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, 2013

OR

o 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	(I.R.S. Employer Identification Number)
incorporation or organization)
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 o

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 x No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  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 14, 2013, the registrant had 6,602,017 shares of common stock, $0.01 par value per share, outstanding.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Condition - Unaudited Nine months ended March 31, 2013 and year ended June 30, 2012		3
	Consolidated Statements of Earnings - Unaudited Three and nine months ended March 31, 2013 and 2012		4
	Consolidated Statements of Comprehensive Income – Unaudited Three and nine months ended March 31, 2013 and 2012
	Consolidated Statements of Changes in Stockholders’ Equity – Unaudited Nine months ended March 31, 2013 and 2012		5
	Consolidated Statements of Cash Flows - Unaudited Nine months ended March 31, 2013 and 2012		7
	Notes to Consolidated Financial Statements - Unaudited		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		35
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		36
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3.	Defaults Upon Senior Securities		37
Item 4.	Mine Safety Disclosures		37
Item 5.	Other Information		37
Item 6.	Exhibits		37
SIGNATURES

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

(Dollars in Thousands)

	March 31,			June 30,
	2013			2012
Assets	(Unaudited)
Cash and cash equivalents	$	7,187		$	3,043
Interest-earning deposits		28,278			53,650
Investment securities classified as available for sale, net		99,383			83,483
Federal Home Loan Bank stock		4,735			4,735
Bank owned life insurance		7,042			6,861
Loans receivable, net of allowance for loan losses of $5,670 and $5,852		311,628			322,499
Loans held-for-sale		475			381
Premises and equipment, net		25,861			26,361
Foreclosed real estate, net		6,489			6,075
Accrued interest receivable:
Investments		355			383
Loans receivable		1,080			1,192
Deferred tax asset		10,386			10,676
Core deposit intangible		1,243			1,537
Other assets		1,872			2,054
Total Assets	$	506,014		$	522,930
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	52,844		$	52,436
Interest-bearing		352,517			371,446
Repurchase agreements		607			398
Federal Home Loan Bank advances		37,644			37,863
Subordinated debentures		7,330			7,245
Other liabilities		1,493			913
Accrued income taxes		—			—
Total liabilities		452,435			470,301
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 6,604,585 shares outstanding at March 31, 2013 and 6,631,989 shares outstanding at June 30, 2012		92			92
Additional paid-in capital		78,349			78,571
Unearned ESOP shares		(2,484	)		(2,809	)
Unearned compensation		(1,046	)		(1,046	)
Accumulated other comprehensive income		1,051			1,095
Retained earnings		9,095			8,067
Treasury stock, at cost (2,577,786 and 2,550,383 shares)		(31,478	)		(31,341	)
Total stockholders’ equity		53,579			52,629
Total liabilities and stockholders’ equity	$	506,014		$	522,930

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						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
Interest income:
Interest on loans receivable	$	4,277		$	4,758		$	13,197		$	15,595
Interest on investment securities		437			478			1,266			1,412
Other interest		67			66			218			190
Total interest income		4,781			5,302			14,681			17,197
Interest expense:
Deposits		358			671			1,190			2,427
Repurchase agreements		1			2			4			5
Advances from FHLB		313			316			950			956
Subordinated debentures		79			84			242			243
Total interest expense		751			1,073			2,386			3,631
Net interest income		4,030			4,229			12,295			13,566
Provision for loan losses		200			600			800			9,273
Net interest income after provision for loan losses		3,830			3,629			11,495			4,293
Noninterest income:
Mortgage origination fee income		97			68			374			264
Service charges and fees		251			265			780			841
Gain on investments		—			—			12			39
Gain (loss) on sale of fixed assets		—			—			1			(19	)
Gain (loss) on sale of foreclosed real estate, net		28			(61	)		(181	)		(140	)
BOLI increase in cash value		61			58			181			177
Other		145			178			452			527
Total noninterest income		582			508			1,619			1,689
Noninterest expense:
Compensation and benefits		1,712			1,494			5,159			4,625
Occupancy expense		322			334			1,025			1,047
Equipment and data processing expense		589			591			1,805			1,798
DIF premiums		278			203			695			606
Advertising		82			155			171			290
Legal and professional services		123			72			368			383
Valuation adjustment and expenses on OREO		128			273			607			2,144
Amortization of intangible assets		92			106			294			336
Other		547			544			1,616			1,658
Total noninterest expense		3,873			3,772			11,740			12,887
Earnings (loss) before income taxes		539			365			1,374			(6,905	)
Income taxes:
Current		4			—			27			—
Deferred		149			31			318			(2,614	)
Total income taxes		153			31			345			(2,614	)
Net earnings (loss)	$	386		$	334		$	1,029		$	(4,291	)
Net earnings (loss) per share, basic	$	0.06		$	0.05		$	0.16		$	(0.69	)
Net earnings (loss) per share, diluted	$	0.06		$	0.05		$	0.16		$	(0.69	)
Net earnings (loss)	$	386		$	334		$	1,029		$	(4,291	)
Other comprehensive income:
Unrealized holding gain (loss)		(272	)		110			(71	)		570
Income tax benefit (expense)		104			(42	)		27			(218	)
Comprehensive income (loss)	$	218		$	402		$	985		$	(3,939	)

See accompanying notes to financial statements.

4

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended March 31, 2013 and 2012

(Dollars in Thousands)

						Unallocated						Accumulated
			Additional			Common						Other								Total
	Common		Paid-in			Stock in			Unearned			Comprehensive			Retained		Treasury			Stockholders’
	Stock		Capital			ESOP			Compensation			Income			Earnings		Stock			Equity
Balance at June 30, 2012	$	92	$	78,571		$	(2,809	)	$	(1,046	)	$	1,095		$	8,067	$	(31,341	)	$	52,629
Net earnings		—		—			—			—			—			1,028		—			1,028
Other comprehensive income		—		—			—			—			(44	)		—		—			(44	)
Shares committed to be released by the ESOP		—		(226	)		325			—			—			—		—			99
Stock options expensed		—		4			—			—			—			—		—			4
Purchase of common stock (27,403 shares)		—		—			—			—			—			—		(137	)		(137	)
Balance at March 31, 2013	$	92	$	78,349		$	(2,484	)	$	(1,046	)	$	1,051		$	9,095	$	(31,478	)	$	53,579

						Unallocated						Accumulated
			Additional			Common						Other								Total
	Common		Paid-in			Stock in			Unearned			Comprehensive		Retained			Treasury			Stockholders’
	Stock		Capital			ESOP			Compensation			Income		Earnings			Stock			Equity
Balance at June 30, 2011	$	92	$	78,895		$	(3,241	)	$	(1,019	)	$	459	$	12,067		$	(31,334	)	$	55,919
Net earnings		—		—			—			—			—		(4,291	)		—			(4,291	)
Other comprehensive income		—		—			—			—			352		—			—			352
Shares committed to be released by the ESOP		—		(238	)		325			(27	)		—		—			—			60
Purchase of common stock (2,484 shares)		—		—			—			—			—		—			(7	)		(7	)
Balance at March 31, 2012	$	92	$	78,657		$	(2,916	)	$	(1,046	)	$	811	$	7,776		$	(31,341	)	$	52,033

See accompanying notes to financial statements.

5

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Nine Months Ended
	March 31,
	2013			2012
Cash flows from operating activities:
Net earnings	$	1,029		$	(4,291	)
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		98			87
Depreciation and amortization expense		1,352			1,404
Amortization of premiums (discounts), net on investment securities		474			228
Provision for loan losses		800			9,273
Amortization of deferred loan fees, net		(132	)		(112	)
(Gain) loss on sale of investment securities		(12	)		(39	)
(Gain) loss on sale of foreclosed real estate, net		181			140
(Gain) loss on sale of fixed assets, net		(1	)		19
Deferred tax expense (benefit)		318			(2,614	)
Stock options expensed		4			—
Originations of mortgage loans held for sale		(15,004	)		(11,391	)
Proceeds from sale of mortgage loans		14,910			11,148
Increase in cash value of life insurance		(181	)		(177	)
Earned portion of MRP		—			(27	)
Decrease (increase) in:
Accrued interest receivable		140			149
Other assets		182			3,185
Increase (decrease) in other liabilities and accrued income taxes		580			(2,803	)
Net cash provided by (used for) operating activities		4,738			4,179
Cash flows used for investing activities:
Loan originations, net of principal collections		7,934			27,235
Investment securities classified as available-for-sale:
Proceeds from maturities, calls and prepayments		23,373			42,132
Proceeds from sale		80			501
Purchase of securities		(39,889	)		(56,771	)
Proceeds from sale of premises and equipment		—			26
Purchase of premises and equipment		(281	)		(707	)
Proceeds from sale of (additions to) foreclosed real estate, net		1,440			1,962
Net cash provided by (used for) investing activities		(7,343	)		14,378
Cash flows from financing activities:
Net decrease in deposits		(18,517	)		(20,407	)
Net increase (decrease) in repurchase agreements		209			(55	)
Repayment of FHLB advances		(178	)		(19	)
Purchase of treasury stock		(137	)		(7	)
Net cash provided by (used for) financing activities		(18,623	)		(20,488	)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		(21,228	)		(1,931	)
Cash, cash equivalents and interest-earning deposits at beginning of period		56,693			40,548
Cash, cash equivalents and interest-earning deposits at end of period	$	35,465		$	38,617
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	1,201		$	2,361
Interest on borrowed funds	$	782		$	786
Interest on subordinated debentures	$	158		$	159
Income taxes		45			—
Real estate acquired in settlement of loans	$	3,689		$	2,495

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 three and nine months ended March 31, 2013 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. 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, 2012, which was filed with the Securities and Exchange Commission on September 21, 2012 and amended on October 16, 2012. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted.

(2) Principles of Consolidation

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

(3) Use of Estimates

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

(4) Limitation on Capital Distributions

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

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

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

(5) Earnings Per Common Share

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“ESOP”) shares. Diluted earnings per 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 three and nine months ended March 31, 2013, stock options to purchase 360,638 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:

7

	Weighted-Average Shares Outstanding for the Three Months Ended March 31,				Weighted-Average Shares Outstanding for the Nine Months Ended March 31,
	2013		2012		2013		2012
Weighted average number of common shares used in computing basic earnings per common share		6,292,214		6,261,939		6,271,036		6,237,203
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		6,292,214		6,261,939		6,271,036		6,237,203

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

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

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

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

8

Specific valuation allowances are established for impaired loans. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. A specific reserve represents the difference between the recorded value of the loan and either its estimated fair value less estimated disposition costs, or the net present value as determined by a discounted cash flow analysis. On a quarterly basis, management evaluates individual loans and lending relationships which have outstanding principal balances of $500,000 or more and which are classified as either substandard, doubtful or loss according to the loan grading policy for impairment. Troubled debt restructurings (“TDRs”) are also considered to be impaired, except for those that have been performing under the new terms for at least six consecutive months.

A TDR occurs when the Bank grants a concession to a borrower with financial difficulties that it would not otherwise consider. The Bank has adopted the guidance and definitions found in ASU 2011-02 in determining if a borrower is experiencing financial difficulties and if a concession has been granted. The majority of the Bank’s TDRs involve a modification involving changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. A TDR may be non-accruing or it may accrue interest. A nonaccrual TDR will be returned to accruing status at such time when the borrower successfully performs under the new terms for at least six consecutive months. The Bank’s TDRs totaled $9.3 million at March 31, 2013 compared to $10.8 million at June 30, 2012.

The following table presents the Bank’s loans classified as TDRs by loan type and accrual status as of March 31, 2013:

	March 31, 2013
	Accrual		Non-accrual		Total
	Status		Status		TDRs
Residential Mortgage	$	670	$	—	$	670
Multi-family		623		5,001		5,624
Construction and land development		148		—		148
Non-residential real estate		—		2,051		2,051
Owner occupied		—		382		382
Commercial		122		262		384
HELOC and Junior Lien		—		—		—
Total	$	1,563	$	7,696	$	9,259

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

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

9

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2013:

	Resid. Mtg			Multi-family		Constr and land dev.			Non- residential real estate			Owner occupied			Comm’l			HELOC and junior lien			Consumer			Total
Allowance for Credit Losses:
Balance at June 30, 2012	$	699		$	596	$	777		$	1,047		$	347		$	2,130		$	234		$	22		$	5,852
Charge Offs		(648	)		—		(138	)		(31	)		(7	)		(441	)		(109	)		(35	)		(1,409	)
Recoveries		—			—		20			—			10			386			—			11			427
Provision		498			415		(122	)		50			(12	)		(61	)		—			32			800
Balance at March 31, 2013	$	549		$	1,011	$	537		$	1,066		$	338		$	2,014		$	125		$	30		$	5,670
Ending balance, Individually Evaluated	$	11		$	501	$	315		$	539		$	—		$	777		$	—		$	—		$	2,143
Ending balance, Collectively Evaluated	$	538		$	510	$	222		$	527		$	338		$	1,237		$	125		$	30		$	3,527
Loans:
Balance at March 31, 2013	$	85,132		$	13,297	$	30,254		$	50,121		$	70,283		$	47,509		$	16,916		$	4,105		$	317,617
Ending balance, Individually Evaluated	$	195		$	5,001	$	550		$	2,948		$	—		$	2,542		$	—		$	—		$	11,236
Ending balance, Collectively Evaluated	$	84,937		$	8,296	$	29,704		$	47,173		$	70,283		$	44,967		$	16,916		$	4,105		$	306,381

The following table is an aging analysis of the loan portfolio at March 31, 2013:

	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Total Current		Total loans receivable
Residential Mortgage	$	998	$	—	$	2,392	$	3,390	$	81,742	$	85,132
Multi-family		—		—		5,004		5,004		8,293		13,297
Construction/land development		22		—		879		901		29,353		30,254
Non-residential real estate		74		—		3,191		3,265		46,856		50,121
Owner occupied		126		—		1,110		1,236		69,047		70,283
Commercial		461		200		303		964		46,545		47,509
HELOC and Junior Lien		—		—		47		47		16,869		16,916
Consumer		13		1		11		25		4,080		4,105
Total	$	1,694	$	201	$	12,937	$	14,832	$	302,785	$	317,617

10

The following table summarizes the credit risk profile by internally assigned grade at March 31, 2013:

	Residential Mortgage		Multi-family		Constr and land dev.		Non- residential real estate		Owner occupied		Comm’l		HELOC and Junior Lien		Consumer		Total
Grade:
Pass	$	77,906	$	7,579	$	26,979	$	33,033	$	66,369	$	43,242	$	15,887	$	3,685	$	274,680
Watch		2,576		—		1,683		12,995		2,589		1,538		73		412		21,866
Special mention		—		—		—		—		—		—		—		—		—
Substandard		4,650		5,718		1,592		4,093		1,325		2,729		956		8		21,071
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total:	$	85,132	$	13,297	$	30,254	$	50,121	$	70,283	$	47,509	$	16,916	$	4,105	$	317,617

11

The following table summarizes the composition of impaired loans, the associated specific reserves, and interest income recognized on impaired loans at March 31, 2013:

	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized
With an allowance recorded:
Residential Mortgage	$	184	$	195	$	11	$	10
Multi-family		4,500		5,001		501		—
Construction and land development		235		550		315		7
Non-residential real estate		2,409		2,948		539		51
Owner occupied		—		—		—		—
Commercial		1,765		2,542		777		162
HELOC and Junior Lien		—		—		—		—
Consumer		—		—		—		—
Total	$	9,093	$	11,236	$	2,143	$	230
With no related allowance:
Residential Mortgage	$	1,346	$	1,346	$	—	$	65
Multi-family		623		623		—		31
Construction and land development		523		523		—		12
Non-residential real estate		1,652		1,652		—		—
Owner occupied		545		545		—		—
Commercial		54		54		—		—
HELOC and Junior Lien		609		609		—		15
Consumer		—		—		—		—
Total	$	5,352	$	5,352	$	—	$	123
Total:
Residential Mortgage	$	1,530	$	1,541	$	11	$	75
Multi-family		5,123		5,624		501		31
Construction and land development		758		1,073		315		19
Non-residential real estate		4,061		4,600		539		51
Owner occupied		545		545		—		—
Commercial		1,819		2,596		777		162
HELOC and Jr Lien		609		609		—		15
Consumer		—		—		—		—
Total	$	14,445	$	16,588	$	2,143	$	353
Average impaired loans for the nine months ended March 31, 2013	$	17,552

(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.

12

At March 31, 2013, we had approximately $12.4 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $3.6 million in unused letters of credit and approximately $30.0 million in unused lines of credit.

(8) Dividends

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.

The table below summarizes the status of the Company’s stock option plans as of March 31, 2013:

	Three Months Ended
	March 31, 2013
			Weighted-
			average
	Shares		exercise price
Outstanding at beginning of period		360,638	$	13.04
Granted during the three-month period		—		—
Options forfeited		—		—
Options exercised		—		—
Outstanding at March 31, 2013		360,638	$	13.04
Options exercisable at March 31, 2013		340,638	$	13.69

The following information applies to options outstanding at March 31, 2013:

Number outstanding		360,638
Range of exercise prices	$	1.97 - $13.69
Weighted-average exercise price	$	13.04
Weighted-average remaining contractual life		1.3
Number of options remaining for future issuance		338,112

13

During the nine months ended March 31, 2013, the Company granted 20,000 stock options. The fair value of stock options granted is amortized as compensation expense on a straight-line basis over the five year vesting period of the grant. Compensation expense related to stock options was approximately $4,000 for the nine months ended March 31, 2013. The estimated fair value of stock options was determined using the Black-Scholes option pricing on the date of the grant award. The Black-Scholes model assumes an expected stock price volatility based on the historical volatility at the date of the grant and an expected term based on the remaining contractual life of the vesting period. The Company bases the estimate of risk-free interest rate on a U.S. Government obligation, with a term equal to the expected life of the options at the grant date. The dividend yield is based on the current quarterly dividend in effect at the time of the grant.

(10) Investment Securities

Investment securities are summarized as follows:

At March 31, 2013
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	21,006		$	191	$	(34	)	$	21,163
Mortgage-backed		67,885			1,798		(189	)		69,494
Municipals		8,182			316		(45	)		8,453
Other Securities		607			—		(334	)		273
Total securities available-for-sale	$	97,680		$	2,305	$	(602	)	$	99,383
Weighted-average rate		1.78	%
Pledged at March 31, 2013	$	11,462

At June 30, 2012
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	24,033		$	263	$	—		$	24,296
Mortgage-backed		52,822			1,658		(65	)		54,415
Municipals		4,245			318		—			4,563
Other Securities		609			—		(400	)		209
Total securities available-for-sale	$	81,709		$	2,239	$	(465	)	$	83,483
Weighted-average rate		2.20	%
Pledged at June 30, 2012	$	13,021

14

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

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(Dollars in thousands)
March 31, 2013
Federal agency securities	$	7,959	$	(34	)	$	—	$	—		$	7,959	$	(34	)
Mortgage-backed securities		18,844		(183	)		445		(6	)		19,289		(189	)
Municipal securities		3,433		(45	)		—		—			3,433		(45	)
Other securities		—		—			274		(334	)		274		(334	)
	$	30,236	$	(262	)	$	719	$	(340	)	$	30,955	$	(602	)

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

Federal Agency Securities – The unrealized losses of $34,000 for these eight federal agency securities were caused by changes in market interest rates. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Because the decline in market value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases and it is not more likely than not the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.

GSE Residential Mortgage-Backed Securities – The unrealized losses of $183,000 for these twenty GSE mortgage-backed securities were caused by changes in market interest rates. The contractual cash flows of these investments are guaranteed by an agency of the U.S. Government. Accordingly it is expected that the securities would not be settled at a price less than the amortized bases of the Company’s investments. Because the decline in market value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases and it is not more likely than not the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.

Private-Label Residential Mortgage-Backed Securities - The unrealized loss of $6,000 for this private-label mortgage-backed security is primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates as indicated by the semi-annual independent valuation of the investment. The valuation methodology used is a future cash flow analysis which is built upon a model based on collateral-specific assumptions as they relate to the underlying loans. Given the expected improvement in the future performances of the expected cash flow, the unrealized losses are not deemed to be attributable to credit quality. Accordingly it is expected that the security would not be settled at a price less than the amortized bases of the Company’s investment. Because the decline in market value is attributable to higher projected collateral losses, wider credit spreads and changes in interest rates and not credit quality, the Company expects to recover the entire amortized cost bases of this security.

15

Municipal Securities – The unrealized losses of $45,000 for these seven investments in municipal securities were caused by changes in market interest rates. The contractual cash flows of these investments are guaranteed by municipal agencies themselves. Accordingly it is expected that the securities would not be settled at a price less than the amortized bases of the Company’s investments. Because the decline in market value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases and it is not more likely than not the Company does not intend to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2013.

Other Securities – The unrealized loss of $334,000 on this collateralized debt obligation (“CDO”) was a result of updated variables and inputs that comprise the model used in the semi-annual independent valuation of this security. The collateral for the CDO investment is comprised of trust preferred securities and senior and subordinated debt issued by banks, insurance companies, REITs, real estate operating companies and homebuilding companies. The CDO is valued by evaluating all relevant credit and structural aspects of the instrument, determining appropriate performance assumptions and performing a discounted cash flow analysis. Given the expected improvement in the future performance of the collateral, the unrealized loss is not deemed to be attributable to credit quality. Since the Company does not intend to sell this investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2013.

Maturities of debt securities at March 31, 2013 are summarized as follows:

					Weighted
	Amortized		Fair		Average
	Cost		Value		Yield
Within 1 year	$	5,692	$	5,735		1.19	%
Over 1 year through 5 years		5,834		5,910		1.66	%
After 5 years through 10 years		20,605		20,901		1.39	%
Over 10 years		65,549		66,837		1.96	%
	$	97,680	$	99,383		1.78	%

(11) Fair Value Disclosures

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

Level 1

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

16

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

Impaired Loans

The Company records loans at fair value on a non-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.

17

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, 2013, 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, 2013
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		—	$	98,664	$	719	$	99,383	$	99,383

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, 2013
Description	Level 1		Level 2		Level 3		Total Gains (Losses)
Impaired Loans		—		—	$	14,445	$	(580	)

18

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

	March 31, 2013						June 30, 2012
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Financial assets:
Cash and due from banks and interest-earning deposits with banks	$	35,465		$	35,465		$	56,693		$	56,693
Available-for-sale securities		99,383			99,383			83,483			83,483
Federal Home Loan Bank stock		4,735			4,735			4,735			4,735
Bank owned life insurance		7,042			7,042			6,861			6,861
Loans receivable, net		311,628			319,401			322,499			330,664
Accrued interest receivable		1,435			1,435			1,575			1,575
Loans held-for-sale		475			475			381			381
Financial liabilities:
Deposits		(405,361	)		(400,485	)		(423,882	)		(424,523	)
Borrowed funds		(38,251	)		(39,630	)		(38,261	)		(40,064	)
Subordinated debentures		(7,330	)		(4,713	)		(7,245	)		(4,200	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		—			12,356			—			8,452
Unused letters of credit		—			3,612			—			4,454
Unused lines of credit		—			29,956			—			31,409

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

Cash and due from banks and interest-earning deposits with banks - The carrying amounts for these assets approximates fair value.

Investment securities – See the discussion presented on Page 18 concerning assets measured at fair value on a recurring basis.

Federal Home Loan Bank stock- The fair value for FHLB stock is the carrying value due to restrictions placed on transferability.

Loans held-for-sale – The fair value of loans held-for-sale is the carrying value since these loans have a commitment to be purchased by a third party.

Loans receivable, net - The fair value is based on discounted cash flow analyses, using interest rates currently being offered for loans with similar terms and for similar maturities. The estimated fair value of loans is adjusted for the allowance for loan losses.

Accrued interest receivable- The carrying amounts of accrued interest receivable approximate fair value.

19

Bank-owned life insurance - The carrying value of this asset is the cash surrender value, which approximates fair value.

Deposits- The fair value of deposits with no stated maturity is equal to the amount payable on demand. The fair value of time deposits is estimated using discounted cash flow analyses. The discount rate is estimated using rates currently offered for deposits of similar remaining maturities.

Borrowed Money - The estimated fair value of debt is based on current rates for similar financing.

Subordinated debt- The fair value for subordinated debt is estimated based on a third party indication of fair value at the respective dates.

(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%.

On January 11, 2012, the Company notified the Trustee for the Trust that, beginning with the January 30, 2012 interest payment period, the Company has elected to defer all payments of interest on the Company’s junior subordinated debentures for an indefinite period of time (but no longer than 20 consecutive quarterly periods). Under the terms of the indenture, the Company is prohibited from paying dividends on its common stock during the period that interest is deferred on the debentures.

(13) Subsequent Events

The Company has evaluated subsequent events for potential recognition and disclosure for the three months ended March 31, 2013. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.

20

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, 2012, which was filed with the Securities and Exchange Commission on September 21, 2012 and amended on October 16, 2012.

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”).

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

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

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

Private Securities Litigation Reform Act Safe Harbor Statement

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

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in the reports we file with the SEC, including our Annual Report on Form 10-K for the year ended June 30, 2012 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, 2013 and 2012

Net Income

For the three months ended March 31, 2013, net income totaled $386,000, or $0.06 per diluted share, compared to $334,000, or $0.05 per diluted share, for the three months ended March 31, 2012. The increase in net income is primarily the result of a reduced loan loss provision and higher noninterest income, partially offset by a reduction in net interest income and an increase in noninterest expense.

For the nine months ended March 31, 2013, net income totaled $1.0 million, or $0.16 per diluted share, compared to a net loss of $4.3 million, or $0.69 per diluted share, for the nine months ended March 31, 2012. The improvement in net income was primarily due to a decrease in the provision for loan losses, which totaled $800,000 for the nine months ended March 31, 2013 compared to $9.3 million for the comparable period in 2012.

21

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
	(Dollars in thousands, except per share data)						(Dollars in thousands, except per share data)
Net earnings (loss)	$	386		$	334		$	1,029		$	(4,291	)
Net earnings (loss) per share, basic	$	0.06		$	0.05		$	0.16		$	(0.69	)
Net earnings (loss) per share, diluted	$	0.06		$	0.05		$	0.16		$	(0.69	)
Return on average assets (annualized)		0.30	%		0.25	%		0.27	%		(1.05	%)
Return on average equity (annualized)		2.87	%		2.56	%		2.56	%		(10.44	%)

Net Interest Income

Net interest income decreased $199,000, or 4.7%, to $4.0 million for the three months ended March 31, 2013 compared to $4.2 million for the same period in 2012. The interest rate spread and net interest margin for the quarter ended March 31, 2013 were 3.54% and 3.63%, respectively, compared to 3.49% and 3.60%, respectively, for the same period in 2012.

The following table summarizes changes in interest income and expense for the three month periods ended March 31, 2013 and 2012:

	Three Months
	Ended
	March 31,
	2013		2012		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	4,277	$	4,758	$	(481	)		(10.1	%)
Investment securities		437		478		(41	)		(8.6	%)
Interest-earning deposits		16		12		4			33.3	%
FHLB stock		51		54		(3	)		(5.6	%)
Total interest income		4,781		5,302		(521	)		(9.8	%)
Interest expense:
Deposits		358		671		(313	)		(46.6	%)
Repurchase Agreements		1		2		(1	)		(50.0	%)
Borrowings		313		316		(3	)		(0.9	%)
Subordinated Notes & Debentures		79		84		(5	)		(6.0	%)
Total interest expense		751		1,073		(322	)		(30.0	%)
Net interest income	$	4,030	$	4,229	$	(199	)		(4.7	%)

For the nine months ended March 31, 2013, net interest income decreased $1.3 million, or 9.4%, to $12.3 million compared to $13.6 million for the same period in 2012. The interest rate spread and net interest margin for the nine months ended March 31, 2013 were 3.54% and 3.63%, respectively, compared to 3.61% and 3.75%, respectively, for the same period in 2012.

22

The following table summarizes changes in interest income and expense for the nine month periods ended March 31, 2013 and 2012:

	Nine Months
	Ended
	March 31,
	2013		2012		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	13,197	$	15,595	$	(2,398	)		(15.4	%)
Investment securities		1,266		1,412		(146	)		(10.3	%)
Interest-earning deposits		60		41		19			46.3	%
FHLB stock		158		149		9			6.0	%
Total interest income		14,681		17,197		(2,516	)		(14.6	%)
Interest expense:
Deposits		1,190		2,427		(1,237	)		(51.0	%)
Repurchase Agreements		4		5		(1	)		(20.0	%)
Borrowings		950		956		(6	)		(0.6	%)
Subordinated Notes & Debentures		242		243		(1	)		(0.4	%)
Total interest expense		2,386		3,631		(1,245	)		(34.3	%)
Net interest income	$	12,295	$	13,566	$	(1,271	)		(9.4	%)

The following table summarizes average balances and average yields and costs for the three and nine months ended March 31, 2013 and 2012.

	Three Months Ended March 31,										Nine Months Ended March 31,
	2013					2012					2013					2012
	Average		Yield/			Average		Yield/			Average		Yield/			Average		Yield/
	Balance		Cost			Balance		Cost			Balance		Cost			Balance		Cost
	(Dollars in thousands)										(Dollars in thousands)
Loans	$	318,078		5.45	%	$	358,261		5.34	%	$	322,346		5.45	%	$	371,555		5.59	%
Investment securities		98,485		1.86	%		83,698		2.38	%		91,112		1.92	%		81,676		2.38	%
Interest-earning deposits		30,526		0.21	%		28,202		0.17	%		34,540		0.23	%		26,597		0.21	%
FHLB stock		4,735		4.37	%		4,735		4.59	%		4,735		4.45	%		4,735		4.19	%
Deposits		354,076		0.41	%		380,949		0.71	%		355,887		0.45	%		386,666		0.84	%
FHLB advances		37,657		3.37	%		37,895		3.35	%		37,721		3.35	%		37,916		3.36	%
Repurchase agreements		972		0.42	%		858		0.94	%		959		0.56	%		949		0.70	%
Subordinated debentures		7,311		4.38	%		7,200		4.69	%		7,284		4.43	%		7,171		4.51	%

23

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, 2013 Compared to 2012									Nine Months Ended March 31, 2013 Compared to 2012
	Increase (Decrease) Due To									Increase (Decrease) Due To
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)									(In thousands)
Interest income:
Loans receivable	$	(540	)	$	59		$	(481	)	$	(2,023	)	$	(375	)	$	(2,398	)
Investment securities		86			(127	)		(41	)		190			(336	)		(146	)
Daily interest-earning deposits and other interest-earning assets		1			(0	)		1			13			15			28
Total interest-earning assets		(452	)		(69	)		(521	)		(1,820	)		(696	)		(2,516	)
Interest expense:
Deposits		(45	)		(269	)		(313	)		(180	)		(1,057	)		(1,237	)
FHLB advances		(2	)		(1	)		(3	)		(5	)		(1	)		(6	)
Repurchase agreements		0			(1	)		(1	)		—			(1	)		(1	)
Subordinated debentures		1			(6	)		(5	)		4			(5	)		(1	)
Total interest-bearing liabilities		(45	)		(277	)		(322	)		(181	)		(1,064	)		(1,245	)
Net change in interest income	$	(407	)	$	208		$	(199	)	$	(1,639	)	$	368		$	(1,271	)

Total interest income decreased $521,000, or 9.8%, to $4.8 million for the three months ended March 31, 2013 and decreased $2.5 million, or 14.6%, to $14.7 million for the nine months ended March 31, 2013 compared to the prior year periods. The decrease in interest income was primarily the result of declines in the average balance of interest-earning assets combined with lower interest rates.

Interest on loans decreased $481,000, or 10.1%, to $4.3 million for the three months ended March 31, 2013 and decreased $2.4 million, or 15.4%, to $13.2 million for the nine months ended March 31, 2013 compared to the prior year periods. The average balance of loans decreased $40.2 million, or 11.2%, to $318.1 million for the three months ended March 31, 2013 and decreased $49.2 million, or 13.2%, to $322.3 million for the nine months ended March 31, 2013. The decrease in the average balance of loans is due to the combination of reduced loan demand, normal paydowns on existing loans, transfers to other real estate owned (“OREO”) and charge-offs. Reduced loan demand has resulted from continued economic weakness in the Bank’s market areas. The average yield on loans was 5.45% for both the three and nine months ended March 31, 2013, compared to 5.34% and 5.59%, respectively, for the same periods in 2012.

Interest on investment securities decreased $41,000, or 8.6%, to $437,000 for the three months ended March 31, 2013 and decreased $146,000, or 10.3%, to $1.3 million for the nine months ended March 31, 2013 compared to the prior year periods. The decrease for both periods was the result of a decline in the average yield of investment securities more than offsetting an increase in the average balance. The average yield on investment securities decreased 52 basis points to 1.86% for the three months ended March 31, 2013 and decreased 46 basis points to 1.92% for the nine months ended March 31, 2013 compared to the same periods in 2012 due to lower market interest rates.

Total interest expense decreased $322,000, or 30.0%, to $751,000 for the three-month period ended March 31, 2013 and decreased $1.2 million, or 34.3%, to $2.4 million for the nine-month period ended March 31, 2013 compared to the prior year periods. The decrease for both periods was due to a decrease in rates paid on deposits combined with decreases in the average balance of deposits. The average rate paid on deposits decreased 30 basis points to 0.41% for the three months ended March 31, 2013 and decreased 39 basis points to 0.45% for the nine months ended March 31, 2013 compared to the prior year periods due to downward repricing of interest bearing deposits in the current low interest rate environment. The decrease in the average balance of deposits is the result of the managed decline of higher rate certificates of deposit.

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Provision for Loan Losses

The provision for loan losses for the three and nine month periods ended March 31, 2013 totaled $200,000 and $800,000, respectively, compared to $600,000 and $9.3 million, respectively, for the prior year periods. The decrease in the provision for loan losses is the result of improvements in asset quality. Net charge-offs for the three and nine month periods ended March 31, 2013 amounted to $232,000 and $982,000, respectively, compared to $4.7 million and $10.6 million for the comparable periods in 2012. Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in the nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors. In addition, the Federal Deposit Insurance Corporation and Tennessee Department of Financial Institutions, as an integral part of their examination process, periodically review our allowance for loan losses and may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Noninterest Income

Noninterest income increased $74,000, or 14.6%, to $582,000 for the three months ended March 31, 2013 compared to $508,000 for the same period in 2012 due primarily to an $89,000 increase in net gain on sale of OREO. Mortgage origination fee income increased $29,000, or 42.6%, to $97,000 for the three months ended March 31, 2013 compared to the prior year due to higher demand for residential mortgage refinancing.

The following table summarizes changes in noninterest income for the three month periods ended March 31, 2013 and 2012:

	Three Months Ended
	March 31,					$			%
	2013		2012			Change			Change
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income	$	97	$	68		$	29			42.6	%
Service charges and fees		251		265			(14	)		(5.3	%)
Loss on sale of foreclosed real estate, net		28		(61	)		89			(145.9	%)
BOLI increase in cash value		61		58			3			5.2	%
Other		145		178			(33	)		(18.5	%)
Total noninterest income	$	582	$	508		$	74			14.6	%

For the nine months ended March 31, 2013, noninterest income decreased $70,000, or 4.1%, to $1.6 million compared to $1.7 million for the same period in 2012. Service charges and fees decreased $61,000, or 7.3% to $780,000 for the nine months ended March 31, 2013 compared to the prior year period. Net losses on sale of OREO totaled $181,000 compared to $140,000 for the same period in 2012. Mortgage origination fee income increased $110,000, or 41.7%, to $374,000 compared to the prior year due to higher demand for residential mortgage refinancing.

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The following table summarizes changes in noninterest income for the nine month periods ended March 31, 2013 and 2012:

	Nine Months Ended
	March 31,						$			%
	2013			2012			Change			Change
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income	$	374		$	264		$	110			41.7	%
Service charges and fees		780			841			(61	)		(7.3	%)
Gain (loss) on sale of fixed assets		1			(19	)		20			(105.3	%)
Gain on investment securities		12			39			(27	)		(69.2	%)
Loss on sale of foreclosed real estate, net		(181	)		(140	)		(41	)		29.3	%
BOLI increase in cash value		181			177			4			2.3	%
Other		452			527			(75	)		(14.2	%)
Total noninterest income	$	1,619		$	1,689		$	(70	)		(4.1	%)

Noninterest Expense

Total noninterest expense increased $101,000, or 2.7%, to $3.9 million for the three months ended March 31, 2013 compared to $3.8 million for the corresponding period in 2012 due primarily to an increase in compensation and benefits. Compensation and benefits increased $218,000, or 14.6%, to $1.7 million due to increases in commissions, salary expense, bonus accruals, and health insurance costs. Valuation adjustments and expenses on other real estate owned decreased $145,000, or 53.1% to $128,000 for the three months ended March 31, 2013. Advertising expense decreased $73,000, or 47.1%, to $82,000 due primarily to marketing efforts in the prior year period to promote new deposit products.

26

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, 2013 compared to the same period in 2012.

	Three Months Ended
	March 31,				$			%
	2013		2012		Change			Change
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits	$	1,712	$	1,494	$	218			14.6	%
Occupancy expense		322		334		(12	)		(3.6	%)
Equipment and data processing expense		589		591		(2	)		(0.3	%)
Deposit insurance premiums		278		203		75			36.9	%
Advertising		82		155		(73	)		(47.1	%)
Professional services		123		72		51			70.8	%
Valuation adjustment and expenses on OREO		128		273		(145	)		(53.1	%)
Amortization of intangible assets		92		106		(14	)		(13.2	%)
Other		547		544		3			0.6	%
Total noninterest expense	$	3,873	$	3,772	$	101			2.7	%

Total noninterest expense decreased $1.1 million, or 8.9%, to $11.7 million for the nine months ended March 31, 2013 compared to $12.9 million for the corresponding period in 2012 due primarily to a decrease in valuation adjustments and expenses on OREO totaling $1.5 million. Compensation and benefits increased $534,000, or 11.5%, to $5.2 million due to increases in commissions, salary expense, bonus accruals, and health insurance costs. Advertising expense decreased $119,000, or 41.0%, to $171,000 primarily due to marketing efforts in the prior year period to promote new deposit products.

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, 2013 compared to the same period in 2012.

	Nine Months Ended
	March 31,				$			%
	2013		2012		Change			Change
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits	$	5,159	$	4,625	$	534			11.5	%
Occupancy expense		1,025		1,047		(22	)		(2.1	%)
Equipment and data processing expense		1,805		1,798		7			0.4	%
Deposit insurance premiums		695		606		89			14.7	%
Advertising		171		290		(119	)		(41.0	%)
Professional services		368		383		(15	)		(3.9	%)
Valuation adjustment and expenses on OREO		607		2,144		(1,537	)		(71.7	%)
Amortization of intangible assets		294		336		(42	)		(12.5	%)
Other		1,616		1,658		(42	)		(2.5	%)
Total noninterest expense	$	11,740	$	12,887	$	(1,147	)		(8.9	%)

Income Taxes

Income tax expense for the three and nine months ended March 31, 2013 increased to $153,000 and $345,000, respectively, compared to income tax expense of $31,000 and a tax benefit of $2.6 million, respectively, for the three and nine months ended March 31, 2012. The increase in income tax expense for both periods was due to higher taxable income.

27

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits decreased $21.2 million to $35.5 million at March 31, 2013 compared to $56.7 million at June 30, 2012. The decrease was primarily the result of purchases of investment securities combined with customer deposit withdrawals.

Investments

The Company’s investment security portfolio primarily consists of U.S. Government agency obligations, mortgage-backed securities issued by government-sponsored entities, and municipal bonds. Investment securities increased to $99.4 million at March 31, 2013 compared to $83.5 million at June 30, 2012. The increase in the investment portfolio reflects security purchases totaling $39.9 million, partially offset by sales, paydowns and calls of securities totaling approximately $23.4 million. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $1.7 million, or $1.1 million net of taxes, at March 31, 2013.

Loans

Net loans decreased $10.9 million, or 3.4%, to $311.6 million at March 31, 2013, compared to $322.5 million at June 30, 2012, due to a combination of reduced loan demand, normal paydowns on existing loans, transfers to OREO and charge-offs. Reduced loan demand is primarily the result of continued economic weakness in the Bank’s market areas.

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Loans receivable, net, are summarized as follows:

	At						At
	March 31,						June 30,
	2013						2012
				Percent of						Percent of			$			%
	Amount			Portfolio			Amount			Portfolio			Change			Change
	(Dollars in thousands)
Real estate loans:
Residential one-to four-family	$	87,797			27.6	%	$	97,182			29.6	%	$	(9,385	)		(9.7	%)
Home equity line of credit		16,041			5.1	%		18,395			5.6	%		(2,354	)		(12.8	%)
Commercial		120,132			37.8	%		127,185			38.7	%		(7,053	)		(5.5	%)
Multi-family		13,297			4.2	%		11,564			3.5	%		1,733			15.0	%
Construction		5,539			1.7	%		548			0.2	%		4,991			910.8	%
Land		23,117			7.3	%		27,487			8.4	%		(4,370	)		(15.9	%)
Total real estate loans		265,923			83.7	%		282,361			85.9	%		(16,438	)		(5.8	%)
Commercial business loans		47,730			15.0	%		42,107			12.8	%		5,623			13.4	%
Consumer loans:
Automobile loans		566			0.2	%		833			0.3	%		(267	)		(32.1	%)
Mobile home loans		—			0.0	%		3			0.0	%		(3	)		(100.0	%)
Loans secured by deposits		343			0.1	%		381			0.1	%		(38	)		(10.0	%)
Other consumer loans		3,055			1.0	%		2,989			0.9	%		66			2.2	%
Total consumer loans		3,964			1.2	%		4,206			1.3	%		(242	)		(5.8	%)
Total gross loans		317,617			100.0	%		328,674			100.0	%		(11,057	)		(3.4	%)
Less:
Deferred loan fees, net		(319	)					(323	)					4			(1.2	%)
Allowance for losses		(5,670	)					(5,852	)					182			(3.1	%)
Loans receivable, net	$	311,628					$	322,499					$	(10,871	)		(3.4	%)

Loan Loss Allowance

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

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

29

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 $5.7 million at March 31, 2013 compared to $5.9 million at June 30, 2012. Our allowance for loan losses represented 1.79% of total loans and 43.83% of nonperforming loans at March 31, 2013 compared to 1.78% of total loans and 31.53% of nonperforming loans at June 30, 2012.

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	5,702		$	10,880		$	5,852		$	8,181
Provision for loan losses		200			600			800			9,273
Recoveries		27			175			427			257
Charge-offs		(259	)		(4,848	)		(1,409	)		(10,904	)
Net charge-offs		(232	)		(4,673	)		(982	)		(10,647	)
Allowance at end of period	$	5,670		$	6,807		$	5,670		$	6,807
Net charge-offs to average outstanding loans during the period, annualized		0.29	%		5.22	%		0.41	%		3.82	%

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. Nonperforming assets totaled $20.1 million, or 3.98% of total assets, at March 31, 2013, compared to $25.2 million, or 4.82% of total assets, at June 30, 2012. Nonaccrual loans totaled $12.9 million at March 31, 2013 compared to $18.6 million at June 30, 2012. TDRs were $9.3 million at March 31, 2013 compared to $10.8 million at June 30, 2012. In general, a TDR exists when we grant a concession to a borrower experiencing financial difficulty that we normally would not otherwise consider. These concessions can result in avoidance of foreclosure proceedings and can result in the full repayment of the loan principal amount. The majority of the Bank’s TDRs involve a modification involving changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. The amount of accruing TDRs totaled $1.6 million at March 31, 2013 compared to $2.3 million at June 30, 2012. Foreclosed real estate amounted to $6.5 million at March 31, 2013 compared to $6.1 million at June 30, 2012. Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, less estimated selling costs. Any initial writedown to fair value is charged to the allowance for loan losses. Any subsequent writedown of foreclosed real estate is charged against earnings. Foreclosed real estate at March 31, 2013 consisted of vacant land totaling $3.9 million, residential property totaling $1.8 million, and commercial real estate totaling $742,000.

30

	March 31,			June 30,
	2013			2012
	(Dollars in thousands
Nonaccrual loans:
Real estate	$	5,190		$	9,040
Commercial business		41			1,034
Consumer		11			33
Total nonaccrual loans		5,242			10,107
Nonaccrual restructured loans:
Real estate		7,433			8,140
Commercial business		262			315
Consumer		—			—
Total nonaccrual restructured loans		7,695			8,455
Total nonperforming loans		12,937			18,562
Nonaccrual investments		719			207
Real estate owned		6,489			6,075
Other nonperforming assets		—			348
Total nonperforming assets	$	20,145		$	25,192
Accruing restructured loans	$	1,563		$	2,304
Accruing restructured loans and nonperforming loans	$	14,500		$	20,866
Total nonperforming loans to total loans		4.07	%		5.65	%
Total nonperforming loans to total assets		2.56	%		3.55	%
Total nonperforming assets to total assets		3.98	%		4.82	%

The following table summarizes activity in OREO during the nine months ended March 31, 2013:

OREO balance at beginning of period	$	6,075
OREO acquired		3,689
OREO sold		(2,169	)
Initial valuation adjustments		(864	)
Subsequent valuation adjustments		(242	)
OREO ending balance	$	6,489

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, 2013 was $7.0 million.

Deposits

Total deposits decreased $18.5 million, or 4.4%, to $405.4 million at March 31, 2013 compared to $423.9 million at June 30, 2012 primarily due to planned runoff of certificates of deposit through lower interest rates. Certificates of deposit decreased $19.6 million, or 11.5%, to $150.8 million while transaction accounts increased $1.1 million to $254.6 million at March 31, 2013. Certificates of deposit comprised 37.2% of total deposits at March 31, 2013 compared to 40.2% of total deposits at June 30, 2012.

31

	March 31,		June 30,
	2013		2012		$ Change			% Change
	(Dollars in thousands)
Noninterest-bearing accounts	$	51,939	$	52,436	$	(497	)		(0.9	%)
NOW accounts		55,997		52,958		3,039			5.7	%
Savings accounts		89,573		96,588		(7,015	)		(7.3	%)
Money market accounts		57,057		51,492		5,565			10.8	%
Certificates of deposit		150,795		170,408		(19,613	)		(11.5	%)
Total	$	405,361	$	423,882	$	(18,521	)		(4.4	%)

Advances

FHLB advances totaled $37.6 million at March 31, 2013 compared to $37.9 million at June 30, 2012. Additional FHLB advances may be utilized in the future to manage daily liquidity needs and to support loan growth.

Stockholders’ Equity

Stockholders’ equity was $53.6 million at March 31, 2013 compared to $52.6 million at June 30, 2012. 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, 2013, the adjustment to stockholders’ equity remained relatively unchanged with a net unrealized gain of $1.1 million compared to June 30, 2012. Stock repurchases for the three months ended March 31, 2013 totaled 25,167 shares at an average cost of $5.19 per share. 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, 2013, 410,339 shares remained eligible for repurchase under the current stock repurchase program.

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents and marketable investment securities that are not pledged as collateral. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At March 31, 2013, cash and cash equivalents totaled $35.5 million compared to $56.7 million at June 30, 2012. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $99.4 million at March 31, 2013 compared to $83.5 million at June 30, 2012. At March 31, 2013, approximately $11.5 million of the investment portfolio was pledged as collateral for municipal deposits and repurchase agreements. Municipal deposits totaled $5.6 million at March 31, 2013. The Company’s external sources of liquidity include borrowing capacity with the Federal Home Loan Bank of Cincinnati, the Federal Reserve, and other correspondent banks. FHLB advances remained relatively unchanged at $37.6 million at March 31, 2013 compared to June 30, 2012. At March 31, 2013, borrowing capacity with the FHLB totaled $38.9 million based on pledged collateral, of which $1.4 million was unused.

32

Additional eligible collateral may be transferred to the FHLB to increase borrowing capacity. The Company can borrow from the Federal Reserve Bank of Atlanta’s discount window to meet short-term liquidity requirements. At March 31, 2013, the Company had approximately $16.9 million of unused borrowing capacity based on pledged collateral with the Federal Reserve Bank discount window. In addition, the Company also maintains federal funds lines with two correspondent banks totaling $18.5 million under which no borrowings were outstanding. These federal funds lines may be terminated at any time and may not be outstanding for more than 14 consecutive days.

The Company anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2013, we had approximately $12.4 million in loan commitments, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $3.6 million in unused letters of credit and approximately $30.0 million in unused lines of credit. At March 31, 2013, we had approximately $79.5 million in certificates of deposit due within one year and $254.6 million in other deposits without specific maturities. We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposits. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net decrease in total deposits of $18.5 million during the nine-month period ended March 31, 2013.

Jefferson Bancshares is a separate entity and apart from Jefferson Federal and must provide for its own liquidity. In addition to its operating expenses, Jefferson Bancshares is responsible for the payment of dividends declared for its shareholders, and interest and principal on outstanding debt. At times, Jefferson Bancshares has repurchased and retired outstanding shares of its stock pursuant to share repurchase programs adopted by the Board of Directors. Payment of 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, 2013, 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, 2013, Jefferson Federal met each of its capital requirements. The following table presents our capital position relative to our regulatory capital requirements at March 31, 2013 and June 30, 2012:

	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, 2013
Total Risk-Based Capital  (To Risk Weighted Assets)	$	49,354		14.31	%	$	27,600	>		8.0	%	$	34,500	>		10.0	%
Tier 1 Capital  (To Risk Weighted Assets)		45,024		13.05	%		13,800	>		4.0	%		20,700	>		6.0	%
Tier 1 Capital  (To Average Assets)		45,024		9.04	%		19,923	>		4.0	%		24,904	>		5.0	%
At June 30, 2012
Total Risk-Based Capital (To Risk Weighted Assets)	$	46,815		13.42	%	$	27,900	>		8.0	%	$	34,875	>		10.0	%
Tier 1 Capital (To Risk Weighted Assets)		42,437		12.17	%		13,950	>		4.0	%		20,925	>		6.0	%
Tier 1 Capital (To Average Assets)		42,437		8.23	%		20,634	>		4.0	%		25,792	>		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, 2013, Jefferson Federal’s leverage capital ratio was 9.04%. 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, 2013, Jefferson Federal had a ratio of total capital to risk-weighted assets of 14.31%. At March 31, 2013, 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, 2012. 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, 2012.

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, 2013 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, 2012.

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, 2013 through January 31, 2013		—		—		—		435,566	(1)
Month #2
February 1, 2013 through February 28, 2013		25,167		5.19		25,167		410,399	(1)
Month #3
March 1, 2013 through March 31, 2013		—		—		—		410,399	(1)
Total		25,167		5.19		25,167		410,399

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

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

31.1	Rule 13a-14(a)/15d-14(a) certification of the principal executive officer
31.2	Rule 13a-14(a)/15d-14(a) certification of the principal financial officer
32.0	Section 1350 certification
10.1	Amended and Restated Change in Control Severance Plan of  Jefferson Federal Bank**
101.0*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Earnings, (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

*	Furnished, not filed.
* *	Management contract or compensatory plan, contract or arrangement.

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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 15, 2013	/s/ Anderson L. Smith
	Anderson L. Smith
	President and Chief Executive Officer
May 15, 2013	/s/ Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary