. Through this offering you have
the opportunity to buy stock directly from the Holding Company without
commission or fee.

Should you have additional questions regarding the conversion and stock
offering, please call us at (xxx) xxx-xxxx Monday through Friday from 8:30 a.m.
to 4:30 p.m. or stop by the Stock Information Center located at 120 Evans
Avenue, Morristown, Tennessee.

Sincerely,

Anderson L. Smith
President and Chief Executive Officer

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



    (Stockholder Letter Street holders - letter 3- Jefferson Bancshares, Inc.
                                   Letterhead)

Xxxxxxxx xx, 2003

Dear Stockholder:

Under separate cover, we forwarded to you information regarding the Plan of
Conversion of Jefferson Federal Savings and Loan Association and Jefferson
Bancshares, MHC and the concurrent offering of common stock of Jefferson
Bancshares, Inc.

As a result of certain requirements, we could not forward a Stock Order and
Certification Form with the other packet of materials. They are enclosed herein.

The deadline for ordering Jefferson Bancshares, Inc. common stock is at 12:00
Noon, Eastern Time, on Xxxxxxxx xx, 2003.

Should you have additional questions regarding the conversion and stock
offering, please call us at (xxx) xxx-xxxx Monday through Friday from 8:30 a.m.
to 4:30 p.m., or stop by the Stock Information Center located at 120 Evans
Avenue, Morristown, Tennessee.

Sincerely,

Anderson L. Smith
President and Chief Executive Officer

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



Xxxxxxxx xx, 2003

Dear Prospective Investor:

We are pleased to announce that Jefferson Bancshares, MHC is converting to stock
form and Jefferson Federal Savings and Loan Association is reorganizing as a
wholly-owned subsidiary of a newly-formed stock holding company named Jefferson
Bancshares, Inc. In conjunction with the conversion, Jeffferson Bancshares, Inc.
is offering shares of common stock in a subscription offering and community
offering. The sale of stock in connection with the conversion will enable us to
raise additional capital to support and enhance our current operations.

We have enclosed the following materials that will help you learn more about our
stock offering. Please read and review the materials carefully before you submit
a Stock Order and Certification Form.

     .    PROSPECTUS: This document provides detailed information about our
          operations and the proposed stock offering.

     .    STOCK ORDER AND CERTIFICATION FORM: This form is used to purchase
          stock by returning it with your payment in the enclosed business reply
          envelope. The deadline for ordering stock is 12:00 Noon, Eastern Time,
          on Xxxxxxx xx, 2003.

We invite our customers, local community members, and the general public to
become stockholders of Jefferson Bancshares. Through this offering you have the
opportunity to buy stock directly from Jefferson Bancshares, without commission
or fee. Our board of directors and management fully support the stock offering.

If you have additional questions regarding the Plan of Conversion and stock
offering, please call us at (xxx) xxx-xxxx Monday through Friday from 8:30 a.m.
to 4:30 p.m., or stop by the Stock Information Center located at 120 Evans
Avenue, Morristown, Tennessee.

Sincerely,

Anderson L. Smith
President and Chief Executive Officer

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



                        (Dear Stockholder Dark blue sky)

Xxxxxxxx xx, 2003

Dear Stockholder:

We are pleased to announce that Jefferson Bancshares, MHC is converting to stock
form and Jefferson Federal Savings and Loan Association is reorganizing as a
wholly-owned subsidiary of a newly-formed stock corporation. In conjunction with
the conversion, Jefferson Bancshares, Inc., a newly-formed corporation, will
serve as the holding company for Jefferson Federal and is offering shares of
common stock in a subscription offering and direct community offering.

Unfortunately, Jefferson Bancshares, Inc. is unable to either offer or sell its
common stock to you because the small number of eligible subscribers in your
jurisdiction makes registration or qualification of the common stock under the
securities laws of your jurisdiction impractical, for reasons of cost or
otherwise. Accordingly, this letter should not be considered an offer to sell or
a solicitation of an offer to buy the common stock of Jefferson Bancshares.

However, you have the right to vote on the Plan of Conversion and the formation
of our charitable foundation at the Special Meeting of Stockholders on Xxxxxxxx
xx, 2003. Therefore, enclosed is a proxy card, a proxy statement (which includes
the notice of the special meeting), a prospectus (which is provided solely as an
accompaniment to the proxy statement) and a return envelope for your proxy card.

I invite you to attend the special meeting on Xxxxxxxx xx, 2003. However,
whether or not you are able to attend, please complete the enclosed proxy card
and return it in the enclosed envelope.

Sincerely,

Anderson L. Smith
President and Chief Executive Officer



                     [Logo w/ Jefferson FS&LA of Morristown]

                                   PROXY GRAM

                              PLEASE VOTE TODAY...

We recently sent you a proxy statement and related materials regarding a
proposal to convert Jefferson Bancshares, MHC to stock form and reorganize
Jefferson Federal Savings and Loan Association of Morristown as a subsidiary of
a newly-formed stock form holding company.

            Your vote on the Plan of Conversion and formation of our
                charitable foundation has not yet been received.

 Voting for the Conversion does not obligate you to purchase stock and will not
    affect your accounts at Jefferson Federal Savings and Loan Association of
                       Morristown or your FDIC insurance.

          Not Returning Your Proxy Cards has the Same Effect as Voting
                           "Against" the Conversion.

Your Board of Directors Unanimously Recommends a Vote "FOR" the Conversion and
"FOR" the formation of our charitable foundation.

                          Your Vote Is Important To Us!
Please sign the enclosed proxy card and return it in the postage-paid envelope
provided TODAY! If you received more than one proxy card, please be sure to sign
and return all cards you received.

Thank you,


Anderson L. Smith
President and Chief Executive Officer

   If you have already mailed your proxy card(s), please accept our thanks and
                             disregard this notice.
                  For further information call (xxx) xxx-xxxx.

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
OF, AND ARE NOT INSURED OR GUARANTEED BY, JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVINGS AND LOAN, JEFFERSON BANCSHARES, INC., THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



                     [Logo w Jefferson FS&LA of Morristown]

                                  PROXY GRAM II
                              PLEASE VOTE TODAY...

We recently sent you a proxy statement and related materials regarding a
proposal to convert Jefferson Bancshares, MHC to stock form and reorganize
Jefferson Federal Savings and Loan Association of Morristown as a subsidiary of
a newly-formed stock form holding company.

            Your vote on the Plan of Conversion and formation of our
                charitable foundation has not yet been received.

 Voting for the Conversion does not obligate you to purchase stock and will not
 affect your accounts at Jefferson Federal Savings and Loan Association or your
                                 FDIC insurance.

          Not Returning Your Proxy Cards has the Same Effect as Voting
                            "Against" the Conversion.

Your Board of Directors Unanimously Recommends a Vote "FOR" the Conversion and
"FOR" the formation of our chartable foundation.

                      Our Reasons for the Corporate Change

- - To obtain additional capital to support internal growth by increasing our
lending and in the communities we serve
- - To continue our expansion within our market area and the contiguous counties.
- - To enhance stockholder returns through higher earnings and capital management
strategies
- - To facilitate acquisitions of other financial institutions as opportunities
arise (although we do not now have any specific acquisition plans).

                          Your Vote Is Important To Us!
Please sign the enclosed proxy card and return it in the postage-paid envelope
provided TODAY! If you received more than one proxy card, please be sure to sign
and return all cards you received.

Thank you,



Anderson L. Smith
President and Chief Executive Officer

   If you have already mailed your proxy card(s), please accept our thanks and
       disregard this notice. For further information call (xxx) xxx-xxxx.

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
OF, AND ARE NOT INSURED OR GUARANTEED BY, JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVINGS AND LOAN, JEFFERSON BANCSHARES, INC., THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



[logo] Jefferson Bancshares, Inc.

XXXXX,xx, 2003

Dear Valued Jefferson Federal Savings and Loan Association Member:

We recently forwarded you a proxy statement and related materials regarding a
proposal to convert Jefferson Federal Savings and Loan Association from a mutual
savings institution to a stock savings institution. This conversion will allow
us to operate in essentially the same manner as we currently operate, but
provides us with the flexibility to add capital, continue to grow and expand the
bank, add new products and services, and increase our lending capability.

As of today, your vote on our Plan of Conversion has not yet been received. Your
Board of Directors unanimously recommends a vote "FOR" the Plan of Conversion.
If you mailed your proxy, please accept our thanks and disregard this request.

We would sincerely appreciate you signing the enclosed proxy card and returning
it promptly in the enclosed postage-paid envelope or dropping it off at your
Jefferson Federal Savings and Loan Association branch. Our meeting on June XXth
is fast approaching and we'd like to receive your vote as soon as possible.

Voting FOR the Conversion does not affect the terms or insurance on your
accounts. For further information call our Information Center at (xxx) xxx-xxxx.

Best regards and thank you,



Anderson L. Smith
President and Chief Executive Officer

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



[LOGO] KEEFE, BRUYETTE & WOODS, INC.

To Members and Friends of Jefferson Federal Savings and Loan Association,
Jefferson Bancshares, Inc., and Jefferson Bancshares, MHC

Keefe, Bruyette & Woods, Inc., a member of the National Association of
Securities Dealers, Inc., is pleased to announce that Jefferson Bancshares, MHC
is converting to stock form and Jefferson Federal Savings and Loan Association
is reorganizing as a wholly-owned subsidiary of a newly-formed stock holding
company named Jefferson Bancshares, Inc. In conjunction with the conversion,
Jefferson Bancshares is offering shares of common stock in a subscription
offering and community offering to certain depositors of the Bank, the Bank's
Employee Stock Ownership Plan, existing stockholders, and members of the general
public pursuant to a Plan of Conversion.

At the request of Jefferson Bancshares, we are enclosing materials explaining
the conversion and your opportunity to invest in shares of Jefferson Bancshares'
common stock. Please read the enclosed Prospectus carefully. Jefferson
Bancshares has asked us to forward these documents to you in view of certain
requirements of the securities laws in your state.

If you have any questions, please visit our Stock Information Center located at
120 Evans Avenue, Morristown, Tennessee, Monday through Friday from 8:30 a.m. to
4:30 p.m. or feel free to call the Stock Information Center at (xxx) xxx-xxxx.

Very truly yours,


Keefe, Bruyette & Woods, Inc.

THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY, JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVINGS AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



                             (Dark Blue Sky Member)

xxxxxxxxxx xx, 2003

Dear Member:

We are pleased to announce that Jefferson Bancshares, MHC is converting to stock
form and Jefferson Federal Savings and Loan Association is reorganizing as a
wholly-owned subsidiary of a newly-formed stock holding company. In conjunction
with the conversion, Jefferson Bancshares, Inc., a newly-formed corporation,
will serve as a holding company for Jefferson Federal, is offering shares of
common stock in a subscription offering and community offering to certain
depositors of Jefferson Federal, to Jefferson Federals Employee Stock Ownership
Plan, to current stockholders and to members of the general public, pursuant to
a Plan of Conversion.

Unfortunately, Jefferson Bancshares is unable to either offer or sell its common
stock to you because the small number of eligible subscribers in your
jurisdiction makes registration or qualification of the common stock under the
securities laws of your jurisdiction impractical, for reasons of cost or
otherwise. Accordingly, this letter should not be considered an offer to sell or
a solicitation of an offer to buy the common stock of Jefferson Bancshares.

However, you have the right to vote on the Plan of Conversion and the formation
of our charitable foundation at the special meeting of members on xxxxxxxx xx,
2003. Therefore, enclosed is a proxy card, a proxy statement (which includes the
Notice of the Special Meeting), a prospectus (which is provided solely as an
accompaniment to the Proxy Statement) and a return envelope for your proxy card.

I invite you to attend the special meeting on xxxxxxxx xx, 2003. However,
whether or not you are able to attend, please complete the enclosed proxy card
and return it in the enclosed envelope.

Sincerely,


Anderson L. Smith
President and Chief Executive Officer



                            YOU ARE CORDIALLY INVITED
                        to a Community Investors Meeting

                      to learn more about the Conversion of
              Jefferson Bancshares, Inc. and the stock offering of


                           Jefferson Bancshares, Inc.


Senior executives of Jefferson FS&LA and its investment bankers will present
information and answer your questions about the Plan of Conversion and
prospectus, as well as about the business and operations of Jefferson FS&LA.


          DATE AND LOCATION                  DATE AND LOCATION



   There will be a Registered Representative at the following location at the
                                  times noted.


                            Stock Information Center
                                120 Evans Avenue


                     Monday - Friday 4:30 a.m. to 4:30 p.m.
                                 (xxx) xxx-xxxx


THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



                           Jefferson Bancshares, Inc.


                               Community Meeting

                                  May xx, 2003


THE SHARES OF COMMON STOCK BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY JEFFERSON BANCSHARES, MHC, JEFFERSON
FEDERAL SAVING AND LOAN ASSOCIATION, JEFFERSON BANCSHARES, INC., THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY COMMON STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.



Branch Locations
- ----------------


[MAP APPEARS HERE]                                        Main Office
                                                          120 Evans Avenue
                                                          Morristown, Tennessee

                                                          Drive-Through
                                                          143 E. Main Street
                                                          Morristown, Tennessee

                                                          Drive-Through
                                                          1960 W. Morris Blvd.
                                                          Morristown, Tennessee



Management of Jefferson Federal


.. Anderson L. Smith, President and Chief Executive Officer

.. Jane P. Hutton, Treasurer and Secretary

.. Douglas H. Rouse, Senior Vice President

.. Eric S. McDaniel, Vice President and Senior Operations Officer



                                  Total Assets

                              [GRAPH APPEARS HERE]





                 6/30/2000     6/30/2001    6/30/2002  12/31/2002
                  $230,589      $254,464     $267,340    $260,443



                                    Asset Mix


                              At December 31, 2002



                              Loans Receivable, Net

                                    [GRAPH]



                                 Loan Portfolio

                                    [GRAPH]


                              At December 31, 2002



                                 Total Deposits

                                   [GRAPH]



                                 Equity Capital

                                    [GRAPH]



                              Capital Requirements

                                     [GRAPH]



                          Total Equity to Total Assets

                                     [GRAPH]



                                   Net Income

                                     [GRAPH]



                            Return on Average Assets

                                     [GRAPH]



                            Return on Average Equity

                                     [GRAPH]



                               Net Interest Margin

                                   [GRAPH]



                                 Pro Forma Data



                              Preference Categories

1.  Eligible Account Holders - Depositors with $50 or more on deposit as of
    December 31, 2001.

2.  Employee Stock Ownership Plan (ESOP)

3.  Supplemental Eligible Account Holders - Depositors with $50 or more on
    deposit as of ______________.

4.  Other Members - Depositors as of __________ or a borrower as of __________
    and your borrowings remain outstanding as of _______.

5.  Stockholders of Jefferson Bancshares, MHC - as of __________.

6.  Local Community - Residents of Cocke, Grainger, Greene, Hamblen, Hawkins,
    Jefferson, Knox or Sevier County, Tennessee

7.  General community



          We thank you for your interest in Jefferson Bancshares, Inc.

EX-99.4

                                                                    Exhibit 99.4


Jefferson Bancshares, MHC                                      REVOCABLE PROXY

      PLEASE DETACH, MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD USING
      THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
- --------------------------------------------------------------------------------

                                                    Jefferson Bancshares, Inc.
                                                     Stock Information Center
                                                         120 Evans Avenue
                                                     Morristown, TN 37814-4709
                                                          (xxx) xxx-xxxx
                                                         Stock Order Form
- --------------------------------------------------------------------------------
  Deadline: The Subscription Offering ends at 12:00 Noon, Eastern time, on Xxx
  xx, 2003. Your original Stock Order and Certification Form, properly executed
  and with the correct payment, must be received (not postmarked) at the address
  on the top of this form, or at any Jefferson Federal Savings and Loan
  Association branch, by the deadline, or it will be considered void. Faxes or
  copies of this form will not be accepted.
- --------------------------------------------------------------------------------
  (1)  Number of Shares       Price Per Share           (2) Total Amount Due
   ---------------------                              ------------------------
                                x $10.00 =            $
   ---------------------                              ------------------------

  The minimum purchase is 25 shares. No person may purchase more than 50,000
  shares, and no person together with his or her associates or group of persons
  acting in concert may purchase more than 75,000 shares. Current shareholders,
  either alone or together with associates or persons acting in concert, may not
  purchase shares in an amount that when combined with shares received in
  exchange for currently outstanding shares of common stock of Jefferson
  Bancshares, Inc., that exceed 2% of the shares issued in the conversion.
  See the Prospectus and the Stock Order Form Instructions.
- --------------------------------------------------------------------------------
  Method of Payment
  (3) [_] Enclosed is a check, bank draft or money order payable to Jefferson
          Bancshares, Inc., Inc. for $______________.

  (4) [_] I authorize Jefferson Federal Savings and Loan Association to make
          withdrawals from my certificate or savings account(s) shown below, and
          understand that the amounts will not otherwise be available for
          withdrawal:

  Account Number(s)                                          Amount(s)
  ------------------------------------------------------------------------------

  ------------------------------------------------------------------------------

  ------------------------------------------------------------------------------
                       Total Withdrawal
                                           -------------------------------------
  There is NO penalty for early withdrawal.
  ------------------------------------------------------------------------------
  (5) Purchaser Information

  a   [_] Eligible Account Holder - Check here if you were a depositor with at
          least $50 on deposit with Jefferson FS&LA as of December 31, 2001.
          Enter information in Section 8 for all deposit accounts that you had
          at Jefferson FS&LA on December 31, 2001.

  b.  [_] Supplemental Eligible Account Holder - Check here if you were a
          depositor with at least $50 on deposit with Jefferson FS&LA as of
          ____________ but are not an Eligible Account Holder. Enter information
          in Section 8 for all deposit accounts that you had at Jefferson FS&LA
          on ____________.

  c.  [_] Other Member - Check here if you were a depositor of Jefferson FS&LA
          as of ___________ or a borrower of Jefferson FS&LA as of _____________
          and your borrowings remained outstanding as of _____________ , but are
          not an Eligible or a Supplemental Eligible Account Holder. Enter
          information in Section 8 for all accounts that you had at Jefferson
          FS&LA on _____________.

  d.  [_] Current Stockholder - Check here if you are a current stockholder of
          Jefferson Bancshares, MHC as of ___________ and list the number of
          shares you own. __________________ shares

  e.  [_] Local Community - Actual persons residing in Cocke, Grainger, Greene,
          Hamblen, Hawkins, Jefferson, Knox or Sevier County, TN

  f.  [_] General Community - Check here if none of the above apply.
  ------------------------------------------------------------------------------
  (6) [_] Check here if you are a director, officer or employee of Jefferson
          Federal Savings and Loan Association or a member of such person's
          immediate family (same household).
  ------------------------------------------------------------------------------
  (7) [_] NASD Affiliation - see description on reverse side of this form.
  ------------------------------------------------------------------------------
  (8) Please review the preprinted account information listed below. The
      accounts printed below may not be all of your qualifying accounts or even
      your accounts as of the earliest of the three dates if you have changed
      names on the accounts. You should list any other accounts that you may
      have or had with Jefferson Federal Savings and Loan Association in the box
      below. SEE THE STOCK ORDER FORM INSTRUCTIONS SHEET FOR FURTHER
      INFORMATION. All subscription orders are subject to the provisions of Plan
      of Conversion and Agreement and Plan of Reorganization (the "Plan
      Conversion").
  ------------------------------------------------------------------------------
  ------------------------------------------------------------------------------





  ------------------------------------------------------------------------------
  Additional Qualifying Accounts

  Account Title (Names on Accounts)                  Account Number
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
  Please Note: Failure to list all of your accounts may result in the loss of
  part or all of your subscription rights (additional space on back of form).
  ------------------------------------------------------------------------------
  (9) Stock Registration - Please Print Legibly and Fill Out Completely
      (Note: The stock certificate and all correspondence related to this stock
      order will be mailed to the address provided below)

                                                                
      [_] Individual            [_]    Uniform Transfer to Minors Act    [_]   Partnership
      [_] Joint Tenants         [_]    Uniform Gift to Minors Act        [_]   Individual Retirement Account
      [_] Tenants in Common     [_]    Corporation                       [_]   Fiduciary/Trust (Under Agreement Dated _____________)



                                                               
  ---------------------------------------------------------------------------------------------------------
  Name                                                              Social Security or Tax I.D.
  ---------------------------------------------------------------------------------------------------------
  Name                                                              Social Security or Tax I.D.
  ---------------------------------------------------------------------------------------------------------
  Mailing                                                                   Daytime
  Address                                                                   Telephone
  ---------------------------------------------------------------------------------------------------------
                                   Zip                                      Evening
  City             State           Code          Country                    Telephone
  ---------------------------------------------------------------------------------------------------------

  

  ------------------------------------------------------------------------------
  Acknowledgment By signing below, I acknowledge receipt of the Prospectus dated
  Xxxxxx xx, 2003 and understand I may not change or revoke my order once it is
  received by Jefferson Bancshares, Inc. Federal regulations prohibit any
  persons from transferring, or entering into any agreement directly or
  indirectly to transfer, the legal or beneficial ownership of subscription
  rights or the underlying securities to the account of another person. Under
  penalty of perjury, I certify that I am purchasing shares solely for my
  account and that there is no agreement or understanding regarding the sale or
  transfer of such shares, or my right to subscribe for shares. Jefferson
  Bancshares, Inc. will pursue any and all legal and equitable remedies in the
  event it becomes aware of the transfer of subscription rights and will not
  honor orders known by it to involve such transfer. Under penalties of perjury,
  I further certify that: (1) the social security number or taxpayer
  identification number given above is correct and (2) I am not subject to
  backup withholding. You must cross out item (2) in this acknowledgement if you
  have been notified by the Internal Revenue Service that you are subject to
  backup withholding because of under-reporting interest or dividends on your
  tax return. By signing below, I also acknowledge that I have not waived any
  rights under the Securities Act of 1933 and the Securities Exchange Act of
  1934, both as amended.

  Signature: THIS FORM MUST BE SIGNED AND DATED BELOW AND ON THE BACK OF THIS
  FORM. This order is not valid if the Stock Order and Certification Form are
  not both signed and properly completed. Your order will be filled in
  accordance with the provisions of the Plan of Conversion as described in the
  Prospectus. An additional signature is required only if payment is by
  withdrawal from an account that requires more than one signature to withdraw
  funds.

  ------------------------------------------------------------------------------
  Signature                                                 Date

  ------------------------------------------------------------------------------
  Signature                                                 Date

  ------------------------------------------------------------------------------
     Office Use Only                Check #   _______________    _______________

  Date Rec'd _______/_______        Ck. Amt. _______________     _______________

  Batch # __________ - Order # ______________________  Category    _____________
  ------------------------------------------------------------------------------



- --------------------------------------------------------------------------------
                           Jefferson Bancshares, Inc.
- --------------------------------------------------------------------------------

   Item (7) continued - NASD Affiliation (this section only applies to those
   individuals who meet the delineated criteria)

Check the box if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD a member, a member of
the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or person associated with an NASD has a beneficial interest. To
comply with conditions under which an exemption from the NASD's Interpretation
With Respect to Free-Riding and Withholding is available, you agree, if you have
checked the NASD affiliation box: (1) not to sell, transfer or hypothecate the
stock for a period of three months following the issuance and (2) to report
this subscription in writing to the applicable NASD member within one day of the
payment therefor.
- --------------------------------------------------------------------------------
Item (8) continued; Purchaser Information

Account Title (Names on Accounts)                Account Number
- -------------------------------------------------------------------------

- -------------------------------------------------------------------------

- -------------------------------------------------------------------------

- -------------------------------------------------------------------------

- -------------------------------------------------------------------------

- -------------------------------------------------------------------------

- -------------------------------------------------------------------------

                               CERTIFICATION FORM

    (This Certification Must Be Signed In Addition to the Stock Order Form On
                                  Reverse Side)

        I ACKNOWLEDGE THAT THE SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF
      JEFFERSON BANCSHARES, INC. ARE NOT A DEPOSIT OR AN ACCOUNT AND ARE NOT
      FEDERALLY INSURED, AND ARE NOT GUARANTEED BY JEFFERSON FEDERAL SAVINGS AND
      LOAN ASSOCIATION OR BY THE FEDERAL GOVERNMENT.

        If anyone asserts that the shares of common stock are federally insured
      or guaranteed, or are as safe as an insured deposit, I should call the
      Office of Thrift Supervision Regional Director, Frederick R Casteel at
      (972)-277-9500.

        I further certify that, before purchasing the shares of common stock of
      Jefferson Bancshares, Inc., I received a copy of the Prospectus dated
      ______________ xx. The prospectus that I received contains disclosure
      concerning the common stock of Jefferson Bancshare, Inc. and describes the
      risks involved in the investment, including the "Risk Factors" beginning
      on page XX of the Prospectus:

      1.    Our loan portfolio possesses increased risk due to our subprime
           lending
      2.    A downturn in the local economy could hurt our profits
      3.    Rising interest rates may hurt our profits
      4.    We expect that our return on equity initially will decline after the
           conversion
      5.    Strong competition within our market area could hurt our profits and
           slow growth
      6.    Our commercial real estate and multi-family loans expose us to
           increased lending risks
      7.    Implementation of new benefit plans will increase our future
           compensation expense which will reduce our profitability and
           stockholders' equity
      8.    Issuance of shares for benefit programs may dilute your ownership
           interest
      9.    Expected voting control by management and employees may prevent
           shareholders from taking actions opposed by management
      10.   The contribution to the Jefferson Federal Charitable Foundation
           means that a shareholder's total ownership interest will be up to
           7.2% less after the contribution
      11.   The contribution to the Jefferson Federal Charitable Foundation may
           decrease the number of shares issued in exchange for shares of
           Jefferson Federal
      12.   Our contribution to the Jefferson Federal Charitable Foundation may
           not be tax deductible, which could hurt our profits
      13.   Establishment of Jefferson Federal Charitable Foundation will hurt
           our profits for the fiscal year 2004
      14.   Failure to approve the Jefferson Federal Foundation may materially
           affect the pro forma market value of Jefferson Bancshares
      15.   Loss of our President and Chief Executive Officer could hurt our
           operations
      16.   Various factors could make takeover attempts more difficult to
           achieve
      17.   Our stock price may decline when trading commences
      18.   There is a decrease in the rights of shareholders under our
           Tennessee charter and bylaws.
      19.   We operate in a highly regulated environment and we may be adversely
           affected by changes in laws and regulations.
      20.   We have broad discretion in allocating the proceeds of the offering.
           Our failure to effectively utilize such proceeds could reduce our
           profitability.
      21.   We may not succeed in our plan to grow.
- -------------------------------------         ----------------------------------
  Signature               Date                   Signature               Date

- -------------------------------------         ----------------------------------
(Note: If shares are to be held jointly, both parties must sign)

EXECUTION OF THIS CERTIFICATION FORM WILL NOT CONSTITUTE A WAIVER OF ANY RIGHTS
THAT A PURCHASER MAY HAVE UNDER THE SECURITIES ACT OF 1933 AND THE SECURITIES
EXCHANGE ACT OF 1934, BOTH AS AMENDED. THE SHARES OF COMMON STOCK BEING OFFERED
ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.



            Jefferson Bancshares, Inc. Stock Order Form Instructions


All subscription orders are subject to the provisions of the Plan of Conversion.

Items 1 and 2 - Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying the number of
shares ordered by the subscription price of $10.00 per share. The minimum
purchase is 25 shares. No person may purchase more than 50,000 shares, and no
person together with his or her associates or group of persons acting in concert
may purchase more than 75,000 shares. Current shareholders, either alone or
together with associates or persons acting in concert, may not purchase shares
in an amount that when combined with shares received in exchange for currently
outstanding shares of common stock of Jefferson Bancshares, Inc., that exceed 2%
of the shares issued in the conversion. For additional information, please see
"The Conversion - Limitations on Common Stock Purchases" in the Prospectus,
which is incorporated herein by reference. Jefferson Bancshares, Inc. reserves
the right to reject the subscription of any order received in the Community
Offering, if any, in whole or in part.

Item 3 - Payment for shares may be made in cash (only if delivered by you in
person), by check, bank draft or money order payable to Jefferson Bancshares,
Inc. DO NOT MAIL CASH. Your funds will earn interest at Jefferson Federal
Savings and Loan Association's current passbook savings rate.

Item 4 - To pay by withdrawal from a savings account or certificate at Jefferson
Federal Savings and Loan Association, insert the account number(s) and the
amount(s) you wish to withdraw from each account. If more than one signature is
required to withdraw, each must sign in the signature box on the front of this
form. To withdraw from an account with checking privileges, please write a
check. Jefferson Federal Savings and Loan Association will waive any applicable
penalties for early withdrawal from certificate accounts. A hold will be placed
on the account(s) for the amount(s) you show. Payments will remain in account(s)
until the stock offering closes. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the passbook rate subsequent to the
withdrawal.

Item 5 - Please check the appropriate box if you were:

a)      A depositor with $50.00 or more on deposit at Jefferson Federal Savings
        and Loan Association as of December 31, 2001. Enter information in
        Section 8 for all deposit accounts that you had at Jefferson Federal
        Savings and Loan Association on December 31, 2001.

b)      A depositor with $50.00 or more on deposit at Jefferson Federal Savings
        and Loan Association as of March 31, 2003, but are not an Eligible
        Account Holder. Enter information in Section 8 for all deposit accounts
        that you had at Jefferson Federal Savings and Loan Association on March
        31, 2003.

c)      A depositor at Jefferson Federal Savings and Loan Association as of
        Xxxxxxxx xx, 2003 or a borrower of Jefferson Federal Savings and Loan
        Association as of May 13, 1994 and your borrowings remained outstanding
        as of Xxxxxxx xx, 2003 but are not an Eligible Account Holder or
        Supplemental Eligible Account. Enter information in Section 8 for all
        deposit accounts that you had at Jefferson Federal Savings and Loan
        Association on Xxxxxxxx xx, 2003.

d)      Current Stockholder of Jefferson Bancshares, Inc. as of Xxxxxx xx, 2003.
        Enter the number of shares you own as of Xxxxxxx xx, 2003 in the blank
        space.

e)      Local Community - natural persons residing in the Tennessee Counties of
        Cocke, Grainger, Greene, Hamblen, Hawkins, Jefferson, Knox or Sevier
        County.

f)      General Community.

Item 6 - Please check this box to indicate whether you are a director, officer
or employee of Jefferson Federal Savings and Loan Association or a member of
such person's immediate family.

Item 7 - Please check this box if you have a National Association of Securities
Dealers, Inc. ("NASD") affiliation (as defined on the reverse side of the Stock
Order Form.)

Item 8 - Please review the preprinted qualifying account number(s) information.
The account number(s) listed may not be all of your account number(s). You
should list any other qualifying accounts that you may have or had with
Jefferson Federal Savings and Loan Association in the box located under the
heading "Additional Qualifying Accounts". These may appear on other Stock Order
Forms you have received. For example, if you are ordering stock in just your
name, you should list all of your deposit accounts as of the earliest of the
three dates that you were a depositor. Similarly, if you are ordering stock
jointly with another depositor, you should list all deposit accounts under which
either of you are owners, i.e. individual accounts, joint accounts, etc. If you
are ordering stock in your minor child's or grandchild's name under the Uniform
Transfer to Minors Act, to qualify in the Subscription Offering the minor must
have had a deposit account on one of the three dates and you should list only
their account number(s). If you are ordering stock corporately, you need to list
just that corporation's deposit accounts, as your individual account(s) do not
qualify. Failure to list all of your qualifying accounts may result in the loss
of part or all of your subscription rights.

Item 9 - The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Jefferson
Bancshares, Inc. common stock. Please complete this section as fully and
accurately as possible, and be certain to supply your social security or Tax
I.D. number(s) and your daytime and evening phone numbers. We will need to call
you if we cannot execute your order as given. If you have any questions
regarding the registration of your stock, please consult your legal advisor.
Subscription rights are not transferable. If you are an eligible or supplemental
eligible account holder or other member, to protect your priority over other
purchasers as described in the Prospectus, you must take ownership in at least
one of the account holder's names.

                  (See Reverse Side for Stock Ownership Guide)



                Jefferson Bancshares, Inc. Stock Ownership Guide

Individual - The stock is to be registered in an individual's name only. You may
not list beneficiaries for this ownership.

Joint Tenants - Joint tenants with rights of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of survivorship,
ownership automatically passes to the surviving joint tenant(s) upon the death
of any joint tenant. You may not list beneficiaries for this ownership.

Tenants in Common - Tenants in common may also identify two or more owners. When
stock is to be held by tenants in common, upon the death of one co-tenant,
ownership of the stock will be held by the surviving co-tenant(s) and by the
heirs of the deceased co-tenant. All parties must agree to the transfer or sale
of shares held by tenants in common. You may not list beneficiaries for this
ownership.

Uniform Gift To Minors - For residents of many states, including Tennessee,
stock may be held in the name of a custodian for the benefit of a minor under
the Uniform Transfer to Minors Act. For residents in other states, stock may be
held in a similar type of ownership under the Uniform Gift to Minors Act of the
individual state. For either ownership, the minor is the actual owner of the
stock with the adult custodian being responsible for the investment until the
child reaches legal age. Only one custodian and one minor may be designated.

Instructions: On the first name line, print the first name, middle initial and
last name of the custodian, with the abbreviation "CUST" after the name. Print
the first name, middle initial and last name of the minor on the second name
line followed by the notation UTMA-TN or UGMA-Other State. List only the minor's
social security number.

Corporation/Partnership - Corporations/Partnerships may purchase stock. Please
provide the Corporation/Partnership's legal name and Tax I.D. number. To have
depositor rights, the Corporation/Partnership must have an account in its legal
name. Please contact the Stock Information Center to verify depositor rights and
purchase limitations.

Individual Retirement Account - Individual Retirement Account ("IRA") holders
may make stock purchases from their deposits through a prearranged
"trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA.
Jefferson Federal Savings and Loan Association does not offer a self-directed
IRA. Please contact the Stock Information Center if you have any questions about
your IRA account and please do not delay in exploring this option.

Registration for IRA's:     On Name Line 1 - list the name of the broker or
                            trust department followed by CUST or TRUSTEE.
                            On Name Line 2 - FBO (for benefit of) YOUR NAME IRA
                            a/c #______.
                            Address will be that of the broker / trust
                            department to where the stock certificate will be
                            sent.
                            The Social Security / Tax I.D. number(s) will be
                            either yours or your trustees, as they direct.
                            Please list your phone numbers.

Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust agreement or pursuant
to a court order. Without a legal document establishing a fiduciary
relationship, your stock may not be registered in a fiduciary capacity.

Instructions: On the first name line, print the first name, middle initial and
last name of the fiduciary if the fiduciary is an individual. If the fiduciary
is a corporation, list the corporate title on the first name line. Following the
name, print the fiduciary title such as trustee, executor, personal
representative, etc. On the second name line, print the name of the maker, donor
or testator or the name of the beneficiary. Following the name, indicate the
type of legal document establishing the fiduciary relationship (agreement, court
order, etc.). In the blank after "Under Agreement Dated," fill in the date of
the document governing the relationship. The date of the document need not be
provided for a trust created by a will.

              (See Reverse Side for Stock Order Form Instructions)