UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

OR

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

For the transition period from              to             

Commission File Number 00-50347

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

(423) 586-8421

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: At May 10, 2010, the registrant had 6,675,930 shares of common stock, $0.01 par value per share, outstanding.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Statements of Condition - Unaudited Nine months ended March 31, 2010 and year ended June 30, 2009	3
	Consolidated Statements of Earnings - Unaudited Three and nine months ended March 31, 2010 and 2009	4
	Consolidated Statements of Changes in Stockholders’ Equity - Unaudited Nine months ended March 31, 2010 and 2009	5
	Consolidated Statements of Cash Flows - Unaudited Nine months ended March 31, 2010 and 2009	6
	Notes to Consolidated Financial Statements - Unaudited	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	(Removed and Reserved)	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
SIGNATURES

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Condition

(Dollars in thousands)

	March 31, 2010			June 30, 2009
	(Unaudited)
Assets
Cash and cash equivalents	$	3,900		$	8,328
Interest-earning deposits		12,387			20,814
Fed funds sold		61,580			14,966
Investment securities classified as available-for-sale, net		52,591			36,544
Federal Home Loan Bank stock		4,735			4,735
Bank owned life insurance		6,329			6,155
Loans receivable, net of allowance for loan losses of $5,412 at March 31, 2010 and $4,722 at June 30, 2009		448,129			498,107
Loans held-for-sale		524			881
Premises and equipment, net		27,800			32,395
Foreclosed real estate, net		4,653			3,328
Accrued interest receivable:
Investments		324			241
Loans receivable		1,741			2,017
Deferred tax asset		7,126			7,337
Goodwill and other intangibles		24,392			24,811
Other assets		6,949			1,996
Total assets	$	663,160		$	662,655
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	45,414		$	48,913
Interest-bearing		434,954			433,254
Repurchase agreements		1,404			789
Federal Home Loan Bank advances		89,953			90,309
Subordinated debentures		6,993			6,910
Other liabilities		4,347			2,943
Accrued income taxes		—			32
Total liabilities		583,065			583,150
Commitments and contingent liabilities		—			—
Stockholders’ equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $.01 par value; 30,000,000 shares authorized; 9,182,372 shares issued and 6,683,714 shares outstanding at March 31, 2010 and 6,706,489 shares outstanding at June 30, 2009		92			92
Additional paid-in capital		79,236			79,394
Unearned ESOP shares		(3,781	)		(4,105	)
Unearned compensation		(1,071	)		(1,121	)
Accumulated other comprehensive income		349			150
Retained earnings		36,410			36,140
Treasury stock, at cost; 2,498,658 shares at March 31, 2010 and 2,475,883 shares at June 30, 2009		(31,140	)		(31,045	)
Total stockholders’ equity		80,095			79,505
Total liabilities and stockholders’ equity	$	663,160		$	662,655

See accompanying notes to financial statements.

3

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Interest income:
Interest on loans receivable	$	6,608		$	7,275		$	20,556		$	18,308
Interest on investment securities		755			884			2,170			1,478
Other interest		67			55			204			168
Total interest income		7,430			8,214			22,930			19,954
Interest expense:
Deposits		1,837			2,549			6,381			6,185
Repurchase agreements		2			9			7			15
Advances from FHLB		799			798			2,438			1,812
Subordinated debentures		78			120			245			226
Total interest expense		2,716			3,476			9,071			8,238
Net interest income		4,714			4,738			13,859			11,716
Provision for loan losses		1,500			300			3,309			610
Net interest income after provision for loan losses		3,214			4,438			10,550			11,106
Noninterest income:
Mortgage origination fee income		61			133			301			242
Service charges and fees		386			366			1,250			1,004
Gain (loss) on sale of fixed assets		(92	)		—			(92	)		1
Gain on sale of investments		1,202			—			1,222			—
Gain (loss) on sale of foreclosed real estate, net		1			(8	)		(8	)		—
BOLI increase in cash value		58			57			175			172
Other		131			97			601			249
Total noninterest income		1,747			645			3,449			1,668
Noninterest expense:
Compensation and benefits		1,664			1,893			5,381			5,081
Occupancy expense		598			355			1,701			848
Equipment and data processing expense		671			667			1,904			1,630
DIF premiums		154			140			506			158
Advertising		15			58			173			106
Other		1,569			925			3,952			2,089
Total noninterest expense		4,671			4,038			13,617			9,912
Earnings before income taxes		290			1,045			382			2,862
Income taxes:
Current		(175	)		260			—			832
Deferred		142			161			(10	)		83
Total income taxes		(33	)		421			(10	)		915
Net earnings	$	323		$	624		$	392		$	1,947
Net earnings per share, basic	$	0.05		$	0.10		$	0.06		$	0.32
Net earnings per share, diluted	$	0.05		$	0.10		$	0.06		$	0.32

See accompanying notes to financial statements.

4

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended March 31, 2010 and 2009

(Dollars in Thousands)

	Common Stock		Additional Paid-in Capital			Unallocated Common Stock in ESOP			Unearned Compensation			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance at June 30, 2009	$	92	$	79,394		$	(4,105	)	$	(1,121	)	$	150		$	36,140		$	(31,045	)	$	79,505
Comprehensive income:
Net earnings		—		—			—			—			—			392			—			392
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $40		—		—			—			—			199			—			—			199
Total comprehensive income		—		—			—			—			—			—			—			591
Dividends		—		—			—			—			—			(200	)		—			(200	)
Dividends used for ESOP payment		—		—			—			—			—			78			—			78
Shares committed to be released by the ESOP		—		(158	)		324			—			—			—			—			166
Earned portion of stock grants		—		—			—			50			—			—			—			50
Purchase of common stock (22,775 shares)		—		—			—			—			—			—			(95	)		(95	)
Balance at March 31, 2010	$	92	$	79,236		$	(3,781	)	$	(1,071	)	$	349		$	36,410		$	(31,140	)	$	80,095
	Common Stock		Additional Paid-in Capital			Unallocated Common Stock in ESOP			Unearned Compensation			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders’ Equity
Balance at June 30, 2008	$	84	$	72,959		$	(4,537	)	$	(1,659	)	$	(17	)	$	34,965		$	(29,018	)	$	72,777
Comprehensive income:
Net earnings		—		—			—			—			—			1,947			—			1,947
Change in net unrealized gain (loss) on securities available for sale, net of taxes of (78)		—		—			—			—			(160	)		—			—			(160	)
Total comprehensive income		—		—			—			—			—			—			—			1,787
Dividends		—		—			—			—			—			(1,185	)		—			(1,185	)
Dividends used for ESOP payment		—		—			—			—			—			116			—			116
Shares committed to be released by the ESOP		—		(57	)		324			—			—			—			—			267
Stock options expensed		—		130			—			—			—			—			—			130
Earned portion of stock grants		—		—			—			267			—			—			—			267
Stock grant at acquisition										254												254
Issuance of shares in acquisition (735,997 shares)		8		6,396																		6,404
Purchase of common stock (203,568 shares)		—		—			—			—			—			—			(1,776	)		(1,776	)
Balance at March 31, 2009	$	92	$	79,428		$	(4,213	)	$	(1,138	)	$	(177	)	$	35,843		$	(30,794	)	$	79,041

5

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Nine Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net earnings	$	392		$	1,947
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		164			268
Depreciation and amortization expense		1,291			470
Amortization of premiums (discounts), net on investment securities		(566	)		653
Provision for loan losses		3,309			610
FHLB stock dividends		—			(83	)
Amortization of deferred loan fees, net		(221	)		(124	)
(Gain) on sale of investment securities		(1,222	)		—
(Gain) loss on sale of foreclosed real estate, net		8			(1	)
(Gain) loss on sale of fixed assets		92			(1	)
Deferred tax benefit		(10	)		83
Originations of mortgage loans held for sale		(13,460	)		(11,090	)
Proceeds from sale of mortgage loans		13,817			11,350
Increase in cash value of life insurance		(175	)		(172	)
Earned portion of MRP		51			267
Stock options expensed		—			130
Decrease (increase) in:
Accrued interest receivable		193			2
Other assets		(4,953	)		(1,029	)
Increase (decrease) in other liabilities and accrued income taxes		1,774			2,609
Net cash provided by (used for) operating activities		484			5,889
Cash flows used for investing activities:
Loan originations, net of principal collections		44,076			(9,537	)
Investment securities classified as available-for-sale:
Proceeds from maturities, calls and prepayments		25,080			8,275
Proceeds from sale		5,636			—
Return of principal on mortgage-backed securities		2,265			1,168
Purchase of securities		(46,919	)		(9,962	)
Acquisition, net of cash received		—			26,748
Proceeds from sale of premises and equipment, construction overpayments		3,323			—
Purchase of premises and equipment		(98	)		(739	)
Proceeds from sale of (additions to) foreclosed real estate, net		1,458			70
Net cash provided by (used for) investing activities		34,821			16,023
Cash flows from financing activities:
Net increase (decrease) in deposits		(1,412	)		(3,337	)
Net increase in repurchase agreements		615			—
Proceeds from advances from FHLB		—			17,000
Repayment of FHLB advances		(51	)		(17,000	)
Purchase of treasury stock		(95	)		(1,776	)
Dividends paid		(603	)		(1,151	)
Net cash provided by (used for) financing activities		(1,546	)		(6,264	)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		33,759			15,648
Cash, cash equivalents and interest-earning deposits at beginning of period		44,108			17,616
Cash, cash equivalents and interest-earning deposits at end of period	$	77,867		$	33,264
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	6,536		$	5,684
Interest on FHLB advances	$	2,438		$	1,812
Interest on other borrowings	$	252		$	241
Income taxes	$	410		$	945
Real estate acquired in settlement of loans	$	3,208			735

See accompanying notes to financial statements.

6

Notes To Consolidated Financial Statements

(1) Basis of Presentation

The condensed consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the “Company” or “Jefferson Bancshares”) and its wholly-owned subsidiary, Jefferson Federal Bank (the “Bank” or “Jefferson Federal”). The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. The results of operations for the period ended March 31, 2010 are not necessarily indicative of the results which may be expected for the entire fiscal year. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, which was filed with the Securities and Exchange Commission on September 14, 2009. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted. The Company has adopted FASB ASC Topic 855 for Subsequent Events which did not significantly change the subsequent events the Company reports either through recognition or disclosure.

(2) Principles of Consolidation

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

(3) Use of Estimates

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

(4) Limitation on Capital Distributions

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

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

7

Notes To Consolidated Financial Statements—(Continued)

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

(5) Earnings Per Common Share

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“ESOP”) shares. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method. For the period ended March 31, 2010, stock options to purchase 577,693 shares were not included in the computation of diluted net income per share as their effect would have been anti-dilutive. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:

	Weighted-Average Shares Outstanding for the Three Months Ended March 31,		Weighted-Average Shares Outstanding for the Nine Months Ended March 31,
	2010	2009	2010	2009
Weighted average number of common shares used in computing basic earnings per common share	6,251,105	6,265,163	6,227,472	6,006,052
Effect of dilutive stock options	—	—	—	—
Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming dilution	6,251,105	6,265,163	6,227,472	6,006,052

(6) Accounting by Creditors for Impairment of a Loan and Allowance for Loan Losses

Impairment of loans having a recorded investment of $13.3 million at March 31, 2010 and an average investment of $12.3 million during the nine month period ended March 31, 2010 has been recognized. The valuation allowance related to impaired loans was $3.4 million at March 31, 2010. Total nonaccrual loans at March 31, 2010 were approximately $20.7 million. For the nine months ended March 31, 2010, gross income which would have been recognized had nonaccrual loans been current in accordance with their original terms amounted to approximately $995,000. Interest income from non-accrual loans included in the Company’s interest income amounted to approximately $432,000 for the nine months ended March 31, 2010.

8

Notes To Consolidated Financial Statements—(Continued)

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2010:

	Allowance for Loan Losses (Dollars in thousands)
Balance at June 30, 2009	$	4,722
Provision for loan losses		3,309
Charge-offs		(2,676	)
Recoveries		57
Balance at March 31, 2010	$	5,412

(7) Financial Instruments With Off-Balance Sheet Risk

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

At March 31, 2010, we had approximately $21.3 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $5.7 million in unused letters of credit and approximately $36.9 million in unused lines of credit.

(8) Dividend Declaration

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

(9) Stock Incentive Plans

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

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

9

Notes To Consolidated Financial Statements—(Continued)

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

The table below summarizes the status of the Company’s stock option plans as of March 31, 2010.

	Three Months Ended March 31, 2010
	Shares	Weighted- average exercise price
Outstanding at beginning of period	577,693	$	12.78
Granted during the three-month period	—
Options forfeited	—
Options exercised	—
Outstanding at March 31, 2010	577,693	$	12.78
Options exercisable at March 31, 2010	577,693	$	12.78

The following information applies to options outstanding at March 31, 2010:

Number outstanding		577,693
Range of exercise prices	$	10.00 - $13.69
Weighted-average exercise price	$	12.78
Weighted-average remaining contractual life		3.11
Number of options remaining for future issuance		305,706

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

(10) Fair Value Disclosures

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. When measuring fair value, the

10

Notes To Consolidated Financial Statements—(Continued)

Company uses valuation techniques that are appropriate and consistently applied. A hierarchy is also established under the standard and is used to prioritize valuation inputs into the following three levels used to measure fair value:

Level 1

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

Level 2

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

Level 3

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

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

Investment Securities Available for Sale

Level 2 investment securities classified as “available-for-sale” are recorded at fair value on at least a monthly basis. Fair value measurements are based upon independent pricing models or other model-based valuation techniques with inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Level 2 securities include mortgage-backed securities issued by government-sponsored

11

Notes To Consolidated Financial Statements—(Continued)

entities, municipal bonds, bonds issued by government agencies, and corporate debt securities. Level 3 investment securities classified as “available-for-sale” are recorded at fair value on at least a semi-annual basis. Fair value measurements are based upon independent pricing models based upon unobservable inputs which require significant management judgment or estimation. Level 3 includes certain mortgage-backed securities and other debt securities.

Impaired Loans

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

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2010, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

	March 31, 2010
Description	Level 1	Level 2		Level 3	Total Carrying Amount in Statement of Financial Condition	Assets/Liabilities Measured at Fair Value
Securities available for sale	—	$	46,131	6,460	52,591	$	52,591

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

	March 31, 2010
Description	Level 1	Level 2	Level 3		Total Carrying Amount in Statement of Financial Condition	Assets/Liabilities Measured at Fair Value
Impaired Loans	—	—	$	9,928	9,928	9,928

12

Notes To Consolidated Financial Statements—(Continued)

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

	March 31, 2010						June 30, 2009
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial assets:
Cash and due from banks and interest-earning deposits with banks	$	77,867		$	77,867		$	44,108		$	44,108
Available-for-sale securities		52,591			52,591			36,544			36,544
Federal Home Loan Bank stock		4,735			4,735			4,735			4,735
Loans receivable		454,031			455,446			503,331			501,841
Accrued interest receivable		2,065			2,065			2,258			2,258
Loans held-for-sale		524			524			881			881
Financial liabilities:
Deposits		(480,368	)		(466,921	)		(482,167	)		(479,770	)
Borrowed funds		(91,357	)		(93,113	)		(91,098	)		(93,486	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		21,253						13,056
Unused letters of credit		5,666						6,134
Unused lines of credit		36,948						37,123

(11) Business Combination

On October 31, 2008, the Company completed its previously announced acquisition of State of Franklin. State of Franklin was headquartered in Johnson City, Tennessee, which is approximately 70 miles northeast of the Company’s headquarters. State of Franklin operated six offices in Johnson City and Kingsport, Tennessee with a branch under construction in Bristol, Tennessee. The primary reason for the acquisition of State of Franklin was to expand the Company’s presence into upper East Tennessee. Under the terms of the merger agreement, the Company issued a combination of shares of Company common stock and cash for the outstanding common shares of State of Franklin. State of Franklin shareholders were given the option of receiving $10.00 in

13

Notes To Consolidated Financial Statements—(Continued)

cash or 1.1287 shares of Company common stock for each share of State of Franklin common stock, or a combination of stock and cash for each share of State of Franklin common stock, provided that 60% of the aggregate shares of State of Franklin common stock would be exchanged for Company common stock and subject to the allocation and proration formula set forth in the merger agreement. However, all State of Franklin common stockholders residing outside of Tennessee were only eligible to receive cash consideration. Based on this structure, the aggregate merger consideration totaled approximately $4.3 million in cash and 736,000 shares of Company common stock. The Company also incurred $557,000 in merger costs that were capitalized into goodwill. The acquisition was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles for business combinations.

(12) Subordinated Debt

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes thereto. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, which was filed with the Securities and Exchange Commission on September 14, 2009.

General

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

The Company has no significant assets, other than all of the outstanding shares of the Bank, and no significant liabilities. Management of the Company and the Bank are substantially similar

14

and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report, including the consolidated financial statements and related financial data, relates primarily to the Bank.

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

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

Private Securities Litigation Reform Act Safe Harbor Statement

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

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended June 30, 2009 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Jefferson Bancshares assumes no obligation to update any forward-looking statements.

Results of Operations for the Three and Nine Months Ended March 31, 2010 and 2009

Net Income

Net income for the three months ended March 31, 2010 was $323,000, or $0.05 per diluted share, compared to net income of $624,000, or $0.10 per diluted share, for the corresponding period in 2009. For the nine months ended March 31, 2010, net income was $392,000, or $0.06 per diluted share compared to $1.9 million, or $0.32 per diluted share, for the same period in 2009. The decline in income for the three and nine months ended March 31, 2010 resulted primarily from a significant increase in the provision for loan losses during the 2010

15

periods due to continued decline in real estate values, higher levels of both net charge-offs and nonperforming assets and continued deterioration in local and national economic conditions. The provision for loan losses for the three and nine months ended March 31, 2010 was $1.5 million and $3.3 million, respectively, compared to $300,000 and $610,000, respectively, for the comparable periods in 2009.

	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
	(Dollars in thousands, except per share data)						(Dollars in thousands, except per share data)
Net earnings	$	323		$	624		$	392		$	1,947
Net earnings per share, basic	$	0.05		$	0.10		$	0.06		$	0.32
Net earnings per share, diluted	$	0.05		$	0.10		$	0.06		$	0.32
Return on average assets (annualized)		0.20	%		0.38	%		0.08	%		0.51	%
Return on average equity (annualized)		1.59	%		3.15	%		0.64	%		3.39	%

Net Interest Income

Net interest income before loan loss provision remained virtually unchanged at $4.7 million for both the quarter ended March 31, 2010 and the quarter ended March 31, 2009. The interest rate spread and net interest margin for the quarter ended March 31, 2010 were 3.16% and 3.34%, respectively, compared to 3.20% and 3.35%, respectively, for the same period in 2009.

The following table summarizes changes in interest income and expense for the three month periods ended March 31, 2010 and 2009:

	Three  Months Ended March 31,
	2010		2009		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	6,608	$	7,275	$	(667	)	(9.2	)%
Investment securities		755		884		(129	)	(14.6	)%
Interest-earning deposits		14		2		12		600.0	%
FHLB stock		53		53		—		0.0	%
Total interest income		7,430		8,214		(784	)	(9.5	)%
Interest expense:
Deposits		1,837		2,549		(712	)	(27.9	)%
Repurchase Agreements		2		9		(7	)	(77.8	)%
Borrowings		799		798		1		0.1	%
Subordinated Notes & Debentures		78		120		(42	)	(35.0	)%
Total interest expense		2,716		3,476		(760	)	(21.9	)%
Net interest income	$	4,714	$	4,738	$	(24	)	(0.5	)%

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For the nine months ended March 31, 2010, net interest income before loan loss provision increased $2.1 million, or 18.3%, to $13.9 million from $11.7 million for the corresponding period in 2009. The interest rate spread and net interest margin for the nine months ended March 31, 2010 were 3.02% and 3.21%, respectively, compared to 3.17% and 3.45%, respectively, for the same period in 2009.

The following table summarizes changes in interest income and expense for the nine month periods ended March 31, 2010 and 2009:

	Nine Months Ended March 31,
	2010		2009		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	20,556	$	18,308	$	2,248		12.3	%
Investment securities		2,170		1,478		692		46.8	%
Interest-earning deposits		38		32		6		18.8	%
FHLB stock		166		136		30		22.1	%
Total interest income		22,930		19,954		2,976		14.9	%
Interest expense:
Deposits		6,381		6,185		196		3.2	%
Repurchase Agreements		7		15		(8	)	(53.3	)%
Borrowings		2,438		1,812		626		34.5	%
Subordinated Notes & Debentures		245		226		19		8.4	%
Total interest expense		9,071		8,238		833		10.1	%
Net interest income	$	13,859	$	11,716	$	2,143		18.3	%

The following table summarizes average balances and average yields and costs for the three and nine months ended March 31, 2010 and 2009:

	Three Months Ended March 31,								Nine Months Ended March 31,
	2010				2009				2010				2009
	Average Balance		Yield/ Cost		Average Balance		Yield/ Cost		Average Balance		Yield/ Cost		Average Balance		Yield/ Cost
	(Dollars in thousands)								(Dollars in thousands)
Loans	$	461,890	5.80	%	$	511,170	5.77	%	$	474,352	5.77	%	$	411,982	5.92	%
Investment securities		56,887	5.51	%		43,085	8.52	%		50,592	5.85	%		25,363	8.01	%
Interest-earning deposits		51,120	0.11	%		16,429	0.05	%		47,175	0.11	%		14,508	0.29	%
FHLB stock		4,735	4.54	%		4,735	4.54	%		4,735	4.67	%		3,464	5.23	%
Deposits		426,020	1.75	%		443,010	2.33	%		430,349	1.98	%		337,526	2.44	%
Total borrowings		98,509	3.62	%		98,993	3.80	%		98,526	3.64	%		70,332	3.89	%

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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.

	Three Months Ended March 31, 2010 Compared to 2009									Nine Months Ended March 31, 2010 Compared to 2009
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume		Rate			Net
	(In thousands)									(In thousands)
Interest income:
Loans receivable	$	(705	)	$	38		$	(667	)	$	2,689	$	(441	)	$	2,248
Investment securities		(81	)		(48	)	$	(129	)		789		(97	)	$	692
Daily interest-earning deposits and other interest-earning assets		8			4		$	12			51		(15	)	$	36
Total interest-earning assets		(778	)		(6	)		(784	)		3,529		(553	)		2,976
Interest expense:
Deposits		(95	)		(617	)		(712	)		640		(444	)		196
Total borrowings		(3	)		(45	)		(48	)		649		(12	)		637
Total interest-bearing liabilities		(97	)		(663	)		(760	)		1,289		(456	)		833
Net change in interest income	$	(681	)	$	657		$	(24	)	$	2,240	$	(97	)	$	2,143

Total interest income decreased $784,000, or 9.5%, to $7.4 million for the three months ended March 31, 2010 primarily due to a change in the mix of average earning assets. The average yield on earning assets declined by 55 basis points to 5.26% for the three months ended March 31, 2010 compared to 5.80% for the corresponding period in 2009. Average fed funds sold and interest-earning deposits increased $34.7 million, or 211.2%, to $51.1 million for the three months ended March 31, 2010. Average loans outstanding decreased $49.3 million, or 9.6%, to $461.9 for the three months ended March 31, 2010 due primarily to lower loan demand combined with loan payoffs during the period. In addition, an increase in nonaccrual loans for the quarter ended March 31, 2010 has negatively impacted interest income on loans and the net interest margin.

Total interest income increased $3.0 million, or 14.9%, to $22.9 million for the nine months ended March 31, 2010 compared to the corresponding period in 2009 primarily as a result of an increase in average interest-earning assets. The nine month period ended March 31, 2010 reflects the full period impact of additional interest-earning assets resulting from the State of Franklin acquisition. Average interest-earning assets increased $121.5 million, or 26.7%, to $576.9 million for the nine months ended March 31, 2010. The average yield on earning assets declined by 56 basis points to 5.31% for the nine months ended March 31, 2010 compared to the corresponding period in 2009. The decline in the average yield on earning assets was primarily the result of lower yields on prime-based consumer and commercial loans. In addition, an increase in nonaccrual loans and nonaccrual investments during the nine months

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ended March 31, 2010 has negatively impacted interest income on loans and the net interest margin. During the quarter ended December 31, 2009, the Company discontinued accruing and reversed payment in kind (“PIK”) interest, amounting to approximately $104,000, on seven securities acquired from State of Franklin.

Total interest expense decreased $760,000 to $2.7 million for the three months ended March 31, 2010. The average balance of interest-bearing liabilities decreased $17.5 million, or 3.2%, to $524.5 million during the quarter ended March 31, 2010, while the rate paid on interest-bearing liabilities declined 50 basis points to 2.10% for the three months ended March 31, 2010. The Company experienced a decrease in average interest-bearing deposits of $17.0 million, or 3.8%, to $426.0 million, primarily due to the Bank’s planned runoff of higher costing time deposits. The average rate paid on deposits decreased 58 basis points to 1.75% for the three months ended March 31, 2010, primarily as a result of declining market interest rates as well as a shift in the mix of deposits towards more transaction accounts. Average FHLB borrowings decreased slightly to $90.0 million for the three months ended March 31, 2010 compared to $90.8 million, while the average rate paid on borrowings remained stable at 3.60%.

For the nine months ended March 31, 2010, interest expense increased $833,000 to $9.1 million with average interest-bearing liabilities increasing $121.0 million, or 29.7%, to $528.9 million and the average cost declining 41 basis points to 2.28%.The nine month period ended March 31, 2010 reflects the full period impact of additional interest-bearing liabilities resulting from the State of Franklin acquisition.

Provision for Loan Losses

The provision for loan losses for the three and nine months ended March 31, 2010 amounted to $1.5 million and $3.3 million, respectively, compared to $300,000 and $610,000, respectively, for the comparable periods in 2009. Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in the nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors. The increase in the provision for loan losses reflects management’s evaluation of credit quality and current economic conditions. Nonperforming loans totaled $20.7 million at March 31, 2010 compared to $6.0 million at June 30, 2009 and $6.7 million at March 31, 2009. The balance of nonaccrual loans at March 31, 2010 consists of $11.5 million in commercial real estate, $7.2 million in residential real estate, $1.9 million in commercial business loans and $99,000 in consumer loans.

Noninterest Income

Noninterest income increased $1.1 million to $1.7 million for the three months ended March 31, 2010 compared to $645,000 for the corresponding period in 2009 due primarily to an increase in gain on sale of investment securities. During the 2010 period, the Company sold several corporate bonds with higher levels of credit risk and recognized gains amounting to $1.2 million. Service charges and fee income increased $20,000 to $386,000 for the quarter ended March 31, 2010 due primarily to additional fee income generated following the acquisition of State of Franklin. Mortgage origination fee income decreased $72,000, or 54.1%, to $61,000

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for the quarter ended March 31, 2010 due to a lower volume of loan originations. Noninterest income for the three months ended March 31, 2010 included a loss on sale of fixed assets totaling $92,000 that was related to the sale of a newly constructed branch facility acquired in connection with the Company’s acquisition of State of Franklin Bancshares, Inc. in October 2008.

Noninterest income increased $1.8 million to $3.4 million for the nine months ended March 31, 2010 compared to $1.7 million for the corresponding period in 2009 due primarily to a $1.2 million gain on sale of investment securities. Service charges and fee income increased $246,000 to $1.3 million for the nine months ended March 31, 2010 due primarily to the full period impact of additional fee income generated following the acquisition of State of Franklin.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended March 31, 2010 compared to the same period in 2009.

	Three Months Ended March 31,						$ Change			% Change
	2010			2009
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income		61			133		$	(72	)	(54.1	)%
Service charges and fees		386			366			20		5.5	%
Gain on sale of fixed assets		(92	)		—			(92	)	NA
Gain on sale of investment securities		1,202			—			1,202		NA
Gain (loss) on sale of foreclosed real estate, net		1			(8	)		9		(112.5	)%
BOLI increase in cash value		58			57			1		1.8	%
Other		131			97			34		35.1	%
Total noninterest income	$	1,747		$	645		$	1,102		170.9	%

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The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the nine months ended March 31, 2010 compared to the same period in 2009.

	Nine Months Ended March 31,					$ Change			% Change
	2010			2009
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income		301			242		59		24.4	%
Service charges and fees		1,250			1,004		246		24.5	%
Gain on sale of fixed assets		(92	)		1		(93	)	(9300.0	)%
Gain on sale of investment securities		1,222			—		1,222		NA
Gain (loss) on sale of foreclosed real estate, net		(8	)		—		(8	)	NA
BOLI increase in cash value		175			172		3		1.7	%
Other		601			249		352		141.4	%
Total noninterest income	$	3,449		$	1,668	$	1,781		106.8	%

Noninterest Expense

Noninterest expense increased $633,000, or 15.7%, to $4.7 million for the three months ended March 31, 2010 compared to the corresponding 2009 period. Other noninterest expense increased $644,000, or 69.6%, to $1.6 million, due to closing expenses related to the sale of a newly constructed branch facility acquired in connection with the Company’s acquisition of State of Franklin Bancshares, Inc. in October 2008, valuation writedowns on foreclosed property and other expenses related to foreclosed assets held for sale. Occupancy expense increased $243,000 to $598,000 due to higher depreciation expense and the write-off of leasehold improvements. Compensation expense decreased $229,000, or 12.1%, to $1.7 million for the three months ended March 31, 2010 compared to the same period in 2009 due to an overall reduction in number of employees.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended March 31, 2010 compared to the same period in 2009.

	Three Months Ended March 31,				$			%
	2010		2009		Change			Change
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits		1,664	$	1,893	$	(229	)	(12.1	)%
Occupancy expense		598	$	355	$	243		68.5	%
Equipment and data processing expense		671		667		4		0.6	%
Deposit insurance premiums		154		140		14		10.0	%
Advertising		15		58		(43	)	(74.1	)%
Other		1,569		925		644		69.6	%
Total noninterest expense	$	4,671	$	4,038	$	633		15.7	%

Noninterest expense increased $3.7 million, or 37.4%, to $13.6 million for the nine months ended March 31, 2010 compared to $9.9 million for the corresponding 2009 period. The

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increase in noninterest expense includes the full period impact of costs incurred in operating six additional full-service offices obtained in connection with the acquisition of State of Franklin. Deposit insurance premiums increased $348,000, to $506,000, due to the increase in the balance of insurable accounts combined with higher deposit insurance premiums. Other noninterest expense increased $1.9 million, to $4.0 million, due to closing expenses related to the sale of a newly constructed branch facility acquired in connection with the Company’s acquisition of State of Franklin Bancshares, Inc. in October 2008, write-downs of nonperforming assets and expenses related to foreclosed property. Other noninterest expense also includes the amortization of the core deposit intangible (“CDI”) resulting from the acquisition of State of Franklin. The CDI totaled $3.4 million at the acquisition date and is being amortized over a 10 year period on an accelerated basis. The expense incurred for CDI amortization for the nine month period ended March 31, 2010 was $419,000 compared to $246,000 for the same period in 2009.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the nine months ended March 31, 2010 compared to the same period in 2009.

	Nine Months Ended March 31,				$ Change		% Change
	2010		2009
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits		5,381	$	5,081	$	300	5.9	%
Occupancy expense		1,701		848		853	100.6	%
Equipment and data processing expense		1,904		1,630		274	16.8	%
Deposit insurance premiums		506	$	158		348	220.3	%
Advertising		173		106		67	63.2	%
Other		3,952		2,089		1,863	89.2	%
Total noninterest expense	$	13,617	$	9,912	$	3,705	37.4	%

Income Taxes

Income tax expense for the three and nine months ended March 31, 2010 was ($33,000) and ($10,000), respectively, compared to $421,000 and $915,000, respectively, for the same periods in 2009 due to lower taxable income.

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits totaled $77.9 million at March 31, 2010 compared to $44.1 million at June 30, 2009 primarily due to increased liquidity resulting from loan repayments.

Investments

The Company’s investment security portfolio primarily consists of U.S. Government agency obligations, mortgage-backed securities issued by government-sponsored entities, and municipal

22

bonds. Investment securities increased to $52.6 million at March 31, 2010 compared to $36.5 million at June 30, 2009. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $565,000, or $349,000 net of taxes. The $16.1 million increase in the investment portfolio reflects security purchases totaling $46.9 million, partially offset by sales and calls of securities totaling approximately $33.0 million. The securities purchased were primarily short- and intermediate-term U.S. Government agency step-up bonds. During the quarter ended March 31, 2010, the Company sold several corporate bonds with higher levels of credit risk, which resulted in gains totaling $1.2 million. These corporate bonds had a book value of $3.1 million and were acquired in connection with the Company’s acquisition of State of Franklin Bancshares, Inc. in October 2008.

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 March 31, 2010

	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	22,482		$	39	$	(130	)	$	22,391
Mortgage-backed		22,184			1,988		(502	)		23,670
Municipals		5,727			159		(6	)		5,880
Other Securities		1,632			95		(1,078	)		650
Total securities available- for-sale	$	52,026		$	2,281	$	(1,716	)	$	52,591
Weighted-average rate		4.69	%

At June 30, 2009

	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	4,206		$	6	$	(65	)	$	4,147
Mortgage-backed		23,088			1,395		(962	)		23,521
Municipals		4,523			63		(19	)		4,567
Other Securities		4,483			631		(805	)		4,309
Total securities available- for-sale	$	36,300		$	2,095	$	(1,851	)	$	36,544
Weighted-average rate		7.65	%

Loans

Net loans decreased $50.0 million to $448.1 million at March 31, 2010 compared to $498.1 million at June 30, 2009 due primarily to lower loan originations due to current economic conditions combined with loan payoffs during the period.

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Loans receivable, net, are summarized as follows:

	At March  31, 2010					At June  30, 2009
	Amount			Percent of Portfolio		Amount			Percent of Portfolio		$ Change			% Change
	(Dollars in thousands)
Real estate loans:
Residential one-to four-family	$	140,253		30.9	%	$	144,659		28.7	%	$	(4,406	)	(3.0	)%
Home equity line of credit		20,153		4.4	%		22,467		4.5	%		(2,314	)	(10.3	)%
Commercial		137,024		30.2	%		159,608		31.7	%		(22,584	)	(14.1	)%
Multi-family		9,018		2.0	%		6,584		1.3	%		2,434		37.0	%
Construction		31,531		6.9	%		40,831		8.1	%		(9,300	)	(22.8	)%
Land		36,985		8.1	%		46,987		9.3	%		(10,002	)	(21.3	)%
Total real estate loans		374,964		82.6	%		421,136		83.7	%		(46,172	)	(11.0	)%
Commercial business loans		72,003		15.9	%		73,467		14.6	%		(1,464	)	(2.0	)%
Consumer loans:
Automobile loans		2,096		0.5	%		2,754		0.5	%		(658	)	(23.9	)%
Mobile home loans		25		0.0	%		43		0.0	%		(18	)	(41.9	)%
Loans secured by deposits		1,363		0.3	%		1,322		0.3	%		41		3.1	%
Other consumer loans		3,580		0.8	%		4,609		0.9	%		(1,029	)	(22.3	)%
Total consumer loans		7,064		1.6	%		8,728		1.7	%		(1,664	)	(19.1	)%
Total gross loans		454,031		100.0	%		503,331		100.0	%		(49,300	)	(9.8	)%
Less:
Deferred loan fees, net		(490	)				(502	)				12		(2.4	)%
Allowance for losses		(5,412	)				(4,722	)				(690	)	14.6	%
Loans receivable, net	$	448,129				$	498,107				$	(49,978	)	(10.0	)%

Loan Loss Allowance

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

In connection with assessing the allowance, we have established a systematic methodology for determining the adequacy of the allowance for loan losses. The methodology utilizes a loan grading system which segments loans with similar risk characteristics. Management performs a monthly assessment of the allowance for loan losses based on the nature and volume of the loan

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portfolio, the amount of impaired and classified loans and historical loan loss experience. In addition, management considers other qualitative factors, including delinquency trends, economic conditions and loan considerations.

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

The allowance for loan losses was $5.4 million at March 31, 2010 compared to $4.7 million at June 30, 2009. Our allowance for loan losses represented 1.19% of total loans and 26.21% of nonperforming loans at March 31, 2010 compared to 0.94% of total loans and 78.3% of nonperforming loans at June 30, 2009.

	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	5,180		$	4,692		$	4,722		$	1,836
Allowance of acquired bank		—			—			—		$	2,577
Provision for loan losses		1,500			300			3,309			610
Recoveries		9			26			57			68
Charge-offs		(1,277	)		(173	)		(2,676	)		(246	)
Net charge-offs		(1,268	)		(147	)		(2,619	)		(178	)
Allowance at end of period	$	5,412		$	4,845		$	5,412		$	4,845
Net charge-offs to average outstanding loans during the period, annualized		1.10	%		0.12	%		0.74	%		0.06	%

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets. Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent. Nonaccrual loans totaled $20.7 million at March 31, 2010 compared to $6.0 million at June 30, 2009. The increase in nonaccrual loans is primarily due to an increase in both nonaccrual residential and commercial real estate loans. Foreclosed real estate amounted to $4.7 million at March 31, 2010 compared to $3.3 million at June 30, 2009. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, less estimated selling costs. Any writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings. Foreclosed real estate at March 31, 2010 consisted of vacant land totaling $629,000, residential property totaling $1.7 million and commercial real estate totaling $2.4 million.

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	March 31, 2010			June 30, 2009
	(Dollars in thousands)
Nonaccruing loans:
Residential real estate	$	7,246		$	2,565
Commercial real estate		11,454			3,159
Commercial business		1,853			252
Consumer		99			55
Total nonaccrual loans		20,652			6,031
Nonaccrual investments		552			—
Real estate owned		4,653			3,328
Other repossessed assets		—			106
Total nonperforming assets	$	25,857		$	9,465
Total nonperforming assets to total assets		3.90	%		1.43	%
Total nonperforming loans to total loans		4.55	%		1.20	%
Allowance for loan losses to total nonperforming loans		26.21	%		78.30	%

Premises and Equipment

Premises and equipment decreased $4.6 million, or 14.2%, to $27.8 million at March 31, 2010 compared to $32.4 million at June 30, 2009 primarily due to the sale of a newly constructed branch facility in Bristol, Tennessee that was acquired in connection with the Company’s acquisition of State of Franklin Bancshares, Inc. in October 2008. The decision to sell the facility was based on management’s determination that the branch would likely not become profitable within a reasonable time period.

Bank Owned Life Insurance

We hold bank owned life insurance (“BOLI”) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at March 31, 2010 was $6.3 million.

Deposits

Total deposits decreased $1.8 million to $480.4 million at March 31, 2010 due to planned runoff of higher costing time deposits which more than offset increases in transaction accounts. Time deposits decreased $39.0 million, or 14.3%, to $233.0 million while transaction accounts increased $37.2 million, or 17.7%, to $247.3 million at March 31, 2010 compared to June 30, 2009. The increase in transaction accounts is due to growth in NOW and money market accounts, promotions targeting savings accounts, and fluctuations in balances.

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	March 31, 2010		June 30, 2009		$ Change			% Change
	(Dollars in thousands)
Noninterest-bearing accounts	$	45,414	$	48,913	$	(3,499	)	(7.2	)%
NOW accounts		60,293		43,795		16,498		37.7	%
Savings accounts		88,313		69,074		19,239		27.9	%
Money market accounts		53,308		48,332		4,976		10.3	%
Certificates of deposit		233,040		272,053		(39,013	)	(14.3	)%
Total	$	480,368	$	482,167	$	(1,799	)	(0.4	)%

Advances

Federal Home Loan Bank of Cincinnati (“FHLB”) advances remained virtually unchanged at $90.0 million at March 31, 2010, compared to $90.3 million at June 30, 2009.

Stockholders’ Equity

Stockholders’ equity amounted to $80.1 million at March 31, 2010 compared to $79.5 million at June 30, 2009. On November 13, 2008, the Company announced its third stock repurchase program pursuant to which up to 620,770 shares of the Company’s outstanding common stock may be repurchased. At March 31, 2010, 489,477 shares remained eligible for repurchase under the current stock repurchase program. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders’ equity. At March 31, 2010, the adjustment to stockholders’ equity was a net unrealized gain of $349,000 compared to a net unrealized gain of $150,000 at June 30, 2009.

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 FHLB of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

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

Our most liquid assets are cash and cash equivalents and marketable investment securities that are not pledged as collateral. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At March 31, 2010, cash and cash equivalents totaled $77.9 million compared to $44.1 million at June 30, 2009. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $52.6 million at March 31, 2010 compared to $36.5 million at June 30, 2009. At March 31, 2010, approximately $9.2 million of the investment portfolio was pledged as collateral for municipal deposits and repurchase agreements. At March 31, 2010, FHLB advances were $90.0 million

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and represented full utilization of the Company’s borrowing capacity with the FHLB. Additional eligible collateral may be transferred to the FHLB to increase borrowing capacity. The Company also maintains federal funds lines with two banks totaling $20.0 million under which no borrowings were outstanding. In addition, the Company maintains borrowing capacity with the Federal Reserve Bank of Atlanta, which amounted to approximately $12.9 million at March 31, 2010.

The Company anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2010, we had approximately $21.3 million in loan commitments, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $5.7 million in unused letters of credit and approximately $36.9 million in unused lines of credit. At March 31, 2010, we had $169.5 million in certificates of deposit due within one year and $247.3 million in other deposits without specific maturities. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net decrease in total deposits of $1.8 million during the nine-month period ended March 31, 2010.

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

Off-Balance Sheet Arrangements

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

For the three months ended March 31, 2010, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

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Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of March 31, 2010, Jefferson Federal met each of its capital requirements. The following table presents our capital position relative to our regulatory capital requirements at March 31, 2010 and June 30, 2009:

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
	(Dollars in thousands)
At March 31, 2010
Total Risk-Based Capital
(To Risk Weighted Assets)	$	55,783	11.81	%	$	37,785	>	8.0	%	$	47,232	>	10.0	%
Tier 1 Capital
(To Risk Weighted Assets)		50,366	10.66	%		18,893	>	4.0	%		28,339	>	6.0	%
Tier 1 Capital
(To Average Assets)		50,366	7.96	%		25,305	>	4.0	%		31,631	>	5.0	%
At June 30, 2009
Total Risk-Based Capital
(To Risk Weighted Assets)	$	53,953	10.49	%	$	41,164	>	8.0	%	$	51,456	>	10.0	%
Tier 1 Capital
(To Risk Weighted Assets)		49,225	9.57	%		20,582	>	4.0	%		30,873	>	6.0	%
Tier 1 Capital
(To Average Assets)		49,225	7.85	%		25,081	>	4.0	%		31,351	>	5.0	%

Under the capital regulations of the FDIC, Jefferson Federal must satisfy various capital requirements. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (“Tier I”) capital to average adjusted assets of at least 3.00% if a particular institution has the highest examination rating and at least 4.00% for all others. At March 31, 2010, Jefferson Federal’s leverage capital ratio was 7.96%. The FDIC’s risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-weighted assets of at least 8.00%. Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At March 31, 2010, Jefferson Federal had a ratio of total capital to risk-weighted assets of 11.81%. At March 31, 2010, the Bank met the minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since June 30, 2009.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009.

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

Period	(a) Total  Number of Shares (or units) Purchased	(b) Average Price Paid per Share (or Unit)		( c ) Total Number of Shares (or  Units) Purchased as Part of Publicly Announced Plans or Progams	( d ) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
Month #1
January 1, 2010	—	$	—	—	509,674	(1)
through
January 31, 2010
Month #2
February 1, 2010	1,369	$	5.22	1,369	508,305	(1)
through
February 28, 2010
Month #3
March 1, 2010	18,828	$	3.93	18,828	489,477	(1)
through				—
March 31, 2010
Total	20,197	$	4.02	20,197	489,477

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

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Item 6. Exhibits

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

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SIGNATURES

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

	JEFFERSON BANCSHARES, INC.
May 10, 2010	/s/  Anderson L. Smith
	Anderson L. Smith
	President and Chief Executive Officer
May 10, 2010	/s/  Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary